Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.62M
2: EX-10.5 Material Contract HTML 27K
3: EX-10.6 Material Contract HTML 99K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 28K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 28K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 26K
7: EX-32.2 Certification -- §906 - SOA'02 HTML 26K
13: R1 Cover Page HTML 77K
14: R2 Unaudited Condensed Consolidated Balance Sheets HTML 147K
15: R3 Unaudited Condensed Consolidated Balance Sheets HTML 47K
(Parenthetical)
16: R4 Unaudited Condensed Consolidated Statements of HTML 130K
Operations
17: R5 Consolidated Statements of Comprehensive Income HTML 45K
(Loss)
18: R6 Unaudited Condensed Consolidated Statements of HTML 139K
Cash Flows
19: R7 Unaudited Condensed Consolidated Statements of HTML 93K
Stockholders? Equity
20: R8 Organization and Nature of Operations HTML 33K
21: R9 Summary of Significant Accounting Policies HTML 64K
22: R10 Revenue from Contracts with Customers HTML 71K
23: R11 Contract Assets HTML 71K
24: R12 Inventories HTML 35K
25: R13 Property and Equipment HTML 40K
26: R14 Leases HTML 131K
27: R15 Accrued Liabilities HTML 37K
28: R16 Debt and Convertible Notes Payable HTML 44K
29: R17 Fair Value Measurements HTML 89K
30: R18 Income Taxes HTML 43K
31: R19 Commitments and Contingencies HTML 31K
32: R20 Stockholders? Equity HTML 34K
33: R21 Earnings (Loss) Per Share HTML 54K
34: R22 Supplemental Cash Flow Information HTML 37K
35: R23 Related Party Transactions HTML 36K
36: R24 Business Segment, Geographic and Major Customer HTML 129K
Information
37: R25 Subsequent Events HTML 30K
38: R26 Summary of Significant Accounting Policies HTML 125K
(Policies)
39: R27 Summary of Significant Accounting Policies HTML 42K
(Tables)
40: R28 Revenue from Contracts with Customers (Tables) HTML 52K
41: R29 Contract Assets (Tables) HTML 41K
42: R30 Inventories (Tables) HTML 35K
43: R31 Property and Equipment (Tables) HTML 42K
44: R32 Leases (Tables) HTML 96K
45: R33 Accrued Liabilities (Tables) HTML 36K
46: R34 Debt and Convertible Notes Payable (Tables) HTML 31K
47: R35 Fair Value Measurements (Tables) HTML 87K
48: R36 Income Taxes (Tables) HTML 38K
49: R37 Stockholders? Equity (Tables) HTML 30K
50: R38 Earnings (Loss) Per Share (Tables) HTML 51K
51: R39 Supplemental Cash Flow Information (Tables) HTML 37K
52: R40 Business Segment, Geographic and Major Customer HTML 128K
Information (Tables)
53: R41 Organization and Nature of Operations (Details) HTML 27K
54: R42 Summary of Significant Accounting Policies - HTML 27K
Restricted Cash (Details)
55: R43 Summary of Significant Accounting Policies - HTML 28K
Narrative (Details)
56: R44 Summary of Significant Accounting Policies - HTML 44K
Property and Equipment (Details)
57: R45 Summary of Significant Accounting Policies - HTML 39K
Revenue Recognition (Details)
58: R46 Revenue from Contracts with Customers - HTML 38K
Disaggregation of Revenue (Details)
59: R47 Revenue from Contracts with Customers - Cost Of HTML 37K
Revenue (Details)
60: R48 Contract Assets - Contract Assets (Details) HTML 38K
61: R49 Contract Assets - Narrative (Details) HTML 37K
62: R50 Contract Assets - Estimated Amortization (Details) HTML 39K
63: R51 Inventories - Components of inventory (Details) HTML 35K
64: R52 Inventories - Narratives (Details) HTML 30K
65: R53 Property and Equipment - Components of Property HTML 49K
and Equipment (Details)
66: R54 Property and Equipment - Narratives (Details) HTML 27K
67: R55 Leases - Narratives (Details) HTML 30K
68: R56 Leases - Components of Lease Expense and HTML 48K
Supplemental Cash Flow Information (Details)
69: R57 Leases - Maturities of Lease Liabilities (Details) HTML 64K
70: R58 Leases - Supplemental Balance Sheet Information HTML 61K
(Details)
71: R59 Accrued Liabilities - Schedule of Current Accrued HTML 43K
Liabilities (Details)
72: R60 Debt and Convertible Notes Payable - Narratives HTML 125K
(Details)
73: R61 Debt and Convertible Notes Payable - Schedule of HTML 35K
Debt (Details)
74: R62 Fair Value Measurements - Recurring (Details) HTML 53K
75: R63 Fair Value Measurements - Monte Carlo Simulation HTML 54K
(Details)
76: R64 Fair Value Measurements - Narratives (Details) HTML 43K
77: R65 Fair Value Measurements - Rollforward (Details) HTML 49K
78: R66 Income Taxes - Reconciliation of Effective Tax HTML 45K
Rate (Details)
79: R67 Income Taxes - Narratives (Details) HTML 40K
80: R68 Stockholders? Equity - Narrative (Details) HTML 95K
81: R69 Stockholders? Equity - Valuation of Assumptions HTML 38K
(Details)
82: R70 Earnings (Loss) Per Share - Schedule of Basic and HTML 79K
Diluted (Details)
83: R71 Supplemental Cash Flow Information (Details) HTML 39K
84: R72 Related Party Transactions (Details) HTML 94K
85: R73 Business Segment, Geographic and Major Customer HTML 85K
Information - Reportable Segments (Details)
86: R74 Business Segment, Geographic and Major Customer HTML 41K
Information - Assets by Reportable Segments
(Details)
87: R75 Business Segment, Geographic and Major Customer HTML 57K
Information - Geographic Information (Details)
88: R76 Business Segment, Geographic and Major Customer HTML 43K
Information - Major Customers (Details)
89: R77 Business Segment, Geographic and Major Customer HTML 41K
and Supplier Information - Major Suppliers
(Details)
90: R78 Subsequent Events (Details) HTML 30K
93: XML IDEA XML File -- Filing Summary XML 171K
91: XML XBRL Instance -- ftk-20230331_htm XML 2.16M
92: EXCEL IDEA Workbook of Financial Reports XLSX 167K
9: EX-101.CAL XBRL Calculations -- ftk-20230331_cal XML 258K
10: EX-101.DEF XBRL Definitions -- ftk-20230331_def XML 684K
11: EX-101.LAB XBRL Labels -- ftk-20230331_lab XML 1.74M
12: EX-101.PRE XBRL Presentations -- ftk-20230331_pre XML 1.14M
8: EX-101.SCH XBRL Schema -- ftk-20230331 XSD 189K
94: JSON XBRL Instance as JSON Data -- MetaLinks 468± 722K
95: ZIP XBRL Zipped Folder -- 0000928054-23-000091-xbrl Zip 443K
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.0001 par value
iFTK
iNew
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. iYes☒ 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). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer ☐iNon-accelerated
filer☒
Smaller reporting company i☒Emerging growth company i☐
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 ☐iNo☒
At
May 9, 2023, there were i88,002,029 outstanding shares of the registrant’s common stock, $0.0001 par value.
