(NYSE:FTK)
FLOTEK INDUSTRIES
ANNUAL REPORT
2018
FLOTEK INDUSTIRES
Mission
Flotek Industries Inc. partners
with our clients to provide
prescriptive, performance-
enhancing chemistry technology
that adds value to our clients’
assets and bottom lines.
and interactions, and caring for our
clients’ resources as if they were our own.
Character of the organization and its people
matters greatly at Flotek and our values will
not be compromised. We are committed to
delivering the highest standards of quality,
Driven by research and innovation, our
loyalty and service to be the best partners to
mission is to build trusted relationships with
key industries where our technologies and
our clients — we do that by communicating
services make a difference.
honestly, upholding integrity in our data
APPLYING INNOVATIVE CHEMISTRY
FLOTEK INDUSTRIES 2018 ANNUAL REPORT
01
FROM THE CEO
Letter to Shareholders
John Chisholm, CEO
Dear fellow shareholders,
Over the past several years, the North
Entering 2018, we saw the potential for
American oil and gas industry has seen one of
improvements in oil and gas fundamentals
the most disruptive periods in recent history as
despite the continued dynamic backdrop of
E&P companies seek to better capitalize on the
the industry. Now more than ever before, oil
dynamic conditions of the market, including
and gas operators are squarely focused on
the burgeoning opportunities offered through
generating cash and delivering returns to
exploitation of unconventional shale. Given
shareholders through a combination of capital
this environment, in 2017, Flotek initiated and
efficiency and investment in value-added
completed a significant transformation that
technologies that optimize production. Custom
included divestment of non-core businesses
chemistry prescribed for unique reservoir
and aggressive cost reduction. Through these
characteristics provides an important solution
wide-ranging initiatives, we exited 2017 as an
as it results in greater production, mitigates
asset-light, specialty chemistry technology
the negative effects of parent-child well
company primarily focused on working directly
communication and promotes continuous
with the end-users of our products in the
production through enhanced waterflooding
energy, consumer & industrial and flavor &
programs, to name a few key benefits.
fragrance industries.
02 FLOTEK INDUSTRIES 2018 ANNUAL REPORT
Flotek Patent
Portfolio
Operators’ ongoing demand for improved
well economics and pricing transparency
is driving a paradigm shift in the business
model to decouple the completion process.
This move to self-sourcing consumables
first began with diesel, moved heavily to
proppants in 2018 and is gaining momentum
in chemistry as operators, regardless of size,
are expanding and accelerating their efforts
are tailored to the unique characteristics of
to source chemistries directly. As a result,
the reservoir to increase fluid mobility by
during 2018 we continued to align more closely
modifying capillary pressures, contact angle
with our clients — both operators and service
and interfacial tension. CnF® chemistries are
companies — to best position the Company for
based on naturally sustainable and non-toxic
long-term success through expansion of our
citrus oils that improve well performance and
unique portfolio of proprietary products and
productivity, thereby increasing operators’
enhancement of our understanding of fluid
return on investment.
system design and applications.
During 2018, the Company celebrated the 10-year
I N N O VAT I N G F O R T H E F U T U R E
anniversary of the first patent granted for
At its core, Flotek is driven by innovation.
For more than a decade, we have developed
leading-edge technologies and products
designed to meet the complex needs of our
clients. Leveraging our best-in-class, in-house
technical capabilities offered through our
Global Research & Innovation Center, at the
end of 2018, Flotek had 123 granted or pending
patents. This included 22 patents granted in
2018, which was the largest number granted
in a single year in the Company’s history, and
another clear indicator of Flotek’s continued
excellence in the innovation of new chemical
CnF®. Over the past decade, we have developed
more than 50 CnF® formulations that have
helped Flotek’s clients address challenges
in the lifecycle of the reservoir and field —
from drilling to cementing to completion and
stimulation activity designed to maximize
recovery in both new and mature fields.
Over the past year, we released numerous
performance analyses of CnF®, demonstrating
the effectiveness of our chemistries across a
variety of basins and reservoirs and applications
including completions, remediation, frac hits and
enhanced waterflooding.
solutions. Of the patents granted in 2018, 20
Flotek’s heritage has been built upon CnF®,
were associated with our Complex nano-Fluid®
which is a premium technology underpinned
(CnF®) flagship line of technologies, which
by extensive Research & Innovation (R&I)
FLOTEK INDUSTRIES 2018 ANNUAL REPORT
03
that drives performance-enhancing results.
allows Flotek the opportunity to accelerate the
Recognizing the evolving needs of our clients
development of optimal designs and applications
and the marketplace, in 2018, we also introduced
of our fluid systems, while delivering full
MicroSolv™ — a new line of stimulation
chemistry experience to our clients.
chemistries designed to deliver enhanced
cost-effective performance over conventional
surfactants by a significant margin. The
product lowers interfacial tension, mitigates
water blockages, reduces surface tension, aids
flowback of water-based frac fluids, improves
clean-up and reduces formation damage
created by phase trapping. The introduction of
MicroSolv™ expanded the Company’s patented
and conventional chemistry solutions we
prescribe and deliver directly to clients.
P R E S C R I P T I V E F L U I D S Y S T E M S : D E L I V E R E D
D I R E C T LY T O T H E W E L L S I T E
Client adoption has been strong as PCM®-
related revenue was the majority of our
domestic revenue in 2018 as compared to less
than 25% in 2017. In addition, we have seen
increased pull-through of our proprietary
value-added chemistries via our PCM®
platform, as well as growth in revenue per
client. While the transition to a full-service
delivery model impacted our operating margins
in 2018, we expect to benefit from increased
efficiencies in logistics and other aspects
of our operations during the second half of
2019 as a result of strategic changes we are
Most operators today optimize their completion
implementing in the first half of the year.
designs on a region-by-region basis, which is
why we have deepened our in-basin technical
knowledge base, fluid applications expertise and
logistics capabilities. In 2018, we transitioned
the majority of our business from delivering to
centralized in-basin locations to a full-service
provider of reservoir-centric fluid systems
delivered directly to our clients at the wellsite.
This holistic approach, which is the basis of our
Prescriptive Chemistry Management® (PCM®)
platform, allows Flotek to work hand-in-hand
with clients to achieve the full value of our
chemistry offerings. This includes CnF® and
other products that address a wide range of
reservoir and geologic challenges and price
points. This close partnership with clients also
A D I S C I P L I N E D A P P R O A C H T O
G R O W T H & P R O F I TA B I L I T Y
Concurrent with our strategic initiatives
designed to augment our value-added
technology offerings and evolve our business
model to one that is better positioned to thrive
in a dynamic and increasingly fragmented
environment, this past year we took further
steps to significantly adjust our cost structure.
I am pleased to report that during 2018 we
reduced collective spending on G&A and
research and innovation by $13 million, or 23%,
from full-year 2017 levels. During the first
half of 2019, we are executing on a number of
identified opportunities to further reduce costs
and ensure our long-term success.
04 FLOTEK INDUSTRIES 2018 ANNUAL REPORT
Aggressively Reducing
Fixed Cost Structure
U N L O C K I N G S H A R E H O L D E R VA L U E
In the fourth quarter of 2018, considerable
effort was focused on the negotiation and
due diligence that led to the sale of Florida
Chemical to Archer Daniels Midland Company
(ADM) for $175 million in the first quarter of
2019. With the closing of the transaction, Flotek
established itself as a pure play and leading
provider of high-performance chemistry
solutions to the upstream oil and gas industry.
Over the past few years, we felt the combined
value of our Consumer and Industrial
Chemistry Technologies and Energy Chemistry
Technologies segments had not been broadly
appreciated outside Flotek. To substantiate
our internal view, in the middle of 2018, we
began a process to discover and potentially
unlock the value of the consumer and industrial
part of our business. Around the same time,
we began discussions with ADM concerning
organic business opportunities. Through those
discussions, it became clear that the future
value of Florida Chemical’s industry-leading
capabilities and growing presence might be
In 2018, we also enhanced our corporate
governance on multiple fronts, adding two
new strategic and independent directors to
Flotek’s Board of Directors (Board) following
the departure of three long-standing directors,
as well as appointing new chairpersons for
each of the Board’s committees. Additionally,
we restructured and enhanced our executive
leadership team, including the addition of a
highly-experienced Chief Financial Officer at
the end of 2018. Since the beginning of 2019,
we have taken further steps in our commitment
to strong corporate governance. This includes
separating the role of Chairman and Chief
best realized in the hands of ADM.
Executive Officer effective as of the 2019 Annual
Meeting. The Board and the executive team will
continue to work closely together as we focus
on further leveraging our core strengths in an
environment of enhanced financial discipline.
ADM is a highly regarded Fortune 50 corporation
recognized for its global leading presence in
transforming crops into agricultural and food
products, and Florida Chemical’s business
aligns extremely well with their expanding
nutrition and flavor and fragrance offerings.
And, while the fit between ADM and Florida
Chemical was convincing, it was also important
to both parties that Flotek’s relationship with
FLOTEK INDUSTRIES 2018 ANNUAL REPORT
05
Florida Chemical would continue going forward.
These options could include returning capital
As such, we entered into long-term reciprocal
to shareholders, executing share buybacks,
supply agreements with ADM that allow Flotek
funding organic growth projects, making
to secure critical supply of d-limonene for our
additional investments in the business that
ongoing operations.
increase long-term shareholder value and
The transaction also provides the potential
exploring other alternatives.
for important new opportunities for growth
L E A D I N G I N P E R F O R M A N C E C H E M I S T R Y
in Flotek’s ongoing business, and we look
forward to working closely with ADM to jointly
explore and develop next-generation chemistry
technologies for the oil and gas and agricultural
industries. We will focus on high-value bio-
based chemistries that align with our current
technology portfolio.
Importantly, we
significantly increased our
financial flexibility as a
result of the transaction.
Importantly, we significantly increased
our financial flexibility as a result of the
transaction. After transaction fees and working
capital adjustments, as well as paying off
all of our outstanding debt and associated
accrued interest, net proceeds from the
transaction were approximately $111 million.
We have formed a committee comprised of
key members of the Board and executive
management to thoroughly evaluate and make
recommendations to the Board on how to best
deploy the net proceeds of the transaction.
06 FLOTEK INDUSTRIES 2018 ANNUAL REPORT
Moving forward, we expect continued oil price
volatility and are focused on managing our
business in an approximate $50 per West Texas
Intermediate (WTI) barrel price environment.
Operators are facing diminishing returns as
mechanical variables have reached, and in
some cases exceeded, both their economic
and technical limits in well completion designs
and subsequent performance, which became
increasingly clear throughout 2018. In this
context, many operators are turning their
attention progressively to utilizing custom
chemistry as a means to optimizing exploitation
of hydrocarbons from the reservoir and
capital efficiency.
We believe Flotek is ideally positioned for
long-term success given our truly differentiated
approach to fluid design and best-in-class
innovation capabilities, and we will continue
with renewed focus on effectively illustrating
that value proposition to our clients and the
industry as a whole. Critical to our future
success is a deep base of technical expertise
and fluid designs across multiple basins and we
have responded by further integrating our team
of technical experts — ranging from chemists
We believe Flotek is ideally positioned for long-
term success given our truly differentiated
approach to fluid design and best-in-class
innovation capabilities, and we will continue
with renewed focus on effectively illustrating
that value proposition to our clients and the
industry as a whole.
to reservoir engineers to geoscientists — into
guidance provided by our Board. We likewise
our sales processes. Our clients appreciate
appreciate the continued support of our
the deep understanding of the performance
shareholders, and look forward to keeping you
of our advanced chemistries, which have now
apprised of our progress.
been applied over thousands of wells across a
wide variety of basins and reservoirs, and we
will continue to expand upon our broad base of
Sincerely,
experience and portfolio of innovative solutions.
In closing, we believe Flotek is solidly positioned
in an anticipated ongoing dynamic environment
and we will leverage our best-in-class chemistry
technologies and optimized cost position to
best ensure our long-term success. I want
to acknowledge the continued hard work and
dedication of all of our employees and strategic
John W. Chisholm
Chairman, President & CEO
Flotek Industries
FLOTEK INDUSTRIES 2018 ANNUAL REPORT
07
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-13270
FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
10603 W. Sam Houston Parkway N. #300
Houston, TX
(Address of principal executive offices)
90-0023731
(I.R.S. Employer
Identification No.)
77064
(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark:
• if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
• if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
No
No
• whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
No
• if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2018 (based on the closing market price on the
NYSE Composite Tape on June 30, 2018) was approximately $150,815,000. At February 28, 2019, there were 57,350,015 outstanding shares of
the registrant’s common stock, $0.0001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of the Annual Report on Form 10-K is incorporated by reference to the registrant’s definitive proxy statement
to be filed pursuant to Regulation 14A for the registrant’s 2019 Annual Meeting of Stockholders.
[THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
4
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Item 4.
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . .
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
37
39
75
75
75
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
Item 10.
Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . .
76
Item 13.
Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . . . . . . . . . . . .
76
Item 14.
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79
i
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Annual Report”), and
in particular, Part II, Item 7 – “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
contains “forward-looking statements” within the meaning of
the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are not historical facts but instead represent the
Company’s current assumptions and beliefs regarding future
events, many of which, by their nature, are inherently
uncertain and outside the Company’s control. The forward-
looking statements contained in this Annual Report are based
on information available as of the date of this Annual Report.
The forward looking statements relate to future industry trends
and economic conditions, forecast performance or results of
current and future initiatives and the outcome of contingencies
and other uncertainties that may have a significant impact on
the Company’s business, future operating results and liquidity.
These forward-looking statements generally are identified by
words such as “anticipate,” “believe,” “estimate,” “continue,”
“intend,” “expect,” “plan,” “forecast,” “project” and similar
expressions, or future-tense or conditional constructions such
as “will,” “may,” “should,” “could” and “would,” or the
negative thereof or other variations thereon or comparable
terminology. The Company cautions that these statements are
merely predictions and are not to be considered guarantees of
future performance. Forward-looking statements are based
upon current expectations and assumptions that are subject to
risks and uncertainties that can cause actual results to differ
materially from those projected, anticipated or implied. A
detailed discussion of potential risks and uncertainties that
could cause actual results and events to differ materially from
forward-looking statements include, but are not limited to,
those discussed in Part I, Item 1A – “Risk Factors” of this
Annual Report and periodically in future reports filed with the
Securities and Exchange Commission (the “SEC”).
The Company has no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information or future events, except as required by law.
ii
PART I
Item 1. Business.
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global,
diversified, technology-driven company that develops and
supplies chemistry and services to the oil and gas industries.
Flotek also supplied high value compounds to companies that
make food and beverages, cleaning products, cosmetics, and
other products that are sold in consumer and industrial
markets, classified as discontinued operations at December
31, 2018.
The Company was originally incorporated in the Province of
British Columbia on May 17, 1985. In October 2001, the
Company moved the corporate domicile to Delaware and
effected a 120 to 1 reverse stock split by way of a reverse
merger with CESI Chemical, Inc. (“CESI”). Since then, the
Company has grown through a series of acquisitions and
organic growth.
In December 2007, the Company’s common stock began
trading on the New York Stock Exchange (“NYSE”) under the
stock ticker symbol “FTK.” Annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”) are posted to the
Company’s website, www.flotekind.com, as soon as
practicable subsequent to electronically filing or furnishing to
the SEC. Information contained in the Company’s website is
not to be considered as part of any regulatory filing. As used
herein, “Flotek,” the “Company,” “we,” “our,” and “us” refers
to Flotek Industries, Inc. and/or the Company’s wholly owned
subsidiaries. The use of these terms is not intended to connote
any particular corporate status or relationship.
Recent Developments
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its Consumer and Industrial Chemistry
Technologies segment, which was completed in the first
quarter of 2019. An investment banking advisory services firm
was engaged and actively marketed this segment. Effective
December 31, 2018, the Company has classified the assets,
liabilities, and results of operations for this segment as
“Discontinued Operations” for all periods presented.
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. During 2017, the Company completed
the sale of substantially all of the assets and transfer of certain
specified liabilities and obligations of each of the Drilling
Technologies and Production Technologies segments. An
investment banking advisory services firm was engaged and
actively marketed these segments. The Company has
classified the assets, liabilities, and results of operations for
1
these two segments as “Discontinued Operations” for all
periods presented.
In August 2016, the Company opened its new Global Research
& Innovation Center. This state-of-the-art research facility
fosters the development of next-generation innovative
chemistries and permits expanded collaboration between
clients, leaders from academia, and Company scientists. These
collaborative opportunities are important and distinguish the
Company’s chemistry technologies and capability within the
industry.
In July 2016, the Company acquired 100% of the stock and
interests in International Polymerics, Inc. (“IPI”) and related
entities for $7.9 million in cash consideration, net of cash
acquired, and 247,764 shares of the Company’s common
stock. IPI is a U.S. based manufacturer of high viscosity guar
gum and guar slurry for the oil and gas industry with a wide
selection of stimulation chemicals. During the third quarter of
2018, the Company discontinued the manufacturing of guar
gum and guar slurry and sold the fixed assets used in this
business line.
Description of Operations and Segments
The Company’s continuing operations have one strategic
business segment: Energy Chemistry Technologies. The
Consumer and Industrial Chemistry Technologies segment is
classified as discontinued operations. In addition, the Drilling
Technologies and Production Technologies segments were
sold during 2017 and all historical information is classified as
discontinued operations.
The Company offers competitive products and services
derived from technological advances, some of which are
patented, and experience in fluid systems applications that are
responsive to industry demands in both domestic and
international markets. Flotek operates and/or distributes its
products in over 20 domestic and international markets.
Financial
information about operating segments and
geographic concentration is provided in Note 19 – “Segment
and Geographic Information” in Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
Information about the Company’s one operating segment is
below.
Energy Chemistry Technologies
The Energy Chemistry Technologies (“ECT”) segment
designs, develops, manufactures, packages, distributes,
delivers, and markets reservoir-centric fluid systems,
including specialty and conventional chemistries, for use in
oil and gas (“O&G”) well drilling, cementing, completion,
remediation, and stimulation activities designed to maximize
recovery in both new and mature fields. Flotek’s specialty
chemistries possess enhanced performance characteristics and
are manufactured to perform in a broad range of basins and
reservoirs with varying downhole pressures, temperatures and
other well-specific conditions customized to customer
specifications. This
services
segment has
laboratories and a research and innovation laboratory that
focus on design improvements, development and viability
testing of new chemistry formulations, and continued
enhancement of existing products. Flotek’s flagship patented
include Complex nano-Fluid®,
chemistry
Pressure reducing Fluids®, and MicroSolv™.
technologies
technical
Chemistries branded Complex nano-Fluid® technologies
(“CnF® products”) are patented both domestically and
internationally and are proven strategically cost-effective
performance additives within both oil and natural gas markets.
The CnF® product mixtures are stable mixtures of plant
derived oils, water, and surface active agents which organize
molecules into nano structures. The combined advantage of
solvents, surface active agents and water, and the resultant
nano structures, improve well treatment results as compared
to the independent use of solvents and surface active agents.
CnF® products are composed of renewable, plant-derived
ingredients and oils that are certified as biodegradable. CnF®
chemistries help achieve improved operational and financial
results for the Company’s customers in low permeability sand
and shale reservoirs.
Chemistries branded Pressure reducing Fluids® technologies
(“PrF® products”) are a patented line of high molecular weight
polymers used as friction reducers that reduce turbulence and
maximize the use of the polymer at a lower loading rate. The
products have proven efficacy in a broad range of water
quality, including high brine and high iron environments.
Introduced in April 2018, chemistries branded MicroSolv™
are a patented line of microemulsion technologies designed to
deliver cost-effective performance.
Discontinued Operations
Consumer and Industrial Chemistry Technologies. The
Consumer and Industrial Chemistry Technologies (“CICT”)
segment, reported as discontinued operations, sourced citrus
oil domestically and internationally and processed citrus oils.
Products produced from processed citrus oil include (1) high
value compounds used as additives by companies in the flavors
and fragrances markets and (2) environmentally friendly
chemistries for use in the oil & gas industry and numerous
other industries around the world. The CICT segment
designed, developed, and manufactured products that were
sold to companies in the flavor and fragrance industries and
specialty chemical industry. These technologies are used
within food and beverage, fragrance, and household and
industrial cleaning products industries.
Drilling Technologies. The Drilling Technologies segment,
reported as discontinued operations, provided downhole
drilling tools for use in energy and mining activities. This
segment assembled, rented, sold, inspected, and marketed
specialized equipment used in energy, mining, and industrial
drilling activities. Established tool rental operations were
located throughout the United States (the “U.S.”) and in a
number of international markets.
Production Technologies. The Production Technologies
segment, reported as discontinued operations, provided
pumping system components, electric submersible pumps
(“ESPs”), gas
and
complementary services. Through the Company’s acquisition
of International Artificial Lift, LLC (“IAL”), the Company
provided a line of next generation hydraulic pumping units
that served to increase and maximize production for oil and
natural gas wells.
separators, production valves,
Seasonality
the year
Overall, operations are not significantly affected by
seasonality; however, winter weather conditions can pose
delays in clients’ activity levels, primarily in oil and gas.
Certain working capital components build and recede
throughout
in conjunction with established
purchasing and selling cycles that can impact operations and
financial position. With
the Company’s
discontinued CICT segment, citrus oil inventories increase
during the first and second quarters in-line with the citrus crop
harvest and processing season. The performance of certain
services within the Company’s remaining ECT segment can
be susceptible to both weather and naturally occurring
phenomena, including, but not limited to, the following:
respect
to
•
•
•
•
the severity and duration of winter temperatures in
North America, which impacts natural gas storage
levels, drilling activity, and commodity prices;
the timing and duration of the Canadian spring thaw
and resulting restrictions that impact activity levels;
the timing and impact of hurricanes upon coastal and
offshore operations; and
the adverse weather and disease that affect citrus crops
in Florida and Brazil which can negatively impact the
availability of citrus oils and increase raw material costs
for the ECT business unit.
Product Demand and Marketing
Demand for the Company’s energy chemistry products and
services is dependent on levels of conventional and non-
conventional oil and natural gas well drilling and completion
activity, both domestically and internationally. Products in the
Energy Chemistry Technologies segment are marketed
directly to customers through the Company’s own sales force
and
through certain contractual agency arrangements.
Established customer relationships provide repeat sales
opportunities. The Company participates in industry trade
shows and publishes technical papers and case studies
examining
its chemistries and
methodologies for evaluating chemistries more effectively.
While the Company’s primary marketing efforts remain
focused in North America, a growing amount of resources and
effort are focused on emerging international markets,
the performance of
2
especially in the Middle East and North Africa (“MENA”) and
South America. In addition
to direct marketing and
relationship development, the Company also markets products
and services through the use of third party agents primarily in
international markets.
Customers
The Company’s customers primarily include major integrated
oil and natural gas companies, oilfield service companies,
independent oil and natural gas companies, pressure pumping
service companies, international supply chain management
companies, and national and state-owned oil companies. In
addition, customers in the discontinued operations at
December 31, 2018, include household and commercial
cleaning product companies, fragrance and cosmetic
companies, and food and beverage manufacturing companies.
In the one segment reported in continuing operations, the
Company had two major customers for the year ended
December 31, 2018, which accounted for 12% and 10% of
consolidated revenue, one major customer for the year ended
December 31, 2017, which accounted for 17% of consolidated
revenue, and two major customers for the year ended
December 31, 2016, which accounted for 22% and 16% of
consolidated revenue. In aggregate, the Company’s largest
three customers collectively accounted for 30%, 32%, and
48% of consolidated
the years ended
revenue
December 31, 2018, 2017, and 2016, respectively.
for
Research and Innovation
The Company is engaged in research and innovation activities
focused on the design of reservoir specific, customized
chemistries in the Energy Chemistry Technologies segment.
In this segment, for the years ended December 31, 2018, 2017,
and 2016, the Company incurred $10.4 million, $13.1 million,
and $9.3 million, respectively, of research and innovation
expense. In 2018, research and innovation expense was
approximately 5.8% of consolidated revenue. The Company
expects that its 2019 research and innovation investment will
continue to remain a significant portion of overall spending
to support new product development and customization
initiatives for its clients.
Backlog
Due to the nature of the Company’s contractual customer
relationships and the way they operate, the Company has
historically not had significant backlog order activity.
Intellectual Property
The Company’s policy is to protect its intellectual property,
both within and outside of the U.S. The Company considers
patent protection for all products and methods deemed to have
commercial significance and that may qualify for patent
protection. The decision to pursue patent protection is
dependent upon several factors, including whether patent
protection can be obtained, cost-effectiveness, and alignment
with operational and commercial interests. The Company
believes its patent and trademark portfolio, combined with
3
confidentiality agreements, trade secrets, proprietary designs,
and manufacturing and operational expertise, are necessary
and appropriate to protect its intellectual property and ensure
continued strategic advantage. Within
its continuing
operations, the Company currently has 50 issued patents and
over six dozen pending patent applications filed in the U.S.
and abroad on various chemical compositions and methods
and software methods. In addition, the Company currently has
55 registered trademarks and over a dozen pending trademark
applications filed in the U.S. and abroad, covering a variety
of its goods and services.
Competition
The ability to compete in the oilfield services industry is
dependent upon the Company’s ability to differentiate its
products and services, provide superior quality and service,
and maintain a competitive cost structure with sufficient raw
material supplies. Activity levels in the oil field goods and
services industry are impacted by current and expected oil and
natural gas prices, oil and natural gas drilling activity,
production levels, and customer drilling and completion
designated capital spending. Domestic and international
regions in which Flotek operates are highly competitive. The
unpredictability of the energy industry and commodity price
fluctuations creates both increased risk and opportunity for
the products and services of both the Company and its
competitors.
Certain oil and natural gas service companies competing with
the Company are larger and have access to more resources.
Such competitors could be better situated to withstand industry
downturns, compete on the basis of price, and acquire and
develop new equipment and technologies, all of which could
affect the Company’s revenue and profitability. Oil and natural
gas service companies also compete for customers and
strategic business opportunities. Thus, competition could have
a detrimental impact upon the Company’s business.
Raw Materials
Materials and components used in the Company’s servicing
and manufacturing operations, as well as those purchased for
sale, are generally available on the open market from multiple
sources. Collection and transportation of raw materials to
Company facilities, however, could be adversely affected by
extreme weather conditions. Additionally, certain raw
materials are available from limited sources. Disruptions to
supply could materially impact sales. The prices paid for raw
materials vary based on energy, citrus, and other commodity
price fluctuations, tariffs, duties on imported materials,
foreign currency exchange rates, business cycle position, and
global demand. Higher prices for chemistries, citrus,
polymers, and other raw materials could adversely impact
future sales and contract fulfillments.
Citrus-based terpene (d-limonene) is an important feedstock
for many of the Company’s formulations. In addition, the
Company utilizes naturally derived terpenes from other
sources and bio-based solvents from other natural sources.
The Company is diligent in its efforts to identify alternate
suppliers, in its contingency planning for potential supply
shortages and in its proactive efforts to reduce costs through
competitive bidding practices. When able, the Company uses
multiple suppliers, both domestically and internationally, to
purchase raw materials on the open market. In connection with
the sale of the CICT segment, Flotek entered into a long-term
supply agreement, which will secure Flotek’s long-term
supply of d-limonene.
Citrus greening disease has adversely affected the availability
of citrus crops around the world, thereby negatively impacting
the supply and increasing the price of citrus terpenes. The
Company’s market position, inventory, and forward purchases
helps ensure availability for its patented CnF® technologies.
As mentioned previously, the Company has also developed
new CnF® formulations utilizing alternative solvents. These
new formulations not only diversify
the Company’s
dependence on citrus terpenes, but they also provide certain
performance benefits necessary for specific customer and
reservoir challenges.
Government Regulations
The Company is subject to federal, state, and local
environmental, occupational safety, and health laws and
regulations within the U.S. and other countries in which the
Company does business. These laws and regulations strictly
govern the manufacture, storage, transportation, sale, use, and
disposal of chemistry products. The Company strives to ensure
full compliance with all regulatory requirements and is
unaware of any material instances of noncompliance.
The Company continually evaluates the environmental impact
of its operations and attempts to identify potential liabilities
and costs of any environmental remediation, litigation, or
associated claims. Several products of the Energy Chemistry
Technologies and discontinued Consumer and Industrial
Chemistry Technologies segments are considered hazardous
materials. In the event of a leak or spill in association with
Company operations, the Company could be exposed to risk
of material cost, net of insurance proceeds, to remediate any
contamination. No environmental claims are currently being
litigated, and the Company does not expect that costs related
to remediation requirements will have a significant adverse
effect on the Company’s consolidated financial position or
results of operations.
Item 1A. Risk Factors.
Employees
At December 31, 2018, the Company had 273 employees in
its continuing operations and 77 employees in its discontinued
operations, exclusive of existing worldwide agency
relationships. None of the Company’s employees are covered
by a collective bargaining agreement and labor relations are
generally positive. Certain international locations have
staffing or work arrangements that are contingent upon local
work councils or other regulatory approvals.
Available Information and Website
The Company’s website is accessible at www.flotekind.com.
Annual reports on Form 10-K, quarterly reports on Form 10-
Q, current reports on Form 8-K, and amendments to reports
filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act are available (see the “Investor Relations”
section of the Company’s website), as soon as reasonably
practicable, subsequent to electronically filing or otherwise
providing reports to the SEC. Corporate governance materials,
guidelines, by-laws, and code of business conduct and ethics
are also available on the website. A copy of corporate
governance materials is available upon written request to the
Company.
The SEC maintains the www.sec.gov website, which contains
reports, proxy and information statements, and other registrant
information filed electronically with the SEC.
The 2018 Annual Chief Executive Officer Certification
required by the NYSE was submitted on May 25, 2018. The
certification was not qualified in any respect. Additionally, the
Company has filed all principal executive officer and financial
officer certifications as required under Sections 302 and 906
of the Sarbanes-Oxley Act of 2002 with this Annual Report.
Information with respect to the Company’s executive officers
and directors is incorporated herein by reference to
information to be included in the proxy statement for the
Company’s 2019 Annual Meeting of Stockholders.
The Company has disclosed and will continue to disclose any
changes or amendments to the Company’s code of business
conduct and ethics as well as waivers to the code of ethics
applicable to executive management by posting such changes
or waivers on the Company’s website.
The Company’s business, financial condition, results of
operations, and cash flows are subject to various risks and
uncertainties. Readers of this report should not consider any
descriptions of these risk factors to be a complete set of all
potential risks that could affect Flotek. These factors should
be carefully considered together with the other information
contained in this Report and the other reports and materials
filed by the Company with the SEC. Further, many of these
risks are interrelated and, as a result, the occurrence of certain
risks could trigger and/or exacerbate other risks. Such a
combination could materially increase the severity of the
impact of these risks on the Company’s business, results of
operations, financial condition, or liquidity.
