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(Registrant’s telephone number, including area code)
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 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☒
This Quarterly Report on Form 10-Q (this “Quarterly Report”), and in particular, Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek Industries, Inc. (“Flotek” or the “Company”), many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the
Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.
The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words including but not limited to, “anticipate,”“believe,”“estimate,”“commit,”“budget,”“aim,”“potential,”“schedule,”“continue,”“intend,”“expect,”“plan,”“forecast,”“project” and similar expressions, or future-tense or conditional constructions such as “will,”“may,”“should,”“could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or revenue thereafter. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied.
A
detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2021 (“Annual Report” or “2021 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022, and periodically in subsequent reports filed with the SEC. The Company has no obligation, and we disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
Preferred
stock, $ii0.0001/ par value, ii100,000/
shares authorized; iiiino///
shares issued and outstanding
i—
i—
Common
stock, $ii0.0001/ par value, ii140,000,000/
shares authorized; i82,884,690 shares issued and i76,773,333 shares outstanding at June 30, 2022 ; i79,483,837
shares issued and i73,461,203 shares outstanding at December 31, 2021
The
accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
9
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — iOrganization
and Nature of Operations
General
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial, commercial, and consumer markets improve their environmental performance.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers and cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The
Company’s Data Analytics (“DA”) segment 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.”
Sources and Uses of Liquidity
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. The availability of adequate capital is dependent on the Company’s operating cash flow, and the availability of and access to debt and equity financing.
The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in the twelve months subsequent to the date of filing the consolidated financial statements. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months, uncertainty surrounding the stability and strength of the oil and gas markets or reduced spending by our customers could have a further negative impact on our liquidity.
On February 2, 2022, the Company completed a Private Investment
in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $i21.2 million in aggregate principal amount of i10% convertible
notes (the Convertible Notes Payable) that resulted in net cash proceeds of approximately $i19.5 million (see Note 9, “Debt and Convertible Notes Payable”).
Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon
issuance of $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 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 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. The term of the ProFrac Agreement is three years starting on April 1, 2022. These Contract Consideration Convertible Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.
On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) upon issuance of $i50 million
in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.
10
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $i19.5 million in cash (see Note 13, “Stockholders’ Equity”). The Prefunded Warrants will 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.
Based on our cash and liquid assets, including the transactions during the six months ended June 30, 2022 we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months. However, the Company cannot guarantee a sufficient level of cash flows in the future. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
Note
2 — iSummary of Significant Accounting Policies
iBasis of Presentation
The
accompanying unaudited consolidated financial statements reflect all adjustments, in the opinion of management, necessary for fair statement of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The financial statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the SEC regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2021 Annual Report. A copy of the 2021 Annual Report is available on the SEC’s website,
www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The information contained on the Company’s website does not form a part of this Quarterly Report.
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 $i40 thousand and $i1.8 million
as of June 30, 2022 and December 31, 2021, respectively.The Company’s restricted cash as of June 30, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $i1.75 million
for amounts due under the terms of the legal settlement discussed in Note 12, “Commitments and Contingencies”.
i
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The
Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate allowance for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for doubtful accounts charged to operating expense.
The majority of the Company’s customers are engaged in the energy industry. The cyclical
nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s contract assets represent consideration issued in the form of convertible notes to a related party customer in connection with the ProFrac Agreement and the Amended ProFrac Agreement discussed in Note 9, “Debt and Convertible Notes Payable” and other incremental costs related to obtaining the ProFrac Agreements. The contract
assets are amortized over the term of the ProFrac Agreements based on forecasted revenues as goods are transferred to the customer and the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations. The contract assets will be tested for recoverability and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the ProFrac Agreements less the direct costs that relate to providing
those goods in the future.
i
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs
the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of goods sold.
i
Property and equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating
expense, while replacement of critical components and major improvements are capitalized. iDepreciation or amortization of property and equipment, including right-of-use assets (“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:
Buildings and leasehold improvements
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.
The Company accounts for the Convertible Notes Payable issued to the PIPE investors for cash proceeds, which is discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.
The
Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration for the ProFrac Agreement, which are discussed in Note 1, “Organization and Nature of Operations” and Note 9, “Debt and Convertible Notes Payable”, as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each
12
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
reporting
date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.
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 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 to depict the transfer of control of promised goods
or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.
The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly.
Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.
The Company applies several practical expedients including:
•Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.
•The majority of the Company’s services are short-term in nature with a contract term of one year or less. As a result the
Company does not disclose the transaction price allocated to remaining performance obligations.
•The Company’s payment terms are short-term in nature with settlements of one year or less. As a result the Company does not adjust the promised amount of consideration for the effects of a significant financing component.
•In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the
Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.
