FLOTEK INDUSTRIES INC/CN/ - Quarter Report: 2022 March (Form 10-Q)
| UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 | |||||||||||
FORM 10-Q | |||||||||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
For the quarterly period ended March 31, 2022 | |||||||||||
| or | |||||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||||
| For the transition period from to | |||||||||||
Commission File Number 1-13270 | |||||||||||
FLOTEK INDUSTRIES, INC. | ||
| (Exact name of registrant as specified in its charter) | ||
| Delaware | 90-0023731 | |||||||||||||
| (State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
8846 N. Sam Houston Parkway W. Houston, TX | 77064 | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(Registrant’s telephone number, including area code)
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.0001 par value | FTK | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the 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 May 13, 2022, there were 76,611,103 outstanding shares of the registrant’s common stock, $0.0001 par value.
TABLE OF CONTENTS
| Forward-Looking Statements | 3 | |||||||
PART I - FINANCIAL INFORMATION | ||||||||
| 4 | ||||||||
Unaudited Condensed Consolidated Balance Sheets at March 31, 2022 and December 31, 2021 | 4 | |||||||
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021 | 5 | |||||||
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2022 and 2021 | 6 | |||||||
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 | 7 | |||||||
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021 | 8 | |||||||
| 9 | ||||||||
| 22 | ||||||||
| 29 | ||||||||
| 29 | ||||||||
PART II - OTHER INFORMATION | ||||||||
| 31 | ||||||||
| 31 | ||||||||
| 31 | ||||||||
| 31 | ||||||||
| 31 | ||||||||
| 32 | ||||||||
| 33 | ||||||||
SIGNATURES | 34 | |||||||
2
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,” “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, 2021 (“Annual Report” or “2021 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022, and periodically in subsequent reports filed with the SEC. The Company has no obligation, and we disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FLOTEK INDUSTRIES INC, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 24,835 | $ | 11,534 | |||||||
| Restricted cash | 40 | 1,790 | |||||||||
Accounts receivable, net of allowance for doubtful accounts of $684 and $659 at March 31, 2022 and December 31, 2021, respectively | 13,239 | 13,297 | |||||||||
| Inventories, net | 10,143 | 9,454 | |||||||||
| Income taxes receivable | 32 | 22 | |||||||||
| Other current assets | 3,372 | 3,740 | |||||||||
| Current contract assets | 3,533 | — | |||||||||
| Assets held for sale | 2,752 | 2,762 | |||||||||
| Total current assets | 57,946 | 42,599 | |||||||||
| Property and equipment, net | 5,079 | 5,296 | |||||||||
| Operating lease right-of-use assets | 1,827 | 2,041 | |||||||||
| Deferred tax assets, net | 282 | 279 | |||||||||
| Other long-term assets | 17 | — | |||||||||
| Long term contract assets | 7,067 | 29 | |||||||||
| TOTAL ASSETS | $ | 72,218 | $ | 50,244 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 8,233 | $ | 7,616 | |||||||
| Accrued liabilities | 6,747 | 8,996 | |||||||||
| Income taxes payable | 4 | 4 | |||||||||
| Interest payable | 94 | 82 | |||||||||
| Current portion of operating lease liabilities | 619 | 602 | |||||||||
| Current portion of finance lease liabilities | 33 | 41 | |||||||||
| Current portion of long-term debt | 1,553 | 1,436 | |||||||||
| Convertible notes payable | 17,609 | — | |||||||||
| Contingent convertible notes payable | 14,050 | — | |||||||||
| Total current liabilities | 48,942 | 18,777 | |||||||||
| Deferred revenue, long-term | 84 | 91 | |||||||||
| Long-term operating lease liabilities | 6,806 | 7,779 | |||||||||
| Long-term finance lease liabilities | 47 | 53 | |||||||||
| Long-term debt | 3,235 | 3,352 | |||||||||
| TOTAL LIABILITIES | 59,114 | 30,052 | |||||||||
| Commitments and contingencies (See Note 15) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | — | — | |||||||||
Common stock, $0.0001 par value, 140,000,000 shares authorized; 82,563,610 shares issued and 76,490,522 shares outstanding at March 31, 2022 ; 79,483,837 shares issued and 73,461,203 shares outstanding at December 31, 2021 | 8 | 8 | |||||||||
| Additional paid-in capital | 367,104 | 363,417 | |||||||||
| Accumulated other comprehensive income | 89 | 81 | |||||||||
| Accumulated deficit | (319,938) | (309,214) | |||||||||
Treasury stock, at cost; 6,073,088 and 6,022,634 shares at March 31, 2022 and December 31, 2021 , respectively | (34,159) | (34,100) | |||||||||
| Total stockholders’ equity | 13,104 | 20,192 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 72,218 | $ | 50,244 | |||||||
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
4
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Revenue from external customers | $ | 10,382 | $ | 11,770 | |||||||
| Revenue from related party | 2,497 | — | |||||||||
| Total revenues | 12,879 | 11,770 | |||||||||
| Cost of goods sold | 13,358 | 12,080 | |||||||||
| Gross loss | (479) | (310) | |||||||||
| Operating costs and expenses: | |||||||||||
| Selling, general, and administrative | 4,879 | 6,082 | |||||||||
| Depreciation and amortization | 195 | 307 | |||||||||
| Research and development | 1,415 | 1,542 | |||||||||
| Loss on sale of property and equipment | 8 | 2 | |||||||||
| Gain on lease termination | (584) | — | |||||||||
| Change in fair value of contingent convertible notes payable | 3,892 | — | |||||||||
| Total operating costs and expenses | 9,805 | 7,933 | |||||||||
| Loss from operations | (10,284) | (8,243) | |||||||||
| Other income (expense): | |||||||||||
| Interest expense | (668) | (18) | |||||||||
| Other income (expense) | 224 | (33) | |||||||||
| Total other expense | (444) | (51) | |||||||||
| Loss before income taxes | (10,728) | (8,294) | |||||||||
| Income tax benefit (expense) | 4 | (6) | |||||||||
| Net Loss | $ | (10,724) | $ | (8,300) | |||||||
| Loss per common share: | |||||||||||
| Basic | $ | (0.15) | $ | (0.12) | |||||||
| Diluted | $ | (0.15) | $ | (0.12) | |||||||
| Weighted average common shares: | |||||||||||
| Weighted average common shares used in computing basic loss per common share | 73,858 | 68,447 | |||||||||
| Weighted average common shares used in computing diluted loss per common share | 73,858 | 68,447 | |||||||||
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
5
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net Loss | $ | (10,724) | $ | (8,300) | |||||||
| Other comprehensive income: | |||||||||||
| Foreign currency translation adjustment | 8 | 49 | |||||||||
| Comprehensive Loss | $ | (10,716) | $ | (8,251) | |||||||
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
6
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (10,724) | $ | (8,300) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Change in fair value of contingent consideration | 94 | (335) | |||||||||
| Change in fair value of contingent convertible notes payable | 3,892 | — | |||||||||
| Amortization of convertible note issuance cost | 166 | — | |||||||||
| Payment in kind interest expense | 485 | — | |||||||||
