value compounds usedCustomers of the CT segment include those of energy related markets as additives by companies in the flavorswell as consumer 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 majorindustrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, pressure-pumpingnational and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, NGLs, natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
Customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations has the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We have developed a new line of Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions
Research & Innovation
R&I supports both segments through green chemistry formulation, specialty chemical formulations, Food and Drug Administration (“FDA”) and Environmental Protection Agency (“EPA”) regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing. For the years ended December 31, 2021 and 2020, the Company incurred $5.5 million and $7.2 million respectively of research and development expense. In 2021, research and development expense was approximately 12.8% of consolidated revenue. The Company expects that its 2022 research and development investment will continue to support new product development, especially in support of enhanced environmental, social and governance (“ESG”) standards, increased adoption of green chemistry and conventional customization initiatives for its clients.
Seasonality
Overall, operations are not significantly affected by seasonality; however, weather conditions can pose delays in clients’ activity levels. Certain working capital components build and recede throughout the year in conjunction with established purchasing and selling cycles that can impact operating results and financial position. The performance of the Company’s services can be susceptible to both weather and naturally occurring phenomena, including, but not limited to, the following:
•the severity and duration of winter temperatures in North America, which impacts natural gas storage levels, drilling activity, commodity prices and operations at the Company’s facilities;
•material deviations from normal seasonality for an extended period can impact access to operations, reduced performance at manufacturing facilities, inability to deploy required personnel, supply chain interruptions, facility damage and customer activity levels;
•the timing and duration of the Canadian spring thaw and resulting restrictions that impact activity levels;
•the timing and impact of hurricanes upon coastal and offshore operations; and
•the COVID-19 pandemic or other pandemics or similar phenomena, which may impact seasonal purchasing and selling cycles.
Product Demand and Marketing
Demand for the Company’s energy-focused products and services in both the CT and DA segments is driven by energy supply and demand, as well as operator desire to deploy improved ESG solutions. Demand for the Company’s energy chemistry
products and services is dependent on levels of conventional and unconventional oil and natural gas well drilling and completion activity, both domestically and internationally.
The Company markets its products to end use customers using both direct and indirect sales channels. These sales channels are accessed using a mix of in-house sales professionals as well as certain contractual agency agreements. The Company also actively participates in industry trade shows, both live and virtual, publishes articles in industry publications, and participates in podcasts and creates other online content to educate the market on its product and service offerings. While the Company’s primary marketing efforts remain focused in North America, resources and effort are also focused on emerging international markets, especially in the Middle East. In addition to direct marketing and relationship development, the Company also markets products and services through the use of third-party agents, primarily in international markets.
Backlog
The Company estimates that entry into the ProFrac Agreement has resulted in a backlog of $225 million of contracted revenue over the next three years, which is expected to increase to at least $1 billion, and up to $2.1 billion, over the next ten years in the event that the ProFrac Amendment Transaction closes. This is all subject to macro- environmental factors and geo-political stability.
Intellectual Property
The Company endeavors to protect its intellectual property, both within and outside of the U.S. The Company considers patent protection for all products and methods deemed to have commercial significance and that may qualify for patent protection. The decision to pursue patent protection is dependent upon several factors, including whether patent protection can be obtained, cost effectiveness, and alignment with operational and commercial interests. The Company believes its patent and trademark portfolio, combined with confidentiality agreements, FDA and EPA registrations and licensing, trade secrets, proprietary designs, and manufacturing and operational expertise, are sufficient to protect its intellectual property and provide continued strategic advantage. As of December 31, 2021, the Company had 128 granted patents, including 104 patents in our CT segment and 23 patents in our DA segment. In addition, the Company also had 26 pending patent applications filed in the U.S. and abroad, including 21 for the CT segment and 5 for the DA segment. The patents of the CT segment cover various chemical compositions and methods of use. The patents of the DA segment cover various systems and methods of use for online determination of chemical composition and data analysis. In addition, the Company had 54 registered trademarks in the U.S. and abroad, covering a variety of its goods and services.
Competition
The ability to compete is dependent upon the Company’s ability to differentiate its products and services by providing superior quality and service, and maintaining a competitive cost structure with sufficient raw material supplies. Activity levels in the oilfield goods and services industry are impacted by current and expected oil and natural gas prices, oil and natural gas drilling activity, production levels, customer drilling and completion-designated capital spending, and customer commitment to improved ESG performance. The unpredictability of the energy industry and commodity price fluctuations creates both increased risk and opportunity for the products and services of both the Company and its competitors. The Company’s CT segment also competes with established companies and brands in the sanitizers, surface cleaners and disinfectants market. The DA segment faces competition from other providers of equipment and services for real-time information in the upstream, midstream, refining and distribution market.
Raw Materials
Materials and components used in the Company’s servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open market from multiple sources. When able, the Company uses multiple suppliers, both domestically and internationally, to purchase raw materials on the open market. The prices paid for raw materials vary based on availability, weather, other commodity price fluctuations, contractual obligations, tariffs, duties on imported materials, foreign currency exchange rates, business cycle position and global demand. Higher prices for chemistries and certain raw materials could adversely impact future sales, contract fulfillment and product margins. The Company is diligent in its efforts to identify alternate suppliers in its contingency planning by reducing the number of contractually obligated volumes and utilizing competitive bidding practices to proactively reduce costs and potential supply shortages.
The DA segment currently sources spectrometers from a single supplier. Due to long lead times, supply chain disruption could adversely impact the results of the segment in the years 2022 and beyond, although re-ordering for 2022 has already begun.
Government Regulations
The Company is subject to federal, state, and local laws and regulations, including laws related to the environment, occupational safety, health, transportation and trade within the U.S. and other countries in which the Company does business. These laws and regulations strictly govern the manufacture, storage, transportation, sale, use and disposal of chemistry products. The Company strives to ensure full compliance with all regulatory requirements.
The Company continually evaluates the environmental impact of its operations and attempts to identify potential liabilities and costs of any environmental remediation, litigation or associated claims. Several products of the CT segment are considered hazardous materials. In the event of a leak or spill in association with Company operations, the Company could be exposed to risk of material cost, net of insurance proceeds, if any, to remediate any contamination. No environmental claims are currently being litigated or investigated (to the Company’s knowledge), and the Company does not expect that costs related to remediation requirements will have a significant adverse effect on the Company’s consolidated financial position or results of operations.
Sustainability
Flotek’s vision is to create solutions to reduce the environmental impact of energy on air, water, land and people. Our mission is to be the collaborative ESG partner of choice for sustainable chemistry technology and digital analytics solutions. We believe that green chemistry and digital transformation reduce the total cost of ownership and environmental risk of our customers and can transform business by reducing carbon footprints, energy consumption, emissions and overall environmental impact.
We have green, sustainable chemistry at our core, and we focus on providing responsible specialty chemistry solutions that are environmentally friendly and cost-competitive. Our products offered by our CT segment displace harmful chemicals such as BTEX in energy production, and our logistics and delivery methodology results in lower product usage and lower carbon emissions due to delivery. The analyzers produced by our DA segment are a closed-loop system, meaning that samples of potentially harmful gasses and fluids do not need to be routinely taken and flared, as is the case with gas chromatographs. This results in lower emissions. In addition, our analyzers’ ability to determine the mixing of two batches of product (“transmix”) in real time results in less time, energy and resources spent processing transmix.
Human Capital
Employee Overview
As of December 31, 2021, the Company had approximately 131 employees, exclusive of existing worldwide agency relationships. None of the Company’s employees are covered by a collective bargaining agreement and labor relations are generally good.
Employees & Health, Safety & Environment
The Company is committed to acting with care to protect the health and safety of people, resources and the environment. Each of us owns health, safety and environment (“HSE”), as it is not isolated to certain individuals or roles. We aim to hold each other accountable to a high standard. Thus, every employee is empowered and expected to stop any activity, big or small, that could jeopardize people, the environment or assets.
Our safety, health and environmental goals are designed to sustain our drive to zero incidents. As a result, safety is woven into the fabric of the Company, from our robust training programs to our ESG moments that begin team meetings, to our Hazardous Observation Card program. Our training program is fundamental to operating safely and protecting people and the environment. The Company maintains a robust health, safety and environmental training program that includes both classroom and online curriculum. We assign specific trainings to employees based on their role and function within the Company. Additionally, the Company’s field and plant personnel complete more than 24 hours of training annually. We continuously monitor all operational activities and update training programs as needed to ensure the curriculum remains relevant and effective for minimizing risk and protecting our employees and the environment.
We have a strong company commitment to safety in all aspects of our operations through training, safety culture, and tracking of key safety metrics. In 2021, we realized our goal of 0.0 Total Recordable Incident Rate (TRIR) company wide. The TRIR is a key safety performance metric which calculates the number of recordable incidents per full-time workers during a one-year
period. When comparing to the safety record of the chemical manufacturing sector, Flotek’s safety performance is an industry leader. This achievement is the result of the focus of our entire organization on building and sustaining a safety culture.
