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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K/A
    Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended
December 31, 2019
 
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to
 
Commission File Number
1-13270
 
FLOTEKA22.JPG
FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware
 
90-0023731
(State of other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
10603 W. Sam Houston Parkway N.
Suite 300
Houston,
TX
77064
(Address of principal executive offices)
(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
FTK
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark:
•      if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 
•      if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 
•      whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
•      whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 
•      whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
•      whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2019 (based on the closing market price on the NYSE Composite Tape on June 28, 2019) was approximately $150,815,000. At March 3, 2020, there were 63,275,372 outstanding shares of the registrant’s common stock, $0.0001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of the Annual Report on Form 10-K is incorporated by reference to the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A for the registrant’s 2020 Annual Meeting of Stockholders.
 



EXPLANATORY NOTE

This Amendment No. 1 (this “Amendment”) to the Annual Report on Form 10-K of Flotek Industries, Inc. (the “Company”) for the year ended December 31, 2019 (the “2019 Form 10-K”) is being filed for the purpose of correcting certain errors in the Exhibit Index under Part IV, Item 15 “Exhibits, Financial Statement Schedules” of the 2019 Form 10-K together with each of the exhibits filed as part of the 2019 Form 10-K, each of which has been amended and restated in its entirety. No revisions are being made to the Company’s financial statements, and this Amendment does not reflect events occurring after the filing of the 2019 Form 10-K, or modify or update those disclosures that may be affected by subsequent events, and no other changes are being made to any other disclosure contained in the Form 10-K.




TABLE OF CONTENTS
 
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FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K (this “Annual Report”), and in particular, Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent the Company’s current assumptions and beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside the Company’s control. The forward-looking statements contained in this Annual Report are based on information available as of the date of this Annual Report. The forward looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words such as “anticipate,” “believe,” “estimate,” “continue,” “intend,”
 
“expect,” “plan,” “forecast,” “project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could” and “would,” or the negative thereof or other variations thereon or comparable terminology. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied. A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements include, but are not limited to, those discussed in Part I, Item 1A – “Risk Factors” of this Annual Report and periodically in future reports filed with the Securities and Exchange Commission (the “SEC”).
The Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
 

ii


PART I
Item 1. Business.
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, technology-driven company that develops and supplies chemistry and services to the oil and gas industries. Flotek also supplied high-value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets, which became classified as discontinued operations at December 31, 2018.
The Company was originally incorporated in the Province of British Columbia on May 17, 1985. In October 2001, the Company moved the corporate domicile to Delaware and effected a 120 to 1 reverse stock split by way of a reverse merger with CESI Chemical, Inc. Since then, the Company has grown organically and through a series of acquisitions.
In December 2007, the Company’s common stock began trading on the New York Stock Exchange (“NYSE”) under the stock ticker symbol “FTK.” Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are posted to the Company’s website, www.flotekind.com, as soon as practicable subsequent to electronically filing or furnishing to the SEC. Information contained in the Company’s website is not to be considered as part of any regulatory filing. As used herein, “Flotek,” the “Company,” “we,” “our,” and “us” refers to Flotek Industries, Inc. and/or the Company’s wholly owned subsidiaries. The use of these terms is not intended to connote any particular corporate status or relationship.
Recent Developments
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry Technologies, (“CICT”) segment, which was completed in the first quarter of 2019. An investment banking advisory services firm was engaged and actively marketed this segment. Effective December 31, 2018, the Company classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry and effective December 31, 2016 classified the Drilling Technologies and Production Technology segments into discontinuing operations. During 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.

 
Description of Operations and Segments
The Company’s continuing operations have one strategic business segment: Energy Chemistry Technologies (“ECT”). The CICT segment was sold in 2019, and the Drilling Technologies, and Production Technologies segments were sold in 2017 and all three are classified as discontinued operations.
The Company offers competitive products and services derived from technological advances, some of which are patented, and experience in fluid systems applications that are responsive to industry demands in both domestic and international markets. Flotek operates and/or distributes its products in seven domestic and international markets.
Financial information about operating segments and geographic concentration is provided in Note 17 – “Business Segment, Geographic and Major Customer Information” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.
Information about the Company’s operating segment is below.
Energy Chemistry Technologies
The ECT segment designs, develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation, and stimulation activities designed to maximize recovery in both new and mature fields. Flotek’s specialty chemistries possess enhanced performance characteristics and are manufactured to perform in a broad range of basins and reservoirs with varying downhole pressures, temperatures and other well-specific conditions customized to customer specifications. This segment has a research and innovation laboratory and technical services laboratories that focus on design improvements, development and viability testing of new chemistry formulations, and continued enhancement of existing products. Flotek’s flagship patented chemistry technologies include Complex nano-Fluid® (“CnF® products”), Pressure reducing Fluids®, and MicroSolv™.
Chemistries branded as Complex nano-Fluid® technologies are patented both domestically and internationally and are performance additives within both oil and natural gas markets. The CnF® product mixtures are stable mixtures of plant derived oils, water, and surface active agents which organize molecules into nano structures. The combined advantage of solvents, surface active agents and water, and the resultant nano structures, improve well treatment results as compared to the independent use of solvents and surface active agents. CnF® products are composed of renewable, plant-derived ingredients and oils that are certified as biodegradable. CnF® chemistries help achieve improved operational and financial

1


results for the Company’s customers in low permeability sand and shale reservoirs.
Chemistries branded as Pressure reducing Fluids® technologies (“PrF® products”) are a patented line of high molecular weight polymers used as friction reducers that reduce turbulence and maximize the use of the polymer at a lower loading rate. The products have proven efficacy in a broad range of water quality, including high brine and high iron environments.
Introduced in April 2018, chemistries branded as MicroSolv™ are a patented line of microemulsion technologies designed to deliver cost-effective performance.
Discontinued Operations
Consumer and Industrial Chemistry Technologies. The CICT segment, reported as discontinued operations, sourced citrus oil domestically and internationally and processed citrus oils. Products produced from processed citrus oil include (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in the oil & gas industry and numerous other industries around the world. The CICT segment designed, developed, and manufactured products that were sold to companies in the flavor and fragrance industries and specialty chemical industry. These technologies were used within food and beverage, fragrance, and household and industrial cleaning products industries.
Drilling Technologies. The Drilling Technologies segment provided downhole drilling tools for use in energy and mining activities. This segment assembled, rented, sold, inspected, and marketed specialized equipment used in energy, mining, and industrial drilling activities. Established tool rental operations were located throughout the United States (the “U.S.”) and in a number of international markets.
Production Technologies. The Production Technologies segment provided pumping system components, electric submersible pumps (“ESPs”), gas separators, production valves, and complementary services. Through the Company’s acquisition of International Artificial Lift, LLC, the Company provided a line of next generation hydraulic pumping units that served to increase and maximize production for oil and natural gas wells.
Seasonality
Overall, operations are not significantly affected by seasonality; however, winter 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 operations and financial position. The performance of certain services within the Company’s remaining ECT segment 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, and commodity prices;
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 adverse weather and disease that affect citrus crops in Florida and Brazil which can negatively impact the availability of citrus oils and increase raw material costs for the ECT segment.
Product Demand and Marketing
Demand for the Company’s energy chemistry products and services is dependent on levels of conventional and non-conventional oil and natural gas well drilling and completion activity, both domestically and internationally. Products in the ECT segment are marketed directly to customers through the Company’s own sales force and through certain contractual agency arrangements. Established customer relationships provide repeat sales opportunities. The Company participates in industry trade shows and publishes technical papers and case studies examining the performance of its chemistries and methodologies for evaluating chemistries more effectively. While the Company’s primary marketing efforts remain focused in North America, a growing amount of resources and effort are focused on emerging international markets, especially in the Middle East and North Africa (“MENA”) and South America. 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.
Customers
The Company’s customers primarily include major integrated oil and natural gas companies, oilfield service companies, independent oil and natural gas companies, pressure pumping service companies, and national and state-owned oil companies. Within the ECT segment, the Company had two major customers for the year ended December 31, 2019, which accounted for 20% and 10%, respectively, of consolidated revenue, two major customers for the year ended December 31, 2018, which accounted for 12% and 10%, respectively, of consolidated revenue, and one major customer for the year ended December 31, 2017, which accounted for 17% of consolidated revenue. In aggregate, the Company’s largest three customers collectively accounted for 40%, 30%, and 32% of consolidated revenue for the years ended December 31, 2019, 2018, and 2017, respectively.

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Research and Innovation
The Company is engaged in research and innovation activities focused on the design of reservoir specific, customized chemistries in the ECT segment. In this segment, for the years ended December 31, 2019, 2018, and 2017, the Company incurred $8.9 million, $10.4 million, and $13.1 million, respectively, of research and innovation expense. In 2019, research and innovation expense was approximately 7.4% of consolidated revenue. The Company expects that its 2020 research and innovation investment will continue to remain a significant portion of overall spending to support new product development and customization initiatives for its clients.
Backlog
Due to the nature of the Company’s contractual customer relationships and the way they operate, the Company has historically not had significant backlog order activity.
Intellectual Property

The Company’s policy is 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, trade secrets, proprietary designs, and manufacturing and operational expertise, are necessary and appropriate to protect its intellectual property and ensure continued strategic advantage. Within its continuing operations, the Company has 82 granted patents and approximately 50 pending patent applications filed in the U.S. and abroad, covering various chemical compositions and methods of use. In addition, within its continuing operations, the Company has 60 registered trademarks in the U.S. and abroad, covering a variety of its goods and services.
Competition
The ability to compete in the oilfield services industry is dependent upon the Company’s ability to differentiate its products and services, provide superior quality and service, and maintain a competitive cost structure with sufficient raw material supplies. Activity levels in the oil field goods and services industry are impacted by current and expected oil and natural gas prices, oil and natural gas drilling activity, production levels, and customer drilling and completion designated capital spending. Domestic and international regions in which Flotek operates are highly competitive. 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.
 