| Depreciation and amortization | 195 | 307 | |||||||||
| Provision for doubtful accounts, net of recoveries | 238 | — | |||||||||
| Provision for excess and obsolete inventory | 310 | 307 | |||||||||
| Loss on sale of property and equipment | 8 | 2 | |||||||||
| Gain on lease termination | (584) | — | |||||||||
| Non-cash lease expense | 56 | 105 | |||||||||
| Stock compensation expense | 739 | 778 | |||||||||
| Deferred income tax (benefit) expense | (4) | 2 | |||||||||
| Changes in current assets and liabilities: | |||||||||||
| Accounts receivable | (180) | 255 | |||||||||
| Inventories | (999) | (78) | |||||||||
| Income taxes receivable | (10) | 267 | |||||||||
| Other current assets | 168 | 405 | |||||||||
| Other long-term assets | (388) | 541 | |||||||||
| Accounts payable | 616 | 695 | |||||||||
| Accrued liabilities | (2,564) | (317) | |||||||||
| Income taxes payable | — | 89 | |||||||||
| Interest payable | 12 | 12 | |||||||||
| Net cash used in operating activities | (8,474) | (5,265) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | — | (19) | |||||||||
| Proceeds from sale of assets | 24 | 2 | |||||||||
| Net cash provided by (used in) investing activities | 24 | (17) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of convertible notes | 21,150 | — | |||||||||
| Payment of issuance costs of convertible notes | (1,084) | — | |||||||||
| Payments to tax authorities for shares withheld from employees | (59) | (105) | |||||||||
| Proceeds from issuance of stock | — | 38 | |||||||||
| Payments for finance leases | (14) | (14) | |||||||||
| Net cash provided by (used in) financing activities | 19,993 | (81) | |||||||||
| Effect of changes in exchange rates on cash and cash equivalents | 8 | 23 | |||||||||
| Net change in cash, cash equivalents and restricted cash | 11,551 | (5,340) | |||||||||
| Cash and cash equivalents at the beginning of period | 11,534 | 38,660 | |||||||||
| Restricted cash at the beginning of period | 1,790 | 664 | |||||||||
| Cash and cash equivalents and restricted cash at beginning of period | 13,324 | 39,324 | |||||||||
| Cash and cash equivalents at end of period | 24,835 | 33,945 | |||||||||
| Restricted cash at the end of period | 40 | 40 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 24,875 | $ | 33,985 | |||||||
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 Months Ended March 31, 2022 and 2021
(In thousands of U.S. dollars and shares)
| 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 | — | — | — | — | — | — | (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) | |||||||||||||||||||||||||||||||||||||||
| Conversion of 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 | |||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | — | — | (8,300) | (8,300) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | 49 | — | 49 | |||||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | (58) | — | 38 | — | — | 38 | |||||||||||||||||||||||||||||||||||||||
| Restricted stock granted | 220 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Restricted stock forfeited | — | — | 5 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | 778 | — | — | 778 | |||||||||||||||||||||||||||||||||||||||
| Shares withheld to cover taxes | — | — | 45 | (105) | — | — | — | (105) | |||||||||||||||||||||||||||||||||||||||
| Other (see Note 12, “Stockholders’ Equity”) | (613) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 78,276 | $ | 8 | 5,573 | $ | (33,956) | $ | 360,537 | $ | 30 | $ | (286,988) | $ | 39,631 | |||||||||||||||||||||||||||||||||
The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
8
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 solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial, commercial, and consumer markets improve their environmental performance.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that enhance the profitability of hydrocarbon producers and cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s Data Analytics (“DA”) segment enables 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, while reducing their carbon footprint, energy consumption and emissions.
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 16, “Business Segment, Geographic and Major Customer Information.”
Sources and Uses of Liquidity
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent on the Company’s operating cash flows, the monetization of non-core assets, and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in the twelve months subsequent to the date of filing the consolidated financial statements.. While we believe that our cash and liquid assets, including the actions taken subsequent to March 31, 2022 discussed below and in Note 17, “Subsequent Events”, will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months, uncertainty surrounding the long-term stability and strength of the oil and gas markets or reduced spending by our customers could have a further negative impact on our liquidity.
On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $19.5 million. Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contingent Convertible Notes Payable”) to ProFrac Holdings LLC. Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC druing the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) thh actual purchased volume during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022 (see Note 3, “Revenue from Contracts with Customers” and Note 8, “Debt and Convertible Notes Payable”). These $10 million Contingent Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.
During 2021, the Company also entered into plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas. These facilities were classified as held for sale as of March 31, 2022 and December 31, 2022. Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $4.3 million of gross proceeds and the sale closed on April 18 2022.
Based on our cash and liquid assets, including the transactions during the three months ended March 31, 2022 and subsequent to March 31, 2022 described above and in Note 17, “Subsequent Events”, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations
9
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
as they become due in the next twelve months. However, the Company cannot guarantee a sufficient level of cash flows in the future. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements reflect all adjustments, in the opinion of management, necessary for fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the SEC regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report. A copy of the 2021 Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The information contained on the Company’s website does not form a part of this Quarterly Report.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
Restricted Cash
The Company’s restricted cash is $40 thousand and $1.8 million as of March 31, 2022 and December 31, 2021, respectively. The Company’s restricted cash as of March 31, 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 11, “Commitments and Contingencies”.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate provision for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the provision for doubtful accounts 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.
