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UNITED 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, 2022March 31, 2023
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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 |
| Commission File Number 1-13270 |
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FLOTEK INDUSTRIES, INC. |
(Exact name of registrant as specified in its charter) |
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Delaware | | 90-0023731 |
(State of other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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8846 N. Sam Houston Parkway W. Houston,TX | | 77064 |
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(Address of principal executive offices) | (Zip Code) |
(713) 849-9911(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.0001 par value | FTK | New York Stock Exchange |
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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.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒
Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At November 7, 2022,May 9, 2023, there were 77,507,26788,002,029 outstanding shares of the registrant’s common stock, $0.0001 par value.
TABLE OF CONTENTS
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Forward-Looking Statements | |
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PART I - FINANCIAL INFORMATION | |
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| Unaudited Condensed Consolidated Balance Sheets at September 30, 2022March 31, 2023 and December 31, 20212022 | |
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| Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 | |
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| Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 | |
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Item 1A | Risk Factors | |
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SIGNATURES | |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (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. 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, future operating results and liquidity. These forward-looking statements generally are identified by words including but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,” “potential,” “schedule,” “continue,” “intend,” “expect,” “plan,” “forecast,” “target”, “think”, “likely”, “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereafter. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 20212022 (“Annual Report” or “2021“2022 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022,23, 2023, 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.
In certain places in this Quarterly Report on Form 10-Q, we may refer to statements provided by third parties that purport to describe trends or developments in supply chain or energy exploration and production and activity and we specifically disclaim any responsibility for the accuracy and completeness of such information and have undertaken no steps to update or independently verify such information.
The following information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and related disclosures and our 20212022 Annual Report.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLOTEK INDUSTRIES INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 8,508 | | | $ | 11,534 | | Cash and cash equivalents | $ | 12,433 | | | $ | 12,290 | |
Restricted cash | Restricted cash | 100 | | | 1,790 | | Restricted cash | 101 | | | 100 | |
Accounts receivable, net of allowance for doubtful accounts of $566 and $659 at September 30, 2022 and December 31, 2021, respectively | 17,597 | | | 11,997 | | |
Accounts receivable, net of allowance for credit losses of $645 and $623 at March 31, 2023 and December 31, 2022, respectively | | Accounts receivable, net of allowance for credit losses of $645 and $623 at March 31, 2023 and December 31, 2022, respectively | 15,609 | | | 19,136 | |
Accounts receivable, related party | Accounts receivable, related party | 25,916 | | | 1,300 | | Accounts receivable, related party | 26,230 | | | 22,683 | |
Inventories, net | Inventories, net | 19,189 | | | 9,454 | | Inventories, net | 15,904 | | | 15,720 | |
| Other current assets | Other current assets | 4,309 | | | 3,762 | | Other current assets | 4,516 | | | 4,045 | |
Current contract assets | Current contract assets | 7,196 | | | — | | Current contract assets | 7,066 | | | 7,113 | |
Assets held for sale | 535 | | | 2,762 | | |
| Total current assets | Total current assets | 83,350 | | | 42,599 | | Total current assets | 81,859 | | | 81,087 | |
Long-term contract assets | Long-term contract assets | 73,878 | | | — | | Long-term contract assets | 71,372 | | | 72,576 | |
Property and equipment, net | Property and equipment, net | 4,781 | | | 5,296 | | Property and equipment, net | 4,807 | | | 4,826 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 1,715 | | | 2,041 | | Operating lease right-of-use assets | 4,923 | | | 5,900 | |
| Deferred tax assets, net | Deferred tax assets, net | 278 | | | 279 | | Deferred tax assets, net | 410 | | | 404 | |
Other long-term assets | Other long-term assets | 17 | | | 29 | | Other long-term assets | 17 | | | 17 | |
TOTAL ASSETS | TOTAL ASSETS | $ | 164,019 | | | $ | 50,244 | | TOTAL ASSETS | $ | 163,388 | | | $ | 164,810 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 29,653 | | | $ | 7,616 | | Accounts payable | $ | 41,929 | | | $ | 33,375 | |
Accrued liabilities | Accrued liabilities | 9,400 | | | 8,996 | | Accrued liabilities | 9,870 | | | 8,984 | |
Income taxes payable | Income taxes payable | 104 | | | 4 | | Income taxes payable | 11 | | | 97 | |
Interest payable | Interest payable | 118 | | | 82 | | Interest payable | — | | | 130 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 653 | | | 602 | | Current portion of operating lease liabilities | 3,050 | | | 3,328 | |
Current portion of finance lease liabilities | Current portion of finance lease liabilities | 35 | | | 41 | | Current portion of finance lease liabilities | 36 | | | 36 | |
Current portion of long-term debt | Current portion of long-term debt | 1,853 | | | 1,436 | | Current portion of long-term debt | 179 | | | 2,052 | |
Convertible notes payable | Convertible notes payable | 19,055 | | | — | | Convertible notes payable | — | | | 19,799 | |
Contract consideration convertible notes payable | 73,030 | | | — | | |
Contract Consideration Convertible Notes Payable | | Contract Consideration Convertible Notes Payable | 43,800 | | | 83,570 | |
Total current liabilities | Total current liabilities | 133,901 | | | 18,777 | | Total current liabilities | 98,875 | | | 151,371 | |
Deferred revenue, long-term | Deferred revenue, long-term | 74 | | | 91 | | Deferred revenue, long-term | 35 | | | 44 | |
Long-term operating lease liabilities | Long-term operating lease liabilities | 6,582 | | | 7,779 | | Long-term operating lease liabilities | 7,133 | | | 8,044 | |
Long-term finance lease liabilities | Long-term finance lease liabilities | 29 | | | 53 | | Long-term finance lease liabilities | 13 | | | 19 | |
Long-term debt | Long-term debt | 2,935 | | | 3,352 | | Long-term debt | 194 | | | 2,736 | |
TOTAL LIABILITIES | TOTAL LIABILITIES | 143,521 | | | 30,052 | | TOTAL LIABILITIES | 106,250 | | | 162,214 | |
Commitments and contingencies (See Note 12) | | |
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, 240,000,000 shares authorized; 83,424,763 shares issued and 77,283,733 shares outstanding at September 30, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021 | 8 | | | 8 | | |
Common stock, $0.0001 par value, 240,000,000 shares authorized; 94,613,664 shares issued and 88,170,936 shares outstanding at March 31, 2023 ; 83,915,918 shares issued and 77,788,391 shares outstanding at December 31, 2022 | | Common stock, $0.0001 par value, 240,000,000 shares authorized; 94,613,664 shares issued and 88,170,936 shares outstanding at March 31, 2023 ; 83,915,918 shares issued and 77,788,391 shares outstanding at December 31, 2022 | 9 | | | 8 | |
Additional paid-in capital | Additional paid-in capital | 386,958 | | | 363,417 | | Additional paid-in capital | 421,596 | | | 388,177 | |
Accumulated other comprehensive income | Accumulated other comprehensive income | 292 | | | 81 | | Accumulated other comprehensive income | 160 | | | 181 | |
Accumulated deficit | Accumulated deficit | (332,492) | | | (309,214) | | Accumulated deficit | (330,176) | | | (351,519) | |
Treasury stock, at cost; 6,141,030 and 6,022,634 shares at September 30, 2022 and December 31, 2021 , respectively | (34,268) | | | (34,100) | | |
Treasury stock, at cost; 6,442,728 and 6,127,527 shares at March 31, 2023 and December 31, 2022 , respectively | | Treasury stock, at cost; 6,442,728 and 6,127,527 shares at March 31, 2023 and December 31, 2022 , respectively | (34,451) | | | (34,251) | |
Total stockholders’ equity | Total stockholders’ equity | 20,498 | | | 20,192 | | Total stockholders’ equity | 57,138 | | | 2,596 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 164,019 | | | $ | 50,244 | | TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 163,388 | | | $ | 164,810 | |
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)
| | | Three months ended September 30, | | Nine months ended September 30, | | | | Three months ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | 2023 | | 2022 |
Revenue: | Revenue: | | | | | | | | Revenue: | | | | | |
Revenue from external customers | Revenue from external customers | $ | 15,206 | | | $ | 8,847 | | | $ | 38,412 | | | $ | 29,782 | | Revenue from external customers | | | $ | 11,652 | | | $ | 10,382 | |
Revenue from related party | Revenue from related party | 30,417 | | | 1,332 | | | 49,462 | | | 1,332 | | Revenue from related party | | | 36,355 | | | 2,497 | |
Total revenues | Total revenues | 45,623 | | | 10,179 | | | 87,874 | | | 31,114 | | Total revenues | | | 48,007 | | | 12,879 | |
Cost of goods sold | 47,465 | | | 4,022 | | | 92,500 | | | 26,876 | | |
Gross income (loss) | (1,842) | | | 6,157 | | | (4,626) | | | 4,238 | | |
Cost of sales | | Cost of sales | | | 46,127 | | | 13,358 | |
Gross profit (loss) | | Gross profit (loss) | | | 1,880 | | | (479) | |
Operating costs and expenses: | Operating costs and expenses: | | | | | | | | Operating costs and expenses: | | | | | |
Selling, general, and administrative | Selling, general, and administrative | 9,035 | | | 4,092 | | | 21,345 | | | 14,379 | | Selling, general, and administrative | | | 6,451 | | | 4,886 | |
Depreciation of property and equipment | 177 | | | 233 | | | 554 | | | 793 | | |
Depreciation | | Depreciation | | | 176 | | | 195 | |
Research and development | Research and development | 985 | | | 1,186 | | | 3,515 | | | 4,194 | | Research and development | | | 614 | | | 1,415 | |
(Gain) loss on sale of property and equipment | (10) | | | 14 | | | (1,916) | | | (55) | | |
Severance costs | | Severance costs | | | 2,223 | | | (7) | |
Loss on sale of property and equipment | | Loss on sale of property and equipment | | | — | | | 8 | |
Gain on lease termination | Gain on lease termination | — | | | — | | | (584) | | | — | | Gain on lease termination | | | — | | | (584) | |
(Gain) loss in fair value of contract consideration convertible notes payable | 4,250 | | | — | | | (9,016) | | | — | | |
(Gain) loss in fair value of Contract Consideration Convertible Notes Payable | | (Gain) loss in fair value of Contract Consideration Convertible Notes Payable | | | (26,095) | | | 3,892 | |
Total operating costs and expenses | Total operating costs and expenses | 14,437 | | | 5,525 | | | 13,898 | | | 19,311 | | Total operating costs and expenses | | | (16,631) | | | 9,805 | |
Income (loss) from operations | Income (loss) from operations | (16,279) | | | 632 | | | (18,524) | | | (15,073) | | Income (loss) from operations | | | 18,511 | | | (10,284) | |
Other income (expense): | Other income (expense): | | | | | | | | Other income (expense): | | | | | |
Paycheck protection plan loan forgiveness | — | | | — | | | — | | | 881 | | |
Payment protection plan loan forgiveness | | Payment protection plan loan forgiveness | | | 4,522 | | | — | |
Interest expense | Interest expense | (2,321) | | | (18) | | | (4,586) | | | (53) | | Interest expense | | | (1,672) | | | (668) | |
Other expense, net | (187) | | | (102) | | | (67) | | | (62) | | |
Other income (expense), net | | Other income (expense), net | | | (9) | | | 224 | |
Total other income (expense) | Total other income (expense) | (2,508) | | | (120) | | | (4,653) | | | 766 | | Total other income (expense) | | | 2,841 | | | (444) | |
Income (loss) before income taxes | Income (loss) before income taxes | (18,787) | | | 512 | | | (23,177) | | | (14,307) | | Income (loss) before income taxes | | | 21,352 | | | (10,728) | |
Income tax expense | (7) | | | (3) | | | (101) | | | (30) | | |
Income tax (expense) benefit | | Income tax (expense) benefit | | | (9) | | | 4 | |
Net income (loss) | Net income (loss) | $ | (18,794) | | | $ | 509 | | | $ | (23,278) | | | $ | (14,337) | | Net income (loss) | | | $ | 21,343 | | | $ | (10,724) | |
| | | Income (loss) per common share: | Income (loss) per common share: | | Income (loss) per common share: | | |
Basic | Basic | $ | (0.25) | | | $ | 0.01 | | | $ | (0.31) | | | $ | (0.21) | | Basic | | | $ | 0.22 | | | $ | (0.15) | |
Diluted | $ | (0.25) | | | $ | 0.01 | | | $ | (0.31) | | | $ | (0.21) | | |
Diluted (see Note 14, “Earnings (Loss) Per Share”) | | Diluted (see Note 14, “Earnings (Loss) Per Share”) | | | $ | (0.02) | | | $ | (0.15) | |
| | | | | Weighted average common shares: | Weighted average common shares: | | Weighted average common shares: | | |
Weighted average common shares used in computing basic income (loss) per common share | Weighted average common shares used in computing basic income (loss) per common share | 75,312 | | | 69,324 | | | 74,095 | | | 68,665 | | Weighted average common shares used in computing basic income (loss) per common share | | | 98,808 | | | 73,858 | |
Weighted average common shares used in computing diluted income (loss) per common share | 75,312 | | | 70,176 | | | 74,095 | | | 68,665 | | |
Weighted average common shares used in computing diluted loss per common share | | Weighted average common shares used in computing diluted loss per common share | | | 158,441 | | | 73,858 | |
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
5
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | | Three months ended September 30, | | Nine months ended September 30, | | | | Three months ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | 2023 | | 2022 |
Net income (loss) | Net income (loss) | $ | (18,794) | | | $ | 509 | | | $ | (23,278) | | | $ | (14,337) | | Net income (loss) | | | $ | 21,343 | | | $ | (10,724) | |
| Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | | |
Foreign currency translation adjustment | Foreign currency translation adjustment | 116 | | | 38 | | | 211 | | | 70 | | Foreign currency translation adjustment | | | (21) | | | 8 | |
| Comprehensive income (loss) | Comprehensive income (loss) | $ | (18,678) | | | $ | 547 | | | $ | (23,067) | | | $ | (14,267) | | Comprehensive income (loss) | | | $ | 21,322 | | | $ | (10,716) | |
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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 FLOW (in thousands) | | | Nine months ended September 30, | | Three months ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Net loss | $ | (23,278) | | | $ | (14,337) | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | |
Net income (loss) | | Net income (loss) | $ | 21,343 | | | $ | (10,724) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |
Change in fair value of contingent consideration | Change in fair value of contingent consideration | (106) | | | (701) | | Change in fair value of contingent consideration | (359) | | | 94 | |
Change in fair value of contract consideration convertible notes payable | (9,016) | | | — | | |
Change in fair value of Contract Consideration Convertible Notes Payable | | Change in fair value of Contract Consideration Convertible Notes Payable | (26,095) | | | 3,892 | |
Amortization of convertible note issuance cost | Amortization of convertible note issuance cost | 663 | | | — | | Amortization of convertible note issuance cost | 83 | | | 166 | |
Paid-in-kind interest expense | Paid-in-kind interest expense | 3,861 | | | — | | Paid-in-kind interest expense | 1,571 | | | 485 | |
Amortization of contract assets | Amortization of contract assets | 1,986 | | | — | | Amortization of contract assets | 1,251 | | | — | |