This Annual Report contains “forward-looking statements,”
as defined in the Private Securities Litigation Reform Act of
1995, that involve risks and uncertainties. Forward-looking
statements discuss Company prospects, expected revenue,
4
expenses and profits, strategic and operational initiatives, and
other activities. Forward-looking statements also contain
suppositions regarding future oil and natural gas industry
conditions, as well as market conditions impacting the
consumer and industrial business, both domestically and
internationally. The Company’s results could differ materially
from those anticipated in the forward-looking statements as a
result of a variety of factors, including risks described below
and elsewhere. See “Forward-Looking Statements” at the
beginning of this Annual Report.
Risks Related to the Company’s Business
The Company’s business is largely dependent upon domestic
and international oil and natural gas industry spending.
Spending could be adversely affected by industry conditions
or by new or increased governmental regulations, global
economic conditions, the availability of credit, and lower oil
and natural gas prices. All of these factors are beyond the
Company’s control. The resulting reductions in customers’
expenditures could have a significant adverse effect on
Company revenue, margins, and overall operating results.
The Company’s energy segment is dependent upon customers’
willingness to make operating and capital expenditures for
exploration, development and production of oil and natural
gas in both North American and global markets. Customers’
expectations of a decline in future oil and natural gas market
prices could result in curtailed spending, thereby reducing
demand for the Company’s products and services. Industry
conditions are influenced by numerous factors over which the
Company has no control, including the supply of and demand
for oil and natural gas, domestic and international economic
conditions, political instability in oil and natural gas producing
countries and merger and divestiture activity among oil and
natural gas producers and service companies.
The price for oil and natural gas is subject to a variety of
factors, including, but not limited to:
•
•
•
•
•
•
•
•
global demand for energy as a result of population
growth, economic development, and general economic
and business conditions;
the ability of the Organization of Petroleum Exporting
Countries (“OPEC”) to set and maintain production
levels and the impact of non-OPEC producers on global
supply;
availability and quantity of natural gas storage;
import and export volumes and pricing of liquefied
natural gas;
pipeline capacity to critical markets and out of
producing regions;
political and economic uncertainty and socio-political
unrest;
cost of exploration, production and transport of oil and
natural gas;
technological advances impacting energy production
and consumption; and
5
• weather conditions.
The volatility of oil and natural gas prices and the
consequential effect on exploration and production activity
could adversely impact the activity levels of the Company’s
customers.
One indicator of drilling and completion spending is drilling
activity as measured by rig count, which the Company actively
monitors to gauge market conditions and forecast product and
service demand. In addition, the U.S. Energy Information
Administration (“EIA”) and other industry data sources report
completion activity which is utilized by the Company. A
reduction in drilling and completion activity could cause a
decline in the demand for, or negatively affect the price of,
some of the Company’s products and services. Domestic
demand for oil and natural gas could also be uniquely affected
by public attitude regarding drilling in environmentally
sensitive areas, vehicle emissions and other environmental
standards, alternative fuels, taxation of oil and gas, perception
of “excess profits” of oil and gas companies, and anticipated
changes in governmental regulation and policy.
Volatile economic conditions could weaken customer
exploration and production expenditures, causing reduced
demand for the Company’s products and services and a
significant adverse effect on the Company’s operating results.
It is difficult to predict the pace of industry growth, the
direction of oil and natural gas prices, the direction and
magnitude of economic activity, and to what extent these
conditions could affect the Company. However, reduced cash
flow and capital availability could adversely impact the
financial condition of the Company’s customers, which could
result
in customer project modifications, delays or
cancellations, general business disruptions, and delay in, or
nonpayment of, amounts that are owed to the Company. This
could cause a negative impact on the Company’s results of
operations and cash flows.
Furthermore, if certain of the Company’s suppliers were to
experience significant cash flow constraints or become
insolvent as a result of such conditions, a reduction or
interruption in supplies or a significant increase in the price
of supplies could occur, adversely impacting the Company’s
results of operations and cash flows.
The Company’s inability to develop and/or introduce new
products or differentiate existing products could have an
adverse effect on its ability to be responsive to customers’
needs and could result in a loss of customers, as well as
adversely affecting the Company’s future success and
profitability.
The oil and natural gas industry is characterized by
technological advancements that have historically resulted in,
and will likely continue to result in, substantial improvements
in the scope and quality of oilfield chemistries and their
function and performance. Consequently, the Company’s
future success is dependent, in part, upon the Company’s
continued ability to timely develop innovative products and
services. Increasingly sophisticated customer needs and the
ability to anticipate and respond to technological and
operational advances in the oil and natural gas industry is
critical. If the Company fails to successfully develop and
introduce innovative products and services that appeal to
customers, or if existing or new market competitors develop
superior products and services, the Company’s revenue and
profitability could deteriorate.
Increased competition could exert downward pressure on
prices charged for the Company’s products and services.
The Company operates in a competitive environment
characterized by large and small competitors. Competitors
with greater resources and lower cost structures or who are
trying to gain market share may be successful in providing
competing products and services to the Company’s customers
at lower prices than the Company currently charges. This may
require the Company to lower its prices, resulting in an adverse
impact on revenues, margins, and operating results.
If the Company is unable to adequately protect intellectual
property rights or is found to infringe upon the intellectual
property rights of others, the Company’s business is likely to
be adversely affected.
The Company relies on a combination of patents, trademarks,
copyrights, trade secrets, non-disclosure agreements, and
other security measures to establish and protect the Company’s
intellectual property rights. Although the Company believes
that existing measures are reasonably adequate to protect
intellectual property rights, there is no assurance that the
measures taken will prevent misappropriation of proprietary
information or dissuade others from independent development
of similar products or services. Moreover, there is no assurance
that the Company will be able to prevent competitors from
copying, reverse engineering, modifying, or otherwise
obtaining and/or using the Company’s technology and
proprietary rights to create competitive products or services.
The Company may not be able to enforce intellectual property
rights outside of the U.S. Additionally, the laws of certain
countries in which the Company’s products and services are
manufactured or marketed may not protect the Company’s
proprietary rights to the same extent as do the laws of the U.S.
Furthermore, other third parties may infringe, challenge,
invalidate, or circumvent the Company’s patents, trademarks,
copyrights and trade secrets. In each case, the Company’s
ability to compete could be significantly impaired.
A portion of the Company’s products and services are without
patent protection. The issuance of a patent does not guarantee
validity or enforceability. The Company’s patents may not
necessarily be valid or enforceable against third parties. The
issuance of a patent does not guarantee that the Company has
the right to use the patented invention. Third parties may have
blocking patents that could be used to prevent the Company
from marketing the Company’s own patented products and
services and utilizing the Company’s patented technology.
The Company is exposed and, in the future, may be exposed
to allegations of patent and other intellectual property
infringement from others. The Company may allege
infringement of its patents and other intellectual property
rights against others. Under either scenario, the Company
could become involved in costly litigation or other legal
proceedings regarding its patent or other intellectual property
rights, from both an enforcement and defensive standpoint.
Even if the Company chooses to enforce its patent or other
intellectual property rights against a third party, there may be
risk that the Company’s patent or other intellectual property
rights become invalidated or otherwise unenforceable through
legal proceedings. If intellectual property infringement claims
are asserted against the Company, the Company could defend
itself from such assertions or could seek to obtain a license
under the third party’s intellectual property rights in order to
mitigate exposure. In the event the Company cannot obtain a
license, third parties could file lawsuits or other legal
proceedings against
the Company, seeking damages
(including treble damages) or an injunction against the
manufacture, use, sale, offer for sale, or importation of the
Company’s products and services. These could result in the
Company having to discontinue the use, manufacture, and sale
of certain products and services, increase the cost of selling
certain products and services, or result in damage to the
Company’s reputation. An award of damages, including
material royalty payments, or the entry of an injunction order
against the use, manufacture, and sale of any of the Company’s
products and services found to be infringing, could have an
adverse effect on the Company’s results of operations and
ability to compete.
The loss of key customers could have an adverse impact on
the Company’s results of operations and could result in a
decline in the Company’s revenue.
The Company has critical customer relationships which are
dependent upon production and development activity related
to a handful of customers. In the segment reported in
continuing operations, revenue derived from the Company’s
three largest customers as a percentage of consolidated
revenue for the years ended December 31, 2018, 2017, and
2016, totaled 30%, 32%, and 48%, respectively. Customer
relationships are historically governed by purchase orders or
other short-term contractual obligations as opposed to long-
term contracts. The loss of one or more key customers could
have an adverse effect on the Company’s results of operations
and could result in a decline in the Company’s revenue.
Loss of key suppliers, the inability to secure raw materials
on a timely basis, or the Company’s inability to pass
commodity price increases on to customers could have an
adverse effect on the Company’s ability to service customer’s
needs and could result in a loss of customers.
Materials used in servicing and manufacturing operations, as
well as those purchased for sale, are generally available on the
open market from multiple sources. Acquisition costs and
transportation of raw materials to Company facilities have
historically been impacted by extreme weather conditions.
6
Certain raw materials used by the Energy Chemistry
Technologies segment are available only from limited sources;
accordingly, any disruptions to critical suppliers’ operations
could adversely impact the Company’s operations. Prices paid
for raw materials could be affected by energy products and
other commodity prices; weather and disease associated with
the Company’s crop dependent raw materials, specifically
citrus greening; tariffs and duties on imported materials;
foreign currency exchange rates; and phases of the general
business cycle and global demand. The Energy Chemistry
Technologies segment secures short and long term supply
agreements for critical raw materials from both domestic and
international vendors.
The prices of key raw materials including citrus terpenes and
polymers are subject to market fluctuations which at times can
be significant and unpredictable. The Company may be unable
to pass along price increases to its customers, which could
result in an adverse impact on margins and operating profits.
The Company currently uses purchasing strategies designed,
where possible, to align the timing of customer demand with
supply commitments. However, the Company currently does
not hedge commodity prices, but may consider such strategies
in the future, and there is no guarantee that the Company’s
purchasing strategies will prevent cost increases from
resulting in adverse impacts on margins and operating profits.
The Company depends on a single-source supplier for citrus
terpene, and the loss of this supplier could significantly harm
the Company’s business, financial condition, and results of
operations.
Citrus-based terpene (d-limonene) is an important feedstock
for many of the Company’s formulations. The Company
recently entered into a terpene Supply Agreement (the “Supply
Agreement”) with Flotek’s former subsidiary, Florida
Chemical Company, LLC (“FCC”), to serve as the Company’s
exclusive supplier of terpene. The Company depends on FCC
to provide it with terpene in a timely manner that meets its
quality, quantity, and cost requirements. FCC may encounter
problems that preclude it from supplying terpene on the terms
set forth in the Supply Agreement, including with respect to
pricing and production volumes. In the event that FCC
encounters such problems or otherwise breaches the Supply
Agreement, the Company’s inability to contract with
alternative sources could result in a prolonged interruption in
its ability to produce the Company’s formulations. Any such
delays or interruptions could ultimately result in a significant
increase in the price of the various formulations or a significant
reduction in the Company’s margins on these formulations,
which could adversely affect the Company’s business,
financial condition, and results of operations.
If the Company loses the services of key members of
management, the Company may not be able to manage
operations and implement growth strategies.
The Company depends on the continued service of the Chief
Executive Officer and President, the Chief Financial Officer,
the Executive Vice President of Operations, and other key
7
members of the executive management team, who possess
significant expertise and knowledge of the Company’s
business and industry. Furthermore, the Chief Executive
Officer and President serves as Chairman of the Board of
Directors. The Company has entered into employment
agreements with certain of these key members; however, at
December 31, 2018, the Company only carried key man life
insurance for the Chief Executive Officer and the Executive
Vice President of Operations. Any loss or interruption of the
services of key members of the Company’s management could
significantly reduce the Company’s ability to manage
operations effectively and implement strategic business
initiatives. On December 31, 2018, Matthew B. Marietta
departed from the Company as the Executive Vice President
of Finance and Corporate Development (Principal Financial
Officer), and H. Richard Walton retired as the Company’s
Chief Accounting Officer. The Company can provide no
assurance that appropriate replacements for key positions
could be found should the need arise.
Failure to maintain effective disclosure controls and
procedures and internal controls over financial reporting
could have an adverse effect on the Company’s operations
and the trading price of the Company’s common stock.
Effective internal controls are necessary for the Company to
provide reliable financial reports, effectively prevent fraud
and operate successfully as a public company. If the Company
cannot provide reliable financial reports or effectively prevent
fraud, the Company’s reputation and operating results could
be harmed. If the Company is unable to maintain effective
disclosure controls and procedures and internal controls over
financial reporting, the Company may not be able to provide
reliable financial reports, which in turn could affect the
Company’s operating results or cause the Company to fail to
meet its reporting obligations. Ineffective internal controls
could also cause investors to lose confidence in reported
financial information, which could negatively affect the
trading price of the Company’s common stock, limit the ability
of the Company to access capital markets in the future, and
require additional costs to improve internal control systems
and procedures.
Network disruptions, security threats and activity related
to global cyber-crime pose risks to the Company’s key
operational, reporting and communication systems.
The Company relies on access to information systems for its
operations. Failures of, or interference with, access to these
systems, such as network communications disruptions, could
have an adverse effect on our ability to conduct operations and
could directly impact consolidated reporting. Security
breaches pose a risk to confidential data and intellectual
to our
result
property, which could
competitiveness and reputation. The Company has policies
and procedures in place, including system monitoring and data
back-up processes, to prevent or mitigate the effects of these
potential disruptions or breaches. However, there can be no
assurance that existing or emerging threats will not have an
adverse impact on our systems or communications networks.
in damages
The Company may pursue strategic acquisitions, joint
ventures, and strategic divestitures, which could have an
adverse impact on the Company’s business.
The Company’s past and potential future acquisitions, joint
ventures, and divestitures involve risks that could adversely
affect the Company’s business. Negotiations of potential
acquisitions, joint ventures, or other strategic relationships,
integration of newly acquired businesses, and/or sales of
existing businesses could be time consuming and divert
management’s attention from other business concerns.
Acquisitions and joint ventures could also expose the
Company to unforeseen liabilities or risks associated with new
markets or businesses. Unforeseen operational difficulties
related to acquisitions and joint ventures could result in
a
diminished
disproportionate amount of the Company’s management’s
attention and resources. Additionally, acquisitions could result
in the commitment of capital resources without the realization
of anticipated returns. Divestitures could result in the loss of
future earnings without adequate compensation and the loss
of unrealized strategic opportunities.
performance
financial
require
or
If the Company does not manage the potential difficulties
associated with expansion successfully, the Company’s
operating results could be adversely affected.
The Company has grown over the last several years through
internal growth, strategic alliances, and strategic business and
asset acquisitions. The Company believes future success will
depend, in part, on the Company’s ability to adapt to market
opportunities and changes, to successfully integrate the
operations of any businesses acquired, expansion of existing
product and service lines, and potentially expand into new
product and service areas in which the Company may not have
prior experience. Factors that could result in strategic business
difficulties include, but are not limited to:
•
•
•
•
•
•
•
failure to effectively integrate acquisitions, joint
ventures or strategic alliances;
failure to effectively plan for risks associated with
expansion into areas in which management lacks prior
experience;
lack of experienced management personnel;
increased administrative burdens;
lack of customer retention;
technological obsolescence; and
infrastructure,
technological, communication and
logistical problems associated with large, expansive
operations.
If the Company fails to manage potential difficulties
successfully, the Company’s operating results could be
adversely impacted.
8
The Company’s ability to grow and compete could be
adversely affected if adequate capital is not available.
The ability of the Company to grow and be competitive in the
market place is dependent on the availability of adequate
capital. Access to capital is dependent, in large part, on the
Company’s cash flows and the availability of and access to
equity and debt financing. The Company’s revolving loan
agreements require approval and place limits on certain capital
transactions and various business acquisitions and
combinations. The Company cannot guarantee that internally
generated cash flows will be sufficient, or that the Company
will continue to be able to obtain equity or debt financing on
acceptable terms, or at all. As a result, the Company may not
be able to finance strategic growth plans, take advantage of
business opportunities, or to respond to competitive pressures.
However, with the remaining proceeds from the sale of the
CICT segment, the Company has formed a Strategic Capital
Committee to evaluate and make recommendations to the
board of directors regarding the manner in which the
remaining net proceeds from the sale will be deployed. The
Company filed a “universal” shelf registration on September
21, 2017, to permit the ability to sell securities to the public
in a timely manner and which it expects to keep active.
Failure to collect for goods and services sold to key customers
could have an adverse effect on the Company’s financial
results, liquidity and cash flows.
from
The Company performs credit analysis on potential
customers; however, credit analysis does not provide full
assurance that customers will be willing and/or able to pay for
the Company.
goods and services purchased
Furthermore, collectability of international sales can be
subject to the laws of foreign countries, which may provide
more limited protection to the Company in the event of a
dispute over payment. Because sales to domestic and
international customers are generally made on an unsecured
basis, there can be no assurance of collectability. If one or more
major customers are unwilling or unable to pay its debts to the
Company, it could have an adverse effect of the Company’s
financial results, liquidity and cash flows.
Unforeseen contingencies such as litigation could adversely
affect the Company’s financial condition.
The Company is, and from time to time may become, a party
to legal proceedings incidental to the Company’s business
involving alleged injuries arising from the use of Company
substances, patent
to hazardous
products, exposure
infringement, employment matters, commercial disputes, and
shareholder lawsuits. The defense of these lawsuits may
require significant expenses, divert management’s attention,
and may require the Company to pay damages that could
adversely affect the Company’s financial condition. In
addition, any insurance or indemnification rights that the
Company may have may be insufficient or unavailable to
protect against potential loss exposures.
The Company’s current insurance policies may not
adequately protect the Company’s business from all potential
risks.
The Company’s operations are subject to risks inherent in the
oil and natural gas industry, such as, but not limited to,
accidents, blowouts, explosions, fires, severe weather, oil and
chemical spills, and other hazards. These conditions can result
in personal injury or loss of life, damage to property,
equipment and the environment, as well as suspension of
customers’ oil and gas operations. These events could result
in damages requiring costly repairs, the interruption of
Company business, including the loss of revenue and profits,
and/or the Company being named as a defendant in lawsuits
asserting large claims. The Company maintains insurance
coverage it believes is adequate and customary to the oil and
natural gas services industry to mitigate liabilities associated
with these potential hazards. The Company does not have
insurance against all foreseeable risks. Consequently, losses
and liabilities arising from uninsured or underinsured events
could have an adverse effect on the Company’s business,
financial condition, and results of operations.
Regulatory pressures, environmental activism, and
legislation could result in reduced demand for the
Company’s products and services, increase the Company’s
costs, and adversely affect the Company’s business, financial
condition, and results of operations.
Regulations restricting volatile organic compounds (“VOC”)
exist in many states and/or communities which limit demand
for certain products. Although citrus oil is considered a VOC,
its health, safety, and environmental profile is preferred over
other solvents (e.g., BTEX), which is currently creating new
market opportunities around the world. Changes in the
perception of citrus oils as a preferred VOC, increased
consumer activism against hydraulic fracturing or other
regulatory or legislative actions by governments could
potentially result in materially reduced demand for the
Company’s products and services and could adversely affect
the Company’s business, financial condition, and results of
operations.
The Company is subject to complex foreign, federal, state,
and local environmental, health, and safety laws and
regulations, which expose the Company to liabilities that
could adversely affect the Company’s business, financial
condition, and results of operations.
The Company’s operations are subject to foreign, federal,
state, and local laws and regulations related to, among other
things, the protection of natural resources, injury, health and
safety considerations, chemical exposure assessment, waste
management, and transportation of waste and other hazardous
materials. The Company’s operations expose the Company to
risks of environmental liability that could result in fines,
9
penalties, remediation, property damage, and personal injury
liability. In order to remain compliant with laws and
regulations, the Company maintains permits, authorizations,
registrations, and certificates as required from regulatory
authorities. Sanctions for noncompliance with such laws and
regulations could include assessment of administrative, civil
and criminal penalties, revocation of permits, and issuance of
corrective action orders.
The Company could incur substantial costs to ensure
compliance with existing and future laws and regulations.
Laws protecting the environment have generally become more
stringent and are expected to continue to evolve and become
more complex and restrictive into the future. Failure to comply
with applicable laws and regulations could result in material
expense associated with future environmental compliance and
remediation. The Company’s costs of compliance could also
increase if existing laws and regulations are amended or
reinterpreted. Such amendments or reinterpretations of
existing laws or regulations, or the adoption of new laws or
regulations, could curtail exploratory or developmental
drilling for, and production of, oil and natural gas which, in
turn, could limit demand for the Company’s products and
services. Some environmental laws and regulations could also
impose joint and strict liability, meaning that the Company
could be exposed in certain situations to increased liabilities
as a result of the Company’s conduct that was lawful at the
time it occurred or conduct of, or conditions caused by, prior
operators or other third parties. Remediation expense and other
damages arising as a result of such laws and regulations could
be substantial and have a material adverse effect on the
Company’s financial condition and results of operations.
certain non-proprietary
Material levels of the Company’s revenue are derived from
customers engaged in hydraulic fracturing services, a process
that creates fractures extending from the well bore through the
rock formation to enable natural gas or oil to flow more easily
through the rock pores to a production well. Some states have
adopted regulations which require operators to publicly
disclose
information. These
regulations could require the reporting and public disclosure
of the Company’s proprietary chemistry formulas. The
adoption of any future federal or state laws or local
requirements, or the implementation of regulations imposing
reporting obligations on, or otherwise limiting, the hydraulic
fracturing process, could increase the difficulty of oil and
natural gas well production activity and could have an adverse
effect on the Company’s future results of operations.
Regulation of greenhouse gases and/or climate change
could have a negative impact on the Company’s business.
Certain scientific studies have suggested that emissions of
certain gases, commonly referred to as “greenhouse gases,”
which include carbon dioxide, methane, and other volatile
organic compounds, may be contributory to the warming
effect of the Earth’s atmosphere and other climatic changes.
In response to such studies, the issue of climate change and
the effect of greenhouse gas emissions, in particular emissions
from fossil fuels, is attracting increasing worldwide attention.
For example, the Paris Agreement was signed in 2016, which
sets forth a global framework to address climate change.
However, in June 2017, the Trump Administration announced
plans to withdraw from the Paris Agreement. Legislation and
regulatory initiatives at the federal, regional, state, and local
level have been considered and in some cases adopted in an
effort to reduce greenhouse gases. Some states have
individually or in regional cooperation imposed restrictions
on greenhouse gas emissions under various policies and
approaches, including establishing a cap on emissions,
requiring efficiency measures, or providing incentives for
pollution reduction, use of renewable energy sources, or use
of replacement fuels with lower carbon content.
Existing or future laws, regulations, treaties, or international
agreements related to greenhouse gases, climate change, and
indoor air quality, including energy conservation or alternative
energy incentives, could have a negative impact on the
Company’s operations, if regulations resulted in a reduction
in worldwide demand for oil, natural gas, and citrus oils. Other
results could be increased compliance costs and additional
operating restrictions, each of which could have a negative
impact on the Company’s operations.
The Company and the Company’s customers are subject to
risks associated with doing business outside of the U.S.,
including political risk, foreign exchange risk, and other
uncertainties.
Revenue from the sale of products to customers outside the
U.S. has been steadily increasing. The Company and its
customers are subject to risks inherent in doing business
outside of the U.S., including, but not limited to:
governmental instability;
corruption;
•
•
• war and other international conflicts;
•
•
•
•
civil and labor disturbances;
requirements of local ownership;
cartel behavior;
partial or total expropriation or nationalization;
•
•
currency devaluation; and
foreign laws and policies, each of which can limit the
movement of assets or funds or result in the deprivation
of contractual rights or appropriation of property
without fair compensation.
Collections from international customers and agents could
also prove difficult due to inherent uncertainties in foreign law
and judicial procedures. The Company could experience
significant difficulty with collections or recovery due to the
political or judicial climate in foreign countries where
Company operations occur or in which the Company’s
products are used.
The Company’s international operations must be compliant
with the Foreign Corrupt Practices Act (the “FCPA”) and other
10
applicable U.S. laws. The Company could become liable under
these laws for actions taken by employees or agents.
Compliance with international laws and regulations could
become more complex and expensive thereby creating
increased risk as the Company’s international business
portfolio grows. Further, the U.S. periodically enacts laws and
imposes regulations prohibiting or restricting trade with
certain nations. The U.S. government could also change these
laws or enact new laws that could restrict or prohibit the
Company from doing business in identified foreign countries.
The Company conducts, and will continue to conduct,
business in currencies other than the U.S. dollar. Historically,
the Company has not hedged against foreign currency
fluctuations. Accordingly, the Company’s profitability could
be affected by fluctuations in foreign exchange rates.
The Company has no control over and can provide no
assurances that future laws and regulations will not materially
impact the Company’s ability to conduct international
business.
The Company’s tax returns are subject to audit by tax
authorities. Taxing authorities may make claims for back
taxes, interest, and penalties.
The Company is subject to income, property, excise,
employment, and other taxes in the U.S. and a variety of other
jurisdictions around the world. Tax rules and regulations in
the U.S. and around the world are complex and subject to
interpretation. From time to time, taxing authorities conduct
audits of the Company’s tax filings and may make claims for
increased taxes and, in some cases, assess interest and
penalties. The assessments for back taxes, interest, and
penalties could be significant. If the Company is unsuccessful
in contesting these claims, the resulting payments could result
in a drain on the Company’s capital resources and liquidity.
Recent U.S. tax legislation, as well as future U.S. tax
legislation, may adversely affect our business, results of
operations, financial condition and cash flow.
Comprehensive tax reform legislation enacted in December
2017, commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”), made significant changes to U.S. federal income
tax laws. The Tax Act, among other things, reduced the
corporate income tax rate to 21%, partially limits the
deductibility of business interest expense and net operating
losses, imposes a one-time tax on unrepatriated earnings from
certain foreign subsidiaries, taxes offshore earnings at reduced
rates regardless of whether they are repatriated and allows the
immediate deduction of certain new investments instead of
deductions for depreciation expense over time. The Tax Act
is complex and far-reaching, and the Company continues to
evaluate the actual impact of its enactment on the Company.
There may be material adverse effects resulting from the Tax
Act that have not been identified and that could have an
adverse effect on the Company’s business, results of
operations, financial condition and cash flow.
Risks Related to the Company’s Industry
General economic declines (recessions), limits to credit
availability, and industry specific factors could have an
adverse effect on energy industry activity resulting in lower
demand for the Company’s products and services.
Worldwide economic uncertainty can reduce the availability
of liquidity and credit markets to fund the continuation and
expansion of industrial business operations worldwide. The
shortage of liquidity and credit combined with pressure on
worldwide equity markets could continue to impact the
worldwide economic climate. Geopolitical unrest around the
world may also impact demand for the Company’s products
and services both domestically and internationally.
Demand for the Company’s energy segment’s products and
services is dependent on oil and natural gas industry activity
and expenditure levels that are directly affected by trends in
oil and natural gas prices. Demand for the Company’s energy
products and services is particularly sensitive to levels of
exploration, development, and production activity of, and the
corresponding capital spending by, oil and natural gas
companies, including national oil companies. One indication
of drilling and completion activity and spending is rig count,
which the Company monitors to gauge market conditions. In
addition, the EIA and other industry data sources report
completion activity which is utilized by the Company. Any
prolonged reduction in oil and natural gas prices or drop in rig
and/or completion count could depress current levels of
exploration,
activity.
Perceptions of longer-term lower oil and natural gas prices by
oil and natural gas companies could similarly reduce or defer
major expenditures given the long-term nature of many large-
scale development projects. Lower levels of activity could
result in a corresponding decline in the demand for the
Company’s oil and natural gas well products and services,
which could have a material adverse effect on the Company’s
revenue and profitability.
development,
production
and
Events in global credit markets can significantly impact the
availability of credit and associated financing costs for many
of the Company’s customers. Many of the Company’s
customers finance their drilling and completion programs
through third-party lenders or public debt offerings. Lack of
available credit or increased costs of borrowing could cause
customers to reduce spending on drilling programs, thereby
reducing demand and potentially resulting in lower prices for
the Company’s products and services. Also, the credit and
the
economic environment could significantly
financial condition of some customers over a prolonged
period, leading to business disruptions and restricted ability
to pay for the Company’s products and services. The
Company’s forward-looking statements assume that the
Company’s lenders, insurers, and other financial institutions
will be able to fulfill their obligations under various credit
agreements, insurance policies, and contracts. If any of the
Company’s significant lenders, insurers and others are unable
to perform under such agreements, and if the Company was
unable to find suitable replacements at a reasonable cost, the
impact
11
Company’s results of operations, liquidity, and cash flows
could be adversely impacted.
A continuing period of depressed oil and natural gas prices
could result in further reductions in demand for the
Company’s products and services and adversely affect the
Company’s business, financial condition, and results of
operations.
The markets for oil and natural gas have historically been
volatile. Such volatility in oil and natural gas prices, or the
perception by the Company’s customers of unpredictability in
oil and natural gas prices, could adversely affect spending
levels. The oil and natural gas markets may be volatile in the
future. The demand for the Company’s products and services
is, in large part, driven by general levels of exploration and
production spending and drilling activity by its customers.
Future declines in oil or natural gas prices could adversely
affect the Company’s business, financial condition, and results
of operations.
New and existing competitors within the Company’s industry
could have an adverse effect on results of operations.
The oil and natural gas industry is highly competitive. The
Company’s principal competitors include numerous small
companies capable of competing effectively in the Company’s
markets on a local basis, as well as a number of large
companies that possess substantially greater financial and
other resources than does the Company. Larger competitors
may be able to devote greater resources to developing,
promoting, and selling products and services. The Company
may also face increased competition due to the entry of new
competitors including current suppliers that decide to sell their
products and services directly to the Company’s customers.
As a result of this competition, the Company could experience
lower sales or greater operating costs, which could have an
adverse effect on the Company’s margins and results of
operations.
The Company’s industry has a high rate of employee
turnover. Difficulty attracting or retaining personnel or
agents could adversely affect the Company’s business.
The Company operates in an industry that has historically been
highly competitive in securing qualified personnel with the
required technical skills and experience. The Company’s
services require skilled personnel able to perform physically
demanding work. Due to industry volatility, the demanding
nature of the work, and the need for industry specific
knowledge and technical skills, current employees could
choose to pursue employment opportunities outside the
Company that offer a more desirable work environment and/
or higher compensation than is offered by the Company. As a
result of these competitive labor conditions, the Company may
not be able to find qualified labor, which could limit the
Company’s growth. In addition, the cost of attracting and
retaining qualified personnel has increased over the past
several years due to competitive pressures. In order to attract
and retain qualified personnel, the Company may be required
to offer increased wages and benefits. If the Company is unable
to increase the prices of products and services to compensate
for increases in compensation, or is unable to attract and retain
qualified personnel, operating results could be adversely
affected.
Severe weather could have an adverse impact on the
Company’s business.
to equipment and
The Company’s business could be materially and adversely
affected by severe weather conditions. Hurricanes, tropical
storms, flash floods, blizzards, cold weather, and other severe
weather conditions could result in curtailment of services,
damage
in
transportation of products and materials, and loss of
productivity. If the Company’s customers are unable to
operate or are required to reduce operations due to severe
weather conditions, and as a result curtail purchases of the
Company’s products and services, the Company’s business
could be adversely affected.
interruption
facilities,
A terrorist attack or armed conflict could harm the
Company’s business.