Compensation: Wages & Benefits
The Company’s compensation programs are designed to provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. We align our programs to attract, retain and motivate employees to achieve high-impact results that create value for all of our stakeholders. In addition to competitive base wages, all employees are eligible for a discretionary bonus, which is based upon individual and triggered by company performance.
A key component of our compensation program is benefits. We engage an outside benefits consulting firm to independently evaluate the effectiveness and competitiveness of our employee benefits program, as well as to tailor our program to the unique needs of the Company’s employee base.
All full-time employees are eligible for comprehensive health insurance, including medical insurance, prescription drug benefits, dental insurance and vision insurance. Additionally, the Company offers flexible spending and health savings accounts, life and disability/accident coverage, telemedicine, critical illness insurance and paid leave. Eligible employees may elect to participate in the Company’s employee stock purchase plan and retirement plans, including its 401(k) plan in the U.S. and its Registered Retirement Savings Plan in Canada. The Company currently matches 401(k) contributions at 100% of up to 2% of an employee’s compensation. The Company also offers access to online and personalized financial planning services as a component of its retirement plan benefit.
The Company continues to prioritize mental health and wellness for employees, maintaining an ongoing dialogue with employees and providing resources through its employee assistance program, which is available to all employees and their families.
Available Information and Website
The Company’s website is www.flotekind.com. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available (see the “Investor Relations” section of the Company’s website), as soon as reasonably practicable, subsequent to electronically filing or otherwise providing reports to the SEC. Corporate governance materials, guidelines, by laws, and code of business conduct and ethics are also available on the website. A copy of corporate governance materials is available upon written request to the Company.
The SEC maintains the www.sec.gov website, which contains reports, proxy and information statements, and other registrant information filed electronically with the SEC.
The Company filed, or furnished, as applicable, all principal executive officer and financial officer certifications as required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with this Annual Report. Information with respect to the Company’s executive officers and directors is incorporated herein by reference to information to be included in the proxy statement for the Company’s 2022 Annual Meeting of Stockholders.
The Company has disclosed and will continue to disclose any changes or amendments to the Company’s code of business conduct and ethics as well as waivers to the code of ethics applicable to executive management by posting such changes or waivers on the Company’s website or in filings with the SEC.
Item 1A. Risk Factors
The Company’s business, financial condition, results of operations, cash flows, liquidity and prospects are subject to various risks and uncertainties. Readers of this Annual Report should not consider any descriptions of these risk factors to be a complete set of all potential risks that could affect the Company. These factors should be carefully considered together with the other information contained in this Annual Report and the other reports and materials filed by the Company with the SEC. Further, many of these risks are interrelated and, as a result, the occurrence of certain risks could trigger and/or exacerbate other risks. Such a combination could materially increase the severity of the impact of these risks on the Company’s business, results of operations, financial condition, cash flows, liquidity or prospects.
This Annual Report contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Forward-looking statements discuss Company prospects, expected revenue, expenses and profits, strategic and operational initiatives, and other activities. Forward-looking statements also contain suppositions regarding future oil and natural gas industry and other conditions, both domestically and internationally. The Company’s results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including risks described below and elsewhere. See “Forward-Looking Statements” at the beginning of this Annual Report.
Risks Related to the Company’s Business
The Company’s business is largely dependent upon its customers’ spending, both in the oil and gas industry and in adjacent industrial applications for professional chemistries. Spending could be adversely affected by industry conditions or by new or increased governmental regulations; global economic conditions; lingering sentiment surrounding the pandemic; the availability of credit; and oil and natural gas prices.
Demand for and prices of the Company’s products are subject to a variety of factors, including, but not limited to:
•global demand for energy as a result of population growth, economic development, and general economic and business conditions;
•the timing and rate of economic recovery from the effects of the pandemic;
•the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and the impact of non-OPEC producers on global supply;
•availability and quantity of natural gas storage;
•import and export volumes and pricing of liquefied natural gas;
•domestic and international refining activity;
•pipeline capacity to critical markets and out of producing regions;
•political and economic uncertainty, sociopolitical unrest including the current conflict in Ukraine and ongoing sanctions imposed on Russia
•cost of exploration, production and transport of oil and natural gas;
•sustained market adoption of green chemistry solutions;
•technological advances impacting energy production and consumption;
•weather conditions; and
•foreign exchange rates.
The volatility of commodity prices and the consequential effect on the activities of the Company’s target customer base could adversely impact the activity levels of the Company’s customers.
Demand for the Company’s goods and services may be adversely impacted if volatile economic conditions weaken customer expenditures, specifically as it concerns the continued adoption of chemistry solutions with lower overall impact on the environment. It is difficult to predict the pace of industry growth, the direction of oil and natural gas prices, the direction and magnitude of economic activity, the continuing impact of the pandemic, the demand for professional chemistry products, and to what extent these conditions could affect the Company. However, reduced cash flow and capital availability could adversely impact the financial condition of the Company’s customers, which could result in customer project modifications, delays or cancellations, general business disruptions, and delay in, or nonpayment of, amounts that are owed to the Company. This could cause a negative impact on the Company’s results of operations and cash flows.
Furthermore, if certain of the Company’s suppliers were to experience significant cash flow constraints or become insolvent as a result of such conditions, a reduction or interruption in supplies or a significant increase in the price of supplies could occur, adversely impacting the Company’s results of operations and cash flows.
The persistence and or emergence of new pandemic threats can significantly reduce demand for our services and adversely impact our financial condition, results of operations and cash flows.
Actions taken by businesses and governments in efforts to mitigate pandemic threats have the potential to negatively impact international and U.S. economic activity for an indeterminable duration. These effects can directly impact the demand for oil and natural gas, as well as our oil and gas related services and products. Furthermore, pandemic conditions can create disruptions in raw materials, logistics, and access to other critical resources such as human capital and financial markets.
Reduced unconventional oil production could lessen the positive effects of a general recovery of the oil and gas industry.
The majority of the Company’s product offerings in its CT segment, other than professional chemistry products are used in unconventional oil and gas operations. The Company has little to no exposure to conventional or offshore sectors. In the event that an industry recovery is disproportionately driven by conventional and offshore oil and gas operations, the Company may not have a resulting increase in its operational results.
The Company’s inability to develop and/or introduce new products or differentiate existing products could have an adverse effect on its ability to be responsive to customers’ needs and could result in a loss of customers, as well as adversely affecting the Company’s future success and profitability.
The industries in which the Company does business are characterized by technological advancements that have historically resulted in, and will likely continue to result in, substantial improvements in the scope and quality of specialty chemistries and analytical services. Consequently, the Company’s future success is dependent, in part, upon the Company’s continued ability to timely develop innovative products and services. Successful introduction of new technology requires time and resources, and there is no assurance that the Company will be able to commercialize new technology in a timely manner. If the Company fails to successfully develop and introduce innovative products and services that appeal to customers, or if existing or new market competitors develop superior products and services, the Company’s revenue and profitability could deteriorate. The Company develops, markets and produces certain green alternatives to many existing products. If these green alternatives do not perform as well as existing conventional products, the Company’s revenue and profitability could be adversely affected.
Increased competition could exert downward pressure on prices charged for the Company’s products and services.
The Company operates in a competitive environment characterized by large and small competitors. Competitors with greater resources and lower cost structures or who are trying to gain market share may be successful in providing competing products and services to the Company’s customers at lower prices than the Company currently charges. The Company operates in an environment with relatively low barriers to entry; employees of the Company may leave and compete directly with the Company. This may require the Company to lower its prices, resulting in an adverse impact on revenues, margins, and operating results. Thus, competition could have a detrimental impact on the Company’s business.
If the Company is unable to adequately protect intellectual property rights or is found to infringe upon the intellectual property rights of others, or is unable to maintain the registrations and certifications of its products and facilities, the Company’s business is likely to be adversely affected.
The Company relies on a combination of patents, trademarks, copyrights, trade secrets, non-disclosure agreements and other methods to access markets and create a competitive advantage. Although the Company believes that existing measures are reasonably adequate to protect intellectual property rights, there is no assurance that the measures taken will prevent misappropriation of proprietary information or dissuade others from independent development of similar products or services. Moreover, there is no assurance that the Company will be able to prevent competitors from copying, reverse engineering, modifying or otherwise obtaining and/or using the Company’s technology and proprietary rights to create competitive products or services. The Company may not be able to enforce intellectual property rights outside of the U.S. Additionally, the laws of certain countries in which the Company’s products and services are manufactured or marketed may not protect the Company’s proprietary rights to the same extent as do the laws of the U.S. Furthermore, other third parties may infringe, challenge, invalidate or circumvent the Company’s patents, trademarks, copyrights and trade secrets. In each case, the Company’s ability to compete could be significantly impaired.