•The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for
as a fulfillment cost and are included in cost of goods sold on our consolidated statement of operations.
i
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities
of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
i
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in
stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes consolidated net income (loss) and foreign currency translation adjustments.
i
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
iIncome
Taxes
13
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity, and recorded the proceeds received
for the Pre-funded 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.
Significant items subject to estimates and assumptions include the useful lives
of property and equipment; long lived asset impairment assessments; stock-based compensation expense; valuation allowances for accounts receivable, inventories, and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified Stock Warrants.
i
Reclassifications
Certain
prior year amounts in the unaudited condensed consolidated statement of operations have been reclassified to conform to the current year presentation. In the fourth quarter of 2021, the Company changed its financial statement presentation to report cost of goods sold and gross loss and eliminated the reporting of operating expenses (excluding depreciation and amortization) on the consolidated statements of operations to conform to customary industry reporting practices. In connection with this change in presentation, the Company reclassified selling costs of $i1.3 million
and $i3.1 million to selling, general and administrative expenses which were previously reported in operating expenses for the three and six months ended June 30, 2021 respectively. The reclassifications and change in presentation of the statements of operations did not impact previously recorded income (loss) from operations, net income (loss) or stockholders’ equity.
/
14
FLOTEK
INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2022
The FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This standard changes the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to be classified in equity and amends diluted earnings per share calculations for certain convertible debt instruments. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, with early adoption allowed for fiscal years beginning after December
15, 2020. The Company has adopted this standard as of January 1, 2022, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures as of January 1, 2022 as there were no convertible debt instruments outstanding as of that date but will have an impact on the future issuances of convertible instruments and contracts in the Company’s equity.
The FASB issued ASU No. 2021-10,
“Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The pronouncement is effective for fiscal years beginning after December 15, 2021.The Company adopted this standard as of January 1, 2022 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
New Accounting Standards Issued But Not Adopted as of June 30,
2022
The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. In recognizing revenue for products and services, the
Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive and discounts offered to customers for prompt payment.
The majority
of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized on an over time basis. The Company bills sales on a monthly basis with payment terms customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of Revenue
The Company differentiates revenue based on
whether the source of revenue is attributable to product sales (point-in-time revenue recognition) or service revenue (over-time revenue recognition).
15
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
i
Revenue
disaggregated by revenue source is as follows (in thousands):
(1)
Product revenues for 2022 include sales to a related party as described in Note 16, “Related Party Transactions.”
/
Arrangements with Multiple Performance Obligations
The Company primarily sells chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, the Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions. Services are recognized
upon completion of commissioning and installation due to the short-term nature of the performance obligation. There may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, the Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements and revenue not yet recognizable is reported under current and long term contract liabilities on the balance
sheet. Subscription-type arrangements were not a material revenue stream in the three and six months ended June 30, 2022 and 2021.
Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract assets associated with incomplete performance obligations are not material.
In
connection with entering into the ProFrac Agreements on February 2, 2022 and May 17, 2022 as discussed in Note 9, “Debt and Convertible Notes Payable”, we recognized contract assets of $i10 million and $i69.5
million, respectively, and associated fees of $i3.6 million, representing the excess consideration to be given over the three and ten year terms of the contracts over the fair value of the convertible notes we issued. The value to be assigned to the contract asset was estimated based on forecasted volumes and contractual pricing in the agreements. As of June
30, 2022, $i76.1 million of the contract assets is classified as long term based upon our estimate of the forecasted revenues from the ProFrac agreements which will not be realized within the first twelve months of the ProFrac Agreements. The Company’s estimate of the timing of the future contract
revenues is evaluated on a quarterly basis throughout the contract term.
During the three and six months ended June 30, 2022. the Company recognized $ii0.7/ million
of contract assets amortization which is presented as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations. The below table reflects our estimated amortization per year (in thousands) based on our current forecasted revenues from the ProFrac Agreements.
16
FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
provision recorded in the three months ended June 30, 2022and 2021 was $i0.4 million and $i0.1 million
for the CT segment and $i49 thousand and $i0.1 million for the DA segment, respectively. The provision recorded in the six months ended June
30, 2022 and 2021 was $i0.7 million and $i0.4 million for the CT segment and $i49 thousand
and $i0.1 million 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 $i0.3 million for the three months ended June 30, 2022 and
2021, and $i0.4 million and $i0.6 million for the six months ended June 30, 2022 and 2021,
respectively.
In the first quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas in its current condition and as a result the associated assets in the amount of $ii0.5/ million
are classified as held for sale as of June 30, 2022 and December 31, 2021. The company also classified $i2.3 million for the Waller facility as held for sale as of December 2021, which was sold on April 18, 2022 (See Note 1, “Organization and Nature of Operations”.
