Company expands its international operations, non-U.S. denominated activity is likely to increase. The Company has not historically performed noused swaps and noor foreign currency hedges. The Company may utilize swaps or foreign currency hedges in the future.
Company’s customers, where applicable. The Company presently does not have any commodity futures contracts but may consider utilizing forms of hedging from time to time in the future.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the StockholdersShareholders and the Board of Directors of
Flotek Industries, Inc.
Houston, Texas
Opinions
Opinion on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheetssheet of Flotek Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018,2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the periodyear then ended, December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as ofat December 31, 2019 and 2018,2020 and the consolidated results of theirits operations and theirits cash flows for each of the three years in the periodyear then ended December 31, 2019,, in conformity with accounting principles generally accepted in the United States of America. Also
We also have audited, in our opinion,accordance with the standards of the Public Company maintained, in all material respects, effectiveAccounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control -– Integrated Framework (2013) issued by COSO.the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2021 expressed an adverse opinion thereon.
Change in Accounting PrincipleBasis for Opinion
As discussed in Note 6 to theThese consolidated financial statements are the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic No. 842.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessmentresponsibility of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.fraud.
Our audits of the consolidated financial statementsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures tothat respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of Fixed and Long-lived Assets – CT Reporting Unit
As described in Notes 7, 8 and 10 to the consolidated financial statements, the Company has recorded net property and equipment (“fixed assets”) of $9.1 million, and operating lease right-of-use assets and intangible assets (“long-lived assets”) of $2.3 million and $0 million, respectively, as of December 31, 2020. As of March 31, 2020, the Company had one reporting unit, ECT, which it considered an asset group for purposes of assessing asset impairment. The Company reviews the asset group for impairment whenever events and changes in circumstances indicate the carrying value of such assets may not be recoverable (“triggering events”). During the quarter ended March 31, 2020, the Company determined there were triggering events, primarily related to the COVID-19 pandemic and the decline in energy prices, and performed an asset impairment test as of March 31, 2020. The asset group is considered impaired when the carrying value exceeds its fair value. The Company determined fair value using the income approach, which requires management to make significant assumptions about expected
future cash flows, including projected revenue and profitability growth rates, discount rates, obsolescence rates, and royalty rates. Management utilized a third-party valuation specialist to assist in the preparation of the valuation of the asset group.
We identified the impairment assessment of the Company’s fixed and long-lived assets as a critical audit matter. Auditing the Company’s impairment test for the asset group was complex and highly judgmental because (i) there was significant judgment used by management to develop the fair value measurement, which led to a high degree of audit judgment and subjectivity in performing procedures relating to fair value measurement; (ii) there was significant effort in performing procedures to evaluate the reasonableness of the fair value measurement and significant assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the appropriateness of the method used by management to determine the fair value of the asset group.
•Evaluating the reasonableness of the assumptions used to estimate expected future cash flows, including revenue and profitability growth rates, by comparing the rates to historical performance and industry data.
•Testing the completeness, accuracy and relevance of underlying data used in the impairment assessment.
•Utilizing professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the Company's impairment assessment and reasonableness of certain significant assumptions described above, including the discount rate, obsolescence rate, and royalty rate.
Business Combination
As described in Note 3 to the consolidated financial statements, the Company completed its acquisition of JP3 Measurement, LLC for consideration of $36.6 million during the second quarter of 2020. The Company allocated the fair value of the purchase consideration to the assets acquired, liabilities assumed and any noncontrolling interests in the acquired entity generally based on their fair values at the acquisition date. As a result of the acquisition, management was required to estimate fair values of the assets acquired and liabilities assumed, including certain identifiable intangible assets. Management utilized a third-party valuation specialist to assist in the preparation of the valuation of certain identifiable intangible assets.
We identified the determination of fair values of certain identifiable intangible assets, which primarily included customer relationships, as a critical audit matter. Management exercised significant judgment to select the valuation methods and to develop the assumptions used in the measurement of the fair value of the identifiable intangible assets. Significant assumptions included discount rates, customer attrition, and projected revenue growth rates. These assumptions are forward-looking and could be affected by future economic and market conditions. The principal considerations for our determination included the following: (i) changes in the significant assumptions could have a significant impact on the fair value of the assets acquired, (ii) significant unobservable inputs and assumptions utilized by management in determining the fair value of the identifiable intangible assets acquired and liabilities assumed, including the earn-out provision, and (iii) appropriateness of use of various valuation models to determine the fair value of the identifiable intangible assets acquired. Auditing these elements involved especially subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Testing the completeness, accuracy and relevance of underlying data used in the analysis.
•Assessing the reasonableness of significant underlying assumptions through: (i) comparing prospective financial information to current industry trends, as well as to historical performance of the acquired business, and (ii) performing analyses to evaluate the potential effect of changes in the significant assumptions.
•Utilizing personnel with specialized knowledge and skill with valuation to assist in: (i) assessing the reasonableness of certain significant assumptions incorporated into the various valuation models, and (ii) assessing the appropriateness of various valuation models utilized by management to determine the fair values of the assets acquired.
Impairment of Goodwill and Long-lived Assets – Data Analytics
As described in Notes 9 and 11 to the consolidated financial statements, during the third quarter of 2020, the Company identified a triggering event related to the Data Analytics operating segment resulting from lower than expected performance and performed a recoverability test of the Data Analytics asset group as of September 30, 2020. As a result of not passing the recoverability test, the Company was required to measure the fair value of the asset group in order to determine the impairment
loss. The fair value of the asset group was estimated based on the discounted future cash flows. The Company also identified a triggering event related to goodwill and performed an impairment analysis. To determine the fair value of the Data Analytics reporting unit, the Company used the discounted cash flow method under the income approach, and the guideline public company method under the market approach. The significant assumptions used to determine the fair value of the asset group and the reporting unit included the projected sales growth rate, discount rate, customer attrition rate, obsolescence rate, and royalty rate.
We identified the impairment assessment of the Company’s goodwill and long-lived assets, including customer relationships, trademarks and patents, as a critical audit matter. Auditing the Company’s impairment test was complex and highly judgmental because (i) there was significant judgment used by management to develop the fair value measurement, which led to a high degree of audit judgment and subjectivity in performing procedures relating to fair value measurement; (ii) there was significant effort in performing procedures to evaluate the reasonableness of the fair value measurement and significant assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
The primary procedures we performed to address this critical audit matter included:
•Evaluating the appropriateness of the method management used to estimate the fair value of the asset group and reporting unit.
•Evaluating the reasonableness of the projections for revenue growth and profitability by comparing the rates to the current and past performance of the business and evaluating whether these assumptions were consistent with evidence obtained in other areas of the audit and industry data.
•Testing the completeness, accuracy and relevance of underlying data used in the impairment assessment.
•Utilizing professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the Company's impairment assessment and reasonableness of certain significant assumptions described above, including the discount rate.
Reserve for Excess and Obsolete Inventory
As described in Note 6 to the consolidated financial statements, the Company has recorded net inventories of $11.8 million as of December 31, 2020. The Company regularly reviews inventory quantities on hand and records provisions for excess or obsolete inventory based on the Company’s forecast of product demand, historical usage of inventory on hand, market conditions, production and procurement requirements and technological developments. Significant management judgment is required to predict the potential impact that the current business climate and evolving market conditions could have on the Company’s assumptions.
We identified the reserve for excess and obsolete inventory as a critical audit matter. The principal considerations for our determination are (i) there was significant judgment by management when developing the reserve for excess and obsolete inventory, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures relating to the reserve for excess and obsolete inventory; and (ii) there was significant audit effort in performing procedures to evaluate management’s analysis and significant assumptions, including projections of future demand and risk of technological or competitive obsolescence for products.
The primary procedures we performed to address this critical audit matter included:
•Testing management’s process for developing the reserve for excess and obsolete inventory, including evaluating the appropriateness of the method,
•Testing the completeness, accuracy, and relevance of underlying data used in the estimate;
•Evaluating the reasonableness of the projections of future demand for products by evaluating whether the assumption was consistent with the product’s historical performance.
•Evaluating the reasonableness of management’s assumption related to the risk of technological or competitive obsolescence for products by evaluating whether the assumption was consistent with technological or competitive obsolescence experienced during the product life cycle of existing products.
Sources and Uses of Liquidity
As described in Note 1 to the Company’s financial statements, the Company currently funds its operations primarily from cash on hand. The Company has a history of operating losses and expects to utilize material cash flows in operations in the 12 months subsequent to the issuance of the financial statements, and while the Company believes that cash and liquid assets will provide sufficient financial resources, it has identified conditions that could have a negative impact on liquidity. In the event that the Company’s cash on hand is not sufficient to fund operations, the Company has identified actions it may take.
We identified the Company's future cash flows and management’s plans as a critical audit matter because of the significant judgment involved in estimating cash flows and the evaluation of management’s plans. Auditing the Company's forecasted cash flows was especially challenging and required significant auditor judgment because (i) there was significant judgment used by management to develop their forecasts, which led to a high degree of audit judgment and subjectivity in performing procedures relating to projected liquidity, and (ii) there was significant effort in performing procedures to evaluate management's conclusion that the Company's plans will be effectively implemented.
The primary procedures we performed to address the critical audit matter included:
•Assessing the reasonableness of management’s key assumptions, including projected revenue, in the forecasted future cash flows and evaluating positive and negative evidence that support or contradict the conclusions reached by management.
•Evaluating management's plans in the context of other audit evidence obtained during the audit to assess the probability of successfully implementing the plans.
•Evaluating the adequacy of the Company’s disclosures in the notes to the financial statements.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2020.
Houston, Texas
March 16, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Flotek Industries, Inc.
Houston, Texas
Opinion on Internal Control over Financial Reporting
We have audited Flotek Industries, Inc. (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”) In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as “the financial statements”) and our report dated March 16, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditsaudit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified regarding management’s failure to design and maintain controls over i) the forecasting process, ii) and nonrecurring transactions, including derecognition of items and cash flow presentation relating to disposal transactions and operating ineffectiveness of controls relating to impairment evaluations, and iii) going concern evaluations, all as described in management’s assessment. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 financial statements, and this report does not affect our report dated March 16, 2021 on those financial statements.
Definition and Limitations of Internal Control Overover Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ MOSS ADAMSBDO USA, LLP
Houston, Texas
March 16, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Flotek Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements and for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Moss Adams LLP
Houston, Texas
March 6, 2020
We have served as the Company’s auditor since 2017.from 2017 to 2020.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 100,575 |
| | $ | 3,044 |
|
Restricted cash | 663 |
| | — |
|
Accounts receivable, net of allowance for doubtful accounts of $1,527 and $1,190 at December 31, 2019 and 2018, respectively | 15,638 |
| | 37,047 |
|
Inventories, net | 21,697 |
| | 27,289 |
|
Income taxes receivable | 631 |
| | 3,161 |
|
Assets held for sale | — |
| | 118,470 |
|
Other current assets | 13,191 |
| | 5,771 |
|
Total current assets | 152,395 |
| | 194,782 |
|
Property and equipment, net | 39,829 |
| | 45,485 |
|
Operating lease right-of-use assets | 16,388 |
| | — |
|
Deferred tax assets, net | 152 |
| | 18,663 |
|
Other intangible assets, net | 23,083 |
| | 26,827 |
|
Other long-term assets | — |
| | 126 |
|
TOTAL ASSETS | $ | 231,847 |
| | $ | 285,883 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 16,231 |
| | $ | 15,011 |
|
Accrued liabilities | 24,552 |
| | 10,335 |
|
Interest payable | — |
| | 8 |
|
Liabilities held for sale | — |
| | 9,174 |
|
Current portion of lease liabilities | 541 |
| | — |
|
Long-term debt, classified as current | — |
| | 49,731 |
|
Total current liabilities and total liabilities | 41,324 |
| | 84,259 |
|
Long-term operating lease liabilities | 16,973 |
| | |
Long-term finance lease liabilities | 158 |
| | — |
|
Deferred tax liabilities, net | 116 |
| | — |
|
TOTAL LIABILITIES | 58,571 |
| | 84,259 |
|
Commitments and contingencies (Note16) |
| |
|
Stockholders’ Equity: | | | |
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding | — |
| | — |
|
Common stock, $0.0001 par value, 80,000,000 shares authorized; 63,656,897 shares issued and 57,882,396 shares outstanding at December 31, 2019; 62,162,875 shares issued and 57,342,279 shares outstanding at December 31, 2018 | 6 |
| | 6 |
|
Additional paid-in capital | 347,564 |
| | 343,536 |
|
Accumulated other comprehensive income (loss) | (966 | ) | | (1,116 | ) |
Retained earnings (accumulated deficit) | (139,844 | ) | | (107,565 | ) |
Treasury stock, at cost; 4,145,481 and 3,770,224 shares at December 31, 2019 and 2018, respectively | (33,484 | ) | | (33,237 | ) |
Total stockholders’ equity | 173,276 |
| | 201,624 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 231,847 |
| | $ | 285,883 |
|
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 38,660 | | | $ | 100,575 | |
Restricted cash | 664 | | | 663 | |
Accounts receivable, net of allowance for doubtful accounts of $1,316 and $1,527 at December 31, 2020 and 2019, respectively | 11,764 | | | 15,638 | |
Inventories, net | 11,837 | | | 23,210 | |
| | | |
Income taxes receivable | 403 | | | 631 | |
| | | |
Other current assets | 3,127 | | | 13,191 | |
Total current assets | 66,455 | | | 153,908 | |
Property and equipment, net | 9,087 | | | 39,829 | |
Operating lease right-of-use assets | 2,320 | | | 16,388 | |
Goodwill | 8,092 | | | 0 | |
Deferred tax assets, net | 223 | | | 152 | |
Other intangible assets, net | 0 | | | 20,323 | |
Other long-term assets | 33 | | | 0 | |
| | | |
TOTAL ASSETS | $ | 86,210 | | | $ | 230,600 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 5,787 | | | $ | 16,231 | |
Accrued liabilities | 18,275 | | | 24,552 | |
Income taxes payable | 21 | | | 0 | |
Interest payable | 34 | | | 0 | |
| | | |
| | | |
Current portion of operating lease liabilities | 636 | | | 486 | |
Current portion of finance lease liabilities | 60 | | | 55 | |
Current portion of long-term debt | 4,048 | | | 0 | |
| | | |
Total current liabilities | 28,861 | | | 41,324 | |
Deferred revenue, long-term | 117 | | | 0 | |
Long-term operating lease liabilities | 8,348 | | | 16,973 | |
Long-term finance lease liabilities | 96 | | | 158 | |
| | | |
| | | |
Long-term debt | 1,617 | | | 0 | |
| | | |
Deferred tax liabilities, net | 0 | | | 116 | |
TOTAL LIABILITIES | 39,039 | | | 58,571 | |
Commitments and contingencies (Note 16) | 0 | | 0 |
Stockholders’ Equity: | | | |
Preferred stock, $0.0001 par value, 100,000 shares authorized; 0 shares issued and outstanding | 0 | | | 0 | |
Common stock, $0.0001 par value, 140,000,000 shares authorized; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020; 63,656,897 shares issued and 59,511,416 shares outstanding at December 31, 2019 | 8 | | | 6 | |
Additional paid-in capital | 359,721 | | | 347,564 | |
Accumulated other comprehensive (loss) income | (19) | | | 181 | |
Accumulated deficit | (278,688) | | | (142,238) | |
Treasury stock, at cost; 5,580,920 and 4,145,481 shares at December 31, 2020 and 2019, respectively | (33,851) | | | (33,484) | |
Total stockholders’ equity | 47,171 | | | 172,029 | |
| | | |
| | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 86,210 | | | $ | 230,600 | |
| | | |
| | | |
| | | |
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | Year ended December 31, | | Years ended December 31, |
| 2019 | | 2018 | | 2017 | | 2020 | | 2019 | |
Revenue | $ | 119,353 |
| | $ | 177,773 |
| | $ | 243,106 |
| Revenue | $ | 53,141 | | | $ | 119,353 | | |