Certain oil and natural gas service companies competing with the Company are larger and have access to more resources. Such competitors could be better situated to withstand industry downturns, compete on the basis of price, and acquire and develop new equipment and technologies, all of which could affect the Company’s revenue and profitability. Oil and natural gas service companies also compete for customers and strategic business opportunities. Thus, competition could have a detrimental impact on the Company’s business.
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 energy, citrus, and other commodity price fluctuations, tariffs, duties on imported materials, foreign currency exchange rates, business cycle position, and global demand. Higher prices for chemistries, citrus, polymers, and other raw materials could adversely impact future sales and contract fulfillments.
Citrus-based terpene (d-limonene) is an important feedstock for many of the Company’s formulations. In addition, the Company utilizes naturally derived terpenes from other sources and bio-based solvents from other natural sources.
The Company is diligent in its efforts to identify alternate suppliers in its contingency planning for potential supply shortages and in its proactive efforts to reduce costs through competitive bidding practices.
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 and is unaware of any material instances of noncompliance.
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 ECT and discontinued CICT segments 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, to remediate any contamination. No environmental claims are currently being litigated, 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.

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Employees
At December 31, 2019, the Company had 174 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 positive. Certain international locations have staffing or work arrangements that are contingent upon local work councils or other regulatory approvals.
Available Information and Website
The Company’s website is accessible at 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 Annual Chief Executive Officer Certification required by the NYSE was submitted on June 21, 2019. The certification was not qualified in any respect. Additionally, the Company has filed 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 2020 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.

Item 1A. Risk Factors.
The Company’s business, financial condition, results of operations, and cash flows are subject to various risks and uncertainties. Readers of this report should not consider any descriptions of these risk factors to be a complete set of all potential risks that could affect Flotek. These factors should be carefully considered together with the other information contained in this 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, or liquidity.
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 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 domestic and international oil and natural gas industry spending.
 
Spending could be adversely affected by industry conditions or by new or increased governmental regulations, global economic conditions, the availability of credit, and lower oil and natural gas prices. All of these factors are beyond the Company’s control. The resulting reductions in customers’ expenditures could have a significant adverse effect on Company revenue, margins, and overall operating results.
The Company’s ECT segment is dependent upon customers’ willingness to make operating and capital expenditures for exploration, development and production of oil and natural gas in both North American and global markets. Customers’ expectations of a decline in future oil and natural gas market prices could result in curtailed spending, thereby reducing demand for the Company’s products and services. Industry conditions are influenced by numerous factors over which the Company has no control, including the supply of and demand for oil and natural gas, domestic and international economic conditions, political instability in oil and natural gas producing countries and merger and divestiture activity among oil and natural gas producers and service companies.
The price for oil and natural gas is 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 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;

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availability and quantity of natural gas storage;
import and export volumes and pricing of liquefied natural gas;
pipeline capacity to critical markets and out of producing regions;
political and economic uncertainty and socio-political unrest;
cost of exploration, production and transport of oil and natural gas;
technological advances impacting energy production and consumption; and
weather conditions.
The volatility of oil and natural gas prices and the consequential effect on exploration and production activity could adversely impact the activity levels of the Company’s customers.
Volatile economic conditions could weaken customer exploration and production expenditures, causing reduced demand for the Company’s products and services and a significant adverse effect on the Company’s operating results. 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, 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 Company’s reliance on unconventional oil production could lessen the positive effects of a general recovery of the oil and gas industry.
The majority of the Company’s current product offerings are used in unconventional oil and gas plays. 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 plays, 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 oil and natural gas industry is characterized by technological advancements that have historically resulted in, and will likely continue to result in, substantial improvements in the scope and quality of oilfield chemistries and their function and performance. Consequently, the Company’s future success is dependent, in part, upon the Company’s continued ability to timely develop innovative products and services. Increasingly sophisticated customer needs and the ability to anticipate and respond to technological and operational advances in the oil and natural gas industry is critical. Proving up 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.
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. 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.
If the Company is unable to adequately protect intellectual property rights or is found to infringe upon the intellectual property rights of others, 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 security measures to establish and protect the Company’s intellectual property rights. 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.

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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. If intellectual property infringement claims are asserted against the Company, the Company could defend itself from such assertions or could seek to obtain a license under the third party’s intellectual property rights in order to mitigate exposure. 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.
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.
The Company has critical customer relationships which are dependent upon production and development activity related to a handful of customers. In the continuing operations segment reported, revenue derived from the Company’s three largest customers as a percentage of consolidated revenue for the years ended December 31, 2019, 2018, and 2017, totaled 40%, 30%, and 32%, respectively. Customer relationships are historically governed by purchase orders or other short-term contractual obligations as opposed to long-term contracts. 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 customers could have an adverse effect on the Company’s ability to service customers’ needs and could result in a 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. Acquisition costs and transportation of raw materials to Company facilities have historically been impacted by extreme weather conditions. Certain raw materials used by the ECT segment are available only from limited sources; accordingly, any disruptions to critical suppliers’ operations could adversely impact the Company’s operations. Prices paid for raw materials could be affected by energy products and other commodity prices; weather and disease associated with the Company’s crop dependent raw materials, specifically citrus greening; tariffs and duties on imported materials; foreign currency exchange rates; and phases of the general business cycle and global demand. The ECT segment secures short and long term supply agreements for critical raw materials from both domestic and international vendors.
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 its raw materials may impact prices. The Company may be unable to pass along price increases to its customers, which could result in an adverse impact on margins and operating profits. The Company currently uses purchasing strategies designed, where possible, to align the timing of customer demand with our supply commitments. However, 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 adverse impacts on margins and operating profits.
The Company depends on a single-source supplier for citrus terpene, and the loss of this supplier could significantly harm the Company’s business, financial condition, and results of operations.
Citrus-based terpene (d-limonene) is an important feedstock for many of the Company’s formulations. In February 2019, the Company entered into a terpene Supply Agreement (the “Supply Agreement”) with Flotek’s former subsidiary, Florida Chemical Company, LLC (“FCC”), to serve as the Company’s supplier of terpene. The Company depends on FCC to provide it with terpene in a timely manner that meets its quality, quantity, and cost requirements. FCC may encounter problems that preclude it from supplying terpene on the terms set forth in the Supply Agreement, including with respect to pricing and production volumes. In the event that FCC encounters such problems or otherwise breaches the Supply Agreement, the Company’s inability to contract with alternative sources could result in a prolonged interruption in its ability to produce the Company’s formulations. Any such delays or interruptions

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could ultimately result in a significant increase in the price of the various formulations or a significant reduction in the Company’s margins on these formulations, which could adversely affect the Company’s business, financial condition, and results of operations.
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 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; however, at December 31, 2019, the Company only carried key man life insurance for the Chief Executive Officer and President. 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.
Removal of members of management or directors may be difficult or costly.
The Company’s management, employees and directors 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. Removal of some management and employees by the Company may also be difficult and require negotiations by the Company.
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.
 
Network disruptions, security threats and activity related to global cyber-crime pose risks to the Company’s key operational, reporting and communication systems.
The Company relies on access to information systems for its operations. Failures of, or interference with, access to these systems, such as 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 mitigate the effects of these potential disruptions or breaches. There can be no assurance that existing or emerging threats will not have an adverse impact on our systems or communications networks.
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.
Failure to manage the Company’s costs during the current period of retraction may have a negative effect on the Company’s ability to reach profitability.
The Company has been in a period of rapid retraction, has sold or discontinued all but one operating segment, and is in the process of adjusting costs and expenses to match its new smaller size. If the Company does not manage its costs and expenses properly, it may not be able to reach profitability.
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

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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 market place 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. The Company’s existing shelf registration statement expires in September 2020, and there is no guarantee that the Company will file a new shelf registration statement.
Failure to adapt to changing buying habits at 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 younger and show different buying habits and approaches. Customers are increasingly 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 analyses 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. 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, 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 oil and natural gas industry, such as, but not limited to, accidents, blowouts, 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 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., BTEX), 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

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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.
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 expose the Company to risks of environmental liability that could result in fines, penalties, remediation, property damage, and personal injury liability. In order to remain compliant with laws and regulations, the Company maintains permits, authorizations, registrations, and certificates as required from regulatory authorities. 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 into 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 law and regulation relating to hydraulic fracturing may have a negative effect on the Company’s operations.
Much of the Company’s revenue is derived from customers engaged in hydraulic fracturing services, a process that creates fractures extending from the well bore through the rock formation to enable natural gas or oil to flow more easily
 
through the rock pores to a production well. 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. In addition, several presidential candidates have proposed additional restrictions on hydraulic fracturing. 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 well 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.

9


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 used.
The Company’s international operations must be compliant with the Foreign Corrupt Practices Act (the “FCPA”) 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 tax returns are subject to audit by tax authorities. Taxing authorities may make claims for back taxes, interest, and penalties.
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.
Recent U.S. tax legislation, as well as future U.S. tax legislation, may adversely affect our business, results of operations, financial condition and cash flow.
Comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”), made significant changes to U.S. federal income 2017 tax laws. The 2017 Tax Act, among other things, reduced the corporate income tax rate to 21%, partially limits the deductibility of business interest expense and net operating losses, imposed a one-time tax on unrepatriated earnings from certain foreign subsidiaries, taxes offshore earnings at reduced rates regardless of whether they are repatriated and allows the
 
immediate deduction of certain new investments instead of deductions for depreciation expense over time. The 2017 Tax Act is complex and far-reaching, and the Company continues to evaluate the actual impact of its enactment on the Company. There may be material adverse effects resulting from the 2017 Tax Act that have not been identified and that could have an adverse effect on the Company’s business, results of operations, financial condition and cash flow.
Risks Related to the Company’s Industry
General economic declines (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 the Company’s ECT segment’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 exploration, development, and production activity of, and the corresponding capital spending by, oil and natural gas companies, including national oil companies. One indication of drilling and completion activity and spending is rig count, which the Company monitors to gauge market conditions. In addition, the U.S. Energy Information Administration (“EIA”) and other industry data sources report completion activity which is utilized by the Company. Any prolonged reduction in oil and natural gas prices or drop in rig and/or completion count could depress current levels of exploration, development, and production activity. Perceptions of longer-term lower oil and natural gas prices by oil and natural gas companies could similarly 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 well 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 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

10


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. The Company’s forward-looking statements assume that the Company’s lenders, insurers, and other financial institutions will be able to fulfill their obligations under various credit agreements, insurance policies, and contracts. If any of the Company’s significant lenders, insurers and others are unable to perform under such agreements, and if the Company was unable to find suitable replacements at a reasonable cost, the Company’s results of operations, liquidity, and cash flows could be adversely impacted.
A continuing period of depressed 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 oil and natural gas 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 natural gas prices could adversely affect the Company’s business, financial condition, and results of operations.
New and existing competitors within the Company’s industry could have an adverse effect on results of operations.
The oil and natural gas industry is 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, 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 Company may be adversely affected by the recent coronavirus outbreak.