Note
7 — iiLeases/
17
FLOTEK
INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2021, the Company entered into a long-term rental agreement to lease its manufacturing facility in Waller, Texas, for $i40 thousand per month for isixty-four
months. Rental income recognized during the three and six months ended June 30, 2022 was inil and $i121 thousand, respectively, and was included in other income in the
consolidated statement of operations. As discussed in Note 1, “Organization and Nature of Operations” this facility was sold on April 18, 2022 and the lease agreement between the tenant and the Company terminated.
In August 2021, the Company entered into a ifive-year triple net operating lease agreement to lease its warehouse facility in Monahans, Texas, for
$i20 thousand per month, and the tenant occupied the warehouse facility in September 2021. Rental income recognized during the three and six months ended June 30, 2022 was $i66 thousand,
and $i131 thousand, respectively and was included in other income in the consolidated statement of operations.
i
The 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 Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a
19
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PPP loan of $i0.9
million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek. The PPP loans had a fixed interest rate of i1% and originally a itwo-year term, maturing in April and May 2022, respectively. No payments of principal or interest
were required during the three or six months ended June 30, 2022 and 2021.
A portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least i60%
of the eligible costs incurred were used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that was not significantly detrimental to the business. The forgiveness of the loans is dependent on the Company having initially qualified for the loans and qualifying for the
forgiveness of such loans based on our past and future adherence to the forgiveness criteria. The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.
During the second quarter of 2021, the Company applied for forgiveness of the JP3 PPP loan with the SBA. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest were fully forgiven. Accordingly, during the second quarter of 2021, the
Company recorded $i0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statement of operations.
The
Company has submitted to the SBA for forgiveness of substantially all of the Flotek PPP loan but as of the date of this filing, the Company has not received a forgiveness notice. If the loan is not forgiven, monthly payments will be due over the remaining term of the loan upon notice that it will not be forgiven. Denial of the forgiveness of the Flotek PPP loan will negatively impact the Company’s liquidity as discussed in Note 1, “Organization and Nature of Operations”.
i
Long-term
debt, including current portion, assuming forgiveness is not obtained, 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 $i19.5 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of i10%
per annum, have a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any time prior to maturity, at a price of $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
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.
As of June 30, 2022, the remaining Convertible Notes Payable are recorded at carrying value of $i18.3 million, including accrued paid-in-kind interest of $i0.8 million,
and net of unamortized issuance costs of $i0.6 million The estimated fair value of the Convertible Notes Payable at June 30, 2022 was $i21.1 million.
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $i10 million
in aggregate principal amount of Contract Consideration Convertible Notes Payable (“ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction.
The ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $i10.0 million
on the issuance date and remeasured to fair value of $i11.7 million as of June 30, 2022 which includes payment-in-kind interest of $i0.4 million.
The fair value adjustment was a $i2.4 million decrease and a $i1.7 million
increase in the three and six months ended June 30, 2022, respectively. See Note 10, “Fair Value Measurements”.
On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended 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”). The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable may be converted at any time prior to the maturity date, which will be one year from the date of issuance under the same stock conversion terms as the Convertible Notes Payable issued in the PIPE transaction.
The Amended ProFrac Agreement Contract Consideration Convertible
Notes Payable are accounted for as liability classified convertible instruments, and were initially recorded at fair value of $i69.5 million on the issuance date and remeasured to fair value of $i55.6 million
as of June 30, 2022 which includes payment-in-kind interest of $i0.6 million. The fair value adjustment was a $ii13.9/ million
decrease in the three and six months ended June 30, 2022. 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. The carrying amount of the Flotek PPP loan approximates its fair value as of June 30, 2022 and December 31, 2021.
21
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 June 30, 2022 and December 31, 2021. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.
i
The
key inputs into the Monte Carlo simulation used to estimate the fair value the earn-out provision were as follows:
The ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $i10.0 million
on February 2, 2022. The ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement due to the use of a quoted price for a similar liability, and classified as Level 3 as of June 30, 2022 due to the use of unobservable inputs. The estimated value of the ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the
Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.
The key inputs into the Monte Carlo simulation used to estimate the fair value the ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of June 30, 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 estimated value of the Amended ProFrac Agreement Contract Consideration Convertible
Notes Payable as of June 30, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of the Company’s common stock, the expected volatility of the Company’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate based on a review of bond yield data for bonds with a CCC+ credit rating which would be supportable by the Company’s financial ratios.
The key inputs into the Monte Carlo simulation used to estimate the fair value the Amended
ProFrac Agreement Contract Consideration Convertible Notes Payable, on the issuance date of May 17, 2022, and as of as of June 30, 2022 were as follows:
The
value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as of June 30, 2022 was $i55.6 million.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment
and operating lease right-of-use assets, are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company estimated the fair value of the remaining stock performance earn-out provision as of June 30, 2022 and 2021 and adjusted the estimated fair value of the contingent liability to $i0.5 million
and $i1.1 million, respectively. The Company records changes in the fair value of the contingent consideration and achievement of performance targets in cost of goods sold.