Costs and expenses: | | | | | | Costs and expenses: | | |
Operating expenses (excluding depreciation and amortization) | 149,225 |
| | 159,808 |
| | 188,744 |
| Operating expenses (excluding depreciation and amortization) | 88,266 | | | 148,100 | | |
Corporate general and administrative | 27,975 |
| | 31,467 |
| | 41,492 |
| Corporate general and administrative | 16,311 | | | 27,975 | | |
| Depreciation and amortization | 8,465 |
| | 9,216 |
| | 9,768 |
| Depreciation and amortization | 3,412 | | | 8,465 | | |
Research and development | 8,863 |
| | 10,356 |
| | 13,130 |
| Research and development | 7,213 | | | 8,863 | | |
| (Gain) loss on disposal of long-lived assets | 1,450 |
| | (443 | ) | | 292 |
| (Gain) loss on disposal of long-lived assets | (94) | | | 1,450 | | |
Impairment of fixed and long-lived assets | | Impairment of fixed and long-lived assets | 69,975 | | | 0 | | |
Impairment of goodwill | — |
| | 37,180 |
| | — |
| Impairment of goodwill | 11,706 | | | 0 | | |
Total costs and expenses | 195,978 |
| | 247,584 |
| | 253,426 |
| Total costs and expenses | 196,789 | | | 194,853 | | |
Loss from operations | (76,625 | ) | | (69,811 | ) | | (10,320 | ) | Loss from operations | (143,648) | | | (75,500) | | |
Other (expense) income: | | | | | | Other (expense) income: | | | | |
Gain on lease termination | | Gain on lease termination | 576 | | | 0 | | |
| Interest expense | (2,019 | ) | | (2,866 | ) | | (2,168 | ) | Interest expense | (60) | | | (2,019) | | |
Loss on sale of business | — |
| | (360 | ) | | — |
| |
Loss on write-down of assets held for sale | — |
| | (2,580 | ) | | — |
| |
Other (expense) income, net | 1,708 |
| | (5,040 | ) | | 1,096 |
| |
Total other expense | (311 | ) | | (10,846 | ) | | (1,072 | ) | |
| Other income (expense), net | | Other income (expense), net | 503 | | | 1,708 | | |
Total other income (expense) | | Total other income (expense) | 1,019 | | | (311) | | |
Loss before income taxes | (76,936 | ) | | (80,657 | ) | | (11,392 | ) | Loss before income taxes | (142,629) | | | (75,811) | | |
Income tax benefit (expense) | 201 |
| | 7,216 |
| | (6,112 | ) | Income tax benefit (expense) | 6,179 | | | (262) | | |
Loss from continuing operations | (76,735 | ) | | (73,441 | ) | | (17,504 | ) | Loss from continuing operations | (136,450) | | | (76,073) | | |
Income (loss) from discontinued operations, net of tax | 44,456 |
| | 2,743 |
| | (9,891 | ) | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | 0 | | | 42,158 | | |
| Net loss | (32,279 | ) | | (70,698 | ) | | (27,395 | ) | Net loss | $ | (136,450) | | | $ | (33,915) | | |
Net loss attributable to noncontrolling interests | — |
| | 358 |
| | — |
| |
Net loss attributable to Flotek Industries, Inc. (Flotek) | $ | (32,279 | ) | | $ | (70,340 | ) | | $ | (27,395 | ) | |
| | | | | | | | | | |
Amounts attributable to Flotek shareholders: | | | | | | |
Loss from continuing operations | $ | (76,735 | ) | | $ | (73,083 | ) | | $ | (17,504 | ) | |
Income (loss) from discontinued operations, net of tax | 44,456 |
| | 2,743 |
| | (9,891 | ) | |
Net loss attributable to Flotek | $ | (32,279 | ) | | $ | (70,340 | ) | | $ | (27,395 | ) | |
| | | | | | |
Basic earnings (loss) per common share: | | | | | | |
| Basic and diluted earnings (loss) per common share: | | Basic and diluted earnings (loss) per common share: | | |
Continuing operations | $ | (1.31 | ) | | $ | (1.26 | ) | | $ | (0.30 | ) | Continuing operations | $ | (2.00) | | | $ | (1.29) | | |
Discontinued operations, net of tax | 0.76 |
| | 0.05 |
| | (0.17 | ) | Discontinued operations, net of tax | 0 | | | 0.72 | | |
Basic earnings (loss) per common share | $ | (0.55 | ) | | $ | (1.21 | ) | | $ | (0.47 | ) | Basic earnings (loss) per common share | $ | (2.00) | | | $ | (0.57) | | |
| | | | | | | | | | |
Diluted earnings (loss) per common share: | | | | | | |
Continuing operations | $ | (1.31 | ) | | $ | (1.26 | ) | | $ | (0.30 | ) | |
Discontinued operations, net of tax | 0.76 |
| | 0.05 |
| | (0.17 | ) | |
Diluted earnings (loss) per common share | $ | (0.55 | ) | | $ | (1.21 | ) | | $ | (0.47 | ) | |
| | | | | | | |
Weighted average common shares: | | | | | | Weighted average common shares: | | |
Weighted average common shares used in computing basic earnings (loss) per common share | 58,750 |
| | 57,995 |
| | 57,580 |
| |
Weighted average common shares used in computing diluted earnings (loss) per common share | 58,750 |
| | 57,995 |
| | 57,580 |
| |
Weighted average common shares used in computing basic and diluted loss per common share | | Weighted average common shares used in computing basic and diluted loss per common share | 68,312 | | | 58,750 | | |
|
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
Loss from continuing operations | $ | (76,735 | ) | | $ | (73,441 | ) | | $ | (17,504 | ) |
Income (loss) from discontinued operations, net of tax | 44,456 |
| | 2,743 |
| | (9,891 | ) |
Net loss | (32,279 | ) | | (70,698 | ) | | (27,395 | ) |
Other comprehensive income (loss): | | | | | |
Foreign currency translation adjustment | 150 |
| | (232 | ) | | 72 |
|
Comprehensive loss | (32,129 | ) | | (70,930 | ) | | (27,323 | ) |
Net loss attributable to noncontrolling interests | — |
| | 358 |
| | — |
|
Comprehensive loss attributable to Flotek | $ | (32,129 | ) | | $ | (70,572 | ) | | $ | (27,323 | ) |
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
Loss from continuing operations, net of tax | $ | (136,450) | | | $ | (76,073) | | | |
Income from discontinued operations, net of tax | 0 | | | 42,158 | | | |
Net loss | (136,450) | | | (33,915) | | | |
Other comprehensive (loss) income: | | | | | |
Foreign currency translation adjustment | (200) | | | 150 | | | |
Comprehensive loss | $ | (136,650) | | | $ | (33,765) | | | |
| | | | | |
| | | | | |
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED
DECEMBER 31, 2019, 2018 AND 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Non-controlling Interests | | Total Stockholders’ Equity |
| Shares Issued | | Par Value | | Shares | | Cost | |
Balance, December 31, 2016 | 59,685 |
| | $ | 6 |
| | 2,029 |
| | $ | (20,269 | ) | | $ | 318,392 |
| | $ | (956 | ) | | $ | (9,830 | ) | | $ | 358 |
| | $ | 287,701 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (27,395 | ) | | — |
| | (27,395 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 72 |
| | — |
| | — |
| | 72 |
|
Stock issued under employee stock purchase plan | — |
| | — |
| | (113 | ) | | — |
| | 654 |
| | — |
| | — |
| | — |
| | 654 |
|
Common stock issued in payment of accrued liability | — |
| | — |
| | — |
| | — |
| | 188 |
| | — |
| | — |
| | — |
| | 188 |
|
Stock options exercised | 663 |
| | — |
| | — |
| | — |
| | 5,884 |
| | — |
| | — |
| | — |
| | 5,884 |
|
Restricted stock awards granted | 275 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeited | — |
| | — |
| | 122 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock purchased | — |
| | — |
| | 200 |
| | (1,729 | ) | | — |
| | — |
| | — |
| | — |
| | (1,729 | ) |
Stock surrendered for exercise of stock options | — |
| | — |
| | 478 |
| | (5,863 | ) | | — |
| | — |
| | — |
| | — |
| | (5,863 | ) |
Stock compensation expense | — |
| | — |
| | — |
| | — |
| | 10,949 |
| | — |
| | — |
| | — |
| | 10,949 |
|
Repurchase of common stock | — |
| | — |
| | 905 |
| | (5,203 | ) | | — |
| | — |
| | — |
| | — |
| | (5,203 | ) |
Balance, December 31, 2017 | 60,623 |
| | $ | 6 |
| | 3,621 |
| | $ | (33,064 | ) | | $ | 336,067 |
| | $ | (884 | ) | | $ | (37,225 | ) | | $ | 358 |
| | $ | 265,258 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (70,340 | ) | | (358 | ) | | (70,698 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | (232 | ) | | — |
| | — |
| | (232 | ) |
Stock issued under employee stock purchase plan | — |
| | — |
| | (111 | ) | | — |
| | 341 |
| | — |
| | — |
| | — |
| | 341 |
|
Restricted stock awards granted | 1,540 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeited | — |
| | — |
| | 158 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock purchased | — |
| | — |
| | 102 |
| | (173 | ) | | — |
| | — |
| | — |
| | — |
| | (173 | ) |
Stock compensation expense | — |
| | — |
| | — |
| | — |
| | 7,128 |
| | — |
| | — |
| | — |
| | 7,128 |
|
Balance, December 31, 2018 | 62,163 |
| | $ | 6 |
| | 3,770 |
| | $ | (33,237 | ) | | $ | 343,536 |
| | $ | (1,116 | ) | | $ | (107,565 | ) | | $ | — |
| | $ | 201,624 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32,279 | ) | |
|
| | (32,279 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | 150 |
| | — |
| | — |
| | 150 |
|
Stock issued under employee stock purchase plan | — |
| | — |
| | (18 | ) | | — |
| | 35 |
| | — |
| | — |
| | — |
| | 35 |
|
Restricted stock awards granted | 924 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeited | — |
| | — |
| | 299 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock units granted | 570 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Treasury stock purchased | — |
| | — |
| | 94 |
| | (247 | ) | | — |
| | — |
| | — |
| | — |
| | (247 | ) |
Stock compensation expense | — |
| | — |
| | — |
| | — |
| | 3,993 |
| | — |
| | — |
| | — |
| | 3,993 |
|
Balance, December 31, 2019 | 63,657 |
| | $ | 6 |
| | 4,145 |
| | $ | (33,484 | ) | | $ | 347,564 |
| | $ | (966 | ) | | $ | (139,844 | ) | | $ | — |
| | $ | 173,276 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | | | Total Stockholders’ Equity |
| Shares Issued | | Par Value | | | | | | Shares | | Cost | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2018 | 62,163 | | | $ | 6 | | | | | | | 3,770 | | | $ | (33,237) | | | $ | 343,536 | | | $ | 31 | | | $ | (108,323) | | | | | $ | 202,013 | |
Net loss | — | | | — | | | | | | | — | | | — | | | — | | | — | | | (33,915) | | | | | (33,915) | |
Foreign currency translation adjustment | — | | | — | | | | | | | — | | | — | | | — | | | 150 | | | — | | | | | 150 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Stock issued under employee stock purchase plan | — | | | — | | | | | | | (18) | | | — | | | 35 | | | — | | | — | | | | | 35 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Restricted stock awards granted | 924 | | | — | | | | | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Restricted stock forfeited | — | | | — | | | | | | | 299 | | | — | | | — | | | — | | | — | | | | | — | |
Restricted stock units granted | 570 | | | — | | | | | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Treasury stock purchased | — | | | — | | | | | | | 94 | | | (247) | | | — | | | — | | | — | | | | | (247) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Stock compensation expense | — | | | — | | | | | | | — | | | — | | | 3,993 | | | — | | | — | | | | | 3,993 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2019 | 63,657 | | | $ | 6 | | | | | | | 4,145 | | | $ | (33,484) | | | $ | 347,564 | | | $ | 181 | | | $ | (142,238) | | | | | $ | 172,029 | |
Net loss | — | | | — | | | | | | | — | | | — | | | — | | | — | | | (136,450) | | | | | (136,450) | |
Foreign currency translation adjustment | — | | | — | | | | | | | — | | | — | | | — | | | (200) | | | — | | | | | (200) | |
Sale of common stock | 200 | | | — | | | | | | | — | | | — | | | 339 | | | — | | | — | | | | | 339 | |
Stock issued under employee stock purchase plan | — | | | — | | | | | | | (78) | | | — | | | 123 | | | — | | | — | | | | | 123 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Restricted stock awards granted | 3,115 | | | 1 | | | | | | | — | | | — | | | 2,322 | | | — | | | — | | | | | 2,323 | |
Restricted stock forfeited | — | | | — | | | | | | | 1,302 | | | — | | | — | | | — | | | — | | | | | — | |
Restricted stock units granted | 86 | | | — | | | | | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Stock surrendered for exercise of stock options | — | | | — | | | | | | | 66 | | | — | | | — | | | — | | | — | | | | | — | |
Treasury stock purchased | — | | | — | | | | | | | 146 | | | (253) | | | — | | | — | | | — | | | | | (253) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Stock issued in JP3 acquisition | 11,500 | | | 1 | | | | | | | — | | | — | | | 8,537 | | | — | | | — | | | | | 8,538 | |
Stock options granted | — | | | — | | | | | | | — | | | — | | | 722 | | | — | | | — | | | | | 722 | |
Stock options exercised | 111 | | | — | | | | | | | — | | | (114) | | | 114 | | | — | | | — | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | 78,669 | | | $ | 8 | | | | | | | 5,581 | | | $ | (33,851) | | | $ | 359,721 | | | $ | (19) | | | $ | (278,688) | | | | | $ | 47,171 | |
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
Cash flows from operating activities: | | | | | |
Net loss attributable to Flotek Industries, Inc. (Flotek) | $ | (32,279 | ) | | $ | (70,340 | ) | | $ | (27,395 | ) |
Income (loss) from discontinued operations, net of tax | 44,456 |
| | 2,743 |
| | (9,891 | ) |
Loss from continuing operations | (76,735 | ) | | (73,083 | ) | | (17,504 | ) |
Adjustments to reconcile loss from continuing operations to net cash (used in) provided by operating activities: | | | | | |
Depreciation and amortization | 8,465 |
| | 9,216 |
| | 9,768 |
|
Amortization of deferred financing costs | 1,428 |
| | 400 |
| | 472 |
|
Provision for doubtful accounts | 512 |
| | 839 |
| | 157 |
|
Provision for excess and obsolete inventory | 5,659 |
| | 2,418 |
| | 388 |
|
Loss on sale of business | — |
| | 360 |
| | — |
|
Loss on write-down of assets held for sale | — |
| | 2,580 |
| | — |
|
(Gain) loss on sale of assets | 1,450 |
| | (443 | ) | | 292 |
|
Impairment of goodwill | — |
| | 37,180 |
| | — |
|
Stock compensation expense | 4,235 |
| | 7,050 |
| | 10,643 |
|
Deferred income tax (benefit) provision | 18,307 |
| | (5,950 | ) | | 181 |
|
Reduction in tax benefit related to share-based awards | 24 |
| | 709 |
| | 1,989 |
|
Non-cash lease expense | 740 |
| | — |
| | — |
|
Changes in current assets and liabilities: | | | | | |
Accounts receivable, net | 20,993 |
| | (2,606 | ) | | 4,076 |
|
Inventories | (65 | ) | | 2,597 |
| | (3,442 | ) |
Income taxes receivable | 2,546 |
| | (1,116 | ) | | 8,008 |
|
Other current assets | (8,359 | ) | | 3,177 |
| | 12,001 |
|
Accounts payable | 1,131 |
| | 4,631 |
| | (8,528 | ) |
Accrued liabilities | 908 |
| | (8,740 | ) | | (6,175 | ) |
Interest payable | (8 | ) | | (35 | ) | | 19 |
|
Net cash (used in) provided by operating activities | (18,769 | ) | | (20,816 | ) | | 12,345 |
|
Cash flows from investing activities: | | | | | |
Capital expenditures | (2,411 | ) | | (3,559 | ) | | (4,197 | ) |
Proceeds from sale of businesses | 169,722 |
| | 1,665 |
| | 18,490 |
|
Proceeds from sale of assets | 240 |
| | 1,387 |
| | 689 |
|
Purchase of patents and other intangible assets | (614 | ) | | (1,602 | ) | | (456 | ) |
Net cash provided (used in) by investing activities | 166,937 |
| | (2,109 | ) | | 14,526 |
|
Cash flows from financing activities: | | | | | |
Repayments of indebtedness | — |
| | — |
| | (9,833 | ) |
Borrowings on revolving credit facility | 42,984 |
| | 277,599 |
| | 383,160 |
|
Repayments on revolving credit facility | (92,715 | ) | | (255,818 | ) | | (393,776 | ) |
Debt issuance costs | — |
| | (111 | ) | | (579 | ) |
Payments for finance leases | (51 | ) | | — |
| | — |
|
Purchase of treasury stock | (247 | ) | | (173 | ) | | (1,729 | ) |
Proceeds from sale of common stock | 35 |
| | 341 |
| | 654 |
|
Repurchase of common stock | — |
| | — |
| | (5,203 | ) |
Proceeds from exercise of stock options | — |
| | — |
| | 21 |
|
Loss from noncontrolling interest | — |
| | (358 | ) | | — |
|
Net cash (used in) provided financing activities | (49,994 | ) | | 21,480 |
| | (27,285 | ) |
Discontinued operations: | | | | | |
Net cash provided by (used in) operating activities | (322 | ) | | 1,296 |
| | 4,102 |
|
Net cash provided by (used in) investing activities | 337 |
| | (1,303 | ) | | (4,078 | ) |
Net cash flows provided by (used in) provided by discontinued operations | 15 |
| | (7 | ) | | 24 |
|
Effect of changes in exchange rates on cash and cash equivalents | 5 |
| | (88 | ) | | 151 |
|
Net change in cash, cash equivalents and restricted cash | 98,194 |
| | (1,540 | ) | | (239 | ) |
Cash, cash equivalents and restricted cash at beginning of year | 3,044 |
| | 4,584 |
| | 4,823 |
|
Cash, cash equivalents and restricted cash at end of year | $ | 101,238 |
| | $ | 3,044 |
| | $ | 4,584 |
|
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
Cash flows from operating activities: | | | | | |
Net loss | $ | (136,450) | | | $ | (33,915) | | | |
Income from discontinued operations, net of tax | 0 | | | 42,158 | | | |
Loss from continuing operations | (136,450) | | | (76,073) | | | |
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | | | | | |
| | | | | |
| | | | | |
Change in fair value of contingent consideration | 2,716 | | | 0 | | | |
Depreciation and amortization | 3,412 | | | 8,465 | | | |
Amortization of deferred financing costs | 0 | | | 1,428 | | | |
| | | | | |
Provision for doubtful accounts | 652 | | | 512 | | | |
Provision for excess and obsolete inventory | 12,261 | | | 5,659 | | | |
| | | | | |
| | | | | |
Impairment of fixed assets | 30,178 | | | 0 | | | |
(Gain) loss on sale of assets | (561) | | | 1,450 | | | |
Impairment of goodwill | 11,706 | | | 0 | | | |
Impairment of right-of-use assets | 7,434 | | | 0 | | | |
| | | | | |
Impairment of intangible assets | 32,363 | | | 0 | | | |
Stock compensation expense | 3,044 | | | 4,235 | | | |
Deferred income tax (benefit) provision | (187) | | | 18,307 | | | |
| | | | | |
Reduction in tax benefit related to stock-based awards | 0 | | | 24 | | | |
Non-cash lease expense | 356 | | | 740 | | | |
Changes in current assets and liabilities: | | | | | |
| | | | | |
Accounts receivable, net | 3,556 | | | 20,993 | | | |
Inventories | 3,955 | | | (727) | | | |
Income taxes receivable | 182 | | | 2,546 | | | |
Other current assets | 1,026 | | | 2,579 | | | |
Other long-term assets | (16) | | | 3,286 | | | |
Accounts payable | (12,323) | | | 1,131 | | | |
Accrued liabilities | (11,260) | | | 908 | | | |
Income taxes payable | 84 | | | 0 | | | |
Interest payable | 34 | | | (8) | | | |
Net cash used in operating activities | (47,838) | | | (4,545) | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | (1,425) | | | (2,411) | | | |
Proceeds from sale of businesses | 9,907 | | | 155,498 | | | |
Proceeds from sale of assets | 109 | | | 240 | | | |
Payments for acquisitions, net of cash acquired | (26,284) | | | 0 | | | |
| | | | | |
Purchase of patents and other intangible assets | (8) | | | (614) | | | |
Net cash (used in) provided by investing activities | (17,701) | | | 152,713 | | | |
Cash flows from financing activities: | | | | | |
| | | | | |
| | | | | |
Borrowings on revolving credit facility | 0 | | | 42,984 | | | |
Repayments on revolving credit facility | 0 | | | (92,715) | | | |
Payment for contingent consideration | (1,200) | | | 0 | | | |
Proceeds from Paycheck Protection Program loan | 4,788 | | | 0 | | | |
| | | | | |
Payments for finance leases | (70) | | | (51) | | | |
| | | | | |
| | | | | |
Purchase of treasury stock | (253) | | | (247) | | | |
| | | | | |
Proceeds from sale of common stock | 462 | | | 35 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net cash provided by (used in) financing activities | 3,727 | | | (49,994) | | | |
Discontinued operations: | | | | | |
Net cash used in operating activities | 0 | | | (322) | | | |
Net cash provided by investing activities | 0 | | | 337 | | | |
Net cash flows provided by discontinued operations | 0 | | | 15 | | | |
Effect of changes in exchange rates on cash and cash equivalents | (102) | | | 5 | | | |
Net change in cash, cash equivalents and restricted cash | (61,914) | | | 98,194 | | | |
Cash, cash equivalents at beginning of period | 100,575 | | | 3,044 | | | |
Restricted cash at the beginning of the period | 663 | | | 663 | | | |
Cash and cash equivalents and restricted cash at beginning of period | 101,238 | | | 3,707 | | | |
Cash and cash equivalents at end of period | 38,660 | | | 100,575 | | | |
Restricted cash at the end of period | 664 | | | 663 | | | |
Cash, cash equivalents and restricted cash at end of period | $ | 39,324 | | | $ | 101,238 | | | |
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, diversified, technology-driven chemistry and data company that developsserves customers in industrial, commercial and supplies chemistries and services to the oil and gas industries. Flotek also supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets, classified as discontinued operations at December 31, 2018.markets.