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. While we do not have any operations in China, our operations could be adversely affected to the extent that coronavirus or any other epidemic harms world economy in general and global demand for oil and gas in particular. Our operations may experience

11


disruptions in the event of a global pandemic or restriction on travel that results from a global pandemic, which may materially and adversely affect our business, financial condition and results of operations. The duration of the business disruption and related financial impact cannot be reasonably estimated at this time but may materially affect our ability to operate our business and result in additional costs. The extent to which the coronavirus or other health epidemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted.
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 due to:
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;
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, financial condition, and results of operations.
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. The Company’s closing stock price on March 3, 2020 was $1.47, and on December 31, 2019, closed at $2.00. 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 the 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.
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 capitalizations. 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.
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 stock of the Company an unattractive investment for investors who are seeking regular yield.
Certain anti-takeover provisions of the Company’s charter documents 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:
permit the Company to issue, without stockholder approval, up to 100,000 shares of preferred stock, in one or more series and, with respect to each series, to

12


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 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 stock price.
The Company is currently authorized to issue up to 80,000,000 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 options. 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 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.
The Company’s ability to use net operating loss carryforwards 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.”
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.
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.


13


Item 2. Properties.
At December 31, 2019, the Company operated five and two manufacturing, warehouse, and research facilities in the U.S. and internationally, respectively. Additionally, the Company has one research facility in Calgary, Alberta, Canada and one warehouse in Dubai, United Arab Emirates. The Company also has sales offices are located in Denver, Colorado, Midland, Texas, Oklahoma City, Oklahoma, and Dubai, United Arab Emirates. The Company owns four of these facilities and the remainder are leased with lease terms that expire from 2020 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
Energy Chemistry
Technologies
Owned
Marlow, Oklahoma
 
Owned
Monahans, Texas
 
Owned
Raceland, Louisiana
 
Owned
Waller, Texas
 
Leased
Dubai, United Arab Emirates
 
Leased
Houston, Texas
 
Leased
Midland, Texas
 
Leased
Oklahoma City, Oklahoma
 
Leased
Raceland, Louisiana
 
Leased
Calgary, Alberta
 
Leased
Denver, Colorado
 
The Company considers owned and leased facilities to be in good condition and suitable for the conduct of business.

Item 3. Legal Proceedings.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not aware of any pending or threatened lawsuits or proceedings
 
that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

Item 4. Mine Safety Disclosures.
Not applicable.


14


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 3, 2020, there were 63,275,372 shares of common stock outstanding held by approximately 7,900 holders of record. The Company’s closing sale price of the common stock on the NYSE on
 
March 3, 2020 was $1.47. 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 and intends, subject to Board approval.

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, 2019 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
 
2,097,494

 
$
1.22

 
3,858,783

Equity compensation plans not approved by security holders
 
4,141,168

 
$
1.33

 

Total
 
6,238,662

 
$
1.29

 
3,858,783

(1)
Includes shares for outstanding stock options (3,000,000 shares), restricted stock awards (1,629,020 shares), restricted stock unit share equivalents (1,038,474 shares), and the right to purchase (572,168 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.


15


Issuer Purchases of Equity Securities
In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common stock. Repurchases may be made in open market or privately negotiated transactions. Through December 31, 2019, the Company has repurchased $25 million of its common stock under this repurchase program.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s common stock. Repurchases may be made in open market or privately negotiated transactions. Through December 31, 2019, the Company has repurchased $0.3 million of its common stock under this authorization and $49.7 million may yet be used to purchase shares.
Repurchases of the Company’s equity securities during the three months ended December 31, 2019 are as follows:
 
 
Total Number
of Shares
Purchased (1)
 
Average Price
Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Value
of Shares that May Yet be
Purchased Under the
Plans or Programs
October 1 to October 31, 2019
 
3,410

 
$
2.09

 

 
$
49,704,947

November 1 to November 30, 2019
 

 
$

 

 
$
49,704,947

December 1 to December 31, 2019
 
16,336

 
$
2.00

 

 
$
49,704,947

Total
 
19,746

 
$
2.02

 

 


(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, (b) to satisfy payments required for common stock upon the exercise of stock options, and (c) as part of a publicly announced repurchase program on the open market.



16


Item 6. Selected Financial Data.
The following table sets forth certain selected historical financial data and should be read in conjunction with Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report. The selected operating and financial position data as of and for each of the five years presented has been derived from audited consolidated Company financial statements, some of which appear elsewhere in this Annual Report. Financial data has been adjusted for discontinued operations, as indicated.
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its CICT segment, which was completed in the first quarter of 2019. An investment banking advisory services firm was engaged and actively marketed this segment.
 
Effective December 31, 2018, the Company classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations.”
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. During 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.



 
As of and for the year ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
 
(in thousands, except per share data)
Operating Data
 
 
 
 
 
 
 
 
 
Revenue (1)
$
119,353

 
$
177,773

 
$
243,106

 
$
188,233

 
$
213,593

(Loss) income from operations (1)
(76,625
)
 
(69,811
)
 
(10,320
)
 
(16,968
)
 
3,536

 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations (1)
$
(76,735
)
 
$
(73,441
)
 
$
(17,504
)
 
$
(4,447
)
 
$
1,489

Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
 
(44,683
)
 
(14,951
)
Net loss
$
(32,279
)
 
$
(70,698
)
 
$
(27,395
)
 
$
(49,130
)
 
$
(13,462
)
 
 
 
 
 
 
 
 
 
 
(1) Amounts exclude impact of discontinued operations.
 
 
 
 
 
 
 
 
 
 
Per Share Data
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
(1.31
)
 
$
(1.26
)
 
$
(0.30
)
 
$
(0.08
)
 
$
0.03

Discontinued operations, net of tax
0.76

 
0.05

 
(0.17
)
 
(0.80
)
 
(0.27
)
Basic earnings (loss) per share
$
(0.55
)
 
$
(1.21
)
 
$
(0.47
)
 
$
(0.88
)
 
$
(0.24
)
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
(1.31
)
 
$
(1.26
)
 
$
(0.30
)
 
$
(0.08
)
 
$
0.03

Discontinued operations, net of tax
0.76

 
0.05

 
(0.17
)
 
(0.80
)
 
(0.27
)
Diluted earnings (loss) per share
$
(0.55
)
 
$
(1.21
)
 
$
(0.47
)
 
$
(0.88
)
 
$
(0.24
)
 
 
 
 
 
 
 
 
 
 
Financial Position Data
 
 
 
 
 
 
 
 
 
Total assets
$
231,847

 
$
285,883

 
$
329,888

 
$
383,215

 
$
403,090

Convertible senior notes, long-term debt, and capital
     lease obligations, less discount and current portion

 

 

 
7,833

 
18,255

Stockholders’ equity
173,276

 
201,624

 
264,900

 
287,343

 
293,651



17


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements included elsewhere in this Annual Report. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results could differ from those expressed or implied by the forward-looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report.
Basis of Presentation

During the fourth quarter of 2018, the Company initiated a strategic plan to sell its CICT segment, which was completed in the first quarter of 2019. Effective December 31, 2018, the Company classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. During 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.
The results of operations of these segments are presented as “Income from discontinued operations” in the statement of operations and the related cash flows of these segments has been reclassified to discontinued operations for all periods presented. The assets and liabilities of these segments have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheet for all periods presented, as applicable.
Executive Summary
Flotek is a global, technology-driven company that develops and supplies chemistries and services to the oil and gas industries. Flotek also supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets, classified as discontinued operations at December 31, 2018. Flotek operates in seven domestic and international markets.

The Company’s business includes specialty chemistries and logistics which enable its customers to pursue improved efficiencies in the drilling and completion of their wells. Customers include major integrated oil and gas oil and gas companies, oilfield services companies, independent oil and gas companies, pressure-pumping service companies, and national and state-owned oil companies. Additionally, the
 
Company also provides automated bulk material handling, loading facilities, and blending capabilities.
Continuing Operations
The operations of the Company are categorized into one reportable segment: Energy Chemistry Technologies.
Energy Chemistry Technologies designs, develops, manufactures, packages, and markets specialty chemistries used in oil and gas well drilling, cementing, completion, and stimulation. These technologies developed by Flotek’s Research and Innovation team enable customers to pursue improved efficiencies in the drilling and completion of wells.
Discontinued Operations
In 2018, the CICT segment qualified for classification as a discontinued operation. The Drilling Technologies and Production Technologies segments were sold during 2017 and are classified as discontinued operations, as well.
Market Conditions
The Company’s success is sensitive to a number of factors, which include, but are not limited to, drilling and well completion activity, customer demand for its advanced technology products, market prices for raw materials, and governmental actions.
Drilling and well completion activity levels are influenced by a number of factors, including the number of rigs in operation and the geographical areas of rig activity. Additional factors that influence the level of drilling and well completion activity include:
Historical, current, and anticipated future oil and gas prices,
Federal, state, and local governmental actions that may encourage or discourage drilling activity,
Customers’ strategies relative to capital funds allocations,
Weather conditions, and
Technological changes to drilling and completion methods and economics.
Customers’ demand for advanced technology products and services provided by the Company are dependent on their recognition of the value of:
Chemistries that improve the economics of their oil and gas operations, and
Chemistries that are economically viable, socially responsible, and ecologically sound.
Market prices for commodities, including citrus oils, can be influenced by:

18


Historical, current, and anticipated future production levels of the global citrus (primarily orange) crops,
Weather related risks,
Health and condition of citrus trees (e.g., disease and pests),
International competition and pricing pressures resulting from natural and artificial pricing influences, and
market demand for orange juice.
Governmental actions may restrict the future use of hazardous chemicals, including, but not limited to, the following industrial applications:
 
Oil and gas drilling and completion operations,
Oil and gas production operations, and
Non-oil and gas industrial solvents.
The chart below reflects the trend of total completions, drilling but uncompleted wells (“ DUCs”) and rig count over the last three years.