A portion of the Company’s products and services are without patent protection. The issuance of a patent does not guarantee validity or enforceability. The Company’s patents may not necessarily be valid or enforceable against third parties. The issuance of a patent does not guarantee that the Company has the right to use the patented invention. Third parties may have blocking patents that could be used to prevent the Company from marketing the Company’s own patented products and services and utilizing the Company’s patented technology.
The Company is exposed and, in the future, may be exposed to allegations of patent and other intellectual property infringement from others. The Company may allege infringement of its patents and other intellectual property rights against others. Under either scenario, the Company could become involved in costly litigation or other legal proceedings regarding its patent or other intellectual property rights, from both an enforcement and defensive standpoint. Even if the Company chooses to enforce its patent or other intellectual property rights against a third party, there may be risk that the Company’s patent or other intellectual
property rights become invalidated or otherwise unenforceable through legal proceedings. In the event the Company cannot obtain a license, third parties could file lawsuits or other legal proceedings against the Company, seeking damages (including treble damages) or an injunction against the manufacture, use, sale, offer for sale, or importation of the Company’s products and services. These could result in the Company having to discontinue the use, manufacture and sale of certain products and services, increase the cost of selling certain products and services, or result in damage to the Company’s reputation. An award of damages, including material royalty payments, or the entry of an injunction order against the use, manufacture and sale of any of the Company’s products and services found to be infringing, could have an adverse effect on the Company’s results of operations and ability to compete.
Certain of the Company’s products and facilities, especially those related to the professional chemistry products, have been registered with the EPA and/or FDA. The failure of the Company to maintain such EPA and FDA registrations could result in the inability of the Company to market or sell its products. In the event that the Company cannot maintain its registrations or licenses or is unable to procure new licenses or registrations for new products or in response to changes to regulatory requirements, the ability of the Company to sell its products and obtain revenue may be adversely affected.
The loss of key customers could have an adverse impact on the Company’s results of operations and could result in a decline in the Company’s revenue.
In the CT segment in aggregate, revenue derived from the Company’s three largest customers as a percentage of consolidated revenue for the years ended December 31, 2021 and 2020, totaled 44% and 50%, respectively. The Company expects that customer concentration risk will increase due to the recent entry into the long-term supply agreement with Profrac Services LLC.Customer relationships are substantially governed by purchase orders or other short-term contractual obligations as opposed to long-term contracts. Losses of customers also may occur due to product, service or pricing issues, as well as industry consolidation. The Company competes in a highly competitive environment and must work diligently to create and maintain productive customer relationships, and the failure to maintain those relationships could result in the loss of one or more key customers. The loss of one or more key customers could have an adverse effect on the Company’s results of operations and could result in a decline in the Company’s revenue.
Loss of key suppliers, the inability to secure raw materials on a timely basis, or the Company’s inability to pass commodity price increases on to its customers could have a material adverse effect on the Company’s ability to service its customers’ needs and could result in a significant loss of customers.
Materials used in servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open market from multiple sources. Certain raw materials used by the Company’s CT segment are available only from limited sources; accordingly, any disruptions to critical suppliers’ operations could materially and adversely impact the Company’s operations. Acquisition costs and transportation of raw materials to the Company’s facilities have historically been impacted by extreme weather conditions. Additionally, prices paid for raw materials could be affected by energy products and other commodity prices; weather and disease associated with our crop dependent raw materials; tariffs and duties on imported materials; evolving geopolitical risks; foreign currency exchange rates; and phases of the general business cycle and global demand.
The prices of key raw materials are subject to market fluctuations, which at times can be significant and unpredictable. Availability of key raw materials, weather events, natural disasters, and health epidemics in countries from which the Company sources raw materials may significantly impact prices. During a period of scarcity of supply the Company may also be negatively impacted by prioritization decisions enacted by its suppliers.
The Company may be unable to pass along price increases to its customers, which could result in a materially adverse impact on margins and operating profits. The Company currently does not hedge commodity prices, but may consider such strategies in the future, and there is no guarantee that the Company’s purchasing strategies will prevent cost increases from resulting in materially adverse impacts on margins and operating profits.
The Company’s DA segment is dependent on its ability to source appropriate technical components for its Verax measurement system, certain of which are specialty products that are sole-sourced and are not easily replaceable with other sources. Any inability to source appropriate components in the future could result in significant difficulty supplying equipment or services to the Company’s customers.
Removal of members of management or directors may be difficult or costly.
The Company’s management, employees, Chairman and Chief Executive Officer may have retention, employment or severance agreements in place. In the event that our employees, management or directors do not have the proper skills for management or operation of the Company, or the Company otherwise wishes to remove them from their position(s), the Company may be required to pay severance or similar payments.
Failure to maintain effective disclosure controls and procedures and internal controls over financial reporting could have an adverse effect on the Company’s operations and the trading price of the Company’s common stock.
Effective internal controls are necessary for the Company to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If the Company cannot provide reliable financial reports or effectively prevent fraud, the Company’s reputation and operating results could be harmed. If the Company is unable to maintain effective disclosure controls and procedures and internal controls over financial reporting, the Company may not be able to provide reliable financial reports, which in turn could affect the Company’s operating results or cause the Company to fail to meet its reporting obligations. Ineffective internal controls could also cause investors to lose confidence in reported financial information, which could negatively affect the trading price of the Company’s common stock, limit the ability of the Company to access capital markets in the future, and require additional costs to improve internal control systems and procedures.
Cyberattacks may have a significant and adverse impact on the Company’s operations and related financial condition.
The Company relies on access to information systems for operational, reporting and communication functions.. Impairments of these systems, such as ransomware and network communications disruptions, could have an adverse effect on our ability to conduct operations and could directly impact consolidated reporting. Phishing attacks could result in sensitive or confidential information being released by the Company. Security breaches pose a risk to confidential data and intellectual property, which could result in damages to our competitiveness and reputation. The Company’s policies and procedures, system monitoring and data back-up processes may not prevent or detect potential disruptions or breaches in a timely or effective manner. There can be no assurance that existing or emerging threats will not have an adverse impact on our systems or communications networks. While the Company does carry cybersecurity insurance, the coverage and amount of such insurance may not be sufficient to adequately compensate the Company for cybersecurity loss.
The Company may pursue strategic acquisitions, joint ventures and strategic divestitures, which could have an adverse impact on the Company’s business.
The Company’s past and potential future acquisitions, joint ventures, and divestitures involve risks that could adversely affect the Company’s business. Negotiations of potential acquisitions, joint ventures, or other strategic relationships, integration of newly acquired businesses, and/or sales of existing businesses could be time consuming and divert management’s attention from other business concerns. Acquisitions and joint ventures could also expose the Company to unforeseen liabilities or risks associated with new markets or businesses. Unforeseen operational difficulties related to acquisitions and joint ventures could result in diminished financial performance or require a disproportionate amount of the Company’s management’s attention and resources. Additionally, acquisitions could result in the commitment of capital resources without the realization of anticipated returns. Divestitures could result in the loss of future earnings without adequate compensation and the loss of unrealized strategic opportunities.
If the Company does not manage the potential difficulties associated with expansion successfully, the Company’s operating results could be adversely affected.
The Company believes future success will depend, in part, on the Company’s ability to adapt to market opportunities and changes, to successfully integrate the operations of any businesses acquired, expansion of existing product and service lines, and potentially expand into new product and service areas in which the Company may not have prior experience. Factors that could result in strategic business difficulties include, but are not limited to:
•failure to effectively integrate acquisitions, joint ventures or strategic alliances;
•failure to effectively plan for risks associated with expansion into areas in which management lacks prior experience;
•lack of experienced management personnel;
•increased administrative burdens;
•lack of customer retention;
•technological obsolescence; and
•infrastructure, technological, communication and logistical problems associated with large, expansive operations.
If the Company fails to manage potential difficulties successfully, the Company’s operating results could be adversely impacted.
The Company’s ability to grow and compete could be adversely affected if adequate capital is not available.
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 cannot guarantee that internally generated cash flows will be sufficient, or that the Company will to be able to obtain equity or debt financing on acceptable terms, or at all. As a result, the Company may not be able to finance strategic growth plans, take advantage of business opportunities, or to respond to competitive pressures. There is no guarantee that the Company will file a new shelf registration statement. The Company’s ability to procure debt financing, is dependent on, among other things, the willingness of banks and other financial institutions to lend into the Company’s industry and on their evaluation of the Company’s credit risk. There is no guarantee that the Company will be able to procure debt financing or, in the event that it is able to procure debt financing, that the financing will be on favorable terms and conditions or at favorable rates of interest.
Failure to adapt to changing buying habits of the Company’s potential and existing customers could have a negative effect on the Company’s ability to attract and retain business.
The demographics and habits of the purchasing departments of many of the Company’s customers and potential customers is changing. Key decision makers are less experienced and show different buying habits and approaches. Customers are increasingly requiring vendors to integrate with purchasing modules and using advanced analytics to make purchasing decisions. If the Company does not adapt to these changing purchasing trends, the Company may not be able to attract or retain business.