Terrorist activities, anti-terrorist efforts, and other armed
conflicts involving the U.S. could adversely affect the U.S.
and global economies and could prevent the Company from
meeting financial and other obligations. The Company could
experience loss of business, delays or defaults in payments
from payors, or disruptions of fuel supplies and markets if
pipelines, production facilities, processing plants, or refineries
are direct targets or indirect casualties of an act of terror or
war. Such activities could reduce the overall demand for oil
and natural gas which, in turn, could also reduce the demand
for the Company’s products and services. Terrorist activities
and the threat of potential terrorist activities and any resulting
economic downturn could adversely affect the Company’s
results of operations, impair the ability to raise capital, or
otherwise adversely impact the Company’s ability to realize
certain business strategies.
Risks Related to the Company’s Securities
The market price of the Company’s common stock has been
and may continue to be volatile.
The market price of the Company’s common stock has
historically been subject to significant fluctuations. The
following factors, among others, could cause the price of the
Company’s common stock to fluctuate significantly due to:
•
•
•
•
•
•
variations in the Company’s quarterly results of
operations;
changes in market valuations of companies in the
Company’s industry;
fluctuations in stock market prices and volume;
fluctuations in oil and natural gas prices;
issuances of common stock or other securities in the
future;
additions or departures of key personnel;
12
•
•
announcements by the Company or the Company’s
competitors of new business, acquisitions, or joint
ventures; and
negative statements made by external parties, about the
Company’s business, in public forums.
The stock market has experienced significant price and
volume fluctuations in recent years that have affected the price
of common stock of companies within many industries
including the oil and natural gas industry. The price of the
Company’s common stock could fluctuate based upon factors
that have little to do with the Company’s operational
performance, and these fluctuations could materially reduce
the Company’s stock price. The Company could be a defendant
in a legal case related to a significant loss of value for the
shareholders. This could be expensive and divert
management’s attention and Company resources, as well as
have an adverse effect on the Company’s business, financial
condition, and results of operations.
If the Company cannot meet the New York Stock Exchange
continued listing requirements, the NYSE may delist the
Company’s common stock.
The Company’s common stock is currently listed on the
NYSE. In the future, if it is not able to meet the continued
listing requirements of the NYSE, which require, among other
things, that the average closing price of our common stock be
above $1.00 over 30 consecutive trading days, the Company’s
common stock may be delisted. The Company’s closing stock
price on February 28, 2019 was $3.20, but on December 24,
2018, closed at a low of $1.01. If the Company is unable to
satisfy the NYSE criteria for continued listing, its common
stock would be subject to delisting. A delisting of its common
stock could negatively impact the Company by, among other
things, reducing the liquidity and market price of the its
common stock; reducing the number of investors willing to
hold or acquire the Company’s common stock, which could
negatively impact its ability to raise equity financing;
decreasing the amount of news and analyst coverage of the
Company; and limiting the Company’s ability to issue
additional securities or obtain additional financing in the
future. In addition, delisting from the NYSE might negatively
impact the Company’s reputation and, as a consequence, its
business.
An active market for the Company’s common stock may not
continue to exist or may not continue to exist at current
trading levels.
Trading volume for the Company’s common stock historically
has been very volatile when compared to companies with
larger market capitalizations. The Company cannot presume
that an active trading market for the Company’s common stock
will continue or be sustained. Sales of a significant number of
shares of the Company’s common stock in the public market
could lower the market price of the Company’s stock.
The Company has no plans to pay dividends on the
Company’s common stock, and, therefore, investors will
have to look to stock appreciation for return on investments.
The Company does not anticipate paying any cash dividends
on the Company’s common stock within the foreseeable
future. The Company currently intends, subject to Board
approval of recommendations by the Strategic Capital
Committee described above, to retain future earnings to fund
the development and growth of the Company’s business and
to meet current debt obligations. Any payment of future
dividends will be at the discretion of the Company’s board of
directors and will depend, among other things, on the
Company’s
capital
requirements, level of indebtedness, statutory and contractual
restrictions applying to the payment of dividends, and other
considerations deemed relevant by the board of directors.
Investors must rely on sales of common stock held after price
appreciation, which may never occur, in order to realize a
return on their investment.
condition,
earnings,
financial
Certain anti-takeover provisions of the Company’s charter
documents and applicable Delaware law could discourage
or prevent others from acquiring the Company, which may
adversely affect the market price of the Company’s common
stock.
The Company’s certificate of incorporation and bylaws
contain provisions that:
•
•
•
•
•
permit the Company to issue, without stockholder
approval, up to 100,000 shares of preferred stock, in
one or more series and, with respect to each series, to
fix the designation, powers, preferences, and rights of
the shares of the series;
prohibit stockholders from calling special meetings;
limit the ability of stockholders to act by written
consent;
prohibit cumulative voting; and
require advance notice for stockholder proposals and
nominations for election to the board of directors to be
acted upon at meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation
Law limits business combinations with owners of more than
15% of the Company’s stock without the approval of the board
of directors. Aforementioned provisions and other similar
provisions make it more difficult for a third party to acquire
the Company exclusive of negotiation. The Company’s board
of directors could choose not to negotiate with an acquirer
deemed not beneficial to or synergistic with the Company’s
strategic outlook. If an acquirer were discouraged from
offering to acquire the Company or prevented from
successfully completing a hostile acquisition by these anti-
takeover measures, stockholders could lose the opportunity to
sell their shares at a favorable price.
Future issuance of additional shares of common stock could
cause dilution of ownership interests and adversely affect
the Company’s stock price.
13
The Company is currently authorized to issue up to 80,000,000
shares of common stock. The Company may, in the future,
issue previously authorized and unissued shares of common
stock, which would result in the dilution of current
stockholders ownership interests. Additional shares are
subject to issuance through various equity compensation plans
or through the exercise of currently outstanding options. The
potential issuance of additional shares of common stock may
create downward pressure on the trading price of the
Company’s common stock. The Company may also issue
additional shares of common stock or other securities that are
convertible into or exercisable for common stock in order to
raise capital or effectuate other business purposes. Future sales
of substantial amounts of common stock, or the perception
that sales could occur, could have an adverse effect on the
price of the Company’s common stock.
The Company filed a “universal” shelf registration on
September 21, 2017, to permit the ability to sell securities to
the public in a timely manner and which it expects to keep
active.
The Company may issue shares of preferred stock or debt
securities with greater rights than the Company’s common
stock.
Subject to the rules of the NYSE, the Company’s certificate
of incorporation authorizes the board of directors to issue one
or more additional series of preferred stock and to set the terms
of the issuance without seeking approval from holders of
common stock. Currently, there are 100,000 preferred shares
authorized, with no shares currently outstanding. Any
preferred stock that is issued may rank senior to common stock
in terms of dividends, priority and liquidation premiums, and
may have greater voting rights than holders of common stock.
The Company’s ability
loss
carryforwards and tax attribute carryforwards to offset
future taxable income may be limited as a result of
transactions involving the Company’s common stock.
to use net operating
Under section 382 of the Internal Revenue Code of 1986, as
amended, a corporation that undergoes an “ownership change”
is subject to limitations on the Company’s ability to utilize
pre-change net operating losses (“NOLs”), and certain other
tax attributes to offset future taxable income. In general, an
ownership change occurs if the aggregate stock ownership of
certain stockholders increases by more than 50 percentage
points over such stockholders’ lowest percentage ownership
during the testing period (generally three years). An ownership
change could limit the Company’s ability to utilize existing
NOLs and tax attribute carryforwards for taxable years
including or following an identified “ownership change.”
Transactions involving the Company’s common stock, even
those outside the Company’s control, such as purchases or
sales by investors, within the testing period could result in an
“ownership change.” In addition, under the Tax Act, the ability
to carry back NOLs to prior taxable years is generally
eliminated, and while NOLs arising in tax years beginning
after 2017 may be carried forward indefinitely, these
post-2017 NOLs may only reduce 80% of the Company’s
taxable income in a tax year. Limitations imposed on the ability
to use NOLs and tax credits to offset future taxable income
could reduce or eliminate the benefit of the NOLs and tax
attributes and could require the Company to pay U.S. federal
income taxes in excess of that which would otherwise be
required if such limitations were not in effect. Similar rules
and limitations may apply for state income tax purposes.
Disclaimer of Obligation to Update
Except as required by applicable law or regulation, the
Company assumes no obligation (and specifically disclaims
any such obligation) to update these risk factors or any other
forward-looking statement contained in this Annual Report to
reflect actual results, changes in assumptions, or other factors
affecting such forward-looking statements.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
the Company operated 16
At December 31, 2018,
manufacturing, warehouse, and research facilities in 7 U.S.
states, one research facility in Calgary, Alberta, and sales
offices in Tokyo, Japan and Dubai, United Arab Emirates. The
Company owns 5 of these facilities and the remainder are
leased with lease terms that expire from 2019 through 2037.
In addition, the Company’s corporate office is a leased facility
located in Houston, Texas. The following table sets forth
facility locations:
Owned/
Leased
Segment
Energy Chemistry
Technologies
Segment
Energy Chemistry
Technologies
Owned/
Leased
Location
Leased Dubai, United Arab Emirates
Leased Houston, Texas
Leased Midland, Texas
Leased Natoma, Kansas
Leased Oklahoma City, Oklahoma
Leased Raceland, Louisiana
Location
Discontinued Operations
Owned Marlow, Oklahoma
Owned Monahans, Texas
Owned Raceland, Louisiana
Owned Waller, Texas
Leased Calgary, Alberta
Leased Canonsburg, Pennsylvania
Leased Denver, Colorado
Consumer and
Industrial
Chemistry
Technologies
Drilling
Technologies
Owned Winter Haven, Florida
Leased Tokyo, Japan
Leased Wysox, Pennsylvania
The Company considers owned and leased facilities to be in
good condition and suitable for the conduct of business.
Item 3. Legal Proceedings.
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern
District of Texas granted the Company’s motion to dismiss the
four consolidated putative securities class action lawsuits that
were filed in November 2015, against the Company and
certain of its officers. The lawsuits were previously
consolidated into a single case, and a consolidated amended
complaint had been filed. The consolidated amended
complaint asserted that the Company made false and/or
misleading statements, as well as failed to disclose material
adverse facts about the Company’s business, operations, and
prospects. The complaint sought an award of damages in an
unspecified amount on behalf of a putative class consisting of
persons who purchased the Company’s common stock
between October 23, 2014 and November 9, 2015, inclusive.
The lead plaintiff has appealed the District Court’s decision
granting the motion to dismiss. On February 7, 2019, a three-
judge panel of the United States Court of Appeals for the Fifth
14
Circuit issued a unanimous opinion affirming the District
Court’s judgment of dismissal in its entirety.
In January 2016, three derivative lawsuits were filed, two in
the District Court of Harris County, Texas (which have since
been consolidated into one case), and one in the United States
District Court for the Southern District of Texas, on behalf of
the Company against certain of its officers and its current
directors. The lawsuits allege violations of law, breaches of
fiduciary duty, and unjust enrichment against the defendants.
The Company believes the lawsuits are without merit and
intends to vigorously defend against all claims asserted.
Discovery has not yet commenced. At this time, the Company
is unable to reasonably estimate the outcome of this litigation.
In addition, as previously disclosed, the U.S. Securities and
Exchange Commission had opened an inquiry related to
similar issues to those raised in the above-described litigation.
On August 21, 2017, the Company received a letter from the
staff of the SEC stating that the inquiry has been concluded
and that the staff does not intend to recommend an enforcement
action against the Company.
aware of any pending or threatened lawsuits or proceedings
that are expected to have a material effect on the Company’s
financial position, results of operations or liquidity.
Other Litigation
The Company is subject to routine litigation and other claims
that arise in the normal course of business. Management is not
Item 4. Mine Safety Disclosures.
Not applicable.
15
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
The Company’s common stock began trading on the NYSE
on December 27, 2007, under the stock ticker symbol “FTK.”
As of the close of business on February 28, 2019, there were
57,350,015 shares of common stock outstanding held by
approximately 9,800 holders of record. The Company’s
closing sale price of the common stock on the NYSE on
February 28, 2019 was $3.20. The Company has never
declared or paid cash dividends on common stock. While the
Company regularly assesses the dividend policy, the Company
has no current plans to declare dividends on its common stock
and intends, subject to Board approval of recommendations
by the Strategic Capital Committee described in Part I, Item
1A – “Risk Factors” of this Annual Report, to continue to use
earnings and other cash in the maintenance and expansion of
its business.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity compensation plan information relating to equity securities authorized for issuance under individual compensation
agreements at December 31, 2018 is as follows:
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights(1)
Weighted-
Average Exercise
Price of Outstanding
Options, Warrants
and Rights(2)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column(a))
(a)
(b)
(c)
1,352,138
$
— $
$
1,352,138
—
—
—
1,492,737
—
1,492,737
(1) Includes shares for outstanding stock options (0 shares), restricted stock awards (1,050,372 shares), and restricted stock unit share equivalents (301,766
shares).
(2) The weighted-average exercise price is for outstanding stock options only and does not include outstanding restricted stock awards or restricted stock unit
share equivalents that have no exercise price.
16
Issuer Purchases of Equity Securities
In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common
stock. Repurchases may be made in open market or privately negotiated transactions. Through December 31, 2018, the Company
has repurchased $25 million of its common stock under this repurchase program.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s
common stock. Repurchases may be made in open market or privately negotiated transactions. Through December 31, 2018, the
Company has repurchased $0.3 million of its common stock under this authorization and $49.7 million may yet be used to purchase
shares.
Repurchases of the Company’s equity securities during the three months ended December 31, 2018 are as follows:
Total
Number
of Shares
Purchased (1)
1,639
$
— $
$
$
71,303
72,942
Average
Price
Paid per
Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Dollar Value
of Shares that May Yet be
Purchased Under the
Plans or Programs (2)
2.44
—
1.09
1.12
— $
— $
— $
—
49,704,947
49,704,947
49,704,947
October 1 to October 31, 2018
November 1 to November 30, 2018
December 1 to December 31, 2018
Total
(1) The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting
of restricted shares and exercise of non-qualified stock options, (b) to satisfy payments required for common stock upon the exercise of stock options, and (c)
as part of a publicly announced repurchase program on the open market.
(2) A covenant under the Company’s Credit Facility limited the amount that may be used to repurchase the Company’s common stock. At December 31, 2018,
this covenant did not permit additional share repurchases. On March 1, 2019, the Company paid off the Credit Facility (see Note 21).
17
Item 6. Selected Financial Data.
The following table sets forth certain selected historical
financial data and should be read in conjunction with Part II,
Item 7 – “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Part II, Item 8 –
“Financial Statements and Supplementary Data” of this
Annual Report. The selected operating and financial position
data as of and for each of the five years presented has been
derived from audited consolidated Company financial
statements, some of which appear elsewhere in this Annual
Report. Financial data has been adjusted for discontinued
operations, as indicated.
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its Consumer and Industrial Chemistry
Technologies segment, which was completed in the first
quarter of 2019. An investment banking advisory services firm
was engaged and actively marketed this segment. Effective
December 31, 2018, the Company has classified the assets,
liabilities, and results of operations for this segment as
“Discontinued Operations” for all periods presented.
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. During 2017, the Company completed
the sale or disposal of the assets and transfer or liquidation of
liabilities and obligations of each of the Drilling Technologies
and Production Technologies segments. The Company has
classified the assets, liabilities, and results of operations for
these two segments as “Discontinued Operations” for all
periods presented.
During 2016 and 2015, the Company made one small
acquisition each year, and in 2014, the Company made two
small acquisitions. Insignificant non-recurring charges were
incurred related to these acquisitions. The net income and non-
recurring charges related to these acquisitions do not
materially affect comparability.
Impairments recognized in 2016 and 2015 relate to the Drilling
Technologies and Production Technologies segments and,
therefore, are included in discontinued operations.
2018
As of and for the year ended December 31,
2016
(in thousands, except per share data)
2017
2015
2014
Operating Data
Revenue (1)
(Loss) income from operations (1)
$ 177,773
(69,811)
$ 243,106
(10,320)
$ 188,233
(16,968)
$ 213,593
3,536
$ 268,761
52,057
(Loss) income from continuing operations (1)
Income (loss) from discontinued operations, net of tax
Net (loss) income
$ (73,441) $ (17,504) $
2,743
(9,891)
(4,447) $
(44,683)
1,489
(14,951)
$
$ (70,698) $ (27,395) $ (49,130) $ (13,462) $
33,260
20,343
53,603
(1) Amounts exclude impact of discontinued operations.
Per Share Data
Basic earnings (loss) per share:
Continuing operations
Discontinued operations, net of tax
Basic earnings (loss) per share
Diluted earnings (loss) per share:
Continuing operations
Discontinued operations, net of tax
Diluted earnings (loss) per share
$
$
$
$
(1.26) $
0.05
(1.21) $
(1.26) $
0.05
(1.21) $
(0.30) $
(0.17)
(0.47) $
(0.30) $
(0.17)
(0.47) $
(0.08) $
(0.80)
(0.88) $
(0.08) $
(0.80)
(0.88) $
$
0.03
(0.27)
(0.24) $
$
0.03
(0.27)
(0.24) $
0.61
0.37
0.98
0.60
0.37
0.97
Financial Position Data
Total assets
Convertible senior notes, long-term debt, and capital
lease obligations, less discount and current portion
Stockholders’ equity
$ 285,883
$ 329,888
$ 383,215
$ 403,090
$ 423,276
—
—
7,833
201,624
264,900
287,343
18,255
293,651
25,398
306,003
18
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and
the related Notes to the Consolidated Financial Statements
included elsewhere in this Annual Report. The following
information contains forward-looking statements, which are
subject to risks and uncertainties. Should one or more of these
risks or uncertainties materialize, actual results could differ
from those expressed or implied by the forward-looking
the
statements. See “Forward-Looking Statements” at
beginning of this Annual Report.
Basis of Presentation
During the fourth quarter of 2018, the Company classified the
Consumer and Industrial Chemistry Technologies segment as
held for sale based on management’s intention to sell this
business. During the fourth quarter of 2016, the Company also
the Drilling Technologies and Production
classified
Technologies segments as held
for sale based on
management’s intention to sell these businesses. The
Company’s historical financial statements have been revised
to present the operating results of the Consumer and Industrial
Chemistry Technologies, Drilling Technologies, and
Production Technologies
discontinued
operations. The results of operations of these segments are
presented as “Loss from discontinued operations” in the
statement of operations and the related cash flows of these
segments has been reclassified to discontinued operations for
all periods presented. The assets and liabilities of these
segments have been reclassified to “Assets held for sale” and
“Liabilities held for sale”, respectively, in the consolidated
balance sheet for all periods presented, as applicable.
segments
as
During 2017, the Company completed the sale or disposal of
the assets and transfer or liquidation of liabilities and
obligations of the Drilling Technologies and Production
Technologies segments.
Results of operations of the Consumer and Industrial
Chemistry Technologies segment for the years ended
December 31, 2018, 2017, and 2016 are discussed below.
Results of operations of the Drilling Technologies and
Production Technologies segments for the year ended
December 31, 2016 are discussed below.
Executive Summary
Flotek is a global, diversified, technology-driven company
that develops and supplies chemistries and services to the oil
and gas industries. Flotek also supplied high value compounds
to companies that make food and beverages, cleaning
products, cosmetics, and other products that are sold in
consumer and industrial markets, classified as discontinued
operations at December 31, 2018. Flotek operates in over 20
domestic and international markets.
19
services
companies,
The Company’s oilfield business
includes specialty
chemistries and logistics which enable its customers in
pursuing improved efficiencies in the drilling and completion
of their wells. Customers include major integrated oil and gas
(“O&G”)
companies,
oilfield
independent O&G companies, pressure-pumping service
companies, national and state-owned oil companies, and
international supply chain management companies. The
Company also produced non-energy-related citrus oil and
related products, classified as discontinued operations at
December 31, 2018, including (1) high value compounds used
as additives by companies in the flavors and fragrances
markets and (2) environmentally friendly chemistries for use
in numerous industries around the world, including the O&G
industry. Additionally, the Company also provides automated
bulk material handling, loading facilities, and blending
capabilities.
Continuing Operations
The operations of the Company are categorized into one
reportable segment: Energy Chemistry Technologies.
• Energy Chemistry Technologies designs, develops,
manufactures, packages, and markets specialty
chemistries used in O&G well drilling, cementing,
completion, and stimulation. These
technologies
developed by Flotek’s Research and Innovation team
enable customers to pursue improved efficiencies in the
drilling and completion of wells.
Discontinued Operations
In 2018, the Consumer and Industrial Chemistry Technologies
segment qualified for classification as a discontinued
operation. The Drilling Technologies and Production
Technologies segments were sold during 2017 and are
classified as discontinued operations, as well.
• Consumer and Industrial Chemistry Technologies
designed, developed, and manufactured products that
are sold to companies in the flavor and fragrance
industries and specialty chemical industry. These
technologies are used by beverage and food companies,
fragrance companies, and companies providing
household and industrial cleaning products.
• Drilling Technologies assembled,
rented, sold,
inspected, and marketed downhole drilling equipment
used in energy, mining, and industrial drilling activities.
•
Production Technologies assembled and marketed
production-related equipment, including pumping
system components, electric submersible pumps
(“ESP”), gas separators, valves, and services that
support natural gas and oil production activities.
Market Conditions
The Company’s success is sensitive to a number of factors,
which include, but are not limited to, drilling and well
completion activity, customer demand for its advanced
technology products, market prices for raw materials, and
governmental actions.
Drilling and well completion activity levels are influenced by
a number of factors, including the number of rigs in operation
and the geographical areas of rig activity. Additional factors
that influence the level of drilling and well completion activity
include:
• Historical, current, and anticipated future O&G
prices,
•
Federal, state, and local governmental actions that
may encourage or discourage drilling activity,
• Customers’ strategies relative to capital funds
allocations,
• Weather conditions, and
• Technological changes to drilling and completion
methods and economics.
Historical North American drilling activity is reflected in
“TABLE A” below.
Customers’ demand for advanced technology products and
services provided by the Company are dependent on their
recognition of the value of:
• Chemistries that improve the economics of their
O&G operations,
• Chemistries that meet the need of consumer product
markets, and
• Chemistries that are economically viable, socially
responsible, and ecologically sound.
Market prices for commodities, including citrus oils, can be
influenced by:
• Historical, current, and anticipated future production
levels of the global citrus (primarily orange) crops,
• Weather related risks,
• Health and condition of citrus trees (e.g., disease and
pests), and
•
International competition and pricing pressures
resulting
from natural and artificial pricing
influences.
Governmental actions may restrict the future use of hazardous
chemicals, including, but not limited to, the following
industrial applications:
• O&G drilling and completion operations,
• O&G production operations, and
• Non-O&G industrial solvents.
TABLE A
Average North American Active Drilling Rigs
United States
Canada
Total
Average U.S. Active Drilling Rigs by Type
Vertical
Horizontal
Directional
Total
Average North American Drilling Rigs by Product
Oil
Natural Gas
Total
2018
2017
2016
2018 vs. 2017
% Change
2017 vs. 2016
% Change
1,032
191
1,223
63
900
69
1,032
961
262
1,223
876
206
1,082
70
736
70
876
812
270
1,082
509
130
639
60
400
49
509
471
168
639
17.8 %
(7.3)%
13.0 %
(10.0)%
22.3 %
(1.4)%
17.8 %
18.3 %
(3.0)%
13.0 %
72.1%
58.5%
69.3%
16.7%
84.0%
42.9%
72.1%
72.4%
60.7%
69.3%
Source: Rig counts are per Baker Hughes (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
20
Source: Rig counts are per Baker Hughes (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
Completions are per the U.S. Energy Information Administration (https://www.eia.gov/petroleum/drilling/) as of January 22, 2019.
Average U.S. rig activity increased by 17.8% in 2018
compared to 2017, and increased 72.1% from 2016 to 2017.
According to data collected by the U.S. Energy Information
Administration (“EIA”) as reported on January 22, 2019,
completions in the seven most prolific areas in the lower 48
states increased 25.4% in 2018 compared to 2017 and
decreased 43.2% from 2016 to 2017.
Outlook for 2019
After a continuous decline in U.S. drilling activity beginning
in mid-2014, the market began to gradually recover in the
second quarter of 2016. Although oil and gas markets have
improved, the level of drilling and completion activity remains
lower than previous levels experienced before the downturn
in 2014. Assuming the price for crude oil remains relatively
stable and regulatory impediments are limited, the Company
expects global oilfield activity to remain stable heading into
2019.
During 2018, the Company continued to analyze and promote
the efficacy of its Complex nano-Fluid® (“CnF®”) chemistries
and its Prescriptive Chemistry Management® (“PCM®”)
offering. Although quarter-to-quarter performance may vary,
the Company expects to continue to penetrate the market over
time by demonstrating the efficacy of its CnF® chemistries and
reservoir-centric full fluid systems via PCM®. The Company
will continue to demonstrate the value and benefit of Flotek
chemistries through comparative analysis of wells with and
without Flotek chemistries and field validation results
conducted in partnership with exploration and production
(“E&P”) companies. Flotek is experiencing a notable shift in
purchasing behaviors in which E&P companies are seeking
greater transparency, control and efficacy in their fluid
systems, as they see diminishing returns on mechanical factors
in their completion designs, such as proppant loading, fluid
loading, and lateral length in their completion. As a result, they
are focusing more on sourcing consumables, including
chemistry, directly from manufacturers and providers of these
products. This trend has created significant changes in Flotek’s
customer base, product portfolio, and sales efforts and
continues to influence changes in inventory and distribution
strategies, capital allocation, and the business model for the
Company. While these challenges are expected to persist in
the near-term, the Company believes it can grow its client base
and revenue opportunities over time. Additionally during the
third quarter, the Company experienced increased demand for
its products internationally, as unconventional activity has
increased outside of the U.S. and international spending has
begun to recover.
The Company continues to enhance and improve its patented
and proven chemistries through its industry leading research
and innovation staff who develop innovative and customer-
responsive products, as well as create new chemistry
technologies, which are expected to address oilfield challenges
of the future and expand the Company’s future product lines.
Completed in 2016, the Company’s Global Research &
Innovation Center in Houston houses scientists, chemists,
geologists, and reservoir, petroleum and geomechanical
engineers who advance the development of next-generation
innovative energy chemistries, as well as expanded
collaboration among clients, leaders from academia, and
Company scientists. These collaborative opportunities are an
important and distinguishing capability within the industry
and provide real-time product and fluid system development
direct to the consumer.
21
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its Consumer and Industrial Chemistry
Technologies segment, which was completed in the first
quarter of 2019. The Company continues to focus on
maximizing the profitability of its product and business
portfolio, and may exit or enter new product lines or businesses
which complement its current operations.
Capital expenditures for continuing operations totaled $3.6
million in 2018. The Company expects maintenance capital
spending to be between $5 million and $9 million in 2019 and
does not have any specific growth capital projects currently
planned or committed. During the first quarter of 2019, the
Company formed a Strategic Capital Committee that will
consider possible growth capital projects that could total as
much as $20 million to $30 million for 2019 and beyond. The
Company will remain nimble in its core capital expenditure
plans, adjusting as market conditions warrant, and will focus
any growth capital spending program on uses that generate
Results of Continuing Operations (in thousands):
positive returns and to areas that pose a strategic long-term
benefit.
Changes to geopolitical, global economic, and industry trends
could have an impact, either positive or negative, on the
Company’s business. In the event of significant adverse
changes to the demand for oil and gas production, the market
price for oil and gas, weather patterns, and/or the availability
of citrus crops, the market conditions affecting the Company
could change rapidly and materially. Should such adverse
changes to market conditions occur, management believes the
Company has access to adequate liquidity to withstand the
impact of such changes while continuing to make strategic
capital investments and acquisitions, if opportunities arise. In
addition, management believes the Company is well-
positioned to take advantage of significant increases in
demand for its products should market conditions improve
dramatically in the near term.
Revenue
Operating expenses (excluding depreciation and amortization)
$
Operating expenses %
Corporate general and administrative costs
Corporate general and administrative costs %
Depreciation and amortization
Research and development costs
(Gain) loss on disposal of long-lived assets
Impairment of goodwill
Loss from operations
Operating margin %
Loss on sale of business
Loss on write-down of assets held for sale
Gain on legal settlement
Interest and other expense, net
Loss before income taxes
Income tax benefit (expense)
Loss from continuing operations
Income (loss) from discontinued operations, net of tax
Net loss
Net loss attributable to noncontrolling interests
Net loss attributable to Flotek Industries, Inc. (Flotek)
$
$
Year ended December 31,
2017
243,106
188,744
$
$
2018
177,773
159,808
89.9 %
31,467
17.7 %
9,216
10,356
(443)
37,180
(69,811)
(39.3)%
(360)
(2,580)
—
(7,906)
(80,657)
7,216
(73,441)
2,743
(70,698)
358
(70,340)
$
$
77.6 %
41,492
17.1 %
9,768
13,130
292
—
(10,320)
(4.2)%
—
—
—
(1,072)
(11,392)
(6,112)
(17,504)
(9,891)
(27,395)
—
(27,395)
$
$
2016
188,233
143,983
76.5 %
43,745
23.2 %
8,172
9,319
(18)
—
(16,968)
(9.0)%
—
—
12,730
(2,413)
(6,651)
2,204
(4,447)
(44,683)
(49,130)
—
(49,130)
Results for 2018 compared to 2017—Consolidated
Consolidated revenue for the year ended December 31, 2018,
decreased $65.3 million, or 26.9%, from 2017. The decrease
in revenue was due to changes in product mix and an ongoing
transition related to the Company selling progressively more
to oil and gas company end users rather than through energy
service companies.
the year ended
Consolidated operating expenses for
December 31, 2018, decreased $28.9 million, or 15.3%, from
2017, and, as a percentage of revenue, increased to 89.9% for
22
the year ended December 31, 2018, from 77.6% in 2017. The
decrease in expenses was primarily attributable to decreased
sales, lower stock compensation expense, and decreased
headcount, partially offset by increased freight and other direct
costs associated with manufacturing.
allowance, the subsequent events that occurred in the first
quarter of 2019 (Note 21) provided a source of income to
support the release of $11.5 million of the valuation allowance.
As such, the Company reversed this portion of the valuation
allowance during the fourth quarter of 2018.
Corporate general and administrative (“CG&A”) expenses are
not directly attributable to products sold or services provided.
CG&A costs decreased $10.0 million, or 24.2%, for the year
ended December 31, 2018, from 2017. As a percentage of
revenue, CG&A rose from 17.1% to 17.7% for the year ended
December 31, 2018, compared to 2017. The decrease in
CG&A costs was primarily due to aggressive cost reduction
measures which began in the last quarter of 2017, as well as
lower incentive and stock compensation expense.
Depreciation and amortization expense for the year ended
December 31, 2018, decreased by $0.6 million, or 5.7%, from
2017.
Research and Innovation (“R&I”) expense for the year ended
December 31, 2018, decreased $2.8 million, or 21.1%, from
2017. The decrease in R&I is primarily attributable to
reallocating personnel into operational roles.