CHARTPIC.JPG

Source: Rig counts and DUCs are per Baker Hughes (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
Completions are per the U.S. Energy Information Administration (https:www.eia.gov/petroleum/drilling/) as of January 21, 2020.






19


Outlook for 2020

The current consensus is there will be further softening in the U.S. onshore oil and gas market in 2020. However, we believe an increase in the adoption of specialty chemicals could more than offset the decrease in drilling and completions activity. Our key sales focus is growing market share by improving returns for our current customers, rebuilding relationships with past customers and identifying new customers that could benefit from our chemistry solutions. Additionally, we are catalyzing focus on total cost of recovery per BOE, rather than initial cost, as well as strengthening the publicly available evidence for the efficacy of using advanced CnF® products to materially impact oil and gas recovery and profitability for operators.
As a result of the pivot we made from an indirect sales channel to a direct sales channel, the Company lost nearly all sales persons by April 2019. The organization has been rebuilt and new sales processes have been implemented. We expect that market segmentation improvements currently underway will better focus sales personnel on higher probability customers. We intend to expand sales efforts to include reestablishing an indirect sales channel for specific customers and markets. A blended approach of indirect and direct sales is expected to increase the sales funnel for existing products and services.
A second sales challenge involves customer procurement strategies that utilize integrated single supplier contracting methodologies. This “bundled-lowest-cost” strategy provides efficiency but diminishes focus on effectiveness and potentially compromises both production rates and ultimate recovery. We do not intend to focus on customers that use “bundled-lowest-cost” methodologies, enabling our sales force to focus on those customers with the desire to achieve the highest return on capital rather than the lowest cost per activity.
During 2020, we intend to invest in analytics, both internally and externally, demonstrating the value and benefits of our products. Our efforts are expected to include partnering with specific clients willing to share the required data to validate publicly the increased profitability of wells using Flotek’s proprietary chemistry. We are also exploring relationships with third-party digital fluid flow modeling experts to provide production forecast for wells with and without treatment.
 
We continue to pursue patents associated with our core business to ensure our ability to provide uninterrupted products and services to our customers. Our creation of intellectual property associated with chemistry supports our belief that the manipulation of subsurface flow conditions through chemistry-coupled with advances in proppant loading, fluid loading and increases in lateral length will yield the most profitable results for our customers. We also believe that to maintain premium pricing and differentiation, our research group must continually position the company as a leader in advanced chemicals.
Building upon significant efforts and progress made in 2019, Flotek will continue to focus on operational excellence as a means for driving efficiencies, cost savings and differentiation in the marketplace. Our emphasis in 2020 will remain on consistent execution, underpinned by our relentless focus on safety.
We do not anticipate a material escalation in our maintenance capital year-over-year. We have numerous evaluations underway to determine the best possible use of our cash in 2020. These include seeking growth opportunities that reduce our dependence on rig count; working on developing lines that create a greater amount of backlog and/or annually recurring revenue; increasing efforts to differentiate our offering from competitors, while enhancing our capability to provide digital transformation of chemistry; striving to strengthen our market share for our current product lines; and evaluating a special distribution to shareholders.
We believe that our cash position, public equity, strong market presence in North America, debt-free status, continuous focus on cost reduction, commitment to environmental, social and governance (“ESG”) matters and strong governance make us attractive to numerous privately held companies seeking liquidity, as well as to independent and major operators who are seeking to increase production for an overall lower cost-per-barrel.






20


Results of Continuing Operations (in thousands): 
 
Years ended December 31,
 
2019
 
2018
 
2017
Revenue
$
119,353

 
$
177,773

 
$
243,106

Operating expenses (excluding depreciation and amortization)
149,225

 
159,808

 
188,744

Operating expenses %
125.0
 %
 
89.9
 %
 
77.6
 %
Corporate general and administrative costs
27,975

 
31,467

 
41,492

Corporate general and administrative costs %
23.4
 %
 
17.7
 %
 
17.1
 %
Depreciation and amortization
8,465

 
9,216

 
9,768

Research and development costs
8,863

 
10,356

 
13,130

(Gain) loss on disposal of long-lived assets
1,450

 
(443
)
 
292

Impairment of goodwill

 
37,180

 

Loss from operations
(76,625
)
 
(69,811
)
 
(10,320
)
Operating margin %
(64.2
)%
 
(39.3
)%
 
(4.2
)%
Loss on sale of business

 
(360
)
 

Loss on write-down of assets held for sale

 
(2,580
)
 

Interest and other expense, net
(311
)
 
(7,906
)
 
(1,072
)
Loss before income taxes
(76,936
)
 
(80,657
)
 
(11,392
)
Income tax benefit (expense)
201

 
7,216

 
(6,112
)
Loss from continuing operations
(76,735
)
 
(73,441
)
 
(17,504
)
Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
Net loss
$
(32,279
)
 
$
(70,698
)
 
$
(27,395
)
Net loss attributable to noncontrolling interests

 
358

 

Net loss attributable to Flotek Industries, Inc. (Flotek)
$
(32,279
)
 
$
(70,340
)
 
$
(27,395
)


Results for 2019 compared to 2018—Consolidated
Consolidated revenue for the year ended December 31, 2019, decreased $58.4 million, or 32.9%, from 2018. The decrease in revenue was due to changes in product mix and continued volatile macro-environment for U.S. onshore drilling and completion activity, the transition of personnel in the Company’s sales organization as well as the ongoing transition related to the Company selling progressively more to oil and gas company end users rather than through energy service companies.
Consolidated operating expenses for the year ended December 31, 2019, decreased $10.6 million, or 6.6%, from 2018, and, as a percentage of revenue, increased to 125.0% for the year ended December 31, 2019, from 89.9% in 2018. The decrease in expenses was primarily attributable to decreased sales, improved logistical and supply chain costs, lower inventory adjustments, and decreased headcount, partially offset by the loss on the purchase commitment associated with the terpene supply agreement, excess and obsolete inventory costs, lower plant utilization and a one-time charge related to the termination of an operations related contract.
Corporate general and administrative (“CG&A”) expenses are not directly attributable to products sold or services provided. CG&A costs decreased $3.5 million, or 11.1%, for the year
 
ended December 31, 2019, from 2018. As a percentage of revenue, CG&A rose from 17.7% to 23.4% for the year ended December 31, 2019, compared to 2018. The decrease in CG&A costs was primarily due to continuing aggressive cost reduction measures which began in the last quarter of 2017, lower incentive and stock compensation expense, lower professional fees as well as decreased headcount and software licensing fees, partially offset by costs associated with severance, legal fees, and certain shareholder-related activities.
Depreciation and amortization expense for the year ended December 31, 2019, decreased by $0.8 million, or 8.1%, from 2018.
Research and Innovation (“R&I”) expense for the year ended December 31, 2019, decreased $1.5 million, or 14.4%, from 2018. The decrease in R&I is primarily attributable to lower headcount.
During the second quarter of 2018, the Company recognized a goodwill impairment charge of $37.2 million in the Energy Chemistry Technologies reporting unit, which resulted from sustained under-performance, lower expectations for the reporting unit.
During the second quarter of 2018, the Company committed to a plan to divest the revenue generating assets associated

21


with the Dalton, Georgia facility within the Energy Chemistry Technologies segment. As a result of this planned divestiture, the Company recorded a loss on write-down of assets held for sale of $2.6 million for the three months ended June 30, 2018. During the third quarter of 2018, the Company completed the sale and recorded a loss on the sale of the business of $0.4 million for the three months ended September 30, 2018.
Loss on disposal of long-lived assets increased $1.9 million primarily due to the disposal of certain corporate software.
Interest and other expense decreased $7.6 million for the year ended December 31, 2019, compared to 2018, primarily due to nonrecurring $1.2 million and $1.9 million write-offs associated with the discontinuation of certain corporate projects during the second and fourth quarter of 2018, respectively, $3.4 million related to moving from an interest expense position to an interest income position as a result of the sale of the CICT segment and subsequent termination of the PNC Bank Credit Facility and $2.6 million associated with a write-down of assets held for sale associated with the Dalton, Georgia facility within the Energy Chemistry Technologies segment offset by acceleration of $1.4 million of unamortized debt issuance costs associated with PNC Bank Credit Facility upon termination of the facility.
The Company recorded an income tax benefit of $0.2 million, yielding an effective tax benefit rate of 0.3%, for the year ended December 31, 2019, compared to an income tax benefit of $7.2 million, yielding an effective tax rate of 8.9%, in 2018. In the second quarter of 2018, the Company determined that it was more likely than not that it will not realize the benefits of its gross deferred tax assets and, therefore, recorded a $15.5 million valuation allowance against the carrying value of net deferred tax assets. As all available evidence should be taken into consideration when assessing the need for a valuation allowance, the subsequent events that occurred in the first quarter of 2019 provided a source of income to support the release of $11.5 million of the valuation allowance. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018.
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry Technologies segment, which was completed in the first quarter of 2019. The Company recorded net income from discontinued operations of $44.5 million for the year ended December 31, 2019.
Results for 2018 compared to 2017—Consolidated
Consolidated revenue for the year ended December 31, 2018, decreased $65.3 million, or 26.9%, from 2017. The decrease in revenue was due to changes in product mix and ongoing transition related to the Company selling progressively more to oil and gas company end users rather than through energy service companies.
Consolidated operating expenses for the year ended December 31, 2018, decreased $28.9 million, or 15.3%, from
 