The Company estimated the initial fair value of $i10.0 million
of the ProFrac Agreement Contract Consideration Convertible Notes Payable on February 2, 2022, by reference to the cash purchase price paid by third party investors for equivalent notes issued simultaneously by the Company. The Company estimated the fair value of the additional $i69.5 million
of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable on the issuance date of May 17, 2022 using a Monte Carlo simulation. The Company adjusted the estimated fair value of the Contract Consideration Convertible Notes Payable to $i55.6
million as of June 30, 2022.
iThe following table presents the changes in the assets and liabilities measured at fair value on a recurring basis classified as Level 3 (in thousands):
Increase
(reduction) in tax benefit related to stock-based awards
i3.1
i2.2
(i2.0)
i1.2
Non-deductible
expenses
(i0.4)
i3.6
i0.1
i1.1
Increase
in valuation allowance
(i27.5)
(i26.5)
(i17.0)
(i23.6)
Tax
settlement
i3.8
i—
(i2.2)
i—
Effective
income tax rate
i3.8
%
(i0.1)
%
(i1.9)
%
(i0.2)
%
/
Fluctuations
in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates.
24
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Terpene Supply Agreement
On March 26, 2021, Flotek Industries, Inc. and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the
Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company (“FCC”) and other parties in state court in Harris County, Texas. The lawsuit claimed damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty.
On April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters.
On October 29, 2021, the Company reached agreement with all parties resolving all claims between the parties (“the ADM Settlement”) that resulted in the termination of the terpene
supply agreement and a settlement payment of $i1.75 million due from Flotek. The one-time payment of $i1.75 million
from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the consolidated balance sheet as of December 31, 2021.
Former CEO Matter
During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to review the findings of the investigation. After the third-party review, Flotek concluded
that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.
Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be
predicted.
Other Commitments and Contingencies
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
25
FLOTEK
INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — iStockholders’ Equity
On June 21, 2022, the Company issued the Prefunded Warrants to ProFrac Holdings II, LLC in exchange for $i11.1 million
in cash (see Note 1, “Organization and Nature of Operations”) and a cash equity contribution of $i8.4 million, for a total cash infusion of $i19.5 million.The
Prefunded Warrants will 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, 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 Prefunded Warrants. The Prefunded Warrants, net of transaction fees of $1.1 million, and the equity contribution from ProFrac are included in additional paid-in capital as of June 30, 2022.
ProFrac Holdings and its affiliates may
not receive any voting or consent rights in respect of the Prefunded Warrants or the underlying shares unless and until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings and its affiliates and (ii) ProFrac Holdings has paid an additional $i4.5 million to the Company. The additional $i4.5 million
will be accounted for as equity contribution when received.
On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $i3.0 million plus $i39 thousand
of accrued interest, were converted into i2,793,030 shares of the Company’s common stock.
During the first quarter 2021, the Company identified i0.6 million
shares that were improperly included in the December 31, 2020 issued share count, and the Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the June 30, 2021 consolidated financial statements or basic and diluted earnings per share.
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. Diluted earnings (loss) per common share is calculated by dividing the adjusted net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and convertible notes payable and settlement
of restricted stock units. The dilutive effect of non-vested stock issued under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the prefunded stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if‑converted method in accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022 (see Note 2, “Summary of Significant Accounting Policies”).
i
The
calculation of the basic and diluted EPS is as follows (in thousands):
Paid-in-Kind
interest expense on convertible notes payable, net of tax
i1,028
i1,402
Change
in fair value of contract consideration convertible notes payable , net of tax
(i13,229)
(i10,228)
Adjusted
net (loss) for dilutive earnings per share
$
(i5,961)
$
(i13,310)
Denominator:
Basic
weighted average shares outstanding
i74,861
i73,476
Dilutive
effect of convertible notes payable
i49,474
i33,610
Diluted
weighted average shares outstanding
i124,335
i107,086
Basic
earnings (loss) per share
i0.08
(i0.06)
Diluted
loss per share
(i0.05)
(i0.12)
/
26
FLOTEK
INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The adjustments to net income (loss) in the numerator are net of estimated tax at i22.9%. For the three and six months ended June 30, 2022 weighted average shares for employee stock awards of i692,494
and i662,230, respectively, and weighted average shares for the prefunded stock warrants of i976,177
and i490,785, respectively, were not included in the dilution calculation since including them would have an anti-dilutive effect.