The Company’s oilfield business designs,Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty chemicals that enhance the profitability of hydrocarbon producers and conventional chemistries, for usecleans surfaces in oilboth commercial and gas well drilling, cementing, completion, remediation,personal settings to help reduce the spread of bacteria, viruses and stimulation activities designedgerms.
The Company’s Data Analytics (“DA”) segment enables users to maximize recoverythe value of their hydrocarbon associated processes by providing analytics associated with the streams in both newseconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and mature fields. Activities in this segment also include construction and managementallows users to pursue automation of automated material handling facilities as well as management of loading facilities and blending operations for oilfield services companies. In the segment reported as discontinued operations at December 31, 2018, the Company processed citrus oiltheir hydrocarbon streams to produce (1) high
maximize their profitability.value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous industries around the world, including the oil and gas industry.
Flotek operates in seven domestic and international markets. Customers include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. The Company also served customers who purchase non-energy-related citrus oilformed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”). The Company’s 2 operating segments, CT and related products, including householdDA, are both supported by its continuing Research & Innovation advanced laboratory capabilities. For further discussion of our operations and commercial cleaning product companies, fragrancesegments, see Note 22, “Business Segment, Geographic and cosmetic companies, and food manufacturing companies, inMajor Customer Information.” For further discussion of the segment reported as discontinued operations at December 31, 2018.JP3 acquisition, see Note 3, “Business Combination.”
FlotekThe Company was initially incorporated under the laws of the Province of British Columbia on May 17,in 1985. OnIn October 23, 2001, Flotekthe Company changed its corporate domicile to the state of Delaware.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic. The pandemic negatively impacted the U.S. and global economy, disrupted domestic and international oil and gas markets, and increased volatility in financial markets. These effects materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. The Company’s primary markets in the U.S. are particularly subject to the impacts on the oil and gas industry. As a result, the Company recorded an impairment to property, plant and equipment; intangible assets; and operating right-of-use assets during the first quarter of 2020. The extended impact of COVID-19 and its effect on the oil and gas industry contributed to additional impairment charges to goodwill and intangible assets in the third quarter of 2020. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” and Note 9, “Goodwill.” In addition, the Company increased the provision of excess and obsolete inventory as discussed in Note 6, “Inventories.” Future developments and effects are highly uncertain and cannot be predicted, including the scope and duration of the pandemic. This uncertainty could have a material impact on accounting estimates and assumptions used in our consolidated financial statements.
Sources and Uses of Liquidity
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to equity and debt 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. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery in of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.
Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:
•Sale of non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Entry into a borrowing facility with one or more lenders;•Raising equity either in the public markets or via a private placement offering; •Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash; and
•Reducing professional advisory fees and headcount.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms or at all.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements include the accounts of Flotek Industries, Inc. and all wholly-owned subsidiary corporations.subsidiaries. Where Flotek owns less than 100% of the share capital of its subsidiaries but is still considered to have sufficient ownership to control the business, results of the business operations are consolidated within the Company’s financial statements. The ownership interests held by other parties are shown as noncontrolling interests.
During the fourth quarter of 2018, the Company classified the Consumer and Industrial Chemistry Technologies (“CICT”) segment as held for sale based on management’s intention to sell this business, which occurred in JanuaryFebruary 2019. The Company’s historical financial statements have been revised to present the operating results of the Consumer and Industrial Chemistry Technologies segment as discontinued operations. The results of operations of this segment are presented as “Income (loss) from discontinued operations” in the statementconsolidated statements of operations, and the related cash flows of this segment have been reclassified to discontinued operations for all periods presented. The assets and liabilities of the Consumer and Industrial Chemistry Technologies segment have been reclassified to “Assets held for sale” and “Liabilities held for
sale”, respectively, in the consolidated balance sheet for all periods presented.
During 2017, the Company completed the sale or disposal of the assets and transfer or liquidation of liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.For further discussion, see Note 4, “Discontinued Operations.”
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
Cash Management
The Company uses a controlled disbursement account for its main cash account. Under this system, outstanding checks can be in excess of the cash balances at the bank before the disbursement account is funded, creating a book overdraft. Book overdrafts on this account are presented as a current liability in accounts payable in the consolidated balance sheets.
Restricted Cash
The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate provision for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical
write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible.
The 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.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
| | | Years ended December 31, | | Years ended December 31, |
| 2019 | | 2018 | | 2017 | | 2020 | | 2019 | |
Balance, beginning of year | $ | 1,190 |
| | $ | 673 |
| | $ | 579 |
| Balance, beginning of year | $ | 1,527 | | | $ | 1,190 | | |
Charged to provision for doubtful accounts, net of recoveries | 512 |
| | 839 |
| | 157 |
| |
Charges to provision for doubtful accounts, net of recoveries | | Charges to provision for doubtful accounts, net of recoveries | 652 | | | 512 | | |
Write-offs | (175 | ) | | (322 | ) | | (63 | ) | Write-offs | (863) | | | (175) | | |
Balance, end of year | $ | 1,527 |
| | $ | 1,190 |
| | $ | 673 |
| Balance, end of year | $ | 1,316 | | | $ | 1,527 | | |
Inventories
Inventories consist of raw materials work-in-process, and finished goods and are stated at the lower of cost, or market determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company quarterly reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceedsexceed 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 estimated market value if those amounts are determined to be less than cost. See Note 6 “Inventories” for discussion of the inventory write-down recorded in 2020.
Property and Equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including right-of-use assets held under capital leases,(“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:
|
| | | | |
Buildings and leasehold improvements | 2-30 years |
Machinery and equipment | 7-10 years |
Furniture and fixtures | 3 years |
Land improvements | 20 years |
Transportation equipment | 2-5 years |
Computer equipment and software | 3-7 years |
Property and equipment, including ROU assets, are reviewed for impairment on ana quarterly basis or whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. Indicative events or circumstances include, but are not limited to, matters such as a significant decline in market value or a significant change in business climate. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows from the use of the asset and its eventual disposition. The amount of impairment loss recognized is the excess of the asset’s carrying amount over its fair value. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to sell.sell. 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.
Internal Use Computer Software Costs
Direct costs incurred to purchase and develop computer software for internal use are capitalized during the application development and implementation stages. These software costs have been primarily for enterprise-level business and finance software that is customized to meet the Company’s specific operational needs. Capitalized costs are included in property and equipment and are amortized on a straight-line basis over the estimated useful life of the software beginning when the software project is substantially complete and placed in service. Costs incurred during the preliminary project stage and costs for training, data conversion, and maintenance are expensed as incurred.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company amortizes software costs using the straight-line method over the expected life of the software, generally three to seven years. The unamortized amount of capitalized software was $1.0 million at December 31, 2019.
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse change in the business climate or a change in the assessment of future operations of a reporting unit.
The Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
The quantitative impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined, when appropriate, with a market-based approach. The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit. If the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.
Other Intangible Assets
The Company’s other intangible assets have finite and indefinite lives and consist ofincluded customer relationships, technology and know-how, trademarks, brand names and purchased patents.
The cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of economic
benefit, ranging from two to 95 years. benefit. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned to these intangible assets.
Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, an impairment loss is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flow models.
Intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit.
The Company assesses whether an indefinite lived intangible impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the indefinite-lived intangible asset is impaired or if the Company elects to not perform a qualitative assessment, the Company then performs the quantitative impairment test. The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.
Business Combinations
The Company includes the results of operations of its acquisitions in its consolidated results, prospectively from the date of acquisition. Acquisitions are accounted for by applying the acquisition method. The Company allocates the fair value of purchase consideration to the assets acquired, liabilities
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assumed and any noncontrolling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and any noncontrolling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce. Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.
Fair Value Measurements
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). “Level 1” measurements are measurements using quoted prices in active markets for identical assets and liabilities. “Level 2” measurements are measurements using quoted prices in markets that are not active or that are based on quoted prices for similar assets or liabilities. “Level 3” measurements are measurements that use significant unobservable inputs which require a company to develop its own assumptions. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 14, “Fair Value Measurements.”
Revenue Recognition
The Company recognizes revenuesrevenue 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. Refer toSee Note 4 –5, “Revenue from Contracts with Customers”Customers,” for further discussion on Revenue.revenue.
The Company recognizes revenue based on the Accounting Standards Codification (“ASC”) 606a 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.
For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the
“total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the years ended December 31, 2019, 2018, and 2017, the percentage-of-completion revenue accounted for less than 0.1% of total revenue during the respective time periods.
As an accounting policy election, 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.
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 revenues.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets and liabilities are recognized related to the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company’s assets and liabilities using statutory tax rates at the applicable year end. 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. Except for a state jurisdiction, the Company maintains a full valuation allowance on its deferred tax assets.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously recorded tax assets when it becomes more likely than not that such assets will not be realized. The Company evaluates, at least annually, net operating loss carry forwards and other net deferred tax assets and considers all available evidence, both positive and negative, to determine whether a valuation allowance is necessary relative to net operating loss carry forwards and other net deferred tax assets. In making this determination, the Company considers cumulative losses in recent years as significant negative evidence. The Company considers recent years to mean the current year plus the two preceding years. The Company considers the recent cumulative income or loss position as objectively verifiable evidence for the projection of future income, which consists primarily of determining the average of the pre-tax income of the current and prior two years after adjusting for certain items not indicative of future performance. Based on this analysis, the Company determines whether a valuation allowance is necessary.
Historically, U.S. Federal income taxes are not provided on unremitted earnings of subsidiaries operating outside the U.S. because it is the Company’s intention to permanently reinvest undistributed earnings in the subsidiary. These earnings would become subject to income tax if they were remitted as dividends or loaned to a U.S. affiliate. Due to the 2017 Tax Act, U.S. federal transition taxes have been recorded at December 31, 2017, for a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable.
The Company has performed an evaluation and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements.
The Company’s policy is to record interest and penalties related to income tax matters as income tax expense.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) attributable to common stockholders, adjusted for the effect of assumed conversions of convertible notes and preferred stock, by the weighted average number of common shares outstanding, including potentially dilutive common share equivalents, if the effect is dilutive. Potentially dilutive common shares equivalents consist of incremental shares of common stock issuable upon exercise of stock options and warrants,
settlement of restricted stock units, and conversion of convertible notes and convertible preferred stock.
Debt Issuance Costs
Costs related to debt issuance are capitalized and amortized as interest expense over the term of the related debt using the straight-line method, which approximates the effective interest method. Upon the repayment of debt, the Company accelerates the recognition of an appropriate amount of the costs as interest expense.
Capitalization of Interest
Interest costs are capitalized for qualifying in-process software development projects. Capitalization of interest commences when activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended use. Capitalized interest is added to the cost of the underlying assets and amortized over the estimated useful lives of the assets.
Stock-Based Compensation
Stock-based compensation expense for share-basedstock-based payments, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.
Use of Estimates
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 application of the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, share-basedbusiness combinations, stock-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is expected to qualify for recognition as a completed sale, within one year, except if events of circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met.
Subsequent changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying amount of the disposal group, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not impact previously recorded net loss.loss and stockholders’ equity.
NewRecent Accounting Pronouncements
(a) Application of NewChanges to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”). We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.
(a) Recently Adopted Guidance
Effective January 1, 2019,2020, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2016-02, “Leases” This standard (ASC 842) requires the recognition of Right of Use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP (ASC 840). The Company adopted ASC 842 using the optional transition method. Consequently, the Company’s reporting for the comparative periods presented prior to 2019 in the financial statements will continue to be in accordance with ASC 840. Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of
deferred rent, of approximately $18.4 million, representing the present value of future lease payments under operating leases with terms of greater than twelve months. Refer to Note 6 - “Leases” for further information surrounding adoption of this new standard.
Effective January 1, 2019, the Company adopted ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2019, the Company adopted ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting.” This standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2018, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” This standard supersedes most of the existing revenue recognition requirements in U.S. GAAP under Accounting Standards Codification (“ASC”) 605 and establishes a new revenue standard, ASC 606. This new standard requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASC 606 using the full retrospective method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Refer to Note 4 — “Revenue from Contracts with Customers” for further information surrounding adoption of this new standard.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” This standard addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively, where applicable, as there were no historical transactions affected by this implementation.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2017-01, “Clarifying the
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Definition of a Business.” This standard provided additional guidance on whether an integrated set of assets and activities constitutes a business. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively and, therefore, prior periods were not adjusted. In addition, the Company had no activity during the year ended December 31, 2019 that was required to be treated differently under this ASU than previously issued guidance.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2017-09, “Scope of Modification Accounting.” This standard provided guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively and, therefore, prior periods presented were not adjusted. There were no changes to the terms or conditions of current share-based payment awards during the year ended December 31, 2019.
(b) New Accounting Requirements and Disclosures
In June 2016, 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 expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” This standard removes, modifies and adds additional requirements for disclosures related to fair value measurement in ASCthe FASB’s Accounting Standards Codification (“ASC”) 820. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted in any interim period. The Company is currently evaluating the impact the pronouncement willImplementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
(b) New Accounting Standards Issued But Not Adopted as of December 31, 2020
The FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard removes specific exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued. The Company is currently evaluating the impact of this standard on the consolidated financial statements and related disclosures.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.
Note 3 — Business Combination
During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The transaction was valued at approximately $36.6 million, as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million. Additionally, the Company was subject to contingent consideration with an estimated fair value of $1.2 million for 2 potential earn-out provisions up to $5.0 million based on certain stock performance targets. The first and second earn-out provisions are payable if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025.
The following table summarizes the fair value of JP3’s assets acquired as of the closing date of May 18, 2020 (in thousands):
| | | | | | | | |
Tradenames and trademarks | | $ | 1,100 | |
Technology and know-how | | 5,000 | |
Customer lists | | 6,800 | |
Inventories | | 7,100 | |
Cash | | 604 | |
Net working capital, net of cash and inventories | | (1,063) | |
Fixed assets | | 426 | |
Long-term debt assumed and other assets (liabilities) | | (893) | |
Goodwill | | 17,522 | |
Net assets acquired | | $ | 36,596 | |
The Company recorded transaction costs of $0.5 million for professional services including legal, accounting, and other professional or consulting fees in connection with the JP3 acquisition to the Company’s operating expenses (excluding depreciation and amortization) in the consolidated statements of operations during the second quarter of 2020.
Pro forma information for JP3 is not provided as the impact is not considered material.
During the third quarter of 2020, the Company made certain measurement period adjustments to inventory, resulting in an increase of goodwill of $2.3 million. See Note 6, “Inventories.”
As discussed in Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” during the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other, and completed an impairment analysis at the DA reporting unit level. During the third quarter of 2020, the Company recognized a finite-lived intangible assets impairment charge of $12.5 million in the DA reporting unit, which resulted from lower performance than expected by the reporting unit. The extended impact of COVID-19 and subsequent decline in oil and gas demand further contributed to the impairment charge. As a result of these factors, the Company concluded that sufficient indicators existed to require an interim quantitative assessment of goodwill for that reporting unit as of September 30, 2020. The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows, and the Company recognized a goodwill
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment charge of $11.7 million. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth.
During the third quarter of 2020, the first stock performance target was achieved. In October 2020, the Company paid $2.5 million into escrow in accordance with the terms of the JP3 Membership Interests Purchase Agreement to partially settle the earn-out payment that had been recorded as an accrued liability at September 30, 2020. At December 31, 2020, the estimated fair value of the second stock performance earn-out provision was $1.4 million, which was recorded as a contingent liability in accrued liabilities.
As the achievement of earn-out provisions and changes in fair value estimates are not acquisition adjustments, the Company recorded $2.7 million of expense for achievement of the first stock performance target and the increase in the fair value of the contingent consideration for the second earn-out provision in operating expenses for the year ended December 31, 2020.
Note 4 —Discontinued Operations
During the fourth quarter of 2018, the Company initiated and began executing a strategic plan to sell its Consumer and Industrial Chemistry Technologies (“CICT”)CICT segment. An investment banking advisory services firm was engaged and actively marketed this segment.
The Company met all of the criteria to classify the CICT segment’s assets and liabilitiessegment as held for sale in the fourth quarter 2018. The Company has2018, and classified the assets, liabilities and results of operations for this segment as “Discontinued Operations” for all periods presented.
