FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
38,660
|
|
|
$
|
100,575
|
|
Restricted cash
|
664
|
|
|
663
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,316 and $1,527 at December 31, 2020 and 2019, respectively
|
11,764
|
|
|
15,638
|
|
Inventories, net
|
11,837
|
|
|
23,210
|
|
|
|
|
|
Income taxes receivable
|
403
|
|
|
631
|
|
|
|
|
|
Other current assets
|
3,127
|
|
|
13,191
|
|
Total current assets
|
66,455
|
|
|
153,908
|
|
Property and equipment, net
|
9,087
|
|
|
39,829
|
|
Operating lease right-of-use assets
|
2,320
|
|
|
16,388
|
|
Goodwill
|
8,092
|
|
|
—
|
|
Deferred tax assets, net
|
223
|
|
|
152
|
|
Other intangible assets, net
|
—
|
|
|
20,323
|
|
Other long-term assets
|
33
|
|
|
—
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
86,210
|
|
|
$
|
230,600
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
5,787
|
|
|
$
|
16,231
|
|
Accrued liabilities
|
18,275
|
|
|
24,552
|
|
Income taxes payable
|
21
|
|
|
—
|
|
Interest payable
|
34
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
636
|
|
|
486
|
|
Current portion of finance lease liabilities
|
60
|
|
|
55
|
|
Current portion of long-term debt
|
4,048
|
|
|
—
|
|
|
|
|
|
Total current liabilities
|
28,861
|
|
|
41,324
|
|
Deferred revenue, long-term
|
117
|
|
|
—
|
|
Long-term operating lease liabilities
|
8,348
|
|
|
16,973
|
|
Long-term finance lease liabilities
|
96
|
|
|
158
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
1,617
|
|
|
—
|
|
|
|
|
|
Deferred tax liabilities, net
|
—
|
|
|
116
|
|
TOTAL LIABILITIES
|
39,039
|
|
|
58,571
|
|
Commitments and contingencies (Note 16)
|
|
|
|
Stockholders’ Equity:
|
|
|
|
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $0.0001 par value, 140,000,000 shares authorized; 78,669,414 shares issued and 73,088,494 shares outstanding at December 31, 2020; 63,656,897 shares issued and 59,511,416 shares outstanding at December 31, 2019
|
8
|
|
|
6
|
|
Additional paid-in capital
|
359,721
|
|
|
347,564
|
|
Accumulated other comprehensive (loss) income
|
(19)
|
|
|
181
|
|
Accumulated deficit
|
(278,688)
|
|
|
(142,238)
|
|
Treasury stock, at cost; 5,580,920 and 4,145,481 shares at December 31, 2020 and 2019, respectively
|
(33,851)
|
|
|
(33,484)
|
|
Total stockholders’ equity
|
47,171
|
|
|
172,029
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
86,210
|
|
|
$
|
230,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
Revenue
|
$
|
53,141
|
|
|
$
|
119,353
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
Operating expenses (excluding depreciation and amortization)
|
88,266
|
|
|
148,100
|
|
|
|
Corporate general and administrative
|
16,311
|
|
|
27,975
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
3,412
|
|
|
8,465
|
|
|
|
Research and development
|
7,213
|
|
|
8,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on disposal of long-lived assets
|
(94)
|
|
|
1,450
|
|
|
|
Impairment of fixed and long-lived assets
|
69,975
|
|
|
—
|
|
|
|
Impairment of goodwill
|
11,706
|
|
|
—
|
|
|
|
Total costs and expenses
|
196,789
|
|
|
194,853
|
|
|
|
Loss from operations
|
(143,648)
|
|
|
(75,500)
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
Gain on lease termination
|
576
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(60)
|
|
|
(2,019)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
503
|
|
|
1,708
|
|
|
|
Total other income (expense)
|
1,019
|
|
|
(311)
|
|
|
|
Loss before income taxes
|
(142,629)
|
|
|
(75,811)
|
|
|
|
Income tax benefit (expense)
|
6,179
|
|
|
(262)
|
|
|
|
Loss from continuing operations
|
(136,450)
|
|
|
(76,073)
|
|
|
|
Income from discontinued operations, net of tax
|
—
|
|
|
42,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(136,450)
|
|
|
$
|
(33,915)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
Continuing operations
|
$
|
(2.00)
|
|
|
$
|
(1.29)
|
|
|
|
Discontinued operations, net of tax
|
—
|
|
|
0.72
|
|
|
|
Basic earnings (loss) per common share
|
$
|
(2.00)
|
|
|
$
|
(0.57)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares:
|
|
|
|
|
|
Weighted average common shares used in computing basic and diluted loss per common share
|
68,312
|
|
|
58,750
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
Loss from continuing operations, net of tax
|
$
|
(136,450)
|
|
|
$
|
(76,073)
|
|
|
|
Income from discontinued operations, net of tax
|
—
|
|
|
42,158
|
|
|
|
Net loss
|
(136,450)
|
|
|
(33,915)
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
Foreign currency translation adjustment
|
(200)
|
|
|
150
|
|
|
|
Comprehensive loss
|
$
|
(136,650)
|
|
|
$
|
(33,765)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Treasury Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other Comprehensive
Income (Loss)
|
|
Retained Earnings
(Accumulated
Deficit)
|
|
|
|
Total Stockholders’ Equity
|
|
Shares Issued
|
|
Par Value
|
|
|
|
|
|
Shares
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
62,163
|
|
|
$
|
6
|
|
|
|
|
|
|
3,770
|
|
|
$
|
(33,237)
|
|
|
$
|
343,536
|
|
|
$
|
31
|
|
|
$
|
(108,323)
|
|
|
|
|
$
|
202,013
|
|
Net loss
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(33,915)
|
|
|
|
|
(33,915)
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
150
|
|
|
—
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued under employee stock purchase plan
|
—
|
|
|
—
|
|
|
|
|
|
|
(18)
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards granted
|
924
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Restricted stock forfeited
|
—
|
|
|
—
|
|
|
|
|
|
|
299
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Restricted stock units granted
|
570
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Treasury stock purchased
|
—
|
|
|
—
|
|
|
|
|
|
|
94
|
|
|
(247)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
(247)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
3,993
|
|
|
—
|
|
|
—
|
|
|
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
63,657
|
|
|
$
|
6
|
|
|
|
|
|
|
4,145
|
|
|
$
|
(33,484)
|
|
|
$
|
347,564
|
|
|
$
|
181
|
|
|
$
|
(142,238)
|
|
|
|
|
$
|
172,029
|
|
Net loss
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(136,450)
|
|
|
|
|
(136,450)
|
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(200)
|
|
|
—
|
|
|
|
|
(200)
|
|
Sale of common stock
|
200
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
339
|
|
|
—
|
|
|
—
|
|
|
|
|
339
|
|
Stock issued under employee stock purchase plan
|
—
|
|
|
—
|
|
|
|
|
|
|
(78)
|
|
|
—
|
|
|
123
|
|
|
—
|
|
|
—
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards granted
|
3,115
|
|
|
1
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
2,322
|
|
|
—
|
|
|
—
|
|
|
|
|
2,323
|
|
Restricted stock forfeited
|
—
|
|
|
—
|
|
|
|
|
|
|
1,302
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Restricted stock units granted
|
86
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock surrendered for exercise of stock options
|
—
|
|
|
—
|
|
|
|
|
|
|
66
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Treasury stock purchased
|
—
|
|
|
—
|
|
|
|
|
|
|
146
|
|
|
(253)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
(253)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued in JP3 acquisition
|
11,500
|
|
|
1
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
8,537
|
|
|
—
|
|
|
—
|
|
|
|
|
8,538
|
|
Stock options granted
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
722
|
|
|
—
|
|
|
—
|
|
|
|
|
722
|
|
Stock options exercised
|
111
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
(114)
|
|
|
114
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
78,669
|
|
|
$
|
8
|
|
|
|
|
|
|
5,581
|
|
|
$
|
(33,851)
|
|
|
$
|
359,721
|
|
|
$
|
(19)
|
|
|
$
|
(278,688)
|
|
|
|
|
$
|
47,171
|
|
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
$
|
(136,450)
|
|
|
$
|
(33,915)
|
|
|
|
Income from discontinued operations, net of tax
|
—
|
|
|
42,158
|
|
|
|
Loss from continuing operations
|
(136,450)
|
|
|
(76,073)
|
|
|
|
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
2,716
|
|
|
—
|
|
|
|
Depreciation and amortization
|
3,412
|
|
|
8,465
|
|
|
|
Amortization of deferred financing costs
|
—
|
|
|
1,428
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
652
|
|
|
512
|
|
|
|
Provision for excess and obsolete inventory
|
12,261
|
|
|
5,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of fixed assets
|
30,178
|
|
|
—
|
|
|
|
(Gain) loss on sale of assets
|
(561)
|
|
|
1,450
|
|
|
|
Impairment of goodwill
|
11,706
|
|
|
—
|
|
|
|
Impairment of right-of-use assets
|
7,434
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Impairment of intangible assets
|
32,363
|
|
|
—
|
|
|
|
Stock compensation expense
|
3,044
|
|
|
4,235
|
|
|
|
Deferred income tax (benefit) provision
|
(187)
|
|
|
18,307
|
|
|
|
|
|
|
|
|
|
Reduction in tax benefit related to stock-based awards
|
—
|
|
|
24
|
|
|
|
Non-cash lease expense
|
356
|
|
|
740
|
|
|
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
3,556
|
|
|
20,993
|
|
|
|
Inventories
|
3,955
|
|
|
(727)
|
|
|
|
Income taxes receivable
|
182
|
|
|
2,546
|
|
|
|
Other current assets
|
1,026
|
|
|
2,579
|
|
|
|
Other long-term assets
|
(16)
|
|
|
3,286
|
|
|
|
Accounts payable
|
(12,323)
|
|
|
1,131
|
|
|
|
Accrued liabilities
|
(11,260)
|
|
|
908
|
|
|
|
Income taxes payable
|
84
|
|
|
—
|
|
|
|
Interest payable
|
34
|
|
|
(8)
|
|
|
|
Net cash used in operating activities
|
(47,838)
|
|
|
(4,545)
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(1,425)
|
|
|
(2,411)
|
|
|
|
Proceeds from sale of businesses
|
9,907
|
|
|
155,498
|
|
|
|
Proceeds from sale of assets
|
109
|
|
|