This Quarterly Report on Form 10-Q (this “Quarterly Report”), and in particular, Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek Industries, Inc. (“Flotek” or the “Company”), many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the
Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.
The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words including but not limited to, “anticipate,”“believe,”“estimate,”“commit,”“budget,”“aim,”“potential,”“schedule,”“continue,”“intend,”“expect,”“plan,”“forecast,”“target”, “think”, “likely”, “project” and similar expressions, or future-tense or conditional constructions such as “will,”“may,”“should,”“could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereafter. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated
or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report” or “2022 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 23, 2023, and periodically in subsequent reports filed with the SEC. The Company has no obligation, and we disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
In
certain places in this Quarterly Report on Form 10-Q, we may refer to statements provided by third parties that purport to describe trends or developments in supply chain or energy exploration and production and activity and we specifically disclaim any responsibility for the accuracy and completeness of such information and have undertaken no steps to update or independently verify such information.
The following information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and related disclosures and our 2022 Annual Report.
Preferred stock, $ii0.0001/
par value, ii100,000/ shares
authorized; iiiino///
shares issued and outstanding
i—
i—
Common
stock, $ii0.0001/ par value, ii240,000,000/
shares authorized; i94,613,664 shares issued and i88,170,936 shares outstanding at March 31, 2023 ; i83,915,918
shares issued and i77,788,391 shares outstanding at December 31, 2022
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 — iOrganization
and Nature of Operations
General
Flotek Industries, Inc. (“Flotek” or the “Company”) creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial and commercial markets improve their environmental performance.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers.
The Company’s Data Analytics (“DA”)
segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with their hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.
The Company’s itwo operating segments, CT and DA, are both supported
by its Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 17, “Business Segment, Geographic and Major Customer Information.”
Going Concern
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
The
Company currently funds its operations from cash on hand and other current assets. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the unaudited condensed consolidated financial statements. The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”). It is not certain that the Company’s cash and other current assets and the
Company’s forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the
unaudited condensed consolidated financial statements are filed.
The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional
liquidity when needed or under acceptable terms, if at all.
The unaudited condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
Note 2 — iSummary
of Significant Accounting Policies
i
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, in the opinion of management, necessary for the fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of
the SEC regarding interim financial reporting and do not include all
9
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2022 Annual Report. A copy of the 2022 Annual Report is available on
the SEC’s website, www.sec.gov 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.
iAll
significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
i
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
iRestricted
Cash
The Company’s restricted cash is $i0.1 million and $i0.1
million as of March 31, 2023 and December 31, 2022, respectively.The Company’s restricted cash 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.
i
Accounts
Receivable and Allowance for Credit Losses
Accounts receivable and accounts receivable, related party, arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for credit losses to reflect any loss anticipated on accounts receivable balances. The Company applies the current expected credit loss (CECL) model, which requires immediate recognition of expected credit losses over the contractual life of receivables and records the appropriate allowance for credit losses as a charge to operating expenses. The allowance for credit losses is based on a combination of the individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific
accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for credit losses charged to operating expense.
The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.
The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 9, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement. The contract assets are amortized over the term of the ProFrac Agreement (i10
years) based on forecasted revenues as goods are transferred to ProFrac Services, LLC, and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations.
/
The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the
Company expects to receive in the future for the transfer of goods under the ProFrac Agreement less the direct costs that relate to providing those goods in the future.
i
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of cost determined by using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on
hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of sales.
iProperty and equipment
10
FLOTEK
INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. iDepreciation or amortization of property and equipment, including operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s
estimated useful life as follows:
Buildings and leasehold improvements
i2-i30
years
Machinery and equipment
i7-i10 years
Furniture and fixtures
i3
years
Land improvements
i20 years
Transportation equipment
i2-i5
years
Computer equipment and software
i3-i7 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.
i
Leases
The
Company leases certain facilities, land, vehicles, and equipment. The Company determines if an arrangement is classified as a lease at inception of the arrangement.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the related lease. Finance leases are under the current and non-current liabilities and the underlying assets are included in property and equipment on the consolidated balance sheet.
As most of the Company’s leases do not provide an implicit rate of return, on a quarterly basis, the
Company’s incremental borrowing rate is used, together with the lease term information available at commencement date of the lease, in determining the present value of lease payments.Operating lease liabilities include related options to extend or terminate lease terms that are reasonably certain of being exercised.
Leases with an initial term of 12 months or less (“short term leases”) are not recorded on the balance sheet; and the lease expense on short-term leases is recognized on a straight-line basis over the lease term.
The Company accounts for the Convertible Notes Payable at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.
The Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration related to a related party contract (see Note 9, “Debt and Convertible Notes Payable”), as
liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.
i
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
11
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 10, “Fair Value Measurements.”
i
Revenue
Recognition
The Company recognizes revenue when it satisfies performance obligations under the terms of the contract with a customer, and control of the promised goods are transferred to the customer or services are performed, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services.
The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract
with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include discounts offered to customers for prompt payment and right of return provisions, which are considered when recognizing revenue and deferred accordingly. The Company does not act as an agent in any of its revenue arrangements.
In recognizing revenue for products and services, the Company determines the transaction price of contracts
with customers, which may consist of fixed and variable consideration. Determining the transaction price may require judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract.
The majority of the CT segment revenue is chemical products that are sold at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product purchased. Additionally,
the CT segment offers various services associated to products sold which includes field services, installation, maintenance, and other functions. These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer.
The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on agreed upon delivery terms. Additionally, the Company offers various services associated with products sold which includes field services, installation, maintenance, and other functions. Services are recognized upon completion of commissioning and installation
due to the short-term nature of the performance obligation. There may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, the Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements, and revenue not yet recognizable is reported under accrued liabilities and deferred revenue on the consolidated balance sheets. Subscription-type arrangements were not a material revenue stream in the three months ended March
31, 2023 and March 31, 2022.
Payment terms for both the CT and DA segments are customarily ii30/-ii60/
days for domestic and ii90/-ii120/
days for international from invoice receipt. 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.
The Company applies several practical expedients including:
•Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally
one year or less.
•The Company’s payment terms are short-term in nature with settlements of one year or less. As a result, the Company does not adjust the promised amount of consideration for the effects of a significant financing component.
•In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s
performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.
•The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.