During the second quarter of 2018, the Company recognized
a goodwill impairment charge of $37.2 million in the Energy
Chemistry Technologies reporting unit, which resulted from
lower expectations, and
sustained under-performance,
additional risks associated with the reporting unit.
During the second quarter of 2018, the Company committed
to a plan to divest the revenue generating assets associated
with the Dalton, Georgia facility within the Energy Chemistry
Technologies segment. As a result of this planned divestiture,
the Company recorded a loss on write-down of assets held for
sale of $2.6 million for the three months ended June 30, 2018.
During the third quarter of 2018, the Company completed the
sale and recorded a loss on the sale of the business of $0.4
million for the three months ended September 30, 2018.
Interest and other expense increased $6.8 million for the year
ended December 31, 2018, compared to 2017, primarily due
to $1.2 million and $1.9 million write-offs associated with the
discontinuation of certain corporate projects during the second
and fourth quarter of 2018, respectively, expenses related to
winding down of certain business ventures, changes in foreign
currency exchange rates, and increased borrowings on the
revolving credit facility throughout 2018.
The Company recorded an income tax benefit of $7.2 million,
yielding an effective tax benefit rate of 8.9%, for the year ended
December 31, 2018, compared to an income tax provision of
$6.1 million, yielding an effective tax rate of 53.7%, in 2017.
In the second quarter of 2018, the Company determined that
it was more likely than not that it will not realize the benefits
of its gross deferred tax assets and, therefore, recorded a $15.5
million valuation allowance against the carrying value of net
deferred tax assets. As all available evidence should be taken
into consideration when assessing the need for a valuation
23
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its Consumer and Industrial Chemistry
Technologies segment, which was completed in the first
quarter of 2019. The Company recorded net income from
discontinued operations of $2.7 million for the year ended
December 31, 2018 for the classification of this segment as
held for sale. The completion of this sale is expected to occur
in the first quarter of 2019.
Results for 2017 compared to 2016—Consolidated
Consolidated revenue for the year ended December 31, 2017,
increased $54.9 million, or 29.2%, from 2016. The increase
in revenue was driven by the upturn in oilfield market activity.
Consolidated operating expenses for
the year ended
December 31, 2017, increased $44.8 million, or 31.1%, from
2016, and, as a percentage of revenue, increased to 77.6% for
the year ended December 31, 2017, from 76.5% in 2016. These
increases were primarily attributable to increased sales and
associated headcount, as well as increased inventory, freight,
and other direct costs associated with manufacturing.
CG&A expenses are not directly attributable to products sold
or services provided. CG&A costs decreased $2.3 million, or
5.2%, for the year ended December 31, 2017 from 2016. As
a percentage of revenue, CG&A declined from 23.2% to
17.1% for the year ended December 31, 2017, compared to
2016. The decrease in CG&A costs was primarily due to lower
legal expenses and stock compensation expense, partially
offset by costs associated with executive retirement.
Depreciation and amortization expense for the year ended
December 31, 2017, increased $1.6 million, or 19.5%, from
2016. This increase was primarily attributable to the
completion and equipping of the Global Research &
Innovation Center in August 2016, along with other
improvements to manufacturing facilities.
Research and Innovation (“R&I”) expense for the year ended
December 31, 2017, increased $3.8 million, or 40.9%, from
2016. The increase in R&I is primarily attributable to increased
personnel for new product development and Flotek’s
commitment to remaining responsive to customer needs,
increased demand, continued growth and refining of existing
product lines, and the development of new chemistries which
are expected to expand the Company’s intellectual property
portfolio.
Interest and other expense decreased $1.3 million, or 55.6%,
for the year ended December 31, 2017, compared to 2016,
primarily due to the repayment of the term loan in May 2017,
as well as decreasing the outstanding balance of the revolving
credit facility throughout 2017.
The Company recorded an income tax provision of $6.1
million, yielding an effective tax provision rate of 53.7%, for
the year ended December 31, 2017, compared to an income
tax benefit of $2.2 million, yielding an effective tax benefit
rate of 33.1%, in 2016.
As part of the Company’s strategic restructuring of its business
to enable a greater focus on its core businesses in energy
chemistry and consumer and industrial chemistry, the
Company completed the sale or disposal of the assets and
transfer or liquidation of liabilities and obligations of the
Drilling Technologies and Production Technologies segments
during 2017. The Company recorded a net loss from
discontinued operations of $14.3 million for the year ended
December 31, 2017.
Results by Segment
Energy Chemistry Technologies (“ECT”)
(dollars in thousands)
2018
Year ended December 31,
2017
Revenue
(Loss) income from operations
Income from operations - excluding impairment
Operating margin % - excluding impairment
$
$
177,773
(36,817)
363
0.2%
$
243,106
33,611
33,611
2016
188,233
29,014
29,014
13.8%
15.4 %
Results for 2018 compared to 2017—Energy Chemistry
Technologies
Results for 2017 compared to 2016—Energy Chemistry
Technologies
ECT revenue for the year ended December 31, 2018,
decreased $65.3 million, or 26.9%, from 2017, compared to a
25.4% increase in completion activity as measured by the EIA.
ECT’s under-performance when compared to these market
indicators was primarily attributable to product mix and an
the Company selling
ongoing
progressively more to oil and gas company end users rather
than through energy service companies.
transition
related
to
Income from operations for the ECT segment decreased $70.4
million for the year ended December 31, 2018, compared to
2017, partially due to the $37.2 million goodwill impairment
charge taken in the second quarter of 2018. Income from
operations, excluding impairment, decreased $33.2 million,
or 98.9%, for the year ended December 31, 2018, compared
to 2017. This decrease is primarily a result of gross margin
compression caused by reduced sales activity coupled with
increases in material and labor costs, inventory reserve
adjustments, and higher logistics expenditures, partially offset
by a reduction in overhead expenses.
Discontinued Operations
During the fourth quarter of 2018, the Company classified the
Consumer and Industrial Chemistry Technologies segment as
held for sale based on management’s intention to sell the
business. In addition, during the fourth quarter of 2016, the
Company classified the Drilling Technologies and Production
Technologies segments as held
for sale based on
management’s intention to sell these businesses. The
Company’s historical financial statements have been revised
to present the operating results of the Consumer and Industrial
24
ECT revenue for the year ended December 31, 2017, increased
$54.9 million, or 29.2%, from 2016, compared to a 39.9%
increase in completion activity as measured by the EIA. ECT
performed along these market indicators by continuing to
promote the benefits of its CnF® chemistries. Revenues
increased with the increased customer demand resulting from
improved oilfield market conditions.
Income from operations for the ECT segment increased $4.6
million, or 15.8%, for the year ended December 31, 2017,
compared to 2016. This increase is primarily attributable to
an increase in gross profit, increased activity associated with
sales and marketing efforts in pursuit of growth opportunities,
and cost reductions. The Company continues its commitment
to research and innovation efforts within Energy Chemistry
Technologies.
Chemistry Technologies, Drilling Technologies, and
Production Technologies
as discontinued
operations.
segments
During 2017, the Company completed the sale or disposal of
the assets and transfer or liquidation of liabilities and
obligations of the Drilling Technologies and Production
Technologies segments.
Consumer and Industrial Chemistry Technologies (“CICT”)
(dollars in thousands)
Revenue
Income from operations
Operating margin %
Year ended December 31,
2018
2017
2016
$
$
72,344
3,054
$
$
4.2%
73,992
7,465
$
$
10.1%
74,599
9,668
13.0%
Results for 2018 compared to 2017—Consumer and
Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2018,
decreased $1.6 million, or 2.2%, from 2017, primarily due to
a decline in the value of terpenes and some softness for flavor
ingredients. The market for citrus oils was affected by the
historic high prices experienced in 2017 and 2018, which
limited market activity and top line revenue. Citrus greening
reduced citrus crops globally, thereby limiting the Company’s
performance in comparison to the growth experienced in 2016
and 2017.
Income from operations for the CICT segment decreased $4.4
million, or 59.1%, for the year ended December 31, 2018, from
2017, primarily due to higher raw material costs and reduced
by-product sales, as well as increased expenses related to
operations of the new still put into production in the third
quarter of 2018.
Results for 2017 compared to 2016—Consumer and
Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2017,
decreased $0.6 million, or 0.8%, from 2016, primarily due to
a decline in sales volumes. The high price for citrus oils limited
market activity and top line revenue. Citrus greening and
adverse weather reduced citrus crops globally, thereby
limiting the Company’s performance in comparison to the
growth experienced in 2016 and 2015.
Income from operations for the CICT segment decreased $2.2
million, or 22.8%, for the year ended December 31, 2017, from
2016, primarily due to higher raw material costs and increased
headcount to facilitate growth in the food and beverages
market through new research activities and the opening of a
sales office in Japan.
Drilling Technologies
(dollars in thousands)
Revenue
Loss from operations
Loss from operations - excluding impairment
Operating margin % - excluding impairment
Results for 2017 compared to 2016—Drilling Technologies
On May 22, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of
the Company’s Drilling
Technologies segment to National Oilwell Varco, L.P.
(“NOV”) for $17.0 million in cash consideration.
2018
Year ended December 31,
2017
2016
— $
— $
— $
—%
11,534
(2,646)
(2,646)
(22.9)%
$
$
$
27,627
(44,522)
(8,000)
(29.0)%
On August 16, 2017, the Company completed the sale of
substantially all of the remaining assets of the Company’s
Drilling Technologies segment to Galleon Mining Tools, Inc.
for $1.0 million in cash consideration and a note receivable of
$1.0 million due in one year.
Upon completion of these sales, the Company ceased all
operations for the Drilling Technologies segment.
$
$
$
25
Production Technologies
(dollars in thousands)
Revenue
Loss from operations
Loss from operations - excluding impairment
Operating margin % - excluding impairment
2018
Year ended December 31,
2017
2016
$
$
$
— $
— $
— $
—%
4,002
(1,357)
(1,357)
(33.9)%
$
$
$
8,292
(8,814)
(4,901)
(59.1)%
Results for 2017 compared to 2016—Production
Technologies
Technologies segment to Raptor Lift Solutions, LLC (“Raptor
Lift”) for $2.9 million in cash consideration.
On May 23, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of the Company’s Production
Upon completion of this sale, the Company ceased all
operations for the Production Technologies segment.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements arise from the
Company’s need to service debt, acquire and maintain
equipment, fund working capital requirements, and when the
opportunities arise, to make strategic acquisitions and
repurchase Company stock. During 2018, the Company
funded capital requirements primarily with cash on hand and
debt financing. Future capital requirements will be funded
with cash on hand, primarily due to the proceeds received from
the sale of the CICT segment.
The Company’s primary source of debt financing was its $75
million Credit Facility with PNC Bank. This Credit Facility
contained provisions for a revolving credit facility secured by
substantially all of the Company’s domestic real and personal
property, including accounts receivable, inventory, land,
buildings, equipment, and other intangible assets. As of
December 31, 2018, the Company had $49.7 million in
outstanding borrowings under the revolving debt portion of
the Credit Facility. At December 31, 2018, the Company was
in compliance with all debt covenants. Significant terms of
the Credit Facility are discussed in Note 13 – “Long-Term
Debt and Credit Facility” in Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
Upon closing of the sale of the CICT segment, the Company
repaid the outstanding balance of the Credit Facility on
March 1, 2019 (see Note 21).
At December 31, 2018, the Company remained compliant
with the continued listing standards of the NYSE.
totaled $3.0 million at
Cash and cash equivalents
December 31, 2018. The Company used $20.8 million of cash
outflows from continuing operations (including $2.1 million
expended in working capital), $3.6 million for capital
expenditures, and $1.6 million for purchases of various patents
and other intangible assets. Offsetting these cash outflows, the
Company received $21.8 million for borrowings of debt, net
of repayments, and $0.3 million of proceeds from the sale of
common stock.
Liquidity
The Company expects maintenance capital spending to be
between $5 million and $9 million in 2019 and does not have
any specific growth capital projects currently planned or
committed. During the first quarter of 2019, the Company
formed a Strategic Capital Committee that will consider
possible growth capital projects that could total as much as
$20 million to $30 million for 2019 and beyond. During 2019,
the Company plans to use internally generated funds to fund
operations and capital expenditures. With the proceeds from
the sale of the CICT segment, the Company paid off its credit
facility balance and has formed a Strategic Capital Committee
to evaluate and make recommendations to the board of
directors regarding the manner in which the remaining net
proceeds from the sale will be deployed. Subject to Board
approval of recommendations by the Strategic Capital
Committee, the Company will continue to invest capital in
what it believes to be economically attractive opportunities
for its shareholders. This includes the potential for share
repurchases as approved by the Board of Directors in June
2015.
Any excess cash generated may be used to pay down the
revolving line of credit or be retained for future use.
26
Net Debt
Net debt represents total debt less cash and cash equivalents and combines the Company’s indebtedness and the cash and cash
equivalents that could be used to repay that debt. Components of net debt are as follows (in thousands):
December 31, 2018 December 31, 2017
Cash and cash equivalents
Current portion of long-term debt
Net debt
$
$
$
3,044
(49,731)
(46,687) $
4,584
(27,950)
(23,366)
Cash Flows
Cash flow metrics from the consolidated statements of cash flows are as follows (in thousands):
Year ended December 31,
2017
2016
2018
Net cash (used in) provided by operating activities
Net cash (used in) provided by investing activities
Net cash provided by (used in) financing activities
Net cash flows (used in) provided by discontinued operations
Effect of changes in exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
$
$
(20,816) $
(2,109)
21,480
(7)
(88)
(1,540) $
$
12,345
14,526
(27,285)
24
151
(239) $
1,192
(21,419)
22,851
(6)
(3)
2,615
Operating Activities
During 2018, 2017, and 2016, cash (used in) provided by
operating activities totaled $(20.8) million, $12.3 million, and
$1.2 million, respectively. Consolidated net loss for 2018,
2017, and 2016 totaled $73.4 million, $17.5 million and $4.4
million, respectively.
Net non-cash contributions to net income in 2018, totaled
items consisted
$54.4 million. Contributory non-cash
primarily of $37.2 million for the goodwill impairment charge
in the second quarter of 2018, $9.6 million for depreciation
and amortization expense, $7.1 million
stock
compensation expense, $3.3 million for provisions related to
accounts receivables and inventory reserves, $2.6 million for
the loss on write-down of assets held for sale, $0.7 million for
reduction in incremental tax benefit related to share-based
awards, and $0.4 million for the loss on sale of business,
partially offset by $6.0 million for changes to deferred income
taxes and $0.4 million for net gain on sale of assets.
for
Net non-cash contributions to net income in 2017, totaled
items consisted
$23.9 million. Contributory non-cash
primarily of $10.2 million for depreciation and amortization
expense, $10.6 million for stock compensation expense, $2.0
million for reduction in incremental tax benefit related to
share-based awards, $0.5 million for provisions related to
accounts receivables and inventory reserves, $0.3 million for
net loss on sale of assets, and $0.2 million for changes to
deferred income taxes.
Net non-cash contributions to net income in 2016, totaled $3.3
million. Contributory non-cash items consisted primarily of
$8.6 million for depreciation and amortization expense, $11.4
million for stock compensation expense, $2.5 million for
reduction in incremental tax benefit related to share-based
awards and $0.5 million for provisions related to accounts
receivables, partially offset by $19.7 million for changes to
deferred income taxes.
During 2018, changes in working capital used $2.1 million in
cash, primarily resulting from increasing accounts receivables
and income taxes receivable by $3.7 million and decreasing
accrued liabilities and interest payable by $8.8 million,
partially offset by decreasing inventories and other current
assets by $5.8 million and increasing accounts payable by $4.6
million.
During 2017, changes in working capital provided $6.0
million in cash, primarily resulting from decreasing accounts
receivables, income taxes receivable, and other current assets
by $24.1 million, partially offset by increasing inventories by
$3.4 million and decreasing accounts payable and accrued
liabilities by $14.7 million.
During 2016, changes in working capital provided $2.3
million in cash, primarily resulting from increasing accounts
payable and accrued liabilities by $39.1 million, partially
offset by increasing accounts receivables, inventories, income
taxes receivable, and other current assets by $34.9 million and
decreasing income taxes payable and interest payable by $2.0
million.
27
Investing Activities
Net cash used in investing activities was $2.1 million during
2018. Cash used in investing activities primarily included $3.6
million for capital expenditures and $1.6 million for the
purchase of various patents and other intangible assets,
partially offset by $1.7 million of proceeds received from the
sale of revenue generating assets associated with a business
line within the Energy Chemistry Technologies segment and
$1.4 million of proceeds received from the sale of fixed assets.
Net cash provided by investing activities was $14.5 million
during 2017. Cash provided by investing activities primarily
included $18.5 million of proceeds received from the sale of
the Drilling Technologies and Production Technologies
segments and $0.7 million of proceeds received from the sale
of fixed assets, partially offset by $4.2 million for capital
expenditures and $0.5 million for the purchase of various
patents and other intangible assets.
Net cash used in investing activities was $21.4 million during
2016. Cash used in investing activities primarily included
$13.1 million for capital expenditures, $7.9 million associated
with the purchase of 100% of the stock and interests of IPI,
and $0.6 million for the purchase of patents and intangible
assets.
Financing Activities
Net cash generated through financing activities was $21.5
million during 2018, primarily due to receiving $21.8 million
for borrowings of debt, net of repayments, and receiving $0.3
million in proceeds from the sale of common stock. Cash
generated through financing activities was partially offset by
a loss from noncontrolling interest of $0.4 million, $0.2
million for purchases of treasury stock for tax withholding
purposes related to the vesting of restricted stock awards and
the exercise of non-qualified stock options and $0.1 million
for payments of debt issuance costs.
Net cash used in financing activities was $27.3 million during
2017, primarily due to using $20.4 million for repayments of
debt, net of borrowings, $5.2 million for the repurchase of
common stock, $1.7 million for purchases of treasury stock
for tax withholding purposes related to the vesting of restricted
stock awards and the exercise of non-qualified stock options,
and $0.6 million for payments of debt issuance costs. Cash
used in financing activities was partially offset by receiving
$0.7 million in proceeds from the sale of common stock.
During 2016, net cash generated through financing activities
was $22.9 million. Cash generated through financing activities
was primarily due to receiving $30.9 million in proceeds from
the sale of common stock, inclusive of $30.1 million, net of
issuance costs, from the private placement of 2.5 million
common shares on July 27, 2016. Cash generated through
financing activities was partially offset by using $2.1 million
for repayments of debt, net of borrowings, reductions in tax
benefit related to stock-based compensation of $2.5 million,
purchases of treasury stock for tax withholding purposes
related to the vesting of restricted stock awards and the
exercise of non-qualified stock options of $2.4 million, and
payments of debt issuance costs of $1.2 million.
Off-Balance Sheet Arrangements
There have been no transactions that generate relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as “structured finance” or “special
purpose entities” (“SPEs”), established for the purpose of
facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of December 31,
2018, the Company was not involved in any unconsolidated
SPEs.
The Company has not made any guarantees to customers or
vendors nor does the Company have any off-balance sheet
arrangements or commitments that have, or are reasonably
likely to have, a current or future effect on the Company’s
financial condition, change in financial condition, revenue,
expenses, results of operations, liquidity, capital expenditures,
or capital resources that are material to investors.
Contractual Obligations
Cash flows from operations are dependent on a variety of
factors, including fluctuations in operating results, accounts
receivable collections, inventory management, and the timing
of payments for goods and services. Correspondingly, the
impact of contractual obligations on the Company’s liquidity
and capital resources in future periods is analyzed in
conjunction with such factors.
Material contractual obligations consist of repayment of
amounts borrowed under the Company’s Credit Facility and
payment of operating lease obligations.
28
Contractual obligations at December 31, 2018 are as follows (in thousands):
Payments Due by Period
Borrowings under revolving credit facility (1)
Operating lease obligations
Total
Total
Less than
1 year
$
$
49,731
19,458
69,189
$
$
49,731
2,562
52,293
1 - 3 years
$
— $
4,290
4,290
$
$
3 -5 years
More than
5 years
— $
3,352
3,352
$
—
9,254
9,254
(1) The borrowing was classified as current debt. The weighted-average interest rate was 5.51% at December 31, 2018. Borrowings under the revolving credit
facility were repaid in full on March 1, 2019.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
Preparation of these statements requires management to make
judgments, estimates and assumptions that affect the amounts
of assets and liabilities in the financial statements and revenue
and expenses during the reporting period. Significant
accounting policies are described in Note 2 – “Summary of
Significant Accounting Policies” in Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
The Company believes the following accounting policies are
critical due to the significant, subjective, and complex
judgments and estimates required when preparing the
consolidated financial statements. The Company regularly
reviews judgments, assumptions, and estimates to the critical
accounting policies.
Basis of Presentation
During the fourth quarter of 2018, the Company classified the
Consumer and Industrial Chemistry Technologies reportable
segment’s operations as held for sale based on management’s
intention to sell this business. In addition, during the fourth
quarter of 2016, the Company classified the Drilling
Technologies and Production Technologies
reportable
segments’ operations as held for sale based on management’s
intention to sell these businesses. The operating results of these
segments have been reported as discontinued operations in the
consolidated financial statements. Amounts previously
reported have been reclassified to conform to this presentation
to allow for meaningful comparison of continuing operations.
Revenue Recognition
The Company recognizes revenues to depict the transfer of
control of promised goods or services to its customers in an
amount that reflects the consideration to which it expects to
be entitled in exchange for those goods or services. Refer to
Note 7 — “Revenue from Contracts with Customers” for
further discussion on Revenue.
The Company recognizes revenue based on the Accounting
Standards Codification (“ASC”) 606 five-step model when all
of the following criteria have been met: (i) a contract with a
customer exists, (ii) performance obligations have been
identified, (iii) the price to the customer has been determined,
29
(iv) the price to the customer has been allocated to the
performance obligations, and (v) performance obligations are
satisfied.
Products and services are sold with fixed or determinable
prices. Certain sales include right of return provisions, which
are considered when recognizing revenue and deferred
accordingly. Deposits and other funds received in advance of
delivery are deferred until the transfer of control is complete.
For certain contracts, the Company recognizes revenue under
the percentage-of-completion method of accounting,
measured by the percentage of “costs incurred to date” to the
“total estimated costs of completion.” This percentage is
applied to the “total estimated revenue at completion” to
calculate proportionate revenue earned to date. For the years
ended December 31, 2018, 2017, and 2016, the percentage-
of-completion revenue accounted for less than 0.1% of total
revenue during the respective time periods. This resulted in
immaterial unfulfilled performance obligations
and
immaterial contract assets and/or liabilities for which the
Company did not record adjustments to opening retained
earnings as of December 31, 2015 or for any periods
previously presented.
As an accounting policy election, the Company excludes from
the measurement of the transaction price all taxes assessed by
a governmental authority that are both imposed on and
concurrent with a specific revenue-producing transaction and
collected by the entity from a customer.
Shipping and handling costs associated with outbound freight
after control over a product has transferred to a customer are
accounted for as a fulfillment cost and are included in cost of
revenues.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of
customers and grants credit based upon historical payment
history, financial condition, and industry expectations, as
available. Determination of the collectability of amounts due
from customers requires the Company to use estimates and
make judgments regarding future events and trends, including
monitoring customers’ payment history and current credit
worthiness, in order to determine that collectability is
reasonably assured. The Company also considers the overall
business climate in which its customers operate.
These uncertainties require the Company to make frequent
judgments and estimates regarding a customers’ ability to pay
amounts due in order to assess and quantify an appropriate
allowance for doubtful accounts. The primary factors used to
quantify the allowance are customer delinquency, bankruptcy,
and the Company’s estimate of its ability to collect outstanding
receivables based on the number of days a receivable has been
outstanding.
The majority of the Company’s customers operate in the
energy industry. The cyclical nature of the industry may affect
customers’ operating performance and cash flows, which
could impact the Company’s ability to collect on these
obligations. Additionally, some customers are located in
international areas that are inherently subject to risks of
economic, political, and civil instability.
The Company continues to monitor the economic climate in
which its customers operate and the aging of its accounts
receivable. The allowance for doubtful accounts is based on
the aging of accounts and an individual assessment of each
invoice. At December 31, 2018, the allowance was 3.1% of
gross accounts receivable, compared to an allowance of 1.9%
a year earlier. While credit losses have historically been within
expectations and the provisions established, should actual
write-offs differ from estimates, revisions to the allowance
would be required.
Inventory Reserves
Inventories consist of raw materials, work-in-process, and
finished goods and are stated at the lower of cost or market,
using the weighted-average cost method. Finished goods
inventories include raw materials, direct labor, and production
overhead. The Company’s inventory reserve represents the
excess of the inventory carrying amount over the amount
expected to be realized from the ultimate sale or other disposal
of the inventory.
The Company regularly reviews inventory quantities on hand
and records provisions or impairments for excess or obsolete
inventory based on the Company’s forecast of product
demand, historical usage of inventory on hand, market
conditions, production and procurement requirements, and
technological developments. Significant or unanticipated
changes in market conditions or Company forecasts could
affect the amount and timing of provisions for excess and
obsolete inventory and inventory impairments.
Significant changes have not been made in the methodology
used to estimate the reserve for excess and obsolete inventory
or impairments during the past three years. Specific
assumptions are updated at the date of each evaluation to
consider Company experience and current industry trends.
Significant judgment is required to predict the potential impact
which the current business climate and evolving market
conditions could have on the Company’s assumptions.
Changes which may occur in the energy industry are hard to
predict, and they may occur rapidly. To the extent that changes
in market conditions result in adjustments to management
assumptions, impairment losses could be realized in future
periods.
At December 31, 2018 and 2017, the reserve for excess and
obsolete inventory was $2.1 million and $0.4 million, or 7.2%
and 1.1% of inventory, respectively.
Business Combinations
The Company allocates
the fair value of purchase
consideration to the assets acquired, liabilities assumed, and
any non-controlling interests in the acquired entity generally
based on their fair values at the acquisition date. The excess
of the fair value of purchase consideration over the fair value
of these assets acquired, liabilities assumed, and any non-
controlling interests in the acquired entity is recorded as
goodwill. The primary items that generate goodwill include
the value of the synergies between the acquired company and
Flotek and the value of the acquired assembled workforce.
Acquisition-related expenses are recognized separately from
the business acquisition and are recognized as expenses as
incurred.
The purchase price allocation process requires management
to make significant estimates and assumptions at the
acquisition date with respect to the fair value of:
•
•
•
•
intangible assets acquired from the acquiree;
tax assets and liabilities assumed from the acquiree;
stock awards assumed from the acquiree that are
included in the purchase price; and
pre-acquisition obligations and contingencies assumed
from the acquiree.
Although the Company believes the assumptions and
estimates it has made in the past have been reasonable and
appropriate, they are based in part on historical experience and
information obtained from the management of the acquired
companies and are inherently uncertain.
Goodwill
Goodwill is not subject to amortization, but is tested for
impairment annually during the fourth quarter, or more
frequently if an event occurs or circumstances change that
would indicate a potential impairment. These circumstances
may include, but are not limited to, a significant adverse
change in the business climate, unanticipated competition, or
a change in projected operations or results of a reporting unit.
Goodwill is tested for impairment at a reporting unit level. At
December 31, 2018, only the Consumer and Industrial
Chemistry Technologies reporting unit had a goodwill
balance.
During the annual testing, the Company assesses whether a
goodwill impairment exists using both qualitative and
quantitative assessments. The qualitative assessment involves
determining whether events or circumstances exist that
30
indicate it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including
goodwill. If, based on this qualitative assessment, it is
determined that it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, the
Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely
than not that the fair value of a reporting unit is less than its
carrying amount or if the Company elects not to perform a
qualitative assessment, a quantitative impairment test is
performed to determine whether goodwill impairment exists
at the reporting unit.
Effective during the fourth quarter of 2017, the Company
adopted Accounting Standards Update (“ASU”) 2017-04,
“Simplifying the Test for Goodwill Impairment,” which
eliminated the second step of the two-step quantitative
impairment test. Now, if quantitative impairment testing is
performed, the Company compares the estimated fair value of
each reporting unit which has 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.
Prior to adoption of ASU 2017-04, if quantitative impairment
testing was performed, the Company used a two-step
quantitative impairment test to determine whether goodwill
impairment exists at the reporting unit. The first step was to
compare the estimated fair value of each reporting unit which
has goodwill to its carrying amount, including goodwill. To
determine fair value estimates, the Company used 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 fair value of a reporting
unit was less than its carrying amount, the second step of the
impairment test was performed to determine the amount of
impairment, if any. The second step compares the implied fair
value of the reporting unit goodwill with the carrying amount
of the goodwill. If the carrying amount of the reporting unit’s
goodwill exceeded its implied value, an impairment loss was
recognized in an amount equal to that excess.
The Company determines fair value using widely accepted
valuation techniques, including discounted cash flows and
market multiples analyses, and through use of independent
fixed asset valuation firms, as appropriate. These types of
analyses contain uncertainties, as they require management to
make assumptions and to apply judgments regarding industry
31
economic factors and the profitability of future business
strategies. The Company’s policy is to conduct impairment
testing based on current business strategies, taking into
consideration current industry and economic conditions as
well as the Company’s future expectations. Key assumptions
used in the discounted cash flow valuation model include,
among others, discount rates, growth rates, cash flow
projections, and terminal value rates. Discount rates and cash
flow projections are the most sensitive and susceptible to
change as they require significant management judgment.
Discount rates are determined using a weighted average cost
of capital (“WACC”). The WACC considers market and
industry data, as well as Company-specific risk factors for
each reporting unit in determining the appropriate discount
rate to be used. The discount rate utilized for each reporting
unit is indicative of the return an investor would expect to
receive for investing in a similar business. Management uses
industry considerations and Company-specific historical and
projected results to develop cash flow projections for each
reporting unit. Additionally, if appropriate, as part of the
market-based approach, the Company utilizes market data
from publicly traded entities whose businesses operate in
industries comparable to the Company’s reporting units,
adjusted for certain factors that increase comparability.
During annual goodwill impairment testing in 2018 and 2017,
the Company first assessed qualitative factors to determine
whether it was necessary to perform the quantitative
impairment test. During annual goodwill impairment testing
in 2016, the Company first assessed qualitative factors to
determine whether it was necessary to perform the two-step
goodwill impairment test.
As of the fourth quarter of 2018, the Company concluded it
was not more-likely-than-not that there was an impairment of
goodwill for the Consumer and Industrial Technologies
(“CICT”) reporting unit based on the assessment of qualitative
factors. During the fourth quarter of 2018, the final criterion
was met for classifying the CICT reporting unit as held for
sale. Therefore, the CICT reporting unit was reported as
discontinued operations. After receiving initial interests from
potential buyers, it was determined that the disposal proceeds,
after considering selling costs, would result in excess over
book value. As this was in-line with quantitative impairment
tests performed in previous quarters for the CICT reporting
unit, no further impairment assessment was needed.