Disposal of the CICT reporting segment represented a strategic shift that will have a major effect on the Company’s operations and financial results.periods.
On January 10, 2019, the Company entered into a Share Purchase Agreement with Archer-Daniels-Midland Company (“ADM”) for the sale of all of the shares representing membership interests in its wholly ownedwholly-owned subsidiary, Florida Chemical Company, LLC (“FCC”), which represented the CICT segment.
Effective February 28, 2019, the Company completed the sale of the CICT segmentFCC to ADM for $175.0 million in cash consideration, with $4.4 million temporarily held in escrow
by ADM forsubject to post-closing working capital adjustments for up to 90 days and $13.1 million temporarily held in escrow to satisfy potential indemnification claims by ADM. ADM with anticipated releasesplaced $17.5 million in escrow for these items, which were released over a period of time through the second quarter of 2020. The escrow balance included in other current assets was 0 and $9.9 million at 6 months, 12 months,December 31, 2020 and 15 months. 2019, respectively. Pursuant to the terms of the Share Purchase Agreement, Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, entered into a supply agreement in which FCC would supply terpene at specified prices for specified quantities.
As of December 31, 2019, the escrow balance including interest was $9.9 million reflected in other current assets.
Concurrent withCompany concluded that the closing of the sale of the CICT segment, the Company retained $11.1 million of historical inventory previously held by the CICT segment. In addition, the Company executed aoriginal long-term supply agreement for terpene. The termmet the definition of a loss contract. As such, the agreement runs through December 2023, with an option to extend for an additional year. The remaining minimum commitmentCompany recognized a current liability and loss of the agreement at$15.8 million as of December 31, 2019 is $72 million. 2019. The loss was capped by the price paid for the terpene supply agreement amendment, executed in February 2020, which aligned purchase commitments to expected usage for blended products as of December 31, 2019.
Pursuant to the post-closing working capital dispute resolution procedures set forth in the Share Purchase Agreement, the Company and ADM engaged a neutral third party arbitratorthird-party auditor to help reach agreement on the final post-closing working capital adjustment. In February 2020, the third party arbitratorthird-party auditor ruled in favor of awarding ADM for the entire $4.1 million disputed amount resulting inof $4.1 million. As a result, the working capital adjustment escrow balance was released to ADM and a corresponding reduction was made to the gain on the sale of the business as of December 31, 2019.
The following summarized financial information has been reported as Discontinued Operations for the years ended December 31 (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | |
| Consumer and Industrial Chemistry Technologies |
| 2020 | | 2019 | | |
Discontinued operations: | | | | | |
Revenue | $ | 0 | | | $ | 11,031 | | | |
Operating expenses | 0 | | | (11,572) | | | |
Depreciation and amortization | 0 | | | 0 | | | |
Research and development | 0 | | | (69) | | | |
| | | | | |
| | | | | |
(Loss) income from operations | 0 | | | (610) | | | |
Other income | 0 | | | 35 | | | |
Gain on sale of businesses | 0 | | | 65,417 | | | |
| | | | | |
Income before income taxes | 0 | | | 64,842 | | | |
Income tax expense | 0 | | | (22,684) | | | |
Net income from discontinued operations | $ | 0 | | | $ | 42,158 | | | |
| | | | | |
| | | | | |
| | | | | |
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2019, 2018, and 2017 (in thousands):
|
| | | | | | | | | | | |
| Consumer and Industrial Chemistry Technologies |
| 2019 | | 2018 | | 2017 |
Discontinued operations: | | | | | |
Revenue | $ | 11,031 |
| | $ | 72,344 |
| | $ | 73,992 |
|
Operating expenses | (11,572 | ) | | (65,940 | ) | | (63,621 | ) |
Depreciation and amortization | — |
| | (2,760 | ) | | (2,391 | ) |
Research and development | (69 | ) | | (590 | ) | | (515 | ) |
Income from operations | (610 | ) | | 3,054 |
| | 7,465 |
|
Other income (expense) | 35 |
| | 341 |
| | (284 | ) |
Gain on sale of businesses | 64,160 |
| | — |
| | — |
|
Income before income taxes | 63,585 |
| | 3,395 |
| | 7,181 |
|
Income tax expense | (19,129 | ) | | (652 | ) | | (2,730 | ) |
Net income (loss) from discontinued operations | $ | 44,456 |
| | $ | 2,743 |
| | $ | 4,451 |
|
The assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2019 and 2018 are as follows (in thousands):
|
| | | | | | | |
| Consumer and Industrial Chemistry Technologies |
| 2019 | | 2018 |
Assets: | | | |
Accounts receivable, net | $ | — |
| | $ | 10,547 |
|
Inventories, net | — |
| | 52,069 |
|
Other current assets | — |
| | 446 |
|
Property and equipment, net | — |
| | 15,899 |
|
Goodwill | — |
| | 19,480 |
|
Other intangible assets, net | — |
| | 20,029 |
|
Assets held for sale | — |
| | 118,470 |
|
Liabilities: | | | |
Accounts payable | $ | — |
| | $ | 8,883 |
|
Accrued liabilities | — |
| | 291 |
|
Liabilities held for sale | $ | — |
| | $ | 9,174 |
|
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. The Company executed a plan to sell or otherwise dispose of the Drilling Technologies and Production Technologies segments. An investment banking advisory services firm was engaged and actively marketed these segments.
The Company met all of the criteria to classify the Drilling Technologies and Production Technologies segments’ assets and liabilities as held for sale in the fourth quarter 2016. The Company has classified the assets, liabilities, and results of operations for these 2 segments as “Discontinued Operations” for all periods presented.
Disposal of the Drilling Technologies and Production Technologies reporting segments represented a strategic shift that would have a major effect on the Company’s operations and financial results.
On May 22, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Drilling Technologies segment to National Oilwell Varco, L.P. (“NOV”) for $17.0 million in cash consideration, subject to normal working capital adjustments, with $1.5 million held back by NOV for up to 18 months to satisfy potential indemnification claims.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 23, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Production Technologies segment to Raptor Lift Solutions, LLC (“Raptor Lift”) for $2.9 million in cash consideration, with $0.4 million held back by Raptor Lift to satisfy potential indemnification claims.
On August 16, 2017, the Company completed the sale of substantially all of the remaining assets of the Company’s
Drilling Technologies segment to Galleon Mining Tools, Inc. for $1.0 million in cash consideration and a note receivable of $1.0 million due in one year.
The sale or disposal of the assets and transfer or liquidation of liabilities and obligations of these segments was completed in 2017. The Company has no continuing involvement with the discontinued operations.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Drilling Technologies | | Production Technologies |
| 2018 | | 2017 | | | 2018 | | 2017 | |
Discontinued operations: | | | | | | | | | |
Revenue | $ | — |
| | $ | 11,534 |
| | | $ | — |
| | $ | 4,002 |
| |
Cost of revenue | — |
| | (7,309 | ) | | | — |
| | (3,236 | ) | |
Selling, general and administrative | — |
| | (6,963 | ) | | | — |
| | (1,759 | ) | |
Research and development | — |
| | (5 | ) | | | — |
| | (364 | ) | |
Gain (loss) on disposal of long-lived assets | — |
| | 97 |
| | | — |
| | — |
| |
Loss from operations | — |
| | (2,646 | ) | | | — |
| | (1,357 | ) | |
Other expense | — |
| | (96 | ) | | | — |
| | (52 | ) | |
Loss on sale of businesses | — |
| | (1,600 | ) | | | — |
| | (479 | ) | |
Loss on write-down of assets held for sale | — |
| | (6,831 | ) | | | — |
| | (9,718 | ) | |
Loss before income taxes | — |
| | (11,173 | ) | | | — |
| | (11,606 | ) | |
Income tax benefit | — |
| | 4,138 |
| | | — |
| | 4,299 |
| |
Net loss from discontinued operations | $ | — |
| | $ | (7,035 | ) | | | $ | — |
| | $ | (7,307 | ) | |
At December 31, 2017, all remaining assets and liabilities of the discontinued operations were assumed by the Company’s continuing operations. These balances included $0.3 million of net accounts receivable, $1.4 million of sales price hold-back that was received during 2018, and $1.4 million of accrued liabilities partially settled in 2018, with the remainder to be settled in 2019.
Note 45 — Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted ASC 606 using the full retrospective method applied to those contracts which were not completed as of December 31, 2015. As a result of electing the full retrospective adoption approach, results for reporting periods beginning after December 31, 2015 are presented under ASC 606.
There was no material impact upon the adoption of ASC 606. As revenue is primarily related to product sales accounted for at a point in time and service contracts that are primarily short-term in nature (typically less than 30 days), the Company did not record any adjustments to retained earnings at December 31, 2015 or for any periods previously presented.
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
to in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an
ongoing basis to reflect updated variable consideration information.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the “total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the years ended December 31, 2019, 2018, and 2017, the percentage-of-completion revenue accounted for less than 0.1% of total revenue during the respective time periods. This resulted in immaterial unfulfilled performance obligations and immaterial contract assets and/or liabilities for which the Company did not record adjustments to opening retained earnings as of December 31, 2015 or for any periods previously presented.
The vast majority of the Company’s products from the CT segment are sold at a point in time and service contracts are short-term in nature. Sales are billedThe DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized over time. The Company bills sales on a monthly basis with payment terms customarily 30-45 days for domestic and 60 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of Revenue
The Company has disaggregated revenues by product sales (point-in-time revenue recognition) and service revenue (over-time revenue recognition), where product. Product sales accounted for over 95% or more of total revenue for the years ended December 31, 2019, 2018,2020 and 2017.
2019.
The Company differentiates revenue and operating expenses (excluding depreciation and amortization) based on whether the source of revenue is attributable to products or services. Revenue and operating expenses (excluding depreciation and amortization) disaggregated by revenue source areis as follows (in thousands):
| | | Years ended December 31, | | Years ended December 31, |
| 2019 | | 2018 | | 2017 | | 2020 | | 2019 | |
Revenue: | | | | | | Revenue: | | | | |
Products | $ | 115,471 |
| | $ | 172,412 |
| | $ | 237,211 |
| Products | $ | 50,478 | | | $ | 115,683 | | |
| Services | 3,882 |
| | 5,361 |
| | 5,895 |
| Services | 2,663 | | | 3,670 | | |
| $ | 119,353 |
| | $ | 177,773 |
| | $ | 243,106 |
| | $ | 53,141 | | | $ | 119,353 | | |
Operating expenses (excluding depreciation and amortization): | | | | | | |
Products | $ | 147,709 |
| | $ | 152,846 |
| | $ | 182,330 |
| |
Services | 1,516 |
| | 6,962 |
| | 6,414 |
| |
| $ | 149,225 |
| | $ | 159,808 |
| | $ | 188,744 |
| |
|
Arrangements with Multiple Performance Obligations
The Company’s contractsCT and DA segments primarily sell chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, both segments offer various services associated to products sold which includes field services, installation, maintenance, and other functions. Service revenue is recognized on an over time basis for CT as services are performed as the customer is simultaneously benefiting as the Company performs. For
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DA, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. DA has additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, DA may provide subscription-type arrangements with customers may include multiple performance obligations. For suchin which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Subscription-type arrangements the total transaction price is allocated to each performance obligationwere not a material revenue stream in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Standalone selling prices are generally determined based on the prices charged to customers (“observable standalone price”) or an expected cost plus a margin approach. For combined products and services within a contract, the Company accounts for individual products and services separately if they are distinct (i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration is allocated between separate products and services within a contract based on the prices at the observable standalone price. For items that are not sold separately, the expected cost plus a margin approach is used to estimate the standalone selling price of each performance obligation.2020.
Contract Balances
Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, no revenue contracts give rise to contract assets orContract liabilities under ASC 606.associated with incomplete performance obligations are not material.
Practical Expedients and Exemptions
The Company has elected to applyapplies several practical expedients as discussed below:
•Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded within segment sellingcorporate general and administrative expenses.
•The majority of the Company’s services are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14, exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
performance obligation is part of a contract that has an original expected duration of one year or less.
•The Company’s payment terms are short-term in nature with settlements of one year or less. The Company has utilized the practical expedient in ASC 606-10-32-18, exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
•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 completed to date. For these contracts, the Company has utilized the practical expedient in ASC 606-10-55-18, allowing the Company to recognize revenue in the amount to which it has a right to invoice.
Accordingly, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
Note 5 — Supplemental Cash Flow Information
Supplemental cash flow information isInventories are as follows (in thousands):
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
Supplemental non-cash investing and financing activities: | | | | | |
Value of common stock issued in payment of accrued liability | $ | — |
| | $ | — |
| | $ | 188 |
|
Exercise of stock options by common stock surrender | — |
| | — |
| | 5,863 |
|
| | | | | |
Supplemental cash payment information: | | | | | |
Interest paid | $ | 599 |
| | $ | 2,502 |
| | $ | 1,851 |
|
Income taxes (received, net of payments) paid, net of refunds | (699 | ) | | (139 | ) | | (10,195 | ) |
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Raw materials | $ | 7,190 | | | $ | 4,339 | |
| | | |
Finished goods | 15,705 | | | 24,569 | |
Inventories | 22,895 | | | 28,908 | |
Less reserve for excess and obsolete inventory | (11,058) | | | (5,698) | |
Inventories, net | $ | 11,837 | | | $ | 23,210 | |
Changes in the reserve for excess and obsolete inventory are as follows (in thousands): | | | | | | | | | | | | | |
| 2020 | | 2019 | | |
Balance, beginning of year | $ | 5,698 | | | $ | 2,117 | | | |
Charged to provisions | 12,261 | | | 5,659 | | | |
Deductions for sales and disposals | (6,901) | | | (2,078) | | | |
Balance, end of the year | $ | 11,058 | | | $ | 5,698 | | | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on an assessment of market values. Write-downs or write-offs of inventory are charged to cost of goods sold.
The provision for excess and obsolete inventory includes charges of $8.4 million for the CT segment and $3.9 million for the DA segment, offset by sales and disposals of $6.9 million, primarily related to terpene sales in 2020.
At December 31, 2020, the Company recognized an increase in the reserve for excess and obsolete inventory of $0.4 million due to terpene on hand exceeding anticipated usage. Also see Note 6— Leases
Effective January 1,16, “Commitments and Contingencies,” for terpene purchase commitments at December 31, 2020. At December 31, 2019, the Company adopted ASC 842 usingrecorded a reserve for excess terpene of $4.4 million.
Note 7 — Property and Equipment
Property and equipment are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Land | $ | 2,415 | | | $ | 2,415 | |
Land improvements | 867 | | | 2,025 | |
Buildings and leasehold improvements | 6,364 | | | 38,741 | |
Machinery and equipment | 7,760 | | | 27,694 | |
| | | |
Furniture and fixtures | 649 | | | 1,671 | |
Transportation equipment | 1,190 | | | 1,440 | |
Computer equipment and software | 1,296 | | | 3,348 | |
Property and equipment | 20,541 | | | 77,334 | |
Less accumulated depreciation | (11,454) | | | (37,505) | |
Property and equipment, net | $ | 9,087 | | | $ | 39,829 | |
Depreciation expense totaled $2.5 million and $6.5 million for the prospective method applied to those leases which were not completed as ofyears ended December 31, 2018. 2020 and 2019, respectively.
During the first quarter of 2020, the Company recognized an impairment of property and equipment of $30.2 million. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, 0 impairments were recognized related to property and equipment.
Note 8 — Leases
The Company has leases for corporate offices, research and development facilities, warehouses, sales offices and equipment. The leases have remaining lease terms of 1 yearone to 19fifteen years, somesome of which include options to extend the leases for up to 10ten years. The Company’s largest lease is for the Global Research and Innovation Center (“GRIC”). The lease was entered into on July 12, 2015, with a fifteen-year term and an option to renew for an additional seven years. The rent payments on the GRIC lease escalate each year until the end of the term.
Upon adoption, the Company recorded operatingOperating lease ROUright-of-use assets and corresponding operating lease liabilities, net of deferred rent, of approximately $18.4 million, representingrepresent the present value of future lease payments under operating leases with terms of greater than twelve months. Leases with an initial expected term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term. The discount rate used upon adoption of ASC 842, “Leases,” in the calculation was the incremental borrowing rate on the revolving credit facility in 2019.
During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the GRIC during the second quarter of 2020. In addition, the lease liability and corresponding right-of-use assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustments to lease liabilities and right-of-use assets totaling of $6.2 million at March 31, 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, during the first quarter of 2020, the Company recorded an impairment of the right-of-use assets totaling $7.4 million. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.”