For the three and six months ended June 30, 2021 weighted average shares for employee stock awards of i1,127,080
and i1,344,233, respectively. were not included in the calculation of diluted loss per share since including them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the periods.
Note 15 — iSupplemental
Cash Flow Information
i
Supplemental cash flow information is as follows (in thousands):
Issuance of convertible notes payable as consideration for ProFrac Agreements
i79,460
i—
Conversion
of convertible notes payable to common stock
i2,949
i—
Issuance
cost of stock warrants included in accrued accounts payable
i1,170
i—
/
Note
16— iRelated Party Transaction
In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the
Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.
In October 2019, an amendment to the employment agreement of Mr. Chisholm was executed, giving the Company the contractual right of offset for any amounts owed by Mr. Chisholm to the
Company for the IRS matter, and giving the Company the right to withhold payments to Mr. Chisholm equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies for the IRS matter from any amounts owed under the employment agreement. At December 31, 2019, the Company netted the related party receivable against the severance payable and recorded $i1.8 million
for potential liability to the IRS. On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. In September 2020, the Company informed Mr. Chisholm it would cease payment of future severance.
During first quarter of 2020, an additional accrual was recorded for $i0.2
million related to potential penalties and interest on the IRS obligation. As of June 30, 2022 and December 31, 2021, the receivable from Mr. Chisholm was $ii1.4/
million, which equaled the payable to the IRS and netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet.
Mr. Ted D. Brown was a Director of the Company since November of 2013 and has been the President and CEO of Confluence Resources LP (“Confluence”), a private oil and gas exploration and production company formed in 2016. As of April 15, 2022 Ted D. Brown stepped down from being a Director of the Company and Confluence will no longer be considered a related party.. For the three and six months ended June, 30, 2022, the
Company’s revenues for chemical sales to Confluence was izero and $i1.4 million respectively.
27
FLOTEK
INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) under which ProFrac Services, LLC is obligated to order chemicals as per the terms of the Agreement discussed in Note 1, “Organization and Nature of Operations”. On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement, (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) to increase the purchase obligation and term of the ProFrac Agreement, as discussed
in Note 1, “Organization and Nature of Operations”. On June 21, 2022, the Company issued prefunded warrants (the “PreFunded Warrants”) to ProFrac Holdings II, LLC, in exchange for $i19.5 million in cash as discussed in Note 13, “Stockholders’ Equity”.
During the three and six months ended June 30, 2022, the
Company’s revenues from chemical sales to ProFrac Services LLC, were $i16.5 million and $i18.9 million respectively. These revenues were
net of amortization of contract assets of $ii0.7/ million
for the three and six months ended June 30, 2022. As of June 30, 2022 and December 31, 2021, ProFrac Services, LLC owed $i11.6 million and izero,
respectively which is recorded in account receivables on the consolidated balance sheet.
On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated $i3.0 million plus $i39 thousand
of accrued interest, were converted into i2,793,030 shares of the Company’s common stock.
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: CT and DA.
Chemistry
Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies and performance throughout the life cycle of their wells, helping customers improve their environmental, social and governance (“ESG) and operational goals. This segment also includes a portfolio of specialty chemical products to address the long-term challenges of in the janitorial, sanitization, food services, and adjacent markets. Customers of the CT segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.
Data Analytics. The DA segment, created in the
second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information on the composition and properties of energy customers’ hydrocarbon fluids. The company markets products and services that support in-line data analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to midstream facilities to refineries and distribution networks
Performance based upon a variety of criteria. The primary financial measure is segment operating income (loss). Various functions, including certain sales and marketing activities and general
and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.
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 June 30,
Chemistry Technologies
Data Analytics (1)
Corporate and Other
Total
2022
Revenue from external customers
$
i12,111
$
i713
$
i—
$
i12,824
Revenue
from related party
i16,549
i—
i—
i16,549
Change
in fair value of contract consideration convertible notes
(i17,158)
i—
i—
(i17,158)
Income
(loss) from operations
i14,944
(i1,198)
(i5,707)
i8,039
Depreciation
and amortization
i166
i15
i1
i182
Additions
to long-lived assets
i5
i—
i—
i5
2021
Revenue
from external customers
$
i7,688
$
i1,477
$
i—
$
i9,165
Revenue
from related party
i—
i—
i—
i—
Income
(loss) from operations
(i3,819)
(i773)
(i2,869)
(i7,461)
Depreciation
and amortization
i233
i20
i—
i253
Additions
to long-lived assets
i13
i—
i—
i13
As
of and for the six months ended June 30,
Chemistry Technologies
Data Analytics (1)
Corporate and Other
Total
2022
Revenue from external customers
$
i21,422
$
i1,784
$
i—
$
i23,206
Revenue
from related party
i19,046
i—
i—
i19,046
Change
in fair value of contract consideration convertible notes
(i13,266)
i—
i—
(i13,266)
Income
(loss) from operations
i8,887
(i2,006)
(i9,126)
(i2,245)
Depreciation
and amortization
i345
i31
i1
i377
Additions
to long-lived assets
i5
i—
i—
i5
2021
Revenue
from external customers
$
i17,990
$
i2,945
$
i—
$
i20,935
Revenue
from related party
i—
i—
i—
i—
Income
(loss) from operations
(i7,407)
(i1,067)
(i7,230)
(i15,704)
Depreciation
and amortization
i524
i35
i1
i560
Additions
to long-lived assets
i31
i—
i—
i31
Assets
of the Company by reportable segments are as follows (in thousands):
The increase in Chemistry Technologies assets is primarily due to contact assets of $i83.3 million.