Failure to collect for goods and services sold to key customers could have an adverse effect on the Company’s financial results, liquidity and cash flows.
The Company performs credit analysis on potential customers; however, credit analysis does not provide full assurance that customers will be willing and/or able to pay for goods and services purchased from the Company. Furthermore, collectability of international sales can be subject to the laws of foreign countries, which may provide more limited protection to the Company in the event of a dispute over payment. Because sales to domestic and international customers are generally made on an unsecured basis, there can be no assurance of collectability. The Company’s sales revenues are concentrated among customers operating in the oil and gas industry. Furthermore, the Company anticipates an increase in concentration risk in 2022 and beyond as a result of the entry of the Company into a substantial long-term agreement with ProFrac Services LLC. If one or more major customers are unwilling or unable to pay its debts to the Company, it could have an adverse effect of the Company’s financial results, liquidity and cash flows.
Unforeseen contingencies such as litigation could adversely affect the Company’s financial condition.
The Company is, and from time to time may become, a party to legal proceedings incidental to the Company’s business involving alleged injuries arising from the use of Company products, exposure to hazardous substances, patent infringement, employment matters, commercial disputes, claims related to adverse physical reactions to the Company’s products such as rashes or allergic reactions and shareholder lawsuits. The defense of these lawsuits may require significant expenses, divert management’s attention, and may require the Company to pay damages that could adversely affect the Company’s financial condition. In addition, any insurance or indemnification rights that the Company may have may be insufficient or unavailable to protect against potential loss exposures.
The Company’s current insurance policies may not adequately protect the Company’s business from all potential risks.
The Company’s operations are subject to risks inherent in the specialty chemical industry, such as, but not limited to, accidents, explosions, fires, severe weather, oil and chemical spills, and other hazards. These conditions can result in personal injury or loss of life, damage to property, equipment and the environment, as well as suspension of customers’ oil and gas operations. These events could result in damages requiring costly repairs, the interruption of Company business, including the loss of revenue and profits, and/or the Company being named as a defendant in lawsuits asserting large claims. The Company does not
have insurance against all foreseeable or unforeseeable risks. Consequently, losses and liabilities arising from uninsured or underinsured events could have an adverse effect on the Company’s business, financial condition and results of operations.
Regulatory pressures, environmental activism, and legislation could result in reduced demand for the Company’s products and services, increase the Company’s costs, and adversely affect the Company’s business, financial condition and results of operations.
Regulations restricting volatile organic compounds (“VOC”) exist in many states and/or communities which limit demand for certain products. Although citrus oil is considered a VOC, its health, safety, and environmental profile is preferred over other solvents (e.g., benzene, toluene, ethylbenzene and xylene), which is currently creating new market opportunities around the world. Changes in the perception of citrus oils as a preferred VOC, increased consumer activism against hydraulic fracturing or other regulatory or legislative actions by governments could potentially result in materially reduced demand for the Company’s products and services and could adversely affect the Company’s business, financial condition, and results of operations.
Perceptions and related usage of chemistry solutions that are currently considered safe and acceptable, within specified parameters, may be subject to change in future periods as research and testing of environmental impacts mature.
The Company is subject to complex foreign, federal, state and local environmental, health, and safety laws and regulations, which expose the Company to liabilities that could adversely affect the Company’s business, financial condition, and results of operations.
The Company’s operations are subject to foreign, federal, state, and local laws and regulations related to, among other things, the protection of natural resources, injury, health and safety considerations, chemical exposure assessment, waste management, and transportation of waste and other hazardous materials. The Company’s operations are exposed to risks of environmental liability that could result in fines, penalties, remediation, property damage, and personal injury liability. Sanctions for noncompliance with such laws and regulations could include assessment of administrative, civil and criminal penalties, revocation of permits, and issuance of corrective action orders.
The Company could incur substantial costs to ensure compliance with existing and future laws and regulations. Laws protecting the environment have generally become more stringent and are expected to continue to evolve and become more complex and restrictive in the future. Failure to comply with applicable laws and regulations could result in material expense associated with future environmental compliance and remediation. The Company’s costs of compliance could also increase if existing laws and regulations are amended or reinterpreted. Such amendments or reinterpretations of existing laws or regulations, or the adoption of new laws or regulations, could curtail exploratory or developmental drilling for, and production of, oil and natural gas which, in turn, could limit demand for the Company’s products and services. Some environmental laws and regulations could also impose joint and strict liability, meaning that the Company could be exposed in certain situations to increased liabilities as a result of the Company’s conduct that was lawful at the time it occurred or conduct of, or conditions caused by, prior operators or other third parties. Remediation expense and other damages arising as a result of such laws and regulations could be substantial and have a material adverse effect on the Company’s financial condition and results of operations.
Changes in laws and regulations relating to hydraulic fracturing may have a negative effect on the Company’s operations.
Much of the Company’s revenue in its CT segment is derived from customers engaged in hydraulic fracturing services. Some states have adopted regulations which require operators to publicly disclose certain non-proprietary information. These regulations could require the reporting and public disclosure of the Company’s proprietary chemistry formulas. The adoption of any future federal or state laws or local requirements, or the implementation of regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process, could increase the difficulty of oil and natural gas production activity and could have an adverse effect on the Company’s future results of operations.
Regulation of greenhouse gases and/or climate change could have a negative impact on the Company’s business.
Certain scientific studies have suggested that emissions of certain gases, commonly referred to as “greenhouse gases,” which include carbon dioxide, methane, and other volatile organic compounds, may be contributory to the warming effect of the Earth’s atmosphere and other climatic changes. In response to such studies, the issue of climate change and the effect of greenhouse gas emissions, in particular emissions from fossil fuels, is attracting increasing worldwide attention.
Existing or future laws, regulations, treaties, or international agreements related to greenhouse gases, climate change, and indoor air quality, including energy conservation or alternative energy incentives, could have a negative impact on the
Company’s operations, if regulations resulted in a reduction in worldwide demand for oil and natural gas. Other results could be increased compliance costs and additional operating restrictions, each of which could have a negative impact on the Company’s operations.
The Company and the Company’s customers are subject to risks associated with doing business outside of the U.S., including political risk, foreign exchange risk, and other uncertainties.
The Company and its customers are subject to risks inherent in doing business outside of the U.S., including, but not limited to:
•governmental instability;
•corruption;
•war and other international conflicts;
•civil and labor disturbances;
•requirements of local ownership;
•cartel behavior;
•partial or total expropriation or nationalization;
•currency devaluation; and
•foreign laws and policies, each of which can limit the movement of assets or funds or result in the deprivation of contractual rights or appropriation of property without fair compensation.
Collections from international customers and agents could also prove difficult due to inherent uncertainties in foreign law and judicial procedures. The Company could experience significant difficulty with collections or recovery due to the political or judicial climate in foreign countries where Company operations occur or in which the Company’s products are sold.
The Company’s international operations must be compliant with the Foreign Corrupt Practices Act and other applicable U.S. laws. The Company could become liable under these laws for actions taken by employees or agents. Compliance with international laws and regulations could become more complex and expensive thereby creating increased risk as the Company’s international business portfolio grows. Further, the U.S. periodically enacts laws and imposes regulations prohibiting or restricting trade with certain nations. The U.S. government could also change these laws or enact new laws that could restrict or prohibit the Company from doing business in identified foreign countries. The Company conducts, and will continue to conduct, business in currencies other than the U.S. dollar. Historically, the Company has not hedged against foreign currency fluctuations. Accordingly, the Company’s profitability could be affected by fluctuations in foreign exchange rates.
The Company has no control over and can provide no assurances that future laws and regulations will not materially impact the Company’s ability to conduct international business.
The Company’s ability to use net operating loss and tax attribute carryforwards to offset future taxable income may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on the Company’s ability to utilize pre-change net operating losses (“NOLs”), and certain other tax attributes to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). An ownership change could limit the Company’s ability to utilize existing NOLs and tax attribute carryforwards for taxable years including or following an identified “ownership change.” Transactions involving the Company’s common stock, even those outside the Company’s control, such as purchases or sales by investors, within the testing period could result in an “ownership change.” Moreover, we believe the recently completed and pending convertible notes transactions may substantially impact our ability to use NOLs.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback NOLs 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. In addition, under the 2017 Tax Act, the ability to carry back NOLs to prior taxable years is generally eliminated, and while NOLs arising in tax years beginning after 2017 may be carried forward indefinitely, these post-2017 NOLs may only reduce 80% of the Company’s taxable income in a tax year. Limitations imposed on the ability to use NOLs and tax credits to offset future taxable income could reduce or eliminate the benefit of the NOLs and tax attributes and could require the Company to pay U.S. federal income taxes in excess of that which would otherwise be required if such limitations were not in effect. Similar rules and limitations may apply for state income tax purposes.