/
12
FLOTEK
INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our consolidated statement of operations.
i
Foreign Currency Translation
The
Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and substantially all assets and liabilities of the Company are denominated in U.S. dollars. Financial statements of foreign subsidiaries that are not U.S. dollar functional currency are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of those foreign subsidiaries are translated into U.S. dollars at exchange rates in effect
as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
i
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments and distributions to stockholders. The
Company’s comprehensive income loss includes consolidated net income (loss) and foreign currency translation adjustments.
i
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
i
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.
i
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.
i
Stock Warrants
The
Company evaluated the Pre-Funded Warrants issued in June 2022 (the “June 2022 Warrants”) and the Pre-Funded Warrants issued in February 2023 (the “February 2023 Warrants”) (see Note 13, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the June 2022 Warrants and the February 2023 Warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the June 2022 Warrants and the February 2023 Warrants within additional paid in capital in the consolidated balance sheets.
i
Use
of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.
13
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Significant items subject to estimates and assumptions include the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense;
allowance for credit losses for accounts receivable; valuation allowances for inventories, and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified Contract Consideration Convertible Notes Payable.
i
Recent Accounting Pronouncements
Changes to U.S. GAAP are established
by the FASB. We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.
New Accounting Standards Issued and Adopted as of January 1, 2023
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 Company adopted this standard prospectively as of January 1, 2023 and the adoption did not have a material impact of the Company’s consolidated financial statements and related disclosures, and there was no cumulative effect on retained earnings.
(1)
Product revenue includes sales to related parties as described in Note 16, “Related Party Transactions.”
Disaggregation of Cost of Sales
The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be directly attributable to either tangible goods or services.
Total cost of sales disaggregated is as follows (in thousands):
Other
cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services. Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs.
Cost of sales split between external and related party sales is as follows (in thousands):
/
14
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
connection with entering into the ProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”, the Company recognized contract assets of $i10.0 million and $i69.5 million,
respectively, and associated fees of $i3.6 million. As of March 31, 2023 and December 31, 2022, $i71.4
million and $i72.6 million, respectively, of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the ProFrac Agreement which will not be realized within the next twelve months of the ProFrac Agreement. The Company’s estimate of the timing of the future contract
revenues is evaluated on a quarterly basis.
During the three months ended March 31, 2023the Company recognized $i1.3 million of contract assets amortization which is recorded as a reduction of the transaction price included in the related
party revenue in the consolidated statement of operations. The below table reflects our estimated amortization per year (in thousands) based on the Company’s current forecasted revenues from the ProFrac Agreement.
The
provision recorded in the three months ended March 31, 2023and 2022 was $i0.1 million and $i0.3 million
for the CT segment and $i0.2 million and izero for the DA segment, respectively.
Note
6 — iProperty and Equipment
Property and equipment are as follows (in thousands):
Depreciation
expense totaled $i0.2 million and $i0.2 million for the three months ended March 31, 2023 and 2022.
Note
7 — iiLeases/
Prior to their
sale in 2022, the Company leased its facilities in Waller, Texas and Monahans, Texas and during the three months ended March 31, 2022 recognized rental income of $i121 thousand and $i185 thousand,
respectively, which is included in other income on the unaudited condensed consolidated statement of operations. The lease agreements between the tenants and the Company were terminated on the sale of the facilities.
iThe components of lease expense and supplemental cash flow information are as follows (in thousands):
In April 2020, the Company received a $i4.8
million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025. On January 5, 2023the Company received notice from the SBA that $i4.4 million
of the $i4.8 million principal amount and accrued interest to that date of $i0.1 million, was forgiven. The remaining principal amount of $i0.4 million
and accrued interest, is to be repaid in monthly installments of $i15 thousand over the remaining term of the loan through April 15, 2025, beginning on March 15, 2023. The forgiveness of the Flotek PPP loan is accounted for as an extinguishment of the debt and the Company has recorded a $i4.5 million
gain in the three months ended March 31, 2023, comprising the principal amount forgiven of $i4.4 million and accrued interest of $i0.1 million.
i
Long-term
debt, including current portion, is as follows (in thousands):
On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction, Flotek issued $i21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of
approximately $i20.1 million (the “Convertible Notes Payable”). The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of i10%
per annum, had a maturity of one year, and were convertible into common stock of Flotek or Pre-Funded Warrants to purchase common stock of Flotek, (a) at the holder's option at any time prior to maturity, at a price of $i1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $i2.50
per share, or $i1.741 per share, for i20 trading days during a i30
consecutive trading day period, or (c) at maturity, at a price of $i0.8705. On March 21, 2022, $i3.0 million
of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately i2.8 million shares of common stock. The issuance cost of $i1.1
million was amortized on a straight-line basis over the term of the Convertible Notes Payable and the amortization was included in interest expense in the unaudited condensed consolidated statements of operations.
On February 2, 2023, the Convertible Notes Payable, excluding those held by ProFrac Holdings, LLC, with a carrying value of $i9.0 million, including accrued paid-in-kind interest of $i0.8
million, were converted, upon maturity, into i10,335,840 shares of common stock at a price of $i0.8705 per
share. The Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $i11.0 million, including accrued paid-in-kind interest of $i1.0
million, were converted, upon maturity, into i12,683,280 February 2023 Warrants with an exercise price of $i0.0001
per share.
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $i10 million
in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Initial ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction described above, including paid-in-kind interest at a rate of i10% per annum and conversion features.
The
Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were accounted for as liability classified convertible instruments and were initially recorded at fair value of $i10.0 million on the issuance date with a corresponding contract asset.
19
FLOTEK
INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, remeasured to and carried at a fair value of $i15.1 million, were converted, upon maturity, into i12,683,281
February 2023 Warrants with an exercise price of $i0.0001 per share (see Note 10, “Fair Value Measurements”).
On May 17, 2022, the
Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively with the Initial ProFrac Agreement, the “ProFrac Agreement”) upon issuance of $i50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”) to ProFrac. The
Amended ProFrac Agreement Contract Consideration Convertible Notes Payable accrue paid-in-kind interest at a rate of i10% per annum and may be converted at any time prior to the maturity date, which is one year from the date of issuance under the same conversion terms as the Convertible Notes Payable issued in the PIPE transaction described above.
The Amended ProFrac Agreement Contract
Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments and were initially recorded at fair value of $i69.5 million on the issuance date with a corresponding contract asset. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to fair value of $i43.8 million
as of March 31, 2023 which includes paid-in-kind interest of $i4.6 million. The fair value adjustment resulted in an a $i26.9 million
decrease in the three months ended March 31, 2023 and is recognized as a gain in fair value Contract Consideration Convertible Notes Payable, net on the unaudited condensed consolidated statement of operations. See Note 10, “Fair Value Measurements”.
Note 10 — iFair 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.
20
FLOTEK
INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liabilities Measured at Fair Value on a Recurring Basis
i
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):
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, 2023 and December 31, 2022. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.
The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $i10.0 million
on February 2, 2022. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 due to the use of unobservable inputs.