During the second quarter of 2018, the Company concluded
it was not more-likely-than-not that there was an impairment
of goodwill for the CICT reporting unit based on the
assessment of qualitative factors. CICT revenues have
increased 1.3% for the six months ended June 30, 2018, versus
the same period in 2017, while gross margins, as a percentage
of revenue, decreased 450 basis points driven by product mix
and higher raw material costs.
For the second quarter of 2018, the Company was not able to
conclude that it was not more-likely-than-not that the
estimated fair value of the Energy Chemistry Technologies
(“ECT”) reporting unit exceeded the carrying amount.
Therefore, the Company performed a quantitative impairment
test for the reporting unit. The results of the impairment test
indicated that the carrying amount of the ECT reporting unit
exceeded the estimated fair value of the reporting unit by
approximately $37.8 million, or 25.6% of the carrying amount.
To evaluate the sensitivity of the fair value calculations for the
ECT reporting units, the Company applied a hypothetical
0.5% unfavorable change in the weighted average cost of
capital, which would have reduced the estimated fair value of
the ECT reporting unit by approximately $5.7 million.
Additionally, reducing the revenue projections by 1.0% and
holding gross margins steady reduced the estimated fair value
approximately $4.4 million. These sensitivity analyses
confirmed the need for an impairment for the ECT reporting
unit. The Company recorded a full impairment of the goodwill
for $37.2 million in the ECT reporting unit during the second
quarter of 2018.
Key assumptions and estimates were based on the experience
of the Company’s management, experience with past
recessions within the oil and gas industry, and internal as well
as published external perspectives of market activity. Key
assumptions used in the discounted cash flow analysis
included:
• Revenue and expenses experience industry level
growth rates annually beyond 2019;
• Margins stay in the lower portion of historical ranges;
and
• Working capital ratios remain consistent with historical
levels.
Some of the factors that affected the change in results of the
impairment test from the fourth quarter of 2017 to the second
quarter of 2018 included:
• Declining revenue and margin compression in the first
half of 2018.
• Mid-year sensitivity analysis decreased 2018 and 2019
expectations.
Based on the Company’s fourth quarter 2018 testing of
goodwill for impairment for the CICT reporting unit, no
impairment was recorded.
and
and Consumer
As of the fourth quarter of 2017, the Company was not able
to conclude that it was not more-likely-than-not that the
estimated fair value of the Energy Chemistry Technologies
(“ECT”)
Industrial Chemistry
Technologies (“CICT”) reporting units exceeded the carrying
amount of the respective reporting units. Therefore, the
Company performed a quantitative impairment test for each
of these reporting units. The results of the impairment test
indicated that the estimated fair values of the two reporting
units exceeded the carrying amount of their respective
reporting units by approximately $34.7 million and $20.2
million, respectively, or an excess of 21% and 23%,
respectively, over the carrying amount. Therefore, no
impairment was deemed necessary for 2017. To evaluate the
sensitivity of the fair value calculations of the ECT and CICT
reporting units, the company applied a hypothetical 10%
unfavorable change in the weighted average cost of capital,
which would have reduced the estimated fair value of the ECT
and CICT reporting units by approximately $23.7 million and
$12.4 million, respectively. These sensitivity analyses were
not indicative of an impairment for the ECT and CICT
reporting units.
Key assumptions and estimates were based on experience of
the Company’s management, experience with past recessions
within the oil and gas industry (specifically the 2008/2009
recession), and internal as well as published external
perspectives of recovery timing. Key assumptions used in the
discounted cash flow analysis included:
• Revenue and expenses grow 2% annually;
• Margins stay in the lower portion of historical ranges;
• Working capital ratios remain consistent with historical
levels;
• Risk premium related to foreign country security,
government stability, and potential future foreign
currency.
Based on the Company’s fourth quarter 2017 testing of
goodwill for
impairment at each reporting unit, no
impairments were recorded.
As of the fourth quarter of 2016, the Company concluded it
was not more likely than not that there was an impairment of
goodwill for the Consumer and Industrial Chemistry
Technologies or Energy Chemistry Technologies reporting
units based on the assessment of qualitative factors. The
Consumer and Industrial Chemistry Technologies reporting
unit has outpaced prior years revenues and maintained strong
margins. The Energy Chemistry Technologies reporting unit
saw quarterly revenue improve throughout 2016 and reduced
only 12% versus 2015 as market activity fell 43% during the
same period. However, the segment continued to produce
strong margins.
The Company was not able to conclude that it was not more
likely than not that the estimated fair value of the Teledrift and
Production Technologies reporting units exceeded
the
carrying amount of the respective reporting units, as of the
fourth quarter of 2016. Therefore, the Company performed a
Step 1 impairment test for each of these reporting units. The
results of the Step 1 test indicated that the estimated fair values
of the two reporting units exceeded the carrying amount of
their respective reporting units by approximately $13.2
million and $6.7 million respectively, or an excess of 34% and
44%, respectively, over the carrying amount. Therefore, no
further testing was required for these two reporting units. To
evaluate the sensitivity of the fair value calculations of the
Teledrift and Production Technologies reporting units, the
Company applied a hypothetical 10% unfavorable change in
the weighted average cost of capital, which would have
reduced the estimated fair value of the Teledrift and Production
Technologies reporting units by approximately $5.3 million
and $4.2 million, respectively. These sensitivity analyses were
32
not indicative of an impairment for the Teledrift or Production
Technologies reporting units.
reporting unit,
As of the third quarter of 2016, the Company concluded it was
not more likely than not that there was an impairment of
goodwill for the Consumer and Industrial Chemistry
Technologies
the Energy Chemistry
Technologies reporting unit, and the Teledrift reporting unit
based on the assessment of qualitative factors. The Consumer
and Industrial Chemistry Technologies reporting unit has seen
increased revenues in 2016 compared to 2015 and has
maintained margins in the range seen from 2014 through 2015.
The Energy Chemistry Technologies reporting unit had an
11% decrease in revenue versus the 27% decline in market
activity for the first quarter of 2016 compared to the fourth
quarter of 2015, a 3% decrease in revenue versus the 35%
decline in market activity for the second quarter of 2016
compared to the first quarter of 2016, and a 4% increase in
revenue versus the 28% increase in market activity for the
third quarter of 2016 compared to the second quarter of 2016,
but continues to maintain gross margins. The Teledrift
reporting unit, having passed the Step 1 impairment tests in
the previous two quarters, had the highest revenue quarter for
2016 and improved margins. Teledrift revenue for the third
quarter of 2016 increased 37% versus the second quarter of
2016 and improved gross margins by 8.4%.
For the first quarter of 2016, the Company was not able to
conclude that it was not more likely than not that the estimated
fair value of the Production Technologies and Teledrift
reporting units exceeded the carrying amount of the respective
reporting units. Therefore, the Company performed a Step 1
impairment test for each of these reporting units. The results
of the Step 1 test indicated that the estimated fair values of the
Production Technologies and the Teledrift reporting units
exceeded the carrying amount of their respective reporting
units by approximately $34.9 million and $2.1 million,
respectively, or an excess of 153% and 5%, respectively, over
the carrying amount. Therefore, no further testing was
required for these two reporting units.
Again, for the second quarter of 2016, the Company was not
able to conclude that it was not more likely than not that the
estimated fair value of the Production Technologies and
Teledrift reporting units exceeded the carrying amount of the
respective reporting units. Therefore, the Company performed
a Step 1 impairment test for each of these reporting units. The
results of the Step 1 test indicated that the estimated fair values
of the Production Technologies and the Teledrift reporting
units exceeded the carrying amount of their respective
reporting units by approximately $17.1 million and $2.2
million, respectively, or an excess of 77% and 6%,
respectively, over the carrying amount. Therefore, no further
testing was required for these two reporting units.
Once again, for the third quarter of 2016, the Company was
not able to conclude that it was not more likely than not that
the estimated fair value of the Production Technologies
reporting unit exceeded the carrying amount of the reporting
unit. Therefore, the Company performed a Step 1 impairment
test for this reporting unit. The results of the Step 1 test
indicated that the estimated fair value of the Production
Technologies reporting unit exceeded the carrying amount of
the reporting unit by approximately $8.1 million, or an excess
of 36.9% over the carrying amount. Therefore, no further
testing was required for this reporting unit.
Key assumptions and estimates were based on experience of
the Company’s management, experience with past recessions
within the oil and gas industry (specifically the 2008/2009
recession), and internal as well as published external
perspectives of recovery timing. Key assumptions used in the
discounted cash flow analysis included:
• U.S. rig count bottoms during 2016 and begins to
recover to average 532 rigs for the last two quarters of
2016. Average Rig count climbs to 725 in 2017, 880
in 2018, and 920 in 2019, and grows by 50 rigs annually
for 2020 through 2023, and then holds flat through
2026;
International revenue grows 3% annually;
•
• Domestic rental revenue per rig and total domestic
revenue per rig dip to lows seen during the 2008/2009
downturn through 2017 and then slowly return to the
lower end of the ranges seen between 2012 and 2014;
International indirect expenses remain 3.5% of total
international revenue;
•
• Domestic indirect expense percentages slowly return
to historical levels;
• Margins stay in the lower portion of historical ranges;
• Working capital ratios remain consistent; and
• Risk premium related to foreign country security and
government stability.
Some of the factors that affected the change in results of the
Step 1 impairment test from the fourth quarter of 2015 to the
fourth quarter of 2016 included:
•
•
Impairment testing of long-lived assets excluding
goodwill resulted in a reduction to the balance sheet of
$14.3 million for the Teledrift reporting unit in the first
quarter of 2016.
Impairment of inventory resulted in a reduction to the
balance sheet of $1.3 million for the Teledrift reporting
unit and $3.9 million for the Production Technologies
reporting unit in the first quarter of 2016.
• Cost reduction initiatives during the first half of 2016
reduced direct and indirect expenses for the Drilling
Technologies segment.
• Due to the surplus of rental tools and the low levels of
drilling rig activity, capital expenditures for new rental
tools will be minimal through 2019 in the Teledrift
reporting unit.
Based on the Company’s fourth quarter 2016 testing of
impairment at each reporting unit, no
goodwill for
impairments were recorded.
33
There are significant inherent uncertainties and judgments
involved in estimating fair value. The Company cannot predict
the occurrence of events or circumstances that could adversely
affect the fair value of goodwill. Such events may include, but
are not limited to, deterioration of the economic environment,
increases in the Company’s weighted average cost of capital,
material negative changes in relationships with significant
customers, reductions in valuations of other public companies
in the Company’s industry, or strategic decisions made in
response to economic and competitive conditions. If actual
results are not consistent with the Company’s current estimates
and assumptions, impairment of goodwill could be required.
Long-Lived Assets Other than Goodwill
Long-lived assets other than goodwill consist of property and
equipment and intangible assets that have determinable and
indefinite lives. The Company makes judgments and estimates
regarding the carrying amount of these assets, including
amounts to be capitalized, depreciation and amortization
methods to be applied, estimated useful lives, and possible
impairments. Property and equipment and intangible assets
with determinable lives are tested for impairment whenever
events or changes in circumstances indicate the carrying
amount of the asset may not be recoverable.
For property and equipment, events or circumstances
indicating possible impairment may include a significant
decrease in market value or a significant change in the business
climate. An impairment loss is recognized when the carrying
amount of an asset exceeds the estimated undiscounted future
cash flows expected to result from the use of the asset and its
eventual disposition. The amount of the impairment loss is the
excess of the asset’s carrying amount over its fair value. Fair
value is generally determined using an appraisal by an
independent valuation firm or by using a discounted cash flow
analysis.
intangible assets with definite
For
lives, events or
circumstances indicating possible impairment may include an
adverse change in the extent or manner in which the asset is
being used or a change in the assessment of future operations.
The Company assesses the recoverability of the carrying
amount by preparing estimates of future revenue, margins, and
cash flows. If the sum of expected future cash flows
(undiscounted and without interest charges) is less than the
carrying amount, an impairment loss is recognized. The
impairment loss recognized is the amount by which the
carrying amount exceeds the fair value. Fair value of these
assets may be determined by a variety of methodologies,
including discounted cash flows.
Intangible assets with indefinite lives are not subject to
amortization, but are tested for impairment annually during
the fourth quarter, or more frequently if an event occurs or
circumstances change that would indicate a potential
impairment. These circumstances may include, but are not
limited to, a significant adverse change in the business climate,
unanticipated competition, or a change in projected operations
or results of a reporting unit.
The Company assesses whether an indefinite lived intangible
impairment exists using both qualitative and quantitative
assessments. The qualitative assessment involves determining
whether events or circumstances exist that indicate it is more
likely than not that the fair value of the indefinite lived
intangible is less than its carrying amount. If, based on this
qualitative assessment, it is determined that it is not more likely
than not that the fair value of the indefinite lived intangible is
less than its carrying amount, the Company does not perform
a quantitative assessment.
If the qualitative assessment indicates that it is more likely
than not that the indefinite-lived intangible asset is impaired
or if the Company elects to not perform a qualitative
assessment, the Company then performs the quantitative
impairment test. The quantitative impairment test for an
indefinite-lived intangible asset consists of a comparison of
the fair value of the asset with its carrying amount. If the
carrying amount of an intangible asset exceeds its fair value,
an impairment loss is recognized in an amount equal to that
excess. Fair value of these assets may be determined by a
variety of methodologies, including discounted cash flows.
to
the Company uses
The development of future net undiscounted cash flow
projections requires management projections of future sales
and profitability trends and the estimation of remaining useful
lives of assets. These projections are consistent with those
projections
internally manage
operations. When potential impairment is identified, a
discounted cash flow valuation model similar to that used to
value goodwill at the reporting unit level, incorporating
discount rates commensurate with risks associated with each
asset, is used to determine the fair value of the asset in order
to measure potential
impairment. Discount rates are
determined by using a WACC. Estimated revenue and WACC
assumptions are the most sensitive and susceptible to change
in the long-lived asset analysis as they require significant
management
the
assumptions used are reflective of what a market participant
would have used in calculating fair value.
judgment. The Company believes
Valuation methodologies utilized to evaluate long-lived assets
other than goodwill for impairment were consistent with prior
periods. Specific assumptions discussed above are updated at
each test date to consider current industry and Company-
specific risk factors from the perspective of a market
participant. The current business climate is subject to evolving
market conditions and requires significant management
judgment to interpret the potential impact to the Company’s
assumptions. To the extent that changes in the current business
climate result in adjustments to management projections,
impairment losses may be recognized in future periods.
The domestic drilling industry has continued to deteriorate
since the end of 2015 to levels not seen since April 1999. As
the business of the Drilling Technologies segment is closely
aligned with the drilling rig count and average U.S. drilling
rig count declined 27% during the first quarter of 2016, the
drop off in rig count led to a decline in revenue and gross profit
of 37% and 69%, respectively, from the fourth quarter of 2015
34
for the Drilling Technologies segment. As a result of the
continued drop in rig count and the significant decline in
operations in the first quarter of 2016, the Company concluded
these were events or circumstances that caused the Company
to test its long-lived assets for impairment within the segment.
During the three months ended March 31, 2016, the Company
completed testing for impairment of long-lived assets within
the Drilling Technologies segment for four asset groups:
• Downhole Tools - primarily used in the vertical drilling
market;
•
International Drill Pipe - primarily used in foreign
mining operations;
• Teledrift Domestic - primarily associated with the
Measurement While Drilling (“MWD”) market in the
U.S.; and
• Teledrift International - primarily associated with the
MWD market in international markets.
Impairment indicators affected both asset groups that are tied
directly to the domestic drilling market. While impairment
indicators are not present for the International Drill Pipe or
Teledrift International asset groups, the Company performed
recoverability tests for all four asset groups.
The recoverability test indicated that the undiscounted
estimated cash flows of the International Drill Pipe and
Teledrift International asset groups exceeded the carrying
amount of their respective asset groups by approximately $2.6
million and $64.1 million, respectively, or an excess of 98%
and 906%, respectively. However, the undiscounted estimated
cash flows of the Downhole Tools and Teledrift Domestic asset
groups did not exceed the carrying amount of their respective
asset groups, and therefore, the Company performed a
discounted cash flow analysis on each asset group to determine
the fair values.
Since the assets in the asset groups are not highly specialized,
the Company assumed the current use of each asset would be
a similar use as if the assets were sold. As such, the cash flow
used in the recoverability test is the same cash flow used to
create the discounted cash flow for fair value analysis. This
testing indicated that the carrying amount of the Downhole
Tools and Teledrift Domestic asset groups exceeded the fair
value by $9.6 million and $14.3 million, respectively, or an
excess of 69% and 56%, respectively. As a result, a combined
impairment loss for these two asset groups of $23.9 million
was recognized during the three months ended March 31,
2016.
Additionally, the business of the Production Technologies
segment incurred similar declines with revenue and gross
profit, falling approximately 30% and 42%, respectively.
Therefore, the Company completed testing for impairment of
the Production Technologies
long-lived assets within
segment.
the
indicated
undiscounted estimated cash flows for the segment exceeded
the carrying amount of assets by $3.0 million, or an excess of
The recoverability
that
test
23%. As a result, no impairment of long-lived assets was
recognized for the Production Technologies segment.
During the second quarter of 2016, the average U.S. drilling
rig count fell 23% versus the first quarter of 2016. The Drilling
Technologies segment held revenue relatively flat and
improved margins when comparing the second and first
quarters of 2016. As such, the Company determined that
testing for impairment of long-lived assets was not warranted
for the segment.
However, the Production Technologies segment results
showed a decline in revenue of 8% and continuing negative
margins when comparing the second and first quarters of 2016.
Therefore, the Company completed testing for impairment of
the Production Technologies
long-lived assets within
segment. The
the
indicated
undiscounted estimated cash flows for the segment exceeded
the carrying amount of assets by $4.4 million, or an excess of
34%. As a result, no impairment of long-lived assets was
recognized for the Production Technologies segment.
recoverability
that
test
During the third quarter of 2016, the average U.S. drilling rig
count rose 14% versus the second quarter of 2016. The Drilling
Technologies segment revenue increased 13% and improved
margins when comparing the third and second quarters of
2016, while the Production Technologies segment results
showed an increase in revenue of 15% and improved margins
when comparing the third and second quarters of 2016. As
such, the Company determined that testing for impairment of
long-lived assets was not warranted for either segment.
During the fourth quarter of 2016, the average U.S. drilling
rig count rose 23% versus the third quarter of 2016. The
Drilling Technologies segment revenue increased 6% and
showed slightly lower margins when compared to the third
quarter of 2016 but still exceeded second quarter 2016
margins. The Production Technologies segment results
showed an increase in revenue of 5% and improved margins
when comparing the fourth and third quarters of 2016. As such,
the Company determined that testing for impairment of long-
lived assets was not warranted for either segment.
Key assumptions and estimates used in performing these
recoverability tests were based on experience of the
Company’s management, experience with past oil and gas
industry downturns and recoveries, and internal, as well as
published external, perspectives of recovery timing. Key
assumptions used in the recoverability test included:
• Rental tools are the primary cash generating assets for
each group;
• Remaining estimated useful life for each group was
determined to be 7 years;
• Carrying amount of the asset group is the net book value
of the assets as of March 31, 2016, for first quarter
testing and June 30, 2016, for second quarter testing;
• Estimates of future cash flows for the group assumed
the sale of the group at the end of the remaining useful
life of the primary asset; and
35
•
Since the Downhole Tools asset group includes product
sales in the cash flow analysis, a portion of the inventory
was included in the carrying amount of the asset group.
The remaining portion of the inventory is normally
utilized to repair and fabricate rental tools and is
included in cost of goods sold.
There are significant inherent uncertainties and judgments
involved in estimating fair value. The Company cannot predict
the occurrence of events or circumstances that could adversely
affect the fair value of the asset (asset group). Such events may
include, but are not limited to, deterioration of the economic
environment, increases in the Company’s weighted average
cost of capital, material negative changes in relationships with
significant customers, reductions in valuations of other public
companies in the Company’s industry, or strategic decisions
made in response to economic and competitive conditions. If
actual results are not consistent with the Company’s current
estimates and assumptions, additional impairment of long-
lived assets could be required.
In 2018, 2017, and 2016, while testing annual indefinite lived
intangible assets for impairment, the Company first assessed
qualitative factors to determine whether it was necessary to
perform the impairment test. Based on its qualitative
assessment, the Company concluded there was no indication
of the need for an impairment of indefinite lived intangibles,
and therefore no further testing was required.
No impairment was recorded for property and equipment and
intangible assets with determinable or indefinite lives during
2018 and 2017.
Fair Value Measurements
Fair value is defined as the amount that would be received for
the sale of an asset or paid for the transfer of a liability in an
orderly transaction between unrelated third party market
participants at the measurement date. In determination of fair
value measurements for assets and liabilities, the Company
considers the principal, or most advantageous, market and
assumptions that market participants would use when pricing
the asset or liability. The Company categorizes financial assets
and liabilities using a three-tiered fair value hierarchy, based
upon the nature of the inputs used in the determination of fair
value. Inputs refer broadly to the assumptions that market
participants would use in pricing an asset or liability and may
be observable or unobservable. Significant judgments and
estimates are required, particularly when inputs are based on
pricing for similar assets or liabilities, pricing in non-active
markets, or when unobservable inputs are required.
Income Taxes
The Company’s tax provision is subject to judgments and
estimates necessitated by
the complexity of existing
regulatory tax statutes and the effect of these upon the
Company due to operations in multiple tax jurisdictions.
Income tax expense is based on taxable income, statutory tax
rates, and tax planning opportunities available in the various
jurisdictions in which the Company operates. The Company’s
income tax expense will fluctuate from year to year as the
amount of pretax income fluctuates. Changes in tax laws and
the Company’s profitability within and across the jurisdictions
may impact the Company’s tax liability. While the annual tax
provision is based on the best information available to the
Company at the time of preparation, several years may elapse
before the ultimate tax liabilities are determined.
The Company uses the liability method in accounting for
income taxes. Deferred tax assets and liabilities are
recognized for temporary differences between financial
statement carrying amounts and the tax bases of assets and
liabilities and are measured using the tax rates expected to be
in effect when the differences reverse. Deferred tax assets are
also recognized for operating loss and tax credit carry
forwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation
allowance is used to reduce deferred tax assets when
uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously
recorded tax assets when it becomes more likely than not such
assets will not be realized. The Company evaluates, at least
annually, net operating loss carry forwards and other net
deferred tax assets and considers all available evidence, both
positive and negative, to determine whether a valuation
allowance is necessary relative to net operating loss carry
forwards and other net deferred tax assets. In making this
determination, the Company considers cumulative losses in
recent years as significant negative evidence. The Company
considers recent years to mean the current year plus the two
preceding years. The Company considers
the recent
cumulative income or loss position of its filings groups as
objectively verifiable evidence for the projection of future
income, which consists primarily of determining the average
of the pre-tax income of the current and prior two years after
adjusting for certain
indicative of future
items not
performance. Based on this analysis, the Company determines
whether a valuation allowance is necessary.
In assessing the need for a valuation allowance in the second
quarter of 2018, the Company considered all available
objective and verifiable evidence, both positive and negative,
including historical levels of pre-tax income (loss) both on a
consolidated basis and tax reporting entity basis, legislative
developments, and expectations and risks associated with
estimates of future pre-tax income. As a result of this analysis,
the Company determined that it is more likely than not that it
will not realize the benefits of certain deferred tax assets and,
therefore, recorded a valuation allowance against the carrying
value of net deferred tax assets, except for deferred tax
liabilities related to non-amortizable intangible assets and
certain state jurisdictions. As all available evidence should be
taken into consideration when assessing the need for a
valuation allowance, the subsequent events that occurred in
the first quarter of 2019 (Note 21) provided a source of income
to support the release of $11.5 million of the valuation
36
allowance. As such, the Company reversed this portion of the
valuation allowance during the fourth quarter of 2018.
The Company periodically identifies and evaluates uncertain
tax positions. This process considers the amounts and
probability of various outcomes that could be realized upon
final settlement. Liabilities for uncertain tax positions are
based on a two-step process. The actual benefits ultimately
realized may differ from the Company’s estimates. Changes
in facts, circumstances, and new information may require a
change in recognition and measurement estimates for certain
individual tax positions. Any changes in estimates are
recorded in results of operations in the period in which the
change occurs. At December 31, 2018, the Company
performed an evaluation of its various tax positions and
concluded that it did not have significant uncertain tax
positions requiring disclosure. The Company’s policy is to
record interest and penalties related to income tax matters as
income tax expense.
Share-Based Compensation
The Company has stock-based incentive plans which are
authorized to issue stock options, restricted stock, and other
incentive awards. Stock-based compensation expense for
stock options and restricted stock is determined based upon
estimated grant-date fair value. This fair value for the stock
options is calculated using the Black-Scholes option-pricing
model and is recognized as expense over the requisite service
period. The option-pricing model requires the input of highly
subjective assumptions, including expected stock price
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
The Company is exposed to market risk from changes in
interest rates, foreign currency exchange rates, and
commodity prices. Market risk is measured as the potential
negative impact on earnings, cash flows, or fair values
resulting from a hypothetical change in interest rates,
commodity prices, or foreign currency exchange rates over
the next year. The Company manages exposure to market risks
at the corporate level. The portfolio of interest-sensitive assets
and liabilities is monitored and adjusted to provide liquidity
necessary to satisfy anticipated short-term needs. The
Company’s risk management policies allow the use of
specified financial instruments for hedging purposes only.
Speculation on interest rates or foreign currency rates is not
permitted. The Company does not consider any of these risk
management activities to be material.
Interest Rate Risk
The Company is exposed to the impact of interest rate changes
on any outstanding indebtedness under the revolving credit
facility agreement and the term loan agreement both of which
have a variable interest rate. The interest rate on advances
under the revolving credit facility varies based on the level of
borrowing under the revolving credit facility. Rates range (a)
volatility and expected option life. For all stock-based
incentive plans, the Company estimates an expected forfeiture
rate and recognizes expense only for those shares expected to
vest. The estimated forfeiture rate is based on historical
experience. To the extent actual forfeiture rates differ from the
estimate, stock-based compensation expense is adjusted
accordingly.
Loss Contingencies
The Company is subject to a variety of loss contingencies that
could arise during the Company’s conduct of business.
Management considers the likelihood of a loss or impairment
of an asset or the incurrence of a liability, as well as the
Company’s ability to reasonably estimate the amount of loss,
in determining potential loss contingencies. An estimated loss
contingency is accrued when it is probable that a liability has
been incurred or an asset has been impaired and the amount
of loss can be reasonably estimated. Accruals for loss
contingencies have not been recorded during the past three
years. The Company regularly evaluates current information
available to determine whether such accruals should be made
or adjusted.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the
Company are described in Note 2 – “Summary of Significant
in Part II, Item 8 – “Financial
Accounting Policies”
Statements and Supplementary Data” of this Annual Report.
between PNC Bank’s base lending rate plus 1.5% to 2.0% or
(b) between the London Interbank Offered Rate (LIBOR) plus
2.5% to 3.0%. PNC Bank’s base lending rate was 5.50% at
December 31, 2018, and would have permitted borrowing at
rates ranging between 7.00% and 7.50%. The Company is
required to pay a monthly facility fee of 0.25% on any unused
amount under the commitment based on daily averages. At
December 31, 2018, $49.7 million was outstanding under the
revolving credit facility, with $(0.3) million borrowed as base
rate loans at an interest rate of 7.50% and $50.0 million
borrowed as LIBOR loans at an interest rate of 5.51%.
The amount borrowed under the term loan was reset to $10.0
million as of September 30, 2016. Monthly principal
payments of $0.2 million were required. On May 22, 2017,
the Company repaid the outstanding balance of the term loan.
No additional amount may be re-borrowed under the term
loan.
Foreign Currency Exchange Risk
The Company presently has limited exposure to foreign
currency risk. As a global company, Flotek operates in over
20 domestic and international markets. Flotek’s functional
37
is primarily
currency
the U.S. dollar. During 2018,
approximately 3.0% of revenue was demarcated in non-U.S.
dollar currencies and virtually all assets and liabilities of the
Company are denominated in U.S. dollars. However, as the
Company expands its international operations, non-U.S.
denominated activity is likely to increase. The Company has
historically performed no swaps and no foreign currency
hedges. The Company may utilize swaps or foreign currency
hedges in the future.
Commodity Risk
The Company purchases raw materials derived from citrus
oils and, therefore, has a commodity risk inherent in orange
harvests. In recent years, citrus greening has disrupted citrus
fruit production in Florida and Brazil which caused raw
material feedstock cost to increase. Tropical storms and
hurricanes, as experienced during 2017, can also impact the
future citrus crop yields in growing regions. The Company
believes that adequate global supply is available to meet the
Company’s needs. The Company primarily relies upon long-
term strategic supply relationships to meet its raw material
needs which are expected to remain in place for the foreseeable
future. Price increases have been passed along to the
Company’s customers, where applicable. The Company
presently does not have any commodity futures contracts but
may consider utilizing forms of hedging from time to time in
the future.
38
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Flotek Industries, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material
respects, effective control over financial reporting as of December 31, 2018, based on criteria established in Internal Control -
Integrated Framework 2013 issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of Flotek Industries, Inc. and subsidiaries as of December 31, 2018 and 2017, the
related consolidated statements of operations, comprehensive income (loss), equity and cash flows for the years then ended, and
the related notes (collectively referred to as the “consolidated financial statements”) and our report dated March 8, 2019 expressed
an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ MOSS ADAMS LLP
Houston, Texas
March 8, 2019
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries (the “Company”) as of
December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), equity and cash
flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2018 and 2017, and the consolidated results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 8, 2019 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for recognizing
revenue due to the adoption of Accounting Standards Codification Topic No. 606.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ MOSS ADAMS LLP
Houston, Texas
March 8, 2019
We have served as the Company’s independent registered public accounting firm since 2017.
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Flotek Industries, Inc.
We have audited the accompanying consolidated statements of operations, comprehensive income (loss), equity and cash flows
of Flotek Industries, Inc. and subsidiaries for the period ended December 31, 2016. These financial statements are the responsibility
of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations
and cash flows of Flotek Industries, Inc. and subsidiaries for the year ended December 31, 2016, in conformity with U.S. generally
accepted accounting principles.
/s/ HEIN & ASSOCIATES LLP
Houston, Texas
February 8, 2017
41
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $1,190 and
$673 at December 31, 2018 and 2017, respectively
Inventories, net
Income taxes receivable
Assets held for sale
Other current assets
Total current assets
Property and equipment, net
Goodwill
Deferred tax assets, net
Other intangible assets, net
Other long-term assets
Assets held for sale
TOTAL ASSETS
Current liabilities:
LIABILITIES AND EQUITY
Accounts payable
Accrued liabilities
Interest payable
Liabilities held for sale
Long-term debt, classified as current
Total current liabilities and total liabilities
Commitments and contingencies
Equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares
issued and outstanding
Common stock, $0.0001 par value, 80,000,000 shares authorized; 62,162,875
shares issued and 57,342,279 shares outstanding at December 31, 2018;
60,622,986 shares issued and 56,755,293 shares outstanding at
December 31, 2017
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Treasury stock, at cost; 3,770,224 and 3,621,435 shares at December 31, 2018
and 2017, respectively
Flotek Industries, Inc. stockholders’ equity
Noncontrolling interests
Total equity
TOTAL LIABILITIES AND EQUITY
December 31,
2018
2017
$
3,044
$
4,584
37,047
27,289
3,161
118,470
5,771
194,782
45,485
—
18,663
26,827
126
—
285,883
15,011
10,335
8
9,174
49,731
84,259
$
$
34,897
32,460
2,826
54,508
8,649
137,924
52,786
37,180
12,713
22,048
527
66,710
329,888
10,394
13,793
43
12,450
27,950
64,630
—
—
6
343,536
(1,116)
(107,565)
(33,237)
201,624
—
201,624
285,883
$
6
336,067
(884)
(37,225)
(33,064)
264,900
358
265,258
329,888
$
$
$
See accompanying Notes to Consolidated Financial Statements.