2017, and, as a percentage of revenue, increased to 89.9% for the year ended December 31, 2018, from 77.6% in 2017. The decrease in expenses was primarily attributable to decreased sales, lower stock compensation expense, and decreased headcount, partially offset by increased freight and other direct costs associated with manufacturing.
CG&A expenses are not directly attributable to products sold or services provided. CG&A costs decreased $10.0 million, or 24.2%, for the year ended December 31, 2018 from 2017. As a percentage of revenue, CG&A rose from 17.1% to 17.7% for the year ended December 31, 2018, compared to 2017. The decrease in CG&A costs was primarily due to aggressive cost reduction measures which began in the last quarter of 2017, as well as lower incentive and stock compensation expense.
Depreciation and amortization expense for the year ended December 31, 2018, decreased $0.6 million, or 5.7%, from 2017.
Research and Innovation (“R&I”) expense for the year ended December 31, 2018, decreased $2.8 million, or 21.1%, from 2017. The decrease in R&I is primarily attributable to reallocating personnel into operational roles.
During the second quarter of 2018, the Company recognized a goodwill impairment charge of $37.2 million in the Energy Chemistry Technologies reporting unit, which resulted from sustained under-performance, lower expectations for the reporting unit.
During the second quarter of 2018, the Company committed to a plan to divest the revenue generating assets associated with the Dalton, Georgia facility within the Energy Chemistry Technologies segment. As a result of this planned divestiture, the Company recorded a loss on write-down of asses held for sale of $2.6 million for the three months ended June 30, 2018. During the third quarter of 2018, the Company completed the sale and recorded a loss on the sale of the business of $0.4 million for the three months ended September 30, 2018.
Interest and other expense increased $6.8 million for the year ended December 31, 2018, compared to 2017, primarily due to $1.2 million and $1.9 million write-offs associated with the discontinuation of certain corporate projects during the second and fourth quarter of 2018, respectively, expenses related to winding down of certain business ventures, changes in foreign currency exchange rates, and increased borrowing on the PNC Bank Credit Facility throughout 2018.
The Company recorded an income tax benefit of $7.2 million, yielding an effective tax benefit rate of 8.9%, for the year ended December 31, 2018, compared to an income tax provision of $6.1 million, yielding an effective tax provision rate of 53.7%, in 2017. In the second quarter of 2018, the Company determined that it was more likely than not that it will not realize the benefits of its gross deferred tax assets and, therefore, recorded a $15.5 million valuation allowance against the carrying value of the net deferred tax assets. As all available evidence should be taken into consideration when

22


assessing the need for a valuation allowance, the subsequent events that occurred in the first quarter of 2019 provided a source of income to support the release of $11.5 million of the valuation allowance. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018.
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry
 
Technologies segment, which was completed in the first quarter of 2019. The Company recorded net income from discontinued operations of $2.7 million for the year ended December 31, 2018 for the classification of this segment as held for sale. The sale was completed during the first quarter of 2019 as expected.
Results by Segment

Energy Chemistry Technologies (“ECT”)
 
 
 
 
 
(dollars in thousands)
Years ended December 31,
 
2019
 
2018
 
2017
Revenue
$
119,353

 
$
177,773

 
$
243,106

(Loss) income from operations
(46,485
)
 
(36,817
)
 
33,611

Income from operations - excluding impairment
(46,485
)
 
363

 
33,611

Operating margin % - excluding impairment
(38.9
)%
 
0.2
%
 
13.8
%

Results for 2019 compared to 2018—Energy Chemistry Technologies
ECT revenue for the year ended December 31, 2019, decreased $58.4 million, or 32.9%, from 2018. ECT’s under-performance when compared to these market indicators were primarily attributable to product mix and continued volatile macro-environment for U.S. onshore drilling and completion activity, the transition of personnel in the Company’s sales organization as well as the ongoing transition related to the Company selling progressively more to oil and gas company end users rather than through energy service companies.
Income from operations for the ECT segment decreased $9.7 million for the year ended December 31, 2019, compared to 2018. This decrease is primarily a result of the loss on the terpene supply agreement, excess and obsolete inventory costs, lower plant utilization and a one-time charge related to the termination of an operations related contract. The loss is partially offset by improved logistical and supply chain costs, lower inventory adjustments, and decreased headcount, partially offset by lower plant utilization and a one-time charge related to the termination of an operations related contract.

 

Results for 2018 compared to 2017—Energy Chemistry Technologies
ECT revenue for the year ended December 31, 2018, decreased $65.3 million, or 26.9% from 2017. ECT’s under-performance when compared to these market indicators was primarily attributable to product mix and an ongoing transition related to the Company selling progressively more to oil and gas company end users rather than through energy service companies.
Income from operations for the ECT segment decreased $70.4 million for the year ended December 31, 2018, compared to 2017, partially due to the $37.2 million goodwill impairment charge taken in the second quarter of 2018. Income from operations, excluding impairment, decreased $33.2 million, or 98.9%, for the year ended December 31, 2018, compared to 2017. This decrease is primarily a result of gross margin compression caused by reduced sales activity coupled with increases in material and labor costs, inventory reserve adjustments, and higher logistics expenditures, partially offset by a reduction in overhead expenses.

Discontinued Operations
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its Consumer and Industrial Chemistry Technologies segment, which was completed in the first quarter of 2019. During 2017, the Company completed the
 
sale or disposal of the assets and transfer or liquidation of liabilities and obligations of the Drilling Technologies and Production Technologies segments.

23



Consumer and Industrial Chemistry Technologies (“CICT”)
 
 
 
 
(dollars in thousands)
 
Years ended December 31,
 
 
2019
 
2018
 
2017
Revenue
 
$
11,031

 
$
72,344

 
$
73,992

Income (loss) from operations
 
$
(610
)
 
$
3,054

 
$
7,465

Operating margin %
 
(5.5
)%
 
4.2
%
 
10.1
%

Results for 2019 compared to 2018—Consumer and Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2019, decreased $61.3 million, or 84.8%, from 2018, primarily due to the sale of the segment as of February 28, 2019.
Income from operations for the CICT segment decreased $3.7 million, or 120.0%, for the year ended December 31, 2019, from 2018, primarily due to the sale of the segment as of February 28, 2019.
Results for 2018 compared to 2017—Consumer and Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2018, decreased $1.6 million, or 2.2%, from 2017, primarily due to
 
a decline in the value of terpenes and some softness for flavor ingredients. The market of citrus oils was affected by the historic high prices experienced in 2017 and 2018, which limited market activity and top line revenue. Citrus greening reduced citrus crops globally, thereby limiting the Company’s performance in comparison to the growth experienced in 2016 and 2017.
Income from operations for the CICT segment decreased $4.4 million, or 59.1%, for the year ended December 31, 2018, from 2017, primarily due to higher raw material costs and reduced by-product sales, as well as increased expenses related to operations of the new still put into production in the third quarter of 2018.

Drilling Technologies
 
 
 
 
 
 
(dollars in thousands)
 
Years ended December 31,
 
 
2019
 
2018
 
2017
Revenue
 
$

 
$

 
$
11,534

Loss from operations
 
$

 
$

 
$
(2,646
)
Loss from operations - excluding impairment
 
$

 
$

 
$
(2,646
)
Operating margin % - excluding impairment
 
%
 
%
 
(22.9
)%

Results for 2018 compared to 2017—Drilling Technologies
On May 22, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Drilling Technologies segment to National Oilwell Varco, L.P. (“NOV”) for $17.0 million in cash consideration.

 
On August 16, 2017, the Company completed the sale of substantially all of the remaining assets of the Company’s Drilling Technologies segment to Galleon Mining Tools, Inc. for $1.0 million in cash consideration and a note receivable of $1.0 million due in one year.
Upon completion of these sales, the Company ceased all operations for the Drilling Technologies segment.

Production Technologies
 
 
 
 
 
 
(dollars in thousands)
 
Years ended December 31,
 
 
2019
 
2018
 
2017
Revenue
 
$

 
$

 
$
4,002

Loss from operations
 
$

 
$

 
$
(1,357
)
Loss from operations - excluding impairment
 
$

 
$

 
$
(1,357
)
Operating margin % - excluding impairment
 
%
 
%
 
(33.9
)%

24



Results for 2018 compared to 2017—Production Technologies
On May 23, 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Production
 
Technologies segment to Raptor Lift Solutions, LLC (“Raptor Lift”) for $2.9 million in cash consideration.
Upon completion of this sale, the Company ceased all operations for the Production Technologies segment.

Capital Resources and Liquidity
Overview
Upon closing of the sale of the CICT segment, the Company repaid the outstanding balance, interest, and fees related on the PNC Bank Credit Facility on March 1, 2019 and subsequently terminated the PNC Bank Credit Facility. As of December 31, 2019, the Company has no debt outstanding.

During 2019, the Company funded capital requirements primarily with cash on hand, including proceeds from the sale of the CICT segment.
At December 31, 2019, the Company remained compliant with the continued listing standards of the NYSE.
Cash and cash equivalents totaled $100.6 million at December 31, 2019. The Company used $18.8 million of cash outflows from continuing operations (including $17.1 million expended in working capital), $2.4 million for capital expenditures, and $0.6 million for purchases of various patents and other intangible assets. Offsetting these cash outflows, the Company received $49.7 million for repayments of debt, net
 
of borrowings, $169.8 million for sale of CICT, and $0.2 million as proceeds from sale of assets.
Liquidity
The Company expects maintenance capital spending to be between $2 million and $4 million in 2020 and does not have any specific growth capital projects currently committed. During 2020, the Company expects to use cash on hand and internally generated funds to fund operations and capital expenditures. With the proceeds from the sale of the CICT segment, the Company paid off its credit facility balance and began evaluation of the manner in which the remaining net proceeds from the sale will be deployed. During 2019, management and the board of directors reviewed options associated with the proceeds from the sale of CICT to include organic and inorganic growth projects, short to mid-term retention of capital, special dividends, and share buybacks, bearing in mind issues related to the optimal timing of capital deployment.