Geographic Information
Revenue by country is based on the location where services are provided and products are sold. No individual countries other than the U.S. and the United Arab Emirates
(“UAE”) accounted for more than 10% of revenue. iRevenue by geographic location is as follows (in thousands):
Long-lived
assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
Major Customers
i
Revenue from major customers, as a percentage of consolidated revenue, is as follows (in thousands):
Three
months ended June 30,
Revenue
% of Total Revenue
2022
Customer A (Related Party)
$
i16,549
i52.2
%
Customer
B
i5,611
i19.1
%
2021
Customer
C
$
i1,038
i11.3
%
Customer
D
i1,810
i19.8
%
Six
months ended June 30,
Revenue
% of Total Revenue
2022
Customer A (Related Party)
$
i17,657
i38.9
%
Customer
B
i8,218
i19.5
%
2021
Customer
C
$
i4,067
i19.4
%
Customer
D
i4,660
i22.3
%
/
The
majority of the Company’s revenue consists predominantly of customers within the oil and gas industry. Customers within the oil and gas industry include ProFrac and other oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. The concentration with ProFrac and in the oil and gas industry increases credit and business risk.
30
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
18 — iSubsequent Events
We have evaluated the effects of events that have occurred subsequent to June 30, 2022, and there have been no material events that would require recognition in the 2022 interim financial statements or disclosure in the notes to the consolidated financial statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Annual Report on Form 10-K for year-end December 31, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the consolidated financial statements and accompanying notes included herein.
Executive Summary
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial, commercial, and consumer markets improve their ESG performance. The
Company serves specialty chemistry needs for both domestic and international energy markets as well as applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation advanced laboratory capabilities.
Company Overview
Chemistry Technologies
The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize
our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.
Customers of the CT segment include those of energy related markets as well as consumer and industrial
applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, 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.
Customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations have the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants.
We have developed a new line of Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions.
31
Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current
and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.
Outlook
Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility. We have based our outlook on the market and weather conditions we perceive today. Changes often occur.
Energy
We expect North American and International onshore activity to continue to improve throughout 2022 from second quarter levels for the next nine months provided that commodity prices remain at or above current levels. The strongest potential growth throughout 2022 will likely comes from
private, rather than publicly traded exploration and production companies. Private exploration and production companies operate the majority of U.S. land rigs and react quickly to changing commodity prices. In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other service companies and believe sales through indirect channels should accelerate in 2022.
Industrial
The Company has a diversified line of EPA and FDA compliant products that target industrial, agricultural and consumer markets with particular focus on customers
that are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers, solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use. The Company believes these adjacent markets diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand. We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states. We will be training and educating their representatives during the next two quarters. The leverage sales effort is anticipated to accelerate sales in the second half of 2022.
Digital
Analytics
The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. Verax has gained a foothold in North American markets for critical applications where compositional information is needed in real-time. The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We continue to work with our customers to identify further facilities and applications where our technology has the highest value. We expect to open and establish our international customer base with our new generation of internationally certified online analyzers. The
new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. We anticipate international sales to increase over the next twelve months because of the newly certified equipment. To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations. AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in a liquids pipeline without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces within 60 seconds. This allows operators to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.
ESG
ESG-focused
solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s products and services
32
offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable
operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil. Additionally, the Company’s real-time sensor technology helps to enable process
and operational efficiencies, minimize waste and processing and reduce emissions.
The Company believes the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of our greener practices and chemistries. We believe the performance-driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.
Supply Chain
During 2020 and 2021 challenging supply chain issues emerged that are continuing throughout 2022 according to Secretary of Transportation Peter
Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:
•Rising freight costs;
•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.
Weather
During the first six months of 2022 there were no major weather events that had a material impact on the first and second quarter results.
COVID-19
The impacts of COVID-19 continue to affect the U.S. and global economy. We believe our protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The resumption of travel has begun to accelerate and in person customer visits began in earnest
during the first quarter of 2022, continued through-out the second quarter of 2022, will likely continue to accelerate.