Risks Related to the Company’s Industry
General economic declines or recessions, limits to credit availability, and industry specific factors could have an adverse effect on energy industry activity resulting in lower demand for the Company’s products and services.
Worldwide economic uncertainty can reduce the availability of liquidity and credit markets to fund the continuation and expansion of industrial business operations worldwide. The shortage of liquidity and credit combined with pressure on worldwide equity markets could continue to impact the worldwide economic climate. Geopolitical unrest around the world may also impact demand for the Company’s products and services both domestically and internationally.
Demand for many of the Company’s products and services is dependent on oil and natural gas industry activity and expenditure levels that are directly affected by trends in oil and natural gas prices. Demand for the Company’s products and services is particularly sensitive to levels of activity in the upstream, downstream and midstream sectors, and the corresponding capital spending by, oil and natural gas companies, including national oil companies. While capital spending programs for domestic producers appear to be improving, uncertainties around the potential for longer-term weakness in oil and natural gas prices could reduce or defer major expenditures given the long-term nature of many large-scale development projects. Lower levels of activity could result in a corresponding decline in the demand for the Company’s oil and natural gas related products and services, which could have a material adverse effect on the Company’s revenue and profitability.
Events in global credit markets can significantly impact the availability of credit and associated financing costs for many of the Company’s customers. Many of the Company’s upstream customers finance their drilling and completion programs through third-party lenders or public debt offerings. Lack of available credit or increased costs of borrowing could cause customers to reduce spending on drilling programs, thereby reducing demand and potentially resulting in lower prices for the Company’s products and services. Also, the credit and economic environment could significantly impact the financial condition of some customers over a prolonged period, leading to business disruptions and restricted ability to pay for the Company’s products and services.
A continuous period of swings in oil and natural gas prices could result in further reductions in demand for the Company’s products and services and adversely affect the Company’s business, financial condition, and results of operations.
The markets for the Company’s products, especially oil and gas markets, have historically been volatile. Such volatility in oil and natural gas prices, or the perception by the Company’s customers of unpredictability in oil and natural gas prices, could adversely affect spending levels. The oil and natural gas markets may be volatile in the future. The demand for the Company’s products and services is, in large part, driven by general levels of exploration and production spending and drilling activity by its customers. Future declines in oil or gas prices could adversely affect the Company’s business, financial condition, and results of operations.
New and existing competitors within the Company’s industries could have an adverse effect on results of operations.
The industries in which the Company competes are highly competitive. The Company’s principal competitors include numerous small companies capable of competing effectively in the Company’s markets on a local basis, as well as a number of large companies that possess substantially greater financial and other resources than does the Company. Larger competitors may be able to devote greater resources to developing, promoting, and selling products and services. The Company may also face increased competition due to the entry of new competitors including current suppliers that decide to sell their products and services directly to the Company’s customers. As a result of this competition, the Company could experience lower sales or greater operating costs, which could have an adverse effect on the Company’s margins and results of operations.
The Company’s industry has a high rate of employee turnover. Difficulty attracting or retaining personnel or agents could adversely affect the Company’s business.
The Company operates in an industry that has historically been highly competitive in securing qualified personnel with the required technical skills and experience. The Company’s services require skilled personnel able to perform physically demanding work. Due to industry volatility, the demanding nature of the work, and the need for industry specific knowledge and technical skills, current employees could choose to pursue employment opportunities outside the Company that offer a
more desirable work environment and/or higher compensation than is offered by the Company. As a result of these competitive labor conditions, the Company may not be able to find qualified labor, which could limit the Company’s growth. In addition, the cost of attracting and retaining qualified personnel has increased over the past several years due to competitive pressures. In order to attract and retain qualified personnel, the Company may be required to offer increased wages and benefits. If the Company is unable to increase the prices of products and services to compensate for increases in compensation including inflation, or is unable to attract and retain qualified personnel, operating results could be adversely affected.
Severe weather could have an adverse impact on the Company’s business.
The Company’s business could be materially and adversely affected by severe weather conditions. Hurricanes, tropical storms, flash floods, blizzards, cold weather, and other severe weather conditions could result in curtailment of services, damage to equipment and facilities, interruption in transportation of products and materials, and loss of productivity. If the Company’s customers are unable to operate or are required to reduce operations due to severe weather conditions, and as a result curtail purchases of the Company’s products and services, the Company’s business could be adversely affected.
A terrorist attack or armed conflict could harm the Company’s business.
Terrorist activities, anti-terrorist efforts, and other armed conflicts involving the U.S. could adversely affect the U.S. and global economies and could prevent the Company from meeting financial and other obligations. The Company could experience loss of business, delays or defaults in payments from payors, or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, or refineries are direct targets or indirect casualties of an act of terror or war. Such activities could reduce the overall demand for oil and natural gas which, in turn, could also reduce the demand for the Company’s products and services. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect the Company’s results of operations, impair the ability to raise capital, or otherwise adversely impact the Company’s ability to realize certain business strategies. The armed conflict in Ukraine could affect regions in which the Company does business directly or indirectly and could harm the Company’s ability to sell its good and services in those regions.
Our DA segment may be materially and negatively affected by government regulations and/or facility disruptions.
The demand for our equipment and services offerings in our DA segment could be materially affected by additional regulations on the upstream, midstream, and downstream portions of the oil and gas sectors. Additional regulation on oil and gas production, transportation, or processing of hydrocarbons may result in significantly reduced demand for our offerings, either individually or as a result of a decline in the overall oil and gas markets in the United States and abroad. In addition, our products are subject to export control laws and regulations, and changes to those laws and regulations may negatively impact our ability to pursue international opportunities. Disruptions to pipelines and refineries, whether due to regulation, weather, demand, or other factors, may also have a materially adverse effect on our ability to derive revenue from our DA segment. Adjustments to our DA segment’s commercial strategy, with a shift towards subscription revenue and away from equipment sales, and the market’s response to that strategy, may materially and adversely affect revenues in the near term, even if the strategic shift is successful, due to longer payback periods on subscription models.
Risks Related to the Company’s Securities
The market price of the Company’s common stock has been and may continue to be volatile.
The market price of the Company’s common stock has historically been subject to significant fluctuations. The following factors, among others, could cause the price of the Company’s common stock to fluctuate:
•variations in the Company’s quarterly results of operations;
•changes in market valuations of companies in the Company’s industry;
•fluctuations in stock market prices and volume;
•fluctuations in oil and natural gas prices;
•issuances of common stock or other securities in the future; including debt convertible into the Company’s common stock;
•additions or departures of key personnel;
•announcements by the Company or the Company’s competitors of new business, acquisitions, or joint ventures; and
•negative statements made by external parties about the Company’s business in public forums.
The stock market has experienced significant price and volume fluctuations in recent years that have affected the price of common stock of companies within many industries including the oil and natural gas industry. The price of the Company’s common stock could fluctuate based upon factors that have little to do with the Company’s operational performance, and these fluctuations could materially reduce the Company’s stock price. The Company could be a defendant in a legal case related to a significant loss of value for the shareholders. This could be expensive and divert management’s attention and Company resources, as well as have an adverse effect on the Company’s business, operating results, cash flows, financial condition or securities.
If the Company cannot meet the New York Stock Exchange continued listing requirements, the NYSE may delist the Company’s common stock.
The Company’s common stock is currently listed on the NYSE. In the future, if it is not able to meet the continued listing requirements of the NYSE, which require, among other things, that the average closing price of our common stock be above $1.00 over 30 consecutive trading days, the Company’s common stock may be delisted. If the Company is unable to satisfy the NYSE criteria for continued listing, its common stock would be subject to delisting. A delisting of its common stock could negatively impact the Company by, among other things, reducing the liquidity and market price of its common stock; reducing the number of investors willing to hold or acquire the Company’s common stock, which could negatively impact its ability to raise equity financing; decreasing the amount of news and analyst coverage of the Company; and limiting the Company’s ability to issue additional securities or obtain additional financing in the future. In addition, delisting from the NYSE might negatively impact the Company’s reputation and, as a consequence, its business, operating results, cash flows, financial condition or securities.
An active market for the Company’s common stock may not continue to exist or may not continue to exist at current trading levels.
Trading volume for the Company’s common stock historically has been very volatile when compared to companies with larger market capitalization. The Company cannot presume that an active trading market for the Company’s common stock will continue or be sustained. Sales of a significant number of shares of the Company’s common stock in the public market could lower the market price of the Company’s stock.
If securities or industry analysts do not publish research or reports about the Company’s business or publish negative reports, the Company’s securities prices and trading volumes could decline and affect the price at which investors could sell securities.
The trading market for the Company’s securities may be affected by the research and reports that industry or securities analysts publish about the Company or its business. The Company does not have any control over these analysts. If analysts do not cover the Company on a regular basis or if one or more analysts cease coverage of the Company or fail to regularly publish reports about the Company, the Company could lose visibility in the financial markets, which in turn could cause the Company’s securities prices or trading volumes to decline. If one or more of such analysts publish negative reports about the Company, the Company’s securities prices would likely decline. These occurrences could affect the price investors could receive from the sale of the Company’s securities.