240
|
|
|
|
Payments for acquisitions, net of cash acquired
|
(26,284)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Purchase of patents and other intangible assets
|
(8)
|
|
|
(614)
|
|
|
|
Net cash (used in) provided by investing activities
|
(17,701)
|
|
|
152,713
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
—
|
|
|
42,984
|
|
|
|
Repayments on revolving credit facility
|
—
|
|
|
(92,715)
|
|
|
|
Payment for contingent consideration
|
(1,200)
|
|
|
—
|
|
|
|
Proceeds from Paycheck Protection Program loan
|
4,788
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Payments for finance leases
|
(70)
|
|
|
(51)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
(253)
|
|
|
(247)
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
462
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
3,727
|
|
|
(49,994)
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
Net cash used in operating activities
|
—
|
|
|
(322)
|
|
|
|
Net cash provided by investing activities
|
—
|
|
|
337
|
|
|
|
Net cash flows provided by discontinued operations
|
—
|
|
|
15
|
|
|
|
Effect of changes in exchange rates on cash and cash equivalents
|
(102)
|
|
|
5
|
|
|
|
Net change in cash, cash equivalents and restricted cash
|
(61,914)
|
|
|
98,194
|
|
|
|
Cash, cash equivalents at beginning of period
|
100,575
|
|
|
3,044
|
|
|
|
Restricted cash at the beginning of the period
|
663
|
|
|
663
|
|
|
|
Cash and cash equivalents and restricted cash at beginning of period
|
101,238
|
|
|
3,707
|
|
|
|
Cash and cash equivalents at end of period
|
38,660
|
|
|
100,575
|
|
|
|
Restricted cash at the end of period
|
664
|
|
|
663
|
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
39,324
|
|
|
$
|
101,238
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a technology-driven chemistry and data company that serves customers in industrial, commercial and consumer markets.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets specialty chemicals that enhance the profitability of hydrocarbon producers and cleans surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s Data Analytics (“DA”) segment enables users to maximize the value of their hydrocarbon associated processes by providing analytics associated with the streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.
The Company formed the DA segment during the second quarter of 2020, after acquiring JP3 Measurement, LLC (“JP3”). The Company’s two operating segments, CT and DA, are both supported by its continuing Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 22, “Business Segment, Geographic and Major Customer Information.” For further discussion of the JP3 acquisition, see Note 3, “Business Combination.”
The Company was initially incorporated under the laws of the Province of British Columbia in 1985. In October 2001, the Company changed its corporate domicile to the state of Delaware.
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a global pandemic. The pandemic negatively impacted the U.S. and global economy, disrupted domestic and international oil and gas markets, and increased volatility in financial markets. These effects materially and adversely affected, and may continue to materially and adversely affect, the demand for oil and natural gas as well as for our services and products. The Company’s primary markets in the U.S. are particularly subject to the impacts on the oil and gas industry. As a result, the Company recorded an impairment to property, plant and equipment; intangible assets; and operating right-of-use assets during the first quarter of 2020. The extended impact of COVID-19 and its effect on the oil and gas industry contributed to additional impairment charges to goodwill and intangible assets in the third quarter of 2020. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” and Note 9, “Goodwill.” In addition, the Company increased the provision of excess and obsolete inventory as discussed in Note 6, “Inventories.” Future developments and effects are highly uncertain and cannot be predicted, including the scope and duration of the pandemic. This uncertainty could have a material impact on accounting estimates and assumptions used in our consolidated financial statements.
Sources and Uses of Liquidity
The Company currently funds its operations and growth primarily from cash on hand. The ability of the Company to grow and be competitive in the marketplace is dependent on the availability of adequate capital. Access to capital is dependent, in large part, on the Company’s cash flows and the availability of and access to equity and debt financing. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash in operations in the following year. While we believe that our cash and liquid assets will provide us with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due, a prolonged COVID-19 impact, a slower than expected recovery in of oil and gas markets, or reduced spending by our customers could have a negative impact on our liquidity.
Accordingly, while the Company believes that its existing cash will enable it to fund its operations and growth, the Company cannot guarantee the level of cash flows in the future. In the event that the Company’s existing cash on hand is not sufficient to fund operations, meet our capital requirements or satisfy the anticipated obligations as they become due, the Company expects to take further action to protect its liquidity position. Such actions may include, but are not limited to:
•Sale of non-core real estate properties;
•Sale-leaseback transactions of facilities;
•Sale of excess inventory and/or raw materials;
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Entry into a borrowing facility with one or more lenders;
•Raising equity either in the public markets or via a private placement offering;
•Reducing executive salaries and/or board of directors’ fees, or making a portion of those fees or salaries in equity instead of cash; and
•Reducing professional advisory fees and headcount.
However, with respect to anticipated transactions, there can be no assurance that such matters can be implemented on acceptable terms or at all.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of Flotek Industries, Inc. and all wholly-owned subsidiaries. Where Flotek owns less than 100% of the share capital of its subsidiaries but is still considered to have sufficient ownership to control the business, results of the business operations are consolidated within the Company’s financial statements. The ownership interests held by other parties are shown as noncontrolling interests.
During the fourth quarter of 2018, the Company classified the Consumer and Industrial Chemistry Technologies (“CICT”) segment as held for sale based on management’s intention to sell this business, which occurred in February 2019. The results of operations of this segment are presented as “Income from discontinued operations” in the consolidated statements of operations, and the related cash flows of this segment have been reclassified to discontinued operations for all periods presented. For further discussion, see Note 4, “Discontinued Operations.”
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
Cash Management
The Company uses a controlled disbursement account for its main cash account. Under this system, outstanding checks can be in excess of the cash balances at the bank before the disbursement account is funded, creating a book overdraft. Book overdrafts on this account are presented as a current liability in accounts payable in the consolidated balance sheets.
Restricted Cash
The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate provision for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible.
The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
Balance, beginning of year
|
$
|
1,527
|
|
|
$
|
1,190
|
|
|
|
Charges to provision for doubtful accounts, net of recoveries
|
652
|
|
|
512
|
|
|
|
Write-offs
|
(863)
|
|
|
(175)
|
|
|
|
Balance, end of year
|
$
|
1,316
|
|
|
$
|
1,527
|
|
|
|
Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of cost, or market determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated market value if those amounts are determined to be less than cost. See Note 6 “Inventories” for discussion of the inventory write-down recorded in 2020.
Property and Equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including right-of-use assets (“ROU”), is calculated using the straight-line method over the asset’s estimated useful life as follows:
|
|
|
|
|
|
Buildings and leasehold improvements
|
2-30 years
|
Machinery and equipment
|
7-10 years
|
Furniture and fixtures
|
3 years
|
Land improvements
|
20 years
|
Transportation equipment
|
2-5 years
|
Computer equipment and software
|
3-7 years
|
Property and equipment, including ROU assets, are reviewed for impairment on a quarterly basis or whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. Indicative events or circumstances include, but are not limited to, matters such as a significant decline in market value or a significant change in business climate. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows from the use of the asset and its eventual disposition. The amount of impairment loss recognized is the excess of the asset’s carrying amount over its fair value. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to sell. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse change in the business climate or a change in the assessment of future operations of a reporting unit.
The Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
The quantitative impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined, when appropriate, with a market-based approach. The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit. If the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.
Other Intangible Assets
The Company’s other intangible assets have finite and indefinite lives and included customer relationships, technology and know-how, trademarks, brand names and purchased patents.
The cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of economic benefit. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned to these intangible assets.
Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, an impairment loss is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flow models.
Intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit.
The Company assesses whether an indefinite lived intangible impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the indefinite-lived intangible asset is impaired or if the Company elects to not perform a qualitative assessment, the Company then performs the quantitative impairment test. The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.
Business Combinations
The Company includes the results of operations of its acquisitions in its consolidated results, prospectively from the date of acquisition. The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed and any noncontrolling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and any noncontrolling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce. Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.
Fair Value Measurements
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 14, “Fair Value Measurements.”
Revenue Recognition
The Company recognizes revenue to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. See Note 5, “Revenue from Contracts with Customers,” for further discussion on revenue.
The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.
As an accounting policy election, the Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets and liabilities are recognized related to the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company’s assets and liabilities using statutory tax rates at the applicable year end. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.
A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Except for a state jurisdiction, the Company maintains a full valuation allowance on its deferred tax assets.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has performed an evaluation and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s consolidated financial statements.
The Company’s policy is to record interest and penalties related to income tax matters as income tax expense.
Stock-Based Compensation
Stock-based compensation expense for stock-based payments, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.
Significant items subject to estimates and assumptions include application of the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, business combinations, stock-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not impact previously recorded net loss and stockholders’ equity.
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”). We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.
(a) Recently Adopted Guidance
Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” This standard removes, modifies and adds additional requirements for disclosures related to fair value measurement in the FASB’s Accounting Standards Codification (“ASC”) 820. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted in any interim period. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
(b) New Accounting Standards Issued But Not Adopted as of December 31, 2020
The FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard removes specific exceptions to the general principles in Topic 740. The pronouncement is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted for public companies for periods in which financial statements have not yet been issued. The Company is currently evaluating the impact of this standard on the consolidated financial statements and related disclosures.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard, including subsequent amendments, on the consolidated financial statements and related disclosures.
Note 3 — Business Combination
During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, targeting an increase of processing efficiencies and valuation of natural gas, crude oil and refined fuels. The transaction was valued at approximately $36.6 million, as of the transaction closing date, comprised of $25.0 million in cash, subject to certain adjustments and contingent consideration as described below, and 11.5 million shares in Flotek common stock with an estimated fair value of $8.5 million, net of a discount for marketability due to a lock-up period. The payment of $25.0 million was subject to certain purchase price adjustments, and the total non-equity consideration at closing was comprised of $25.0 million plus net working capital in excess of the target net working capital of $1.9 million. Additionally, the Company was subject to contingent consideration with an estimated fair value of $1.2 million for two potential earn-out provisions up to $5.0 million based on certain stock performance targets. The first and second earn-out provisions are payable if the ten-day volume-weighted average share price equals or exceeds $2 per share and $3 per share, respectively, before May 18, 2025.
The following table summarizes the fair value of JP3’s assets acquired as of the closing date of May 18, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
Tradenames and trademarks
|
|
$
|
1,100
|
|
Technology and know-how
|
|
5,000
|
|
Customer lists
|
|
6,800
|
|
Inventories
|
|
7,100
|
|
Cash
|
|
604
|
|
Net working capital, net of cash and inventories
|
|
(1,063)
|
|
Fixed assets
|
|
426
|
|
Long-term debt assumed and other assets (liabilities)
|
|
(893)
|
|
Goodwill
|
|
17,522
|
|
Net assets acquired
|
|
$
|
36,596
|
|
The Company recorded transaction costs of $0.5 million for professional services including legal, accounting, and other professional or consulting fees in connection with the JP3 acquisition to the Company’s operating expenses (excluding depreciation and amortization) in the consolidated statements of operations during the second quarter of 2020.
Pro forma information for JP3 is not provided as the impact is not considered material.
During the third quarter of 2020, the Company made certain measurement period adjustments to inventory, resulting in an increase of goodwill of $2.3 million. See Note 6, “Inventories.”
As discussed in Note 11, “Impairment of Fixed, Long-lived and Intangible Assets,” during the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other, and completed an impairment analysis at the DA reporting unit level. During the third quarter of 2020, the Company recognized a finite-lived intangible assets impairment charge of $12.5 million in the DA reporting unit, which resulted from lower performance than expected by the reporting unit. The extended impact of COVID-19 and subsequent decline in oil and gas demand further contributed to the impairment charge. As a result of these factors, the Company concluded that sufficient indicators existed to require an interim quantitative assessment of goodwill for that reporting unit as of September 30, 2020. The fair value of the reporting unit was estimated based on an analysis of the present value of future discounted cash flows, and the Company recognized a goodwill
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment charge of $11.7 million. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth.
During the third quarter of 2020, the first stock performance target was achieved. In October 2020, the Company paid $2.5 million into escrow in accordance with the terms of the JP3 Membership Interests Purchase Agreement to partially settle the earn-out payment that had been recorded as an accrued liability at September 30, 2020. At December 31, 2020, the estimated fair value of the second stock performance earn-out provision was $1.4 million, which was recorded as a contingent liability in accrued liabilities.
As the achievement of earn-out provisions and changes in fair value estimates are not acquisition adjustments, the Company recorded $2.7 million of expense for achievement of the first stock performance target and the increase in the fair value of the contingent consideration for the second earn-out provision in operating expenses for the year ended December 31, 2020.
Note 4 — Discontinued Operations
During the fourth quarter of 2018, the Company initiated and began executing a strategic plan to sell its CICT segment. The Company met all of the criteria to classify the CICT segment as held for sale in the fourth quarter 2018, and classified the assets, liabilities and results of operations for this segment as “Discontinued Operations” for all periods.
On January 10, 2019, the Company entered into a Share Purchase Agreement with Archer-Daniels-Midland Company (“ADM”) for the sale of all of the shares representing membership interests in its wholly-owned subsidiary, Florida Chemical Company, LLC (“FCC”), which represented the CICT segment.
Effective February 28, 2019, the Company completed the sale of FCC to ADM for $175.0 million in cash consideration, subject to post-closing working capital adjustments and potential indemnification claims by ADM. ADM placed $17.5 million in escrow for these items, which were released over a period of time through the second quarter of 2020. The escrow balance included in other current assets was zero and $9.9 million at December 31, 2020 and 2019, respectively. Pursuant to the terms of the Share Purchase Agreement, Flotek Chemistry, LLC (“Flotek Chemistry”), a wholly-owned subsidiary of the Company, entered into a supply agreement in which FCC would supply terpene at specified prices for specified quantities.
As of December 31, 2019, the Company concluded that the original long-term supply agreement met the definition of a loss contract. As such, the Company recognized a current liability and loss of $15.8 million as of December 31, 2019. The loss was capped by the price paid for the terpene supply agreement amendment, executed in February 2020, which aligned purchase commitments to expected usage for blended products as of December 31, 2019.
Pursuant to the post-closing working capital dispute resolution procedures set forth in the Share Purchase Agreement, the Company and ADM engaged a neutral third-party auditor to help reach agreement on the final post-closing working capital adjustment. In February 2020, the third-party auditor ruled in favor of awarding ADM the entire disputed amount of $4.1 million. As a result, the working capital adjustment escrow balance was released to ADM and a corresponding reduction was made to the gain on sale of business as of December 31, 2019.
The following summarized financial information has been reported as Discontinued Operations for the years ended December 31 (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and Industrial Chemistry Technologies
|
|
2020
|
|
2019
|
|
|
Discontinued operations:
|
|
|
|
|
|
Revenue
|
$
|
—
|
|
|
$
|
11,031
|
|
|
|
Operating expenses
|
—
|
|
|
(11,572)
|
|
|
|
Depreciation and amortization
|
—
|
|
|
—
|
|
|
|
Research and development
|
—
|
|
|
(69)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
—
|
|
|
(610)
|
|
|
|
Other income
|
—
|
|
|
35
|
|
|
|
Gain on sale of businesses
|
—
|
|
|
65,417
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
—
|
|
|
64,842
|
|
|
|
Income tax expense
|
—
|
|
|
(22,684)
|
|
|
|
Net income from discontinued operations
|
$
|
—
|
|
|
$
|
42,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 — Revenue from Contracts with Customers
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an ongoing basis to reflect updated variable consideration information.