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of goods sold.
10
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including right-of-use assets (“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:
| Buildings and leasehold improvements | 2-30 years | ||||
| Machinery and equipment | 7-10 years | ||||
| Furniture and fixtures | 3 years | ||||
| Land improvements | 20 years | ||||
| Transportation equipment | 2-5 years | ||||
| Computer equipment and software | 3-7 years | ||||
Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.
Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.
Liability Classified Convertible Notes Payable and Contingent Convertible Notes Payable
The Company accounts for the Convertible Notes Payable issued to the PIPE investors for cash proceeds, which is discussed in Note 1 and Note 8, at amortized cost pursuant to FASB ASC Topic 470, Debt.
The Company accounts for the Contingent Convertible Notes Payable issued as consideration for the ProFrac Agreement, which is discussed in Note 8, “Debt and Convertible Notes Payable”, as liability classified convertible instruments in accordance with Financial Accounting Standards Board 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 9, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.
Fair Value Measurements
The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 9, “Fair Value Measurements.”
Revenue Recognition
The Company recognizes revenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.
The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.
11
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 majority of the Company’s services are short-term in nature with a contract term of one year or less. As a result the Company does not disclose the transaction price allocated to remaining performance obligations.
•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.
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 sold on our consolidated statement of operations.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
Comprehensive Loss
Comprehensive loss encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive loss includes consolidated net 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.
Use of Estimates
12
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Significant items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets; property and equipment and intangible asset impairment assessments; stock-based compensation expense; 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 contingent convertible notes payable.
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 profit (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 $1.7 million to selling, general and administrative expenses which were previously reported in operating expenses for the three months ended March 31, 2021. The reclassifications and change in presentation of the statements of operations did not impact previously recorded loss from operations, net loss or stockholders’ equity.
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“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 March 31, 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 has 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 but will have an impact on the future issuances of convertible instruments and contracts in the Company’s equity.
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 fiscals 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 March 31, 2022
The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.
Note 3 — Revenue from Contracts with Customers
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract.
13
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an ongoing basis to reflect updated variable consideration information.
The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized over time. The Company bills sales on a monthly basis with payment terms customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of Revenue
The Company differentiates revenue based on whether the source of revenue is attributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition).
Revenue disaggregated by revenue source is as follows (in thousands):
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
Products (1) | $ | 12,199 | $ | 11,082 | |||||||
| Services | 680 | 688 | |||||||||
| $ | 12,879 | $ | 11,770 | ||||||||
(1) Product revenues for 2022 include sales to a related party as described in Note 15, “Related Party Transactions.”
Arrangements with Multiple Performance Obligations
The CT and DA segments primarily sell chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, both segments offer various services associated to products sold which includes field services, installation, maintenance, and other functions. For DA, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. DA has 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, DA 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. Subscription-type arrangements were not a material revenue stream in the quarters ended March 31, 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.
Contract Assets
Contract assets represent consideration paid to a ProFrac Services, LLC by the Company in the form of Contingent Convertible Notes Payable issued as an inducement to enter intothe ProFrac Agreement. As consideration for the the economic value of the long-term revenue commitment from ProFrac Agreement as described in Note 1, “Organization and Nature of Operations”, the Company issued $10.0 million in aggregate principal amount of Contingent Convertible Notes Payable to ProFrac Holdings, LLC, under theProFrac Agreement, and which may be converted into shares of common stock of the Company under the terms of the Contingent Convertible Notes Payable described further in Note 8, “Debt and Convertible Notes Payable”.
During the three months ended March 31, 2022, contract assets of $10.6 million was recorded by the Company, as consideration paid to the customer, which included $0.6 million of issuance costs. Under FASB ASC 606, Revenues from Contract with Customers, consideration paid to a customer is accounted for as a reduction of the transaction price of a contract. Accordingly, the Company will amortize the contract assets against the revenues under the ProFrac Agreement over the three-year contract term beginning April 1, 2022. As of March 31, 2022, the Company classified $7.1 million of the contract asset as long term based upon its estimate of the ProFrac Agreement revenues which will not be realized within the first 12 months of the contract. The company’s estimate of the timing of future contract revenues will be evaluated on a quarterly basis throughout the contract term.
14
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Inventories
Inventories are as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | 5,474 | $ | 5,610 | |||||||
| Finished goods | 14,544 | 13,985 | |||||||||
| Inventories | 20,018 | 19,595 | |||||||||
| Less reserve for excess and obsolete inventory | (9,875) | (10,141) | |||||||||
| Inventories, net | $ | 10,143 | $ | 9,454 | |||||||
The provisions recorded in the three months ended March 31, 2022 and 2021 was $0.3 million for the CT segment and nil for the DA segment.
Note 5 — Property and Equipment
Property and equipment are as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Land | $ | 886 | $ | 886 | |||||||
| Land improvements | 520 | 520 | |||||||||
| Buildings and leasehold improvements | 5,356 | 5,473 | |||||||||
| Machinery and equipment | 6,819 | 6,843 | |||||||||
| Furniture and fixtures | 540 | 620 | |||||||||
| Transportation equipment | 878 | 878 | |||||||||
| Computer equipment and software | 1,175 | 1,176 | |||||||||
| Property and equipment | 16,174 | 16,396 | |||||||||
| Less accumulated depreciation | (11,095) | (11,100) | |||||||||
| Property and equipment, net | $ | 5,079 | $ | 5,296 | |||||||
Depreciation expense totaled $0.2 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.
In the third quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas, in their current condition and as a result the associated assets in the amount of $2.8 million are classified as held for sale as of March 31, 2021 and December 31, 2021. Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $4.3 million of gross proceeds and the sale closed on April 18, 2022 See further discussion in Note 17, Subsequent Events.
Note 6 — Leases
In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $40 thousand per month for sixty-four months. Rental income recognized during the three months ended March 31, 2022 was $121 thousand and was included in other income in the consolidated statement of operations. As discussed in Note 1, “Organization and Nature of Operations” this facility was sold on April 18, 2022 and the lease agreement between the tenant and the Company 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 $20 thousand per month, and the tenant occupied the warehouse facility in September 2021. Rental income recognized during the three months ended March 31, 2022 was $185 thousand and was included in other income in the consolidated statement of operations.