42
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenue
Costs and expenses:
Operating expenses (excluding depreciation and amortization)
Corporate general and administrative
Depreciation and amortization
Research and development
(Gain) loss on disposal of long-lived assets
Impairment of goodwill
Total costs and expenses
Loss from operations
Other (expense) income:
Interest expense
Loss on sale of business
Loss on write-down of assets held for sale
Gain on legal settlement
Other (expense) income, net
Total other (expense) income
Loss before income taxes
Income tax benefit (expense)
Loss from continuing operations
Income (loss) from discontinued operations, net of tax
Net loss
Net loss attributable to noncontrolling interests
Net loss attributable to Flotek Industries, Inc. (Flotek)
Amounts attributable to Flotek shareholders:
Loss from continuing operations
Income (loss) from discontinued operations, net of tax
Net loss attributable to Flotek
Basic earnings (loss) per common share:
Continuing operations
Discontinued operations, net of tax
Basic earnings (loss) per common share
Diluted earnings (loss) per common share:
Continuing operations
Discontinued operations, net of tax
Diluted earnings (loss) per common share
Weighted average common shares:
Year ended December 31,
2017
2016
2018
$
177,773
$
243,106
$
188,233
159,808
31,467
9,216
10,356
(443)
37,180
247,584
(69,811)
(2,866)
(360)
(2,580)
—
(5,040)
(10,846)
(80,657)
7,216
(73,441)
2,743
(70,698)
358
(70,340) $
188,744
41,492
9,768
13,130
292
—
253,426
(10,320)
(2,168)
—
—
—
1,096
(1,072)
(11,392)
(6,112)
(17,504)
(9,891)
(27,395)
—
(27,395) $
143,983
43,745
8,172
9,319
(18)
—
205,201
(16,968)
(1,979)
—
—
12,730
(434)
10,317
(6,651)
2,204
(4,447)
(44,683)
(49,130)
—
(49,130)
(73,083) $
2,743
(70,340) $
(17,504) $
(9,891)
(27,395) $
(4,447)
(44,683)
(49,130)
(1.26) $
0.05
(1.21) $
(1.26) $
0.05
(1.21) $
(0.30) $
(0.17)
(0.47) $
(0.30) $
(0.17)
(0.47) $
(0.08)
(0.80)
(0.88)
(0.08)
(0.80)
(0.88)
$
$
$
$
$
$
$
Weighted average common shares used in computing basic earnings
(loss) per common share
Weighted average common shares used in computing diluted earnings
(loss) per common share
57,995
57,995
57,580
57,580
56,087
56,087
See accompanying Notes to Consolidated Financial Statements.
43
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Loss from continuing operations
Income (loss) from discontinued operations, net of tax
Net loss
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive loss
Net loss attributable to noncontrolling interests
Comprehensive loss attributable to Flotek
Year ended December 31,
2018
2017
2016
$
$
(73,441) $
2,743
(70,698)
(17,504) $
(9,891)
(27,395)
(232)
(70,930)
358
(70,572) $
72
(27,323)
—
(27,323) $
(4,447)
(44,683)
(49,130)
281
(48,849)
—
(48,849)
See accompanying Notes to Consolidated Financial Statements.
44
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Common Stock
Treasury Stock
Shares
Issued
Par
Value
Shares
Cost
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Non-
controlling
Interests
Total
Equity
Balance, December 31, 2015
56,220
$
Net loss
Foreign currency translation adjustment
Sale of common stock, net of issuance cost
Stock issued under employee stock purchase plan
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Stock surrendered for exercise of stock options
Excess tax benefit related to share-based awards
Stock compensation expense
Stock issued in IAL acquisition
Balance, December 31, 2016
Net loss
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
Common stock issued in payment of accrued liability
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Stock surrendered for exercise of stock options
Stock compensation expense
Stock issued in IPI acquisition
Repurchase of common stock
Balance, December 31, 2017
Net loss
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Stock compensation expense
Balance, December 31, 2018
—
—
2,450
—
114
653
—
—
—
—
—
248
59,685
$
—
—
—
—
663
275
—
—
—
—
—
—
60,623
$
—
—
—
1,540
—
—
—
62,163
$
6
—
—
—
—
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
6
1,785
$ (17,869)
$
273,451
$
(1,237)
$
39,300
$
358
$ 294,009
—
—
—
(93)
—
—
96
—
—
—
—
—
—
—
238
(2,350)
3
—
—
—
(50)
—
—
—
—
—
30,090
833
184
—
—
—
—
(2,510)
13,076
3,268
—
281
—
—
—
—
—
—
—
—
—
—
(49,130)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(49,130)
281
30,090
833
184
—
—
(2,350)
(50)
(2,510)
13,076
3,268
2,029
$ (20,269)
$
318,392
$
(956)
$
(9,830)
$
358
$ 287,701
—
—
(113)
—
—
—
122
200
478
—
—
905
—
—
—
—
—
—
—
(1,729)
(5,863)
—
—
(5,203)
—
—
654
188
5,884
—
—
—
—
10,949
—
—
—
72
—
—
—
—
—
—
—
—
—
—
(27,395)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(27,395)
72
654
188
5,884
—
—
(1,729)
(5,863)
10,949
—
(5,203)
3,621
$ (33,064)
$
336,067
$
(884)
$
(37,225)
$
358
$ 265,258
—
—
(111)
—
158
102
—
—
—
—
—
—
(173)
—
—
—
341
—
—
—
7,128
—
(232)
—
—
—
—
—
(70,340)
(358)
(70,698)
—
—
—
—
—
—
—
—
—
—
—
—
(232)
341
—
—
(173)
7,128
3,770
$ (33,237)
$
343,536
$
(1,116)
$
(107,565)
$
— $ 201,624
See accompanying Notes to Consolidated Financial Statements.
45
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss attributable to Flotek Industries, Inc. (Flotek)
Income (loss) from discontinued operations, net of tax
Loss from continuing operations
Adjustments to reconcile loss from continuing operations to net cash (used in) provided by operating
activities:
Depreciation and amortization
Amortization of deferred financing costs
Provision for doubtful accounts
Provision for excess and obsolete inventory
Loss on sale of business
Loss on write-down of assets held for sale
(Gain) loss on sale of assets
Impairment of goodwill
Stock compensation expense
Deferred income tax (benefit) provision
Reduction in tax benefit related to share-based awards
Changes in current assets and liabilities:
Accounts receivable, net
Inventories
Income taxes receivable
Other current assets
Accounts payable
Accrued liabilities
Income taxes payable
Interest payable
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of businesses
Proceeds from sale of assets
Payments for acquisitions, net of cash acquired
Purchase of patents and other intangible assets
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Repayments of indebtedness
Borrowings on revolving credit facility
Repayments on revolving credit facility
Debt issuance costs
Reduction in tax benefit related to share-based awards
Purchase of treasury stock
Proceeds from sale of common stock
Repurchase of common stock
Proceeds from exercise of stock options
Loss from noncontrolling interest
Net cash provided by (used in) financing activities
Discontinued operations:
Net cash provided by operating activities
Net cash used in investing activities
Net cash flows (used in) provided by discontinued operations
Effect of changes in exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year ended December 31,
2018
2017
2016
$
(70,340) $
2,743
(73,083)
(27,395) $
(9,891)
(17,504)
(49,130)
(44,683)
(4,447)
9,216
400
839
2,418
360
2,580
(443)
37,180
7,050
(5,950)
709
(2,606)
2,597
(1,116)
3,177
4,631
(8,740)
—
(35)
(20,816)
(3,559)
1,665
1,387
—
(1,602)
(2,109)
—
277,599
(255,818)
(111)
—
(173)
341
—
—
(358)
21,480
9,768
472
157
388
—
—
292
—
10,643
181
1,989
4,076
(3,442)
8,008
12,001
(8,528)
(6,175)
—
19
12,345
(4,197)
18,490
689
—
(456)
14,526
(9,833)
383,160
(393,776)
(579)
—
(1,729)
654
(5,203)
21
—
(27,285)
1,296
(1,303)
(7)
(88)
(1,540)
4,584
3,044
$
4,102
(4,078)
24
151
(239)
4,823
4,584
$
$
8,172
424
482
—
—
—
(18)
—
11,446
(19,681)
2,510
(10,905)
(1,463)
(8,189)
(14,296)
6,365
32,769
(1,890)
(87)
1,192
(13,072)
—
115
(7,863)
(599)
(21,419)
(15,564)
338,460
(325,043)
(1,199)
(2,510)
(2,350)
30,923
—
134
—
22,851
874
(880)
(6)
(3)
2,615
2,208
4,823
See accompanying Notes to Consolidated Financial Statements.
46
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global,
diversified, technology-driven company that develops and
supplies chemistries and services to the oil and gas industries.
Flotek also supplied high value compounds to companies that
make food and beverages, cleaning products, cosmetics, and
other products that are sold in consumer and industrial
markets, classified as discontinued operations at December
31, 2018.
The Company’s oilfield business
includes specialty
chemistries and logistics which enable its customers in
pursuing improved efficiencies in the drilling and completion
of their wells. The Company also provides automated bulk
material handling, loading facilities, and blending capabilities.
In the segment reported as discontinued operations at
December 31, 2018, the Company processed citrus oil to
produce (1) high value compounds used as additives by
companies in the flavors and fragrances markets and (2)
environmentally friendly chemistries for use in numerous
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been
prepared in accordance with the accounting principles
generally accepted in the United States of America (“U.S.
GAAP”).
The consolidated financial statements include the accounts of
Flotek Industries, Inc. and all wholly-owned subsidiary
corporations. 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 segment as
held for sale based on management’s intention to sell this
business. In addition, during the fourth quarter of 2016, the
Company classified the Drilling Technologies and Production
for sale based on
Technologies segments as held
management’s intention to sell these businesses. The
Company’s historical financial statements have been revised
to present the operating results of the Consumer and Industrial
Chemistry Technologies, Drilling Technologies, and
discontinued
Production Technologies
operations. The results of operations of these segments are
presented as “Loss from discontinued operations” in the
statement of operations and the related cash flows of these
segments has been reclassified to discontinued operations for
all periods presented. The assets and liabilities of the
segments
as
industries around the world, including the oil and gas (“O&G”)
industry.
Flotek operates in over 20 domestic and international markets.
Customers include major integrated O&G companies, oilfield
services companies, independent O&G companies, pressure-
pumping service companies, national and state-owned oil
companies, and international supply chain management
companies. The Company also served customers who
purchase non-energy-related citrus oil and related products,
including household and commercial cleaning product
companies, fragrance and cosmetic companies, and food
manufacturing
as discontinued
operations at December 31, 2018.
companies,
reported
Flotek was initially incorporated under the laws of the
Province of British Columbia on May 17, 1985. On
October 23, 2001, Flotek changed its corporate domicile to the
state of Delaware.
Consumer and Industrial Chemistry Technologies segment
have been reclassified to “Assets held for sale” and “Liabilities
held for sale”, respectively, in the consolidated balance sheet
for all periods presented.
During 2017, the Company completed the sale or disposal of
the assets and transfer or liquidation of liabilities and
obligations of each of the Drilling Technologies and
Production Technologies segments.
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.
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
47
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
Balance, beginning of year
Charged to provision for doubtful accounts
Write-offs
Balance, end of year
Inventories
Inventories consist of raw materials, work-in-process, and
finished goods and are stated at the lower of cost, determined
using the weighted-average cost method, or net realizable
value. Finished goods inventories include raw materials, direct
labor, and production overhead. The Company regularly
reviews inventories on hand and current market conditions to
determine if the cost of finished goods inventories exceeds
current market prices and impairs the cost basis of the
inventory accordingly. The Company records a provision for
excess and obsolete inventory based primarily on forecasts of
product demand, historical
trends, market conditions,
production, or procurement requirements and technological
developments and advancements.
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 assets held under capital leases, is
calculated using the straight-line method over the asset’s
estimated useful life as follows:
Buildings and leasehold improvements
Machinery and equipment
Furniture and fixtures
Transportation equipment
Computer equipment and software
2-30 years
7-10 years
3 years
2-5 years
3-7 years
Property and equipment are reviewed for impairment on an
annual basis or whenever events or changes in circumstances
48
Year ended December 31,
2017
2016
2018
$
$
673
839
(322)
1,190
$
$
579
157
(63)
673
$
$
716
482
(619)
579
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.
Internal Use Computer Software Costs
Direct costs incurred to purchase and develop computer
software for internal use are capitalized during the application
development and implementation stages. These software costs
have been primarily for enterprise-level business and finance
software that is customized to meet the Company’s specific
operational needs. Capitalized costs are included in property
and equipment and are amortized on a straight-line basis over
the estimated useful life of the software beginning when the
software project is substantially complete and placed in
service. Costs incurred during the preliminary project stage
and costs for training, data conversion, and maintenance are
expensed as incurred.
The Company amortizes software costs using the straight-line
method over the expected life of the software, generally 3 to
7 years. The unamortized amount of capitalized software was
$3.1 million at December 31, 2018.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
If the qualitative assessment indicates that it is more likely
than not that the fair value of a reporting unit is less than its
carrying amount or if the Company elects not to perform a
qualitative assessment, a quantitative impairment test is
performed to determine whether goodwill impairment exists
at the reporting unit.
The quantitative impairment test, used to identify both the
existence of impairment and the amount of impairment loss,
compares the estimated fair value of each reporting unit with
goodwill to its carrying amount, including goodwill. To
determine fair value estimates, the Company uses the income
approach based on discounted cash flow analyses, combined,
when appropriate, with a market-based approach. The market-
based approach considers valuation comparisons of recent
public sale transactions of similar businesses and earnings
multiples of publicly traded businesses operating in industries
consistent with the reporting unit. If the carrying amount of a
reporting unit, including goodwill, exceeds its fair value, an
impairment loss is recognized in an amount equal to that
excess, limited to the amount of goodwill allocated to that
reporting unit.
Other Intangible Assets
The Company’s other intangible assets have finite and
indefinite lives and consist of customer relationships,
trademarks, brand names, and purchased patents.
The cost of intangible assets with finite lives is amortized using
the straight-line method over the estimated period of economic
benefit, ranging from 2 to 95 years. Asset lives are adjusted
whenever there is a change in the estimated period of economic
benefit. No residual value has been assigned to these intangible
assets.
Intangible assets with finite lives are tested for impairment
whenever events or changes in circumstances indicate the
carrying amount may not be recoverable. These conditions
may include a change in the extent or manner in which the
asset is being used or a change in future operations. The
Company assesses the recoverability of the carrying amount
by preparing estimates of future revenue, margins, and cash
flows. If the sum of expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount,
an impairment loss is recognized. The impairment loss
recognized is the amount by which the carrying amount
exceeds the fair value. Fair value of these assets may be
determined by a variety of methodologies, including
discounted cash flow models.
Intangible assets with indefinite lives are not subject to
amortization, but are tested for impairment annually during
the fourth quarter, or more frequently if an event occurs or
circumstances change that would indicate a potential
impairment. These circumstances may include, but are not
limited to, a significant adverse change in the business climate,
unanticipated competition, or a change in projected operations
or results of a reporting unit.
The Company assesses whether an indefinite lived intangible
impairment exists using both qualitative and quantitative
assessments. The qualitative assessment involves determining
whether events or circumstances exist that indicate it is more
likely than not that the fair value of the indefinite lived
intangible is less than its carrying amount. If, based on this
qualitative assessment, it is determined that it is not more likely
than not that the fair value of the indefinite lived intangible is
less than its carrying amount, the Company does not perform
a quantitative assessment.
If the qualitative assessment indicates that it is more likely
than not that the indefinite-lived intangible asset is impaired
or if the Company elects to not perform a qualitative
assessment, the Company then performs the quantitative
impairment test. The quantitative impairment test for an
indefinite-lived intangible asset consists of a comparison of
the fair value of the asset with its carrying amount. If the
carrying amount of an intangible asset exceeds its fair value,
an impairment loss is recognized in an amount equal to that
excess. Fair value of these assets may be determined by a
variety of methodologies, including discounted cash flows.
Business Combinations
The Company includes the results of operations of its
acquisitions in its consolidated results, prospectively from the
date of acquisition. Acquisitions are accounted for by applying
the acquisition method. The Company allocates the fair value
of purchase consideration to the assets acquired, liabilities
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,
49
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
of-completion revenue accounted for less than 0.1% of total
revenue during the respective time periods. This resulted in
immaterial unfulfilled performance obligations
and
immaterial contract assets and/or liabilities for which the
Company did not record adjustments to opening retained
earnings as of December 31, 2015 or for any periods
previously presented.
Fair Value Measurements
to unobservable
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 market participants would use to value an asset
or liability and may be observable or unobservable. The
hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (level 1) and the lowest
inputs (level 3). “Level 1”
priority
measurements are measurements using quoted prices in active
markets for identical assets and liabilities. “Level 2”
measurements are measurements using quoted prices in
markets that are not active or that are based on quoted prices
for similar assets or liabilities. “Level 3” measurements are
measurements that use significant unobservable inputs which
require a company to develop its own assumptions. When
determining the fair value of assets and liabilities, the
Company uses the most reliable measurement available.
Revenue Recognition
The Company recognizes revenues to depict the transfer of
control of promised goods or services to its customers in an
amount that reflects the consideration to which it expects to
be entitled in exchange for those goods or services. Refer to
Note 7 – “Revenue from Contracts with Customers” for further
discussion on Revenue.
The Company recognizes revenue based on the Accounting
Standards Codification (“ASC”) 606 five-step model when all
of the following criteria have been met: (i) a contract with a
customer exists, (ii) performance obligations have been
identified, (iii) the price to the customer has been determined,
(iv) the price to the customer has been allocated to the
performance obligations, and (v) performance obligations are
satisfied.
Products and services are sold with fixed or determinable
prices. Certain sales include right of return provisions, which
are considered when recognizing revenue and deferred
accordingly. Deposits and other funds received in advance of
delivery are deferred until the transfer of control is complete.
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
During the year ended December 31, 2015, the Company
restructured its legal entities such that there is only one U.S.
tax filing group filing a single U.S. consolidated federal
income tax return beginning in 2016.
For certain contracts, the Company recognizes revenue under
the percentage-of-completion method of accounting,
measured by the percentage of “costs incurred to date” to the
“total estimated costs of completion.” This percentage is
applied to the “total estimated revenue at completion” to
calculate proportionate revenue earned to date. For the years
ended December 31, 2018, 2017, and 2016, the percentage-
The Company uses the liability method in accounting for
income taxes. Deferred tax assets and liabilities are recognized
for temporary differences between financial statement
carrying amounts and the tax bases of assets and liabilities and
are measured using the tax rates expected to be in effect when
the differences reverse. Deferred tax assets and liabilities are
recognized related to the anticipated future tax effects of
50
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 used to reduce deferred tax assets when
uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously
recorded tax assets when it becomes more likely than not that
such assets will not be realized. The Company evaluates, at
least annually, net operating loss carry forwards and other net
deferred tax assets and considers all available evidence, both
positive and negative, to determine whether a valuation
allowance is necessary relative to net operating loss carry
forwards and other net deferred tax assets. In making this
determination, the Company considers cumulative losses in
recent years as significant negative evidence. The Company
considers recent years to mean the current year plus the two
preceding years. The Company considers
the recent
cumulative income or loss position as objectively verifiable
evidence for the projection of future income, which consists
primarily of determining the average of the pre-tax income of
the current and prior two years after adjusting for certain items
not indicative of future performance. Based on this analysis,
the Company determines whether a valuation allowance is
necessary.
Historically, U.S. Federal income taxes are not provided on
unremitted earnings of subsidiaries operating outside the U.S.
because it is the Company’s intention to permanently reinvest
undistributed earnings in the subsidiary. These earnings would
become subject to income tax if they were remitted as
dividends or loaned to a U.S. affiliate. Due to the 2017 Tax
Cuts and Jobs Act, U.S. federal transition taxes have been
recorded at December 31, 2017, for a one-time U.S. tax
liability on those earnings which have not previously been
repatriated to the U.S. Determination of the amount of
unrecognized deferred U.S. income tax liability on these
unremitted earnings is not practicable.
The Company has performed an evaluation and concluded that
there are no significant uncertain tax positions requiring
recognition in the Company’s financial statements.
The Company’s policy is to record interest and penalties
related to income tax matters as income tax expense.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by
dividing net income (loss) available to common stockholders
by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share is
calculated by dividing net income (loss) attributable to
common stockholders, adjusted for the effect of assumed
conversions of convertible notes and preferred stock, by the
weighted average number of common shares outstanding,
including potentially dilutive common share equivalents, if
the effect is dilutive. Potentially dilutive common shares
equivalents consist of incremental shares of common stock
issuable upon exercise of stock options and warrants,
settlement of restricted stock units, and conversion of
convertible notes and convertible preferred stock.
Debt Issuance Costs
Costs related to debt issuance are capitalized and amortized
as interest expense over the term of the related debt using the
straight-line method, which approximates the effective
interest method. Upon the repayment of debt, the Company
accelerates the recognition of an appropriate amount of the
costs as interest expense.
Capitalization of Interest
Interest costs are capitalized for qualifying in-process software
development projects. Capitalization of interest commences
when activities to prepare the asset are in progress and
expenditures and borrowing costs are being incurred. Interest
costs are capitalized until the assets are ready for their intended
use. Capitalized interest is added to the cost of the underlying
assets and amortized over the estimated useful lives of the
assets.
Stock-Based Compensation
Stock-based compensation expense for share-based payments,
related to stock options, restricted stock awards, and restricted
stock units, is recognized based on their grant-date fair values.
The Company recognizes compensation expense, net of
estimated forfeitures, on a straight-line basis over the requisite
service period of the award. Estimated forfeitures are based
on historical experience.
Use of Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and
reported amounts of revenue and expenses. Actual results
could differ from these estimates.
Significant items subject to estimates and assumptions include
application of the carrying amount and useful lives of property
and equipment and intangible assets, impairment assessments,
share-based compensation expense, and valuation allowances
for accounts receivable, inventories, and deferred tax assets.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the
period in which all of the following criteria are met: (1)
management, having the authority to approve the action,
commits to a plan to sell the disposal group; (2) the disposal
group is available for immediate sale in its present condition
51
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subject only to terms that are usual and customary for sales of
such disposal groups; (3) an active program to locate a buyer
or buyers and other actions required to complete the plan to
sell the disposal group have been initiated; (4) the sale of the
disposal group is probable, and transfer of the disposal group
is expected to qualify for recognition as a completed sale,
within one year, except if events of circumstances beyond the
Company’s control extend the period of time required to sell
the disposal group beyond one year; (5) the disposal group is
being actively marketed for sale at a price that is reasonable
in relation to its current fair value; and (6) actions required to
complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be
withdrawn.
A disposal group that is classified as held for sale is initially
measured at the lower of its carrying amount or fair value less
any costs to sell. Any loss resulting from this measurement is
recognized in the period in which the held for sale criteria are
met.
Subsequent changes in the fair value of a disposal group less
any costs to sell are reported as an adjustment to the carrying
amount of the disposal group, as long as the new carrying
amount does not exceed the carrying amount of the asset at
the time it was initially classified as held for sale. Upon
determining that a disposal group meets the criteria to be
classified as held for sale, the Company reports the assets and
liabilities of the disposal group for all periods presented in the
line items assets held for sale and liabilities held for sale,
respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that
can be clearly distinguished, operationally and for financial
reporting purposes, that either has been disposed of or is
classified as held for sale is reported in discontinued
operations, if the disposal represents a strategic shift that has,
or will have, a major effect on the Company’s operations and
financial results.
General corporate overhead is not allocated to discontinued
operations for all periods presented. Interest expense on debt
required to be repaid as a result of disposal transactions is
allocated to discontinued operations. Interest allocated to
discontinued operations totaled $0.2 million and $0.4 million
for the years ended December 31, 2017 and 2016, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform
to the current year presentation. The reclassifications did not
impact net loss.
New Accounting Pronouncements
(a) Application of New Accounting Standards
Effective January 1, 2018, the Company adopted the
accounting guidance
in Accounting Standards Update
(“ASU”) No. 2014-09, “Revenue from Contracts with
Customers.” This standard supersedes most of the existing
revenue recognition requirements in U.S. GAAP under
Accounting Standards Codification (“ASC”) 605 and
establishes a new revenue standard, ASC 606. This new
standard requires entities to recognize revenue at an amount
that reflects the consideration to which the Company expects
to be entitled in exchange for transferring goods or services to
a customer. The new standard also requires significantly
expanded disclosures
the qualitative and
regarding
quantitative information of an entity’s nature, amount, timing,
and uncertainty of revenue and cash flows arising from
contracts with customers. The Company adopted ASC 606
using the full retrospective method. The adoption of this
standard did not have a material impact on the Company’s
consolidated financial statements. Refer to Note 7 —
“Revenue from Contracts with Customers” for further
information surrounding adoption of this new standard.
Effective January 1, 2018, the Company adopted the
accounting guidance in ASU No. 2016-15, “Classification of
Certain Cash Receipts and Cash Payments.” This standard
addressed eight specific cash flow issues with the objective of
reducing the existing diversity in practice. Implementation of
this standard did not have a material effect on the consolidated
financial statements and related disclosures. The Company
applied this standard prospectively, where applicable, as there
were no historical
this
implementation.
affected by
transactions
Effective January 1, 2018, the Company adopted the
accounting guidance in ASU No. 2017-01, “Clarifying the
Definition of a Business.” This standard provided additional
guidance on whether an integrated set of assets and activities
constitutes a business. Implementation of this standard did not
have a material effect on the consolidated financial statements
and related disclosures. The Company applied this standard
prospectively and, therefore, prior periods were not adjusted.
In addition, the Company had no activity during the year ended
December 31, 2018 that was required to be treated differently
under this ASU than previously issued guidance.
Effective January 1, 2018, the Company adopted the
accounting guidance in ASU No. 2017-09, “Scope of
Modification Accounting.” This standard provided guidance
about which changes to the terms or conditions of a share-
based payment award require an entity to apply modification
accounting under Topic 718. Implementation of this standard
52
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
did not have a material effect on the consolidated financial
statements and related disclosures. The Company applied this
standard prospectively and, therefore, prior periods presented
were not adjusted. There were no changes to the terms or
conditions of current share-based payment awards during the
year ended December 31, 2018.
a new lease accounting system in connection with the adoption
of the updated guidance. The impact of ASC 842 has been
evaluated on the internal control over financial reporting and
other changes in business practices and processes. The
Company is in the process of finalizing its catalog of existing
lease contracts and implementing changes to its systems.
(b) New Accounting Requirements and Disclosures
In February 2016, the Financial Accounting Standards Board
(“FASB”) issued ASU No. 2016-02, “Leases.” This standard
(ASC 842) requires the recognition of right of use (“ROU”)
assets and lease liabilities by lessees for those leases classified
as operating leases under previous U.S. GAAP (ASC 840).
The lease liability represents the lessee’s obligation to make
lease payments arising from a lease and will be measured as
the present value of the future lease payments. The ROU asset
represents the lessee’s right to use a specified asset for the lease
term and will be measured at the lease liability amount,
adjusted for lease prepayment, lease incentives received and
the lessee’s initial direct costs. The pronouncement is effective
for annual reporting periods beginning after December 15,
2018, including interim periods within that reporting period
and should be applied using a modified retrospective transition
approach, with early application permitted. In July 2018, the
FASB issued ASU No. 2018-10 and ASU No. 2018-11, which
provide codification and targeted improvements to the original
guidance issued, as well as modifies the transition methods
available upon adoption.
Certain practical expedients are provided when adopting the
guidance. The Company plans to elect the package of practical
expedients allowing the Company to not reassess whether any
expired or existing contracts are, or contain, leases, the lease
classification for any expired or existing leases, or initial direct
costs for any expired or existing leases. The Company also
plans to apply the hindsight practical expedient allowing the
Company to use hindsight when determining the lease term
and assessing impairment of expired or existing leases. In
addition, the Company will elect to apply the short-term lease
exception, and will therefore not record a ROU asset or
corresponding lease liability for leases with a term of twelve
months or less and instead recognize a single lease cost
allocated over the lease term, generally on a straight line basis.
Further, the Company plans to elect the practical expedient to
not separate lease components from non-lease components
and account for both as a single lease component for all asset
classes.
The Company has substantially completed its evaluation of
the impact on the Company’s lease portfolio. As part of the
assessment, the Company formed an implementation work
team, conducted training for the relevant staff regarding the
potential impacts of ASC 842, and have concluded on the
Company’s contract analyses and policy review. The
Company engaged external resources to assist in the efforts of
completing the analysis of potential changes to current
accounting practices and are in the process of implementing
The Company will adopt the new standard effective January
1, 2019 using the optional transition method. Consequently,
the Company’s reporting for the comparative periods
presented in the financial statements will continue to be in
accordance with ASC 840. The adoption of this guidance will
result in the addition of ROU assets and corresponding lease
obligations to the consolidated balance sheet, yet the Company
does not anticipate a significant impact on the consolidated
statements of operations or cash flows. Upon adoption, the
Company expects to record operating lease ROU assets and
corresponding operating lease liabilities of approximately
$19.5 million, representing the present value of future lease
payments under operating leases with terms of greater than
twelve months. The Company is continuing to evaluate the
impact the pronouncement will have on the related disclosures.
the
loss
incurred
In June 2016, the FASB issued ASU No. 2016-13,
“Measurement of Credit Losses on Financial Instruments.”
This standard replaces
impairment
methodology in current U.S. GAAP with a methodology that
reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information to
inform credit loss estimates. The pronouncement is effective
for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years, with early adoption
for the fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The
Company
the
pronouncement will have on the consolidated financial
statements and related disclosures.
is currently evaluating
impact
the
In February 2018, the FASB issued ASU No. 2018-02,
“Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income.” This standard allows a
reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting
from the 2017 Tax Cuts and Jobs Act. The pronouncement is
effective for fiscal years beginning after December 15, 2018,
and interim periods within those fiscal years, with early
adoption permitted in any interim period. The Company is
currently evaluating the impact the pronouncement will have
the consolidated financial statements and related
on
disclosures.