Depreciation and amortization | 554 | | | 793 | | |
Provision for doubtful accounts, net of recoveries | 147 | | | (42) | | |
Inventory purchase commitment settlement | — | | | (7,633) | | |
Inventory write down | 1,036 | | | — | | |
Depreciation | | Depreciation | 176 | | | 195 | |
Provision for credit losses, net of recoveries | | Provision for credit losses, net of recoveries | 23 | | | 238 | |
Provision for excess and obsolete inventory | Provision for excess and obsolete inventory | 666 | | | 687 | | Provision for excess and obsolete inventory | 258 | | | 310 | |
Gain on sale of property and equipment | Gain on sale of property and equipment | (1,916) | | | (55) | | Gain on sale of property and equipment | — | | | 8 | |
Gain on lease termination | Gain on lease termination | (584) | | | — | | Gain on lease termination | — | | | (584) | |
Non-cash lease expense | Non-cash lease expense | 168 | | | 223 | | Non-cash lease expense | 977 | | | 56 | |
Stock compensation expense | Stock compensation expense | 2,262 | | | 2,710 | | Stock compensation expense | (1,112) | | | 739 | |
Deferred income tax (benefit) expense | 1 | | | 13 | | |
Deferred income tax benefit | | Deferred income tax benefit | (6) | | | (4) | |
Paycheck protection plan loan forgiveness | Paycheck protection plan loan forgiveness | — | | | (881) | | Paycheck protection plan loan forgiveness | (4,522) | | | — | |
Changes in current assets and liabilities: | Changes in current assets and liabilities: | | Changes in current assets and liabilities: | |
Accounts receivable | Accounts receivable | (5,748) | | | 111 | | Accounts receivable | 3,504 | | | (194) | |
Accounts receivable, related party | Accounts receivable, related party | (24,616) | | | — | | Accounts receivable, related party | (3,546) | | | 14 | |
Inventories | Inventories | (11,373) | | | 2,330 | | Inventories | (441) | | | (999) | |
Income taxes receivable | Income taxes receivable | 3 | | | 405 | | Income taxes receivable | — | | | (10) | |
Other assets | Other assets | (537) | | | (1,696) | | Other assets | (470) | | | (220) | |
Contract assets | (3,600) | | | — | | |
| Accounts payable | Accounts payable | 22,036 | | | (604) | | Accounts payable | 8,554 | | | 616 | |
Accrued liabilities | Accrued liabilities | 493 | | | 415 | | Accrued liabilities | 1,236 | | | (2,350) | |
Operating lease liabilities | Operating lease liabilities | (404) | | | — | | Operating lease liabilities | (1,190) | | | (214) | |
Income taxes payable | Income taxes payable | 100 | | | (53) | | Income taxes payable | (87) | | | — | |
Interest payable | Interest payable | 36 | | | 36 | | Interest payable | (8) | | | 12 | |
| Net cash used in operating activities | (47,166) | | | (18,279) | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | 1,140 | | | (8,474) | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
Capital expenditures | Capital expenditures | (175) | | | (31) | | Capital expenditures | (157) | | | — | |
Proceeds from sale of assets | Proceeds from sale of assets | 4,215 | | | 74 | | Proceeds from sale of assets | — | | | 24 | |
| Net cash provided by investing activities | 4,040 | | | 43 | | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (157) | | | 24 | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
Payment for forfeited stock options | | Payment for forfeited stock options | (617) | | | — | |
Payments on long term debt | | Payments on long term debt | (15) | | | — | |
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 convertible notes | 21,150 | | | — | | |
Payment of issuance costs of convertible notes | (1,084) | | | — | | |
Proceeds from issuance of warrants | 19,500 | | | — | | |
Payment of issuance costs of stock warrants | (1,170) | | | — | | |
Payments to tax authorities for shares withheld from employees | Payments to tax authorities for shares withheld from employees | (191) | | | (407) | | Payments to tax authorities for shares withheld from employees | (200) | | | (59) | |
Proceeds from issuance of stock | Proceeds from issuance of stock | 24 | | | — | | Proceeds from issuance of stock | 20 | | | — | |
Payments for finance leases | Payments for finance leases | (30) | | | (44) | | Payments for finance leases | (6) | | | (14) | |
| Net cash provided by (used in) financing activities | 38,199 | | | (451) | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (818) | | | 19,993 | |
| Effect of changes in exchange rates on cash and cash equivalents | Effect of changes in exchange rates on cash and cash equivalents | 211 | | | (70) | | Effect of changes in exchange rates on cash and cash equivalents | (21) | | | 8 | |
Net change in cash, cash equivalents and restricted cash | (4,716) | | | (18,757) | | |
Net change in cash and cash equivalents and restricted cash | | Net change in cash and cash equivalents and restricted cash | 144 | | | 11,551 | |
Cash and cash equivalents at the beginning of period | Cash and cash equivalents at the beginning of period | 11,534 | | | 38,660 | | Cash and cash equivalents at the beginning of period | 12,290 | | | 11,534 | |
Restricted cash at the beginning of period | Restricted cash at the beginning of period | 1,790 | | | 664 | | Restricted cash at the beginning of period | 100 | | | 1,790 | |
Cash and cash equivalents and restricted cash at beginning of period | Cash and cash equivalents and restricted cash at beginning of period | 13,324 | | | 39,324 | | Cash and cash equivalents and restricted cash at beginning of period | 12,390 | | | 13,324 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | 8,508 | | | 20,527 | | Cash and cash equivalents at end of period | 12,433 | | | 24,835 | |
Restricted cash at the end of period | Restricted cash at the end of period | 100 | | | 40 | | Restricted cash at the end of period | 101 | | | 40 | |
Cash, cash equivalents and restricted cash at end of period | $ | 8,608 | | | $ | 20,567 | | |
Cash and cash equivalents and restricted cash at end of period | | Cash and cash equivalents and restricted cash at end of period | $ | 12,534 | | | $ | 24,875 | |
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
Three and Nine Months Ended September 30,March 31, 2023 and 2022 and 2021
(In thousands of U.S. dollars and shares)
| Three months ended September 30, 2022 | |
Three months ended March 31, 2023 | | Three months ended March 31, 2023 |
| | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | | Total Stockholders’ Equity | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | | Total Stockholders’ Equity |
| | Shares Issued | | Par Value | | Shares | | Cost | | Total Stockholders’ Equity | | Shares Issued | | Par Value | | Shares | | Cost | | Additional Paid-in Capital | |
Balance, June 30, 2022 | 82,885 | | | $ | 8 | | | 6,111 | | | $ | (34,238) | | | $ | 386,310 | | | $ | 176 | | | $ | (313,698) | | | | $ | 38,558 | | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (18,794) | | | | (18,794) | | |
Balance, December 31, 2022 | | Balance, December 31, 2022 | 83,916 | | | $ | 8 | | | 6,127 | | | $ | (34,251) | | | $ | 388,177 | | | $ | 181 | | | $ | (351,519) | | | | $ | 2,596 | |
Net income | | Net income | — | | | — | | | — | | | — | | | — | | | — | | | 21,343 | | | | 21,343 | |
Foreign currency translation adjustment | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 116 | | | — | | | | 116 | | Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (21) | | | — | | | | (21) | |
| Stock issued under employee stock purchase plan | | Stock issued under employee stock purchase plan | — | | | — | | | (21) | | | — | | | 20 | | | — | | | — | | | | 20 | |
| Restricted stock granted | Restricted stock granted | 502 | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | Restricted stock granted | 15 | | | — | | | — | | | — | | | — | | | — | | | | — | |
| Restricted stock forfeited | Restricted stock forfeited | | — | | | 5 | | | — | | | — | | | — | | | — | | | | — | | Restricted stock forfeited | (40) | | | — | | | 165 | | | — | | | — | | | — | | | — | | | | — | |
Restricted stock units vested | Restricted stock units vested | 58 | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | Restricted stock units vested | 387 | | | — | | | — | | | — | | | — | | | — | | | | — | |
Forfeited stock options purchased | | Forfeited stock options purchased | — | | | — | | | — | | | — | | | (617) | | | — | | | — | | | | (617) | |
Stock compensation expense | Stock compensation expense | — | | | — | | | — | | | — | | | 671 | | | — | | | — | | | | 671 | | Stock compensation expense | — | | | — | | | (1,112) | | | — | | | — | | | | (1,112) | |
Shares withheld to cover taxes | Shares withheld to cover taxes | (20) | | | — | | | 25 | | | (30) | | | (23) | | | — | | | — | | | | (53) | | Shares withheld to cover taxes | — | | | — | | | 171 | | | (200) | | | — | | | — | | | — | | | | (200) | |
Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable to Pre-Funded Warrants | | Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable to Pre-Funded Warrants | — | | | — | | | — | | | — | | | 15,092 | | | — | | | — | | | | 15,092 | |
Conversion of convertible notes payable to Pre-Funded Warrants | | Conversion of convertible notes payable to Pre-Funded Warrants | — | | | — | | | — | | | — | | | 11,040 | | | — | | | — | | | | 11,040 | |
Conversion of convertible notes payable to Common Stock | | Conversion of convertible notes payable to Common Stock | 10,336 | | | 1 | | | — | | | — | | | 8,996 | | | — | | | — | | | | 8,997 | |
| Balance, September 30, 2022 | 83,425 | | | $ | 8 | | | 6,141 | | | $ | (34,268) | | | $ | 386,958 | | | $ | 292 | | | $ | (332,492) | | | | $ | 20,498 | | |
Balance, March 31, 2023 | | Balance, March 31, 2023 | 94,614 | | | $ | 9 | | | 6,442 | | | $ | (34,451) | | | $ | 421,596 | | | $ | 160 | | | $ | (330,176) | | | | $ | 57,138 | |
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Nine months ended September 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 | — | | | — | | | — | | | — | | | — | | | — | | | (23,278) | | | | | (23,278) | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 211 | | | — | | | | | 211 | |
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Stock issued under employee stock purchase plan | — | | | — | | | (19) | | | — | | | 24 | | | — | | | — | | | | | 24 | |
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Restricted stock granted | 1,128 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Restricted stock forfeited | (3) | | | — | | | 25 | | | — | | | — | | | — | | | — | | | | | — | |
Restricted stock units vested | 58 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Stock compensation expense | — | | | — | | | — | | | — | | | 2,262 | | | — | | | — | | | | | 2,262 | |
Shares withheld to cover taxes | (35) | | | — | | | 113 | | | (168) | | | (23) | | | — | | | — | | | | | (191) | |
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 | |
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Balance, September 30, 2022 | 83,425 | | | $ | 8 | | | 6,141 | | | $ | (34,268) | | | $ | 386,958 | | | $ | 292 | | | $ | (332,492) | | | | | $ | 20,498 | |
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Three months ended March 31, 2022 |
| 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, 2021 | 79,484 | | | $ | 8 | | | 6,022 | | | $ | (34,100) | | | $ | 363,417 | | | $ | 81 | | | $ | (309,214) | | | | | $ | 20,192 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (10,724) | | | | | (10,724) | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 8 | | | — | | | | | 8 | |
| | | | | | | | | | | | | | | | | |
Restricted stock granted | 287 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Restricted stock forfeited | — | | | — | | | 8 | | | — | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | |
Stock compensation expense | — | | | — | | | — | | | — | | | 739 | | | — | | | — | | | | | 739 | |
Shares withheld to cover taxes | | | — | | | 43 | | | (59) | | | — | | | — | | | — | | | | | (59) | |
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Conversion of convertible notes payable notes to common stock | 2,793 | | | — | | | — | | | — | | | 2,948 | | | — | | | — | | | | | 2,948 | |
Balance, March 31, 2022 | 82,564 | | | $ | 8 | | | 6,073 | | | $ | (34,159) | | | $ | 367,104 | | | $ | 89 | | | $ | (319,938) | | | | | $ | 13,104 | |
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
8
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Three months ended September 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, June 30, 2021 | 79,607 | | | $ | 8 | | | 5,628 | | | $ | (34,017) | | | $ | 361,424 | | | $ | 13 | | | $ | (293,534) | | | | | $ | 33,894 | |
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Net loss | — | | | — | | | — | | | — | | | — | | | — | | | 509 | | | | | 509 | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 38 | | | — | | | | | 38 | |
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Stock issued under employee stock purchase plan | — | | | — | | | (28) | | | 20 | | | (89) | | | — | | | — | | | | | (69) | |
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Restricted stock granted | 9 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
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Restricted stock forfeited | (6) | | | — | | | 4 | | | 8 | | | 3 | | | — | | | — | | | | | 11 | |
Stock compensation expense | — | | | — | | | — | | | — | | | 961 | | | — | | | — | | | | | 961 | |
Shares withheld to cover taxes | — | | | — | | | 45 | | | 64 | | | (125) | | | — | | | — | | | | | (61) | |
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Balance, September 30, 2021 | 79,610 | | | $ | 8 | | | 5,649 | | | $ | (33,925) | | | $ | 362,174 | | | $ | 51 | | | $ | (293,025) | | | | | $ | 35,283 | |
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Nine months ended September 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 | — | | | — | | | — | | | — | | | — | | | | | (14,337) | | | | | (14,337) | |
Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 70 | | | — | | | | | 70 | |
Stock issued under employee stock purchase plan | — | | | — | | | (112) | | | (110) | | | (136) | | | — | | | — | | | | | (246) | |
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 (see Note 13, “Stockholders’ Equity”) | (613) | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Balance, September 30, 2021 | 79,610 | | | $ | 8 | | | 5,649 | | | $ | (33,925) | | | $ | 362,174 | | | $ | 51 | | | $ | (293,025) | | | | | $ | 35,283 | |
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 Nature of Operations
General
Flotek Industries, Inc. (“Flotek” or the “Company”) creates unique 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 consumercommercial markets improve their 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.
The Company’s Data Analytics (“DA”) segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with their 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.
The Company’s two operating segments, CT and DA, are both supported by its Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 17, “Business Segment, Geographic and Major Customer Information.”
AsGoing Concern
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) assuming the Company will continue as a resultgoing concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a series of transactions in 2022 with ProFrac Holdings, LLC, Flotek has become a consolidated subsidiary of ProFrac Holding Corp. since May 17, 2022.going concern exists.
Sources and Uses of Liquidity
The Company currently funds its operations and growth primarily from cash on hand and other liquidcurrent assets. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in the twelve months subsequent towithin one year after the date of filing the unaudited condensed consolidated financial statements.
The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from its long-term supply agreement withthe ProFrac Services, LLCAgreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, Related“Related Party Transactions)Transactions”). We believeIt is not certain that ourthe Company’s cash and other liquidcurrent assets and ourthe Company’s forecasted operating cash flows currently expected to be generated from the ongoing execution of the long-term supply agreement with ProFrac Services, LLCAgreement will provide usthe Company with sufficient financial resources to fund operations and meet ourthe Company’s capital requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are filed.
The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company cannot guarantee a sufficient level of cash flows in the future. The consolidated financial statements have been prepared assumingmay be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.