During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office in exchange for a one-time payment of $1.0 million and moved all corporate employees to the GRIC facility effective as of June 29, 2020. As a result of terminating the corporate headquarters office lease and making the one-time payment, the Company recorded a gain on lease termination of $0.6 million.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
| | | | | | | | | | | | | | | |
| For the years ended | | |
| December 31, |
| 2020 | | 2019 |
| | | | | | | |
Operating lease expense | $ | 1,370 | | | | | $ | 2,609 | | | |
Finance lease expense: | | | | | | | |
Amortization of right-of-use assets | 17 | | | | | 1,237 | | | |
Interest on lease liabilities | 18 | | | | | 10 | | | |
Total finance lease expense | 35 | | | | | 1,247 | | | |
Short-term lease expense | 202 | | | | | 123 | | | |
| | | | | | | |
Total lease expense | $ | 1,607 | | | | | $ | 3,979 | | | |
| | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | $ | 2,884 | | | | | $ | 2,336 | | | |
Operating cash flows from finance leases | 18 | | | | | 10 | | | |
Financing cash flows from finance leases | 70 | | | | | 51 | | | |
|
| | | | | | | |
| For the years ending |
| December 31, |
| 2019 | | 2018 |
Operating lease expense | $ | 2,609 |
| | $ | — |
|
Finance lease expense: | | | |
Amortization of right-of-use assets | 1,237 |
| | — |
|
Interest on lease liabilities | 10 |
| | — |
|
Total finance lease expense | 1,247 |
| | — |
|
Short-term lease expense | 123 |
| | — |
|
Total lease expense | $ | 3,979 |
| | $ | — |
|
| | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | 2,336 |
| | — |
|
Operating cash flows from finance leases | 10 |
| | — |
|
Financing cash flows from finance leases | 51 |
| | — |
|
Maturities of lease liabilities are as follows (in thousands):
| | | | | | | | | | | | | | |
Years ending December 31, | | Operating Leases | | Finance Leases |
| | | |
2021 | | $ | 1,367 | | | $ | 69 | |
2022 | | 1,289 | | | 46 | |
2023 | | 1,317 | | | 39 | |
2024 | | 1,347 | | | 23 | |
2025 | | 1,347 | | | 0 | |
Thereafter | | 6,865 | | | 0 | |
Total lease payments | | 13,532 | | | 177 | |
Less: Interest | | (4,548) | | | (21) | |
Present value of lease liabilities | | $ | 8,984 | | | $ | 156 | |
|
| | | | | | | | |
Years ending December 31, | | Operating Leases | | Finance Leases |
2020 | | 2,012 |
| | 70 |
|
2021 | | 1,962 |
| | 70 |
|
2022 | | 1,916 |
| | 47 |
|
2023 | | 1,976 |
| | 40 |
|
2024 | | 2,017 |
| | 23 |
|
Thereafter | | 23,692 |
| | — |
|
Total lease payments | | $ | 33,575 |
| | $ | 250 |
|
Less: Interest | | (16,116 | ) | | (37 | ) |
Present value of lease liabilities | | $ | 17,459 |
| | $ | 213 |
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows for the years ended December 31 (in thousands):
| | | | | | | | | | | | | |
| 2020 | | 2019 | | |
Operating Leases | | | | | |
Operating lease right-of-use assets | $ | 2,320 | | | $ | 16,388 | | | |
| | | | | |
Current portion of operating lease liabilities | $ | 636 | | | $ | 486 | | | |
Long-term operating lease liabilities | 8,348 | | | 16,973 | | | |
Total operating lease liabilities | $ | 8,984 | | | $ | 17,459 | | | |
| | | | | |
Finance Leases | | | | | |
Property and equipment | $ | 147 | | | $ | 293 | | | |
Accumulated depreciation | (26) | | | (28) | | | |
Property and equipment, net | $ | 121 | | | $ | 265 | | | |
| | | | | |
Current portion of finance lease liabilities | $ | 60 | | | $ | 55 | | | |
Long-term finance lease liabilities | 96 | | | 158 | | | |
Total finance lease liabilities | $ | 156 | | | $ | 213 | | | |
| | | | | |
Weighted Average Remaining Lease Term | | | | | |
Operating leases | 9.9 years | | 16.6 years | | |
Finance leases | 3.1 years | | 4.6 years | | |
| | | | | |
Weighted Average Discount Rate | | | | | |
Operating leases | 8.9 | % | | 8.9 | % | | |
Finance leases | 9.0 | % | | 9.0 | % | | |
|
| | | |
| December 31, 2019 |
Operating Leases | |
Operating lease right-of-use assets | $ | 16,388 |
|
| |
Current portion of lease liabilities | $ | 486 |
|
Long-term operating lease liabilities | 16,973 |
|
Total operating lease liabilities | $ | 17,459 |
|
| |
Finance Leases | |
Property and equipment | $ | 293 |
|
Accumulated depreciation | (28 | ) |
Property and equipment, net | $ | 265 |
|
| |
Current portion of lease liabilities | $ | 55 |
|
Long-term finance lease liabilities | 158 |
|
Total finance lease liabilities | $ | 213 |
|
| |
Weighted Average Remaining Lease Term | |
Operating leases | 16.6 years |
|
Finance leases | 4.6 years |
|
| |
Weighted Average Discount Rate | |
Operating leases | 8.9 | % |
Finance leases | 9.0 | % |
Rent expense under operating leases totaled $1.6 million for the year ended December 31, 2020, and $2.9 million for the year ended December 31, 2019.
Note 7 — Inventories
Inventories are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
Raw materials | $ | 4,339 |
| | $ | 10,608 |
|
Work-in-process | — |
| | — |
|
Finished goods | 23,056 |
| | 18,798 |
|
Inventories | 27,395 |
| | 29,406 |
|
Less reserve for excess and obsolete inventory | (5,698 | ) | | (2,117 | ) |
Inventories, net | $ | 21,697 |
| | $ | 27,289 |
|
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Balance, beginning of year | $ | 2,117 |
| | $ | 368 |
| | $ | 50 |
|
Charged to provisions | 5,659 |
| | 2,418 |
| | 388 |
|
Deductions for disposals | (2,078 | ) | | (669 | ) | | (70 | ) |
Balance, end of the year | $ | 5,698 |
| | $ | 2,117 |
| | $ | 368 |
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on an assessment of market values. Write-downs or write-offs of inventory are charged to cost of goods sold. At December 31, 2019, the Company recorded a reserve for excess terpene of $4.4 million.
Note 8 — Property and Equipment
Property and equipment are as follows (in thousands):
|
| | | | | | | |
| December 31 |
| 2019 | | 2018 |
Land | $ | 4,440 |
| | $ | 4,372 |
|
Buildings and leasehold improvements | 38,741 |
| | 37,719 |
|
Machinery and equipment | 27,694 |
| | 26,995 |
|
Fixed assets in progress | — |
| | 581 |
|
Furniture and fixtures | 1,671 |
| | 1,573 |
|
Transportation equipment | 1,440 |
| | 1,852 |
|
Computer equipment and software | 3,348 |
| | 9,370 |
|
Property and equipment | 77,334 |
| | 82,462 |
|
Less accumulated depreciation | (37,505 | ) | | (36,977 | ) |
Property and equipment, net | $ | 39,829 |
| | $ | 45,485 |
|
Depreciation expense totaled $6.5 million, $7.8 million, and $8.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.
During the years ended December 31, 2019, 2018, and 2017, 0 impairments were recognized related to property and equipment.
Note 9— Goodwill
The Company has 0 reporting units which have a goodwill balance at December 31, 2019.
Goodwill is tested for impairment annually in the fourth quarter, or more frequently if circumstances indicate a potential impairment. During the fourth quarter of 2017, the Company adopted ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. If the carrying amount exceeds the reporting unit’s fair value, the Company will recognize an impairment charge for the excess amount.
During the second quarter of 2018,2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. The Company identified the acquired company as the DA segment, a new operating segment. See Note 3, “Business Combination.” The Company recorded goodwill of $17.5 million at the date of acquisition.
During the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other, and completed an impairment analysis at the DA reporting unit level. During the third quarter of 2020, the Company recognized a goodwill impairment charge of $37.2 million$11.7 million.
Also, during the third quarter of 2020, the Company made certain measurement period adjustments to inventory obtained in the Energy Chemistry Technologies (“ECT”) reporting unit, which resulted from sustained under-performanceJP3 acquisition, resulting in an increase of goodwill of $2.3 million. See Note 6, “Inventories.”
Changes in the carrying amount of goodwill are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Activity during the year ended December 31, 2020: | | | | | | | | | | | |
Acquisition goodwill recognized | $ | 17,522 | | | | | | | | | | | |
Measurement period adjustment | 2,276 | | | | | | | | | | | |
Goodwill impairment recognized | (11,706) | | | | | | | | | | | |
Goodwill balance, net of impairment | $ | 8,092 | | | | | | | | | | | |
| | | | | | | | | | | |
Balance at December 31, 2020: | | | | | | | | | | | |
Goodwill | $ | 19,798 | | | | | | | | | | | |
Accumulated impairment losses | (11,706) | | | | | | | | | | | |
Goodwill balance, net of impairment | $ | 8,092 | | | | | | | | | | | |
Note 10 — Other Intangible Assets
Intangible assets acquired are amortized on a straight-line basis. Amortization of intangible assets acquired totaled $0.9 million and, lower expectations$2.0 million for the years ended December 31, 2020 and 2019, respectively.
Amortization of deferred financing costs totaled $1.4 million for the year ended December 31, 2019. In March 2019, the Company repaid the outstanding balance of its credit facility. See Note 13, “Debt.”
During the year ended December 31, 2020, the Company recorded impairment charges of $32.4 million for other intangible assets, impairing all finite-lived intangible assets, including those acquired in the May 2020 acquisition of JP3. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, 0 impairments were recognized related to other intangible assets.
At December 31, 2019, the reporting unit. As a result of these factors, a qualitative analysis, and additional risks associated with the business, the Company concluded that sufficient indicators existed to require an interim quantitative assessment
of goodwill for that reporting unit as of June 30, 2018. The fairnet carrying value of the reporting unitother intangible assets was estimated based on an analysis of the present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The assumptions were based on the actual historical performance of the reporting unit and took into account a recent weakening of operating results in an improving market environment. The excess of the reporting unit’s carrying value over the estimated fair value was recorded$20.3 million, as the goodwill impairment charge during the three months ended June 30, 2018 and represented all of the ECT reporting unit’s goodwill.follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | |
| | | |
| | | | | Cost | | Accumulated Amortization |
Finite-lived intangible assets: | | | | | | | |
Patents and technology | | | | | $ | 17,493 | | | $ | (6,715) | |
Customer relationships | | | | | 15,367 | | | (6,013) | |
| | | | | | | |
Trademarks and brand names | | | | | 1,351 | | | (1,160) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total finite-lived intangible assets | | | | | $ | 34,211 | | | $ | (13,888) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in
Note 11 — Impairment of Fixed, Long-lived and Intangible Assets
The Company recorded impairment charges of fixed, long-lived and intangible assets during the carrying amount of goodwill for the ECT reporting unit areyear ended December 31, 2020, as follows (in thousands):
| | | | | | | |
| | | |
| | | |
Property and equipment, net | $ | 30,178 | | | |
Operating lease right-of-use assets | 7,434 | | | |
Other Intangibles: | | | |
Patents and technology | 14,733 | | | |
Customer relationships | 15,796 | | | |
Intangible assets in progress | 596 | | | |
Trademarks and brand names | 1,238 | | | |
Total other intangibles | 32,363 | | | |
| | | |
Total impairment of fixed, long-lived and intangible assets | $ | 69,975 | | | |
|
| | | |
Balance at December 31, 2017: | |
Goodwill | $ | 37,180 |
|
Accumulated impairment losses | — |
|
Goodwill balance, net | 37,180 |
|
Activity during the year 2018: | |
Goodwill impairment recognized | (37,180 | ) |
Acquisition goodwill recognized | — |
|
Balance at December 31, 2018: | |
Goodwill | 37,180 |
|
Accumulated impairment losses | (37,180 | ) |
Goodwill balance, net | — |
|
Activity during the year 2019: | |
Goodwill impairment recognized | — |
|
Acquisition goodwill recognized | — |
|
Balance at December 31, 2019: | |
Goodwill | — |
|
Accumulated impairment losses | — |
|
Goodwill balance, net | $ | — |
|
During the first quarter of 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the industry, which began to negatively impact the Company’s results of operations. These declines of results of operations were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to COVID-19. Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.
Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of March 31, 2020, and an impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and the related negative impact on oil and natural gas prices on projections of future cash flows. Note 10 — Other Intangible Assets
OtherDuring the second quarter of 2020, the Company purchased JP3 and formed the DA segment. During the third quarter of 2020, revenue declined due to limited access to worksites, inability to install equipment, changes in the Company’s leadership, reduction of capital spending by clients due to COVID-19, inability to present to new customers and difficulty in working on the international marketing of the Verax analyzer. Further, the Company was negatively impacted by reduced demand in the oil and gas sector because of reductions in capital spending across our customer base, lower than anticipated growth in the international market gained from the JP3 acquisition and the delayed start of the Company’s global sales business executive.
Although the site lockdowns and extreme caution to prevent the spread of COVID-19 that began in the first half of 2020 began to ease during the third quarter, the segment saw very little of the expected repeat business and almost none from new customers due to frozen budgets. Secondly, COVID-19 restrictions adversely impacted the Company’s ability to physically gain on-site access to customers’ operations, including laboratory and testing facilities, which is a critical component to JP3’s multi-phased sales approach.
In consideration of these events, management reevaluated forecasted sales activity, expected margins and the long-term expectations of the DA segment for the third quarter of 2020. Based on these factors, the Company concluded a triggering event occurred in the DA segment, and accordingly, an interim quantitative impairment test was performed as of September 30, 2020.
Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of September 30, 2020. The Company recognized an impairment loss of $12.5 million in the DA reporting unit finite-lived intangible assets, are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| December 31, |
| 2019 | | 2018 |
| Cost | | Accumulated Amortization | | Cost | | Accumulated Amortization |
Finite lived intangible assets: | | | | | | | |
Patents and technology | $ | 17,493 |
| | $ | 6,715 |
| | $ | 18,884 |
| | $ | 6,689 |
|
Customer lists | 15,367 |
| | 6,013 |
| | 15,367 |
| | 5,259 |
|
Trademarks and brand names | 1,351 |
| | 1,160 |
| | 1,485 |
| | 1,149 |
|
Total finite lived intangible assets acquired | 34,211 |
| | 13,888 |
| | 35,736 |
| | 13,097 |
|
Deferred financing costs | — |
| | — |
| | 1,924 |
| | 496 |
|
Total amortizable intangible assets | 34,211 |
| | $ | 13,888 |
| | 37,660 |
| | $ | 13,593 |
|
Indefinite lived intangible assets: | | | | | | | |
Trademarks and brand names | 2,760 |
| | | | 2,760 |
| | |
Total other intangible assets | $ | 36,971 |
| | | | $ | 40,420 |
| | |
| | | | | | | |
Carrying amount: | | | | | | | |
Other intangible assets, net | $ | 23,083 |
| | | | $ | 26,827 |
| | |
which resulted primarily from lower performance than expected by the reporting unit. The extendedIntangible assets acquired are amortized on a straight-line basis over two to 95 years. Amortization of intangible assets acquired totaled $2.0 million, $1.4 million, and $1.5 million for the years end ended December 31, 2019, 2018, and 2017, respectively.
Amortization of deferred financing costs totaled $1.4 million, $0.4 million, and $0.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.68
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated future amortization expense for other finite livedimpact of COVID-19 and declines in the oil and gas sector also contributed to the impairment loss. Also see Note 3, “Business Combination.” No impairments of fixed, long-lived and intangible assets including deferred financing costs, at December 31, 2019 isoccurred during the fourth quarter of 2020.
Note 12 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Loss on purchase commitments (Note 16) | $ | 9,402 | | | $ | 15,750 | |
Severance costs | 3,558 | | | 3,450 | |
Payroll and benefits | 1,789 | | | 471 | |
Contingent liability for earn-out provision | 1,416 | | | 0 | |
Taxes other than income taxes | 544 | | | 1,799 | |
Due to third parties | 434 | | | 2,509 | |
Legal costs | 333 | | | 149 | |
Deferred revenue, current | 146 | | | 0 | |
| | | |
Other | 653 | | | 424 | |
| | | |
| | | |
Total current accrued liabilities | $ | 18,275 | | | $ | 24,552 | |
|
| | | | |
Year ending December 31, | | |
2020 | | $ | 1,941 |
|
2021 | | 1,935 |
|
2022 | | 1,915 |
|
2023 | | 1,858 |
|
2024 | | 1,854 |
|
Thereafter | | 10,109 |
|
Other amortizable intangible assets, net | | $ | 19,612 |
|
During the years ended December 31, 2019, 2018, and 2017, 0 impairments were recognized related to other intangible assets.
Note 1113 — Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Long-term debt | | | |
Flotek PPP loan | $ | 4,788 | | | $ | 0 | |
JP3 PPP loan | 877 | | | 0 | |
Total | 5,665 | | | 0 | |
| | | |
Less current maturities | (4,048) | | | 0 | |
| | | |
Total long-term debt, net of current portion | $ | 1,617 | | | $ | 0 | |
| | | |
| | | |
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
Long-term debt, classified as current: | | | |
Borrowings under revolving credit facility | $ | — |
| | $ | 49,731 |
|
Payroll Protection Program LoanIn April 2020, the Company received a $4.8 million loan under the Payroll Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 in April 2020. The PPP loans have a fixed interest rate of 1% and have a two-year term, maturing 2022. No payments of principal or interest were required during the year ended December 31, 2020.
OnA portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60% of the eligible costs incurred are 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 is not significantly detrimental to the business. As of December 31, 2020, the Company had not applied for or estimated the potential forgiveness on the PPP loans. The receipt of these funds, and the forgiveness of the loans attendant to these funds, is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a government audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.
Bank Credit Facility
Through March 1, 2019, the Company maintained a revolving credit facility with PNC Bank, National Association (the “Credit Facility”) with a maximum revolving advance amount of $75 million. Upon closing the sale of the CICT segment in 2019, the Company repaid the outstanding balance, ofinterest and fees on the Credit Facility on March 1, 2019, and terminated the Credit Facility.
0Note 1214 — Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.
•Level 1 — Quoted prices in active markets for identical assets or liabilities;
•Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these accounts. The PPP loans for Flotek and JP3 also approximate fair value due to maturity in less than eighteen months.
Liabilities Measured at Fair Value on a Recurring Basis
At December 31, 2019The following table presents the Company’s assets and 2018, no liabilities were required to bethat are measured at fair value on a recurring basis.basis and the level within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Balance at December 31, | | | | | | | | Balance at December 31, |
| Level 1 | | Level 2 | | Level 3 | 2020 | | Level 1 | | Level 2 | | Level 3 | | 2019 |
Contingent consideration | $ | 0 | | | $ | 0 | | | $ | 1,416 | | $ | 1,416 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $2.5 million, which was transferred out of Level 3 to a current liability and subsequently settled during the fourth quarter of 2020. No other transfers occurred during the year ended December 31, 2020. At December 31, 2020, the estimated fair value of the remaining stock performance earn-out provision was $1.4 million, which was recorded as a contingent liability. The estimated fair value of the earn-out provision was valued using the Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.
There were no transfers in or out of either Level 1, Level 2 or Level 3 fair value measurements during the yearsyear ended December 31, 2019. At December 31, 2019, 2018, and 2017.no liabilities were required to be measured at fair value on a recurring basis.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment, goodwill and other intangible assets are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the three months ended June 30, 2018,first quarter of 2020, the Company recorded an impairment of $37.2$57.5 million for goodwillimpairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3.
As disclosed in Note 3, “Business Combination,” the Company acquired JP3 in May 2020. The fair values of JP3’s long-lived assets and intangibles were determined using the income approach. The fair value of the Company’s inventory was determined using the comparative sales method. The fair value measurements were primarily based on significant inputs that are not observable in the ECTmarket and thus represent a Level 3 measurement, other than cash and working capital accounts, which carrying amounts were determined to approximate fair value due to their short-term nature.