In June 2018, the FASB issued ASU No. 2018-07,
“Improvements
to Nonemployee Share-Based Payment
Accounting.” This standard expands the scope of Topic 718 to
include share-based payment transactions for acquiring goods
and services from nonemployees. The pronouncement is
effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years, with early
53
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adoption permitted no earlier than an entity’s adoption date of
Topic 606. The Company is currently evaluating the impact
the pronouncement will have on the consolidated financial
statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13,
“Disclosure Framework — Changes to the Disclosure
Requirements for Fair Value Measurement.” This standard
removes, modifies, and adds additional requirements for
Note 3 — Discontinued Operations
During the fourth quarter of 2018, the Company initiated and
began executing a strategic plan to sell its Consumer and
Industrial Chemistry Technologies (“CICT”) segment. An
investment banking advisory services firm was engaged and
actively marketed this segment.
The Company met all of the criteria to classify the CICT
segment’s assets and liabilities as held for sale in the fourth
quarter 2018. The Company has classified the assets,
disclosures related to fair value measurement in ASC 820. The
pronouncement is effective for fiscal years beginning after
December 15, 2019, including interim periods within those
fiscal years, with early adoption permitted in any interim
period. The Company is currently evaluating the impact the
pronouncement will have on the consolidated financial
statements and related disclosures.
liabilities, and results of operations for this segment as
“Discontinued Operations” for all periods presented.
Disposal of the CICT reporting segment represented a strategic
shift that will have a major effect on the Company’s operations
and financial results.
During the first quarter of 2019, the Company entered into a
material definitive agreement and, subsequently, completed
the sale of the CICT segment (see Note 21).
The following summarized financial information has been segregated from continuing operations and reported as Discontinued
Operations for the years ended December 31, 2018, 2017, and 2016 (in thousands):
Consumer and Industrial Chemistry Technologies
2018
2017
2016
Discontinued operations:
Revenue
Operating expenses
Depreciation and amortization
Research and development
Income from operations
Other income (expense)
Income before income taxes
Income tax expense
$
72,344
$
73,992
$
(65,940)
(2,760)
(590)
3,054
341
3,395
(652)
(63,621)
(2,391)
(515)
7,465
(284)
7,181
(2,730)
Net income from discontinued operations
$
2,743
$
4,451
$
74,599
(62,673)
(2,257)
(1)
9,668
127
9,795
(3,441)
6,354
54
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2018 and 2017 are as follows (in
thousands):
Assets:
Accounts receivable, net
Inventories, net
Other current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Assets held for sale
Liabilities:
Accounts payable
Accrued liabilities
Liabilities held for sale
Consumer and Industrial Chemistry Technologies
2018
2017
$
$
$
$
10,547
52,069
446
15,899
19,480
20,029
118,470
8,883
291
9,174
$
$
11,121
43,299
88
16,049
19,480
26,183
116,220
11,654
796
12,450
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. The Company executed a plan to sell or
otherwise dispose of the Drilling Technologies and Production
Technologies segments. An investment banking advisory
services firm was engaged and actively marketed these
segments.
The Company met all of the criteria to classify the Drilling
Technologies and Production Technologies segments’ assets
and liabilities as held for sale in the fourth quarter 2016. The
Company has classified the assets, liabilities, and results of
operations for
two segments as “Discontinued
Operations” for all periods presented.
Disposal of the Drilling Technologies and Production
Technologies reporting segments represented a strategic shift
that would have a major effect on the Company’s operations
and financial results.
these
On December 30, 2016, the Company sold a portion of its
Drilling Technologies segment and recorded a loss of $1.2
million which is included in the loss from discontinued
operations for the year ended December 31, 2016.
On May 22, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of
the Company’s Drilling
Technologies segment to National Oilwell Varco, L.P.
(“NOV”) for $17.0 million in cash consideration, subject to
normal working capital adjustments, with $1.5 million held
back by NOV for up to 18 months to satisfy potential
indemnification claims.
On May 23, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of the Company’s Production
Technologies segment to Raptor Lift Solutions, LLC (“Raptor
Lift”) for $2.9 million in cash consideration, with $0.4 million
held back by Raptor Lift to satisfy potential indemnification
claims.
On August 16, 2017, the Company completed the sale of
substantially all of the remaining assets of the Company’s
Drilling Technologies segment to Galleon Mining Tools, Inc.
for $1.0 million in cash consideration and a note receivable of
$1.0 million due in one year.
The sale or disposal of the assets and transfer or liquidation of
liabilities and obligations of these segments was completed in
2017. The Company has no continuing involvement with the
discontinued operations.
55
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarized financial information has been segregated from continuing operations and reported as Discontinued
Operations for the years ended December 31, 2017 and 2016 (in thousands):
Drilling Technologies
Production Technologies
2017
2016
2017
2016
Discontinued operations:
Revenue
Cost of revenue
Selling, general and administrative
Depreciation and amortization
Research and development
Gain (loss) on disposal of long-lived assets
Impairment of inventory and long-lived assets
Loss from operations
Other expense
Loss on sale of businesses
Loss on write-down of assets held for sale
Loss before income taxes
Income tax benefit
$
11,534
$
27,627
$
4,002
$
(7,309)
(6,963)
—
(5)
97
—
(2,646)
(96)
(1,600)
(6,831)
(11,173)
4,138
(18,667)
(15,285)
(1,714)
(64)
103
(36,522)
(44,522)
(412)
(1,199)
(18,971)
(65,104)
23,661
(3,236)
(1,759)
—
(364)
—
—
(1,357)
(52)
(479)
(9,718)
(11,606)
4,299
Net loss from discontinued operations
$
(7,035) $
(41,443) $
(7,307) $
8,292
(7,881)
(3,790)
(584)
(888)
(50)
(3,913)
(8,814)
(96)
—
(6,161)
(15,071)
5,477
(9,594)
At December 31, 2017, all remaining assets and liabilities of the discontinued operations were assumed by the Company’s continuing
operations. These balances included $0.3 million of net accounts receivable, $1.4 million of sales price hold-back that was received
during 2018, and $1.4 million of accrued liabilities partially settled in 2018, with the remainder to be settled in 2019.
Note 4 — Impairment of Inventory and Long-Lived
Assets for Discontinued Operations
During the three months ended March 31, 2016, as a result of
changes in the oil and gas industry that occurred since the
beginning of 2016 and the corresponding impact on the
Company’s business outlook, the Company evaluated the
direction of its business activities. Crude oil prices, which
appeared to have stabilized during the fourth quarter of 2015,
fell further during the first quarter of 2016, decreasing
approximately 21% from average prices seen in the fourth
quarter of 2015. The U.S. drilling rig count declined from 698
at December 31, 2015 to 450 at April 1, 2016, a decline of
35.5%.
Due to the decreased rig activity and its impact on
management’s expectations for future market activity, the
Company further refocused operations of its Drilling
Technologies segment. The Company decided to exit the
business of building and repairing motors in all domestic
markets. In addition, changes in drilling technique, including
further escalation of the move to a dominance of pad drilling,
reduced the marketability of certain other inventory items. The
focus of the Production Technologies segment shifted to its
new technologies for electric submersible pumps for the oil
and gas industry and for hydraulic pumping units. Inventory
associated with older technologies for these items has been
evaluated for impairment. As a result of these changes in focus
and projected declines in asset utilization, the Company
recorded a pre-tax impairment of inventories as noted below.
Changes in the business climate noted above and increasing
operating losses experienced within the Drilling Technologies
and Production Technologies segments during the three
months ended March 31, 2016, caused the Company to test
asset groups within these two segments for recoverability.
Recoverability of the carrying amount of the asset groups was
based upon estimated future cash flows while taking into
consideration various assumptions and estimates, including
future use of the assets, remaining useful life of the assets, and
eventual disposition of the assets. Undiscounted estimated
cash flows of two asset groups associated with domestic
operations in the Drilling Technologies segment did not
exceed the carrying amount of the respective asset groups.
Therefore, the Company performed an analysis of discounted
future cash flows to determine the fair value of each of these
two asset groups. As a result of this testing, the Company
recorded a pre-tax impairment of long-lived assets as noted
below.
56
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded impairment charges during the three months ended March 31, 2016, as follows (in thousands):
Drilling Technologies:
Inventories
Long-lived assets:
Property and equipment
Intangible assets other than goodwill
Production Technologies:
Inventories
Total impairment
$
12,653
14,642
9,227
3,913
40,435
$
Based on the changes in the business climate discussed above and continuing operating losses experienced during the three months
ended March 31, 2016, June 30, 2016, September 30, 2016, and December 31, 2016, goodwill within the Teledrift and Production
Technologies reporting units was tested for impairment. However, no impairments of goodwill were recorded based upon this
testing.
Note 5 — Assets Held for Sale
During the second quarter of 2018, the Company committed
to a plan to divest the revenue generating assets associated
with the Dalton, Georgia facility within the Energy
Chemistry Technologies segment. The Company determined
that the divestiture of this business line did not meet the
criteria for discontinued operations presentation, as the
commitment to divest this business line does not represent a
strategic shift that will have a major effect on its operations
and financial results. These assets were available for
immediate sale in their present condition, subject to only
usual and customary terms. During the three months ended
June 30, 2018, a loss on write-down of assets held for sale
of $2.6 million was recorded to state the assets at fair value
less costs to sell.
Note 6 — Acquisitions
The assets classified as held for sale at December 31, 2017
is as follows (in thousands):
Property and equipment, net
Valuation allowance
Assets held for sale, net
$
$
4,998
—
4,998
On September 10, 2018, the Company completed the sale of
the assets of the Dalton, Georgia facility to T&L Properties
of Dalton, LLC for $1.8 million in cash consideration. The
Company recorded a loss on the sale of the business of $0.4
million for the three months ended September 30, 2018.
On July 27, 2016, the Company acquired 100% of the stock
and interests in International Polymerics, Inc. (“IPI”) and
related entities for $7.9 million in cash consideration, net of
cash acquired, and 247,764 shares of the Company’s common
stock. IPI is a U.S. based manufacturer of high viscosity guar
gum and guar slurry for the oil and gas industry with a wide
selection of stimulation chemicals.
Note 7 — Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted ASC 606
using the full retrospective method applied to those contracts
which were not completed as of December 31, 2015. As a result
of electing the full retrospective adoption approach, results for
reporting periods beginning after December 31, 2015 are
presented under ASC 606.
There was no material impact upon the adoption of ASC 606.
As revenue is primarily related to product sales accounted for
at a point in time and service contracts that are primarily short-
term in nature (typically less than 30 days), the Company did
not record any adjustments to retained earnings at December
31, 2015 or for any periods previously presented.
Revenues are recognized when control of the promised goods
or services is transferred to the customer, in an amount that
reflects the consideration the Company expects to be entitled
to in exchange for those goods or services. In recognizing
revenue for products and services, the Company determines
the transaction price of purchase orders or contracts with
customers, which may consist of fixed and variable
consideration. Determining the transaction price may require
57
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
significant
includes
judgment by management, which
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.
For certain contracts, the Company recognizes revenue under
the percentage-of-completion method of accounting,
measured by the percentage of “costs incurred to date” to the
“total estimated costs of completion.” This percentage is
applied to the “total estimated revenue at completion” to
calculate proportionate revenue earned to date. For the years
ended December 31, 2018, 2017, and 2016, the percentage-
of-completion revenue accounted for less than 0.1% of total
revenue during the respective time periods. This resulted in
immaterial unfulfilled performance obligations
and
immaterial contract assets and/or liabilities for which the
Company did not record adjustments to opening retained
earnings as of December 31, 2015 or for any periods
previously presented.
The vast majority of the Company’s products are sold at a point
in time and service contracts are short-term in nature. Sales
are billed on a monthly basis with payment terms customarily
30 days from invoice receipt. In addition, sales taxes are
excluded from revenues.
Disaggregation of Revenue
The Company has disaggregated revenues by product sales
(point-in-time revenue recognition) and service revenue (over-
time revenue recognition), where product sales accounted for
over 95% of total revenue for the years ended December 31,
2018, 2017, and 2016.
The Company differentiates revenue and operating expenses (excluding depreciation and amortization) based on whether the
source of revenue is attributable to products or services. Revenue and operating expenses (excluding depreciation and amortization)
disaggregated by revenue source are as follows (in thousands):
Revenue:
Products
Services
Operating expenses (excluding depreciation and amortization):
Products
Services
Year ended December 31,
2017
2016
2018
$
$
$
$
172,412
5,361
177,773
152,846
6,962
159,808
$
$
$
$
237,211
5,895
243,106
182,330
6,414
188,744
$
$
$
$
182,294
5,939
188,233
140,108
3,875
143,983
Arrangements with Multiple Performance Obligations
The Company’s contracts with customers may include
multiple performance obligations. For such arrangements, the
total transaction price is allocated to each performance
obligation in an amount based on the estimated relative
standalone selling prices of the promised goods or services
underlying each performance obligation. Standalone selling
prices are generally determined based on the prices charged
to customers (“observable standalone price”) or an expected
cost plus a margin approach. For combined products and
services within a contract, the Company accounts for
individual products and services separately if they are distinct
(i.e. if a product or service is separately identifiable from other
items in the contract and if a customer can benefit from it on
its own or with other resources that are readily available to the
customer). The consideration is allocated between separate
products and services within a contract based on the prices at
the observable standalone price. For items that are not sold
separately, the expected cost plus a margin approach is used
to estimate the standalone selling price of each performance
obligation.
Contract Balances
Under revenue contracts for both products and services,
customers are invoiced once the performance obligations have
been satisfied, at which point payment is unconditional.
Accordingly, no revenue contracts give rise to contract assets
or liabilities under ASC 606.
Practical Expedients and Exemptions
The Company has elected to apply several practical expedients
as discussed below:
•
Sales commissions are expensed when incurred
because the amortization period would have been one
58
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
year or less. These costs are recorded within segment
selling and administrative expenses.
to a customer and when the customer pays for that good
or service will be one year or less.
• The majority of the Company’s services are short-term
in nature with a contract term of one year or less. 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 has
utilized the practical expedient in ASC 606-10-32-18,
exempting the Company from adjusting the promised
amount of consideration for the effects of a significant
financing component given that the period between
when the Company transfers a promised good or service
•
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
the
Company to recognize revenue in the amount to which
it has a right to invoice.
in ASC 606-10-55-18, allowing
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 8 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
Year ended December 31,
2017
2016
2018
Supplemental non-cash investing and financing activities:
Value of common stock issued in acquisitions
Value of common stock issued in payment of accrued liability
Exercise of stock options by common stock surrender
Supplemental cash payment information:
Interest paid
Income taxes (received, net of payments) paid, net of refunds
$
$
— $
—
—
— $
188
5,863
3,268
—
50
$
2,502
(139)
$
1,851
(10,195)
2,024
333
Note 9 — Inventories
Inventories are as follows (in thousands):
Raw materials
Work-in-process
Finished goods
Inventories
Less reserve for excess and obsolete inventory
Inventories, net
December 31,
2018
2017
10,608
—
18,798
29,406
(2,117)
27,289
$
$
13,462
3
19,363
32,828
(368)
32,460
$
$
59
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
Balance, beginning of year
Charged to costs and expenses
Deductions
Balance, end of the year
2018
2017
2016
$
$
368
2,418
(669)
2,117
$
$
50
388
(70)
368
$
$
50
—
—
50
Note 10 — Property and Equipment
Property and equipment are as follows (in thousands):
Land
Buildings and leasehold improvements
Machinery and equipment
Fixed assets in progress
Furniture and fixtures
Transportation equipment
Computer equipment and software
Property and equipment
Less accumulated depreciation
Property and equipment, net
December 31
2018
2017
$
$
4,372
37,719
26,995
581
1,573
1,852
9,370
82,462
(36,977)
45,485
$
$
4,008
37,786
25,762
3,573
1,869
1,802
12,044
86,844
(34,058)
52,786
Depreciation expense totaled $7.8 million, $8.4 million, and $6.6 million for the years ended December 31, 2018, 2017, and 2016,
respectively.
During the years ended December 31, 2018, 2017, and 2016, no impairments were recognized related to property and equipment.
Note 11 — Goodwill
The Company has no reporting units which have a goodwill
balance at December 31, 2018.
Goodwill is tested for impairment annually in the fourth
quarter, or more frequently if circumstances indicate a
potential impairment. During the fourth quarter of 2017, the
Company adopted ASU 2017-04, which eliminates Step 2
from the goodwill impairment test. If the carrying amount
exceeds the reporting unit’s fair value, the Company will
recognize an impairment charge for the excess amount.
During the second quarter of 2018, the Company recognized
a goodwill impairment charge of $37.2 million in the Energy
Chemistry Technologies (“ECT”) reporting unit, which
resulted from sustained under-performance and
lower
expectations related to the reporting unit. As a result of these
factors, a qualitative analysis, and additional risks associated
with the business, the Company concluded that sufficient
indicators existed to require an interim quantitative assessment
of goodwill for that reporting unit as of June 30, 2018. The
fair value of the 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 assumptions were based on the actual historical
performance of the reporting unit and took into account a
recent weakening of operating results in an improving market
environment. The excess of the reporting unit’s carrying value
over the estimated fair value was recorded as the goodwill
impairment charge during the three months ended June 30,
2018 and represented all of the ECT reporting unit’s goodwill.
During annual goodwill impairment testing for the year ended
December 31, 2017, the Company first assessed the qualitative
factors and was unable to conclude that it was not more likely
than not that fair value of the ECT reporting unit exceeded the
carrying amount of the reporting unit. Therefore, the Company
performed the quantitative impairment test. The result of this
testing indicated that the fair value of the ECT reporting unit
exceeded the carrying amount, including goodwill, of the
reporting unit.
60
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During annual goodwill impairment testing for the year ended
December 31, 2016, the Company first assessed qualitative
factors to determine whether it was necessary to perform the
two-step goodwill impairment test that the Company has
historically used. The Company concluded that it was not more
likely than not that goodwill was impaired as of the fourth
quarter of 2016, and therefore, further testing was not required.
No impairments of goodwill were recognized during the years
ended December 31, 2017 and 2016.
Changes in the carrying amount of goodwill for the ECT reporting unit are as follows (in thousands):
Balance at December 31, 2016:
Goodwill
Accumulated impairment losses
Goodwill balance, net
Activity during the year 2017:
Goodwill impairment recognized
Acquisition goodwill recognized
Balance at December 31, 2017:
Goodwill
Accumulated impairment losses
Goodwill balance, net
Activity during the year 2018:
Goodwill impairment recognized
Acquisition goodwill recognized
Balance at December 31, 2018:
Goodwill
Accumulated impairment losses
Goodwill balance, net
Note 12 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
Finite lived intangible assets:
Patents and technology
Customer lists
Trademarks and brand names
Total finite lived intangible assets acquired
Deferred financing costs
Total amortizable intangible assets
Indefinite lived intangible assets:
Trademarks and brand names
Total other intangible assets
Carrying amount:
Other intangible assets, net
$
$
$
$
$
37,180
—
37,180
—
—
37,180
—
37,180
(37,180)
—
37,180
(37,180)
—
December 31,
2018
2017
Cost
Accumulated
Amortization
Cost
Accumulated
Amortization
3,144
4,505
1,114
8,763
96
8,859
$
$
6,689
5,259
1,149
13,097
496
13,593
$
$
$
$
$
9,457
15,367
1,532
26,356
1,791
28,147
2,760
30,907
22,048
18,884
15,367
1,485
35,736
1,924
37,660
2,760
40,420
26,827
61
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets acquired are amortized on a straight-line
basis over two to 95 years. Amortization of intangible assets
acquired totaled $1.4 million, $1.4 million, and $1.5 million
for the years end ended December 31, 2018, 2017, and 2016,
respectively.
Amortization of deferred financing costs totaled $0.4 million,
$0.5 million, and $0.4 million for the years ended
December 31, 2018, 2017, and 2016, respectively.
Estimated future amortization expense for other finite lived intangible assets, including deferred financing costs, at December 31,
2018 is as follows (in thousands):
Year ending December 31,
2019
2020
2021
2022
2023
Thereafter
Other amortizable intangible assets, net
$
$
2,351
2,324
2,315
2,048
1,821
13,208
24,067
During the years ended December 31, 2018, 2017, and 2016, no impairments were recognized related to other intangible assets.
Note 13 — Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands):
Long-term debt, classified as current:
Borrowings under revolving credit facility
December 31,
2018
2017
$
49,731
$
27,950
Borrowing under the revolving credit facility is classified as current debt as a result of the required lockbox arrangement and the
subjective acceleration clause.
Credit Facility
On May 10, 2013, the Company and certain of its subsidiaries
(the “Borrowers”) entered into an Amended and Restated
Revolving Credit, Term Loan and Security Agreement (as
amended, the “Credit Facility”) with PNC Bank, National
Association (“PNC Bank”). The Company may borrow under
the Credit Facility for working capital, permitted acquisitions,
capital expenditures and other corporate purposes. The Credit
Facility continues in effect until May 10, 2022. Under terms
of the Credit Facility, as amended, the Company has total
borrowing availability of $75 million under a revolving credit
facility. A term loan was repaid in May 2017 and may not be
re-borrowed. In addition, the Company repaid the outstanding
balance of the revolving credit facility on March 1, 2019 (see
Note 21).
The Credit Facility was secured by substantially all of the
Company’s domestic real and personal property, including
accounts receivable, inventory, land, buildings, equipment and
other intangible assets. The Credit Facility contained
customary representations, warranties, and both affirmative
and negative covenants. The Company was in compliance with
all debt covenants at December 31, 2018. In the event of
default, PNC Bank may accelerate the maturity date of any
outstanding amounts borrowed under the Credit Facility.
Effective June 13, 2018, the Company entered into an
Eleventh Amendment to the Credit Facility which, among
other things, maintained the maximum revolving advance
amount at $75 million, but added a collateral block equal to
$10 million minus the amount of any collateral value in excess
of $75 million and, to the extent not duplicated, any inventory
collateral in excess of $52 million. Compliance with the fixed
charge coverage ratio and the leverage ratio was suspended
through December 31, 2018, as long as there was not a
financial covenant trigger event, which occurs if undrawn
availability is less than $15 million at any month-end through
December 31, 2018. At December 31, 2018, undrawn
availability for this calculation was $25.1 million.
62
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Credit Facility contained financial covenants to maintain
a fixed charge coverage ratio and a leverage ratio, as well as
establishes an annual limit on capital expenditures. The fixed
charge coverage ratio is the ratio of (a) earnings before interest,
taxes, depreciation, and amortization (“EBITDA”), adjusted
for non-cash stock-based compensation, during the period to
(b) all debt payments during the period. The fixed charge
coverage ratio requirement was to begin for the quarter ended
March 31, 2019 at 1.10 to 1.00, and for each annualized fiscal
quarter in 2019 and thereafter. The leverage ratio (funded debt
to adjusted EBITDA) requirement was to begin for the quarter
ended March 31, 2019, at not greater than 3.00 to 1.00, and
for each annualized fiscal quarter in 2019 and thereafter. These
financial covenants would be tested earlier if a financial
covenant trigger event occurs. Following a triggering event,
the fixed charge coverage ratio must be maintained at no less
than 1.10 to 1.00 and the leverage ratio must be maintained at
no greater than 3.00 to 1.00 as of the last day of the quarter.
The annual limit on capital expenditures for 2018 and each
fiscal year thereafter was $26 million. The annual limit on
capital expenditures is reduced if the undrawn availability
under the revolving credit facility falls below $15 million at
any month-end.
The Credit Facility restricted the payment of cash dividends
on common stock and limited the amount that may be used to
repurchase common stock and preferred stock.
Beginning with fiscal year 2017, the Credit Facility included
a provision that 25% of EBITDA minus cash paid for taxes,
dividends, debt payments, and unfunded capital expenditures,
not to exceed $3.0 million for any year, be paid on the
outstanding balance within 75 days of the fiscal year end. For
the year ended December 31, 2018, there was no additional
payment required based on this provision.
Each of the Company’s domestic subsidiaries was fully
obligated for Credit Facility indebtedness as a borrower or as
a guarantor.
(a) Revolving Credit Facility
Under the revolving credit facility, the Company may borrow
up to $75 million through May 10, 2022. This included a
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.
sublimit of $10 million that may be used for letters of credit.
The revolving credit facility was secured by substantially all
of the Company’s domestic accounts receivable and inventory.
At December 31, 2018, eligible accounts receivable and
inventory securing the revolving credit facility provided total
borrowing capacity of $66.6 million under the revolving credit
facility. Available borrowing capacity, net of outstanding
borrowings, was $16.8 million at December 31, 2018.
The interest rate on advances under the revolving credit facility
varied based on the fixed charge coverage ratio. Rates ranged
(a) between PNC Bank’s base lending rate plus 1.5% to 2.0%
or (b) between the London Interbank Offered Rate (LIBOR)
plus 2.5% to 3.0%. PNC Bank’s base lending rate was 5.5%
at December 31, 2018. The Company was required to pay a
monthly facility fee of 0.25% per annum on any unused
amount under the commitment based on daily averages. At
December 31, 2018, $49.7 million was outstanding under the
revolving credit facility, with $(0.3) million borrowed as base
rate loans at an interest rate of 7.5% and $50.0 million
borrowed as LIBOR loans at an interest rate of 5.51%.
On March 1, 2019, the Company repaid the outstanding
balance of the Credit Facility (see Note 21).
(b) Term Loan
The amount borrowed under the term loan was reset to $10
million effective as of September 30, 2016. Monthly principal
payments of $0.2 million were required. On May 22, 2017,
the Company repaid the outstanding balance of the term loan.
No additional amount may be re-borrowed under the term loan.
Debt Maturities
At December 31, 2018, borrowing under the revolving credit
facility, which matures on May 10, 2022, is classified a current
debt, and therefore, the entire balance is considered to mature
in 2019.
• 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
63
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• 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.
Liabilities Measured at Fair Value on a Recurring Basis
At December 31, 2018 and 2017, no liabilities were required
to be measured at fair value on a recurring basis. There were
no transfers in or out of either Level 1, Level 2, or Level 3 fair
value measurements during the years ended December 31,
2018, 2017, and 2016.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and
equipment, goodwill, and other intangible assets are measured
at fair value on a non-recurring basis and are subject to fair
value adjustment in certain circumstances. During the three
months ended June 30, 2018, the Company recorded an
impairment of $37.2 million for goodwill in the ECT reporting
unit (see Note 11). No impairments of goodwill were
recognized during the years ended December 31, 2017 and
2016. No impairment of property and equipment or other
intangible assets were recognized during the years ended
December 31, 2018, 2017, and 2016.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments,
including cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, approximate fair
value due to the short-term nature of these accounts. The
Company had no cash equivalents at December 31, 2018 or
2017.
The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
December 31,
2018
2017
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Borrowings under revolving credit facility
$
49,731
$
49,731
$
27,950
$
27,950
The carrying amount of borrowings under the revolving credit facility approximates its fair value because the interest rate is
variable.
Note 15 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by
dividing net income (loss) by the weighted average number of
common shares outstanding for the period. Diluted earnings
(loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares
outstanding combined with dilutive common
share
equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the
calculation of diluted loss per share for the years ended
December 31, 2018, 2017, and 2016, since including them
would have an anti-dilutive effect on loss per share due to the
loss from continuing operations incurred during the period.
Securities convertible into shares of common stock that were
not considered in the diluted loss per share calculations were
0.3 million restricted stock units for the year ended
December 31, 2018, 0.7 million stock options, before they
were converted into common shares during 2017, and 0.7
million restricted stock units for the year ended December 31,
2017, and 0.7 million stock options and 0.8 million restricted
stock units for the year ended December 31, 2016.
A reconciliation of the number of shares used for the basic and diluted earnings (loss) per common share computations is as follows
(in thousands):
Weighted average common shares outstanding - Basic
57,995
57,580
56,087
Assumed conversions:
Incremental common shares from stock options
Incremental common shares from restricted stock units
Weighted average common shares outstanding - Diluted
—
—
57,995
—
—
57,580
—
—
56,087
Year ended December 31,
2017
2018
2016
64
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — Income Taxes
Components of the income tax (benefit) expense are as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Income tax (benefit) expense
Year ended December 31,
2017
2016
2018
$
$
— $
97
(740)
(643)
(6,585)
(89)
101
(6,573)
(7,216) $
(1,126) $
587
488
(51)
5,994
214
(45)
6,163
6,112
$
(3,325)
(126)
(526)
(3,977)
1,904
(85)
(46)
1,773
(2,204)
The components of (loss) income before income taxes are as follows (in thousands):
United States
Foreign
(Loss) income before income taxes
Year ended December 31,
2017
2016
2018
$
$
(80,034) $
(623)
(80,657) $
(10,025) $
(1,367)
(11,392) $
(5,292)
(1,359)
(6,651)
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
Federal statutory tax rate
State income taxes, net of federal benefit
Non-U.S. income taxed at different rates
(Increase) decrease in valuation allowance
Impact of 2017 Tax Cuts and Jobs Act
Net operating loss carryback adjustment
Reduction in tax benefit related to stock-based awards
Non-deductible expenditures and goodwill
Research and development credit
Other
Effective income tax rate
Year ended December 31,
2017
2016
2018
21.0%
0.8
0.8
(3.6)
—
—
(1.0)
(9.0)
0.3
(0.4)
8.9%
35.0 %
(3.2)
(4.3)
0.1
(64.2)
—
(16.9)
(3.9)
3.6
0.1
(53.7)%
35.0%
2.5
(0.6)
(0.2)
—
(4.7)
—
(6.1)
5.7
1.5
33.1%
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax
impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income
taxed at different rates.
Comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Acts (“2017 Tax
Act”), makes significant changes to U.S. federal income tax laws. The 2017 Tax Act, among other things, reduces the corporate
income tax rate from 35% to 21%, partially limits the deductibility of business interest expense and net operating losses, provides
additional limitations on the deductibility of executive compensation, imposes a one-time tax on unrepatriated earnings from
certain foreign subsidiaries, taxes offshore earnings at reduced rates regardless of whether they are repatriated, and allows the
immediate deduction of certain new investments instead of deductions for depreciation expense over time. The Company had not
completed its determination of the 2017 Tax Act and recorded provisional amounts in its financial statements as of December 31,
2017. The Company recorded a provisional expense for the effects of the 2017 Tax Act of $7.3 million. The effects of the 2017
65
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Act on the Company include three main categories: 1) remeasurement of the net deferred tax assets from 35% to 21%, which
resulted in tax expense of $5.5 million; 2) a one-time tax on unrepatriated earnings from certain foreign subsidiaries of $0.2 million;
and 3) additional limitations on the deductibility of executive compensation, which resulted in tax expense of $1.6 million. The
Company completed its review of the 2017 Tax Act in 2018, and there were no material changes in the measurement period.