The unaudited condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, in the opinion of management, necessary for the 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
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 20212022 Annual Report. A copy of the 20212022 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
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s restricted cash is $0.1 million and $1.8$0.1 million as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The Company’s restricted cash as of September 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 AccountsCredit Losses
Accounts receivable including those withand accounts receivable, related party, arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accountscredit losses to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collectedapplies the current expected credit loss (CECL) model, which requires immediate recognition of expected credit losses over the contractual life of receivables and records the appropriate allowance for doubtful accountscredit losses as a charge to operating expenses. The allowance for doubtful accountscredit losses 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 accountscredit losses charged to operating expense.
The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.
Contract Assets
The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 9, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining a contract with a related party customer.the ProFrac Agreement. The contract assets are amortized over the term of the related party contractProFrac Agreement (10 years) based on forecasted revenues as goods are transferred to the related party customerProFrac Services, LLC, 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 are tested for recoverability on a recurring basis 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 contractProFrac Agreement 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 by 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.sales.
Property and equipment
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or 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
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Leases
The Company leases certain facilities, land, vehicles, and equipment. The Company determines if an arrangement is classified as a lease at inception of the arrangement.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the related lease. Finance leases are under the current and non-current liabilities and the underlying assets are included in property and equipment on the consolidated balance sheet.
As most of the Company’s leases do not provide an implicit rate of return, on a quarterly basis, the Company’s incremental borrowing rate is used, together with the lease term information available at commencement date of the lease, in determining the present value of lease payments.Operating lease liabilities include related options to extend or terminate lease terms that are reasonably certain of being exercised.
Leases with an initial term of 12 months or less (“short term leases”) are not recorded on the balance sheet; and the lease expense on short-term leases is recognized on a straight-line basis over the lease term.
Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable
The Company accounts for the 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 related to a related party contract (see 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 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
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 depictwhen it satisfies performance obligations under the transferterms of the contract with a customer, and control of the promised goods are transferred to the customer or services to its customersare performed, in an amount that reflects the consideration to which itthe Company 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 discounts offered to customers for prompt payment and right of return provisions, which are considered when recognizing revenue and deferred accordingly. DepositsThe Company does not act as an agent in any of its revenue arrangements.
In recognizing revenue for products and services, the Company determines the transaction price of contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require 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.
The majority of the CT segment revenue is chemical products that are sold at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product purchased. Additionally, the CT segment offers various services associated to products sold which includes field services, installation, maintenance, and other funds receivedfunctions. These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer.
The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on agreed upon delivery terms. Additionally, the Company offers various services associated with products sold which includes field services, installation, maintenance, and other functions. Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. There 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, the Company may provide subscription-type arrangements with customers in advance of deliverywhich 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 accrued liabilities and deferred revenue on the consolidated balance sheets. Subscription-type arrangements were not a material revenue stream in the three months ended March 31, 2023 and March 31, 2022.
Payment terms for both the CT and DA segments are deferred untilcustomarily 30-60 days for domestic and 90-120 days for international from invoice receipt. Under revenue contracts for both products and services, customers are invoiced once the transfer of controlperformance obligations have been satisfied, at which point payment is complete.unconditional. Contract assets associated with incomplete performance obligations are not material.
The Company applies several practical expedients including:
•Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.
•The Company’s payment terms are short-term in nature with settlements of one year or less. As a result, the Company does not adjust the promised amount of consideration for the effects of a significant financing component.
•In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.
•The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods soldsales in our consolidated statement of operations.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and substantially all assets and liabilities of the Company are denominated in U.S. dollars. Financial statements of foreign subsidiaries that are not U.S. dollar functional currency are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of those 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 and distributions to stockholders. The Company’s comprehensive income (loss)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
Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets 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.
The 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 PrefundedPre-Funded Warrants issued in June 2022 (the “June 2022 Warrants”) and the Pre-Funded Warrants issued in February 2023 (the “February 2023 Warrants”) (see Note 13, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrantsJune 2022 Warrants and the February 2023 Warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the PrefundedJune 2022 Warrants and the February 2023 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.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Significant items subject to estimates and assumptions include the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense; allowance for credit losses for accounts receivable; valuation allowances for accounts receivable, inventories, and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified Stock Warrants.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
Certain prior year amounts in the unaudited condensed consolidated statement of operations have been reclassified to conform to the current year 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 $1.4 million and $4.4 million to selling, general and administrative expenses which were previously reported in operating expenses for the three and nine months ended September 30, 2021 respectively. The reclassifications and change in presentation of the statements of operations did not impact previously recorded income (loss) from operations, net income (loss) or stockholders’ equity.
Payable.
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the 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 and Adopted as of January 1, 2022
The FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This standard changes 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 adopted this standard as of January 1, 2022, and the adoption 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.
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.The Company adopted this standard as of January 1, 2022 and the 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 September 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 evaluatingadopted this standard prospectively as of January 1, 2023 and the adoption did not have a material impact of this standard, including subsequent amendments, on the Company’s consolidated financial statements and related disclosures.disclosures, and there was no cumulative effect on retained earnings.
Note 3 — Revenue from Contracts with Customers
Revenues are recognized when controlDisaggregation of the promised goods or services is transferred to the customer, in an amount that reflects the consideration theRevenue
The Company expects to be entitled in exchange for those goods or services. In recognizingdifferentiates 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 whether the amountsource of consideration the Company expectsrevenue is attributable to receive and discounts offeredproduct sales or service revenue.
Total revenue disaggregated by revenue source is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
Revenue: | | | | | | | |
Products (1) | | | | | $ | 46,767 | | | $ | 12,199 | |
Services | | | | | 1,240 | | | 680 | |
| | | | | $ | 48,007 | | | $ | 12,879 | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Product revenue includes sales to customers for prompt payment.
The majority of the products from the CT segment are sold at a pointrelated parties as described 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 basis. Payment terms are customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.
Note 16, “Related Party Transactions.”
Disaggregation of RevenueCost of Sales
The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be directly attributable to either tangible goods or services.
Total cost of sales disaggregated is as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
Cost of sales: | | | | | | | |
Tangible goods sold | | | | | $ | 41,529 | | | $ | 9,788 | |
Services | | | | | 141 | | | (53) | |
Other | | | | | 4,457 | | | 3,623 | |
| | | | | $ | 46,127 | | | $ | 13,358 | |
Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services. Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs.
Cost of sales split between external and related party sales is as follows (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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). | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
Cost of sales: | | | | | | | |
Cost of sales for external customers | | | | | $ | 11,196 | | | $ | 10,768 | |
Cost of sales for related parties | | | | | 34,931 | | | 2,590 | |
| | | | | $ | 46,127 | | | $ | 13,358 | |
Revenue disaggregated by revenue source is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue: | | | | | | | |
Products (1) | $ | 44,574 | | | $ | 9,494 | | | $ | 85,356 | | | $ | 29,017 | |
Services | 1,049 | | | 685 | | | 2,518 | | | 2,097 | |
| $ | 45,623 | | | $ | 10,179 | | | $ | 87,874 | | | $ | 31,114 | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Product revenues for 2022 include sales to related parties as described in Note 16, “Related Party Transactions.”
Arrangements with Multiple Performance Obligations
The Company primarily sells chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, the Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions. Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. There 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, the 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 accrued liabilities and deferred revenue on the balance sheet. Subscription-type arrangements were not a material revenue stream in the three and nine months ended September 30, 2022 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 assets associated with incomplete performance obligations are not material.
Note 4 - Contract Assets
Contract assets are as follows (in thousands):
| | | | | | | | | | | |
| |
| September 30, 2022 | | December 31, 2021 |
Contract assets | $ | 83,060 | | | $ | — | |
Less accumulated amortization | (1,986) | | | — | |
Contract assets, net | $ | 81,074 | | | $ | — | |
| | | | | | | | | | | |
| |
| March 31, 2023 | | December 31, 2022 |
Contract assets | $ | 83,060 | | | $ | 83,060 | |
Less accumulated amortization | (4,622) | | | (3,371) | |
Contract assets, net | 78,438 | | | 79,689 | |
Less current contract assets | (7,066) | | | (7,113) | |
Contract assets, long term | $ | 71,372 | | | $ | 72,576 | |
In connection with entering into the ProFrac AgreementsAgreement on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”, the Company recognized contract assets of $10.0 million and $69.5 million, respectively, and associated fees of $3.6 million. As of September 30,March 31, 2023 and December 31, 2022, $73.9$71.4 million and $72.6 million, respectively, of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the ProFrac agreementsAgreement which will not be realized within the next twelve months of the ProFrac Agreements.Agreement. The Company’s estimate of the timing of the future contract revenues is evaluated on a quarterly basis.
During the three and nine months ended September 30, 2022March 31, 2023 the Company recognized $1.2$1.3 million and $2.0 million, respectively, of contract assets amortization which is presentedrecorded 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 the Company’s current forecasted revenues from the ProFrac Agreements.Agreement.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Years ending December 31, | Years ending December 31, | | Amortization | | | Years ending December 31, | | Amortization | | |
2022 (excluding the nine months ended September 30, 2022 ) | $ | 1,451 | | | | |
2023 | | 7,918 | | | | |
2023 (excluding the three months ended March 31, 2023) | | 2023 (excluding the three months ended March 31, 2023) | $ | 4,924 | | | |
2024 | 2024 | | 8,692 | | | | 2024 | | 8,565 | | | |
2025 | 2025 | | 8,692 | | | | 2025 | | 8,961 | | | |
2026 | 2026 | | 8,692 | | | | 2026 | | 8,961 | | | |
2027 | | 2027 | | 8,961 | | | |
Thereafter through May 2032 | Thereafter through May 2032 | | 45,629 | | | | Thereafter through May 2032 | | 38,066 | | | |
Total contract assets | Total contract assets | | $ | 81,074 | | | | Total contract assets | | $ | 78,438 | | | |
Based on our tests of recoverability, we did not identify impairment of such contract assets as of September 30, 2022.March 31, 2023.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Inventories
Inventories are as follows (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Raw materials | Raw materials | $ | 7,000 | | | $ | 5,610 | | Raw materials | $ | 6,503 | | | $ | 5,800 | |
Finished goods | Finished goods | 21,490 | | | 13,985 | | Finished goods | 17,196 | | | 18,130 | |
Inventories | Inventories | 28,490 | | | 19,595 | | Inventories | 23,699 | | | 23,930 | |
Less reserve for excess and obsolete inventory | Less reserve for excess and obsolete inventory | (9,301) | | | (10,141) | | Less reserve for excess and obsolete inventory | (7,795) | | | (8,210) | |
Inventories, net | Inventories, net | $ | 19,189 | | | $ | 9,454 | | Inventories, net | $ | 15,904 | | | $ | 15,720 | |
The provision recorded in the three months ended September 30, 2022March 31, 2023 and 20212022 was $44.8 thousand $0.1 million and $0.10.3 million for the CT segmentsegment and $14.4 thousand $0.2 million and nilzero for the DA segment, respectively. The provision recorded in the nine months ended September 30, 2022 and 2021 was $0.8 million and $0.5 million for the CT segment and $0.1 million and $0.2 million for the DA segment, respectively.
The Company wrote off inventory of $1.0 million in the three and nine months ended September 30, 2022 relating to the Company’s decision to cease the manufacture and sale of hand sanitizers. There were no inventory write offs in the three and nine months ended September 30, 2021.
Note 6 — Property and Equipment
Property and equipment are as follows (in thousands): | | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Land | Land | $ | 886 | | | $ | 886 | | Land | $ | 886 | | | $ | 886 | |
Land improvements | Land improvements | 520 | | | 520 | | Land improvements | 520 | | | 520 | |
Buildings and leasehold improvements | Buildings and leasehold improvements | 5,356 | | | 5,473 | | Buildings and leasehold improvements | 5,356 | | | 5,356 | |
Machinery and equipment | Machinery and equipment | 6,683 | | | 6,843 | | Machinery and equipment | 6,758 | | | 6,758 | |
Furniture and fixtures | Furniture and fixtures | 545 | | | 620 | | Furniture and fixtures | 532 | | | 532 | |
Transportation equipment | Transportation equipment | 806 | | | 878 | | Transportation equipment | 784 | | | 784 | |
Computer equipment and software | Computer equipment and software | 1,288 | | | 1,176 | | Computer equipment and software | 1,582 | | | 1,425 | |
Property and equipment | Property and equipment | 16,084 | | | 16,396 | | Property and equipment | 16,418 | | | 16,261 | |
Less accumulated depreciation | Less accumulated depreciation | (11,303) | | | (11,100) | | Less accumulated depreciation | (11,611) | | | (11,435) | |
Property and equipment, net | Property and equipment, net | $ | 4,781 | | | $ | 5,296 | | Property and equipment, net | $ | 4,807 | | | $ | 4,826 | |
Depreciation expense totaled $0.2 million and $0.2 million for the three months ended September 30, 2022March 31, 2023 and 2021,2022.
Note 7 — Leases
Prior to their sale in 2022, the Company leased its facilities in Waller, Texas and $0.6 millionMonahans, Texas and $0.8 million forduring the ninethree months ended September 30,March 31, 2022 recognized rental income of $121 thousand and 2021, respectively.
During 2021,$185 thousand, respectively, which is included in other income on the unaudited condensed consolidated statement of operations. The lease agreements between the tenants and the Company committed to plans to sell its warehouse facility in Monahans, Texas in its current conditionwere terminated on the sale of the facilities.
The components of lease expense and supplemental cash flow information are as a result the associated assets in the amount of $0.5 million are classified as held for sale as of September 30, 2022 andfollows (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021. The company also classified $2.3 million for the Waller, Texas facility as held for sale as of December 2021. The Waller, Texas facility was sold on April 18, 2022 and the Company recognized a gain on the sale of the facility of $1.9 million during the nine months ended September 30, 2022.
Note 7 — Leases
In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $40.0 thousand per month for sixty-four months. Rental income recognized during nine months ended September 30, 2022 was $121.0 thousand, and was included in other expense, net in the consolidated statement of operations. Rental income recognized during the three and nine months ended September 30, 2021 was nil. As discussed in Note 6, “Property and Equipment” this facility was sold on April 18, 2022 and the lease agreement between the tenant and the Company terminated.