The majority of the products from the CT segment are sold at a point in time and service contracts are short-term in nature. The DA segment recognizes revenue for sales of equipment at the time of sale. Revenue related to service and support is recognized over time. The Company bills sales on a monthly basis with payment terms customarily 30-45 days for domestic and 60 days for international from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of Revenue
The Company has disaggregated revenues by product sales (point-in-time revenue recognition) and service revenue (over-time revenue recognition). Product sales accounted for 95% or more of total revenue for the years ended December 31, 2020 and 2019.
The Company differentiates revenue and based on whether the source of revenue is attributable to products or services. Revenue disaggregated by revenue source is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
Revenue:
|
|
|
|
|
|
Products
|
$
|
50,478
|
|
|
$
|
115,683
|
|
|
|
|
|
|
|
|
|
Services
|
2,663
|
|
|
3,670
|
|
|
|
|
$
|
53,141
|
|
|
$
|
119,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrangements with Multiple Performance Obligations
The CT and DA segments primarily sell chemicals and equipment recognized at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Additionally, both segments offer various services associated to products sold which includes field services, installation, maintenance, and other functions. Service revenue is recognized on an over time basis for CT as services are performed as the customer is simultaneously benefiting as the Company performs. For
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DA, services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. DA has additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, DA may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Subscription-type arrangements were not a material revenue stream in 2020.
Contract Balances
Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract liabilities associated with incomplete performance obligations are not material.
Practical Expedients and Exemptions
The Company applies several practical expedients as discussed below:
•Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded within corporate general and administrative expenses.
•The majority of the Company’s services are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14, exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
•The Company’s payment terms are short-term in nature with settlements of one year or less. The Company utilized the practical expedient in ASC 606-10-32-18, exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
•In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date. For these contracts, the Company has utilized the practical expedient in ASC 606-10-55-18, allowing the Company to recognize revenue in the amount to which it has a right to invoice.
Accordingly, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
Note 6 — Inventories
Inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Raw materials
|
$
|
7,190
|
|
|
$
|
4,339
|
|
|
|
|
|
Finished goods
|
15,705
|
|
|
24,569
|
|
Inventories
|
22,895
|
|
|
28,908
|
|
Less reserve for excess and obsolete inventory
|
(11,058)
|
|
|
(5,698)
|
|
Inventories, net
|
$
|
11,837
|
|
|
$
|
23,210
|
|
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Balance, beginning of year
|
$
|
5,698
|
|
|
$
|
2,117
|
|
|
|
Charged to provisions
|
12,261
|
|
|
5,659
|
|
|
|
Deductions for sales and disposals
|
(6,901)
|
|
|
(2,078)
|
|
|
|
Balance, end of the year
|
$
|
11,058
|
|
|
$
|
5,698
|
|
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on an assessment of market values. Write-downs or write-offs of inventory are charged to cost of goods sold.
The provision for excess and obsolete inventory includes charges of $8.4 million for the CT segment and $3.9 million for the DA segment, offset by sales and disposals of $6.9 million, primarily related to terpene sales in 2020.
At December 31, 2020, the Company recognized an increase in the reserve for excess and obsolete inventory of $0.4 million due to terpene on hand exceeding anticipated usage. Also see Note 16, “Commitments and Contingencies,” for terpene purchase commitments at December 31, 2020. At December 31, 2019, the Company recorded a reserve for excess terpene of $4.4 million.
Note 7 — Property and Equipment
Property and equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Land
|
$
|
2,415
|
|
|
$
|
2,415
|
|
Land improvements
|
867
|
|
|
2,025
|
|
Buildings and leasehold improvements
|
6,364
|
|
|
38,741
|
|
Machinery and equipment
|
7,760
|
|
|
27,694
|
|
|
|
|
|
Furniture and fixtures
|
649
|
|
|
1,671
|
|
Transportation equipment
|
1,190
|
|
|
1,440
|
|
Computer equipment and software
|
1,296
|
|
|
3,348
|
|
Property and equipment
|
20,541
|
|
|
77,334
|
|
Less accumulated depreciation
|
(11,454)
|
|
|
(37,505)
|
|
Property and equipment, net
|
$
|
9,087
|
|
|
$
|
39,829
|
|
Depreciation expense totaled $2.5 million and $6.5 million for the years ended December 31, 2020 and 2019, respectively.
During the first quarter of 2020, the Company recognized an impairment of property and equipment of $30.2 million. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, no impairments were recognized related to property and equipment.
Note 8 — Leases
The Company has leases for corporate offices, research and development facilities, warehouses, sales offices and equipment. The leases have remaining lease terms of one to fifteen years, some of which include options to extend the leases for up to ten years. The Company’s largest lease is for the Global Research and Innovation Center (“GRIC”). The lease was entered into on July 12, 2015, with a fifteen-year term and an option to renew for an additional seven years. The rent payments on the GRIC lease escalate each year until the end of the term.
Operating lease right-of-use assets and corresponding operating lease liabilities, net of deferred rent, represent the present value of future lease payments under operating leases with terms of greater than twelve months. Leases with an initial expected term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term. The discount rate used upon adoption of ASC 842, “Leases,” in the calculation was the incremental borrowing rate on the revolving credit facility in 2019.
During the first quarter of 2020, the Company ceased use of the corporate headquarters leased offices and moved corporate employees to the GRIC during the second quarter of 2020. In addition, the lease liability and corresponding right-of-use assets for the corporate headquarters and GRIC were remeasured to remove the anticipated term extensions as the Company determined it was no longer reasonably certain to utilize the extension at the GRIC. The remeasurement resulted in adjustments to lease liabilities and right-of-use assets totaling of $6.2 million at March 31, 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, during the first quarter of 2020, the Company recorded an impairment of the right-of-use assets totaling $7.4 million. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.”
During the second quarter of 2020, the Company terminated the lease of the corporate headquarters office in exchange for a one-time payment of $1.0 million and moved all corporate employees to the GRIC facility effective as of June 29, 2020. As a result of terminating the corporate headquarters office lease and making the one-time payment, the Company recorded a gain on lease termination of $0.6 million.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Operating lease expense
|
$
|
1,370
|
|
|
|
|
$
|
2,609
|
|
|
|
Finance lease expense:
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
17
|
|
|
|
|
1,237
|
|
|
|
Interest on lease liabilities
|
18
|
|
|
|
|
10
|
|
|
|
Total finance lease expense
|
35
|
|
|
|
|
1,247
|
|
|
|
Short-term lease expense
|
202
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
Total lease expense
|
$
|
1,607
|
|
|
|
|
$
|
3,979
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
2,884
|
|
|
|
|
$
|
2,336
|
|
|
|
Operating cash flows from finance leases
|
18
|
|
|
|
|
10
|
|
|
|
Financing cash flows from finance leases
|
70
|
|
|
|
|
51
|
|
|
|
Maturities of lease liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ending December 31,
|
|
Operating Leases
|
|
Finance Leases
|
|
|
|
|
2021
|
|
$
|
1,367
|
|
|
$
|
69
|
|
2022
|
|
1,289
|
|
|
46
|
|
2023
|
|
1,317
|
|
|
39
|
|
2024
|
|
1,347
|
|
|
23
|
|
2025
|
|
1,347
|
|
|
—
|
|
Thereafter
|
|
6,865
|
|
|
—
|
|
Total lease payments
|
|
13,532
|
|
|
177
|
|
Less: Interest
|
|
(4,548)
|
|
|
(21)
|
|
Present value of lease liabilities
|
|
$
|
8,984
|
|
|
$
|
156
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Operating Leases
|
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
2,320
|
|
|
$
|
16,388
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
$
|
636
|
|
|
$
|
486
|
|
|
|
Long-term operating lease liabilities
|
8,348
|
|
|
16,973
|
|
|
|
Total operating lease liabilities
|
$
|
8,984
|
|
|
$
|
17,459
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
|
Property and equipment
|
$
|
147
|
|
|
$
|
293
|
|
|
|
Accumulated depreciation
|
(26)
|
|
|
(28)
|
|
|
|
Property and equipment, net
|
$
|
121
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
Current portion of finance lease liabilities
|
$
|
60
|
|
|
$
|
55
|
|
|
|
Long-term finance lease liabilities
|
96
|
|
|
158
|
|
|
|
Total finance lease liabilities
|
$
|
156
|
|
|
$
|
213
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
Operating leases
|
9.9 years
|
|
16.6 years
|
|
|
Finance leases
|
3.1 years
|
|
4.6 years
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
Operating leases
|
8.9
|
%
|
|
8.9
|
%
|
|
|
Finance leases
|
9.0
|
%
|
|
9.0
|
%
|
|
|
Rent expense under operating leases totaled $1.6 million for the year ended December 31, 2020, and $2.9 million for the year ended December 31, 2019.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9— Goodwill
During the second quarter of 2020, the Company acquired 100% ownership of JP3, a privately-held data and analytics technology company, in a cash-and-stock transaction. The Company identified the acquired company as the DA segment, a new operating segment. See Note 3, “Business Combination.” The Company recorded goodwill of $17.5 million at the date of acquisition.