The Company has no plans to pay dividends on the Company’s common stock, and, therefore, investors will have to look to stock appreciation for return on investments.
The Company does not anticipate paying any cash dividends on the Company’s common stock within the foreseeable future. Any payment of future dividends will be at the discretion of the Company’s board of directors and will depend, among other things, on the Company’s earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations deemed relevant by the board of directors. Investors must rely on sales of common stock held after price appreciation, which may never occur, in order to realize a return on their investment. The lack of plans for dividends may make the common stock of the Company an unattractive investment for investors who are seeking dividends.
Certain anti-takeover provisions of the Company’s certificate of incorporation and applicable Delaware law could discourage or prevent others from acquiring the Company, which may adversely affect the market price of the Company’s common stock.
The Company’s certificate of incorporation and bylaws contain provisions that, among other things:
•permit the Company to issue, without stockholder approval, shares of preferred stock, in one or more series and, with respect to each series, to fix the designation, powers, preferences, and rights of the shares of the series;
•prohibit stockholders from calling special meetings;
•limit the ability of stockholders to act by written consent;
•prohibit cumulative voting; and
•require advance notice for stockholder proposals and nominations for election to the board of directors to be acted upon at meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more than 15% of the Company’s voting stock without the approval of the board of directors. Aforementioned provisions and other similar provisions make it more difficult for a third party to acquire the Company exclusive of negotiation. The Company’s board of directors could choose not to negotiate with an acquirer deemed not beneficial to or synergistic with the Company’s strategic outlook. If an acquirer were discouraged from offering to acquire the Company or prevented from successfully completing a hostile acquisition by these anti-takeover measures, stockholders could lose the opportunity to sell their shares at a favorable price.
Future issuance of additional shares of common stock could cause dilution of ownership interests and adversely affect the Company’s common stock price.
The Company is currently authorized to issue up to 140,000,000 shares of common stock. The Company may, in the future, issue previously authorized and unissued shares of common stock, which would result in the dilution of current stockholders’ ownership interests. Additional shares are subject to issuance through various equity compensation plans or through the exercise of currently outstanding equity awards. The potential issuance of additional shares of common stock may create downward pressure on the trading price of the Company’s common stock. The Company may also issue additional shares of common stock or other securities that are convertible into or exercisable for common stock in order to raise capital or effectuate other business purposes. Future sales of substantial amounts of common stock, or the perception that sales could occur, could have an adverse effect on the price of the Company’s common stock.
The Company may issue a substantial amount of securities in connection with future acquisitions, and the sale of those securities could adversely affect the trading price of our common stock or other securities.
As part of our growth strategy, we may issue additional securities, or securities that have rights, preferences, and privileges senior to our other securities. We may file future shelf registration statements with the SEC that we may use to sell securities from time to time in connection with acquisitions. To the extent that we are able to grow through acquisitions and are able to pay for such acquisitions with shares of our common stock or other securities, the number of outstanding shares of common stock or other securities that will be eligible for sale in the future is likely to increase substantially. Persons receiving shares of our common stock or other securities in connection with these acquisitions may be more likely to sell large quantities of their common stock or other securities, which may influence the price of our common stock or other securities. In addition, the potential issuance of additional shares of common stock or other securities in connection with anticipated acquisitions could lessen demand for our common stock or other securities and result in a lower price than would otherwise be obtained.
The Company may issue shares of preferred stock or debt securities with greater rights than the Company’s common stock.
Subject to the rules of the NYSE, the Company’s certificate of incorporation authorizes the board of directors to issue one or more additional series of preferred stock and to set the terms of the issuance without seeking approval from holders of common stock. Currently, there are 100,000 preferred shares authorized, with no shares currently outstanding. Any preferred stock that is issued may rank senior to common stock in terms of dividends, priority and liquidation premiums, and may have greater voting rights than holders of common stock.
General Risk Factors
If the Company loses the services of key members of management, the Company may not be able to manage operations and implement growth strategies.
The Company depends on the continued service of the Chief Executive Officer and President, the Chief Operating Officer, the Chief Financial Officer and other key members of the executive management team, who possess significant expertise and knowledge of the Company’s business and industry. Furthermore, the Chief Executive Officer and President serves as Chairman of the Board of Directors. The Company has entered into employment agreements with certain of these key members. Any loss or interruption of the services of key members of the Company’s management could significantly reduce the Company’s ability to manage operations effectively and implement strategic business initiatives.
The Company’s tax returns are subject to audit by tax authorities. Taxing authorities may make claims for back taxes, interest and penalties. Changes in U.S. tax legislation may adversely affect our business, results of operations, financial condition and cash flows.
The Company is subject to income, property, excise, employment, and other taxes in the U.S. and a variety of other jurisdictions around the world. Tax rules and regulations in the U.S. and around the world are complex and subject to interpretation. From time to time, taxing authorities conduct audits of the Company’s tax filings and may make claims for increased taxes and, in some cases, assess interest and penalties. The assessments for back taxes, interest, and penalties could be significant. If the Company is unsuccessful in contesting these claims, the resulting payments could result in a drain on the Company’s capital resources and liquidity. In addition, there may be material adverse effects resulting from new or future U.S. tax reforms that have not been identified and that could have an adverse effect on the Company’s business, results of operations, financial condition and cash flows.
Disclaimer of Obligation to Update
Except as required by applicable law or regulation, the Company assumes no obligation (and specifically disclaims any such obligation) to update these risk factors or any other forward-looking statement contained in this Annual Report to reflect actual results, changes in assumptions, or other factors affecting such forward-looking statements.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
As of December 31, 2021, the Company operates two manufacturing, warehouse and research facilities in the U.S. Internationally, the Company has a warehouse and research facility in Calgary, Alberta, Canada and a warehouse in Dubai, United Arab Emirates. The Company also has sales offices in Dubai, United Arab Emirates and Calgary, Alberta, Canada. The Company owns four of these facilities and the remainder are leased with lease terms that expire from 2022 through 2030. In addition, the Company’s corporate office is a leased facility located in Houston, Texas. The following table sets forth facility locations:
| | | | | | | | |
| Segment | Owned/Leased | Location |
| Chemistry Technologies | Owned | Marlow, Oklahoma |
| Chemistry Technologies | Owned | Monahans, Texas |
| Chemistry Technologies | Owned | Raceland, Louisiana |
| Chemistry Technologies | Owned | Waller, Texas |
| Chemistry Technologies | Leased | Dubai, United Arab Emirates |
| Chemistry Technologies | Leased | Calgary, Alberta |
| Chemistry Technologies | Leased | Raceland, Louisiana |
| Chemistry Technologies | Leased | Houston, Texas |
| Data Analytics | Leased | Austin, Texas |
In the third quarter of 2021, the Company committed to plans to sell its warehouse facility in Monahans, Texas and its manufacturing facility in Waller, Texas, and subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $4.2 million, which is expected to close in April 2022.
Item 3. Legal Proceeding
Litigation
On March 26, 2021, the Company and Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the
Company, filed a lawsuit against Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company, LLC (“FCC”) and other parties in state court in Harris County, Texas. The lawsuit claims damages relating to the terpene supply agreement between Flotek Chemistry and FCC and related breaches of fiduciary duty. Contemporaneously with the filing of the suit, Flotek Chemistry delivered a notice of termination of the terpene supply agreement.
Subsequent to the lawsuit described above, on April 5, 2021, ADM and FCC filed a lawsuit in the Delaware Court of Chancery seeking to enjoin the lawsuit filed in Texas and claiming damages under the terpene supply agreement and other matters. On October 29, 2021, the Company and Flotek Chemistry reached agreement with all parties resolving all claims between the parties. On or before January 3, 2022, Flotek will pay to ADM a one-time payment of $1.75 million and the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5 million pounds of terpene through 2023.
In 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to review the findings of the investigation. After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.
Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be predicted.
The Company is subject to other routine litigation and other claims that arise in the normal course of business. Except as disclosed above, 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.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock began trading on the NYSE on December 27, 2007, under the stock ticker symbol “FTK.” As of the close of business on March 28, 2022, there were approximately 9,980 holders of record. The Company’s closing sale price of the common stock on the NYSE on March 30, 2022 was $1.33. The Company has never declared or paid cash dividends on common stock. While the Company regularly assesses the dividend policy, the Company has no current plans to declare dividends on its common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity compensation plan information relating to equity securities authorized for issuance under individual compensation agreements at December 31, 2021, is as follows:
| | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1) | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights(2) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) |
| | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | | 6,401,581 | | | $ | 1.17 | | | 4,241,722 | |
| | | | | | |
| | | | | | |
(1) Includes shares for outstanding stock options (3,821,875 shares), restricted stock awards (1,809,636 shares), and restricted stock unit share equivalents (770,070 shares).