In March 2022, the Company entered into an agreement with its landlord to terminate the lease on its facility in Calgary, Alberta for a one-time termination fee of $85 thousand. This lease was previously scheduled to continue until 2033, and due to its early termination, the Company recorded a gain on lease termination from the reduction of lease liabilities and ROU assets of $0.6 million that is included in the consolidated statements of operations during the three months ended March 31, 2022.
15
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of lease expense and supplemental cash flow information are as follows (in thousands):
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating lease expense | $ | 228 | $ | 238 | |||||||
| Finance lease expense: | |||||||||||
| Amortization of right-of-use assets | 4 | 4 | |||||||||
| Interest on lease liabilities | 3 | 3 | |||||||||
| Total finance lease expense | 7 | 7 | |||||||||
| Short-term lease expense | 124 | 69 | |||||||||
| Total lease expense | $ | 359 | $ | 314 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows used in operating leases | $ | (375) | $ | (372) | |||||||
| Operating cash flows from finance leases | (10) | (3) | |||||||||
| Financing cash flows from finance leases | (3) | (14) | |||||||||
Maturities of lease liabilities as of March 31,2022 are as follows (in thousands):
| Years ending December 31, | Operating Leases | Finance Leases | ||||||||||||
| 2022 (excluding three months ended March 31, 2022) | $ | 775 | $ | 35 | ||||||||||
| 2023 | 1,221 | 39 | ||||||||||||
| 2024 | 1,247 | 18 | ||||||||||||
| 2025 | 1,274 | — | ||||||||||||
| 2026 | 1,302 | — | ||||||||||||
| Thereafter | 4,783 | — | ||||||||||||
| Total lease payments | $ | 10,602 | $ | 92 | ||||||||||
| Less: Interest | (3,177) | (12) | ||||||||||||
| Present value of lease liabilities | $ | 7,425 | $ | 80 | ||||||||||
16
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Operating Leases | |||||||||||
| Operating lease right-of-use assets | $ | 1,827 | $ | 2,041 | |||||||
| Current portion of operating lease liabilities | 619 | 602 | |||||||||
| Long-term operating lease liabilities | 6,806 | 7,779 | |||||||||
| Total operating lease liabilities | $ | 7,425 | $ | 8,381 | |||||||
| Finance Leases | |||||||||||
| Property and equipment | $ | 147 | $ | 147 | |||||||
| Accumulated depreciation | (37) | (33) | |||||||||
| Property and equipment, net | $ | 110 | $ | 114 | |||||||
| Current portion of finance lease liabilities | $ | 33 | $ | 41 | |||||||
| Long-term finance lease liabilities | 47 | 53 | |||||||||
| Total finance lease liabilities | $ | 80 | $ | 94 | |||||||
| Weighted Average Remaining Lease Term | |||||||||||
| Operating leases | 8.9 years | 9.1 years | |||||||||
| Finance leases | 2.7 years | 2.9 years | |||||||||
| Weighted Average Discount Rate | |||||||||||
| Operating leases | 8.9 | % | 8.9 | % | |||||||
| Finance leases | 8.9 | % | 8.9 | % | |||||||
Note 7 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Severance costs | $ | 2,584 | $ | 2,581 | |||||||
| Loss on purchase commitments (Note 11) | — | 1,750 | |||||||||
| Payroll and benefits | 993 | 1,054 | |||||||||
| Legal costs | 885 | 1,013 | |||||||||
| Contingent liability for earn-out provision | 702 | 608 | |||||||||
| Deferred revenue, current | 567 | 528 | |||||||||
| Taxes other than income taxes | 304 | 241 | |||||||||
| Other | 712 | 1,221 | |||||||||
| Total current accrued liabilities | $ | 6,747 | $ | 8,996 | |||||||
Note 8 — Debt and Convertible Notes Payable
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 Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek. The PPP loans
17
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 months ended March 31, 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 income on the consolidated statement of operations.
In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025.
The Company has submitted to the SBA for forgiveness of substantially all of the Flotek PPP loan but as of March 31, 2022 and 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 that it will not be forgiven. Denial of the forgiveness of the Flotek PPP loan will negatively impact the Company’s liquidity as discussed in Note 1, “Organization and Nature of Operations”.
Long-term debt, including current portion, is as follows (in thousands):
March 31, 2022 | December 31, 2021 | ||||||||||
Flotek PPP loan | $ | 4,788 | $ | 4,788 | |||||||
Less current maturities | (1,553) | (1,436) | |||||||||
Total long-term debt, net of current portion | $ | 3,235 | $ | 3,352 | |||||||
On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction on February 2, 2022, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $19.5 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum, have a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $0.8705. On March 21, 2022, $3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock. As of March 31, 2022, the Convertible Notes Payable are recorded at carrying value of $17.6 million, including accrued paid-in-kind interest of $0.3 million, and net of unamortized issuance costs of $0.8 million. The estimated fair value of the Convertible Notes Payable at March 31, 2022 was $25.5 million, estimated using a Monte Carlo simulation model.
18
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contingent Convertible Notes Payable under the same terms as the Convertible Notes Payable issued in the PIPE transaction. Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. If minimum volumes are not achieved in any given year, ProFrac 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.
On February 2, 2022, the Company also entered into a Master Transaction Agreement with ProFrac Holdings, LLC (the “Master Transaction Agreement”) which supplements the terms of the ProFrac Agreement and provides that if ProFrac does not perform their purchase obligations under the ProFrac Agreement, the Company shall have the right, but not the obligation, to repurchase a percentage of the Contingent Convertible Notes Payable, or a percentage of the securities issued pursuant to the conversion of the Contingent \Convertible Notes Payable if applicable, for aggregate consideration of $1.00, as follows: (a) 0% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first three years of the term have been paid prior to termination of the ProFrac Agreement; (b) 33% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first two years of the term have been paid prior to termination of the ProFrac Agreement; (c) 66% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first one years of the term have been paid prior to termination of the ProFrac Agreement; (d) 100% if the aggregate amount of payments required to be paid to the Company under the terms of the ProFrac Agreement in respect to the first year of the term have not been paid prior to termination of the ProFrac Agreement. The foregoing repurchase provisions will terminate as of the closing of the ProFrac transaction as described further in Note 1, “Organization and Nature of Operations”.