During the third quarter of 2020, the Company identified a triggering event under ASC 350, Intangibles — Goodwill and Other, and completed an impairment analysis at the DA reporting unit level. During the third quarter of 2020, the Company recognized a goodwill impairment charge of $11.7 million.
Also, during the third quarter of 2020, the Company made certain measurement period adjustments to inventory obtained in the JP3 acquisition, resulting in an increase of goodwill of $2.3 million. See Note 6, “Inventories.”
Changes in the carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity during the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition goodwill recognized
|
$
|
17,522
|
|
|
|
|
|
|
|
|
|
|
|
Measurement period adjustment
|
2,276
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment recognized
|
(11,706)
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance, net of impairment
|
$
|
8,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
19,798
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment losses
|
(11,706)
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance, net of impairment
|
$
|
8,092
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 — Other Intangible Assets
Intangible assets acquired are amortized on a straight-line basis. Amortization of intangible assets acquired totaled $0.9 million and, $2.0 million for the years ended December 31, 2020 and 2019, respectively.
Amortization of deferred financing costs totaled $1.4 million for the year ended December 31, 2019. In March 2019, the Company repaid the outstanding balance of its credit facility. See Note 13, “Debt.”
During the year ended December 31, 2020, the Company recorded impairment charges of $32.4 million for other intangible assets, impairing all finite-lived intangible assets, including those acquired in the May 2020 acquisition of JP3. See Note 11, “Impairment of Fixed, Long-lived and Intangible Assets.” During the year ended December 31, 2019, no impairments were recognized related to other intangible assets.
At December 31, 2019, the net carrying value of other intangible assets was $20.3 million, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated
Amortization
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Patents and technology
|
|
|
|
|
$
|
17,493
|
|
|
$
|
(6,715)
|
|
Customer relationships
|
|
|
|
|
15,367
|
|
|
(6,013)
|
|
|
|
|
|
|
|
|
|
Trademarks and brand names
|
|
|
|
|
1,351
|
|
|
(1,160)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets
|
|
|
|
|
$
|
34,211
|
|
|
$
|
(13,888)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Impairment of Fixed, Long-lived and Intangible Assets
The Company recorded impairment charges of fixed, long-lived and intangible assets during the year ended December 31, 2020, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
30,178
|
|
|
|
Operating lease right-of-use assets
|
7,434
|
|
|
|
Other Intangibles:
|
|
|
|
Patents and technology
|
14,733
|
|
|
|
Customer relationships
|
15,796
|
|
|
|
Intangible assets in progress
|
596
|
|
|
|
Trademarks and brand names
|
1,238
|
|
|
|
Total other intangibles
|
32,363
|
|
|
|
|
|
|
|
Total impairment of fixed, long-lived and intangible assets
|
$
|
69,975
|
|
|
|
During the first quarter of 2020, the price of crude oil declined by over 50%, trading below $25 per barrel, causing a significant disruption across the industry, which began to negatively impact the Company’s results of operations. These declines of results of operations were driven by market factors, including an oversupply of oil, insufficient storage and demand destruction resulting from the reaction to COVID-19. Based on these factors, the Company concluded that a triggering event occurred and, accordingly, an interim quantitative impairment test was performed as of March 31, 2020.
Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of March 31, 2020, and an impairment loss of $57.5 million was recorded as a result of the adverse effect of the COVID-19 pandemic, estimated effect on the economy, and the related negative impact on oil and natural gas prices on projections of future cash flows.
During the second quarter of 2020, the Company purchased JP3 and formed the DA segment. During the third quarter of 2020, revenue declined due to limited access to worksites, inability to install equipment, changes in the Company’s leadership, reduction of capital spending by clients due to COVID-19, inability to present to new customers and difficulty in working on the international marketing of the Verax analyzer. Further, the Company was negatively impacted by reduced demand in the oil and gas sector because of reductions in capital spending across our customer base, lower than anticipated growth in the international market gained from the JP3 acquisition and the delayed start of the Company’s global sales business executive.
Although the site lockdowns and extreme caution to prevent the spread of COVID-19 that began in the first half of 2020 began to ease during the third quarter, the segment saw very little of the expected repeat business and almost none from new customers due to frozen budgets. Secondly, COVID-19 restrictions adversely impacted the Company’s ability to physically gain on-site access to customers’ operations, including laboratory and testing facilities, which is a critical component to JP3’s multi-phased sales approach.
In consideration of these events, management reevaluated forecasted sales activity, expected margins and the long-term expectations of the DA segment for the third quarter of 2020. Based on these factors, the Company concluded a triggering event occurred in the DA segment, and accordingly, an interim quantitative impairment test was performed as of September 30, 2020.
Using the income approach, the fair value of the reporting unit was determined based on the present value of future cash flows. The Company utilized internal forecast trends and potential growth rates to estimate future cash flows of the asset group. Based on the results of the quantitative assessment, the Company concluded the carrying value of the asset group exceeded its fair value as of September 30, 2020. The Company recognized an impairment loss of $12.5 million in the DA reporting unit finite-lived intangible assets, which resulted primarily from lower performance than expected by the reporting unit. The extended
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impact of COVID-19 and declines in the oil and gas sector also contributed to the impairment loss. Also see Note 3, “Business Combination.” No impairments of fixed, long-lived and intangible assets occurred during the fourth quarter of 2020.
Note 12 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Loss on purchase commitments (Note 16)
|
$
|
9,402
|
|
|
$
|
15,750
|
|
Severance costs
|
3,558
|
|
|
3,450
|
|
Payroll and benefits
|
1,789
|
|
|
471
|
|
Contingent liability for earn-out provision
|
1,416
|
|
|
—
|
|
Taxes other than income taxes
|
544
|
|
|
1,799
|
|
Due to third parties
|
434
|
|
|
2,509
|
|
Legal costs
|
333
|
|
|
149
|
|
Deferred revenue, current
|
146
|
|
|
—
|
|
|
|
|
|
Other
|
653
|
|
|
424
|
|
|
|
|
|
|
|
|
|
Total current accrued liabilities
|
$
|
18,275
|
|
|
$
|
24,552
|
|
Note 13 — Debt
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Long-term debt
|
|
|
|
Flotek PPP loan
|
$
|
4,788
|
|
|
$
|
—
|
|
JP3 PPP loan
|
877
|
|
|
—
|
|
Total
|
5,665
|
|
|
—
|
|
|
|
|
|
Less current maturities
|
(4,048)
|
|
|
—
|
|
|
|
|
|
Total long-term debt, net of current portion
|
$
|
1,617
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Payroll Protection Program Loan
In April 2020, the Company received a $4.8 million loan under the Payroll Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 in April 2020. The PPP loans have a fixed interest rate of 1% and have a two-year term, maturing 2022. No payments of principal or interest were required during the year ended December 31, 2020.
A portion of the loans may be eligible for forgiveness by the SBA depending on the extent of proceeds used for payroll costs and other designated expenses incurred for up to 24 weeks following loan origination, subject to adjustments for headcount reductions and compensation limits and provided that at least 60% of the eligible costs incurred are used for payroll. Receipt of these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support ongoing operations of the Company. This certification further required the Company to take into account current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. As of December 31, 2020, the Company had not applied for or estimated the potential forgiveness on the PPP loans. The receipt of these funds, and the forgiveness of the loans attendant to these funds, is dependent on the Company having initially qualified for the loans and qualifying for the forgiveness of such loans based on our
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
past and future adherence to the forgiveness criteria. The PPP loans are subject to any new guidance and new requirements released by the Department of the Treasury, which initially indicated that all companies that have received funds in excess of $2.0 million will be subject to a government audit by the SBA to further ensure PPP loans are limited to eligible borrowers in need.
Bank Credit Facility
Through March 1, 2019, the Company maintained a revolving credit facility with PNC Bank, National Association (the “Credit Facility”) with a maximum revolving advance amount of $75 million. Upon closing the sale of the CICT segment in 2019, the Company repaid the outstanding balance, interest and fees on the Credit Facility on March 1, 2019, and terminated the Credit Facility.
Note 14 — Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.
•Level 1 — Quoted prices in active markets for identical assets or liabilities;
•Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term nature of these accounts. The PPP loans for Flotek and JP3 also approximate fair value due to maturity in less than eighteen months.
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
2019
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,416
|
|
$
|
1,416
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2020, the first stock performance target of the contingent consideration was achieved, and the Company accrued a liability of $2.5 million, which was transferred out of Level 3 to a current liability and subsequently settled during the fourth quarter of 2020. No other transfers occurred during the year ended December 31, 2020. At December 31, 2020, the estimated fair value of the remaining stock performance earn-out provision was $1.4 million, which was recorded as a contingent liability. The estimated fair value of the earn-out provision was valued using the Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.