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured, at maturity, to a fair value of $i15.1
million based on the closing price of the shares of common stock of $i1.19, on the date of conversion. The fair value adjustment was a $i0.8
million increase and a $i3.9 million decrease in the three months ended March 31, 2023 and 2022, respectively.
The estimated value of the Initial ProFrac Agreement Contract
Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation. The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of December 31, 2022 were as follows:
On May 17, 2022, the Company measured the Amended ProFrac
Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $i69.5 million. The Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes. The estimated value of the Amended ProFrac Agreement Contract
Consideration Convertible Notes Payable as at March 31, 2023 and December 31, 2022 was valued using a Monte Carlo simulation.
The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, as of March 31, 2023 and December 31, 2022 were as follows:
Assets
Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment and operating lease ROU assets, are measured at fair value on a non-recurring basis and are subject to adjustment to their fair value in certain circumstances.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
iThe
following table presents the changes in balances of liabilities for the three months ended March 31, 2023 and 2022 classified as Level 3 (in thousands):
Transfer
of ProFrac Agreement Contract Consideration Convertible Notes Payable from Level 2
i—
i10,000
Increase
in principal of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest
i85
i158
Increase
in principal of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable for paid-in-kind interest
i1,331
i—
Change
in fair value of contingent earnout consideration
(i358)
i94
Change
in fair value of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable
i786
i3,892
Change
in fair value of Amended ProFrac Agreement Contract Consideration Convertible Notes Payable
(i26,881)
i—
Conversion
of Initial ProFrac Agreement Contract Consideration Convertible Notes Payable on maturity
(i15,091)
i—
Balance
- end of period
$
i44,025
$
i14,752
Note
11 — iIncome Taxes
The income tax benefit differed from the amounts computed by applying the U.S. federal income tax rate of 21% respectively, to loss before income tax for the reasons set forth below:
Increase
(reduction) in tax benefit related to stock-based awards
i0.4
(i0.1)
Increase
in valuation allowance
(i20.4)
(i20.8)
Permanent
differences
(i1.1)
(i0.4)
Non-deductible
expenses
i0.1
i—
Effective
income tax rate
i—
%
i—
%
/
Internal
Revenue Code (“IRC”) section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. During 2023, the Company converted various debt instruments into Company stock and warrants causing an ownership change within the meaning of IRC section 382 that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC section 382 limitation.
As of March 31, 2023, the Company has an estimated $i181.6 million
in U.S. federal NOL carryforwards, $i104.9 million in certain state NOL carryforwards, $i7.5 million in section 163(j) interest
limitation carryforwards and $i3.8 million in tax credit carryforwards. As a result of the change of control experienced in 2023, the Company’s ability to use NOLs to reduce taxable income is generally limited to an annual amount which is currently estimated to be $i3.5 million
a year as a result of the section 382 limitation which may be revised based on further detailed analysis. NOLs that exceed the section 382 limitation in any year continue to be allowed as carryforwards until they expire and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. Federal NOLs incurred prior to 2018 generally have a 20-year life until they expire in varying amounts between 2029 and 2037. Federal NOLs generated in 2018 and after are carried forward indefinitely. State NOLs have various carryforward periods depending on the legislation in the respective state jurisdiction. The Company’s use of new NOLs arising after the date of an ownership change would not be impacted by the 382 limitation. If the
23
FLOTEK
INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company does not generate a sufficient level of taxable income prior to the expiration of the pre-2018 NOL carryforward periods, then the ability to apply those NOLs as offsets to future taxable income is lost. Based on the preliminary section 382 limitation, the Company estimates that $i41.9 million of
the state NOL carryforwards and $i3.8 million of the tax credit carryforwards will expire unutilized. The tax effected amount of the estimated expirations is included in the Company’s valuation allowance.
Note 12 — iCommitments
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.
Former CEO (J Chisholm) 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, and related party accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the
Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
Note 13 — iStockholders’ Equity
On February 2, 2023, the Convertible Notes Payable pursuant to the PIPE transaction discussed in Note 9, “Debt and
Convertible Notes Payable”, excluding those held by ProFrac Holdings, LLC, were converted, upon maturity, into i10,335,840 shares of common stock at a price of $i0.8705
per share. The Convertible Notes Payable converted into common stock shares had a carrying value of $i9.0 million, including accrued paid-in-kind interest of $i0.8
million and were recorded as additional paid-in-capital as of March 31, 2023.
The Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying value of $i11.0 million, including accrued interest of $i1.0
million, were converted, upon maturity, into i12,683,280 February 2023 Warrants with an exercise price of $i0.0001
per share and were recorded as additional paid-in-capital.
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable discussed in Note 9, “Debt and Convertible Notes Payable”, remeasured to and carried at a fair value of $i15.1 million, were converted, upon maturity, into i12,683,281
February 2023 Warrants and were recorded as additional paid-in-capital.
The February 2023 Warrants permit ProFrac Holdings II, LLC to purchase i25,366,561 shares of common stock of the Company at an exercise price equal to $i0.0001
per share and may be exercised at any time. Since there are no contingent conditions to be satisfied prior to exercise, the February 2023 Warrants are included in calculation of basic earnings (loss) per share. (See Note 14, “Earnings (Loss) Per Share”).
24
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 21, 2022, ProFrac Holdings II, LLC paid $i19.5 million
for Pre-Funded Warrants (the “June 2022 Warrants”) of the Company. The June 2022 Warrants were recorded in equity at their fair value of $i11.1 million, estimated using a Black-Scholes Option Pricing model, less $i1.2
million of transaction costs paid. The remaining cash received of $i8.4 million was recognized as an equity contribution. The June 2022 Warrants permit ProFrac Holdings II, LLC to purchase i13,104,839
shares of common stock of the Company at an exercise price equal to $i0.0001 per share, and a $i4.5
million exercise fee representing a i20% premium to the 30-day volume average price of the Company’s common stock at the close of business on the day prior to the date of the issuance of the June 2022 Warrants. The June 2022 Warrants, net of transaction fees of $i1.1 million,
and the equity contribution of $i8.4 million from ProFrac Holdings II, LLC were recorded as additional paid-in capital.
i
The
key inputs into the Black-Scholes Option Pricing Model used to estimate the fair value of the June 2022 Warrants as of the issuance on June 21, 2022 were as follows:
Risk-free interest rate
i3.21%
Expected
volatility
i90.0%
Term until liquidation (years)
i2.00
Stock
price
$i1.11
Strike price (exercise fee)
$i4.5
million
/
ProFrac Holdings II, LLC and its affiliates may not receive any voting or consent rights in respect of the June 2022 Warrants or the underlying shares of common stock unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings II, LLC and its affiliates and (ii) ProFrac Holdings II, LLC has paid an additional $i4.5 million
to the Company. The additional $i4.5 million will be accounted for as an equity contribution if received.