During the third quarter of 2020, the Company’s DA segment recorded an impairment charge on finite-lived intangible assets of $12.5 million and an impairment charge on goodwill of $11.7 million. The fair value of the DA reporting unit (see Note 9). NaN impairmentswas estimated based on an analysis of goodwillthe present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The fair value measurements were recognizedprimarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During the third quarter of 2020, the first stock performance target for the contingent consideration was achieved, resulting in an accrued liability of $2.5 million, which was settled during the yearsfourth quarter of 2020. The Company also estimated the fair value of the remaining stock performance earn-out provision at December 31, 2020 and recorded the fair value of the contingent liability of $1.4 million. The expense for achievement of the first stock performance target and the change in the fair value of the contingent consideration for the second earn-out provision are recorded in operating expenses in continuing operations for the period ended December 31, 2019,and 2017. No impairment of property and equipment or other intangible assets were recognized during2020.
The following table presents the years ended December 31, 2019, 2018, and 2017.changes in contingent consideration balances classified as Level 3 balances:
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 |
Balance - beginning of period | | $ | 0 | | | $ | 0 | |
Additions / issuances | | 1,200 | | | 0 | |
Change in fair value | | 2,716 | | | 0 | |
| | | | |
Transfer out of Level 3 | | (2,500) | | | 0 | |
Balance - end of period | | $ | 1,416 | | | $ | 0 | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair
value due to the short-term nature of these accounts. The Company had 0 cash equivalents at December 31, 2019 or 2018.
The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| December 31, |
| 2019 | | 2018 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Borrowings under revolving credit facility | $ | — |
| | $ | — |
| | $ | 49,731 |
| | $ | 49,731 |
|
The carrying amount of borrowings under the revolving credit facility approximates its fair value because the interest rate is variable.
Note 13 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended December 31, 2019, 2018, and 2017, since including them
would have an anti-dilutive effect on loss per share due to the loss from continuing operations incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 0.1 million restricted stock units and 3.0 million stock options for the year ended December 31, 2019, and 0.7 million restricted stock units for the year ended December 31, 2018, and 0.7 million stock options and 0.8 million restricted stock units for the year ended December 31, 2017.
A reconciliation of the number of shares used for the basic and diluted earnings (loss) per common share computations is as follows (in thousands):
|
| | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
Weighted average common shares outstanding - Basic | 58,750 |
| | 57,995 |
| | 57,580 |
|
Assumed conversions: | | | | | |
Incremental common shares from stock options | — |
| | — |
| | — |
|
Incremental common shares from restricted stock units | — |
| | — |
| | — |
|
Weighted average common shares outstanding - Diluted | 58,750 |
| | 57,995 |
| | 57,580 |
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1415 — Income Taxes
Components of the income tax (benefit) expense are as follows (in thousands):
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
Current: | | | | | |
Federal | $ | (22,923 | ) | | $ | — |
| | $ | (1,126 | ) |
State | (2,295 | ) | | 97 |
| | 587 |
|
Foreign | (238 | ) | | (740 | ) | | 488 |
|
Total current | (25,456 | ) | | (643 | ) | | (51 | ) |
Deferred: | | | | | |
Federal | 23,910 |
| | (6,585 | ) | | 5,994 |
|
State | 1,345 |
| | (89 | ) | | 214 |
|
Foreign | — |
| | 101 |
| | (45 | ) |
Total deferred | 25,255 |
| | (6,573 | ) | | 6,163 |
|
Income tax (benefit) expense | $ | (201 | ) | | $ | (7,216 | ) | | $ | 6,112 |
|
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
Current: | | | | | |
Federal | $ | (6,115) | | | $ | (22,923) | | | |
State | 144 | | | (2,295) | | | |
Foreign | (21) | | | (238) | | | |
Total current | (5,992) | | | (25,456) | | | |
Deferred: | | | | | |
Federal | (116) | | | 24,373 | | | |
State | (71) | | | 1,345 | | | |
Foreign | 0 | | | 0 | | | |
Total deferred | (187) | | | 25,718 | | | |
Income tax (benefit) expense | $ | (6,179) | | | $ | 262 | | | |
The components of (loss) incomeloss before income taxes are as follows (in thousands):
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
United States | $ | (76,758 | ) | | $ | (80,034 | ) | | $ | (10,025 | ) |
Foreign | (178 | ) | | (623 | ) | | (1,367 | ) |
Loss before income taxes | $ | (76,936 | ) | | $ | (80,657 | ) | | $ | (11,392 | ) |
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
United States | $ | (141,864) | | | $ | (75,633) | | | |
Foreign | (765) | | | (178) | | | |
Loss before income taxes | $ | (142,629) | | | $ | (75,811) | | | |
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
Federal statutory tax rate | 21.0 | % | | 21.0 | % | | |
State income taxes, net of federal benefit | 2.1 | | | 0.6 | | | |
Non-U.S. income taxed at different rates | 0.2 | | | 0.5 | | | |
| | | | | |
Increase in valuation allowance | (20.3) | | | (20.5) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Reduction in tax benefit related to stock-based awards | (0.2) | | | (0.1) | | | |
| | | | | |
Effect of tax rate differences of NOL carryback | 1.5 | | | 0 | | | |
Research and development credit | 0 | | | 0.2 | | | |
Other | 0 | | | (2.0) | | | |
Effective income tax rate | 4.3 | % | | (0.3) | % | | |
|
| | | | | | | | |
| Year ended December 31, |
| 2019 | | 2018 | | 2017 |
Federal statutory tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 0.6 |
| | 0.8 |
| | (3.2 | ) |
Non-U.S. income taxed at different rates | 0.5 |
| | 0.8 |
| | (4.3 | ) |
(Increase) decrease in valuation allowance | (19.9 | ) | | (3.6 | ) | | 0.1 |
|
Impact of 2017 Tax Cuts and Jobs Act | — |
| | — |
| | (64.2 | ) |
Net operating loss carryback adjustment | — |
| | — |
| | — |
|
Reduction in tax benefit related to stock-based awards | (0.1 | ) | | (1.0 | ) | | (16.9 | ) |
Non-deductible expenditures and goodwill | — |
| | (9.0 | ) | | (3.9 | ) |
Research and development credit | 0.2 |
| | 0.3 |
| | 3.6 |
|
Other | (2.0 | ) | | (0.4 | ) | | 0.1 |
|
Effective income tax rate | 0.3 | % | | 8.9 | % | | (53.7 | )% |
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss. Based on analysis of the extended NOL carryback provision, the Company recorded a tax receivable of $6.1 million as of March 31, 2020, which was received in July 2020.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.
Comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Acts (“2017 Tax Act”), makes significant changes to U.S. federal income tax laws. The 2017 Tax Act, among other things, reduces the corporate income tax rate from 35% to 21%, partially limits the deductibility of business interest expense and net operating losses, provides additional limitations on the deductibility of executive compensation, imposes a one-time tax on unrepatriated earnings from certain foreign subsidiaries, taxes offshore earnings at reduced rates, regardless of whether they are repatriated, and allows the immediate deduction of certain new investments instead of deductions for depreciation expense over time. The Company had not completed its determination of the 2017 Tax Act and recorded provisional amounts in its financial statements as of December 31, 2017. The Company recorded a provisional expenseexcept for the effects of the 2017 Tax Act of $7.3 million. The effects of the 2017
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Act on the Company include three main categories: 1) remeasurement of the net deferred tax assets from 35% to 21%, which resulted in tax expense of $5.5 million; 2) a one-time tax on unrepatriated earnings from certain foreign subsidiaries of $0.2 million; and 3) additional limitations on the deductibility of executive compensation, which resulted in tax expense of $1.6 million. The Company completed its review of the 2017 Tax Act in 2018, and there were no material changes in the measurement period.
NOL carryback claim discussed above.Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. The components of deferred tax assets and liabilities are as follows (in thousands):
|
| | | | | | | |
| December 31, |
| 2019 | | 2018 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 17,248 |
| | $ | 30,241 |
|
Allowance for doubtful accounts | 1,037 |
| | 1,073 |
|
Inventory valuation reserves | 629 |
| | 1,057 |
|
Equity compensation | 353 |
| | 548 |
|
Goodwill | 965 |
| | 1,089 |
|
Accrued compensation | 587 |
| | 342 |
|
Foreign tax credit carryforward | 3,894 |
| | 4,041 |
|
Settlement liability | 3,530 |
| | — |
|
Lease liability | 3,992 |
| | — |
|
Interest expense limitation | — |
| | 534 |
|
Other | 96 |
| | 50 |
|
Total gross deferred tax assets | 32,331 |
| | 38,975 |
|
Valuation allowance | (19,878 | ) | | (4,042 | ) |
Total deferred tax assets, net | 12,453 |
| | 34,933 |
|
Deferred tax liabilities: | | | |
Property and equipment | (3,696 | ) | | (6,613 | ) |
Intangible assets | (4,597 | ) | | (9,657 | ) |
ROU asset | (3,793 | ) | | — |
|
Prepaid insurance and other | (331 | ) | | — |
|
Total gross deferred tax liabilities | (12,417 | ) | | (16,270 | ) |
Net deferred tax assets | $ | 36 |
| | $ | 18,663 |
|
72
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 23,589 | | | $ | 17,248 | |
Allowance for doubtful accounts | 1,134 | | | 1,037 | |
Inventory valuation reserves | 2,093 | | | 629 | |
Equity compensation | 435 | | | 353 | |
Goodwill | 4,087 | | | 965 | |
Accrued compensation | 657 | | | 587 | |
Foreign tax credit carryforward | 3,802 | | | 3,894 | |
Accrued liabilities | 2,076 | | | 3,530 | |
Lease liability | 1,945 | | | 3,992 | |
Property and equipment | 3,640 | | | 0 | |
Intangible assets | 6,026 | | | 0 | |
| | | |
Other | 353 | | | 96 | |
Total gross deferred tax assets | 49,837 | | | 32,331 | |
Valuation allowance | (48,671) | | | (20,341) | |
Total deferred tax assets, net | 1,166 | | | 11,990 | |
Deferred tax liabilities: | | | |
Property and equipment | 0 | | | (3,696) | |
Intangible assets | 0 | | | (4,134) | |
ROU asset | (686) | | | (3,793) | |
| | | |
| | | |
| | | |
Prepaid insurance and other | (257) | | | (331) | |
Total gross deferred tax liabilities | (943) | | | (11,954) | |
Net deferred tax assets | $ | 223 | | | $ | 36 | |
As of December 31, 2019,2020, the Company had U.S. net operating loss carryforwards of $68.9$94.7 million, including $49.6$46.4 million expiring in various amounts in 2035 through 2037 which can offset 100% of taxable income and $19.3$48.3 million that has an indefinite carryforward period which can offset 80% of taxable income per year. The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo an “ownership change” for purposes of Section 382 of the Tax Code.
Net deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes. ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance, in the second quarter of 2018, the Company consideredconsiders all available objective and
verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income. As a result of this analysis,December 31, 2019, the Company determined that it iswas more likely than not that it willwould not realize the benefits of certain deferred tax assets and, therefore, recorded a $15.5$20.3 million valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions. As all available evidence should be taken into consideration when assessing the need for a valuation allowance, the subsequent events that occurred in the first quarter of 2019 provided a source of income to support the release of $11.5 million of the valuation allowance which resulted in a deferred tax asset of $18.7 million. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018. At December 31, 2019,2020, the
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
valuation allowance against the net federal and state deferred tax assets was $19.9$48.7 million.
The Company has not calculated U.S. taxes on unremitted earnings of certain non-U.S. subsidiaries due to the Company’s intent to reinvest the unremitted earnings of the non-U.S. subsidiaries. At December 31, 2019,2020, the Company had approximately $2.3$5.7 million in unremitted earnings for one of its foreign jurisdictions, which were not included for U.S. tax purposes. Due to the 2017 Tax Act, U.S. federal transition taxes have been recorded for a one-time U.S. tax liability on these earnings which have not previously been repatriated to the U.S. However, certain withholding taxes will need to be paid upon repatriation. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.
The Company has performed an evaluation and concluded there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The
evaluation was performed for the tax years which remain subject to examination by tax jurisdictions as of December 31, 2019,2020, which are the years ended December 31, 20152017 through December 31, 20192020 for U.S. federal taxes and the years ended December 31, 20142016 through December 31, 20192020 for state tax jurisdictions.
At December 31, 2019, the Company had 0 unrecognized tax benefits.
In January 2017,During 2020, the Internal Revenue Service (“IRS”) notified the Company that ita 2018 tax return was selected for examination as
a result of a carryback claim. At this time, the Company is not aware of any findings that would examinehave a material impact on the
consolidated financial statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — Commitments and Contingencies
Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s “IRS” federal tax returnsfinancial position, results of operations or liquidity.
Commitments
Terpene Supply Agreement
On February 26, 2020, Flotek Chemistry entered into an amendment to the terpene supply agreement between Flotek Chemistry and FCC. Pursuant to the terms and conditions of the amendment, the terpene supply agreement was amended to, among other things, (a) reduce the minimum quantity of terpene that Flotek Chemistry is required to purchase by approximately 3/4ths in 2020 and by approximately half in each of 2021, 2022 and 2023, (b) provide a fixed per pound price for terpene in 2020, (c) reduce the maximum amount of terpene subject to the terpene supply agreement by approximately 1/3rd, and (d) change the payment terms to net 45 days. In order to make the terms and conditions of the amendment to the terpene supply agreement effective, Flotek Chemistry made a one-time payment in February 2020 of $15.8 million to ADM. The expense associated with the terpene supply agreement amendment payment was recorded as a loss on contract purchase commitments, reported in operating expenses in continuing operations in December 2019.
For the year ended December 31, 2020, the Company recognized a loss of $9.9 million and an accrued liability of $9.4 million at December 31, 2020, associated with the amended terpene supply agreement due to the Company’s expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased and expected selling prices of the excess terpene as such loss is not considered recoverable. The reductions in expected usage resulted from reduced demand for terpene in the oil and gas sector due of capital spending reductions across our customer base and impacts of COVID-19, combined with product mix changes using lower concentrations of terpene.
Indemnification
The Company agreed to provide indemnification to National Oilwell DHT, L.P. for certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017. The expenses incurred by the Company were $0.4 million and $0.6 million for the years ended December 31, 2020 and 2019, respectively. The Company expects to incur additional costs during 2021, which are uncertain, but could be as much as $0.5 million or more.
Lease Obligations
See Note 8, “Leases.”
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the sanitizer, surface cleaner and disinfectant industry to a lesser extent. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the sanitizer, surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk.
Within the CT segment, the Company had two major customers for the year ended December 31, 2014.2020, which accounted for 24% and 18% of consolidated revenue, and two major customers for the year ended December 31, 2019, which accounted for 20% and 10% of consolidated revenue. The examination included (1)Company’s largest three customers collectively accounted for 50% and 40% of consolidated revenue for the corporate returnsyears ended December 31, 2020 and (2) employment tax matters. 2019, respectively.
No single customer of the DA segment accounted for 10% or more of the Company’s consolidated revenue for the year ended December 31, 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The IRS fieldwork has been completedCompany 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 relationthree major U.S. financial institutions and balances often exceed insurable amounts.
Note 17 —Stockholders’ Equity
Common and Preferred Stock
On May 5, 2020, the shareholders of the Company approved an amendment to the corporate returns with no adverse findings. Further discussion of the employment tax matter can be found in Note 19 ---“Related Party Transaction.”
Note 15 — Common Stock
The Company’s Amended and Restated Certificate of Incorporation, as previously amended, November 9, 2009, authorizesto increase the Companyauthorized shares of common stock from 80 million shares to issue up to 80140 million shares of common stock, par value $0.0001 per share, and 100,000 shares of 1 or more series of preferred stock, par value $0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.
A reconciliation of the changes in common shares issued is as follows:
| | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 |
Shares issued at the beginning of the year | 63,656,897 | | | 62,162,875 | |
Issued upon sale of common stock | 200,000 | | | 0 | |
| | | |
| | | |
| | | |
Issued upon exercise of stock options | 111,298 | | | 0 | |
| | | |
Issued as restricted stock award grants | 3,114,978 | | | 924,022 | |
Issued as restricted stock unit grants | 86,241 | | | 570,000 | |
| | | |
Issued in business combination to acquire JP3 | 11,500,000 | | | 0 | |
| | | |
Shares issued at the end of the year | 78,669,414 | | | 63,656,897 | |
|
| | | | | |
| Year ended December 31, |
| 2019 | | 2018 |
Shares issued at the beginning of the year | 62,162,875 |
| | 60,622,986 |
|
Issued as restricted stock award grants | 924,022 |
| | 1,539,889 |
|
Issued as restricted stock unit grants | 570,000 |
| | — |
|
Shares issued at the end of the year | 63,656,897 |
| | 62,162,875 |
|
Treasury StockThe Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended December 31, 2020 and 2019, the Company purchased 145,703 shares and 93,977 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees that were forfeited are accounted for as treasury stock. During the year ended December 31, 2020, there were 66,115 shares surrendered for the exercise of stock options. During the year ended December 31, 2019, 0 shares were surrendered for the exercise of stock options.
Stock Repurchase Program
In June 2015, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock. Repurchases could be made in the open market or through privately negotiated transactions. On June 9, 2020, the board of directors of the Company rescinded the authorization to repurchase the Company’s stock under this program.
During the year ended December 31, 2019, the Company repurchased $0.3 million of its common stock under this authorization. NaN shares were repurchased under this program during the year ended December 31, 2020.
Note 18 — Stock-Based Compensation and Other Benefit Plans
Stock-Based Incentive Plans
Stockholders approved long termlong-term incentive plans in 2019, 2018, 2014, 2010 and 2007 (the “2019 Plan”,Plan,” the “2018 Plan,” the “2014 Plan,” the “2010 Plan,”Plan” and the “2007 Plan,” respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, and certain other incentive awards. The maximum
number of shares that may be issued under the 2019 Plan, 2018 Plan, 2014 Plan, 2010 Plan and 2007 Plan are 1.0 million, 3.0 million, 5.2 million, 6.0 million and 2.2 million, respectively. At December 31, 2019,2020, the Company had a total of 3.91.8 million shares remaining to be granted under the 2019 Plan 2018 Plan, 2014 Plan, and 20102018 Plan. Shares may no longer be granted under the 2007, Plan.