In August 2021, the Company entered into a five-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for $21.0 thousand per month, and the tenant occupied the warehouse facility in September 2021. Rental income recognized during the three and nine months ended September 30, 2022 was $65.0 thousand and $196.0 thousand, respectively, and was included in other expense, net in the consolidated statement of operations. Rental income recognized during the three and nine months ended September 30, 2021 was $12.0 thousand and was included in other expense, net in the consolidated statement of operations.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
| | | Three months ended September 30, | | Nine months ended September 30, | | | | Three months ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | 2023 | | 2022 |
Operating lease expense | Operating lease expense | $ | 217 | | | $ | 247 | | | $ | 665 | | | $ | 735 | | Operating lease expense | | | $ | 240 | | | $ | 228 | |
Finance lease expense: | Finance lease expense: | | Finance lease expense: | | |
Amortization of right-of-use assets | 4 | | | 4 | | | 11 | | | 11 | | |
Amortization of assets | | Amortization of assets | | | 4 | | | 4 | |
Interest on lease liabilities | Interest on lease liabilities | 1 | | | 2 | | | 5 | | | 9 | | Interest on lease liabilities | | | 1 | | | 3 | |
Total finance lease expense | Total finance lease expense | 5 | | | 6 | | | 16 | | | 20 | | Total finance lease expense | | | 5 | | | 7 | |
Short-term lease expense | Short-term lease expense | 68 | | | 15 | | | 270 | | | 44 | | Short-term lease expense | | | 41 | | | 124 | |
| Total lease expense | Total lease expense | $ | 290 | | | $ | 268 | | | $ | 951 | | | $ | 799 | | Total lease expense | | | $ | 286 | | | $ | 359 | |
| Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows used in operating leases | Operating cash flows used in operating leases | $ | 461 | | | $ | 380 | | | $ | 1,186 | | | $ | 1,107 | | Operating cash flows used in operating leases | | | $ | 1,365 | | | $ | 375 | |
Operating cash flows from finance leases | Operating cash flows from finance leases | 13 | | | 10 | | | 32 | | | 62 | | Operating cash flows from finance leases | | | 10 | | | 10 | |
Financing cash flows from finance leases | Financing cash flows from finance leases | 1 | | | 2 | | | 5 | | | 8 | | Financing cash flows from finance leases | | | 1 | | | 3 | |
Maturities of lease liabilities as of September 30, 2022March 31, 2023 are as follows (in thousands):
| Years ending December 31, | Years ending December 31, | | Operating Leases | | Finance Leases | Years ending December 31, | | Operating Leases | | Finance Leases |
2022 (excluding the nine months ended September 30, 2022) | $ | 262 | | | $ | 9 | | |
2023 | | 1,221 | | | 39 | | |
2023 (excluding the three months ended March 31, 2023) | | 2023 (excluding the three months ended March 31, 2023) | $ | 2,992 | | | $ | 29 | |
2024 | 2024 | | 1,247 | | | 22 | | 2024 | | 2,394 | | | 23 | |
2025 | 2025 | | 1,274 | | | — | | 2025 | | 1,391 | | | — | |
2026 | 2026 | | 1,302 | | | — | | 2026 | | 1,418 | | | — | |
2027 | | 2027 | | 1,339 | | | — | |
Thereafter | Thereafter | | 4,782 | | | — | | Thereafter | | 3,443 | | | — | |
Total lease payments | Total lease payments | | $ | 10,088 | | | $ | 70 | | Total lease payments | | $ | 12,977 | | | $ | 52 | |
Less: Interest | Less: Interest | | (2,853) | | | (6) | | Less: Interest | | (2,794) | | | (3) | |
Present value of lease liabilities | Present value of lease liabilities | | $ | 7,235 | | | $ | 64 | | Present value of lease liabilities | | $ | 10,183 | | | $ | 49 | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows (in thousands):
| | | September 30, 2022 | | December 31, 2021 | | | March 31, 2023 | | December 31, 2022 | |
Operating Leases | Operating Leases | | | | | Operating Leases | | | | |
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 1,715 | | | $ | 2,041 | | | Operating lease right-of-use assets | $ | 4,923 | | | $ | 5,900 | | |
| Current portion of operating lease liabilities | Current portion of operating lease liabilities | 653 | | | 602 | | | Current portion of operating lease liabilities | 3,050 | | | 3,328 | | |
Long-term operating lease liabilities | Long-term operating lease liabilities | 6,582 | | | 7,779 | | | Long-term operating lease liabilities | 7,133 | | | 8,044 | | |
Total operating lease liabilities | Total operating lease liabilities | $ | 7,235 | | | $ | 8,381 | | | Total operating lease liabilities | $ | 10,183 | | | $ | 11,372 | | |
| Finance Leases | Finance Leases | | | Finance Leases | | |
Property and equipment | Property and equipment | $ | 147 | | | $ | 147 | | | Property and equipment | $ | 147 | | | $ | 147 | | |
Accumulated depreciation | Accumulated depreciation | (52) | | | (33) | | | Accumulated depreciation | (59) | | | (55) | | |
Property and equipment, net | Property and equipment, net | $ | 95 | | | $ | 114 | | | Property and equipment, net | $ | 88 | | | $ | 92 | | |
| Current portion of finance lease liabilities | Current portion of finance lease liabilities | $ | 35 | | | $ | 41 | | | Current portion of finance lease liabilities | $ | 36 | | | $ | 36 | | |
Long-term finance lease liabilities | Long-term finance lease liabilities | 29 | | | 53 | | | Long-term finance lease liabilities | 13 | | | 19 | | |
Total finance lease liabilities | Total finance lease liabilities | $ | 64 | | | $ | 94 | | | Total finance lease liabilities | $ | 49 | | | $ | 55 | | |
| Weighted Average Remaining Lease Term | Weighted Average Remaining Lease Term | | | Weighted Average Remaining Lease Term | | |
Operating leases | Operating leases | 8.9 years | | 9.1 years | | Operating leases | 5.3 years | | 5.3 years | |
Finance leases | Finance leases | 1.8 years | | 2.9 years | | Finance leases | 1.3 years | | 1.6 years | |
| Weighted Average Discount Rate | Weighted Average Discount Rate | | | Weighted Average Discount Rate | | |
Operating leases | Operating leases | 8.9 | % | | 8.9 | % | | Operating leases | 9.3 | % | | 9.3 | % | |
Finance leases | Finance leases | 9.0 | % | | 8.9 | % | | Finance leases | 8.9 | % | | 8.9 | % | |
Note 8 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Severance costs | Severance costs | $ | 2,606 | | | $ | 2,581 | | Severance costs | $ | 4,375 | | | $ | 2,617 | |
Loss on purchase commitments | — | | | 1,750 | | |
Payroll and benefits | Payroll and benefits | 2,866 | | | 1,054 | | Payroll and benefits | 919 | | | 684 | |
Legal costs | Legal costs | 41 | | | 1,013 | | Legal costs | 1,312 | | | 447 | |
Contingent liability for earn-out provision | Contingent liability for earn-out provision | 502 | | | 608 | | Contingent liability for earn-out provision | 225 | | | 583 | |
Deferred revenue, current | Deferred revenue, current | 283 | | | 528 | | Deferred revenue, current | 502 | | | 655 | |
Taxes other than income taxes | Taxes other than income taxes | 1,359 | | | 241 | | Taxes other than income taxes | 1,545 | | | 1,884 | |
Other | Other | 1,743 | | | 1,221 | | Other | 992 | | | 2,114 | |
Total current accrued liabilities | Total current accrued liabilities | $ | 9,400 | | | $ | 8,996 | | Total current accrued liabilities | $ | 9,870 | | | $ | 8,984 | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Debt and Convertible Notes Payable
Long Term Debt
Paycheck Protection Program Loans
In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek. The PPP loans had a fixed interest rate of 1% and originally a two-year term, maturing in April and May 2022, respectively. No payments of principal or interest were required during the three or nine months ended September 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 reductions and compensation limits and provided that at least 60% of the eligible costs incurred were 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 was not significantly detrimental to the business. The forgiveness of the loans 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 were fully forgiven. Accordingly, during the second quarter of 2021, the Company recorded $0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other expense, net 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.
During the third quarter of 2021, On January 5, 2023 the Company submitted to the SBA, request for forgiveness of substantially all of the Flotek PPP loan. As of the date of this filing, the Company has not received a forgiveness notice. If the loan is not forgiven, monthly payments will be due over the remaining term of the loan upon notice from the SBA that it will not$4.4 million of the $4.8 million principal amount and accrued interest to that date of $0.1 million, was forgiven. The remaining principal amount of $0.4 million and accrued interest, is to be forgiven.repaid in monthly installments of $15 thousand over the remaining term of the loan through April 15, 2025, beginning on March 15, 2023. The forgiveness of the Flotek PPP loan is accounted for as an extinguishment of the debt and the Company has recorded a $4.5 million gain in the three months ended March 31, 2023, comprising the principal amount forgiven of $4.4 million and accrued interest of $0.1 million.
Long-term debt, including current portion, assuming forgiveness is not obtained, is as follows (in thousands):
| | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Flotek PPP loan | Flotek PPP loan | $ | 4,788 | | | $ | 4,788 | | Flotek PPP loan | $ | 373 | | | $ | 4,788 | |
Less current maturities | Less current maturities | (1,853) | | | (1,436) | | Less current maturities | (179) | | | (2,052) | |
Total long-term debt, net of current portion | Total long-term debt, net of current portion | $ | 2,935 | | | $ | 3,352 | | Total long-term debt, net of current portion | $ | 194 | | | $ | 2,736 | |
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. The PIPE transaction was exempted from the registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws.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 $20.1 million.million (the “Convertible Notes Payable”). 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, havehad a maturity of one year, and are convertedwere convertible into common stock of Flotek or Pre-Funded Warrants to purchase 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 per share, or $1.741 per share, 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. The issuance cost of $1.1 million was amortized on a straight-line basis over the term of the Convertible Notes Payable and the amortization was included in interest expense in the unaudited condensed consolidated statements of operations.
As of September 30, 2022,On February 2, 2023, the remaining Convertible Notes Payable, are recorded atexcluding those held by ProFrac Holdings, LLC, with a carrying value of $19.1$9.0 million, including accrued paid-in-kind interest of $1.3$0.8 million, and netwere converted, upon maturity, into 10,335,840 shares of unamortized issuance costscommon stock at a price of $0.3 million.$0.8705 per share. The estimated fair value of the Convertible Notes Payable at September 30, 2022 was $22.8 million.held by ProFrac Holding, LLC, with a carrying value of $11.0 million, including accrued paid-in-kind interest of $1.0 million, were converted, upon maturity, into 12,683,280 February 2023 Warrants with an exercise price of $0.0001 per share.
Initial ProFrac Agreement Contract Consideration Convertible Notes Payable
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Initial ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction described above, including paid-in-kind interest at a rate of 10% per annum and conversion features.
The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were accounted for as liability classified convertible instruments and were initially recorded at fair value of $10.0 million on the issuance date with a corresponding contract asset.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 2, 2022,2023, 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. This offering of the Contract Consideration Convertible Notes Payable was exempted from the registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws.
TheInitial ProFrac Agreement Contract Consideration Convertible Notes Payable, are accounted for as liability classified convertible instrumentsremeasured to and were initially recordedcarried at a fair value of $10.0$15.1 million, on the issuance date and remeasured to fair valuewere converted, upon maturity, into 12,683,281 February 2023 Warrants with an exercise price of $12.6 million as of September 30, 2022 which includes paid-in-kind interest of $0.7 million. The fair value adjustment was an increase of $0.6 million and a $1.9 million in the three and nine months ended September 30, 2022, respectively. See$0.0001 per share (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 Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively with the Initial ProFrac Agreement, the “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”) to ProFrac. This offering of theThe Amended ProFrac Agreement Contract Consideration Convertible Notes Payable was exempted from the registration under the Securities Act in reliance on Section 4(a)(2)accrue paid-in-kind interest at a rate of the Securities Act and/or Regulation D promulgated thereunder,10% per annum and in reliance on similar exemptions under applicable state securities laws. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable may be converted at any time prior to the maturity date, which is one year from the date of issuance under the same stock conversion terms as the Convertible Notes Payable issued in the PIPE transaction.transaction described above.
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 andwith a corresponding contract asset. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to fair value of $60.5$43.8 million as of September 30, 2022March 31, 2023 which includes paid-in-kind interest of $1.9$4.6 million. The fair value adjustment wasresulted in an a $3.6 million increase and a $10.9$26.9 million decrease in the three and nine months ended September 30, 2022.March 31, 2023 and is recognized as a gain in fair value Contract Consideration Convertible Notes Payable, net on the unaudited condensed consolidated statement of operations. See Note 10, “Fair Value Measurements”.
Note 10 — 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.
FLOTEK INDUSTRIES, INC.
NOTES TO 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):
| | | September 30, | | December 31, | | March 31, | | December 31, |
| | Level 1 | | Level 2 | | Level 3 | 2022 | | Level 1 | | Level 2 | | Level 3 | | 2021 | | Level 1 | | Level 2 | | Level 3 | 2023 | | Level 1 | | Level 2 | | Level 3 | | 2022 |
Contingent earnout consideration | Contingent earnout consideration | $ | — | | | $ | — | | | $ | 502 | | $ | 502 | | | $ | — | | | $ | — | | | $ | 608 | | | $ | 608 | | Contingent earnout consideration | $ | — | | | $ | — | | | $ | 225 | | $ | 225 | | | $ | — | | | $ | — | | | $ | 583 | | | $ | 583 | |
ProFrac Agreement contract consideration convertible notes | $ | — | | | $ | — | | | 12,570 | | $ | 12,570 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
Amended ProFrac Agreement contract consideration convertible notes | $ | — | | | $ | — | | | 60,460 | $ | 60,460 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
Initial ProFrac Agreement Contract Consideration Convertible Notes | | Initial ProFrac Agreement Contract Consideration Convertible Notes | — | | | — | | | — | | — | | | — | | | — | | | 14,220 | | | 14,220 | |
Amended ProFrac Agreement Contract Consideration Convertible Notes | | Amended ProFrac Agreement Contract Consideration Convertible Notes | — | | | — | | | 43,800 | | 43,800 | | | — | | | — | | | 69,350 | | | 69,350 | |
Total | Total | $ | — | | | $ | — | | | $ | 73,532 | | $ | 73,532 | | | $ | — | | | $ | — | | | $ | 608 | | | $ | 608 | | Total | $ | — | | | $ | — | | | $ | 44,025 | | $ | 44,025 | | | $ | — | | | $ | — | | | $ | 84,153 | | | $ | 84,153 | |
|
Contingent Earnout Consideration Key Inputs
The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of September 30, 2022March 31, 2023 and December 31, 2021.2022. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.
The key inputs into the Monte Carlo simulation used to estimate the fair value of the earn-out provision were as follows: | | | | | | | | |
| March 31, 2023 | December 31, 2022 |
Risk-free interest rate | 4.03 | % | 4.34% |
Expected volatility | 90 | % | 100.0% |
Term until liquidation (years) | 2.13 | 2.38 |
Stock price | $0.69 | $1.12 |
Discount rate | 10.92 | % | 9.95% |
| | | | | | | | |
| September 30, 2022 | December 31, 2021 |
Risk-free interest rate | 4.24% | 1.02% |
Expected volatility | 100.0% | 90.0% |
Term until liquidation (years) | 2.63 | 3.38 |
Stock price | $1.00 | $1.13 |
Discount rate | 11.91% | 6.71% |
Initial ProFrac Agreement Contract Consideration Notes Payable Key Inputs
The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $10.0 million on February 2, 2022. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 subsequently due to the use of unobservable inputs.
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, at maturity, to a fair value of $15.1 million based on the closing price of the shares of common stock of $1.19, on the date of conversion. The fair value adjustment was a $0.8 million increase and a $3.9 million decrease in the three months ended March 31, 2023 and 2022, respectively.
The estimated value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable as of September 30,December 31, 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 the risk free rate of interest.
simulation. The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of September 30,December 31, 2022 were as follows:
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | |
| | September 30,December 31, 2022 |
Risk-free interest rate | | 3.55%4.12% |
Expected volatility | | 100.0% |
Term until liquidation (years) | | 0.3420.09 |
Stock price | | $1.001.12 |
Discount rate | | 3.55%4.12% |
The valuation of the ProFrac Agreement Contract Consideration Convertible Notes Payable was $12.6 million as of September 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 Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as at March 31, 2023 and December 31, 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 the risk free rate of interest.simulation.