On March 21, 2022, the Convertible Notes Payable issued pursuant to the PIPE transaction discussed in Note 9, “Debt and Convertible Notes Payable”, which had been purchased by certain funds associated with one of the
Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $i3.0 million plus $i39 thousand
of accrued interest, were converted into i2,793,030 shares of the Company’s common stock.
Note 14 — iEarnings
(Loss) Per Share
iBasic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period, which includes the February 2023 Warrants (See Note 9, “Debt and Convertible Notes Payable”, and Note 13, “Stockholders’ Equity”). Diluted earnings (loss) per common share is calculated by dividing the adjusted net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. Potentially dilutive common
share equivalents consist of incremental shares of common stock issuable upon conversion of convertible notes payable, exercise of stock warrants and vesting and settlement of stock awards. The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the Pre-Funded stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022 (see Note 2, “Summary of Significant Accounting Policies”).
iThe
calculation of the basic and diluted earnings (loss) per share for the three months ended March 31, 2023 and 2022 is as follows (in thousands):
25
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Adjustments
to net income available to shareholders
Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable
i1,571
—
Valuation
(gain)/loss on Contract Consideration Convertible Notes Payable carried at FV
(i26,095)
—
Adjusted
net income (loss) for diluted earnings per share
$
(i3,181)
$
(i10,724)
Anti-dilutive
adjustments to net income available to shareholders excluded from Numerator for Diluted Earnings calculation
Paid-in-Kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable
i—
i485
Valuation
(gain)/loss on Contract Consideration Convertible Notes Payable carried at FV
i—
i3,892
Total
numerator adjustment excluded from diluted earnings computation
$
i—
$
i4,377
Denominator:
Basic
weighted average shares outstanding
i98,808
i73,858
Average
number of diluted shares for convertible notes payable and Contract Consideration Convertible Notes Payable
i59,633
i—
Diluted
weighted average shares outstanding
i158,441
i73,858
Basic
earnings (loss) per share
$
i0.22
$
(i0.15)
Diluted
loss per share
$
(i0.02)
$
(i0.15)
Anti-dilutive
incremental shares excluded from denominator for diluted earnings computation
Average number of diluted shares for June 2022 stock warrants
i8,997
i—
Average
number of diluted shares for options and restricted stock
i1,023
i609
For
the three months ended March 31, 2023 weighted average shares for the June 2022 stock warrants and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect as it would reduce the loss per share.
For the three months ended March 31, 2022, paid-in-kind interest expense on convertible notes payable and Contract Consideration Convertible Notes Payable and the change in fair value related to the Contract Consideration Convertible Notes Payable, were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per
share due to the net loss incurred during the period. For the three months ended March 31, 2022 weighted average shares for convertible notes payable and Contract Consideration Convertible Notes Payable and weighted average shares for employee stock awards were not included in the dilution calculation since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.
26
FLOTEK INDUSTRIES,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — iSupplemental Cash Flow Information
i
Supplemental
cash flow information is as follows (in thousands):
Supplemental
non cash financing and investing activities:
Issuance of convertible notes payable as consideration for ProFrac Agreements
i—
i10,000
Conversion
of convertible notes payable to common stock
i8,996
i2,948
Conversion
of convertible notes payable to February 2023 Warrants
i11,040
i—
Conversion
of initial Contract Consideration Convertible Notes Payable to February 2023 Warrants
i15,092
i—
/
Note
16— iRelated Party Transactions
On February 2, 2022, the Company entered into the Initial ProFrac Agreement, upon issuance of $i10 million
in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the Initial ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for i33% of ProFrac Services, LLC’s hydraulic fracturing
fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the Initial ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (i25%) 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 May 17, 2022, the Company entered into the Amended ProFrac Agreement upon issuance of $i50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt
and Convertible Notes Payable”). The Initial ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of i70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.
On February 1, 2023, the Company
entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No. 2”) dated February 2, 2022. The Amended ProFrac Agreement No. 2 has an effective date of January 1, 2023. The ProFrac Agreement was amended to (1) provide a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active hydraulic fracturing fleets to i30
fleets, (2) waive any liquidated damages payment relating to any potential order shortfall prior to January 1, 2023, (3) add additional fees to certain products, and (4) provide margin increases based on revenue percentages from non-ProFrac customers. The Company believes the net present value of the economic benefit attributable to the Amended ProFrac Agreement No. 2 will exceed the value of the liquidated damages payments that would have been received for the period from April 1, 2022 through December 31, 2022.
On February 2, 2023, the Convertible Notes Payable held by ProFrac Holding, LLC, with a carrying
value of $i11.0 million, including accrued paid-in-kind interest of $i1.0 million, were converted, upon maturity, into i12,683,280
February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”).
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, with a carrying value of $i11.0 million, including accrued interest of $i1.0
million, were converted, upon maturity, into i12,683,281 February 2023 Warrants (see Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’ Equity”). The fair value of the Initial ProFrac Agreement Contact Consideration Convertible Notes Payable, as of February 2, 2023, was $i15.1
million (see Note 10, “Fair Value Measurements”).
During the three months ended March 31, 2023 and 2022, the Company’s revenues from ProFrac Services LLC were $i36.4 million and $i1.1
million, respectively. For the three months ended March 31, 2023 and 2022, these revenues were net of amortization of contract assets of $i1.3 million and inil. Cost
of sales attributable to these revenues were $i34.9 million and
27
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$i1.1 million,
respectively for the three months ended March 31, 2023 and 2022. As of March 31, 2023 and December 31, 2022 our accounts receivable from ProFrac Services, LLC was $i26.2 million and $i22.7
million, respectively which is recorded in accounts receivable, related party on the consolidated balance sheet.
Also, during 2023 and 2022, we had the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC:
•PIPE Transaction (see Note 9, “Debt and Convertible Notes Payable”)
•June 2022 Warrants (see Note 13, “Stockholders’ Equity)
On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated
$i3.0 million plus $i39 thousand of accrued interest and amortization of issuance costs of
$i90 thousand, were converted into i2,793,030 shares of the
Company’s common stock.
Mr. Ted D. Brown was a Director of the Company beginning in November of 2013 and is the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company. The Company’s revenues and related cost of sales for product sales to Confluence were $i1.4 million and $i1.4
million, for the three months ended March 31, 2022. As of June 9, 2022 Mr. Brown stepped down from being a Director of the Company and Confluence is no longer considered a related party as of June 9, 2022.
Note 17 — iBusiness
Segment, Geographic and Major Customer Information
i
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:
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. 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 includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The
company markets products and services that support in-line data analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks
Performance is based upon a variety of criteria. The primary financial measure is segment operating income (loss). Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.