(2) The weighted-average exercise price is for outstanding stock options only and does not include outstanding restricted stock awards. restricted stock unit equivalents, and rights that have no exercise price.
Unregistered Sales of Equity Securities
None
Issuer Purchases of Equity Securities
The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock. Repurchases of the Company’s equity securities during the three months ended December 31, 2021, that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:
| | | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| October 1, 2021 to October 31, 2021 | 1,624 | | | $1.26 | | | | |
| November 1, 2021 to November 30, 2021 | 1,015 | | | $0.82 | | | | |
| December 1, 2021 to December 31, 2021 | 34,171 | | | $0.70 | | | | |
| Total | 36,810 | | | $0.73 | | | | |
(1) The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares and exercise of non-qualified stock options and (b) to satisfy payments required for common stock upon the exercise of stock options.
Item 6. [Reserved]
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Executive Summary
Flotek Industries, Inc. (“Flotek” or the “Company”) creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial, commercial, and consumer markets improve their ESG performance. The Company serves specialty chemistry needs for both domestic and international energy markets as well as applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation advanced laboratory capabilities.
The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and supplying professional chemistries that clean surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. These real-time data and analytics prevent waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance. During the second quarter of 2020, the Company acquired 100% ownership of JP3 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, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.
Company Overview
Chemistry Technologies
The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.
Customers of the CT segment include those of energy related markets as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, NGLs, natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
Customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations has the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We have developed a new line of Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions.
Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, FDA and EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.
Outlook
Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry and weather volatility. We have based our outlook on the market and weather conditions we perceive today. Changes often occur.
Energy
We expect North American and International onshore activity to continue to improve throughout 2022 from fourth quarter 2021 levels for the next twelve months provided that commodity prices remain at or above current levels. The strongest potential growth throughout 2022 will likely comes from private, rather than publicly traded exploration and production companies. Private exploration and production companies operate the majority of U.S. land rigs and react quickly to changing commodity prices. In the current commodity price environment, we expect the private companies to increase activity and publicly traded companies to have modest spending increases in the year ahead. Additionally, we have reestablished our ability to sell product through other service companies and believe sales through indirect channels should accelerate in 2022.
Industrial
In 2020, the Company launched a diversified line of EPA and FDA compliant products that target industrial, agricultural and consumer markets with particular focus on customers that are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s product line includes adjuvants, disinfectants, surface cleaners, degreasers, solvents and a multitude of proprietary chemistries for industrial, commercial and consumer use. The Company believes these adjacent markets provide an opportunity to diversify and expand the Company’s portfolio of chemistry solutions to meet the growing demand. We have signed four manufacturing sales representation groups with 150+ sales personnel covering 48 states. We will be training and educating their representatives during the next two quarters. The leverage sales effort is anticipated to accelerate sales in the second half of 2022.
Digital Analytics
The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. Verax has gained a foothold in NA markets for critical applications where compositional information is needed in real-time. The technology delivers real-time insight on valuable operations data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We continue to work with our customers to identify further facilities and applications where our technology has the highest value. We expect to open and establish our international customer base with our new generation of internationally certified online analyzers. The new analyzers are specifically designed to withstand routine exposure to extreme outdoor environments, ambient temperatures up to 55°C/131°F and sandstorm pollution common to important international environments. We anticipate international sales to increase over the next twelve months because of the newly certified equipment. To drive recurring revenue, we continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations. AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in a liquids pipeline without the need for additional sampling or chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect interfaces within 60 seconds. This allows operators to cut batches quickly and accurately, reduce transmix and minimize off-spec product that requires downgrades.
ESG
ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on sustainability and minimized impact on the environment. The Company’s products and services offer a significant benefit to businesses seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene and xylene) chemicals. Benzene is a carcinogenic chemical that can cause acute physical damage, chronic blood disorders, reproductive disorders, leukemia and when exposed to the atmosphere, benzene creates smog, which can be carried to the ground through rain and contaminates water bodies and soil. Additionally, the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste and processing and reduce emissions.
The Company believes the industry focus on maintaining a “social license to operate” provides the platform to accelerate the adoption of our greener practices and chemistries. We believe the performance-driven ESG focus of the Company assists in reducing environmental liabilities and improving returns for our customers.
Supply Chain
During 2020 and 2021 challenging supply chain issues emerged that “will continue into 2022” according to Secretary of Transportation Peter Buttigieg. The anticipated activity increases will strain supply chains generally. The principal supply issues facing our industry for the next twelve months will include:
•Rising Freight Costs;
•Delays due to Port Congestion;
•Labor Shortages and
•Demand Forecasting.
All bidding will require the risk of shipping costs and delays be factored into proposals. Trucking availability and pricing will impact North American opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could also result in supply disruption.
Weather
During 2021, Hurricane Ida and other weather related events caused significant disruptions to the energy industry in the US. The Company was able to maintain consistent operations throughout the year and provide support to our partners in Louisiana and surrounding areas during Hurricane Ida. The Company’s operations, as well as those of our primary customer base, are periodically subjected to potential weather related disruptions. The Company monitors and carefully evaluates guidance from authoritative sources including the National Weather Service and other agencies. We currently do not anticipate weather related events to have a material impact on first quarter results.
COVID-19
The impacts of COVID-19 continue to affect the U.S. and global economy. The protocols and processes established to maintain business continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The resumption of travel while often onerous has begun to accelerate and in person customer visits that began in earnest during the third quarter will continue to accelerate.
Consolidated Results of Operations (in thousands)
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| | | | | | Years ended December 31, |
| | | | | | | | | 2021 | | 2020 |
| Revenue | | | | | | | | | | |
| Revenue from external customers | | | | | | | | $ | 39,627 | | | $ | 53,141 | |
| Revenue from related party | | | | | | | | 3,641 | | | — | |
| Total revenues | | | | | | | | 43,268 | | | 53,141 | |
| Cost of goods sold | | | | | | | | 40,012 | | | 81,814 | |
| Cost of good sold % | | | | | | | | 92.5 | % | | 154.0 | % |
| Gross profit (loss) | | | | | | | | 3,256 | | | (28,673) | |
| Gross profit (loss) % | | | | | | | | 7.5 | % | | (54.0) | % |
| Selling general and administrative | | | | | | | | 20,166 | | | 22,763 | |
| Selling general and administrative % | | | | | | | | 46.6 | % | | 42.8 | % |
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| Depreciation and amortization | | | | | | | | 1,011 | | | 3,412 | |
| Research and development | | | | | | | | 5,537 | | | 7,213 | |
| Gain on disposal of property and equipment | | | | | | | | (94) | | | (94) | |
| Impairment of goodwill | | | | | | | | 8,092 | | | 11,706 | |
| Impairment of property and equipment and intangible assets | | | | | | | | — | | | 69,975 | |
| | | | | | | | | | |
| Loss from operations | | | | | | | | (31,456) | | | (143,648) | |
| Operating margin % | | | | | | | | (72.7) | % | | (270.3) | % |
| PPP loan forgiveness | | | | | | | | 881 | | | — | |
| Gain on lease termination | | | | | | | | — | | | 576 | |
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| Interest and other income, net | | | | | | | | 9 | | | 443 | |
| Loss before income taxes | | | | | | | | (30,566) | | | (142,629) | |
| Income tax benefit | | | | | | | | 40 | | | 6,179 | |
| Net Loss | | | | | | | | $ | (30,526) | | | $ | (136,450) | |
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| Net loss % | | | | | | | | (70.6) | % | | (256.8) | % |
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Consolidated revenue for the year ended December 31, 2021, decreased $9.9 million, or 18.6%, versus the same period of 2020. Revenue during the year ended December 31, 2021 reflected a loss of revenue in the CT segment associated with two major customers changing ownership during 2021, losses related to the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales. Current year revenue decreases were partially offset by the incremental post acquisition JP3 revenues generated in the second, third, and fourth quarter of 2021.
Consolidated cost of goods sold for the year ended December 31, 2021, decreased $41.8 million, or 51.1% versus the same period of 2020. In 2020 cost of goods sold included $11.7 million purchase commitment and excess terpene reserve of which $7.6 million was reversed in 2021. This resulted in a $19.3 million decrease year on year. Additionally, both segments had non-recurring product rationalization expenses in 2020 of an aggregate $9.6 million. In 2021, the decline in revenues in addition to cost reduction initiatives including reducing personnel and facility costs also contributed to the year on year decrease.
Selling general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided. SG&A expenses for the year ended December 31, 2021, decreased $2.6 million, or 11.4%, versus the same period of 2020. SG&A expenses decreased as a result of a reduction in compensation costs including severance partially offset by an increase in non-recurring legal related costs related to litigation and investigations.