The Contingent Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $10.0 million on the issuance date and remeasured to fair value of $14.1 million as of March 31, 2022 (see Note 9, “Fair Value Measurements”).
Note 9 — Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.
•Level 1 — Quoted prices in active markets for identical assets or liabilities;
•Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts. The carrying amount of the Flotek PPP loan approximates its fair value as of March 31, 2022 and December 31, 2021.
19
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):
| March 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | 2022 | Level 1 | Level 2 | Level 3 | 2021 | |||||||||||||||||||||||||||||||||||||
| Contingent earnout consideration | $ | — | $ | — | $ | 702 | $ | 702 | $ | — | $ | — | $ | 608 | $ | 608 | ||||||||||||||||||||||||||||
| Contingent convertible notes | $ | — | $ | — | $ | 14,050 | $ | 14,050 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||
| Total | $ | — | $ | — | $ | 14,752 | $ | 14,752 | $ | — | $ | — | $ | 608 | $ | 608 | ||||||||||||||||||||||||||||
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 March 31, 2022 and December 31, 2021. 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 the earn-out provision were as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| Risk-free interest rate | 2.45% | 1.02% | ||||||
| Expected volatility | 90.0% | 90.0% | ||||||
| Term until liquidation (years) | 3.13 | 3.38 | ||||||
| Stock price | $1.26 | $1.13 | ||||||
| Discount rate | 7.86% | 6.71% | ||||||
The Contingent Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Contingent Convertible Notes Payable had an initial fair value of $10.0 million on February 2, 2022. The Contingent Convertible Notes Payable were classified as Level 2 at the initial measurement due to the use of a quoted price for a similar liability, and classified as Level 3 as of March 31, 2022 due to the use of unobservable inputs. The estimated value of the Contingent Convertible Notes Payable as of March 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 a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.
The key inputs into the Monte Carlo simulation used to estimate the fair value the Contingent Convertible Notes Payable as of March 31, 2022 were as follows:
| March 31, 2022 | |||||
| Risk-free interest rate | 1.63% | ||||
| Expected volatility | 90.0% | ||||
| Term until liquidation (years) | 0.84 | ||||
| Stock price | $1.26 | ||||
| Discount rate | 7.2% | ||||
Assets Measured at Fair Value on a Nonrecurring Basis
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FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s non-financial assets, including property and equipment and operating lease right-of-use assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances.
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 March 31, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $0.7 million and $1.1 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 Contingent 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 adjusted the estimated fair value of the Contingent Convertible Notes Payable to $14.1 million as of March 31, 2022.
The following table presents the changes in the assets and liabilities measured at fair value on a recurring basis classified as Level 3 (in thousands):
| Three months ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Balance - beginning of period | $ | 608 | $ | 1,416 | ||||||||||
| Transfer of contingent convertible notes payable from Level 2 | 10,000 | — | ||||||||||||
| Increase in principle of convertible notes for paid-in-kind interest | 158 | — | ||||||||||||
| Change in fair value of contingent earnout consideration | 94 | (335) | ||||||||||||
| Change in fair value of contingent convertible notes payable | 3,892 | — | ||||||||||||
| Balance - end of period | $ | 14,752 | $ | 1,081 | ||||||||||
Note 10 — Income Taxes
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
| Three months ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| U.S. federal statutory tax rate | 21.0 | % | 21.0 | % | ||||||||||
| State income taxes, net of federal benefit | 0.1 | (0.1) | ||||||||||||
| Non-U.S. income taxed at different rates | 0.2 | 0.6 | ||||||||||||
| Increase (reduction) in tax benefit related to stock-based awards | (0.1) | 0.1 | ||||||||||||
| Increase in valuation allowance | (20.8) | (21.7) | ||||||||||||
| Permanent differences | (0.4) | — | ||||||||||||
| Effective income tax rate | — | % | (0.1) | % | ||||||||||
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates.
Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse.
21
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Commitments and Contingencies
Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Except 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.
Terpene Supply Agreement
As of December 31, 2020, the Company’s consolidated balance sheet included an accrued liability of $9.4 million associated with the terpene supply agreement with Florida Chemical Company, LLC (“FCC”), a wholly owned subsidiary of Archer-Daniels-Midland Company (“ADM”). The Company calculated the liability based on its expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased under the terpene supply agreement and the expected selling prices of the excess terpene. Losses for the year ended December 31, 2020 on the terpene contract totaled $11.7 million and was recognized in cost of goods sold in the consolidated statements of operations.
On March 26, 2021, Flotek Industries, Inc. and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, filed a lawsuit against ADM, FCC and other parties in state court in Harris County, Texas. The lawsuit claimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
On April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters.
On October 29, 2021, the Company reached agreement with all parties resolving all claims between the parties (“the ADM Settlement”) that resulted in the termination of the terpene supply agreement and a settlement payment of $1.75 million due from Flotek. In accordance with the terms of the ADM Settlement, the Company reduced the accrued liability associated with the terpene supply agreement to $1.75 million and recorded a gain of $7.6 million in cost of goods sold in the consolidated statement of operations for the year ended December 31, 2021. 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.
Former CEO Matter
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.
Other Commitments and Contingencies
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
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FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Stockholders’ Equity
During the first quarter 2021, the Company identified 0.6 million shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the March 31, 2021 consolidated financial statements or basic and diluted earnings per share.
Note 13 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and settlement of restricted stock units.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the three months ended March 31, 2022 and 2021, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the periods. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were notes payable convertible into 26.3 million shares, 0.8 million restricted stock units and 4.3 million stock options for the three months ended March 31, 2022, and 0.4 million restricted stock units and 3.0 million stock options for the three months ended March 31, 2021.
Note 14 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Supplemental cash flow information: | |||||||||||
| Interest paid | $ | 5 | $ | 6 | |||||||
| Income taxes received | — | (351) | |||||||||
| Non cash financing and investing activities: | |||||||||||
| Issuance of convertible notes payable as consideration for customer contract | 10,000 | — | |||||||||
| Conversion of convertible notes payable to common stock | 2,949 | — | |||||||||
Note 15 — Related Party Transaction
In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.