The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, as of September 30,March 31, 2023 and December 31, 2022 were as follows:
| | | | | | |
| | September 30, 2022 |
Risk-free interest rate | | 3.95% |
Expected volatility | | 100.0% |
Term until liquidation (years) | | 0.63 |
Stock price | | $1.00 |
Discount rate | | 3.95% |
The value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of September 30, 2022 was $60.5 million. | | | | | | | | |
| March 31, 2023 | December 31, 2022 |
Risk-free interest rate | 4.77% | 4.59% |
Expected volatility | 90.0% | 100.0% |
Term until liquidation (years) | 0.13 | 0.38 |
Stock price | $0.69 | $1.12 |
Discount rate | 4.77% | 4.59% |
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment and operating lease right-of-useROU assets, are measured at fair value on a non-recurring basis and are subject to adjustment to their fair value adjustment in certain circumstances.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company estimated the fair value of the remaining stock performance earn-out provision as of September 30, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $0.5 million and $0.7 million, respectively. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in 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 $73.0 million as of September 30, 2022.
The following table presents the changes in balances of liabilities for the assetsthree months ended March 31, 2023 and liabilities measured at fair value on a recurring basis2022 classified as Level 3 (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Balance - beginning of period | $ | 67,694 | | | $ | 1,115 | | | $ | 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 | | | — | |
Increase in principle of ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest | 266 | | | — | | | 681 | | | — | |
Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for paid-in-kind interest | 1,293 | | | — | | | 1,905 | | | — | |
Change in fair value of contingent earnout consideration | 28 | | | (400) | | | (106) | | | (701) | |
Change in fair value of ProFrac Agreement contract consideration convertible notes payable | 634 | | | — | | | 1,889 | | | — | |
Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable | 3,617 | | | — | | | (10,905) | | | — | |
| | | | | | | |
| | | | | | | |
Balance - end of period | $ | 73,532 | | | $ | 715 | | | $ | 73,532 | | | $ | 715 | |
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
Balance - beginning of period | | | | | $ | 84,153 | | | $ | 608 | |
Transfer of ProFrac Agreement Contract Consideration Convertible Notes Payable from Level 2 | | | | | — | | | 10,000 | |
| | | | | | | |
Increase in principal of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest | | | | | 85 | | | 158 | |
Increase in principal of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest | | | | | 1,331 | | | — | |
Change in fair value of contingent earnout consideration | | | | | (358) | | | 94 | |
Change in fair value of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable | | | | | 786 | | | 3,892 | |
Change in fair value of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable | | | | | (26,881) | | | — | |
Conversion of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity | | | | | (15,091) | | | — | |
| | | | | | | |
Balance - end of period | | | | | $ | 44,025 | | | $ | 14,752 | |
Note 11 — Income Taxes
A reconciliation ofThe income tax benefit differed from the amounts computed by applying the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:of 21% respectively, to loss before income tax for the reasons set forth below:
| | | Three months ended September 30, 2022 | | Nine months ended September 30, 2022 | | | | Three months ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | 2023 | | 2022 |
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 | | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal benefit | State income taxes, net of federal benefit | — | | | — | | | — | | | (0.2) | | State income taxes, net of federal benefit | | | — | | | 0.1 | |
Non-U.S. income taxed at different rates | Non-U.S. income taxed at different rates | 0.2 | | | 0.8 | | | (0.3) | | | 0.3 | | Non-U.S. income taxed at different rates | | | 0.1 | | | 0.2 | |
Increase (reduction) in tax benefit related to stock-based awards | Increase (reduction) in tax benefit related to stock-based awards | — | | | (0.3) | | | (0.4) | | | 1.2 | | Increase (reduction) in tax benefit related to stock-based awards | | | 0.4 | | | (0.1) | |
Increase in valuation allowance | | Increase in valuation allowance | | | (20.4) | | | (20.8) | |
Permanent differences | | Permanent differences | | | (1.1) | | | (0.4) | |
Non-deductible expenses | Non-deductible expenses | 0.5 | | | 5.8 | | | 0.4 | | | 1.1 | | Non-deductible expenses | | | 0.1 | | | — | |
Increase in valuation allowance | (21.7) | | | (27.3) | | | (20.7) | | | (23.6) | | |
2018 IRS exam assessment | — | | | — | | | (0.4) | | | — | | |
Effective income tax rate | Effective income tax rate | — | % | | — | % | | (0.4) | % | | (0.2) | % | Effective income tax rate | | | — | % | | — | % |
Internal Revenue Code (“IRC”) section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. During 2023, the Company converted various debt instruments into Company stock and warrants causing an ownership change within the meaning of IRC section 382 that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC section 382 limitation.
FluctuationsAs of March 31, 2023, the Company has an estimated $181.6 million in effectiveU.S. federal NOL carryforwards, $104.9 million in certain state NOL carryforwards, $7.5 million in section 163(j) interest limitation carryforwards and $3.8 million in tax ratescredit carryforwards. As a result of the change of control experienced in 2023, the Company’s ability to use NOLs to reduce taxable income is generally limited to an annual amount which is currently estimated to be $3.5 million a year as a result of the section 382 limitation which may be revised based on further detailed analysis. NOLs that exceed the section 382 limitation in any year continue to be allowed as carryforwards until they expire and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. Federal NOLs incurred prior to 2018 generally have historically beena 20-year life until they expire in varying amounts between 2029 and 2037. Federal NOLs generated in 2018 and after are carried forward indefinitely. State NOLs have various carryforward periods depending on the legislation in the respective state jurisdiction. The Company’s use of new NOLs arising after the date of an ownership change would not be impacted by permanentthe 382 limitation. If the
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company does not generate a sufficient level of taxable income prior to the expiration of the pre-2018 NOL carryforward periods, then the ability to apply those NOLs as offsets to future taxable income is lost. Based on the preliminary section 382 limitation, the Company estimates that $41.9 million of the state NOL carryforwards and $3.8 million of the tax differences with no associated incomecredit carryforwards will expire unutilized. The tax impact, changeseffected amount of the estimated expirations is included in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates.Company’s valuation allowance.
Note 12 — Commitments and Contingencies
Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. ManagementExcept as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Former CEO (J Chisholm) Matter
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be predicted.
Terpene Supply Agreement
On October 29, 2021, the Company reached agreement (“the ADM Settlement) with Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company (“FCC”) and other parties to pay $1.75 million and resolve all claims between the parties in relation to lawsuit claiming damages relating to the terpene supply agreement between Flotek Chemistry, LCC (“Flotek Chemistry”), a wholly owned subsidiary of the Company and FCC. 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 consolidated balance sheet as of December 31, 2021.
Other Commitments and Contingencies
The Company is subject to concentrations of credit risk within trade accounts receivable, and related party accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
Note 13 — Stockholders’ Equity
On March 21, 2022,February 2, 2023, the Convertible Notes Payable whichpursuant to the PIPE transaction discussed in Note 9, “Debt and Convertible Notes Payable”, excluding those held by ProFrac Holdings, LLC, were converted, upon maturity, into 10,335,840 shares of common stock at a price of $0.8705 per share. The Convertible Notes Payable converted into common stock shares had been purchaseda carrying value of $9.0 million, including accrued paid-in-kind interest of $0.8 million and were recorded as additional paid-in-capital as of March 31, 2023.
The Convertible Notes Payable held by certain funds associatedProFrac Holding, LLC, with onea carrying value of $11.0 million, including accrued interest of $1.0 million, were converted, upon maturity, into 12,683,280 February 2023 Warrants with an exercise price of $0.0001 per share and were recorded as additional paid-in-capital.
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, remeasured to and carried at a fair value of $15.1 million, were converted, upon maturity, into 12,683,281 February 2023 Warrants and were recorded as additional paid-in-capital.
The February 2023 Warrants permit ProFrac Holdings II, LLC to purchase 25,366,561 shares of common stock of the Company’s directors, which aggregated $3.0 million plus $39 thousandCompany at an exercise price equal to $0.0001 per share and may be exercised at any time. Since there are no contingent conditions to be satisfied prior to exercise, the February 2023 Warrants are included in calculation of accrued interest, were converted into 2,793,030 shares of the Company’s common stock.basic earnings (loss) per share. (See Note 14, “Earnings (Loss) Per Share”).
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 21, 2022, ProFrac Holdings II, LLC paid $19.5 million for PreFundedPre-Funded Warrants (the “June 2022 Warrants”) of the Company. The PreFundedJune 2022 Warrants were recorded in equity at their fair value of $11.1 million, estimated using a Black-Scholes Option Pricing model, less $1.2 million of transaction costs paid. The remaining cash received of $8.4 million was recognized as an equity contribution. This offering of the PrefundedThe June 2022 Warrants was exempted from the registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state securities laws. 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, and a $4.5 million exercise fee 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 PrefundedJune 2022 Warrants. The PrefundedJune 2022 Warrants, net of transaction fees of $1.1 million, and the equity contribution of $8.4 million from ProFrac are included inHoldings II, LLC were recorded as additional paid-in capitalcapital.
The key inputs into the Black-Scholes Option Pricing Model used to estimate the fair value of the June 2022 Warrants as of September 30, 2022.the issuance on June 21, 2022 were as follows:
| | | | | |
Risk-free interest rate | 3.21% |
Expected volatility | 90.0% |
Term until liquidation (years) | 2.00 |
Stock price | $1.11 |
Strike price (exercise fee) | $4.5 million |
ProFrac Holdings II, LLC and its affiliates may not receive any voting or consent rights in respect of the PrefundedJune 2022 Warrants or the underlying shares of common stock unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings II, LLC and its affiliates and (ii) ProFrac Holdings II, LLC has paid an additional $4.5 million to the Company. The additional $4.5 million will be accounted for as an equity contribution whenif received.
DuringOn March 21, 2022, the first quarter 2021,Convertible Notes Payable issued pursuant to the Company identified 0.6 million shares that were improperly includedPIPE transaction discussed in Note 9, “Debt and Convertible Notes Payable”, which had been purchased by certain funds associated with one of the December 31, 2020 issued share count,Company’s directors including the D3 Family Fund and the Company adjustedD3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of accrued interest, were converted into 2,793,030 shares of the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the September 30, 2022 consolidated financial statements or basic and diluted earnings per share.
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Net LossEarnings (Loss) Per Share
Basic incomeearnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period.period, which includes the February 2023 Warrants (See Note 9, “Debt and Convertible Notes Payable”, and Note 13, “Stockholders’ Equity”). Diluted incomeearnings (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 conversion of convertible notes payable, exercise of stock warrants and vesting and settlement of stock awards. 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 prefundedPre-Funded 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 incomeearnings (loss) per share for the three and nine months ended September 30,March 31, 2023 and 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | | | 2022 | | |
Numerator: | | | | | | | |
Net income (loss) for basic earnings per share | $ | (18,794) | | | | | $ | (23,278) | | | |
Anti-dilutive Adjustment to Net Income available to shareholders excluded from Numerator for Diluted Earnings Computation | | |
Paid-in-Kind interest expense on convertible notes payable, net of tax | 2,043 | | | | | 3,861 | | | |
Valuation (gain) loss on convertible notes carried at FV, net of tax | 4,250 | | | | | (9,016) | | | |
Total numerator adjustment excluded from diluted earnings computation | $ | 6,293 | | | | | $ | (5,155) | | | |
| | | | | | | |
Denominator: | | | | | | | |
Basic and diluted weighted average shares outstanding | 75,312 | | | | | 74,095 | | | |
Anti-dilutive Incremental Shares Excluded from Denominator for Diluted Earnings Computation | | |
Average number of diluted shares for convertible notes payable | 74,395 | | | | | 47,354 | | | |
Average number of diluted shares for stock warrants | 8,897 | | | | | 3,324 | | | |
Average number of diluted shares for options and restricted | 418 | | | | | 571 | | | |
| | | | | | | |
Basic and diluted loss per share | (0.25) | | | | | (0.31) | | | |
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | | 2022 | | |
Numerator: | | | | | | |
Net income (loss) for basic earnings per share | $ | 21,343 | | | | $ | (10,724) | | | |
Adjustments to net income available to shareholders | | | | | | |
Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable | 1,571 | | | | — | | | |
Valuation (gain)/loss on Contract Consideration Convertible Notes Payable carried at FV | (26,095) | | | | — | | | |
Adjusted net income (loss) for diluted earnings per share | $ | (3,181) | | | | $ | (10,724) | | | |
Anti-dilutive adjustments to net income available to shareholders excluded from Numerator for Diluted Earnings calculation | | |
Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable | — | | | | 485 | | | |
Valuation (gain)/loss on Contract Consideration Convertible Notes Payable carried at FV | — | | | | 3,892 | | | |
Total numerator adjustment excluded from diluted earnings computation | $ | — | | | | $ | 4,377 | | | |
| | | | | | |
Denominator: | | | | | | |
Basic weighted average shares outstanding | 98,808 | | | | 73,858 | | | |
Average number of diluted shares for convertible notes payable and Contract Consideration Convertible Notes Payable | 59,633 | | | | — | | | |
Diluted weighted average shares outstanding | 158,441 | | | | 73,858 | | | |
| | | | | | |
Basic earnings (loss) per share | $ | 0.22 | | | | $ | (0.15) | | | |
Diluted loss per share | $ | (0.02) | | | | $ | (0.15) | | | |
Anti-dilutive incremental shares excluded from denominator for diluted earnings computation | | |
| | | | | | |
Average number of diluted shares for June 2022 stock warrants | 8,997 | | | | — | | | |
Average number of diluted shares for options and restricted stock | 1,023 | | | | 609 | | | |
For the three and nine months ended September 30,March 31, 2023 weighted average shares for the June 2022 stock warrants and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect as it would reduce the loss per share.
For the three months ended March 31, 2022, paid-in-kind interest expense net of tax, on convertible notes payable and Contract Consideration Convertible Notes Payable and the change in fair value related to the contract consideration convertible notes payable, net of tax,Contract Consideration Convertible Notes Payable, were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.period. For the three and nine months ended September 30,March 31, 2022 weighted average shares for convertible notes payable weighted average shares for stock warrantsand Contract Consideration Convertible Notes Payable and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.