25


Net Debt
Net debt represents total debt less cash and cash equivalents and combines the Company’s indebtedness and the cash and cash equivalents that could be used to repay that debt. Components of net debt are as follows (in thousands):
 
December 31, 2019
 
December 31, 2018
Cash and cash equivalents
$
100,575

 
$
3,044

Current portion of long-term debt

 
(49,731
)
Net debt
$
100,575

 
$
(46,687
)

Cash Flows
Cash flow metrics from the consolidated statements of cash flows are as follows (in thousands):
  
Years ended December 31,
  
2019
 
2018
 
2017
Net cash (used in) provided by operating activities
$
(18,769
)
 
$
(20,816
)
 
$
12,345

Net cash provided (used in) by investing activities
166,937

 
(2,109
)
 
14,526

Net cash (used in) provided financing activities
(49,994
)
 
21,480

 
(27,285
)
Net cash flows provided by (used in) provided by discontinued operations
15

 
(7
)
 
24

Effect of changes in exchange rates on cash and cash equivalents
5

 
(88
)
 
151

Net change in cash, cash equivalents and restricted cash
$
98,194

 
$
(1,540
)
 
$
(239
)

Operating Activities
During 2019, 2018, and 2017, cash (used in) operating activities totaled $18.8 million, $20.8 million, and $12.3 million, respectively. Consolidated net loss for 2019, 2018, and 2017 totaled $76.7 million, $73.1 million and $17.5 million, respectively.
Net non-cash contributions to net income in 2019, totaled $40.8 million. Contributory non-cash items consisted primarily of $9.9 million for depreciation and amortization expense, $4.2 million for stock compensation expense, $18.3 million for changes to deferred income taxes and $1.5 million for net gain on sale of assets.
Net non-cash contributions to net income in 2018, totaled $54.4 million. Contributory non-cash items consisted primarily of $9.6 million for depreciation and amortization expense, $37.2 million for the impairment of goodwill, intangible assets or fixed assets, $7.1 million for stock compensation expense, $2.6 million for the loss on write down of assets held for sale, $0.7 million for reduction in incremental tax benefit related to share-based awards, $3.3 million for provisions related to accounts receivables and inventory reserves, $(0.4) million for net loss on sale of assets, and $(6.0) million for changes to deferred income taxes.

Net non-cash contributions to net income in 2017, totaled $23.9 million. Contributory non-cash items consisted primarily of $10.2 million for depreciation and amortization expense, $10.6 million for stock compensation expense, $2.0 million for reduction in incremental tax benefit related to
 
share-based awards and $0.2 million for provisions related to accounts receivables, partially offset by $0.2 million for changes to deferred income taxes.
During 2019, changes in working capital provided $17.1 million in cash, primarily resulting from increasing accounts receivables and income taxes receivable by $8.4 million and decreasing accrued liabilities and interest payable by $0.0 million, partially offset by decreasing inventories and other current assets by $23.5 million and increasing accounts payable by $2.0 million.
During 2018, changes in working capital used $2.1 million in cash, primarily resulting from decreasing accounts receivables, income taxes receivable, and other current assets by $5.8 million, partially offset by increasing inventories by $3.7 million and decreasing accounts payable and accrued liabilities by $8.8 million.
During 2017, changes in working capital provided $6.0 million in cash, primarily resulting from increasing accounts payable while accrued liabilities remained relatively unchanged, partially offset by increasing accounts receivables, inventories, income taxes receivable, and other current assets by $3.4 million and decreasing income taxes payable and interest payable by $14.7 million.

26


Investing Activities
Net cash provided by investing activities was $166.9 million during 2019. Cash provided by investing activities included $169.7 million of proceeds received from the sale of revenue generating assets associated with a business line within the ECT segment and $0.2 million of proceeds received from the sale of fixed assets, partially offset by $2.4 million for capital expenditures and $0.6 million for the purchase of various patents and other intangible assets.
Net cash used in investing activities was $2.1 million during 2018. Cash used in investing activities primarily included $1.7 million of proceeds received from the sale of the Drilling Technologies and Production Technologies segments and $1.4 million of proceeds received from the sale of fixed assets, partially offset by $3.6 million for capital expenditures and $1.6 million for the purchase of various patents and other intangible assets.
Net cash provided by investing activities was $14.5 million during 2017. Cash provided by investing activities primarily included $4.2 million for capital expenditures, $0.5 million for the purchase of patents and intangible assets offset by $18.5 million of proceeds from sale of business and $0.7 million of proceeds from sales of assets.
Financing Activities
Net cash used in financing activities was $50.0 million during 2019, primarily due to using $49.7 million for repayments of debt, net of borrowings.
Net cash generated through financing activities was $21.5 million during 2018, due to receiving $21.8 million for borrowings of debt, net of repayments, $0.2 million for purchases of treasury stock for tax withholding purposes related to the vesting of restricted stock awards and the exercise of non-qualified stock options, and $0.1 million for payments of debt issuance costs. Cash generated through financing activities was partially offset by receiving $0.3 million in proceeds from the sale of common stock.
During 2017, net cash used in financing activities was $27.3 million. Cash used in financing activities was primarily due
 
to receiving $0.7 million in proceeds from the sale of common stock, inclusive of $30.1 million, net of issuance costs, from the private placement of 2.5 million common shares on July 27, 2016. Cash used in financing activities was partially offset by using $20.4 million for repayments of debt, net of borrowings, purchases of treasury stock for tax withholding purposes related to the vesting of restricted stock awards and the exercise of non-qualified stock options of $1.7 million, and payments of debt issuance costs of $0.6 million.
Off-Balance Sheet Arrangements
There have been no transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose entities” (“SPEs”), established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2019, the Company was not involved in any unconsolidated SPEs.
The Company has not made any guarantees to customers or vendors nor does the Company have any off-balance sheet arrangements or commitments that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, change in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Contractual Obligations
Cash flows from operations are dependent on a variety of factors, including fluctuations in operating results, accounts receivable collections, inventory management, and the timing of payments for goods and services. Correspondingly, the impact of contractual obligations on the Company’s liquidity and capital resources in future periods is analyzed in conjunction with such factors.
Material contractual obligations consist of supply commitments, operating and finance lease obligations.

Contractual obligations at December 31, 2019 are as follows (in thousands):
 
Payments Due by Period
 
Total
 
Less than 1 year
 
1 - 3 years
 
3 -5 years
 
More than
5 years
Finance lease obligation
$
249

 
$
70

 
$
117

 
$
62

 
$

Operating lease obligations
33,599

 
2,036

 
3,878

 
3,993

 
23,692

Supply commitments for raw materials
72,020

 
18,005

 
54,015

 

 

Total
$
105,868

 
$
20,111

 
$
58,010

 
$
4,055

 
$
23,692

.



27


Critical Accounting Policies and Estimates
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparation of these statements requires management to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenue and expenses during the reporting period. Significant accounting policies are described in Note 2 – “Summary of Significant Accounting Policies” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report. The Company believes the following accounting policies are critical due to the significant, subjective, and complex judgments and estimates required when preparing the consolidated financial statements. The Company regularly reviews judgments, assumptions, and estimates to the critical accounting policies.
Basis of Presentation
During the fourth quarter of 2018, the Company initiated a strategic plan to sell its CICT segment, which was completed in the first quarter of 2019. Effective December 31, 2018, the Company classified the assets, liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.
Amounts previously reported have been reclassified to conform to this presentation to allow for meaningful comparison of continuing operations.
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. During 2017, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.
Revenue Recognition
The Company recognizes revenues to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Refer to Note 4 — “Revenue from Contracts with Customers” for further discussion on Revenue.
The Company recognizes revenue based on the Accounting Standards Codification (“ASC”) 606 five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred
 
accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.
For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the “total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the years ended December 31, 2019, 2018, and 2017, the percentage-of-completion revenue accounted for less than 0.1% of total revenue during the respective time periods.
As an accounting policy election, the Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of customers and grants credit based upon historical payment history, financial condition, and industry expectations, as available. Determination of the collectability of amounts due from customers requires the Company to use estimates and make judgments regarding future events and trends, including monitoring customers’ payment history and current credit worthiness, in order to determine that collectability is reasonably assured. The Company also considers the overall business climate in which its customers operate.
These uncertainties require the Company to make frequent judgments and estimates regarding a customers’ ability to pay amounts due in order to assess and quantify an appropriate allowance for doubtful accounts. The primary factors used to quantify the allowance are customer delinquency, bankruptcy, and the Company’s estimate of its ability to collect outstanding receivables based on the number of days a receivable has been outstanding.
The majority of the Company’s customers operate in the energy industry. The cyclical nature of the industry may affect customers’ operating performance and cash flows, which could impact the Company’s ability to collect on these obligations. Additionally, some customers are located in international areas that are inherently subject to risks of economic, political, and civil instability.
The Company continues to monitor the economic climate in which its customers operate and the aging of its accounts receivable. The allowance for doubtful accounts is based on the aging of accounts and an individual assessment of each invoice. At December 31, 2019, the allowance was 8.9% of

28


gross accounts receivable, compared to an allowance of 3.1% a year earlier. While credit losses have historically been within expectations and the provisions established, should actual write-offs differ from estimates, revisions to the allowance would be required.
Inventory Reserves
Inventories consist of raw materials, work-in-process, and finished goods and are stated at the lower of cost or market, using the weighted-average cost method. Finished goods inventories include raw materials, direct labor, and production overhead. The Company’s inventory reserve represents the excess of the inventory carrying amount over the amount expected to be realized from the ultimate sale or other disposal of the inventory.
The Company regularly reviews inventory quantities on hand and records provisions or impairments for excess or obsolete inventory based on the Company’s forecast of product demand, historical usage of inventory on hand, market conditions, production and procurement requirements, and technological developments. Significant or unanticipated changes in market conditions or Company forecasts could affect the amount and timing of provisions for excess and obsolete inventory and inventory impairments.
Significant changes have not been made in the methodology used to estimate the reserve for excess and obsolete inventory or impairments during the past four years. Specific assumptions are updated at the date of each evaluation to consider Company experience and current industry trends. Significant judgment is required to predict the potential impact which the current business climate and evolving market conditions could have on the Company’s assumptions. Changes which may occur in the energy industry are hard to predict, and they may occur rapidly. To the extent that changes in market conditions result in adjustments to management assumptions, impairment losses could be realized in future periods.
At December 31, 2019 and 2018, the reserve for excess and obsolete inventory was $5.7 million and $2.1 million, or 20.8% and 7.2% of inventory, respectively.
Business Combinations
The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed, and any non-controlling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed, and any non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce. Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.
 
Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
Goodwill
Goodwill is not subject to amortization, but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit. Goodwill is tested for impairment at a reporting unit level.
During the annual testing, the Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
During annual goodwill impairment testing in 2018 and 2017, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative impairment test. During annual goodwill impairment testing in 2017, the Company first assessed qualitative factors to determine whether it was necessary to perform the two-step goodwill impairment test.
As of the fourth quarter of 2018, the Company concluded it was not more-likely-than-not that there was an impairment of goodwill for the CICT reporting unit based on the assessment of qualitative factors. During the fourth quarter of 2018, the final criterion was met for classifying the CICT reporting unit as held for sale. Therefore, the CICT reporting unit was reported as discontinued operations. After receiving initial interests from potential buyers, it was determined that the disposal proceeds, after considering selling costs, would result in excess over book value. As this was in-line with quantitative impairment tests performed in previous quarters for the CICT reporting unit, no further impairment assessment was needed.
For the second quarter of 2018, the Company was not able to conclude that it was not more-likely-than-not that the estimated fair value of the Energy Chemistry Technologies (“ECT”) reporting unit exceeded the carrying amount.

29


Therefore, the Company performed a quantitative impairment test for the reporting unit. The results of the impairment test indicated that the carrying amount of the ECT reporting unit exceeded the estimated fair value of the reporting unit by approximately $37.8 million, or 25.6% of the carrying amount. To evaluate the sensitivity of the fair value calculations for the ECT reporting units, the Company applied a hypothetical 0.5% unfavorable change in the weighted average cost of capital, which would have reduced the estimated fair value of the ECT reporting unit by approximately $5.7 million. Additionally, reducing the revenue projections by 1.0% and holding gross margins steady reduced the estimated fair value approximately $4.4 million. These sensitivity analyses confirmed the need for an impairment for the ECT reporting unit. The Company recorded a full impairment of the goodwill for $37.2 million in the ECT reporting unit during the second quarter of 2018.
At December 31, 2019, no goodwill was reported on the balance sheet.
Long-Lived Assets Other than Goodwill
Long-lived assets other than goodwill consist of property and equipment and intangible assets that have determinable and indefinite lives. The Company makes judgments and estimates regarding the carrying amount of these assets, including amounts to be capitalized, depreciation and amortization methods to be applied, estimated useful lives, and possible impairments. Property and equipment and intangible assets with determinable lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
For property and equipment, events or circumstances indicating possible impairment may include a significant decrease in market value or a significant change in the business climate. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss is the excess of the asset’s carrying amount over its fair value. Fair value is generally determined using an appraisal by an independent valuation firm or by using a discounted cash flow analysis.
For intangible assets with definite lives, events or circumstances indicating possible impairment may include an adverse change in the extent or manner in which the asset is being used or a change in the assessment of future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, an impairment loss is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.
 
Intangible assets with indefinite lives are not subject to amortization, but are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit.
The Company assesses whether an indefinite lived intangible impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the indefinite-lived intangible asset is impaired or if the Company elects to not perform a qualitative assessment, the Company then performs the quantitative impairment test. The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.
The development of future net undiscounted cash flow projections requires management projections of future sales and profitability trends and the estimation of remaining useful lives of assets. These projections are consistent with those projections the Company uses to internally manage operations. When potential impairment is identified, a discounted cash flow valuation model similar to that used to value goodwill at the reporting unit level, incorporating discount rates commensurate with risks associated with each asset, is used to determine the fair value of the asset in order to measure potential impairment. Discount rates are determined by using a WACC. Estimated revenue and WACC assumptions are the most sensitive and susceptible to change in the long-lived asset analysis as they require significant management judgment. The Company believes the assumptions used are reflective of what a market participant would have used in calculating fair value.
Valuation methodologies utilized to evaluate long-lived assets other than goodwill for impairment were consistent with prior periods. Specific assumptions discussed above are updated at each test date to consider current industry and Company-specific risk factors from the perspective of a market participant. The current business climate is subject to evolving market conditions and requires significant management judgment to interpret the potential impact to the Company’s assumptions. To the extent that changes in the current business

30


climate result in adjustments to management projections, impairment losses may be recognized in future periods.
There are significant inherent uncertainties and judgments involved in estimating fair value. The Company cannot predict the occurrence of events or circumstances that could adversely affect the fair value of the asset group. Such events may include, but are not limited to, deterioration of the economic environment, increases in the Company’s WACC, material negative changes in relationships with significant customers, reductions in valuations of other public companies in the Company’s industry, or strategic decisions made in response to economic and competitive conditions. If actual results are not consistent with the Company’s current estimates and assumptions, additional impairment of long-lived assets could be required.
In 2019, 2018, and 2017, while testing annual indefinite lived intangible assets for impairment, the Company first assessed qualitative factors to determine whether it was necessary to perform the impairment test. Based on its qualitative assessment, the Company concluded there was no indication of the need for an impairment of indefinite lived intangibles, and therefore no further testing was required.
No impairment was recorded for property and equipment and intangible assets with determinable or indefinite lives during 2019 and 2018.
Fair Value Measurements
Fair value is defined as the amount that would be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction between unrelated third party market participants at the measurement date. In determination of fair value measurements for assets and liabilities, the Company considers the principal, or most advantageous, market and assumptions that market participants would use when pricing the asset or liability. The Company categorizes financial assets and liabilities using a three-tiered fair value hierarchy, based upon the nature of the inputs used in the determination of fair value. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability and may be observable or unobservable. Significant judgments and estimates are required, particularly when inputs are based on pricing for similar assets or liabilities, pricing in non-active markets, or when unobservable inputs are required.
Income Taxes
The Company’s tax provision is subject to judgments and estimates necessitated by the complexity of existing regulatory tax statutes and the effect of these upon the Company due to operations in multiple tax jurisdictions. Income tax expense is based on taxable income, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which the Company operates. The Company’s income tax expense will fluctuate from year to year as the amount of pretax income fluctuates. Changes in tax laws and the Company’s profitability within and across the jurisdictions
 
may impact the Company’s tax liability. While the annual tax provision is based on the best information available to the Company at the time of preparation, several years may elapse before the ultimate tax liabilities are determined.
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously recorded tax assets when it becomes more likely than not such assets will not be realized. The Company evaluates, at least annually, net operating loss carry forwards and other net deferred tax assets and considers all available evidence, both positive and negative, to determine whether a valuation allowance is necessary relative to net operating loss carry forwards and other net deferred tax assets. In making this determination, the Company considers cumulative losses in recent years as significant negative evidence. The Company considers recent years to mean the current year plus the two preceding years. The Company considers the recent cumulative income or loss position of its filings groups as objectively verifiable evidence for the projection of future income, which consists primarily of determining the average of the pre-tax income of the current and prior two years after adjusting for certain items not indicative of future performance. Based on this analysis, the Company determines whether a valuation allowance is necessary.
In assessing the need for a valuation allowance in the second quarter of 2018, the Company considered all available objective and verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income. As a result of this analysis, the Company determined that it is more likely than not that it will not realize the benefits of certain deferred tax assets and, therefore, recorded a valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions. As all available evidence should be taken into consideration when assessing the need for a valuation allowance, the subsequent events that occurred in the first quarter of 2019 provided a source of income to support the release of $11.5 million of the valuation allowance. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018.
The Company periodically identifies and evaluates uncertain tax positions. This process considers the amounts and

31


probability of various outcomes that could be realized upon final settlement. Liabilities for uncertain tax positions are based on a two-step process. The actual benefits ultimately realized may differ from the Company’s estimates. Changes in facts, circumstances, and new information may require a change in recognition and measurement estimates for certain individual tax positions. Any changes in estimates are recorded in results of operations in the period in which the change occurs. At December 31, 2019, the Company performed an evaluation of its various tax positions and concluded that it did not have significant uncertain tax positions requiring disclosure. The Company’s policy is to record interest and penalties related to income tax matters as income tax expense.
Share-Based Compensation
The Company has stock-based incentive plans which are authorized to issue stock options, restricted stock, and other incentive awards. Stock-based compensation expense for stock options and restricted stock is determined based upon estimated grant-date fair value. This fair value for the stock options is calculated using the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The option-pricing model requires the input of highly subjective assumptions, including expected stock price volatility and expected option life. For all stock-based incentive plans, the Company estimates an expected forfeiture
 
rate and recognizes expense only for those shares expected to vest. The estimated forfeiture rate is based on historical experience. To the extent actual forfeiture rates differ from the estimate, stock-based compensation expense is adjusted accordingly.
Loss Contingencies
The Company is subject to a variety of loss contingencies that could arise during the Company’s conduct of business. Management considers the likelihood of a loss or impairment of an asset or the incurrence of a liability, as well as the Company’s ability to reasonably estimate the amount of loss, in determining potential loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. Accruals for loss contingencies have not been recorded during the past three years. The Company regularly evaluates current information available to determine whether such accruals should be made or adjusted.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2 – “Summary of Significant Accounting Policies” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.