Depreciation and amortization expense decreased $2.4 million, or 70.4% for the year ended December 31, 2021, versus the same period of 2020, primarily due to impairments of property and equipment and other intangible assets recorded during the year ended December 31, 2020.
Research and development (“R&D”) costs decreased $1.7 million, or 23.2% for the year ended December 31, 2021, versus the same period of 2020 due to lower personnel costs as a result of our reduction in workforce from 2020 to 2021.
Loss from operations improved by $112.2 million, or 78.1% for the year ended December 31, 2021, versus the same periods in 2020. The loss from operations improvement is primarily a result of the improvement to gross loss and reductions of expenses for SG&A, depreciation and amortization and R&D described above, and the impairment expenses of $81.7 million recorded during the year ended December 31, 2020 compared to impairment expenses of $8.1 million for the year ended December 31, 2021.
Loss before income taxes for the year ended December 31, 2021, was also impacted by an $0.9 million gain from the forgiveness of the JP3 Paycheck Protection Program (“PPP”) loan, and for the year ended December 31, 2020 by a $0.6 million gain from lease termination.
The Company’s income tax benefit for the year ended December 31, 2021 was minimal. The Company recorded an income tax benefit of $6.2 million in 2020, primarily as a result of the extended net operating loss carryback provisions included in the CARES Act.
Results by Segment (in thousands):
Chemistry Technologies Results of Operations:
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| Years ended December 31 | | | | |
| 2021 | | 2020 | | | | |
| Revenue | $ | 38,929 | | | $ | 50,310 | | | | | |
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| | | | | | | |
| Loss from operations | (5,466) | | | (88,486) | | | | | |
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CT revenue for the year ended December 31, 2021, decreased $11.4 million compared to 2020. The decrease in revenue during 2021 compared to 2020 was driven by impacts from industry consolidation and international activity. While the pandemic continued to weigh on economic activity in 2021, global supply chain management companies. and demand has steadily normalized through the second half of 2021. Revenue from two major customers was reduced temporarily as a result of market consolidation in the Permian basin in addition the normalization and decline of market demand for sanitizers and non-recurring citrus terpenes sales. Additionally, international activity, primarily in the Middle East, decreased year over year. CT also granted price concessions in our effort to maintain and obtain market share.
Loss from operations for the CT segment for the year ended December 31, 2021, improved $83.0 million, or 93.9% compared to 2020. The improvement in loss from operations is due to significantly lower expenses, primarily the result of impairment charges of property and equipment of $54.7 million in 2020. Secondly, expenses during 2020 included an $11.7 million charge to reserve for terpene purchase commitment losses, while expenses during 2021 were reduced by a $7.6 million gain as a result of reaching a settlement agreement for terpene purchase commitment. Certain cost reduction initiatives to optimize our cost structure contributed to the current decrease in operating losses by reducing personnel, office costs, equipment and facilities costs as the Company continues to consolidate its physical facilities and equipment rentals to align with activity.
Data Analytics Results of Operations:
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| Years ended December 31, | | | | | | | | | | |
| 2021 | | 2020 | | | | | | | | | | |
| Revenue | $ | 4,339 | | | $ | 2,831 | | | | | | | | | | | |
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| Loss from operations | (12,168) | | | (36,407) | | | | | | | | | | | |
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On May 18, 2020, the Company purchased JP3 and formed the DA segment. DA revenue for the year ended December 31, 2021, increased $1.5 million compared to revenue for 2020, which was only the post-acquisition partial period revenues between May 18, 2020 to December 31, 2020. Loss from operations for the DA segment for the year ended December 31, 2021 improved $24.2 million or 66.6% compared to 2020. The improvement in loss from operations is primarily the result of impairment charges of property and equipment, other intangible assets and goodwill of $24.2 million in 2020 compared to a goodwill impairment charge of $8.1 million in 2021. Additionally, operating expenses in 2020 were impacted by $3.9 million related to product rationalization and also by the change in fair value of the contingent consideration for the JP3 acquisition. A portion of the stock performance earn-out provision was triggered in 2020 resulting in $2.7 million of charges to cost of goods
sold in 2020, while the revaluations of the contingent consideration in 2021 resulted in reductions to cost of goods sold of $0.8 million. Operating margins in 2021 were positively impacted by increased revenue and margins.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and funding working capital requirements. During 2021, the Company funded capital requirements primarily with cash on hand.
As of December 31, 2021, the Company had available cash and cash equivalents of $11.5 million, as compared to $38.7 million at December 31, 2020. During the year ended December 31, 2021, the Company had an operating loss of $31.5 million, $25.8 million of cash used for operating activities and $0.4 million of cash used for financing activities. Cash provided by investing activities was minimal.
Liquidity
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to debt and equity financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. Uncertainty surrounding the long- term stability and strength of the oil and gas markets, or reduced spending by our customers could have a further negative impact on our liquidity
On February 2, 2022, the Company completed a Private Investment in Public Equity (PIPE) transaction with a consortium of investors, including with related parties, through the issuance of $21.2 million aggregate of convertible notes that resulted in net cash proceeds of approximately $19.5 million. Also, on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) upon issuance of $10 million of convertible notes. Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. If minimum volumes are not achieved, the Company receives 25% of the difference between (i) the aggregate Purchase Price of the quantity of Products comprising the Minimum Purchase Obligation during such calendar year. The term of the ProFrac Agreement is three years starting on April 1, 2022.
The Company also served customers who purchase non-energy-related citrus oilcommitted to plans to sell its warehouse facility in Monahhans, Texas and related products,its manufacturing facility in Waller, Texas. These facilities were classified as held for sale as of December 31, 2021. Subsequent to December 31, 2021, the Company executed a contract to sell its Waller facility for $4.2 million of cash proceeds. The sale is expected to close in April 2022.
Based on our cash and liquid assets, including householdthe transactions subsequent to year end described above and commercial cleaning product companies, fragrancein Note 22 Subsequent Events, we believe that our cash and cosmetic companies,liquid assets will provide us with sufficient financial resources to fund operations and food manufacturing companies,meet our capital requirements and anticipated obligations as they become due. However the Company cannot guarantee a sufficient level of cash flows in the segment reported as discontinued operations atfuture.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2021 | | 2020 |
| Net cash used in operating activities | $ | (25,840) | | | $ | (47,838) | |
| Net cash provided by (used in) investing activities | 112 | | | (17,701) | |
| Net cash (used in) provided by financing activities | (372) | | | 3,727 | |
| | | |
| | | |
| Effect of changes in exchange rates on cash and cash equivalents | 100 | | | (102) | |
| Net change in cash, cash equivalents and restricted cash | $ | (26,000) | | | $ | (61,914) | |
Operating Activities
Net cash used in operating activities was $25.8 million and $47.8 million during the year ended December 31, 2018.2021 and 2020, respectively. Consolidated net loss for the year ended December 31, 2021 and 2020, were $30.6 million and $136.5 million, respectively.
FlotekDuring the year ended December 31, 2021, non-cash adjustments to net income totaled $4.2 million as compared to $112.8 million for the same period of 2020.
•For the year ended December 31, 2021, non-cash adjustments included a $7.6 million benefit related to the ADM settlement and $8.1 million of impairment charges. The non-cash adjustment for the provision of excess and obsolete inventory was initially incorporated under$0.6 million and depreciation was $1.0 million. Other non-cash adjustments included stock based compensation of $3.8 million, JP3 PPP loan forgiveness of $0.9 million and $0.8 million related to the lawschange in fair value of contingent consideration.
•For the year ended December 31, 2020, contributory non-cash adjustments consisted primarily of $81.7 million of impairment charges, $9.4 million of inventory purchase commitment reserve charges, $12.3 million for the provision of excess and obsolete inventory, $3.0 million for stock compensation expense, $3.4 million for depreciation and amortization and $2.7 million related to the change in fair value consideration.
During the year ended December 31, 2021, changes in working capital provided $0.5 million of cash as compared to using $24.2 million for the same period of 2020.
•For the year ended December 31, 2021, changes in working capital resulted primarily from increases in accounts receivable and other current assets of $2.0 million and accounts payable of $1.8 million. This has been offset by decreases in inventories and income taxes receivable of $2.1 million and accrued liabilities of $1.4 million.
•For the year ended December 31, 2020 the use of working capital primarily resulted from a reduction in accrued liabilities and accounts payable of $33.0 million, which included two one-time payments made in 2020: one payment of $15.8 million to amend a long-term supply agreement and one to pay $4.1 million for the final post-closing working capital adjustment related to the 2019 sale of the ProvinceCICT segment. Decreases in accounts receivable, inventories and other current assets provided cash of British Columbia on May 17, 1985. On October 23, 2001, Flotek changed its corporate domicile$8.5 million.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2021 was negligible. Net cash used in investing activities was $17.7 million for the year ended December 31, 2020. Cash used in investing activities included $26.3 million from purchase of JP3 offset by cash provided of $9.9 million due to the staterelease of Delaware.