Change
in fair value of contract consideration convertible notes payable
(17,158)
—
(13,266)
—
Income (loss) from operations
8,039
(7,461)
(2,245)
(15,704)
Operating
margin %
27.4
%
(81.4)
%
(5.3)
%
(75.0)
%
Interest and other income, net
(1,701)
936
(2,145)
885
Income (loss)
before income taxes
6,338
(6,525)
(4,390)
(14,819)
Income tax expense
(98)
(21)
(94)
(27)
Net
income (loss)
$
6,240
$
(6,546)
$
(4,484)
$
(14,846)
Consolidated
revenue for the three and six months ended June 30, 2022increased $20.2 million, or 220.5%, and $21.3 million or 101.8%, respectively, versus the same period of 2021 driven by activity with ProFrac starting in the second quarter.
Consolidated cost of goods sold for the three and six months ended June 30, 2022, increased $20.9 million or 194.0%, and $22.2 million or 97.1%, respectively, versus the same periods of 2021, primarily attributable to the increase in revenues. Cost of goods sold were also impacted by one- time expenses incurred due to the ramp up of ProFrac activity.
Selling general and administrative (“SG&A”) expenses are not directly
attributable to products sold or services provided. SG&A expenses for the three and six months ended June 30, 2022, increased $3.2 million or 76.8%, and $2.0 million or 19.7%, respectively, versus the same period of 2021. SG&A expenses increased as a result of higher professional fees relating to the ProFrac and PIPE transactions, higher employee costs due to an ERC credit reported in 2021 and decreased legal fees due to large expense incurred on two significant matters in 2021.
Depreciation of property and equipment decreased $0.1 million or 28.2%, for the three months ended June 30, 2022, versus the same period of 2021. Depreciation of property and equipment decreased $0.2 million or 32.7% for the six months ended June 30, 2022.
Research
and development (“R&D”) costs for the three and six months ended June 30, 2022 decreased $0.4 million or 23.9% and $0.5 million or 15.9%, respectively, versus the same period of 2021 due to lower personnel costs as a result of a reduction in workforce and lower non-labor cost.
Income from operations increased by $15.5 million or 207.7% for the three months ended June 30, 2022, versus the same period in 2021. The income from operations increase is a result of the revaluation of the contract consideration convertible notes payable and the gain on sale of property and equipment partially offset by higher SG&A expenses. For the six months ended June 30, 2022, loss from operations
decreased by $13.5 million or 85.7% attributable mainly to the revaluation of the
34
contract consideration convertible notes payable and gain on sale of property and equipment and partially offset by increased SG&A expenses.
Income before income taxes for the three months ended June 30, 2022, was impacted by interest charges of $1.6 million versus $17 thousand for the same period in 2021. For the six months ended June 30, 2022 and 2021 interest
charges were $2.3 million and $35 thousand respectively. The increased interest costs relate to payment in kind interest expense on the Contract Consideration Convertible Notes Payable.
CT revenue for the three and six months ended June 30, 2022 increased $21.0 million, and $22.5 million, respectively, compared to the same periods of 2021. The increased revenue in 2022 is driven
mainly by the ProFrac contract commencing in the second quarter, of which $16.5 million relates to the ProFrac Agreements along with a significant increase in revenue with two other major customers.
Income from operations for the CT segment for the three months ended June 30, 2022 improved by $18.8 million or 491% compared to the same period of 2021. The improvement is primarily as a result of the favourable revaluation of the Contract Consideration Convertible Notes Payable of $17.2 million. Excluding the revaluation there was an overall improvement in income from operations of $1.6 million for the three months ended June 30, 2022, attributable
mainly to the gain on sale of property and equipment. Income from operations for the six months ended June 30, 2022 improved by $16.3 million or $220% compared to the same period of 2021. The improvement relates mainly to the revaluation of the Contract Consideration Convertible Notes Payable of $13.3 million and the gain on sale of property and equipment and lease termination.
DA revenue for the three and six months ended June 30, 2022 decreased $0.8 million, and $1.2 million, respectively, compared to the same periods of 2021 due to less orders
in 2022 and some projects being delayed to later in the year.
Loss from operations for the DA segment for the three and six months ended June 30, 2022 worsened by $0.4 million or 55%, and $0.9 million or 88%, respectively, compared to the same period of 2021. The worsening loss from operations is primarily as a result of the decrease in revenues.
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 six months ended June 30, 2022, the Company funded working capital requirements with proceeds from warrants issued for $19.5 million and cash on hand.