32


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risk from changes in foreign currency exchange rates, and commodity prices. Market risk is measured as the potential negative impact on earnings, cash flows, or fair values resulting from a hypothetical change in interest rates, commodity prices, or foreign currency exchange rates over the next year. The Company manages exposure to market risks at the corporate level. The portfolio of interest-sensitive assets and liabilities is monitored and adjusted to provide liquidity necessary to satisfy anticipated short-term needs. The Company’s risk management policies allow the use of specified financial instruments for hedging purposes only. Speculation on interest rates or foreign currency rates is not permitted. The Company does not consider any of these risk management activities to be material.
Foreign Currency Exchange Risk
The Company presently has limited exposure to foreign currency risk. As a global company, Flotek operates in seven domestic and international markets. Flotek’s functional currency is primarily the U.S. dollar. During 2019, approximately 4.0% of revenue was denominated in non-U.S. dollar currencies and virtually all assets and liabilities of the Company are denominated in U.S. dollars. However, as the
 
Company expands its international operations, non-U.S. denominated activity is likely to increase. The Company has historically performed no swaps and no foreign currency hedges. The Company may utilize swaps or foreign currency hedges in the future.
Commodity Risk
The Company purchases raw materials derived from citrus oils and, therefore, has a commodity risk inherent in orange harvests. In recent years, citrus greening has disrupted citrus fruit production in Florida and Brazil which caused raw material feedstock cost to increase. Tropical storms and hurricanes, as experienced during 2017, can also impact the future citrus crop yields in growing regions. The Company believes that adequate global supply is available to meet the Company’s needs. The Company primarily relies upon long-term strategic supply relationships to meet many of its raw material needs which are expected to remain in place for the foreseeable future. Price increases have been passed along to the Company’s customers, where applicable. The Company presently does not have any commodity futures contracts but may consider utilizing forms of hedging from time to time in the future.


33


Item 8.  Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of
Flotek Industries, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic No. 842.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

34


statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ MOSS ADAMS LLP

Houston, Texas
March 6, 2020

We have served as the Company’s auditor since 2017.



35


FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
December 31,
 
2019
 
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
100,575

 
$
3,044

Restricted cash
663

 

Accounts receivable, net of allowance for doubtful accounts of $1,527 and
    $1,190 at December 31, 2019 and 2018, respectively
15,638

 
37,047

Inventories, net
21,697

 
27,289

Income taxes receivable
631

 
3,161

Assets held for sale

 
118,470

Other current assets
13,191

 
5,771

Total current assets
152,395

 
194,782

Property and equipment, net
39,829

 
45,485

Operating lease right-of-use assets
16,388

 

Deferred tax assets, net
152

 
18,663

Other intangible assets, net
23,083

 
26,827

Other long-term assets

 
126

TOTAL ASSETS
$
231,847

 
$
285,883

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,231

 
$
15,011

Accrued liabilities
24,552

 
10,335

Interest payable

 
8

Liabilities held for sale

 
9,174

Current portion of lease liabilities
541

 

Long-term debt, classified as current

 
49,731

Total current liabilities and total liabilities
41,324

 
84,259

Long-term operating lease liabilities
16,973

 
 
Long-term finance lease liabilities
158

 

Deferred tax liabilities, net
116

 

TOTAL LIABILITIES
58,571

 
84,259

Commitments and contingencies (Note16)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares
    issued and outstanding

 

Common stock, $0.0001 par value, 80,000,000 shares authorized; 63,656,897
    shares issued and 57,882,396 shares outstanding at December 31, 2019;
    62,162,875 shares issued and 57,342,279 shares outstanding at
    December 31, 2018
6

 
6

Additional paid-in capital
347,564

 
343,536

Accumulated other comprehensive income (loss)
(966
)
 
(1,116
)
Retained earnings (accumulated deficit)
(139,844
)
 
(107,565
)
Treasury stock, at cost; 4,145,481 and 3,770,224 shares at December 31, 2019
    and 2018, respectively
(33,484
)
 
(33,237
)
Total stockholders’ equity
173,276

 
201,624

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
231,847

 
$
285,883

See accompanying Notes to Consolidated Financial Statements.

36


FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) 
 
Year ended December 31,
 
2019
 
2018
 
2017
Revenue
$
119,353

 
$
177,773

 
$
243,106

Costs and expenses:
 
 
 
 
 
Operating expenses (excluding depreciation and amortization)
149,225

 
159,808

 
188,744

Corporate general and administrative
27,975

 
31,467

 
41,492

Depreciation and amortization
8,465

 
9,216

 
9,768

Research and development
8,863

 
10,356

 
13,130

(Gain) loss on disposal of long-lived assets
1,450

 
(443
)
 
292

Impairment of goodwill

 
37,180

 

Total costs and expenses
195,978

 
247,584

 
253,426

Loss from operations
(76,625
)
 
(69,811
)
 
(10,320
)
Other (expense) income:
 
 
 
 
 
Interest expense
(2,019
)
 
(2,866
)
 
(2,168
)
Loss on sale of business

 
(360
)
 

Loss on write-down of assets held for sale

 
(2,580
)
 

Other (expense) income, net
1,708

 
(5,040
)
 
1,096

Total other expense
(311
)
 
(10,846
)
 
(1,072
)
Loss before income taxes
(76,936
)
 
(80,657
)
 
(11,392
)
Income tax benefit (expense)
201

 
7,216

 
(6,112
)
Loss from continuing operations
(76,735
)
 
(73,441
)
 
(17,504
)
Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
Net loss
(32,279
)
 
(70,698
)
 
(27,395
)
Net loss attributable to noncontrolling interests

 
358

 

Net loss attributable to Flotek Industries, Inc. (Flotek)
$
(32,279
)
 
$
(70,340
)
 
$
(27,395
)
 
 
 
 
 
 
Amounts attributable to Flotek shareholders:
 
 
 
 
 
Loss from continuing operations
$
(76,735
)
 
$
(73,083
)
 
$
(17,504
)
Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
Net loss attributable to Flotek
$
(32,279
)
 
$
(70,340
)
 
$
(27,395
)
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
Continuing operations
$
(1.31
)
 
$
(1.26
)
 
$
(0.30
)
Discontinued operations, net of tax
0.76

 
0.05

 
(0.17
)
Basic earnings (loss) per common share
$
(0.55
)
 
$
(1.21
)
 
$
(0.47
)
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
Continuing operations
$
(1.31
)
 
$
(1.26
)
 
$
(0.30
)
Discontinued operations, net of tax
0.76

 
0.05

 
(0.17
)
Diluted earnings (loss) per common share
$
(0.55
)
 
$
(1.21
)
 
$
(0.47
)
 
 
 
 
 
 
Weighted average common shares:
 
 
 
 
 
Weighted average common shares used in computing basic earnings (loss) per common share
58,750

 
57,995

 
57,580

Weighted average common shares used in computing diluted earnings (loss) per common share
58,750

 
57,995

 
57,580

See accompanying Notes to Consolidated Financial Statements.

37


FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 
Years ended December 31,
 
2019
 
2018
 
2017
Loss from continuing operations
$
(76,735
)
 
$
(73,441
)
 
$
(17,504
)
Income (loss) from discontinued operations, net of tax
44,456

 
2,743

 
(9,891
)
Net loss
(32,279
)
 
(70,698
)
 
(27,395
)
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustment
150

 
(232
)
 
72

Comprehensive loss
(32,129
)
 
(70,930
)
 
(27,323
)
Net loss attributable to noncontrolling interests

 
358

 

Comprehensive loss attributable to Flotek
$
(32,129
)
 
$
(70,572
)
 
$
(27,323
)
See accompanying Notes to Consolidated Financial Statements.



38



FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED
DECEMBER 31, 2019, 2018 AND 2017
(in thousands)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Retained Earnings
(Accumulated
Deficit)
 
Non-controlling Interests
 
Total Stockholders’ Equity
 
Shares Issued
 
Par Value
 
Shares
 
Cost
 
Balance, December 31, 2016
59,685

 
$
6

 
2,029

 
$
(20,269
)
 
$
318,392

 
$
(956
)
 
$
(9,830
)
 
$
358

 
$
287,701

Net loss

 

 

 

 

 

 
(27,395
)
 

 
(27,395
)
Foreign currency translation adjustment

 

 

 

 

 
72

 

 

 
72

Stock issued under employee stock purchase plan

 

 
(113
)
 

 
654

 

 

 

 
654

Common stock issued in payment of accrued liability

 

 

 

 
188

 

 

 

 
188

Stock options exercised
663

 

 

 

 
5,884

 

 

 

 
5,884

Restricted stock awards granted
275

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
122

 

 

 

 

 

 

Treasury stock purchased

 

 
200

 
(1,729
)
 

 

 

 

 
(1,729
)
Stock surrendered for exercise of stock options

 

 
478

 
(5,863
)
 

 

 

 

 
(5,863
)
Stock compensation expense

 

 

 

 
10,949

 

 

 

 
10,949

Repurchase of common stock

 

 
905

 
(5,203
)
 

 

 

 

 
(5,203
)
Balance, December 31, 2017
60,623

 
$
6

 
3,621

 
$
(33,064
)
 
$
336,067

 
$
(884
)
 
$
(37,225
)
 
$
358

 
$
265,258

Net loss

 

 

 

 

 

 
(70,340
)
 
(358
)
 
(70,698
)
Foreign currency translation adjustment

 

 

 

 

 
(232
)
 

 

 
(232
)
Stock issued under employee stock purchase plan

 

 
(111
)
 

 
341

 

 

 

 
341

Restricted stock awards granted
1,540

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
158

 

 

 

 

 

 

Treasury stock purchased

 

 
102

 
(173
)
 

 

 

 

 
(173
)
Stock compensation expense

 

 

 

 
7,128

 

 

 

 
7,128

Balance, December 31, 2018
62,163

 
$
6

 
3,770

 
$
(33,237
)
 
$
343,536

 
$
(1,116
)
 
$
(107,565
)
 
$

 
$
201,624

Net loss

 

 

 

 

 

 
(32,279
)
 


 
(32,279
)
Foreign currency translation adjustment

 

 

 

 

 
150

 

 

 
150

Stock issued under employee stock purchase plan