28
FLOTEK
INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
i
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
Corporate and Other
Total
2023
Revenue from external customers
Products
$
i8,561
$
i1,941
$
i—
$
i10,502
Services
i664
i486
i—
i1,150
Total
revenue from external customers
i9,225
i2,427
i—
i11,652
Revenue
from related party
—
Products
i36,265
i—
i—
i36,265
Services
i—
i90
i—
i90
Total
revenue from related parties
i36,265
i90
i—
i36,355
Gross
profit
i434
i1,446
i—
i1,880
Change
in fair value of Contract Consideration Convertible Notes Payable
(i26,095)
i—
i—
(i26,095)
Income
(loss) from operations
i23,379
i457
(i5,325)
i18,511
Paid-in-kind
interest on Contract Consideration Convertible Notes Payable
i1,416
i—
i—
i1,416
Paid-in-kind
interest on convertible notes payable
i—
i—
i155
i155
Depreciation
i157
i18
i1
i176
Additions
to long-lived assets
i30
i95
i32
i157
2022
Revenue
from external customers
Products
$
i8,909
$
i793
$
i—
$
i9,702
Services
i402
i278
i—
i680
Total
revenue from external customers
i9,311
i1,071
i—
i10,382
Revenue
from related party
Products
i2,497
i—
i—
i2,497
Services
i—
i—
i—
i—
Total
revenue from related parties
i2,497
i—
i—
i2,497
Gross
profit (loss)
(i662)
i183
i—
(i479)
Change
in fair value of Contract Consideration Convertible Notes Payable
i3,892
i—
i—
i3,892
Loss
from operations
(i6,057)
(i808)
(i3,419)
(i10,284)
Paid-in-kind
interest on Contract Consideration Convertible Notes Payable
i158
i—
i—
i158
Paid-in-kind
interest on convertible notes payable
i—
i—
i327
i327
Depreciation
i178
i16
i1
i195
Additions
to long-lived assets
i—
i—
i—
i—
/
29
FLOTEK
INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segments are as follows (in thousands):
Revenue by country is based on the location where services are provided and products are sold. For the three months ended March 31, 2023 no individual countries other than the U.S. accounted for more than 10% of revenue. For the three months ended March 31, 2022 no individual countries other than the U.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. iRevenue
by geographic location is as follows (in thousands):
We have evaluated the effects of events that have occurred subsequent to March 31, 2023, and there have been no material events that would require recognition in the March 31, 2023 interim financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.
New
York Stock Exchange (“NYSE”) Continued Listing Requirements
The Company’s common stock is currently listed on the NYSE. On April 12, 2023, the Company received written notice from the NYSE that the average closing price of the Company’s shares of common stock was below $i1.00
per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, the Company has notified the NYSE that it intends to cure the $1.00 per share deficiency. Based on the applicable NYSE procedures, the Company has six months following the receipt of the NYSE’s notice to cure the deficiency and regain compliance. The NYSE’s notice has no immediate impact on the listing of the Company’s common stock, which will continue to trade on the NYSE subject to the Company’s continued compliance with the other listing requirements of the NYSE. The common
stock of the Company will continue to trade under the symbol “FTK” but will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as the Company is deemed to be in compliance. The Company intends to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.
31
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Flotek,” the "Company,""we,""us" and "our" refer to Flotek Industries, Inc. and its wholly-owned subsidiaries.
The following discussion should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“Annual Report” or “2022 Annual Report”) filed with the U.S. Securities and Exchange Commission (the “SEC”) and the unaudited consolidated financial statements and accompanying notes included herein. Comparative
segment revenues and related financial information are discussed herein and are presented in Note 17 to our unaudited consolidated financial statements. See “Forward Looking Statements” in this report and “Risk Factors” included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our 2022 Annual Report, for a description of important factors that could cause actual results to differ from expected results. Our historical financial information may not be indicative of our future performance.
Executive Summary
Flotek creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial and commercial markets improve their environmental performance. The
Company serves specialty chemistry needs for both domestic and international energy markets.
The Company has two operating segments, Chemistry Technologies (“CT”) and Data Analytics (“DA”), which are both supported by the Company’s continuing Research and Innovation (“R&I”) advanced laboratory capabilities.
Company Overview
Chemistry Technologies
We believe that the Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value
by elevating their environmental, social and governance (“ESG”) performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.
Customers of the CT segment include those of energy related markets, such as
our related party ProFrac Services, LLC, as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, natural gas liquids (“NGLs”), 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.
We believe customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations have the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers
in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We have developed a line of Verax™ analyzers for deployment internationally which was certified for compliance in hazardous locations and harsh weather conditions.
32
Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the
Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.
Outlook
Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility. We have based our outlook on the market conditions we perceive today. Changes often occur.
Energy
We believe that we are in the early years of a tight supply cycle for oil and gas triggered by an extended period of underinvestment in energy development, infrastructure and new sources of oil and gas production. While
the demand for oil and gas could fluctuate depending on the macroeconomic condition, we believe that this tight supply cycle could last and could provide support to high oil prices for multiple years. We expect that the strongest potential growth throughout 2023 will likely come from independent, rather than large major exploration and production companies. Independent 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 these companies to increase activity and the larger companies to have modest spending increases in the year ahead.
Digital Analytics
The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve
performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. We believe Verax™ analyzers have gained a foothold in North American markets for critical applications where compositional information is needed in real-time. The technology delivers insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API (American Petroleum Institute) gravity, viscosity, BTU (British Thermal Unit) and more, simultaneously. We continue to collaborate with our customers to identify further facilities and applications where our technology has the highest value. 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 real-time versus traditional lab analysis. We believe this allows customers to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades. We are also gaining traction leveraging the Verax™ in applications where operators and service companies are using field gas as a substitute for diesel in dual fuel engines as the market moves to Tier 4 equipment and eFleets. Analyzing this in real-time allows companies to maximize the substitution rate while lowering emissions, reducing fuel consumption/costs, and protecting the equipment from damage.
ESG
ESG-focused
solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment. We anticipate the Company’s products and services could offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the
Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Additionally, we believe the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.
We believe the industry focus on maintaining a “social license to operate” provides the platform to accelerate the sale of our products and services that we believe can help the customer achieve a greener goal. We believe the performance driven ESG focus of the Company assists in reducing
environmental liabilities and improving returns for our customers.
33
Supply Chain
The principal supply issues facing our industry for the next twelve months will include:
•Fluctuating freight costs for shipping to our customers;
•Availability of raw materials;
•Delays due to port congestion;
•Labor shortages; and
•Demand
forecasting.
All bidding will require the risk of shipping costs and delays to be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could also result in supply disruption.
New York Stock Exchange (“NYSE”) Continued Listing Requirements
The Company’s common stock is currently listed on the NYSE. On
April 12, 2023, the Company received written notice from the NYSE that the average closing price of the Company’s shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, the Company has notified the NYSE that it intends to cure the $1.00 per share deficiency. Based on the applicable NYSE procedures, the Company has six months following the receipt of the NYSE’s notice to cure the deficiency and regain compliance. The NYSE’s notice has no immediate
impact on the listing of the Company’s common stock, which will continue to trade on the NYSE subject to the Company’s continued compliance with the other listing requirements of the NYSE. The common stock of the Company will continue to trade under the symbol “FTK” but will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as the Company is deemed to be in compliance. The Company
intends to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.