35
As of June 30, 2022, the Company had available cash and cash equivalents of $33.1 million, as compared to $11.5 million at December 31, 2021. During the six months ended June 30, 2022,
the Company had an operating loss of $2.2 million, $23.9 million of cash used in operating activities, $4.2 million cash provided by investing activities and $39.4 million of cash provided by financing activities.
Liquidity
The Company currently funds its operations and growth primarily from cash on hand which includes the proceeds from the convertible notes and warrants received in the second quarter. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the
Company’s cash flows and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. Uncertainty surrounding the stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity
On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including related parties, through the issuance of $21.2 million in aggregate principal amount of 10% convertible notes (the Convertible Notes Payable) that resulted
in net cash proceeds of approximately $19.5 million (see Note 9, “Debt and Convertible Notes Payable”).
Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at
least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022. These Contract Consideration Convertible
Notes Payable were issued in addition to the Convertible Notes Payable purchased in cash by ProFrac Holdings, LLC as one of the investors in the PIPE.
On May 17, 2022, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreements”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and
a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.
On June 21, 2022, the “Company issued prefunded warrants (the “Prefunded Warrants”) to ProFrac Holdings II, LLC in exchange for $19.5 million in cash, net of issuance costs, (see Note 13, “Stockholders’ Equity”). The Prefunded Warrants will permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock of the Company at an exercise price equal to $0.0001 per share.
The Company also sold its manufacturing facility in Waller, Texas. The sale closed on April 18,2022 with $4.3
million of gross proceeds.
Based on our cash and liquid assets, we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next 12 months. However the Company cannot guarantee a sufficient level of cash flows in the future.
36
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
Net
cash provided by (used in) financing activities
39,431
(273)
Effect of changes in exchange rates on cash and cash equivalents
95
(31)
Net change in cash, cash equivalents and restricted cash
$
19,800
$
(11,503)
Operating
Activities
Net cash used in operating activities was $23.9 million and $11.2 million during the six months ended June 30, 2022 and 2021, respectively. Consolidated net loss for the six months ended June 30, 2022 and 2021, were $4.5 million and $14.8 million, respectively.
During the six months ended June 30, 2022, non-cash adjustments to net income (loss) totaled $10.0 million as compared to $1.8 million for the same period of 2021.
During the six months ended June 30, 2022, changes in working capital
used $9.4 million of cash as compared to providing $1.8 million for the same period of 2021.
•For the six months ended June 30, 2022, changes in working capital resulted primarily from an increase in accounts receivable and inventories of $10.1 million and $4.5 million, respectively, due to increased revenue, change in contract asset of $3.6 million attributable to fees associated with the Contract Consideration Convertible Notes Payable and decreased accrued liabilities due mainly to payment of the ADM Settlement (Note 12, “Commitments and Contingencies”). This is partially offset by an increase in accounts payable of $12.2 million relating mainly to purchases made
to support our contract with ProFrac.
•For the six months ended June 30, 2021 the cash provided by working capital primarily resulted from routine operations, including a reduction in accounts receivable of $2.0 million, partially offset by a decrease in accrued liabilities of $1.0 million.
Investing Activities
Net cash from investing activities for the six months ended June 30, 2022 was $4.2 million from the sale of the manufacturing facility in Waller, Texas which closed on April 18, 2022.
Net cash from investing activities for
the six months ended June 30, 2021 was negligible.
Financing Activities
Net cash provided by financing activities was $39.4 million for the six months ended June 30, 2022, primarily from the proceeds of the issuance of convertible notes and warrants partially offset by issuance costs relating to the convertible notes.
Net cash used in financing activities was $0.3 million for the six months ended June 30, 2021, primarily for purchases of common stock related to tax withholding requirements.
Off-Balance Sheet Arrangements
The
Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors.
37
Critical Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles 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. 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2021 describe the significant accounting policies and methods used in the preparation of the
Company’s condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates. There have been no material changes to the quantitative or qualitative disclosures about market risk set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” of the Company’s Annual Report.
Item 4. Controls
and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.
Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Controls over Financial Reporting
There
have been no changes in the Company’s system of internal control over financial reporting (identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) under the Exchange Act) during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
38
PART
II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material changes since the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2022.
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 Annual Report on Form
10-K for the year ended December 31, 2021 (the “Annual Report”), which could materially affect our business, financial condition and/or future results. As of June 30, 2022, there have been no material changes in our risk factors from those set forth in the Annual Report. The risks described in the Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future results.
Item 2. Unregistered Sales of Equity Securities
Unregistered
Sales of Equity Securities
Disclosures in Note 9, “Debt and Convertible Notes Payable” and Note 13, “Stockholders’Equity”, of the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 are incorporated by reference hereto.
Issuer Purchases of Equity Securities
The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is
elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock. Repurchases of the Company’s equity securities during the three months ended June 30, 2022, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:
(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.
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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.
40
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.