2010 and 2014 Plans.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant. During the fourth quarter 2019, 3.02020, 1.3 million stock options were granted, 1.0 million time-vested and 2.0 million performance-based.all market-based options. The time-vested stock options will vest equally over the next five years. The performance-basedmarket-based options are restricted until performance criteria defined in the agreement are met. Proceeds received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate. The Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the estimate. Stock-based compensation expense is recorded for all equity awards expected to vest.
During the year ended December 31, 2020, 0.1 million stock options vested, and 0.6 million stock options were forfeited. NaN stock options vested or were forfeited during the year ended December 31, 2019.
Stock option activity for the years ended December 31, 2020 and 2019, 2018, and 2017.are as follows
| | Stock Options | Shares | | Weighted-Average Exercise Price | |
| | | Shares | | Weighted-Average Exercise Price | Weighted-Average Fair Value | |
Outstanding as of January 1, 2019 | — |
| | $ | — |
| Outstanding as of January 1, 2019 | 0 | | | $ | 0 | | $ | 0 | | |
Granted | 3,000,000 |
| | 1.22 |
| Granted | 3,000,000 | | | 1.93 | | 1.25 | | |
Exercised | — |
| | — |
| Exercised | 0 | | | 0 | | 0 | | |
Forfeited | — |
| | — |
| Forfeited | 0 | | | 0 | | 0 | | |
Expired | — |
| | — |
| |
| Outstanding as of January 1, 2020 | | Outstanding as of January 1, 2020 | 3,000,000 | | | 0 | |
Granted | | Granted | 1,327,795 | | | 1.12 | | 0.62 | | |
Exercised | | Exercised | (111,298) | | | 0.92 | | 0.51 | | |
Forfeited | | Forfeited | (556,497) | | | 0.92 | | 0.51 | | |
| Outstanding as of | | | | Outstanding as of | | | | |
December 31, 2019 | 3,000,000 |
| | $ | 1.22 |
| |
December 31, 2020 | | December 31, 2020 | 3,660,000 | | | 0 | |
Vested or expected to vest at | | | | Vested or expected to vest at | | | | |
December 31, 2019 | — |
| | $ | — |
| |
Options exercisable as of | | | | |
December 31, 2019 | — |
| | $ | — |
| |
December 31, 2020 | | December 31, 2020 | 1,111,298 | | | |
|
.
The following table sets forth significant assumptions used in the Black-Scholes model for time-vested options and the Monte Carlo model for performance-basedmarket-based options to determine the fair value of the options at the date of grant:
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | | | |
| Market-Based Options | | Market-Based Options | | | | |
Risk-free interest rate | 0.12 | % | | 1.84 | % | | | | |
Expected volatility of common stock | 103.50 | % | | 71.57 | % | | | | |
Expected life of options in years | 2 | | 7 | | | | |
| | | | | | | |
Vesting period in years | 2 | | 7 | | | | |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth significant assumptions used in the Black Scholes model for time-vested options to determine the fair value of the options at the date of grant:
| | | | | | | |
| | Year Ended December 31, 2019 |
| | | Time-Vested Options |
Initial stock price | | | $ | 1.93 |
Strike price | | | 1.93 |
Term (in years) | | | 6.5 |
Risk-free rate | | | 1.8 | % |
Volatility rate | | | 73.6 | % |
The Company had no time-vested options granted in 2020. At December 31, 2019.2020, the unrecognized compensation cost related to stock options was $3.6 million.
|
| | | | | |
| Time-Vested Options | | Performance-Based Options |
Risk-free interest rate | 1.81 | % | | 1.84 | % |
Expected volatility of common stock | 73.59 | % | | 71.57 | % |
Expected life of options in years | 5.0 |
| | 7.0 |
|
Dividend yield | — | % | | — | % |
Vesting period in years | 5.0 |
| | 7.0 |
|
Restricted Stock
The Company grants employees either time-vesting or performance-basedmarket-based restricted shares in accordance with terms specified in the Restricted Stock Agreements (“RSAs”). Time-
Agreements. During the year ended December 31, 2020, 53% of the restricted shares granted were time-vesting and 47% were performance-based. Grantees of restricted shares retain voting rights for the granted shares.vesting•Time-vesting restricted shares vest after a stipulated period of time has elapsed subsequent toafter the date of grant, generally three
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years. Certain time-vested shares have also been issued with a portion of the shares granted vesting immediately.
Performance-based•Market-based restricted shares are issued with performance criteria defined over a designated performance period and vest only when, and if, the outlined performance
criteria are met. During the year ended December 31, 2019, 63% of the restricted shares granted were time-vesting and 37% were performance-based. Grantees of restricted shares retain voting rights for the granted shares.
Restricted stock share activity for the year ended December 31, 2019 is as follows:
|
| | | | | | | |
Restricted Stock Shares | | Shares | | Weighted- Average Fair Value at Date of Grant |
Non-vested at January 1, 2019 | | 1,050,372 |
| | $ | 3.47 |
|
Granted to employees | | 1,494,022 |
| | 2.62 |
|
Vested | | (615,941 | ) | | 3.72 |
|
Forfeited | | (299,433 | ) | | 3.16 |
|
Non-vested at December 31, 2019 | | 1,629,020 |
| | $ | 2.66 |
|
The weighted-average grant-date fair value of restricted stock granted during the years ended December 31, 2020 and 2019, 2018, and 2017 was $2.62, $10.62, and $11.92 per share, respectively. are as follows:
| | | | | | | | | | | | | | |
Restricted Stock Shares | | Shares | | Weighted- Average Fair Value at Date of Grant |
Non-vested at January 1, 2019 | | 1,050,372 | | | $ | 3.47 | |
Granted to employees | | 1,494,022 | | | 2.62 | |
Vested | | (615,941) | | | 3.72 | |
Forfeited | | (299,433) | | | 3.16 | |
Non-vested at January 1, 2020 | | 1,629,020 | | | 2.66 | |
Granted to employees | | 3,114,978 | | | 0.83 | |
| | | | |
| | | | |
Vested | | (711,988) | | | 2.94 | |
Forfeited | | (1,236,910) | | | 1.65 | |
Non-vested at December 31, 2020 | | 2,795,100 | | | $ | 1.00 | |
The total fair value of restricted stock that vested during the years ended December 31, 2020 and 2019 2018,was $2.1 million and 2017 was $6.3 million, $8.6 million, and $15.4 million, respectively.
At December 31, 2019, there was $1.8 million of2020, unrecognized compensation expense related to non-vested restricted stock.stock was $1.8 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 2.00.8 years.
Restricted Stock Units
During the year ended December 31, 2020, the Company granted 0.9 million market-based restricted stock units (“RSUs”). The performance period for these RSUs continues until December 22, 2024.
During the year ended December 31, 2019, the Company granted performance-based restricted stock units (“RSUs”) for 1,071,530 shares equivalents.1.1 million RSUs. The performance period for these share equivalentsRSUs continues until December 31, 2024.2024.
During the year ended December 31, 2018, the Company granted performance-based RSUs for 604,682 share equivalents, which had a performance period through December 31, 2019. No RSUs were earned during this performance period.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock units activity for the yearyears ended December 31, 2020 and 2019, isare as follows:
| | | | | | | | | | | | | | |
Restricted Stock Units (1) | | Units | | Weighted- Average Fair Value at Date of Grant |
RSUs at January 1, 2019 | | 301,766 | | | $ | 3.94 | |
2018 forfeited | | (272,046) | | | 6.39 | |
2019 granted | | 1,071,530 | | | 3.75 | |
2019 forfeited | | (62,776) | | | 1.66 | |
RSUs at January 1, 2020 | | 1,038,474 | | | 3.24 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
2020 granted | | 922,786 | | | 1.19 | |
| | | | |
2020 forfeited | | (733,711) | | | 3.79 | |
RSUs at December 31, 2020 | | 1,227,549 | | | $ | 1.25 | |
|
| | | | | | | |
Restricted Stock Units | | Units | | Weighted- Average Fair Value at Date of Grant |
RSU equivalents at January 1, 2019 | | 301,766 |
| | $ | 3.94 |
|
2018 equivalents forfeited | | (272,046 | ) | | 6.39 |
|
Total equivalents | | 29,720 |
| | — |
|
2019 equivalents granted | | 1,071,530 |
| | 3.75 |
|
2019 equivalents forfeited | | (62,776 | ) | | 1.66 |
|
RSU equivalents at December 31, 2019 | | 1,038,474 |
| | $ | 3.24 |
|
(1) Restricted stock units and performance stock units are disclosed in the preceding table.
At December 31, 2019, there was $2.1 million of2020, unrecognized compensation expense related to 2019 and 2018 restricted stock units.units was $2.0 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.31.2 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders on May 18,in 2012. The Company registered 500,000 shares of its common stock, currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the Company’s common stock through accumulated payroll deductions. The ESPP allows participants
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to purchase common stock at a purchase price equal to 85% of the fair market value of the common stock on the last business day of a three-month offering period which coincides with calendar quarters. Payroll deductions may not exceed 10% of an employee’s compensation and participants may not purchase more than 1,000 shares in any one offering period. In addition, for each calendar year, an employee may not be granted purchase rights for Flotek Stock valued over $25,000, as determined at the time such purchase right is granted. The fair valuevalue of the discount associated with shares purchased under the plan is recognized as share-basedstock-based compensation expense and was $0.1 million $0.1 million, and $0.1 million duringfor each of the years ended December 31, 2019, 2018,2020 and 2017, respectively.2019. The total fair value of the shares purchased under the plan during each of the years ended December 31, 2019, 2018,2020 and 20172019 was $0.1 million $0.8 million, and $1.0 million, respectively.. The employee payment associated with participation in the plan was satisfiedoccurs through payroll deductions. Effective after the third quarter 2018 purchase, the Company temporarily suspended the ESPP due to lack of shares. Following shareholder approval for additional shares, the Company initiatedresumed the ESPP during the second quarter 2019.
Share-BasedStock-Based Compensation Expense
Non-cash share-basedstock-based compensation expense related to restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $7.1 million, $10.6$3.2 million and $11.4$4.0 million during the years ended December 31, 2019, 2018,2020 and 2017,2019, respectively.
Treasury Stock
The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended December 31, 2019, 2018, and 2017, the Company purchased 93,977 shares, 199,644 shares, and 238,216 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees that were forfeited are accounted for as treasury stock. During the year ended December 31, 2019, there were 0 shares surrendered
for the exercise of stock options. During the years ended December 31, 2018 and 2017, shares surrendered for the exercise of stock options were 478,287 and 3,225, respectively. These surrendered shares are also accounted for as treasury stock.
Stock Repurchase Program
In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through December 31, 2019, the Company has repurchased $25 million of its common stock under this authorization.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through December 31, 2019, the Company repurchased $0.3 million of its common stock under this authorization.
During the year ended December 31, 2018, the Company did 0t repurchase any shares of its outstanding common stock. During the year ended December 31, 2017, the Company repurchased 905,000 shares of its outstanding common stock on the open market at a cost of $5.2 million, inclusive of transaction costs, or an average price of $5.75 per share. During the year ended December 31, 2016, the Company did 0t repurchase any shares of its outstanding common stock.
At December 31, 2019, the Company had $49.7 million remaining under its share repurchase program. A covenant under the Company’s Credit Facility limited the amount that may be used to repurchase the Company’s common stock. At December 31, 2019, this covenant did not permit additional share repurchases.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — Commitments and Contingencies
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern District of Texas granted the Company’s motion to dismiss the four consolidated putative securities class action lawsuits that were filed in November 2015, against the Company and certain of its officers. The lawsuits were previously consolidated into a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint asserted that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint sought an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss. On February 7, 2019, a three-judge panel of the United States Court of Appeals for the Fifth Circuit issued a unanimous opinion affirming the District Court’s judgment of dismissal in its entirety.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. 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.
Other Commitments
Rent expense under operating leases totaled $2.9 million, $2.9 million, and $3.3 million during the years ended December 31, 2019, 2018, and 2017, respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the U.S. All employees are eligible to participate in the plan upon employment. On January 1, 2015, the Company implemented a new matching program. The Company matches contributions at 100% of up to 2% of an employee’s compensation and, if greater, the Company matches contributions at 50% from 5% to 8% of an employee’s compensation.compensation. In April 2020, the Company suspended its matching contribution to employee accounts.
During the years ended December 31, 2019, 2018,2020 and 2017,2019, compensation expense included $0.7 million, $1.0$0.2 million and $1.0$0.7 million, respectively, related to the Company’s 401(k) match.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from the oil and gas industry. Customers include major oilfield services companies, major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies, and state-owned national oil companies. This concentration of customers in one industry increases credit and business risks.
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 maintained at a major financial institution and balances often exceed insurable amounts.
Note 1719 — Business Segment, Geographic and Major Customer InformationEarnings (Loss) Per Share
Segment InformationBasic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by chief operating decision-makers in deciding how to allocate resources and assess performance. The operations of the Company are categorized into 1 reportable segment: Energy Chemistry Technologies.
Energy Chemistry Technologies designs, develops, manufactures, packages, and markets specialty chemistries used in oil and natural gas well drilling, cementing, completion, and stimulation. In addition, the Company’s chemistries are used in specialized enhanced and improved oil recovery markets. Activities in this segment also include
construction and management of automated material handling facilities and management of loading facilities and blending operations for oilfield services companies.
The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. 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 reportable segments.78
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and settlement of restricted stock units.
Summarized financial informationPotentially dilutive securities were excluded from the calculation of diluted loss per share for the reportable segments is as follows (in thousands):years ended December 31, 2020 and 2019, since including them would have an anti-dilutive effect on loss per share due to the loss from continuing operations incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.8 million restricted stock units and 3.8 million stock options for the year ended December 31, 2020 and 0.1 million restricted stock units for the year ended December 31, 2019.
|
| | | | | | | | | | | | |
As of and for the years ended December 31, | | Energy Chemistry Technologies | | Corporate and Other | | Total |
| | | | | | |
2019 | | | | | | |
Net revenue from external customers | | $ | 119,353 |
| | $ | — |
| | $ | 119,353 |
|
Loss from operations | | (46,485 | ) | | (30,140 | ) | | (76,625 | ) |
Depreciation and amortization | | 7,439 |
| | 1,026 |
| | 8,465 |
|
Capital expenditures | | 2,411 |
| | — |
| | 2,411 |
|
| | | | | | |
2018 | | | | | | |
Net revenue from external customers | | $ | 177,773 |
| | $ | — |
| | $ | 177,773 |
|
Income (loss) from operations | | (36,817 | ) | | (32,994 | ) | | (69,811 | ) |
Depreciation and amortization | | 7,107 |
| | 2,109 |
| | 9,216 |
|
Capital expenditures | | 2,733 |
| | 826 |
| | 3,559 |
|
| | | | | | |
2017 | | | | | | |
Net revenue from external customers | | $ | 243,106 |
| | $ | — |
| | $ | 243,106 |
|
Income (loss) from operations | | 33,611 |
| | (43,931 | ) | | (10,320 | ) |
Depreciation and amortization | | 7,323 |
| | 2,445 |
| | 9,768 |
|
Capital expenditures | | 3,279 |
| | 918 |
| | 4,197 |
|
Assets of the Company by reportable segments are as follows (in thousands):
|
| | | | | | | |
| December 31, 2019 | | December 31, 2018 |
Energy Chemistry Technologies | $ | 117,357 |
| | $ | 139,205 |
|
Corporate and Other | 114,490 |
| | 28,208 |
|
Total segments | 231,847 |
| | 167,413 |
|
Held for sale | — |
| | 118,470 |
|
Total assets | $ | 231,847 |
| | $ | 285,883 |
|
Geographic
Note 20 — Supplemental Cash Flow Information
Revenue by country is based on the location where services are provided and products are used. No individual country other than the United States (“U.S.”) accounted for more than 10% of revenue. Revenue by geographic locationSupplemental cash flow information is as follows (in thousands):
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
Supplemental non-cash investing and financing activities: | | | | | |
Equity issued — acquisition of JP3 | $ | 8,538 | | | $ | 0 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Supplemental cash payment information: | | | | | |
Interest paid | $ | 25 | | | $ | 599 | | | |
Income taxes (received, net of payments) paid | (6,246) | | | (699) | | | |
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
U.S. | $ | 104,786 |
| | $ | 146,421 |
| | $ | 219,517 |
|
Other countries | 14,567 |
| | 31,352 |
| | 23,589 |
|
Total | $ | 119,353 |
| | $ | 177,773 |
| | $ | 243,106 |
|
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
|
| | | | | |
| Years ended December 31, |
| 2019 | | 2018 | | 2017 |
Customer A | 20.4% | | * | | * |
Customer B | 10.3% | | 12.23% | | * |
Customer C | * | | 10.1% | | * |
Customer D | * | | * | | 16.7% |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Quarterly Financial Data (Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total |
| (in thousands, except per share data) |
2019 | | | | | | | | | |
Revenue (1) | $ | 43,256 |
| | $ | 34,692 |
| | $ | 21,879 |
| | $ | 19,526 |
| | $ | 119,353 |
|
Loss from operations (1) | (14,266 | ) | | (13,859 | ) | | (11,853 | ) | | (36,647 | ) | | (76,625 | ) |
| | | | | | | | | |
(Loss) income from continuing operations (1) | $ | (15,380 | ) | | $ | (12,990 | ) | | $ | (11,227 | ) | | $ | (37,138 | ) | | $ | (76,735 | ) |
Income (loss) from discontinued operations, net of tax | 48,372 |
| | (1,608 | ) | | 117 |
| | (2,425 | ) | | 44,456 |
|
Net (loss) income | 32,992 |
| | (14,598 | ) | | (11,110 | ) | | (39,563 | ) | | (32,279 | ) |
Net loss attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
|
Net loss attributable to Flotek Industries, Inc. (Flotek) | $ | 32,992 |
| | $ | (14,598 | ) | | $ | (11,110 | ) | | $ | (39,563 | ) | | $ | (32,279 | ) |
| | | | | | | | | |
Amounts attributable to Flotek shareholders: | | | | | | | | | |
Loss from continuing operations (1) | $ | (15,380 | ) | | $ | (12,990 | ) | | $ | (11,227 | ) | | $ | (37,138 | ) | | $ | (76,735 | ) |
Income (loss) from discontinued operations, net of tax | 48,372 |
| | (1,608 | ) | | 117 |
| | (2,425 | ) | | 44,456 |
|
Net income (loss) attributable to Flotek | $ | 32,992 |
| | $ | (14,598 | ) | | $ | (11,110 | ) | | $ | (39,563 | ) | | $ | (32,279 | ) |
| | | | | | | | | |
Basic earnings (loss) per common share (2): | | | | | | | | | |
Continuing operations | $ | (0.26 | ) | | $ | (0.22 | ) | | $ | (0.19 | ) | | $ | (0.64 | ) | | $ | (1.31 | ) |
Discontinued operations | 0.83 |
| | (0.03 | ) | | — |
| | (0.04 | ) | | 0.76 |
|
Basic earnings (loss) per common share | $ | 0.57 |
| | $ | (0.25 | ) | | $ | (0.19 | ) | | $ | (0.68 | ) | | $ | (0.55 | ) |
Diluted earnings (loss) per common share (2): | | | | | | | | | |
Continuing operations | $ | (0.26 | ) | | $ | (0.22 | ) | | $ | (0.19 | ) | | $ | (0.64 | ) | | $ | (1.31 | ) |
Discontinued operations | 0.83 |
| | (0.03 | ) | | — |
| | (0.04 | ) | | 0.76 |
|
Diluted earnings (loss) per common share | $ | 0.57 |
| | $ | (0.25 | ) | | $ | (0.19 | ) | | $ | (0.68 | ) | | $ | (0.55 | ) |
| | | | | | | | | |
2018 | | | | | | | | | |
Revenue (1) | $ | 41,069 |
| | $ | 39,546 |
| | $ | 53,709 |
| | $ | 43,449 |
| | $ | 177,773 |
|
(Loss) income from operations (1) | (9,223 | ) | | (47,140 | ) | | (4,080 | ) | | (9,368 | ) | | (69,811 | ) |
| | | | | | | | | |
Loss from continuing operations (1) | $ | (9,528 | ) | | $ | (68,987 | ) | | $ | (4,869 | ) | | $ | 9,943 |
| | $ | (73,441 | ) |
(Loss) income from discontinued operations, net of tax | 9,595 |
| | (6,404 | ) | | 937 |
| | (1,385 | ) | | 2,743 |
|
Net loss (income) | $ | 67 |
| | $ | (75,391 | ) | | $ | (3,932 | ) | | $ | 8,558 |
| | $ | (70,698 | ) |
| | | | | | | | | |
Basic earnings (loss) per common share (2): | | | | | | | | | |
Continuing operations | $ | (0.17 | ) | | $ | (1.19 | ) | | $ | (0.08 | ) | | $ | 0.18 |
| | $ | (1.26 | ) |
Discontinued operations | 0.17 |
| | (0.11 | ) | | 0.02 |
| | (0.02 | ) | | 0.05 |
|
Basic earnings (loss) per common share | $ | — |
| | $ | (1.30 | ) | | $ | (0.06 | ) | | $ | 0.16 |
| | $ | (1.21 | ) |
Diluted earnings (loss) per common share (2): | | | | | | | | | |
Continuing operations | $ | (0.17 | ) | | $ | (1.19 | ) | | $ | (0.08 | ) | | $ | 0.18 |
| | $ | (1.26 | ) |
Discontinued operations | 0.17 |
| | (0.11 | ) | | 0.02 |
| | (0.02 | ) | | 0.05 |
|
Diluted earnings (loss) per common share | $ | — |
| | $ | (1.30 | ) | | $ | (0.06 | ) | | $ | 0.16 |
| | $ | (1.21 | ) |
| | | | | | | | | |
(1) Amounts exclude impact of discontinued operations. |
(2) The sum of the quarterly earnings (loss) per share (basic and diluted) may not agree to the earnings (loss) per share for the year due to the timing of common stock issuances. |
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1921 — Related Party Transaction
In January 2017, the 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 has executed a personal guaranty in favor of the Company, supporting this indemnification.