There were no transfers in or out of either Level 1, Level 2 or Level 3 fair value measurements during the year ended December 31, 2019. At December 31, 2019, no liabilities were required to be measured at fair value on a recurring basis.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment, goodwill and other intangible assets are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the first quarter of 2020, the Company recorded an impairment of $57.5 million for impairment of long-lived assets. Management inputs used in fair value measurements were classified as Level 3.
As disclosed in Note 3, “Business Combination,” the Company acquired JP3 in May 2020. The fair values of JP3’s long-lived assets and intangibles were determined using the income approach. The fair value of the Company’s inventory was determined using the comparative sales method. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement, other than cash and working capital accounts, which carrying amounts were determined to approximate fair value due to their short-term nature.
During the third quarter of 2020, the Company’s DA segment recorded an impairment charge on finite-lived intangible assets of $12.5 million and an impairment charge on goodwill of $11.7 million. The fair value of the DA reporting unit was estimated based on an analysis of the present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
In conjunction with the May 2020 acquisition of JP3, the Company recorded contingent consideration of $1.2 million. Management inputs used in the fair value measurement were classified as Level 3. During the third quarter of 2020, the first stock performance target for the contingent consideration was achieved, resulting in an accrued liability of $2.5 million, which was settled during the fourth quarter of 2020. The Company also estimated the fair value of the remaining stock performance earn-out provision at December 31, 2020 and recorded the fair value of the contingent liability of $1.4 million. The expense for achievement of the first stock performance target and the change in the fair value of the contingent consideration for the second earn-out provision are recorded in operating expenses in continuing operations for the period ended December 31, 2020.
The following table presents the changes in contingent consideration balances classified as Level 3 balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2020
|
|
2019
|
Balance - beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions / issuances
|
|
1,200
|
|
|
—
|
|
Change in fair value
|
|
2,716
|
|
|
—
|
|
|
|
|
|
|
Transfer out of Level 3
|
|
(2,500)
|
|
|
—
|
|
Balance - end of period
|
|
$
|
1,416
|
|
|
$
|
—
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Income Taxes
Components of the income tax (benefit) expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(6,115)
|
|
|
$
|
(22,923)
|
|
|
|
State
|
144
|
|
|
(2,295)
|
|
|
|
Foreign
|
(21)
|
|
|
(238)
|
|
|
|
Total current
|
(5,992)
|
|
|
(25,456)
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(116)
|
|
|
24,373
|
|
|
|
State
|
(71)
|
|
|
1,345
|
|
|
|
Foreign
|
—
|
|
|
—
|
|
|
|
Total deferred
|
(187)
|
|
|
25,718
|
|
|
|
Income tax (benefit) expense
|
$
|
(6,179)
|
|
|
$
|
262
|
|
|
|
The components of loss before income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
United States
|
$
|
(141,864)
|
|
|
$
|
(75,633)
|
|
|
|
Foreign
|
(765)
|
|
|
(178)
|
|
|
|
Loss before income taxes
|
$
|
(142,629)
|
|
|
$
|
(75,811)
|
|
|
|
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
Federal statutory tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
|
State income taxes, net of federal benefit
|
2.1
|
|
|
0.6
|
|
|
|
Non-U.S. income taxed at different rates
|
0.2
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Increase in valuation allowance
|
(20.3)
|
|
|
(20.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in tax benefit related to stock-based awards
|
(0.2)
|
|
|
(0.1)
|
|
|
|
|
|
|
|
|
|
Effect of tax rate differences of NOL carryback
|
1.5
|
|
|
—
|
|
|
|
Research and development credit
|
—
|
|
|
0.2
|
|
|
|
Other
|
—
|
|
|
(2.0)
|
|
|
|
Effective income tax rate
|
4.3
|
%
|
|
(0.3)
|
%
|
|
|
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act provided the ability for taxpayers to carryback a net operating loss (“NOL”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to each of the five years preceding the year of the loss. Based on analysis of the extended NOL carryback provision, the Company recorded a tax receivable of $6.1 million as of March 31, 2020, which was received in July 2020.
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates, except for the NOL carryback claim discussed above.
Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. The components of deferred tax assets and liabilities are as follows (in thousands):
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
23,589
|
|
|
$
|
17,248
|
|
Allowance for doubtful accounts
|
1,134
|
|
|
1,037
|
|
Inventory valuation reserves
|
2,093
|
|
|
629
|
|
Equity compensation
|
435
|
|
|
353
|
|
Goodwill
|
4,087
|
|
|
965
|
|
Accrued compensation
|
657
|
|
|
587
|
|
Foreign tax credit carryforward
|
3,802
|
|
|
3,894
|
|
Accrued liabilities
|
2,076
|
|
|
3,530
|
|
Lease liability
|
1,945
|
|
|
3,992
|
|
Property and equipment
|
3,640
|
|
|
—
|
|
Intangible assets
|
6,026
|
|
|
—
|
|
|
|
|
|
Other
|
353
|
|
|
96
|
|
Total gross deferred tax assets
|
49,837
|
|
|
32,331
|
|
Valuation allowance
|
(48,671)
|
|
|
(20,341)
|
|
Total deferred tax assets, net
|
1,166
|
|
|
11,990
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
—
|
|
|
(3,696)
|
|
Intangible assets
|
—
|
|
|
(4,134)
|
|
ROU asset
|
(686)
|
|
|
(3,793)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid insurance and other
|
(257)
|
|
|
(331)
|
|
Total gross deferred tax liabilities
|
(943)
|
|
|
(11,954)
|
|
Net deferred tax assets
|
$
|
223
|
|
|
$
|
36
|
|
As of December 31, 2020, the Company had U.S. net operating loss carryforwards of $94.7 million, including $46.4 million expiring in various amounts in 2035 through 2037 which can offset 100% of taxable income and $48.3 million that has an indefinite carryforward period which can offset 80% of taxable income per year. The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo an “ownership change” for purposes of Section 382 of the Tax Code.
Net deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes. ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance, the Company considers 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 of December 31, 2019, the Company determined that it was more likely than not that it would not realize the benefits of certain deferred tax assets and, therefore, recorded a $20.3 million valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to certain state jurisdictions. At December 31, 2020, the valuation allowance against the net federal and state deferred tax assets was $48.7 million.
The Company has not calculated U.S. taxes on unremitted earnings of certain non-U.S. subsidiaries due to the Company’s intent to reinvest the unremitted earnings of the non-U.S. subsidiaries. At December 31, 2020, the Company had approximately $5.7 million in unremitted earnings for one of its foreign jurisdictions, which were not included for U.S. tax purposes. Due to the 2017 Tax Act, U.S. federal transition taxes have been recorded for a one-time U.S. tax liability on these earnings which have not previously been repatriated to the U.S. However, certain withholding taxes will need to be paid upon repatriation. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.
The Company performed an evaluation and concluded there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years which remain subject to examination by tax jurisdictions as of December 31, 2020, which are the years ended December 31, 2017 through December 31, 2020 for U.S. federal taxes and the years ended December 31, 2016 through December 31, 2020 for state tax jurisdictions.
During 2020, the Internal Revenue Service (“IRS”) notified the Company that a 2018 tax return was selected for examination as
a result of a carryback claim. At this time, the Company is not aware of any findings that would have a material impact on the
consolidated financial statements.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — Commitments and Contingencies
Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Commitments
Terpene Supply Agreement
On February 26, 2020, Flotek Chemistry entered into an amendment to the terpene supply agreement between Flotek Chemistry and FCC. Pursuant to the terms and conditions of the amendment, the terpene supply agreement was amended to, among other things, (a) reduce the minimum quantity of terpene that Flotek Chemistry is required to purchase by approximately 3/4ths in 2020 and by approximately half in each of 2021, 2022 and 2023, (b) provide a fixed per pound price for terpene in 2020, (c) reduce the maximum amount of terpene subject to the terpene supply agreement by approximately 1/3rd, and (d) change the payment terms to net 45 days. In order to make the terms and conditions of the amendment to the terpene supply agreement effective, Flotek Chemistry made a one-time payment in February 2020 of $15.8 million to ADM. The expense associated with the terpene supply agreement amendment payment was recorded as a loss on contract purchase commitments, reported in operating expenses in continuing operations in December 2019.
For the year ended December 31, 2020, the Company recognized a loss of $9.9 million and an accrued liability of $9.4 million at December 31, 2020, associated with the amended terpene supply agreement due to the Company’s expected usage of terpene in blended products being less than the minimum quantities of terpene required to be purchased and expected selling prices of the excess terpene as such loss is not considered recoverable. The reductions in expected usage resulted from reduced demand for terpene in the oil and gas sector due of capital spending reductions across our customer base and impacts of COVID-19, combined with product mix changes using lower concentrations of terpene.