For the three months ended September 30, 2021, diluted earnings per common share included 851,702 common share equivalents. For the nine months ended September 30, 2021, weighted average shares for employee stock awards of 1,130,719, were not included in the calculation of diluted loss per share since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| | | Nine months ended September 30, | | Three months ended March 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
| Supplemental cash flow information: | Supplemental cash flow information: | | | | Supplemental cash flow information: | | | |
Interest paid | Interest paid | $ | 25 | | | $ | 17 | | Interest paid | $ | 18 | | | $ | 5 | |
Income taxes received | — | | | (351) | | |
Supplemental non-cash activities: | | |
Employee retention credit | — | | | 2,851 | | |
| Non cash financing and investing activities: | | |
Supplemental non cash financing and investing activities: | | Supplemental non cash financing and investing activities: | |
Issuance of convertible notes payable as consideration for ProFrac Agreements | Issuance of convertible notes payable as consideration for ProFrac Agreements | 79,460 | | | — | | Issuance of convertible notes payable as consideration for ProFrac Agreements | — | | | 10,000 | |
Conversion of convertible notes payable to common stock | Conversion of convertible notes payable to common stock | 2,948 | | | — | | Conversion of convertible notes payable to common stock | 8,996 | | | 2,948 | |
Conversion of convertible notes payable to February 2023 Warrants | | Conversion of convertible notes payable to February 2023 Warrants | 11,040 | | | — | |
Conversion of initial Contract Consideration Convertible Notes Payable to February 2023 Warrants | | Conversion of initial Contract Consideration Convertible Notes Payable to February 2023 Warrants | 15,092 | | | — | |
|
Note 16— Related Party Transactions
In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.
In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed 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. On 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 September 30, 2022 and December 31, 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 was a Director of the Company beginning in November of 2013 and is the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company. As of April 15, 2022 Ted D. Brown stepped down from being a Director of the Company and Confluence will no longer be considered a related party as of April 15, 2022. The Company’s revenues for chemical sales to Confluence were $1.4 million through April 15, 2022. The Company’s revenues from chemical sales to Confluence for the three and nine months ended September 30, 2021 were $1.3 million and $1.3 million, respectively. As of December 31, 2021, Confluence owed $1.3 million which is recorded in accounts receivable, related party on the consolidated balance sheet.
On February 2, 2022, the Company entered into a long-term supply agreement withthe Initial ProFrac Services, LLC (the “ProFrac Agreement”)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 Initial 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 Initial 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.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 17, 2022, the Company entered into an amendment to the Amended 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 Initial 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,February 1, 2023, the Company issued prefunded warrantsentered into an amendment to the ProFrac Agreement (the “PreFunded Warrants”“Amended ProFrac Agreement No. 2”) dated February 2, 2022. The Amended ProFrac Agreement No. 2 has an effective date of January 1, 2023. The ProFrac Agreement was amended to (1) provide a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Holdings II,Services, LLC in exchangeto increase the number of active hydraulic fracturing fleets to 30 fleets, (2) waive any liquidated damages payment relating to any potential order shortfall prior to January 1, 2023, (3) add additional fees to certain products, and (4) provide margin increases based on revenue percentages from non-ProFrac customers. The Company believes the net present value of the economic benefit attributable to the Amended ProFrac Agreement No. 2 will exceed the value of the liquidated damages payments that would have been received for $19.5the period from April 1, 2022 through December 31, 2022.
On February 2, 2023, the Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $11.0 million, in cash as discussed inincluding accrued paid-in-kind interest of $1.0 million, were converted, upon maturity, into 12,683,280 February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”).
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, with a carrying value of $11.0 million, including accrued interest of $1.0 million, were converted, upon maturity, into 12,683,281 February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”). The fair value of the Initial ProFrac Agreement Contact Consideration Convertible Notes Payable, as of February 2, 2023, was $15.1 million (see Note 10, “Fair Value Measurements”).
During the three and nine months ended September 30,March 31, 2023 and 2022, the Company’s revenues from chemical sales to ProFrac Services LLC were $30.4$36.4 million and $48.1$1.1 million, respectively. TheseFor the three months ended March 31, 2023 and 2022, these revenues were net of amortization of contract assets of $1.2$1.3 million and $2.0nil. Cost of sales attributable to these revenues were $34.9 million and
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1.1 million, respectively for the three and nine months ended September 30, 2022, respectively.March 31, 2023 and 2022. As of September 30, 2022March 31, 2023 and December 31, 2021,2022 our accounts receivable from ProFrac Services, LLC was $25.9$26.2 million and zero,$22.7 million, respectively which is recorded in accounts receivable, related party on the consolidated balance sheet.
Also, during 2023 and 2022, we had the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC:
•PIPE Transaction (see Note 9, “Debt and Convertible Notes Payable”)
•June 2022 Warrants (see Note 13, “Stockholders’ Equity)
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 and amortization of issuance costs of $90 thousand, were converted into 2,793,030 shares of the Company’s common stock.
Mr. Ted D. Brown was a Director of the Company beginning in November of 2013 and is the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company. The Company’s revenues and related cost of sales for product sales to Confluence were $1.4 million and $1.4 million, for the three months ended March 31, 2022. As of June 9, 2022 Mr. Brown stepped down from being a Director of the Company and Confluence is no longer considered a related party as of June 9, 2022.
Note 17 — 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 environmental, social and governance (“ESG)ESG and operational goals. 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.
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 company markets products and services that support in-line data analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks
Performance is based upon a variety of criteria. The primary financial measure is segment operating income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the reportable segments is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
As of and for the three months ended September 30, | Chemistry Technologies | | Data Analytics | | Corporate and Other | | Total |
2022 | | | | | | | |
Revenue from external customers | $ | 13,511 | | | $ | 1,695 | | | $ | — | | | $ | 15,206 | |
Revenue from related party | 30,417 | | | — | | | — | | | 30,417 | |
Change in fair value of contract consideration convertible notes | 4,250 | | | — | | | — | | | 4,250 | |
Loss from operations | (10,603) | | | (745) | | | (4,931) | | | (16,279) | |
Depreciation and amortization | 162 | | | 14 | | | 1 | | | 177 | |
Additions to long-lived assets | 25 | | | 33 | | | 112 | | | 170 | |
| | | | | | | |
2021 | | | | | | | |
Revenue from external customers | $ | 8,044 | | | $ | 803 | | | $ | — | | | $ | 8,847 | |
Revenue from related party | 1,332 | | | — | | | — | | | 1,332 | |
Income (loss) from operations | 4,399 | | | (1,071) | | | (2,696) | | | 632 | |
Depreciation and amortization | 215 | | | 17 | | | 1 | | | 233 | |
Additions to long-lived assets | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
As of and for the nine months ended September 30, | Chemistry Technologies | | Data Analytics | | Corporate and Other | | Total |
2022 | | | | | | | |
Revenue from external customers | $ | 34,933 | | | $ | 3,479 | | | $ | — | | | $ | 38,412 | |
Revenue from related party | 49,462 | | | — | | | — | | | 49,462 | |
Change in fair value of contract consideration convertible notes | (9,016) | | | — | | | — | | | (9,016) | |
Loss from operations | (1,716) | | | (2,751) | | | (14,057) | | | (18,524) | |
Depreciation and amortization | 507 | | | 45 | | | 2 | | | 554 | |
Additions to long-lived assets | 30 | | | 33 | | | 112 | | | 175 | |
| | | | | | | |
2021 | | | | | | | |
Revenue from external customers | $ | 26,033 | | | $ | 3,749 | | | $ | — | | | $ | 29,782 | |
Revenue from related party | 1,332 | | | — | | | — | | | 1,332 | |
Loss from operations | (3,009) | | | (2,138) | | | (9,926) | | | (15,073) | |
Depreciation and amortization | 739 | | | 52 | | | 2 | | | 793 | |
Additions to long-lived assets | 31 | | | — | | | — | | | 31 | |
| | | | | | | | | | | | | | | | | | | | | | | |
As of and for the three months ended March 31, | Chemistry Technologies | | Data Analytics | | Corporate and Other | | Total |
2023 | | | | | | | |
Revenue from external customers | | | | | | | |
Products | $ | 8,561 | | | $ | 1,941 | | | $ | — | | | $ | 10,502 | |
Services | 664 | | | 486 | | | — | | | 1,150 | |
Total revenue from external customers | 9,225 | | | 2,427 | | | — | | | 11,652 | |
Revenue from related party | | | | | | | — | |
Products | 36,265 | | | — | | | — | | | 36,265 | |
Services | — | | | 90 | | | — | | | 90 | |
Total revenue from related parties | 36,265 | | | 90 | | | — | | | 36,355 | |
Gross profit | 434 | | | 1,446 | | | — | | | 1,880 | |
Change in fair value of Contract Consideration Convertible Notes Payable | (26,095) | | | — | | | — | | | (26,095) | |
Income (loss) from operations | 23,379 | | | 457 | | | (5,325) | | | 18,511 | |
Paid-in-kind interest on Contract Consideration Convertible Notes Payable | 1,416 | | | — | | | — | | | 1,416 | |
Paid-in-kind interest on convertible notes payable | — | | | — | | | 155 | | | 155 | |
Depreciation | 157 | | | 18 | | | 1 | | | 176 | |
Additions to long-lived assets | 30 | | | 95 | | | 32 | | | 157 | |
| | | | | | | |
2022 | | | | | | | |
Revenue from external customers | | | | | | | |
Products | $ | 8,909 | | | $ | 793 | | | $ | — | | | $ | 9,702 | |
Services | 402 | | | 278 | | | — | | | 680 | |
Total revenue from external customers | 9,311 | | | 1,071 | | | — | | | 10,382 | |
Revenue from related party | | | | | | | |
Products | 2,497 | | | — | | | — | | | 2,497 | |
Services | — | | | — | | | — | | | — | |
Total revenue from related parties | 2,497 | | | — | | | — | | | 2,497 | |
Gross profit (loss) | (662) | | | 183 | | | — | | | (479) | |
Change in fair value of Contract Consideration Convertible Notes Payable | 3,892 | | | — | | | — | | | 3,892 | |
Loss from operations | (6,057) | | | (808) | | | (3,419) | | | (10,284) | |
Paid-in-kind interest on Contract Consideration Convertible Notes Payable | 158 | | | — | | | — | | | 158 | |
Paid-in-kind interest on convertible notes payable | — | | | — | | | 327 | | | 327 | |
Depreciation | 178 | | | 16 | | | 1 | | | 195 | |
Additions to long-lived assets | — | | | — | | | — | | | — | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segments are as follows (in thousands):
| | | | September 30, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
Chemistry Technologies | Chemistry Technologies | $ | 150,160 | | | $ | 34,387 | | Chemistry Technologies | $ | 142,033 | | | $ | 146,542 | |
Data Analytics | Data Analytics | 7,215 | | | 7,329 | | Data Analytics | 7,308 | | | 5,645 | |
Corporate and Other | Corporate and Other | 6,644 | | | 8,528 | | Corporate and Other | 14,047 | | | 12,623 | |
Total assets | Total assets | $ | 164,019 | | | $ | 50,244 | | Total assets | $ | 163,388 | | | $ | 164,810 | |
|
The increase in Chemistry Technologies assets is primarily due to contact assets of $81.1 million.
Geographic Information
Revenue by country is based on the location where services are provided and products are sold. NoFor the three months ended March 31, 2023 no individual countries other than the U.S. accounted for more than 10% of revenue. For the three months ended March 31, 2022 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 March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | 2023 | | 2022 |
U.S. (1) | U.S. (1) | $ | 42,670 | | | $ | 8,094 | | | $ | 78,959 | | | $ | 24,624 | | U.S. (1) | | | $ | 46,126 | | | $ | 10,334 | |
UAE | UAE | 2,242 | | | 1,319 | | | 6,692 | | | 3,741 | | UAE | | | 1,403 | | | 1,311 | |
Other countries | Other countries | 711 | | | 766 | | | 2,223 | | | 2,749 | | Other countries | | | 478 | | | 1,234 | |
Total revenue | Total revenue | $ | 45,623 | | | $ | 10,179 | | | $ | 87,874 | | | $ | 31,114 | | Total revenue | | | $ | 48,007 | | | $ | 12,879 | |
(1) Includes revenue from related party
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands): | | | | | | | | | | | | | | | | | | |
Three months ended September 30, | | Revenue | | % of Total Revenue | | | | |
2022 | | | | | | | | |
Customer A (Related Party) | | $ | 30,417 | | | 66.7 | % | | | | |
| | | | | | | | |
2021 | | | | | | | | |
Customer C | | $ | 3,041 | | | 29.9 | % | | | | |
Customer D | | 1,332 | | | 13.1 | % | | | | |
| | | | | | | | | | | | | | | | | | |
Three months ended March 31, | | Revenue | | % of Total Revenue | | | | |
2023 | | | | | | | | |
Customer A (Related Party) | | $ | 36,355 | | | 75.7 | % | | | | |
2022 | | | | | | | | |
Customer B | | $ | 2,607 | | | 20.2 | % | | | | |
Customer C (Related Party) | | 1,389 | | | 10.8 | % | | | | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | |
Nine months ended September 30, | | Revenue | | % of Total Revenue | | | | |
2022 | | | | | | | | |
Customer A (Related Party) | | $ | 48,074 | | | 54.7 | % | | | | |
Customer B | | 10,905 | | | 12.4 | % | | | | |
| | | | | | | | |
2021 | | | | | | | | |
Customer C | | $ | 7,701 | | | 24.8 | % | | | | |
Customer D | | 4,067 | | | 13.1 | % | | | | |
The majority of the Company’s revenue consists predominantly of customers within the oil and gas 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. The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk.
Major Suppliers
Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Expenditure | | % of Total Expenditure | | | | |
Three months ended March 31, | | | | | | | | |
2023 | | | | | | | | |
Supplier A | | $ | 16,954 | | | 40.1 | % | | | | |
Supplier B | | 7,145 | | | 16.9 | % | | | | |
Supplier C | | 4,504 | | | 10.6 | % | | | | |
2022 | | | | | | | | |
Supplier B | | 2,117 | | | 27.0 | % | | | | |
Supplier D | | 933 | | | 11.9 | % | | | | |
Note 18 — Subsequent Events
The Company hasWe have evaluated the effects of events that have occurred subsequent to September 30, 2022,March 31, 2023, and there have been no material events that would require recognition in the September 30, 2022March 31, 2023 interim financial statements or disclosure in the notes to the consolidated financial statements.statements, except as disclosed below.
Sublease of Corporate Headquarters
On April 1, 2023, the Company entered into an agreement to sublease the facility in Houston, Texas, which is currently the Company’s corporate headquarters, beginning September 1, 2023, or earlier, and ending October 30, 2030. The Company plans to lease a smaller facility to relocate the headquarters before September 1, 2023.
New York Stock Exchange (“NYSE”) Continued Listing Requirements
The Company’s common stock is currently listed on the NYSE. On April 12, 2023, the Company received written notice from the NYSE that the average closing price of the Company’s shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, the Company has notified the NYSE that it intends to cure the $1.00 per share deficiency. Based on the applicable NYSE procedures, the Company has six months following the receipt of the NYSE’s notice to cure the deficiency and regain compliance. The NYSE’s notice has no immediate impact on the listing of the Company’s common stock, which will continue to trade on the NYSE subject to the Company’s continued compliance with the other listing requirements of the NYSE. The common stock of the Company will continue to trade under the symbol “FTK” but will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as the Company is deemed to be in compliance. The Company intends to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Flotek,” the "Company," "we," "us" and "our" refer to Flotek Industries, Inc. and its wholly-owned subsidiaries.