In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed by Mr. Chisholm to the Company for the IRS matter, and giving the Company the right to withhold payments to Mr. Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement. At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $1.8 million for potential liability to the IRS. On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. In September 2020, the Company informed Mr. Chisholm it would cease payment of future severance.
During first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of March 31, 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.
23
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mr. Ted D. Brown has been a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company formed in 2016. For the three months ended March 31, 2022, the Company’s revenues for chemical sales to Confluence was $1.4 million. As of March 31, 2022 and December 31, 2021, Confluence owed $1.4 million and $1.3 million respectively to the Company which is recorded in account receivables on the consolidated balance sheet.
During the three months ended March 31, 2022, the Company’s revenues from chemical sales to ProFrac was $1.1 million. These revenues were not pursuant to the ProFrac agreement discussed in Note 1, “Organization and Nature of Operations”. There were no revenues from ProFrac during the three months ended March 31, 2021. As of March 31, 2022 and December 31, 2021, ProFrac owed $1.1 million and $0, respectively which is recorded in account receivables on the consolidated balance sheet.
Note 16 — 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 ESG and operational goals. This segment also includes a portfolio of specialty chemical products to address the long-term challenges of in the janitorial, sanitization, food services, and adjacent markets. 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.
The Company evaluates performance 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.
24
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 March 31, | Chemistry Technologies | Data Analytics (1) | Corporate and Other | Total | |||||||||||||||||||
| 2022 | |||||||||||||||||||||||
| Revenue from external customers | $ | 9,311 | $ | 1,071 | $ | — | $ | 10,382 | |||||||||||||||
| Revenue from related party | 2,497 | — | — | 2,497 | |||||||||||||||||||
| Loss from operations | (6,057) | (808) | (3,419) | (10,284) | |||||||||||||||||||
| Depreciation and amortization | 178 | 16 | 1 | 195 | |||||||||||||||||||
| Additions to long-lived assets | — | — | — | — | |||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| Revenue from external customers | $ | 10,302 | $ | 1,468 | $ | — | $ | 11,770 | |||||||||||||||
| Revenue from related party | — | — | — | — | |||||||||||||||||||
| Loss from operations | (3,589) | (292) | (4,362) | (8,243) | |||||||||||||||||||
| Depreciation and amortization | 292 | 15 | — | 307 | |||||||||||||||||||
| Additions to long-lived assets | 19 | — | — | 19 | |||||||||||||||||||
Assets of the Company by reportable segments are as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Chemistry Technologies | $ | 33,476 | $ | 34,387 | |||||||
| Data Analytics | 5,915 | 7,329 | |||||||||
| Corporate and Other | 32,827 | 8,528 | |||||||||
| Total assets | $ | 72,218 | $ | 50,244 | |||||||
Geographic Information
Revenue by country is based on the location where services are provided and products are sold. No individual countries other than the U.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
| Three months ended March 31, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| U.S. | $ | 10,334 | $ | 9,661 | |||||||||||||
| UAE | 1,311 | 1,103 | |||||||||||||||
| Other countries | 1,234 | 1,006 | |||||||||||||||
| Total revenue | $ | 12,879 | $ | 11,770 | |||||||||||||
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
25
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands):
| Three months ended March 31, | Chemistry Technologies | % of Total Revenue | ||||||||||||
| 2022 | ||||||||||||||
| Customer A | $ | — | — | % | ||||||||||
| Customer B | 2,607 | 20.2 | % | |||||||||||
| Customer C (Related Party) | 1,389 | 10.8 | % | |||||||||||
| 2021 | ||||||||||||||
| Customer A | $ | 3,029 | 25.7 | % | ||||||||||
| Customer B | 2,849 | 24.2 | % | |||||||||||
The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. The concentration in the oil and gas industry increases credit and business risk.
26
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 — Subsequent Events
We have evaluated the effects of events that have occurred subsequent to March 31, 2022, and there have been no material events that would require recognition in the 2022 interim financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC (“ProFrac Holdings”), in exchange for $10 million of convertible notes under the same terms as the convertible notes issued in the PIPE transaction. Under the ProFrac Agreement, ProFrac Services, LLC (“ProFrac Services”) is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services. ProFrac Services 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 during such calendar year. The term of the ProFrac Agreement is three years starting April 1, 2022. In connection with the ProFrac Agreement, the Company also granted ProFrac Holdings LLC. the right to designate two nominees to serve on Flotek’s board of directors.
On February 16, 2022, the Company entered into a transaction with ProFrac Holdings, LLC that once closed, would expand the ProFrac Agreement to a term of ten years and to increase ProFrac Services’ minimum purchase obligation for each year to the greater of 70% of ProFrac Services’ requirements and a baseline measured by ProFrac Services’ first 30 hydraulic fracturing fleets deployed. Closing of the transaction is subject to customary closing conditions, including a stockholder vote as described below. As part of the transaction, at closing of the amended agreement Flotek would (a) issue to ProFrac $50 million in principal amount of 10% PIK notes convertible into Flotek’s common stock with a maturity of one year, and (b) grant ProFrac the right to designate two additional nominees to Flotek’s board of directors, for a total of four out of seven directors. Conversion price of the convertible notes will be $1.088125 per share under certain conditions prior to maturity, or $0.8705 per share at maturity. The convertible notes contain other terms and conditions similar to the convertible notes issued to ProFrac on February 2, 2022.
On May 9, 2022, the Company held a special meeting of stockholders to approve this transaction. Stockholders were also asked to approve permitting the Board to increase the authorized common stock of the Company and a reverse split of the Company’s common stock, in each case to facilitate the issuance of the additional 10% PIK notes. All proposals at the meeting passed, and the Company expects to close the transactions with ProFrac during the second quarter of 2022. The Company is evaluating its expected working capital needs in order to facilitate the ramp in activity after closing of the contract extension.
Subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $4.3 million, which closed on April 18, 2022. This will result in an estimated gain on sale of the Waller facility of $1.9 million that will be reflected in the consolidated financial statements for the three and six months ended June 30, 2022 and the cessation of rental income from this facility due to the subsequent termination of the lease agreement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Annual Report on Form 10-K for year-end December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the consolidated financial statements and accompanying notes included herein.
Executive Summary
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial, commercial, and consumer markets improve their ESG performance. The Company serves specialty chemistry needs for both domestic and international energy markets as well as applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation advanced laboratory capabilities.