At June 30, 2019, the Company recorded a liability of $2.4 million related to the estimated employment tax under-withholding for the years 2014 through 2018. By September 30, 2019, the liability totaled $1.8 million, after the Company paid $0.6 million to the IRS for these taxes and made an additional accrual covering the estimated under-withholding
tax liability through 2019. In addition, at June 30, 2019, the Company recorded a receivable from the affiliated companies of Mr. Chisholm totaling $2.4 million. In October 2019, an amendment to the employment agreement was executed, giving the Company the contractual right of offset for any amounts owed to the Company, against, and giving the Company the right to withhold payments equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies from, any amounts owed under the employment agreement. The Company netted the related party receivable against the severance payable as of December 31, 2019. At December 31, 2019, the Company recorded $1.8 million for potential liability to the IRS.
Note 20 — Subsequent Events
On February 26,January 5, 2020, Flotek Chemistry, LLC, a wholly-owned subsidiaryMr. Chisholm ceased to be an employee of the Company. During 2020, the Company entered intodid not make any payments to Mr. Chisholm.
During the first quarter of 2020, an amendmentadditional accrual was recorded for $0.2 million related to potential penalties and interest on the terpene supply agreement between Flotek Chemistry and Florida Chemical Company, LLC. Pursuant to the terms and conditions of the amendment, the terpene supply agreement is amended to, among other things, (a) reduce the minimum quantity of terpene that Flotek Chemistry is required to purchase by approximately 3/4ths in 2020 and by approximately half in each of 2021, 2022 and 2023, (b) provide a fixed per pound price for terpene in 2020, (c) reduce the maximum amount of terpene subject to the terpene supply Agreement by approximately 1/3rd, and (d) change the payment terms to net 45 days. In order to make the terms and conditions of the Amendment effective, Flotek Chemistry made a one-time payment of $15.8 million to Florida Chemical Company, LLC, which is included in accrued liabilities at December 31, 2019.
IRS obligation. As of December 31, 2019,2020, the Company concluded that the amended long-term supply agreement met the definition of a
loss contract. As such, the Company recognized a loss as of December 31, 2019receivable from Mr. Chisholm was $1.4 million, which is equal to the price paid for terpene supply agreement amendment which aligns purchase commitments to expected usage for blended products.
Pursuantpayable to the post-closing working capital dispute resolution procedures set forthIRS and was netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet. In September 2020, the Company stopped all payments to Mr. Chisholm pending the completion and results of ongoing IRS audits.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: CT and DA.
Chemistry Technologies. The CT segment includes specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies in the Share Purchase Agreement,drilling and completion of their wells.The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields. Customers of the CT business segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and ADM engagedresident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce Food and Drug Administration and Environmental Protection Agency compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a neutral third party auditorportfolio of specialty chemical products to help reach agreementaddress the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks.
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 about the composition of energy customers’ hydrocarbon fluids. The customers of the DA segment span across the entire market, from production upstream to midstream facilities to refineries and distribution networks. To date, the DA segment has focused solely on North American markets. The DA segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, optimizing transmix, increasing efficiencies of towers, enabling automation of fluid handling, and reducing losses due to give-away (i.e., that portion of a product of higher value than what is specified) using real-time process information.
The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. 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.
Summarized financial information of the reportable segments is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of and for the years ended December 31, | | Chemistry Technologies | | | | | | Data Analytics(1) | | Corporate and Other | | Total |
| | | | | | | | | | | | |
2020 | | | | | | | | | | | | |
Net revenue from external customers | | $ | 50,310 | | | | | | | $ | 2,831 | | | $ | 0 | | | $ | 53,141 | |
Loss from operations, including impairment | | (88,486) | | | | | | | (36,407) | | | (18,755) | | | (143,648) | |
Depreciation and amortization | | 2,519 | | | | | | | 422 | | | 471 | | | 3,412 | |
| | | | | | | | | | | | |
Additions to long-lived assets | | 1,425 | | | | | | | 0 | | | 0 | | | 1,425 | |
| | | | | | | | | | | | |
2019 | | | | | | | | | | | | |
Net revenue from external customers | | $ | 119,353 | | | | | | | $ | 0 | | | $ | 0 | | | $ | 119,353 | |
Loss from operations, including impairment | | (45,682) | | | | | | | 0 | | | (29,818) | | | (75,500) | |
Depreciation and amortization | | 7,439 | | | | | | | 0 | | | 1,026 | | | 8,465 | |
| | | | | | | | | | | | |
Additions to long-lived assets | | 2,411 | | | | | | | 0 | | | 0 | | | 2,411 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) The financial information disclosed for the DA segment is for the period May 18, 2020 to December 31, 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segment are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Chemistry Technologies | $ | 43,346 | | | $ | 116,110 | |
Data Analytics | 13,201 | | | 0 | |
Corporate and Other | 29,663 | | | 114,490 | |
| | | |
| | | |
Total assets | $ | 86,210 | | | $ | 230,600 | |
Geographic Information
Revenue by country is based on the final post-closing working capital adjustment. In February 2020,location where services are provided and products are used. No individual countries other than the third party auditor ruledU.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2020 | | 2019 | | |
U.S. | $ | 40,632 | | | $ | 104,786 | | | |
UAE | 6,763 | | | 3,897 | | | |
Other countries | 5,746 | | | 10,670 | | | |
Total revenue | $ | 53,141 | | | $ | 119,353 | | | |
Long-lived assets held in favor of awarding ADM forcountries other than the entire $4.1 million disputed amount resulting in a reductionU.S. are not considered material to the gain on the saleconsolidated financial statements.
Major Customers
Revenue from major customers and as a percentage of the businessconsolidated revenue, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2020 | | Chemistry Technologies | | % of Total Revenue | | Data Analytics | | % of Total Revenue |
Customer A | | $ | 12,891 | | | 24.26 | % | | * | | * |
Customer B | | * | | * | | * | | * |
Customer C | | $ | 9,394 | | | 17.68 | % | | * | | * |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2019 | | | | | | | | |
Customer A | | $ | 24,386 | | | 20.43 | % | | * | | * |
Customer B | | $ | 12,322 | | | 10.32 | % | | * | | * |
Customer C | | * | | * | | * | | * |
*This customer did not account for more than 10% of December 31, 2019.revenue during this period.
81
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There
are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained. The Company’s
Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are designed to provide such reasonable assurance.
The Company’s management, with the participationprocesses were not effective because of the principal executive and principalmaterial weaknesses in our internal control over financial officers, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2019, as required by Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the principal executive and principal financial officers have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019.reporting described below.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act.
The As of December 31, 2020, Company’s management including the principal executive and principal financial officers, assessedhas evaluated the effectiveness of its internal control over financial reporting as of December 31, 2019, based on criteriaunder the Exchange Act. The Company’s management used the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“COSO”)(COSO) to perform this evaluation. Management excluded JP3, which was acquired by the Company in Internal Control – Integrated Framework. UponMay 2020, from its assessment of the effectiveness of internal control over financial reporting, as the Company may omit an assessment of an acquired business’s internal control over financial reporting from its assessment of the registrant’s internal control for up to one year from the acquisition date. As of and for the year ended December 31, 2020, JP3 represented 5% of total revenue and 15% of total assets of the consolidated financial statement amounts. Based upon this evaluation, the Company’sour management has concluded as of December 31, 2020, that the Company’sour internal control over financial reporting was not effective because of the material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in connection withinternal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the preparationCompany’s annual or interim financial statements will not be prevented or detected on a timely basis.
The Company identified deficiencies in its internal control over financial reporting that represented material weaknesses. Specifically, the Company’s management determined that the Company did not, as of December 31, 2020, design and maintain effective internal controls over financial reporting. The material weaknesses relate to: (1) ineffective design and operation of controls over nonrecurring transactions, including derecognition of items and cash flow presentation relating to disposal transactions, and operating ineffectiveness of controls relating to impairment evaluations; (2) ineffective design and operating effectiveness over forecasts used in business combinations and impairment evaluations; and (3) the ineffective design and operating effectiveness of the assessment of going concern.
The Company believes that, notwithstanding the material weaknesses mentioned above, the consolidated financial statements contained in this Form 10-K present fairly, in all material respects, the consolidated financial positions, results of operations
and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of December 31, 2019.the dates and for the periods stated therein.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20192020, has been audited by Moss AdamsBDO USA, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Remediation Plan and Status
The Company has implemented and continues to implement certain remediation actions and continues to test and evaluate the elements of the remediation plan. These elements include:
•Implementing monitoring controls over the review and validation of both tangible and intangible assets;
•Expanding controls over impairments of goodwill and long-lived assets;
•Enhancing specificity in the design and implementation of controls around nonrecurring, complex accounting activities, with the assistance of technical subject-matter experts;
•Implementing controls for forecasting and budgeting, to include additional process documentation and precision;
•Expanding monthly management review controls; and,
•Enhancing existing control procedures around the quarterly going concern analysis process.
The Company believes that the actions listed above will provide appropriate remediation of the material weaknesses; however, the testing of the effectiveness of the controls has not been completed by the Company. Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing for completion of remediation. The material weaknesses will be fully remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management.
Changes in Internal Control over Financial Reporting
There
During the second quarter of 2020, the Company acquired JP3, a privately-held data and analytics technology company. Due to the timing of the acquisition, management did not include the internal control processes for JP3 in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2020. The acquisition is excluded from the certifications required under the Sarbanes-Oxley Act. We will include all aspects of internal control over financial reporting for this acquisition in our 2021 assessment. Upon acquisition and at December 31, 2020, management has concluded that there have been no changes to JP3’s previous structure around internal controls over financial reporting.
Additionally, the Company remediated a previously reported material weakness related to the elimination of intercompany
profits in inventory during Q4 2020.
Except for the items described above, there have been no changes in the Company’s system of internal control over financial reporting during the three monthsfiscal quarter ended December 31, 20192020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of year end.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
|
| | | | | | | |
Exhibit Number
| | Exhibit Title |
2.1 | †† | ShareMembership Interest Purchase Agreement, dated as of January 10, 2019,May 18, 2020, by and between Flotek Industries, Inc., JP3 Measurement, LLC, the CompanySellers party thereto, and Archer-Daniels-Midland Company (portions of this exhibit have been omitted pursuant to a confidential treatment request, which has been granted)John A. Cardwell, as Seller Representative (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 4, 2019).May 19, 2020)
|
3.1 | | |
3.2 | | |
3.3 | |
|
4.13.4 | * | |
4.1 | |
|
4.2 | * | |
10.1 | † | |
Fifth Amended and Restated Service10.1 | † | |
10.2 | † | |
10.210.3 | † | |
10.3 | † | |
10.4 | † | |
10.5 | † | |
10.6 | † | |
10.7 | † | |
10.8 | † | |
10.510.9 | † | |
10.10 | *** | |
10.610.11 | † | |
10.710.12 | †*** | |
10.8 | † | |
10.9 | † | |
10.10 | † | |
10.11 | *** | |
10.12 | *** | |
10.13 | | |
10.14 | † | |
10.15 | † | |
| | | | | | | | |
10.16Exhibit Number | | Exhibit Title |
10.16 | † | |
|
10.17 | | |
Exhibit
Number
| | Exhibit Title |
10.17 | † | |
10.18 | † | |
10.19 | † | |
10.20 | † | |
10.21 | † | |
10.22 | † | |
10.23 | † | |
10.24 | † | |
10.25 | † | |
10.26 | † | |
21.1 | * | |
23.1 | * | |
31.123.2 | * | |
31.1 | * | |
31.2 | * | |
32.1 | ** | |
32.2 | ** | |
101.INS | * | Inline XBRL Instance Document. |
101.SCH | * | Inline XBRL Schema Document. |
101.CAL | * | Inline XBRL Calculation Linkbase Document. |
101.LAB | * | Inline XBRL Label Linkbase Document. |
101.PRE | * | Inline XBRL Presentation Linkbase Document. |
101.DEF | * | Inline XBRL Definition Linkbase Document. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| | |
* | | Filed with this Form 10-K/A.10-K. |
** | | Furnished with this Form 10-K/A,10-K, not filed. |
*** | | Portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K in order for them to remain confidential. |
† | | Management contracts or compensatory plans or agreements. |
†† | | Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments have been omitted. The Company hereby agrees to furnish a copy of any omitted schedule or attachment to the Securities and Exchange Commission upon request. |
Item 16. Form 10-K Summary.
None.
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.
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FLOTEK INDUSTRIES, INC. |
| |
By: | | /s/ John W. Gibson, Jr. |
| | John W. Gibson, Jr. |
| | President, Chief Executive Officer and Chairman of the Board |
Date: March 13, 202016, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | |
SIGNATURES | TITLE | | | DATE |
Signature | | Title | | Date |
| | | | |
/s/ JOHNJohn W. GIBSON JR.Gibson Jr. John W. Gibson, Jr. | | President, Chief Executive Officer, and Chairman of the Board (Principal Executive Officer) | | March 13, 202016, 2021 |
John W. Gibson Jr. | | (Principal Executive Officer) | | |
/s/ ELIZABETH T. WILKINSONMichael E. Borton Michael E. Borton | | Chief Financial Officer (Principal Financial and Accounting Officer) | | March 13, 202016, 2021 |
Elizabeth T. Wilkinson | | (Principal Financial Officer and Principal Accounting Officer) | | |
/s/ MICHELLE M. ADAMS | | Director | | March 13, 2020 |
Michelle M. Adams Michelle M. Adams | Director | | | March 16, 2021 |
/s/ TED D. BROWNHarsha V. Agadi Harsha V. Agadi | Director | Director | | March 13, 202016, 2021 |
| | |
/s/ Ted D. Brown Ted D. Brown | Director | | | March 16, 2021 |
/s/ L. MELVIN COOPERMichael Fucci Michael Fucci | Director | Director | | March 13, 202016, 2021 |
L. Melvin Cooper | | | | |
/s/ PAUL W. HOBBY | | Director | | March 13, 2020 |
Paul W. Hobby Paul W. Hobby | Director | | | March 16, 2021 |
/s/ L.V. “BUD” MCGUIRE | | Director | | March 13, 2020 |
L.V. “Bud” McGuire | | | | |
/s/ DAVID NIERENBERG | | Director | | March 13, 2020 |
David Nierenberg David Nierenberg | Director | | | March 16, 2021 |