The following discussion should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 20212022 (“Annual Report” or “2022 Annual Report”) filed with the U.S. Securities and Exchange Commission (the “SEC”) and the unaudited consolidated financial statements and accompanying notes included herein. Comparative segment revenues and related financial information are discussed herein and are presented in Note 17 to our unaudited consolidated financial statements. See “Forward Looking Statements” in this report and “Risk Factors” included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our 2022 Annual Report, on Form 10-K for the fiscal year ended December 31, 2021, for a description of important factors that could cause actual results to differ from expected results. Our historical financial information may not be indicative of our future performance.
Executive Summary
Flotek Industries, Inc. (“Flotek” or the “Company”) creates unique 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 consumercommercial markets improve their ESGenvironmental performance. The Company serves specialty chemistry needs for both domestic and international energy markets.
The Company has two operating segments, CTChemistry Technologies (“CT”) and DA,Data Analytics (“DA”), which are both supported by the Company’s continuing Research and Innovation (“R&I”) advanced laboratory capabilities.
Company Overview
Chemistry Technologies
TheWe believe that the Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESGenvironmental, social and governance (“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, such as our related party ProFrac Services, LLC, 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 our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, natural gas liquids (NGLs)(“NGLs”), natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
CustomersWe believe customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations have the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We have developed a new line of VeraxVerax™ analyzers for deployment internationally which was 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 conditions we perceive today. Changes often occur.
Energy
We expect North American and International onshore energy, exploration and production activity to continue to improve throughout 2022 from third quarter levels. Going into 2023 we believe that we are in the early years of a tight supply cycle for oil and gas triggered by an extended period of underinvestment in energy development, infrastructure and new sources of oil and gas production. While shorterthe demand cycles will comefor oil and gogas could fluctuate depending on the fluctuating macroeconomic backdrop, thecondition, we believe that this tight supply cycle is durablecould last and willcould provide underlying support to high oil prices for multiple years. TheWe expect that the strongest potential growth throughout 20222023 will likely comescome from private,independent, rather than publicly tradedlarge major exploration and production companies. PrivateIndependent 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 privatethese companies to increase activity and publicly tradedthe larger companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other oilfield service companies and believe sales through indirect channels to the exploration and production companies and oilfield service companies could accelerate in 2023.
Industrial
The Company has 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’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 diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand.
Digital Analytics
The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. We believe Verax Verax™analyzers have gained a foothold in North American markets for critical applications where compositional information is needed in real-time. The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API (American Petroleum Institute) gravity, viscosity, BTU (British Thermal Unit) and more, simultaneously. We continue to workcollaborate with our customers to identify further facilities and applications where our technology has the highest value. We expect to open and establish our international customer base with our new generation of internationally certified online analyzers. The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. We anticipate international sales to increase over the next twelve months because of the newly certified equipment. To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations. AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in a liquids pipeline 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.real-time versus traditional lab analysis. We believe this allows operatorscustomers to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades. We are also gaining traction leveraging the Verax™ in applications where operators and service companies are using field gas as a substitute for diesel in dual fuel engines as the market moves to Tier 4 equipment and eFleets. Analyzing this in real-time allows companies to maximize the substitution rate while lowering emissions, reducing fuel consumption/costs, and protecting the equipment from damage.
ESG
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. We anticipate the Company’s products and services could 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 (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, we believe the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.
The Company believesWe believe the industry focus on maintaining a “social license to operate” provides the platform to accelerate the sale of our products and services that we believe can help the customer achieve a greener goal. We believe the performance 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 are continuing throughout 2022 according to Secretary of Transportation Peter Buttigieg. We expect the anticipated supply chain activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:
•Fluctuating freight costs;costs for shipping to our customers;
•Availability of raw materials;
•Delays due to port congestion;
•Labor shortagesshortages; and
•Demand forecasting.
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.
COVID-19New York Stock Exchange (“NYSE”) Continued Listing Requirements
The impactsCompany’s common stock is currently listed on the NYSE. On April 12, 2023, the Company received written notice from the NYSE that the average closing price of COVID-19the Company’s shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, the Company has notified the NYSE that it intends to cure the $1.00 per share deficiency. Based on the applicable NYSE procedures, the Company has six months following the receipt of the NYSE’s notice to cure the deficiency and regain compliance. The NYSE’s notice has no immediate impact on the listing of the Company’s common stock, which will continue to affecttrade on the U.S. and global economy. We believe our protocols and processes establishedNYSE subject to maintain business continuitythe Company’s continued compliance with COVID-19the other listing requirements of the NYSE. The common stock of the Company will continue to trade under the symbol “FTK” but will have proven robust enoughan added designation of “.BC” to diminish concern about business disruption unless new variants emerge.indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as the Company is deemed to be in compliance. The Company intends to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.
Consolidated Results of Operations (in thousands)
| | | Three months ended September 30, | | | Nine months ended September 30, | | | | | Three months ended March 31, |
| | 2022 | | 2021 | | | 2022 | | 2021 | | | | | 2023 | | 2022 |
Revenue | Revenue | | | | | | | | | Revenue | | | | | | |
Revenue from external customers | Revenue from external customers | $ | 15,206 | | | $ | 8,847 | | | | $ | 38,412 | | | $ | 29,782 | | Revenue from external customers | | | | $ | 11,652 | | | $ | 10,382 | |
Revenue from related party | Revenue from related party | 30,417 | | | 1,332 | | | | 49,462 | | | 1,332 | | Revenue from related party | | | | 36,355 | | | 2,497 | |
Total revenues | Total revenues | 45,623 | | | 10,179 | | | | 87,874 | | | 31,114 | | Total revenues | | | | 48,007 | | | 12,879 | |
Cost of goods sold | 47,465 | | | 4,022 | | | | 92,500 | | | 26,876 | | |
Cost of goods sold % | 104.0 | % | | 39.5 | % | | | 105.3 | % | | 86.4 | % | |
Cost of sales | | Cost of sales | | | | 46,127 | | | 13,358 | |
Cost of sales % | | Cost of sales % | | | | 96.1 | % | | 103.7 | % |
Gross profit (loss) | Gross profit (loss) | (1,842) | | | 6,157 | | | | (4,626) | | | 4,238 | | Gross profit (loss) | | | | 1,880 | | | (479) | |
Gross profit (loss) % | Gross profit (loss) % | (4.04) | % | | 60.5 | % | | | (5.3) | % | | 13.6 | % | Gross profit (loss) % | | | | 3.9 | % | | (3.7) | % |
Selling general and administrative | Selling general and administrative | 9,035 | | | 4,092 | | | | 21,345 | | | 14,379 | | Selling general and administrative | | | | 6,451 | | | 4,886 | |
Selling general and administrative % | Selling general and administrative % | 19.8 | % | | 40.2 | % | | | 24.3 | % | | 46.2 | % | Selling general and administrative % | | | | 13.4 | % | | 37.9 | % |
| Depreciation and amortization | 177 | | | 233 | | | | 554 | | | 793 | | |
Depreciation | | Depreciation | | | | 176 | | | 195 | |
Research and development | Research and development | 985 | | | 1,186 | | | | 3,515 | | | 4,194 | | Research and development | | | | 614 | | | 1,415 | |
(Gain) loss on sale of property and equipment | (10) | | | 14 | | | | (1,916) | | | (55) | | |
| Severance costs | | Severance costs | | | | 2,223 | | | (7) | |
Loss on sale of property and equipment | | Loss on sale of property and equipment | | | | — | | | 8 | |
Gain on lease termination | Gain on lease termination | — | | | — | | | | (584) | | | — | | Gain on lease termination | | | | — | | | (584) | |
Change in fair value of contract consideration convertible notes payable | 4,250 | | | — | | | | (9,016) | | | — | | |
(Gain) loss in fair value of Contract Consideration Convertible Notes Payable | | (Gain) loss in fair value of Contract Consideration Convertible Notes Payable | | | | (26,095) | | | 3,892 | |
Income (loss) from operations | Income (loss) from operations | (16,279) | | | 632 | | | | (18,524) | | | (15,073) | | Income (loss) from operations | | | | 18,511 | | | (10,284) | |
Operating margin % | Operating margin % | (35.7) | % | | 6.2 | % | | | (21.1) | % | | (48.4) | % | Operating margin % | | | | 38.6 | % | | (79.9) | % |
Interest and other income, net | Interest and other income, net | (2,508) | | | (120) | | | | (4,653) | | | 766 | | Interest and other income, net | | | | 2,841 | | | (444) | |
Income (loss) before income taxes | Income (loss) before income taxes | (18,787) | | | 512 | | | | (23,177) | | | (14,307) | | Income (loss) before income taxes | | | | 21,352 | | | (10,728) | |
Income tax expense | (7) | | | (3) | | | | (101) | | | (30) | | |
Income tax (expense) benefit | | Income tax (expense) benefit | | | | (9) | | | 4 | |
Net income (loss) | Net income (loss) | $ | (18,794) | | | $ | 509 | | | | $ | (23,278) | | | $ | (14,337) | | Net income (loss) | | | | $ | 21,343 | | | $ | (10,724) | |
Net income (loss) % | | Net income (loss) % | | | | 44.5 | % | | (83.3) | % |
|
Consolidated revenue for the three and nine months ended September 30, 2022,March 31, 2023 increased $35.4$35.1 million, or 348%273%, and $56.8 million or 182%, respectively, versus the same period of 2021,2022, primarily driven by related party activity under the ProFrac contractAgreement which commenced in the second quarter of 2022 and continued increased activity across our customer base, particularly in the Chemistry TechnologiesDA segment. Related party revenues in the CT segment are partially offset by $1.3 million of contract assets amortization for the three months ended March 31, 2023.
Consolidated cost of goods soldsales for the three and nine months ended September 30, 2022,March 31, 2023 increased $43.4$32.8 million, or 1080%245%, and $65.6 million or 244%, respectively, versus the same periodsperiod of 2021,2022, primarily attributable to the increase in revenues. Cost of goods sold in 2022 were negatively impacted by one- time expenses incurred due to the ramp up of ProFrac activity and the write down of inventory of $1.0 million in the three months ended September 30, 2022, relating to the decision to cease the manufacture and sale of hand sanitizers. Cost of goods sold in three months ended September 30, 2021, benefited from the release of accrued costs of $7.6 million subsequent to the agreement of a settlement with ADM, see Note 12, “Commitments and Contingencies”.revenue.
Selling general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided. SG&A expenses for the three months ended September 30, 2022,March 31, 2023 increased $4.9$1.6 million, or 121% versus the same period of 2021. $1.9 million of the increase related to bonus accruals. No bonus amounts had been accrued previously during 2022 and nil was accrued as of the same period in the prior year. The remainder of the increase was largely driven by increased professional fees. SG&A expenses for the nine months ended September 30, 2022, increased $7.0 million or 48%32%, versus the same period of 2021 as a result of increased personnel costs2022. The increase relates mainly attributable to professional fees, driven by higher year on year bonus costs and 2021 benefiting from an Employee Retention Credit, (“ERC”). Professionallegal fees for the nine months ended September 30, 2022 were higher due to costs associated with potential financing transactions, partially offset by lower legal fees.a decrease in capital transaction related costs.
Depreciation
Severance costs of property and equipment decreased $0.1$2.2 million or 24%, forwere recorded in the three months ended September 30, 2022, versusMarch 31, 2023 compared to a credit of $7 thousand for the same period of 2021. Depreciation of property2022, and equipment decreased $0.2 million or 30% for the nine months ended September 30, 2022.
were attributable to senior management changes. Research and development (“R&D”) costs for the three and nine months ended September 30, 2022,March 31, 2023, decreased $0.2$0.8 million or 17% and $0.7 million or 16%57%, respectively, versus the same period of 20212022 due to lower personnel costs as a result of a reduction in workforcesample testing in 2023 and lower non-labor cost.personnel cost driven by headcount optimization.
LossIncome from operations decreasedincreased by $16.9$28.8 million or 2676%280% for the three months ended September 30, 2022,March 31, 2023, versus the same period in 2021.2022. The increased loss from operationsimprovement is partly attributable toprimarily driven by the negative gross margin, increased SG&A costs and the loss ongain in fair value of the Contract Consideration Convertible Notes Payable. ForPayable of $26.1 million compared to a loss in fair value of $3.9 million for the ninesame period of 2022. The improvement is partially offset by severance costs of $2.2 million.
Interest and other income for the three months ended September 30, 2022, the loss from operationsMarch 31, 2023, increased by $3.5$3.3 million or 23% attributable mainly to740% driven by a $4.5 million gain for the negative gross marginforgiveness of the Flotek PPP loan (see Note 9, “Debt and increased SG&A costs.Convertible Notes Payable”). This was partially offset by the gain on salenon-cash interest charges of property and equipment and lease termination and a credit relating to the change$1.7 million in fair value of Contract Consideration Convertible Notes Payable.
Loss before taxes for the three months ended September 30, 2022, was impacted by interest charges of $2.3March 31, 2023 versus $0.7 million versus $18 thousand for the same period in 2021. For the nine months ended September 30, 2022 and 2021 interest charges were $4.6 million and $53 thousand respectively.2022. The increased interest cost relates to payment in kindpaid- in-kind interest expense on the Convertible Notes Payableconvertible notes payable and the Contract Consideration Convertible Notes Payable.
The Company’s income tax expense(expense) benefit for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 was minimal.
Results by Segment (in thousands):
Chemistry Technologies Results of Operations:
| | | Three months ended September 30, | | Nine months ended September 30, | | | | Three months ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | 2023 | | 2022 |
Revenue | $ | 43,928 | | | $ | 9,376 | | | $ | 84,395 | | | $ | 27,365 | | |
| Revenue from external customers | | Revenue from external customers | | | $ | 9,225 | | | $ | 9,311 | |
Revenue from related party | | Revenue from related party | | | 36,265 | | | 2,497 | |
Income (loss) from operations | Income (loss) from operations | (10,603) | | | 4,399 | | | (1,716) | | | (3,009) | | Income (loss) from operations | | | 23,379 | | | (6,057) | |
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CT revenue from external customers for the three and nine months ended September 30, 2022 increased $34.6March 31, 2023 decreased $0.1 million and $57.0 million, respectively,or 0.9%, compared to the same periodsperiod of 2021.2022. Revenue from related parties increased $33.8 million or 1352%, compared to the same period of 2022. The increased revenue in 20222023 is driven primarily by the ProFrac AgreementsAgreement which commenced in the second quarter of 2022, of which the Company recognized $30.4 million and $48.1 million, for the three and nine months ended September 30, 2022, respectively.2022.
Income (loss) from operations for the CT segment for the three months ended September 30, 2022 decreased by $15.0March 31, 2023 increased $29.4 million or 341%486% compared to the same period of 2021.2022. The declineimprovement is primarily attributable to the loss on revaluationgain in fair value of the Contract Consideration Convertible Notes Payable of $4.3$26.1 million increased costs primarily due to bonus accruals and the gross margin decrease driven by the inventory write down of $1.0 million and cost of goods sold for the three months ended September 30, 2021 benefiting fromMarch 31, 2023 compared to a loss of $3.9 million for the releasesame period of accrued2022. The improvement is partially offset by increased cost of sales, driven by activity, with notable, significant increased freight and equipment rental costs, relating toand severance costs of $0.6 million, driven by changes in senior management. During the ADM settlement of $7.6 million. Thethree months ended March 31, 2022, the loss from operations included a gain on lease termination of $0.6 million.