Company Overview
Chemistry Technologies
27
The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.
Customers of the CT segment include those of energy related markets as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.
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, 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.
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 Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions.
Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.
Outlook
Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility. We have based our outlook on the market and weather conditions we perceive today. Changes often occur.
Energy
We expect North American and International onshore activity to continue to improve throughout 2022 from first quarter levels for the next nine months provided that commodity prices remain at or above current levels. The strongest potential growth throughout 2022 will likely comes from private, rather than publicly traded exploration and production companies. Private exploration and production companies operate the majority of U.S. land rigs and react quickly to changing commodity prices. In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other service companies and believe sales through indirect channels should accelerate in 2022.
Industrial
In 2020, the Company launched 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,
28
solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use. The Company believes these adjacent markets provide an opportunity to diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand. We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states. We will be training and educating their representatives during the next two quarters. The leverage sales effort is anticipated to accelerate sales in the second half of 2022.
Digital Analytics
The use of data and digital analytics is a growing trend in all industries where technology is 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. Verax has 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 gravity, viscosity, BTU and more, simultaneously. We continue to work 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. This allows operators to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.
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. The Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.
The Company believes the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of our greener practices and chemistries. We believe the performance-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 already continuing into 2022” according to Secretary of Transportation Peter Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:
•Rising Freight Costs;
•Delays due to Port Congestion;
•Labor Shortages and
•Demand Forecasting.
All bidding will require the risk of shipping costs and delays 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
29
delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could also result in supply disruption.
Weather
During the first three months of 2022 there were no major weather events that had a material impact on first quarter results.
COVID-19
The impacts of COVID-19 continue to affect the U.S. and global economy. We believe our protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The resumption of travel has begun to accelerate and we estimate that in person customer visits that began in earnest during the first quarter of 2022 will continue to accelerate.
Consolidated Results of Operations (in thousands)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | |||||||||||
| Revenue from external customers | $ | 10,382 | $ | 11,770 | |||||||
| Revenue from related party | 2,497 | — | |||||||||
| Total revenues | 12,879 | 11,770 | |||||||||
| Cost of goods sold | 13,358 | 12,080 | |||||||||
| Cost of good sold % | 103.7 | % | 102.6 | % | |||||||
| Gross profit (loss) | (479) | (310) | |||||||||
| Gross profit (loss) % | (3.7) | % | (2.6) | % | |||||||
| Selling general and administrative | 4,879 | 6,082 | |||||||||
| Selling general and administrative % | 37.9 | % | 51.7 | % | |||||||
| Depreciation and amortization | 195 | 307 | |||||||||
| Research and development | 1,415 | 1,542 | |||||||||
| Loss on sale of property and equipment | 8 | 2 | |||||||||
| Gain on lease termination | (584) | — | |||||||||
| Change in fair value of convertible notes payable | 3,892 | ||||||||||
| Loss from operations | (10,284) | (8,243) | |||||||||
| Operating margin % | (79.9) | % | (70.0) | % | |||||||
| Interest and other income, net | (444) | (51) | |||||||||
| Loss before income taxes | (10,728) | (8,294) | |||||||||
| Income tax benefit/ (expense) | 4 | (6) | |||||||||
| Net Loss | $ | (10,724) | $ | (8,300) | |||||||
| Net loss % | (83.3) | % | (70.5) | % | |||||||
Consolidated revenue for the three months ended March 31, 2022, increased $1.1 million, or 9.4%, versus the same period of 2021. Revenue during the three months ended March 31, 2022 reflected an increase of revenue in the CT segment of $1.5 million driven by the impacts of industry consolidation of customers and increased related party activity, see further discussion in Note 15, “Related Party Transaction”. This increase was partially offset by a decrease in revenue in the DA segment of $0.4 million due to one-time orders from customers in the three months ended March 31, 2021 not repeated in 2022.
Consolidated cost of goods sold for the three months ended March 31, 2022, increased $1.3 million, or 10.6% versus the same period of 2021 primarily attributable to the increase in revenue with the change in margin being due to sales mix.
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 March 31, 2022, decreased $1.2 million, or 19.8%, versus the same period of 2021.
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SG&A expenses decreased as a result of a reduction in professional fees due to a decrease in contract labor and consulting and, legal fees partially offset by increased advisor fees relating to work around the ProFrac/PIPE deal and other items. Corporate marketing costs also decreased primarily due to nonrecurring marketing fees and other initiatives.
Depreciation and amortization expense decreased $0.1 million, or 36.4% for the three months ended March 31, 2022, versus the same period of 2021 The decrease is as a result of asset disposals and the reclassification of assets relating to the Monahans, Texas and Waller, Texas facilities to assets held for sale in 2021.
Research and development (“R&D”) costs decreased $0.1 million, or 8.2% for the three months ended March 31, 2022, versus the same period of 2021 due to lower personnel costs as a result of our reduction in workforce and lower non-labor cost primarily from the re-negotiation of a contract which resulted in a credit for past expenses taken.
Loss from operations worsened by $2.0 million, or 24.8% for the three months ended March 31, 2022, versus the same period in 2021. The loss from operations increase is primarily a result of the revaluation of the convertible note payable partly offset by a gain from lease termination of $0.6 million, increased revenue and the reduction in expenses for SG&A, depreciation and amortization and R&D described above.
Loss before income taxes for the three months ended March 31, 2022, was impacted by interest charges of $0.4 million versus $0.05 million for the same period in 2021.
The Company’s income tax benefit for the three months ended March 31, 2022 and expense for the same period in 2021 was minimal.
Results by Segment (in thousands):
Chemistry Technologies Results of Operations:
| Three months ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Revenue | $ | 11,808 | $ | 10,302 | ||||||||||
| Loss from operations | (6,057) | (3,589) | ||||||||||||
CT revenue for the three months ended March 31, 2022, increased $1.5 million compared to 2021. The increase in revenue during 2022 compared to 2021 was driven by impacts from industry consolidation and increased related party activity, see further discussion in Note 15, “Related Party Transaction”. While the pandemic continued to weigh on economic activity in 2021, global supply and demand has steadily normalized through the second half of 2021 and into 2022.