Indemnification
The Company agreed to provide indemnification to National Oilwell DHT, L.P. for certain intellectual property-related claims in connection with sale of its Teledrift business unit in 2017. The expenses incurred by the Company were $0.4 million and $0.6 million for the years ended December 31, 2020 and 2019, respectively. The Company expects to incur additional costs during 2021, which are uncertain, but could be as much as $0.5 million or more.
Lease Obligations
See Note 8, “Leases.”
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from its CT segment, which consists predominantly of customers within the oil and gas industry and the sanitizer, surface cleaner and disinfectant industry to a lesser extent. Customers within the oil and gas industry include oilfield services companies, integrated oil and natural gas companies, independent oil and natural gas companies, and state-owned national oil companies. Customers within the sanitizer, surface cleaner and disinfectant industry typically include industrial and consumer markets, including hospitals, travel and hospitality, food services, e-commerce and retail, sports and entertainment. The concentration in the oil and gas industry increases credit and business risk.
Within the CT segment, the Company had two major customers for the year ended December 31, 2020, which accounted for 24% and 18% of consolidated revenue, and two major customers for the year ended December 31, 2019, which accounted for 20% and 10% of consolidated revenue. The Company’s largest three customers collectively accounted for 50% and 40% of consolidated revenue for the years ended December 31, 2020 and 2019, respectively.
No single customer of the DA segment accounted for 10% or more of the Company’s consolidated revenue for the year ended December 31, 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and balances often exceed insurable amounts.
Note 17 —Stockholders’ Equity
Common and Preferred Stock
On May 5, 2020, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as previously amended, to increase the authorized shares of common stock from 80 million shares to 140 million shares of common stock, par value $0.0001 per share, and 100,000 shares of one or more series of preferred stock, par value $0.0001 per share. The additional authorized shares are available for corporate purposes, including acquisitions.
A reconciliation of the changes in common shares issued is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
Shares issued at the beginning of the year
|
63,656,897
|
|
|
62,162,875
|
|
Issued upon sale of common stock
|
200,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued upon exercise of stock options
|
111,298
|
|
|
—
|
|
|
|
|
|
Issued as restricted stock award grants
|
3,114,978
|
|
|
924,022
|
|
Issued as restricted stock unit grants
|
86,241
|
|
|
570,000
|
|
|
|
|
|
Issued in business combination to acquire JP3
|
11,500,000
|
|
|
—
|
|
|
|
|
|
Shares issued at the end of the year
|
78,669,414
|
|
|
63,656,897
|
|
Treasury Stock
The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended December 31, 2020 and 2019, the Company purchased 145,703 shares and 93,977 shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees that were forfeited are accounted for as treasury stock. During the year ended December 31, 2020, there were 66,115 shares surrendered for the exercise of stock options. During the year ended December 31, 2019, no shares were surrendered for the exercise of stock options.
Stock Repurchase Program
In June 2015, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock. Repurchases could be made in the open market or through privately negotiated transactions. On June 9, 2020, the board of directors of the Company rescinded the authorization to repurchase the Company’s stock under this program.
During the year ended December 31, 2019, the Company repurchased $0.3 million of its common stock under this authorization. No shares were repurchased under this program during the year ended December 31, 2020.
Note 18 — Stock-Based Compensation and Other Benefit Plans
Stock-Based Incentive Plans
Stockholders approved long-term incentive plans in 2019, 2018, 2014, 2010 and 2007 (the “2019 Plan,” the “2018 Plan,” the “2014 Plan,” the “2010 Plan” and the “2007 Plan,” respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, and certain other incentive awards. The maximum number of shares that may be issued under the 2019 Plan, 2018 Plan, 2014 Plan, 2010 Plan and 2007 Plan are 1.0 million, 3.0 million, 5.2 million, 6.0 million and 2.2 million, respectively. At December 31, 2020, the Company had a total of 1.8 million shares remaining to be granted under the 2019 Plan and 2018 Plan. Shares may no longer be granted under the 2007, 2010 and 2014 Plans.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant. During 2020, 1.3 million stock options were granted, all market-based options. The market-based options are restricted until criteria defined in the agreement are met. Proceeds received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate. The Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the estimate. Stock-based compensation expense is recorded for all equity awards expected to vest. During the year ended December 31, 2020, 0.1 million stock options vested, and 0.6 million stock options were forfeited. No stock options vested or were forfeited during the year ended December 31, 2019.
Stock option activity for the years ended December 31, 2020 and 2019, are as follows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Fair Value
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2019
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Granted
|
3,000,000
|
|
|
1.93
|
|
1.25
|
|
|
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2020
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
1,327,795
|
|
|
1.12
|
|
0.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
(111,298)
|
|
|
0.92
|
|
0.51
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(556,497)
|
|
|
0.92
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
3,660,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
1,111,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.
The following table sets forth significant assumptions used in the Monte Carlo model for market-based options to determine the fair value of the options at the date of grant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
Market-Based Options
|
|
Market-Based Options
|
|
|
|
|
Risk-free interest rate
|
0.12
|
%
|
|
1.84
|
%
|
|
|
|
|
Expected volatility of common stock
|
103.50
|
%
|
|
71.57
|
%
|
|
|
|
|
Expected life of options in years
|
2
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting period in years
|
2
|
|
7
|
|
|
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth significant assumptions used in the Black Scholes model for time-vested options to determine the fair value of the options at the date of grant:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
Time-Vested Options
|
Initial stock price
|
|
|
$
|
1.93
|
Strike price
|
|
|
1.93
|
Term (in years)
|
|
|
6.5
|
Risk-free rate
|
|
|
1.8
|
%
|
Volatility rate
|
|
|
73.6
|
%
|
The Company had no time-vested options granted in 2020. At December 31, 2020, the unrecognized compensation cost related to stock options was $3.6 million.
Restricted Stock
The Company grants employees either time-vesting or market-based restricted shares in accordance with terms specified in the Restricted Stock Agreements. During the year ended December 31, 2020, 53% of the restricted shares granted were time-vesting and 47% were performance-based. Grantees of restricted shares retain voting rights for the granted shares.
•Time-vesting restricted shares vest after a stipulated period has elapsed after the date of grant, generally three years. Certain time-vested shares have also been issued with a portion of the shares granted vesting immediately.
•Market-based restricted shares are issued with criteria defined over a designated period and vest only when, and if, the outlined criteria are met.
Restricted stock share activity for the years ended December 31, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Shares
|
|
Shares
|
|
Weighted-
Average Fair
Value at Date of
Grant
|
Non-vested at January 1, 2019
|
|
1,050,372
|
|
|
$
|
3.47
|
|
Granted to employees
|
|
1,494,022
|
|
|
2.62
|
|
Vested
|
|
(615,941)
|
|
|
3.72
|
|
Forfeited
|
|
(299,433)
|
|
|
3.16
|
|
Non-vested at January 1, 2020
|
|
1,629,020
|
|
|
2.66
|
|
Granted to employees
|
|
3,114,978
|
|
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
(711,988)
|
|
|
2.94
|
|
Forfeited
|
|
(1,236,910)
|
|
|
1.65
|
|
Non-vested at December 31, 2020
|
|
2,795,100
|
|
|
$
|
1.00
|
|
The total fair value of restricted stock that vested during the years ended December 31, 2020 and 2019 was $2.1 million and $6.3 million, respectively.
At December 31, 2020, unrecognized compensation expense related to non-vested restricted stock was $1.8 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 0.8 years.
Restricted Stock Units
During the year ended December 31, 2020, the Company granted 0.9 million market-based restricted stock units (“RSUs”). The performance period for these RSUs continues until December 22, 2024.
During the year ended December 31, 2019, the Company granted 1.1 million RSUs. The period for these RSUs continues until December 31, 2024.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock units activity for the years ended December 31, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units (1)
|
|
Units
|
|
Weighted-
Average Fair
Value at Date of
Grant
|
RSUs at January 1, 2019
|
|
301,766
|
|
|
$
|
3.94
|
|
2018 forfeited
|
|
(272,046)
|
|
|
6.39
|
|
2019 granted
|
|
1,071,530
|
|
|
3.75
|
|
2019 forfeited
|
|
(62,776)
|
|
|
1.66
|
|
RSUs at January 1, 2020
|
|
1,038,474
|
|
|
3.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 granted
|
|
922,786
|
|
|
1.19
|
|
|
|
|
|
|
2020 forfeited
|
|
(733,711)
|
|
|
3.79
|
|
RSUs at December 31, 2020
|
|
1,227,549
|
|
|
$
|
1.25
|
|
(1) Restricted stock units and performance stock units are disclosed in the preceding table.