Data Analytics Results of Operations:
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2023 | | 2022 |
Revenue from external customers | | | | | $ | 2,427 | | | $ | 1,071 | |
Revenue from related party | | | | | 90 | | | — | |
Income (loss) from operations | | | | | 457 | | | (808) | |
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DA revenue from external customers for the ninethree months ended September 30, 2022 decreased by $1.3March 31, 2023 increased $1.4 million or 43%127% compared to the same period of 2021. The improvement relates mainly to the revaluation of the Contract Consideration Convertible Notes Payable of $9.0 million and the gain on sale of property and equipment and lease termination, partially offset by the lower gross margin and increased costs2022 primarily due to bonus accruals.
Data Analytics Results of Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2022 | | Nine months ended September 30, 2022 |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | $ | 1,695 | | | $ | 803 | | | $ | 3,479 | | | $ | 3,749 | |
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Loss from operations | (745) | | | (1,071) | | | (2,751) | | | (2,138) | |
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DA revenue for the three months ended September 30, 2022 increased $0.9 million or 111% compared to the same period of 2021 due to significant products revenues from three new customers. Revenue from related party customers and several existing customers. DA revenue for the nine months ended September 30, 2022 decreased $0.3was $0.1 million or 7% comparedrelating to the same period of 2021.services provided to ProFrac Services, LLC.
LossIncome from operations for the DA segment for the three months ended September 30, 2022 decreased by $0.3March 31, 2023 increased $1.3 million or 30%157% compared to the same period for 2021 due to2022 driven by increased revenuesactivity and improved margins partially offset by an increase in costs driven primarily by bonus accruals. decreased R&D expense.
Corporate and Other Results of Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | | | | | | | |
| 2023 | | 2022 | | | | | | | | | | |
Loss from operations | $ | (5,325) | | | $ | (3,419) | | | | | | | | | | | |
| | | | | | | | | | | | | |
Loss from operations for the DA segment for the ninethree months ended September 30, 2022
worsened by $0.6March 31, 2023, increased $1.9 million, or 29%56%, compared to the same period of 2021.2022 attributable to severance costs and increased professional fees. Severance costs of $1.6 million were recorded in the three months ended March 31, 2023, relating to senior management changes. The worsening loss from operations is primarily as a result of increased R&D expense and decreased revenuesincrease in professional fees relates mainly to higher legal fees partially offset by lower personnel cost.capital transaction related costs.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and funding working capital requirements. During the ninethree months ended September 30, 2022,March 31, 2023, the Company funded working capital requirements with net cash proceeds from the issuance of Convertible Notes Payable for $20.1 million, prefunded warrants issued for $18.3 million and cash on hand.
As of September 30, 2022,March 31, 2023, the Company had availableunrestricted cash and cash equivalents of $8.5$12.4 million, as compared to $11.5$12.3 million aton December 31, 2021.2022. During the ninethree months ended September 30, 2022,March 31, 2023, the Company had an operating lossincome of $18.5 million, $47.2 million of cash used in operating activities, $4.0 million cash provided by investing activities and $38.2$1.1 million of cash provided by operating activities, $0.2 million cash used in investing activities and $0.8 million of cash used in financing activities.
LiquidityGoing Concern
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
The Company currently funds its operations and growth primarily from cash on hand and other liquidcurrent assets. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in the twelve months subsequent towithin one year after the date of filing the unaudited condensed consolidated financial statements.
The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from its long-term supply agreement withthe ProFrac Services, LLCAgreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, Related“Related Party Transactions)Transactions”). We believeIt is not certain that ourthe Company’s cash and other liquidcurrent assets and ourthe Company’s forecasted operating cash flows currently expected to be generated from the ongoing execution of the long-term supply agreement with ProFrac Services, LLCAgreement will provide usthe Company with sufficient financial resources to fund operations and meet ourthe Company’s capital requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are filed.
The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company cannot guarantee a sufficient level of cash flows in the future. The consolidated financial statements have been prepared assumingmay be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.
The unaudited condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
Net cash used in operating activities | $ | (47,166) | | | $ | (18,279) | |
Net cash provided by investing activities | 4,040 | | | 43 | |
Net cash provided by (used in) financing activities | 38,199 | | | (451) | |
Effect of changes in exchange rates on cash and cash equivalents | 211 | | | (70) | |
Net change in cash, cash equivalents and restricted cash | $ | (4,716) | | | $ | (18,757) | |
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2022 |
Net cash provided by (used in) operating activities | $ | 1,140 | | | $ | (8,474) | |
Net cash (used in) provided by investing activities | (157) | | | 24 | |
Net cash (used in) provided by financing activities | (818) | | | 19,993 | |
Effect of changes in exchange rates on cash and cash equivalents | (21) | | | 8 | |
Net change in cash and cash equivalents and restricted cash | $ | 144 | | | $ | 11,551 | |
Operating Activities
Net cash provided by operating activities was $1.1 million during the three months ended March 31, 2023 compared to $8.5 million used in operating activities was $47.2 million and $18.3 million duringfor the ninesame period of 2022. Consolidated net income for the three months ended September 30, 2022 and 2021, respectively. ConsolidatedMarch 31, 2023 was $21.3 million compared to a net loss of $10.7 million for the ninethree months ended September 30, 2022 and 2021 were $23.3 million and $14.3 million, respectively.March 31, 2022.
During the ninethree months ended September 30, 2022,March 31, 2023, non-cash adjustments to net income (loss) totaled $0.3$27.8 million as compared to $4.9$5.6 million for the same period of 2021.2022.
•For the three months ended March 31, 2023 non-cash adjustments included $26.1 million for the change in fair value of Contract Consideration Convertible Notes Payable, $4.5 million for PPP loan forgiveness and $1.1 million stock compensation adjustment. These were offset by non-cash positive adjustments of $1.6 million paid-in-kind interest expense, $1.3 million amortization of contract assets and $1.0 million non-cash lease expense.
•For the three months ended March 31, 2022 non-cash adjustments included $3.9 million for the change in fair value of Contract Consideration Convertible Notes Payable, $0.7 million stock compensation expense, $0.5 million paid-in-kind interest expense and $0.3 million provision for excess and obsolete inventory. These were partially offset by $0.6 million for the gain on lease termination.
During the ninethree months ended September 30, 2022,March 31, 2023, changes in working capital used $23.6provided $7.6 million of cash as compared to providing $0.9using $3.3 million for the same period of 2021.2022.
•For the ninethree months ended September 30, 2022,March 31, 2023, changes in working capital resulted primarily from an increase in accounts receivable, accounts receivable related party and inventories of $5.7 million, $24.6 million and $11.4 million, respectively, due to the significant revenue increase. Contract assets increased $3.6 million relating to transaction fees
paid, associated with Contract Consideration Convertible Notes Payable. This is partially offset by an increase in accounts payable of $22.0 million relating primarily to purchases made to support our contract with ProFrac.$8.6 million.
•For the ninethree months ended September 30, 2021, the cash provided byMarch 31, 2022, changes in working capital resulted primarily resulted from routine operations, including a reductiondecrease in accounts receivable and inventoryaccrued liabilities of $2.4 million offset bypartially due to payment of a legal settlement accrued in 2021 and an increase in inventories of other assets of $1.7$1.0 million.
Investing Activities
Net cash fromused in investing activities for the ninethree months ended September 30, 2022March 31, 2023 was $4.0$0.2 million from the sale of the manufacturing facility in Waller, Texas which closed on April 18, 2022 partially offsetdriven by capital additions.
Net cash fromprovided by investing activities for the ninethree months ended September 30, 2021March 31, 2022 was negligible.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2023 was $0.8 million, and relates primarily to payments for forfeited stock options and to tax authorities for shares withheld from employees. Net cash provided by financing activities was $38.2$20.0 million for the ninethree months ended September 30,March 31, 2022, primarily from the proceeds offrom the issuance of convertible notes and prefunded warrants partially offset by issuance costs.
Net cash used in financing activities was $0.5 million for the nine months ended September 30, 2021, primarily for purchases of common stock related to tax withholding requirements.
Off-Balance Sheet Arrangements
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.
notes.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principlesGAAP and the Company’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. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company’s 2022 Annual Report describes the critical accounting policies and estimates used in the preparation of the Company’s condensed consolidated financial statements. Note 2, “Summary of Significant Accounting Policies” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2022 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 about Market Risk
The Company is exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of the Company’s Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.
In accordance with Exchange Act Rules 13a–15(e) and 15d–15(e), we carried out an evaluation under the supervision and with the participation of our management, including the Interim Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2023. Based upon this evaluation, our interim Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2023, our disclosure controls and procedures were not effective because of a material weakness in our internal control over financial reporting described below.
Material Weakness in Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, as amended.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the preparation of the Company’s 2022 Annual Report, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2022, and identified the material weakness described below that continues to exist as of March 31, 2023.
Specifically, (i) the Company did not have sufficient resources in place throughout the reporting period with the appropriate training and knowledge of internal controls over financial reporting in order to establish the Company’s financial reporting processes to design, implement and operate an effective system of internal control over financial reporting; (ii) the Company did not conduct an adequate continuous risk assessment over financial reporting to identify and analyze risks of financial misstatement due to error and/or fraud and to identify and assess necessary changes in financial reporting processes and internal controls impacted by significant changes in the business and increase in transactions; and (iii) the Company did not have an effective information and communication process that ensured appropriate and accurate information was available to financial reporting personnel on a timely basis in order that they could fulfill their roles and responsibilities.
Accordingly, the Company did not establish appropriate control activities through policies and procedures to mitigate risk to the achievement of the Company’s financial reporting objectives, as follows:
•The Company did not design effective controls over the identification and subsequent accounting for modifications to lease agreements;
•The Company did not design effective controls over the accuracy of prepaid asset accounts;
•The Company did not design effective controls over the completeness and accuracy of the related party revenue accrual at period end to ensure all sales are properly accounted for.
These control deficiencies resulted in several material and immaterial misstatements that were corrected prior to the issuance of the consolidated financial statements included in the 2022 Annual Report.
The Company believes that, notwithstanding the material weakness mentioned above, the unaudited condensed consolidated financial statements contained in this Form 10-Q fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company in conformity with generally accepted accounting principles in the United States as of the dates and for the periods presented in this Form 10-Q.
Remediation Plan and Status
The Company has implemented and continues to implement certain remediation actions and continues to evaluate the elements of the remediation plan. These elements include:
Based upon this evaluation,•Implementing a revised FY2023 financial control risk assessment process based on changes in process that have impacted the Company as well as a regularly recurring assessment process focused on identifying and analyzing risks of financial misstatements due to changes in our business or the nature of transactions; and
•Enhancing the information and communication processes to ensure the organization communicates information internally in a timely manner, including information regarding objectives, responsibilities and the functioning of internal controls over financial reporting. Changes will include more frequent discussion of significant business transactions and the impact of these transactions on the Company’s principal executive officerfinancial reporting, and principal financial officer have concludedimproving communication to employees regarding their responsibilities for ensuring that effective internal controls are maintained.
The Company believes that the Company’s disclosureactions listed above will provide appropriate remediation of the material weakness; however, the testing of the effectiveness of the controls has not been completed by the Company. Due to the nature of the remediation process and procedures were effectivethe need for sufficient time after implementation to evaluate and test the design and effectiveness of the controls, no assurance can be given as to the timing for completion of September 30, 2022.remediation. The material weakness will be fully remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management.
Changes in Internal Controls over Financial Reporting
ThereExcept as described above in “Remediation Plan and Status”, 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 September 30, 2022March 31, 2023 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
There areExcept as described in Note 12, “Commitments and Contingencies” of the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1, there have been no material changes sincein the legal proceedings as described in “Item3. - Legal Proceedings” in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2022.23, 2023.
Item 1A. Risk Factors
In 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 2022 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 September 30, 2022,March 31, 2023, except as set forth below, there have been no material changes in our risk factors from those set forth in the Annual Report. The risks described in the Annual Report and below are not the only risks facing our company. Additional risks and uncertainties not currently known to us or thatthose we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.
If we cannot regain compliance with the NYSE’s continued listing requirements and rules, the NYSE may delist our common stock, which could negatively affect our company, the price of our common stock and our stockholders’ ability to sell our common stock.
On April 12, 2023, we received written notice from the NYSE that the average closing price of our shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, we have notified the NYSE that we intend to cure the $1.00 per share deficiency. Based on the applicable NYSE procedures, we have six months following the receipt of the NYSE’s notice to cure the deficiency and regain compliance. The NYSE’s notice has no immediate impact on the listing of our common stock, which will continue to trade on the NYSE subject to our continued compliance with the other listing requirements of the NYSE. Our shares of common stock will continue to trade under the symbol “FTK” but will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as we are deemed to be in compliance. We intend to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.
If our common stock ultimately were to be delisted for any reason, it could negatively impact us by (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; and (iv) impairing our ability to provide equity incentives to our employees.
Item 2. Unregistered Sales of Equity Securities
Unregistered Sales of Equity Securities
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.None
Issuer PurchasesRepurchases 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 or exercise of the award stock.award. Repurchases of the Company’s equity securities during the three months ended September 30, 2022,March 31, 2023, 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 | | | | |
| | | | | | | |
| | | | | | | |
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July 1, 2022 to July 31, 2022 | — | | | 0.00 | | | | |
August 1, 2022 to August 31, 2022 | 30,599 | | | 1.16 | | | | |
September 1, 2022 to September 30, 2022 | 14,054 | | | 1.21 | | | | |
Total | 44,653 | | | | | | | |
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Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | | | |
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January 1, 2023 to January 31, 2023 | 4,407 | | | $ | 1.07 | | | | | |
February 1, 2023 to February 28, 2023 | 2,472 | | | $ | 1.18 | | | | | |
March 1, 2023 to March 31, 2023 | 163,882 | | | $ | 1.17 | | | | | |
Total | 170,761 | | | | | | | |
(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.On May 5, 2023, the Board approved a form of director and officer indemnification agreement (the “D&O Indemnification Agreement”) to be used by the Company to provide contractual indemnification, expense advancement, and other related rights to the members of the Board and the Company’s executive officers who are a party thereto in accordance with the Delaware General Corporation Law, and authorized the Company to enter into the D&O Indemnification Agreement with each of the Company’s directors and executive officers. The foregoing description of the D&O Indemnification Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the D&O Indemnification Agreement, a copy of which is attached hereto as Exhibit 10.6 and incorporated herein by reference.
Item 6. Exhibits
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101.INS | * | Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document | | | |
101.SCH | * | Inline XBRL Schema Document | | | |
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 with this Form 10-Q. | | | |
** | | Furnished with this Form 10-Q, not filed. | | | |
*** | | 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 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: November 9, 2022May 10, 2023
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FLOTEK INDUSTRIES, INC. |
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By: | | /s/ John W. Gibson, Jr.Harsha V. Agadi |
| | John W. Gibson, Jr.Harsha V. Agadi |
| | President,Interim Chief Executive Officer and Chairman of the BoardDirector (Principal Executive Officer) |
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By: | | /s/ Seham CarsonBond Clement |
| | Seham CarsonBond Clement |
| | Interim Chief Financial Officer (Principal Financial and Accounting Officer) |