Loss from operations for the CT segment for the three months ended March 31, 2022, worsened $2.4 million, or (68.8)% compared to 2021. The reduction is a result of the revaluation of the convertible note of $3.9 million. Excluding the revaluation of the note there was an overall improvement. The improvement in loss from operations is due to increased revenues, lower personnel costs due to reduced headcount and lower rental fees for International Organization for Standardization (ISO) tanks. The improvement in loss from operations was partially offset by an increase in the bad debt provision.
Data Analytics Results of Operations:
| Three months ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Revenue | $ | 1,071 | $ | 1,468 | ||||||||||
| Loss from operations | (808) | (292) | ||||||||||||
DA revenue for the three months ended March 31, 2022, decreased $0.4 million compared to the same period in 2021 due to one time orders not repeated in 2022. Loss from operations for the DA segment for the three months ended March 31, 2022 worsened by $0.5 million or 176.7% compared to the same period in 2021. The worsening loss from operations is primarily the result of the decrease in revenues and the fair value adjustment of the JP3 earnout.
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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 first three months of 2022, the Company funded working capital requirements with proceeds from convertible notes of $20.0 million and cash on hand.
As of March 31, 2022, the Company had available cash and cash equivalents of $24.8 million, as compared to $11.5 million at December 31, 2021. During the three months ended March 31, 2022, the Company had an operating loss of $10.7 million, $8.5 million of cash used in operating activities and $20.0 million of cash provided by financing activities. Cash provided by investing activities was minimal.
Liquidity
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. Uncertainty surrounding the long- term stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity
On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including with related parties, through the issuance of $21.2 million in aggregate principal amount of convertible notes that resulted in net cash proceeds of approximately $19.5 million. Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of convertible notes. Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. If minimum volumes are not achieved in any given year, the Company receives liquidated damages equal to 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.
The Company also sold and its manufacturing facility in Waller, Texas. These facilities were classified as held for sale as of March 31, 2022. Subsequent to March 31, 2022, the Company executed a contract to sell its Waller facility for $4.3 million of gross proceeds. The sale closed in April 2022.
Based on our cash and liquid assets, including the transactions subsequent to March 31, 2022 described above and in Note 17 - “Subsequent Events”, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next 12 months. However the Company cannot guarantee a sufficient level of cash flows in the future.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net cash used in operating activities | $ | (8,474) | $ | (5,265) | |||||||
| Net cash provided by (used in) investing activities | 24 | (17) | |||||||||
| Net cash provided by (used in) financing activities | 19,993 | (81) | |||||||||
| Effect of changes in exchange rates on cash and cash equivalents | 8 | 23 | |||||||||
| Net change in cash, cash equivalents and restricted cash | $ | 11,551 | $ | (5,340) | |||||||
Operating Activities
Net cash used in operating activities was $8.5 million and $5.3 million during the three months ended March 31, 2022 and 2021, respectively. Consolidated net loss for the three months ended March 31, 2022 and 2021, were $10.7 million and $8.3 million, respectively.
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During the three months ended March 31, 2022, non-cash adjustments to net income totaled $5.6 million as compared to $1.2 million for the same period of 2021.
•For the three months ended March 31, 2022, non-cash adjustments included $3.9 million for the change in fair value of convertible notes, $0.7 million stock compensation expense, $0.5 million PIK interest expense, $0.2 million provision for doubtful accounts and $0.2 million for depreciation. A benefit of $0.6 million was included for the gain on lease termination.
•For the three months ended March 31, 2021, non-cash charges included $0.3 million for depreciation, and a $0.3 million decrease in the fair value of contingent consideration.
During the three months ended March 31, 2022, changes in working capital used $3.3 million of cash as compared to providing $1.9 million for the same period of 2021.
•For the three months ended March 31, 2022, changes in working capital resulted primarily from a decrease in accrued liabilities of $2.6 million partially due to payment of the ADM Settlement (Note 11) and an increase in inventories of $1.0 million.
•For the three months ended March 31, 2021 the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable and other current assets totaling $0.5 million combined with an increase of accounts payable of $0.7 million, partially offset by a decrease in accrued liabilities of $0.3million.
Investing Activities
Net cash from investing activities for the three months ended March 31, 2022 and 2021 was negligible.
Financing Activities
Net cash provided by financing activities was $20.0 million for the three months ended March 31, 2022, primarily from the proceed from the issuance of convertible notes. Net cash used in financing activities was $0.1 million for the three months ended March 31, 2021, primarily from purchases of common stock related to tax withholding requirements.
Off-Balance Sheet Arrangements
There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2022, the Company was not involved in any unconsolidated SPEs.
The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors other than the long term terpene agreement discussed in Note 11 - Commitments and Contingencies
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.
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Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.
Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our internal control over financial reporting disclosure controls and processes were effective as of March 31, 2022
Changes in Internal Controls over Financial Reporting
There have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Litigation
There are no material changes since the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Disclosures in Note 8, “Debt and Convertible Notes Payable”, and Note 17, “Subsequent Events”, of the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 are incorporated by reference hereto.
Issuer Purchases of Equity Securities
The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock. Repurchases of the Company’s equity securities during the three months ended March 31, 2022, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | |||||||||
| January 1, 2022 to January 31, 2022 | 5,853 | $ | 1.11 | ||||||||
| February 1, 2022 to February 28, 2022 | 2,471 | 0.82 | |||||||||
| March 1, 2021 to March 31, 2022 | 28,206 | 1.41 | |||||||||
| Total | 36,530 | ||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit Number | Description of Exhibit | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | *** | |||||||
| 31.1 | * | |||||||
| 31.2 | * | |||||||
| 32.1 | ** | |||||||
| 32.2 | ** | |||||||
| 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.
| FLOTEK INDUSTRIES, INC. | ||||||||
| By: | /s/ John W. Gibson, Jr. | |||||||
| John W. Gibson, Jr. | ||||||||
| President, Chief Executive Officer and Chairman of the Board | ||||||||
Date: May 16, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURES | TITLE | DATE | ||||||
/s/ John W. Gibson Jr. John W. Gibson, Jr. | President, Chief Executive Officer, and Chairman of the Board (Principal Executive Officer) | May 16, 2022 | ||||||
/s/ Michael E. Borton Michael E. Borton | Chief Financial Officer (Principal Financial and Accounting Officer) | May 16, 2022 | ||||||
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