At December 31, 2020, unrecognized compensation expense related to restricted stock units was $2.0 million. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.2 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders in 2012. The Company registered 500,000 shares of its common stock, currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the Company’s common stock through accumulated payroll deductions. The ESPP allows participants to purchase common stock at a purchase price equal to 85% of the fair market value of the common stock on the last business day of a three-month offering period which coincides with calendar quarters. Payroll deductions may not exceed 10% of an employee’s compensation and participants may not purchase more than 1,000 shares in any one offering period. In addition, for each calendar year, an employee may not be granted purchase rights for Flotek Stock valued over $25,000, as determined at the time such purchase right is granted. The fair value of the discount associated with shares purchased under the plan is recognized as stock-based compensation expense and was $0.1 million for each of the years ended December 31, 2020 and 2019. The total fair value of the shares purchased under the plan during each of the years ended December 31, 2020 and 2019 was $0.1 million. The employee payment associated with participation in the plan occurs through payroll deductions. Effective after the third quarter 2018 purchase, the Company suspended the ESPP due to lack of shares. Following shareholder approval for additional shares, the Company resumed the ESPP during the second quarter 2019.
Stock-Based Compensation Expense
Non-cash stock-based compensation expense related to restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP was $3.2 million and $4.0 million during the years ended December 31, 2020 and 2019, respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the U.S. All employees are eligible to participate in the plan upon employment. On January 1, 2015, the Company implemented a new matching program. The Company matches contributions at 100% of up to 2% of an employee’s compensation and, if greater, the Company matches contributions at 50% from 5% to 8% of an employee’s compensation. In April 2020, the Company suspended its matching contribution to employee accounts.
During the years ended December 31, 2020 and 2019, compensation expense included $0.2 million and $0.7 million, respectively, related to the Company’s 401(k) match.
Note 19 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon exercise of stock options and settlement of restricted stock units.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended December 31, 2020 and 2019, since including them would have an anti-dilutive effect on loss per share due to the loss from continuing operations incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were 1.8 million restricted stock units and 3.8 million stock options for the year ended December 31, 2020 and 0.1 million restricted stock units for the year ended December 31, 2019.
Note 20 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
Equity issued — acquisition of JP3
|
$
|
8,538
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash payment information:
|
|
|
|
|
|
Interest paid
|
$
|
25
|
|
|
$
|
599
|
|
|
|
Income taxes (received, net of payments) paid
|
(6,246)
|
|
|
(699)
|
|
|
|
Note 21 — Related Party Transaction
In January 2017, the IRS notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019, that certain employment taxes related to the compensation of our former CEO, Mr. Chisholm, were not properly withheld in 2014 and proposed an adjustment. Mr. Chisholm’s affiliated companies through which he provided his services have agreed to indemnify the Company for any such taxes, and Mr. Chisholm executed a personal guaranty in favor of the Company, supporting this indemnification.
At June 30, 2019, the Company recorded a liability of $2.4 million related to the estimated employment tax under-withholding for the years 2014 through 2018. By September 30, 2019, the liability totaled $1.8 million, after the Company paid $0.6 million to the IRS for these taxes and made an additional accrual covering the estimated under-withholding tax liability through 2019. In addition, at June 30, 2019, the Company recorded a receivable from the affiliated companies of Mr. Chisholm totaling $2.4 million. In October 2019, an amendment to the employment agreement was executed, giving the Company the contractual right of offset for any amounts owed to the Company, and giving the Company the right to withhold payments equal to amounts reasonably estimated to potentially become due to the Company by the affiliated companies from, any amounts owed under the employment agreement. The Company netted the related party receivable against the severance payable as of December 31, 2019. At December 31, 2019, the Company recorded $1.8 million for potential liability to the IRS.
On January 5, 2020, Mr. Chisholm ceased to be an employee of the Company. During 2020, the Company did not make any payments to Mr. Chisholm.
During the first quarter of 2020, an additional accrual was recorded for $0.2 million related to potential penalties and interest on the IRS obligation. As of December 31, 2020, the receivable from Mr. Chisholm was $1.4 million, which is equal to the payable to the IRS and was netted with Mr. Chisholm’s severance liability. Both the IRS and severance liabilities are recorded in accrued liabilities on the consolidated balance sheet. In September 2020, the Company stopped all payments to Mr. Chisholm pending the completion and results of ongoing IRS audits.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22 — Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following reportable segments: CT and DA.
Chemistry Technologies. The CT segment includes specialty chemistries, logistics and technology services, which enable its customers to pursue improved efficiencies in the drilling and completion of their wells. The Company designs, develops, manufactures, packages, distributes, delivers and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas well drilling, cementing, completion, remediation and stimulation activities designed to maximize recovery in both new and mature fields. Customers of the CT business segment include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and international supply chain management companies.
In 2020, the Company leveraged historical expertise, existing infrastructure, personnel, supply chain, research and resident consumer market experience to address the emerging demand for sanitizers, surface cleaners and disinfectants for industrial, commercial and consumer use. Rather than operating under relaxed pandemic-related guidelines, the Company sought to produce Food and Drug Administration and Environmental Protection Agency compliant products by completing all necessary upgrades to its already ISO 9001:2015 certified facility in Marlow, Oklahoma. Today the Company has a portfolio of specialty chemical products to address the long-term challenges created by the current COVID-19 pandemic and in preparation for future outbreaks.
Data Analytics. The DA segment, created in the second quarter of 2020 in conjunction with the acquisition of JP3 on May 18, 2020, includes the design, development, production, sale and support of equipment and services that create and provide valuable information about the composition of energy customers’ hydrocarbon fluids. The customers of the DA segment span across the entire market, from production upstream to midstream facilities to refineries and distribution networks. To date, the DA segment has focused solely on North American markets. The DA segment provides real-time hydrocarbon composition data that helps its customers generate additional profit by enhancing blending, optimizing transmix, increasing efficiencies of towers, enabling automation of fluid handling, and reducing losses due to give-away (i.e., that portion of a product of higher value than what is specified) using real-time process information.
The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to the reportable segment.
Summarized financial information of the reportable segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the years ended December 31,
|
|
Chemistry Technologies
|
|
|
|
|
|
Data Analytics(1)
|
|
Corporate and
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
50,310
|
|
|
|
|
|
|
$
|
2,831
|
|
|
$
|
—
|
|
|
$
|
53,141
|
|
Loss from operations, including impairment
|
|
(88,486)
|
|
|
|
|
|
|
(36,407)
|
|
|
(18,755)
|
|
|
(143,648)
|
|
Depreciation and amortization
|
|
2,519
|
|
|
|
|
|
|
422
|
|
|
471
|
|
|
3,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
1,425
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
1,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
119,353
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119,353
|
|
Loss from operations, including impairment
|
|
(45,682)
|
|
|
|
|
|
|
—
|
|
|
(29,818)
|
|
|
(75,500)
|
|
Depreciation and amortization
|
|
7,439
|
|
|
|
|
|
|
—
|
|
|
1,026
|
|
|
8,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to long-lived assets
|
|
2,411
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The financial information disclosed for the DA segment is for the period May 18, 2020 to December 31, 2020.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Chemistry Technologies
|
$
|
43,346
|
|
|
$
|
116,110
|
|
Data Analytics
|
13,201
|
|
|
—
|
|
Corporate and Other
|
29,663
|
|
|
114,490
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
86,210
|
|
|
$
|
230,600
|
|
Geographic Information
Revenue by country is based on the location where services are provided and products are used. No individual countries other than the U.S. and the United Arab Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
|
U.S.
|
$
|
40,632
|
|
|
$
|
104,786
|
|
|
|
UAE
|
6,763
|
|
|
3,897
|
|
|
|
Other countries
|
5,746
|
|
|
10,670
|
|
|
|
Total revenue
|
$
|
53,141
|
|
|
$
|
119,353
|
|
|
|
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
Major Customers
Revenue from major customers and as a percentage of consolidated revenue, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2020
|
|
Chemistry Technologies
|
|
% of Total Revenue
|
|
Data Analytics
|
|
% of Total Revenue
|
Customer A
|
|
$
|
12,891
|
|
|
24.26
|
%
|
|
*
|
|
*
|
Customer B
|
|
*
|
|
*
|
|
*
|
|
*
|
Customer C
|
|
$
|
9,394
|
|
|
17.68
|
%
|
|
*
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
24,386
|
|
|
20.43
|
%
|
|
*
|
|
*
|
Customer B
|
|
$
|
12,322
|
|
|
10.32
|
%
|
|
*
|
|
*
|
Customer C
|
|
*
|
|
*
|
|
*
|
|
*
|
*This customer did not account for more than 10% of revenue during this period.