(Gain) loss in fair value of Contract Consideration Convertible Notes Payable
(26,095)
3,892
Income
(loss) from operations
18,511
(10,284)
Operating margin %
38.6
%
(79.9)
%
Interest
and other income, net
2,841
(444)
Income (loss) before income taxes
21,352
(10,728)
Income tax
(expense) benefit
(9)
4
Net income (loss)
$
21,343
$
(10,724)
Net
income (loss) %
44.5
%
(83.3)
%
Consolidated
revenue for the three months ended March 31, 2023 increased $35.1 million, or 273%, versus the same period of 2022, primarily driven by related party activity under the ProFrac Agreement which commenced in the second quarter of 2022 and continued increased activity across our customer base, particularly in the DA segment. Related party revenues in the CT segment are partially offset by $1.3 million of contract assets amortization for the three months ended March 31, 2023.
Consolidated cost of sales for the three months ended March 31, 2023 increased $32.8 million, or 245%, versus the same period of 2022, primarily attributable to the increase in
revenue.
SG&A expenses for the three months ended March 31, 2023 increased $1.6 million, or 32%, versus the same period of 2022. The increase relates mainly to professional fees, driven by higher legal fees partially offset by a decrease in capital transaction related costs.
Severance costs of $2.2 million were recorded in the three months ended March 31, 2023 compared to a credit of $7 thousand for the same period of 2022, and were attributable to senior management changes.
Research and development (“R&D”) costs for the three months ended March 31, 2023, decreased $0.8 million or 57%, versus
the same period of 2022 due to a reduction in sample testing in 2023 and lower personnel cost driven by headcount optimization.
Income from operations increased by $28.8 million or 280% for the three months ended March 31, 2023, versus the same period in 2022. The improvement is primarily driven by the gain in fair value of the Contract Consideration Convertible Notes Payable of $26.1 million compared to a loss in fair value of $3.9 million for the same period of 2022. The improvement is partially offset by severance costs of $2.2 million.
35
Interest
and other income for the three months ended March 31, 2023, increased $3.3 million or 740% driven by a $4.5 million gain for the forgiveness of the Flotek PPP loan (see Note 9, “Debt and Convertible Notes Payable”). This was partially offset by non-cash interest charges of $1.7 million in the three months ended March 31, 2023 versus $0.7 million for the same period in 2022. The increased interest cost relates to paid- in-kind interest expense on the convertible notes payable and the Contract Consideration Convertible Notes Payable.
CT revenue from external customers for the three months ended March 31, 2023 decreased $0.1 million or 0.9%, compared to the same period of 2022. Revenue from related parties increased $33.8 million or 1352%, compared to the same period of 2022. The increased revenue in 2023 is driven by the ProFrac
Agreement which commenced in the second quarter of 2022.
Income from operations for the CT segment for the three months ended March 31, 2023 increased $29.4 million or 486% compared to the same period of 2022. The improvement is primarily attributable to the gain in fair value of the Contract Consideration Convertible Notes Payable of $26.1 million for the three months ended March 31, 2023 compared to a loss of $3.9 million for the same period of 2022. The improvement is partially offset by increased cost of sales, driven by activity, with notable, significant increased freight and equipment rental costs, and severance costs of $0.6 million, driven by changes in senior management. During the three months ended March
31, 2022, the loss from operations included a gain on lease termination of $0.6 million.
DA
revenue from external customers for the three months ended March 31, 2023 increased $1.4 million or 127% compared to the same period of 2022 primarily due to significant products revenues from three new customers. Revenue from related party customers was $0.1 million relating to services provided to ProFrac Services, LLC.
Income from operations for the DA segment for the three months ended March 31, 2023 increased $1.3 million or 157% compared to the same period for 2022 driven by increased activity and decreased R&D expense.
Loss
from operations for the three months ended March 31, 2023, increased $1.9 million, or 56%, compared to the same period of 2022 attributable to severance costs and increased professional fees. Severance costs of $1.6 million were recorded in the three months ended March 31, 2023, relating to senior management changes. The increase in professional fees relates mainly to higher legal fees partially offset by lower capital transaction related costs.
36
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 three months ended March 31, 2023, the Company funded working capital requirements with cash on hand.
As of March 31, 2023, the Company had unrestricted cash and cash equivalents of $12.4 million, as compared to $12.3 million on December 31, 2022. During the three months ended March 31, 2023, the Company had an operating income
of $18.5 million, $1.1 million of cash provided by operating activities, $0.2 million cash used in investing activities and $0.8 million of cash used in financing activities.
Going Concern
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
The
Company currently funds its operations from cash on hand and other current assets. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the unaudited condensed consolidated financial statements. The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 9, “Debt and Convertible Notes Payable” and Note 16, “Related Party Transactions”). It is not certain that the Company’s cash and other current assets and the
Company’s forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet the Company’s capital requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the
unaudited condensed consolidated financial statements are filed.
The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional
liquidity when needed or under acceptable terms, if at all.
The unaudited condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
Net cash provided by (used in) operating activities
$
1,140
$
(8,474)
Net cash (used in) provided by investing activities
(157)
24
Net
cash (used in) provided by financing activities
(818)
19,993
Effect of changes in exchange rates on cash and cash equivalents
(21)
8
Net change in cash and cash equivalents and restricted cash
$
144
$
11,551
37
Operating
Activities
Net cash provided by operating activities was $1.1 million during the three months ended March 31, 2023 compared to $8.5 million used in operating activities for the same period of 2022. Consolidated net income for the three months ended March 31, 2023 was $21.3 million compared to a net loss of $10.7 million for the three months ended March 31, 2022.
During the three months ended March 31, 2023, non-cash adjustments to net income (loss) totaled $27.8 million as compared to $5.6 million for the same period of 2022.
•For the three months ended March 31, 2023
non-cash adjustments included $26.1 million for the change in fair value of Contract Consideration Convertible Notes Payable, $4.5 million for PPP loan forgiveness and $1.1 million stock compensation adjustment. These were offset by non-cash positive adjustments of $1.6 million paid-in-kind interest expense, $1.3 million amortization of contract assets and $1.0 million non-cash lease expense.
•For the three months ended March 31, 2022 non-cash adjustments included $3.9 million for the change in fair value of Contract Consideration Convertible Notes Payable, $0.7 million stock compensation
expense, $0.5 million paid-in-kind interest expense and $0.3 million provision for excess and obsolete inventory. These were partially offset by $0.6 million for the gain on lease termination.
During the three months ended March 31, 2023, changes in working capital provided $7.6 million of cash as compared to using $3.3 million for the same period of 2022.
•For the three months ended March 31, 2023, changes in working capital resulted primarily from an increase in accounts payable of $8.6 million.
•For the three months ended March 31, 2022, changes in working capital resulted primarily from a decrease in accrued liabilities of $2.4 million
partially due to payment of a legal settlement accrued in 2021 and an increase in inventories of $1.0 million.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2023 was $0.2 million driven by capital additions. Net cash provided by investing activities for the three months ended March 31, 2022 was negligible.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2023 was $0.8 million, and relates primarily to payments for forfeited stock options and to tax authorities for shares withheld from employees. Net cash provided by financing activities was $20.0 million
for the three months ended March 31, 2022, primarily from the proceeds from the issuance of convertible notes.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the
Company’s 2022 Annual Report describes the critical accounting policies and estimates used in the preparation of the Company’s condensed consolidated financial statements. Note 2, “Summary of Significant Accounting Policies” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and in the Notes to Consolidated Financial Statements in Part II, Item 8 of the 2022 Annual Report describe the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements.
Item 3. Quantitative
and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of the Company’s Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
38
The
Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding
of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.
In accordance with Exchange Act Rules 13a–15(e) and 15d–15(e), we carried out an evaluation under the supervision and with the participation of our management, including the Interim Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2023. Based upon this evaluation, our interim Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2023, our disclosure controls and procedures were not effective because of a material weakness in our internal control over financial
reporting described below.
Material Weakness in Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, as amended.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In
connection with the preparation of the Company’s 2022 Annual Report, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2022, and identified the material weakness described below that continues to exist as of March 31, 2023.
Specifically, (i) the Company did not have sufficient resources in place throughout the reporting period with the appropriate training and knowledge of internal controls over financial reporting in order to establish the Company’s financial reporting
processes to design, implement and operate an effective system of internal control over financial reporting; (ii) the Company did not conduct an adequate continuous risk assessment over financial reporting to identify and analyze risks of financial misstatement due to error and/or fraud and to identify and assess necessary changes in financial reporting processes and internal controls impacted by significant changes in the business and increase in transactions; and (iii) the Company did not have an effective information and communication process that ensured appropriate and accurate information was available to financial reporting personnel on a timely basis in order that they could fulfill their roles and responsibilities.
Accordingly,
the Company did not establish appropriate control activities through policies and procedures to mitigate risk to the achievement of the Company’s financial reporting objectives, as follows:
•The Company did not design effective controls over the identification and subsequent accounting for modifications to lease agreements;
•The Company did not design effective controls over the accuracy of prepaid asset accounts;
•The
Company did not design effective controls over the completeness and accuracy of the related party revenue accrual at period end to ensure all sales are properly accounted for.
These control deficiencies resulted in several material and immaterial misstatements that were corrected prior to the issuance of the consolidated financial statements included in the 2022 Annual Report.
The Company believes that, notwithstanding the material weakness mentioned above, the unaudited condensed consolidated financial statements contained in this Form 10-Q fairly present, in all material respects, the financial condition, results of operations and cash flows of the
Company in conformity with generally accepted accounting principles in the United States as of the dates and for the periods presented in this Form 10-Q.
Remediation Plan and Status
The Company has implemented and continues to implement certain remediation actions and continues to evaluate the elements of the remediation plan. These elements include:
39
•Implementing a revised FY2023 financial control risk assessment
process based on changes in process that have impacted the Company as well as a regularly recurring assessment process focused on identifying and analyzing risks of financial misstatements due to changes in our business or the nature of transactions; and
•Enhancing the information and communication processes to ensure the organization communicates information internally in a timely manner, including information regarding objectives, responsibilities and the functioning of internal controls over financial reporting. Changes will include more frequent discussion of significant business transactions and the impact of these transactions on the Company’s financial reporting, and improving communication to employees regarding their responsibilities
for ensuring that effective internal controls are maintained.
The Company believes that the actions listed above will provide appropriate remediation of the material weakness; however, the testing of the effectiveness of the controls has not been completed by the Company. Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the design and effectiveness of the controls, no assurance can be given as to the timing for completion of remediation. The material weakness will be fully remediated when the Company concludes that the controls have been operating for sufficient time
and independently validated by management.
Changes in Internal Controls over Financial Reporting
Except as described above in “Remediation Plan and Status”, there have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
40
PART
II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as described in Note 12, “Commitments and Contingencies” of the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1, there have been no material changes in the legal proceedings as described in “Item3. - Legal Proceedings” in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2023.
Item
1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors contained in “Item 1A.-Risk Factors” in our 2022 Annual Report, which could materially affect our business, financial condition and/or future results. As of March 31, 2023, except as set forth below, there have been no material changes in our risk factors from those set forth in the Annual Report. The risks described in the Annual Report and below are not the only risks facing our company. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.
If we cannot regain
compliance with the NYSE’s continued listing requirements and rules, the NYSE may delist our common stock, which could negatively affect our company, the price of our common stock and our stockholders’ ability to sell our common stock.
On April 12, 2023, we received written notice from the NYSE that the average closing price of our shares of common stock was below $1.00 per share over a period of 30 consecutive days, which is below the requirement for continued listing on the NYSE. In accordance with applicable NYSE procedures, we have notified the NYSE that we intend to cure the $1.00 per share deficiency. Based on the applicable NYSE procedures, we have six months following the receipt of the NYSE’s notice to cure the deficiency and regain compliance. The
NYSE’s notice has no immediate impact on the listing of our common stock, which will continue to trade on the NYSE subject to our continued compliance with the other listing requirements of the NYSE. Our shares of common stock will continue to trade under the symbol “FTK” but will have an added designation of “.BC” to indicate that the status of the common stock is “below compliance” with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as we are deemed to be in compliance. We intend to explore available options to regain compliance, which may include, if necessary, effectuating a reverse stock split.
If our common stock ultimately were to be delisted for any reason, it could negatively impact us by (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold
or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; and (iv) impairing our ability to provide equity incentives to our employees.
Item 2. Unregistered Sales of Equity Securities
Unregistered Sales of Equity Securities
None
Issuer Repurchases of Equity Securities
The
Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting or exercise of the award. Repurchases of the Company’s equity securities during the three months ended March 31, 2023, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule
10b-18(a)(3) under the Exchange Act are as follows:
(1) The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment
remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options and (b) to satisfy payments required for common stock upon the exercise of stock options.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On
May 5, 2023, the Board approved a form of director and officer indemnification agreement (the “D&O Indemnification Agreement”) to be used by the Company to provide contractual indemnification, expense advancement, and other related rights to the members of the Board and the Company’s executive officers who are a party thereto in accordance with the Delaware General Corporation Law, and authorized the Company to enter into the D&O Indemnification Agreement with each of the Company’s directors and executive officers. The foregoing description of the D&O Indemnification
Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the D&O Indemnification Agreement, a copy of which is attached hereto as Exhibit 10.6 and incorporated herein by reference.
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.
43
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.