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):
Deferred tax assets:
Net operating loss carryforwards
Allowance for doubtful accounts
Inventory valuation reserves
Equity compensation
Goodwill
Accrued compensation
Foreign tax credit carryforward
Interest expense limitation
Other
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets, net
Deferred tax liabilities:
Property and equipment
Intangible assets
Goodwill
Convertible debt
Unearned revenue
Prepaid insurance and other
Total gross deferred tax liabilities
Net deferred tax assets
December 31,
2018
2017
$
$
30,241
1,073
1,057
548
1,089
342
4,041
534
50
38,975
(4,042)
34,933
(6,613)
(9,657)
—
—
—
—
(16,270)
18,663
$
$
24,569
981
827
685
—
222
3,955
—
—
31,239
(1,187)
30,052
(6,216)
(10,084)
(365)
(619)
(52)
(3)
(17,339)
12,713
As of December 31, 2018, the Company had U.S. net
operating loss carryforwards of $127.5 million, including
$106.7 million expiring in various amounts in 2029 through
2037 which can offset 100% of taxable income and $20.8
million that has an indefinite carryforward period which can
offset 80% of taxable income per year. The ability to utilize
net operating losses and other tax attributes could be subject
to a significant limitation if the Company were to undergo an
“ownership change” for purposes of Section 382 of the Tax
Code.
Net deferred tax assets arise due to the recognition of income
and expense items for tax purposes, which differ from those
used for financial statement purposes. ASC 740, Income
Taxes, provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. In assessing
the need for a valuation allowance in the second quarter of
2018, the Company considered all available objective and
verifiable evidence, both positive and negative, including
historical levels of pre-tax income (loss) both on a consolidated
basis and tax reporting entity basis, legislative developments,
and expectations and risks associated with estimates of future
pre-tax income. As a result of this analysis, the Company
determined that it is more likely than not that it will not realize
the benefits of certain deferred tax assets and, therefore,
recorded a $15.5 million valuation allowance against the
carrying value of net deferred tax assets, except for deferred
tax liabilities related to non-amortizable intangible assets and
certain state jurisdictions. As all available evidence should be
taken into consideration when assessing the need for a
valuation allowance, the subsequent events that occurred in
the first quarter of 2019 (Note 21) provided a source of income
to support the release of $11.5 million of the valuation
allowance which resulted in a deferred tax asset of $18.7
million. As such, the Company reversed this portion of the
valuation allowance during the fourth quarter of 2018.
66
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2018, the Company had
approximately $3.2 million in unremitted earnings for one of
its foreign jurisdictions, which were not included for U.S. tax
purposes. Due to the 2017 Tax Act, U.S. federal transition taxes
have been recorded for a one-time U.S. tax liability on these
earnings which have not previously been repatriated to the
U.S. However, certain withholding taxes will need to be paid
upon repatriation. It is not practicable to estimate the amount
of the deferred tax liability on such unremitted earnings.
The Company has performed an evaluation and concluded
there are no significant uncertain tax positions requiring
recognition in the Company’s financial statements. The
evaluation was performed for the tax years which remain
Note 17 — Common Stock
subject to examination by tax jurisdictions as of December 31,
2018, which are the years ended December 31, 2015 through
December 31, 2018 for U.S. federal taxes and the years ended
December 31, 2014 through December 31, 2018 for state tax
jurisdictions.
At December 31, 2018, the Company had no unrecognized tax
benefits.
In January 2017, the Internal Revenue Service notified the
Company that it will examine the Company’s federal tax
returns for the year ended December 31, 2014. No adjustments
have been asserted and management believes that sustained
adjustments, if any, would not have a material effect on the
Company’s financial position, results of operations or
liquidity.
The Company’s Certificate of Incorporation, as amended November 9, 2009, authorizes the Company to issue up to 80 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.
A reconciliation of the changes in common shares issued is as follows:
Shares issued at the beginning of the year
Issued as restricted stock award grants
Issued upon exercise of stock options
Shares issued at the end of the year
Year ended December 31,
2017
2018
60,622,986
1,539,889
—
62,162,875
59,684,669
275,029
663,288
60,622,986
Stock-Based Incentive Plans
Stockholders approved long term incentive plans in 2018,
2014, 2010, and 2007 (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 2018 Plan, 2014 Plan, 2010 Plan, and 2007
Plan are 3.0 million, 5.2 million, 6.0 million, and 2.2 million,
respectively. At December 31, 2018, the Company had a total
of 1.5 million shares remaining to be granted under the 2018
Plan, 2014 Plan, and 2010 Plan. Shares may no longer be
granted under the 2007 Plan.
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. Options expire no later than ten years from the date
of grant and generally vest in four years or less. 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.
The fair value of stock options at the date of grant is calculated
using the Black-Scholes option pricing model. The risk free
interest rate is based on the implied yield of U.S. Treasury
zero-coupon securities that correspond to the expected life of
the option. Volatility is estimated based on historical and
implied volatilities of the Company’s stock and of identified
companies considered to be representative peers of the
Company. The expected life of awards granted represents the
period of time the options are expected to remain outstanding.
The Company uses the “simplified” method which is permitted
for companies that cannot reasonably estimate the expected
life of options based on historical share option exercise
experience. The Company does not expect to pay dividends
on common stock. No options were granted to employees
during 2018, 2017, and 2016.
67
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Black-Scholes option valuation model was developed to
estimate the fair value of traded options that have no vesting
restrictions and are fully-transferable. Because option
valuation models require the use of subjective assumptions,
changes in these assumptions can materially affect the fair
value calculation. The Company’s options are not
characteristic of traded options; therefore, the option valuation
models do not necessarily provide a reliable measure of the
fair value of options.
The total intrinsic value of stock options exercised during the
years ended December 31, 2017 and 2016 was $2.3 million
and $1.0 million, respectively. No stock options vested during
the years ended December 31, 2018, 2017, and 2016.
At December 31, 2017, the Company had no remaining
outstanding stock options.
Restricted Stock
The Company grants employees either time-vesting or
performance-based restricted shares in accordance with terms
specified in the Restricted Stock Agreements (“RSAs”). Time-
vesting restricted shares vest after a stipulated period of time
has elapsed subsequent to the date of grant, generally three
years. Certain time-vested shares have also been issued with
a portion of the shares granted vesting immediately.
Performance-based
issued with
performance criteria defined over a designated performance
period and vest only when, and if, the outlined performance
criteria are met. During the year ended December 31, 2018,
84% of the restricted shares granted were time-vesting and
16% were performance-based. Grantees of restricted shares
retain voting rights for the granted shares.
restricted shares are
Restricted stock share activity for the year ended December 31, 2018 is as follows:
Restricted Stock Shares
Non-vested at January 1, 2018
Granted to employees
RSAs converted from 2016 restricted stock units
Vested
Forfeited
Non-vested at December 31, 2018
Weighted-
Average Fair
Value at Date of
Grant
12.24
3.67
12.02
10.82
5.52
3.47
Shares
246,258
1,287,484
252,405
(578,114)
(157,661)
1,050,372
$
$
The weighted-average grant-date fair value of restricted stock
granted during the years ended December 31, 2018, 2017, and
2016 was $3.67, $10.62, and $11.92 per share, respectively.
The total fair value of restricted stock that vested during the
years ended December 31, 2018, 2017, and 2016 was $6.3
million, $8.6 million, and $15.4 million, respectively.
At December 31, 2018, there was $2.7 million of unrecognized
compensation expense related to non-vested restricted stock.
The unrecognized compensation expense is expected to be
recognized over a weighted-average period of 2.0 years.
Restricted Stock Units
During the year ended December 31, 2018, the Company
granted performance-based restricted stock units (“RSUs”) for
407,698 shares equivalents. The performance period for these
share equivalents continues until December 31, 2019.
During the year ended December 31, 2017, the Company
granted performance-based RSUs
for 604,682 share
equivalents, which had a performance period through
December 31, 2018. No RSUs were earned during this
performance period.
68
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock unit share activity for the year ended December 31, 2018 is as follows:
Restricted Stock Unit Shares
RSU share equivalents at January 1, 2018
2016 RSUs converted to RSAs in 2018
2017 share equivalents forfeited
2017 share equivalents not earned
2017 share equivalents
2018 share equivalents granted
2018 share equivalents forfeited
RSU share equivalents at December 31, 2018
Weighted-
Average Fair
Value at Date of
Grant
Shares
725,331
(252,405)
(121,514)
(351,412)
—
407,698
(105,932)
301,766
$
$
16.41
12.02
19.33
18.56
—
3.95
3.95
3.95
At December 31, 2018, there was $3.2 million of unrecognized
compensation expense related to 2018 and 2017 restricted
stock units. The unrecognized compensation expense is
expected to be recognized over a weighted-average period of
1.3 years.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) was
approved by stockholders on May 18, 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 share-based compensation
expense and was $0.1 million, $0.1 million, and $0.1 million
during the years ended December 31, 2018, 2017, and 2016,
respectively. The total fair value of the shares purchased under
the plan during the years ended December 31, 2018, 2017, and
2016 was $0.4 million, $0.8 million, and $1.0 million,
respectively. The employee payment associated with
participation in the plan was satisfied through payroll
deductions. Effective after the third quarter 2018 purchase, the
Company temporarily suspended the ESPP due to lack of
shares.
Share-Based Compensation Expense
purchased under the Company’s ESPP was $7.1 million, $10.6
million, and $11.4 million during
the years ended
December 31, 2018, 2017, and 2016, respectively.
Treasury Stock
The Company accounts for treasury stock using the cost
method and includes treasury stock as a component of
stockholders’ equity. During the years ended December 31,
2018, 2017, and 2016, the Company purchased 102,333
shares, 199,644 shares, and 238,216 shares, respectively, of
the Company’s common stock at market value as payment of
income tax withholding owed by employees upon the vesting
of restricted shares and the exercise of stock options. Shares
issued as restricted stock awards to employees that were
forfeited are accounted for as treasury stock. During the year
ended December 31, 2018, there were no shares surrendered
for the exercise of stock options. During the years ended
December 31, 2017 and 2016, shares surrendered for the
exercise of stock options were 478,287 and 3,225,
respectively. These surrendered shares are also accounted for
as treasury stock.
Stock Repurchase Program
In November 2012, the Company’s Board of Directors
authorized the repurchase of up to $25 million of the
Company’s common stock. Repurchases may be made in the
open market or through privately negotiated transactions.
Through December 31, 2018, the Company has repurchased
$25 million of its common stock under this authorization.
In June 2015, the Company’s Board of Directors authorized
the repurchase of up to an additional $50 million of the
Company’s common stock. Repurchases may be made in the
open market or through privately negotiated transactions.
Through December 31, 2018, the Company has repurchased
$0.3 million of its common stock under this authorization.
Non-cash share-based compensation expense related to
restricted stock, restricted stock unit grants, and stock
During the year ended December 31, 2018, the Company did
not repurchase any shares of its outstanding common stock.
69
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2017, the Company
repurchased 905,000 shares of its outstanding common stock
on the open market at a cost of $5.2 million, inclusive of
transaction costs, or an average price of $5.75 per share.
During the year ended December 31, 2016, the Company did
not repurchase any shares of its outstanding common stock.
At December 31, 2018, the Company has $49.7 million
remaining under its share repurchase program. A covenant
under the Company’s Credit Facility limited the amount that
may be used to repurchase the Company’s common stock. At
December 31, 2018, this covenant did not permit additional
share repurchases.
Note 18 — Commitments and Contingencies
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern
District of Texas granted the Company’s motion to dismiss the
four consolidated putative securities class action lawsuits that
were filed in November 2015, against the Company and certain
of its officers. The lawsuits were previously consolidated into
a single case, and a consolidated amended complaint had been
filed. The consolidated amended complaint asserted that the
Company made false and/or misleading statements, as well as
failed to disclose material adverse facts about the Company’s
business, operations, and prospects. The complaint sought an
award of damages in an unspecified amount on behalf of a
putative class consisting of persons who purchased the
Company’s common stock between October 23, 2014 and
November 9, 2015, inclusive. The lead plaintiff appealed the
District Court’s decision granting the motion to dismiss. On
February 7, 2019, a three-judge panel of the United States
Court of Appeals for the Fifth Circuit issued a unanimous
opinion affirming the District Court’s judgment of dismissal
in its entirety.
In January 2016, three derivative lawsuits were filed, two in
the District Court of Harris County, Texas (which have since
been consolidated into one case), and one in the United States
District Court for the Southern District of Texas, on behalf of
the Company against certain of its officers and its current
directors. The lawsuits allege violations of law, breaches of
fiduciary duty, and unjust enrichment against the defendants.
The Company believes the lawsuits are without merit and
intends to vigorously defend against all claims asserted.
Discovery has not yet commenced. At this time, the Company
is unable to reasonably estimate the outcome of this litigation.
In addition, as previously disclosed, the U.S. Securities and
Exchange Commission had opened an inquiry related to
similar issues to those raised in the above-described litigation.
On August 21, 2017, the Company received a letter from the
staff of the SEC stating that the inquiry has been concluded
and that the staff does not intend to recommend an enforcement
action against the Company.
Other Litigation
The Company is subject to routine litigation and other claims
that arise in the normal course of business. Management is not
aware of any pending or threatened lawsuits or proceedings
that are expected to have a material effect on the Company’s
financial position, results of operations or liquidity.
Legal Settlement
In December 2016, the Company reached a settlement with a
stockholder related to disgorgement of potential short-swing
profits under Section 16(b) of the Securities Exchange Act of
1934 in connection with purchases and sales of Company
securities. As a result of the settlement, the Company recorded
a gain of $12.7 million.
Operating Lease Commitments
The Company has operating leases for office space, vehicles,
and equipment. Future minimum lease payments under
operating leases at December 31, 2018 are as follows (in
thousands):
Year ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Minimum
Lease
Payments
2,562
$
2,256
2,034
2,001
1,351
9,254
19,458
$
Rent expense under operating leases totaled $2.9 million, $2.9
million, and $3.3 million during the years ended December 31,
2018, 2017, and 2016, 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.
During the years ended December 31, 2018, 2017, and 2016,
compensation expense included $0.7 million, $1.0 million and
70
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1.0 million, respectively, related to the Company’s 401(k)
match.
This concentration of customers in one industry increases
credit and business risks.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from the
oil and gas industry. Customers include major oilfield services
companies, major integrated oil and natural gas companies,
independent oil and natural gas companies, pressure pumping
service companies, and state-owned national oil companies.
The Company is subject to concentrations of credit risk within
trade accounts receivable, as the Company does not generally
require collateral as support for trade receivables. In addition,
the majority of the Company’s cash is maintained at a major
financial institution and balances often exceed insurable
amounts.
Note 19 — 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 chief operating decision-makers
in deciding how to allocate resources and assess performance.
The operations of the Company are categorized into one
reportable segments: Energy Chemistry Technologies.
• Energy Chemistry Technologies designs, develops,
manufactures, packages, and markets specialty
chemistries used in oil and natural gas well drilling,
cementing, completion, and stimulation. In addition, the
in specialized
Company’s chemistries are used
enhanced and
recovery markets.
Activities in this segment also include construction and
improved oil
management of automated material handling facilities
and management of loading facilities and blending
operations for oilfield services companies.
The Company evaluates performance based upon a variety of
criteria. The primary financial measure is segment operating
income. Various functions, including certain sales and
marketing activities and general and administrative activities,
are provided centrally by the corporate office. Costs associated
with corporate office functions, other corporate income and
expense items, and income taxes are not allocated to reportable
segments.
Summarized financial information of the reportable segments is as follows (in thousands):
As of and for the year ended December 31,
Energy Chemistry
Technologies
Corporate and
Other
Total
2018
Net revenue from external customers
Income (loss) from operations
Depreciation and amortization
Capital expenditures
2017
Net revenue from external customers
Income (loss) from operations
Depreciation and amortization
Capital expenditures
2016
Net revenue from external customers
Income (loss) from operations
Depreciation and amortization
Capital expenditures
$
$
$
177,773
(36,817)
7,107
2,733
243,106
33,611
7,323
3,279
188,233
29,014
5,935
10,674
— $
(32,994)
2,109
826
— $
(43,931)
2,445
918
— $
(45,982)
2,237
2,398
177,773
(69,811)
9,216
3,559
243,106
(10,320)
9,768
4,197
188,233
(16,968)
8,172
13,072
$
$
$
71
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segments are as follows (in thousands):
Energy Chemistry Technologies
Corporate and Other
Total segments
Held for sale
Total assets
Geographic Information
December 31, 2018
December 31, 2017
$
$
139,205
28,208
167,413
118,470
285,883
$
$
172,799
35,871
208,670
121,218
329,888
Revenue by country is based on the location where services are provided and products are used. No individual country other than
the United States (“U.S.”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
U.S.
Other countries
Total
Year ended December 31,
2017
2016
2018
$
$
146,421
31,352
177,773
$
$
219,517
23,589
243,106
$
$
164,596
23,637
188,233
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, as a percentage of consolidated revenue, is as follows:
Customer A
Customer B
Customer C
Year ended December 31,
2017
*
*
16.7%
2016
*
16.4%
21.9%
2018
12.2%
10.1%
*
72
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 — Quarterly Financial Data (Unaudited)
First
Quarter
Second
Quarter
Third
Quarter
(in thousands, except per share data)
Fourth
Quarter
Total
2018
Revenue (1)
Loss from operations (1)
(Loss) income from continuing operations (1)
Income (loss) from discontinued operations, net of tax
Net (loss) income
Net loss attributable to noncontrolling interests
Net loss attributable to Flotek Industries, Inc. (Flotek)
Amounts attributable to Flotek shareholders:
(Loss) income from continuing operations (1)
Income (loss) from discontinued operations, net of tax
Net income (loss) attributable to Flotek
Basic earnings (loss) per common share (2):
Continuing operations
Discontinued operations
Basic earnings (loss) per common share
Diluted earnings (loss) per common share (2):
Continuing operations
Discontinued operations
Diluted earnings (loss) per common share
2017
Revenue (1)
(Loss) income from operations (1)
$
$
$
$
$
$
$
$
$
$
$
41,069
(9,223)
39,546
(47,140)
$
$
53,709
(4,080)
43,449
(9,368)
$ 177,773
(69,811)
(9,528) $ (68,987) $
9,595
67
—
67
(6,404)
(75,391)
357
$ (75,034) $
(4,869) $
937
(3,932)
—
(3,932) $
9,943
(1,385)
8,558
1
8,559
$ (73,441)
2,743
(70,698)
358
$ (70,340)
(9,528) $ (68,630) $
9,595
67
(6,404)
$ (75,034) $
(4,869) $
937
(3,932) $
9,944
(1,385)
8,559
$ (73,083)
2,743
$ (70,340)
(0.17) $
0.17
— $
(0.17) $
0.17
— $
(1.19) $
(0.11)
(1.30) $
(1.19) $
(0.11)
(1.30) $
(0.08) $
0.02
(0.06) $
(0.08) $
0.02
(0.06) $
0.17
(0.02)
0.15
0.17
(0.02)
0.15
$
$
$
$
(1.26)
0.05
(1.21)
(1.26)
0.05
(1.21)
$
60,765
(4,326)
$
65,875
(2,469)
$
61,167
(4,088)
55,299
563
$ 243,106
(10,320)
Loss from continuing operations (1)
(Loss) income from discontinued operations, net of tax
Net loss
$
(3,041) $
(8,937)
$ (11,978) $
(1,835) $
(1,991)
(3,826) $
(4,275) $
1,173
(3,102) $
(8,353) $ (17,504)
(9,891)
(8,489) $ (27,395)
(136)
Basic earnings (loss) per common share (2):
Continuing operations
Discontinued operations
Basic earnings (loss) per common share
Diluted earnings (loss) per common share (2):
Continuing operations
Discontinued operations
Diluted earnings (loss) per common share
$
$
$
$
(0.05) $
(0.15)
(0.20) $
(0.05) $
(0.15)
(0.20) $
(0.03) $
(0.03)
(0.06) $
(0.03) $
(0.03)
(0.06) $
(0.07) $
0.02
(0.05) $
(0.07) $
0.02
(0.05) $
(0.15) $
—
(0.15) $
(0.15) $
—
(0.15) $
(0.30)
(0.17)
(0.47)
(0.30)
(0.17)
(0.47)
(1) Amounts exclude impact of discontinued operations.
(2) The sum of the quarterly earnings (loss) per share (basic and diluted) may not agree to the earnings (loss) per share for the year due to the timing of
common stock issuances.
73
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 — Subsequent Events
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 interest in its wholly owned subsidiary, Florida
Chemical Company, LLC, which represents the CICT
segment.
Effective February 28, 2019, the Company completed the
sale of the CICT segment to ADM for $175.0 million in cash
consideration, with $4.4 million temporarily held in escrow
by ADM for post-closing working capital adjustments for up
to 90 days and $13.1 million temporarily held in escrow by
ADM with releases at 6 months, 12 months, and 15 months
to satisfy potential indemnification claims. The Company
expects to recognize a gain on the sale of approximately $62
million to $66 million, pending post-closing adjustments.
Upon closing of the above transaction, the Company repaid
the outstanding balance, interest, and fees related to the
revolving credit facility on March 1, 2019, and subsequently
terminated the Credit Facility with PNC Bank.
74
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are
designed to ensure that information required to be disclosed
by the Company in reports filed or submitted under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. The
Company’s disclosure controls and procedures are also
designed to ensure such information is accumulated and
communicated to management, including the principal
executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosures. There
are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility
of human error and the circumvention or overriding of controls
and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable
assurance that control objectives are attained. The Company’s
disclosure controls and procedures are designed to provide
such reasonable assurance.
The Company’s management, with the participation of the
principal executive and principal financial officers, evaluated
the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of December 31, 2018,
as required by Rule 13a-15(e) of the Exchange Act. Based
upon that evaluation, the principal executive and principal
financial officers have concluded that the Company’s
disclosure controls and procedures were effective as of
December 31, 2018.
Item 9B. Other Information.
None.
Management’s Report on Internal Control over Financial
Reporting
including
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) of the Exchange Act.
The Company’s management,
the principal
executive and principal financial officers, assessed the
effectiveness of internal control over financial reporting as of
December 31, 2018, based on criteria issued by the Committee
of Sponsoring Organizations of the Treadway Commission
(2013 Framework) (“COSO”) in Internal Control – Integrated
Framework. Upon evaluation, the Company’s management
has concluded that the Company’s internal control over
financial reporting was effective in connection with the
preparation of the consolidated financial statements as of
December 31, 2018.
The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2018 has been audited
by Moss Adams LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s system of
internal control over financial reporting during the three
months ended December 31, 2018 that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
75
PART III
Item 10. Directors, Executive Officers and Corporate
Governance.
Item 13. Certain Relationships and Related
Transactions, and Director Independence.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2019 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2019 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
Item 11. Executive Compensation.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2019 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2019 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters.
The information required by this Item is incorporated by
reference to the Company’s Definitive Proxy Statement for
the 2019 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
76
Item 15. Exhibits and Financial Statement Schedules.
PART IV
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
3.3
3.4
4.1
4.2
Exhibit Title
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s
Form 10-Q for the quarter ended September 30, 2007).
Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
Amended and Restated Bylaws, dated December 9, 2014 (incorporated by reference to Exhibit 3.1 to the Company’s
Form 8-K filed on December 10, 2014).
Second Amended and Restated Bylaws, dated October 11, 2017 (incorporated by reference to Exhibit 3.1 to the
Company’s Form 8-K filed on October 17, 2017).
Form of Certificate of Common Stock (incorporated by reference to Appendix E to the Company’s Definitive
Proxy Statement filed on September 27, 2001).
Registration Rights Agreement, dated as of July 26, 2016, by and among the Company, Donald Bramblett, and
Mark Kieper (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-3
(File No. 333-212864) filed on August 3, 2016).
10.1
† 2010 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Statement filed on July 13, 2010).
Amended and Restated Revolving Credit, Term Loan and Security Agreement dated May 10, 2013 (incorporated
by reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 13, 2013).
First Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated December
31, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 7, 2014).
† 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company’s Definitive Proxy
Statement filed on April 18, 2014).
Fifth Amended and Restated Service Agreement, dated as of April 15, 2014, between the Company, Protechnics
II, Inc. and Chisholm Management, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K
filed on April 21, 2014).
† Letter Agreement, dated as of April 15, 2014, between the Company and John Chisholm (incorporated by reference
to Exhibit 10.2 to the Company’s Form 8-K filed on April 21, 2014).
Second Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated
December 5, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 10,
2014).
Third Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated June
19, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 24, 2015).
Fourth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated July
21, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 23, 2015).
10.10
† Employment Agreement, dated effective January 1, 2016 between the Company and Joshua A. Snively, Sr.
10.11
10.12
10.13
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 7, 2016).
Fifth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated effective
March 31, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 3, 2016).
Form of Subscription Agreement, dated as of July 26, 2016 (incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on August 1, 2016).
Sixth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated effective
September 30, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November
2, 2016).
10.14
† Retirement Agreement, dated February 14, 2017, between Robert M. Schmitz and the Company (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 17, 2017).
10.15
10.16
10.17
† Retirement Agreement, dated February 16, 2017, between Steve Reeves and the Company (incorporated by
reference to Exhibit 10.2 to the Company’s Form 8-K filed on February 17, 2017).
† Letter Agreement, dated February 13, 2017, among the Company, Protechnics II, Inc. and Chisholm Management,
Inc. amending the Fifth Amended and Restated Service Agreement among such parties (incorporated by reference
to Exhibit 10.3 to the Company’s Form 8-K filed on February 17, 2017).
Seventh Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement and Sixth
Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective as
of March 31, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 1, 2017).
77
Exhibit
Number
10.18
10.19
10.20
10.21
10.22
Exhibit Title
Asset Purchase Agreement, dated May 2, 2017, by and among National Oilwell DHT, L.P., Dreco Energy Services
ULC, and National Oilwell Varco, L.P., the buyers, Teledrift Company, Turbeco, inc., Flotek Technologies ULC,
and Flotek Industries FZE, the sellers, and Flotek Industries, Inc (incorporated by reference to Exhibit 10.2 to the
Company’s Form 10-Q for the quarter ended June 30, 2017).
Eighth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated
effective as of June 7, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter
ended September 30, 2017).
Ninth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective
as of July 1, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended
September 30, 2017).
Tenth Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated effective
as of September 29, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October
3, 2017).
† Confidential Severance and Release Agreement, dated effective October 12, 2017, between the Company and
Robert Bodnar (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended
September 30, 2017).
10.23
† Employment Agreement, dated effective March 16, 2018, between the Company and Joshua A. Snively, Sr.
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 22, 2018).
10.24
† Employment Agreement, dated effective March 16, 2018, between the Company and H. Richard Walton
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 22, 2018).
10.25
10.26
10.27
10.28
10.29
10.30
10.31
21
23.1
23.2
31.1
31.2
32.1
32.2
† Employment Agreement, dated effective March 16, 2018, between the Company and Matthew B. Marietta
(incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on March 22, 2018).
† Form of Restricted Stock Agreement, dated March 16, 2018, between the Company and Joshua A. Snively, Sr.
and Matthew B. Marietta (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on March
22, 2018).
† Form of Restricted Stock Agreement, dated March 16, 2018, between the Company and H. Richard Walton
(incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on March 22, 2018).
† 2018 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company’s Definitive Proxy
Statement filed on March 30, 2018).
Eleventh Amendment to Amended and Restated Revolving Credit, Term Loan and Security Agreement dated June
13, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 13, 2018).
† Employment Agreement, dated effective December 20, 2018, between the Company and Elizabeth T. Wilkinson
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 27, 2018).
† Form of Restricted Stock Agreement, dated December 27, 2018, between the Company and Elizabeth T. Wilkinson
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December 27, 2018).
* List of Subsidiaries.
* Consent of Moss Adams LLP.
* Consent of Hein & Associates LLP.
* Rule 13a-14(a) Certification of Principal Executive Officer.
* Rule 13a-14(a) Certification of Principal Financial Officer.
** Section 1350 Certification of Principal Executive Officer.
** Section 1350 Certification of Principal Financial Officer.
101.INS * XBRL Instance Document.
101.SCH * XBRL Schema Document.
101.CAL * XBRL Calculation Linkbase Document.
101.LAB * XBRL Label Linkbase Document.
101.PRE * XBRL Presentation Linkbase Document.
101.DEF * XBRL Definition Linkbase Document.
*
**
†
Filed with this Form 10-K.
Furnished with this Form 10-K, not filed.
Management contracts or compensatory plans or agreements.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
FLOTEK INDUSTRIES, INC.
By:
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and Chairman of the Board
Date: March 8, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer, and Chairman of the Board
March 8, 2019
(Principal Executive Officer)
/s/ ELIZABETH T. WILKINSON
Elizabeth T. Wilkinson
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/ MICHELLE M. ADAMS
Michelle M. Adams
/s/ TED D. BROWN
Ted D. Brown
/s/ L. MELVIN COOPER
L. Melvin Cooper
/s/ L.V. “BUD” MCGUIRE
L.V. “Bud” McGuire
/s/ DAVID NIERENBERG
David Nierenberg
/s/ KATHERINE T. RICHARD
Katherine T. Richard
Director
Director
Director
Director
Director
Director
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
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FLOTEK INDUSTRIES, INC.
LIST OF SUBSIDIARIES
EXHIBIT 21
Flotek Chemistry, LLC
Oklahoma Limited Liability Company
Material Translogistics, Inc.
Texas Corporation
Flotek Industries FZE
Flotek Ecuador Investments, LLC
Texas Limited Liability Company
Flotek Ecuador Management, LLC
Texas Limited Liability Company
Flotek Chemical Ecuador Cia. Ltda.
Jebel Ali Free Zone Establishment
Ecuador Limited Liability Company
Flotek Services, LLC
Panama Limited Liability Company
USA Petrovalve, Inc.
Texas Corporation
Turbeco, Inc.
Texas Corporation
Flotek Export, Inc.
Texas Corporation
Flotek Paymaster, Inc.
Texas Corporation
Teledrift Company
Delaware Corporation
Flotek International, Inc.
Delaware Corporation
Flotek Hydralift, Inc.
Texas Corporation
Florida Chemical Company, Inc.
Delaware Corporation
Flotek Flavor & Fragrance, LLC
Delaware Limited Liability Company
Flotek Gulf, LLC
Omani Limited Liability Company
Flotek Gulf Research, LLC
Omani Limited Liability Company
Flotek Industries Holdings Limited
England and Wales Corporation
Flotek Industries UK Limited
England and Wales Corporation
Flotek Technologies ULC
British Columbia Unlimited Liability Company
Flotek Energetic Foundation - Making a Difference
Texas Nonprofit Corporation
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements filed on Form S-8 (Nos. 333-157276, 333-172596,
333-174983, 333-183617, 333-198757, 333-213407, and 333-225865) and on Form S-3 (Nos. 333-161552, 333-166442,
333-166443, 333-173806, 333-174199, 333-189555, 333-212864 and 333-219618) of our reports dated March 8, 2019, relating
to the consolidated financial statements of Flotek Industries, Inc. and subsidiaries which report expresses an unqualified opinion
and includes an explanatory paragraph relating to the adoption of new accounting standards, and the effectiveness of internal
control over financial reporting of Flotek Industries, Inc. and subsidiaries appearing in this Annual Report (Form 10-K) for the
year ended December 31, 2018.
EXHIBIT 23.1
/s/ Moss Adams LLP
Houston, Texas
March 8, 2019
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements filed on Form S-8 (Nos. 333-157276, 333-172596,
333-174983, 333-183617, 333-198757, 333-213407 and 333-225865) and on Form S-3 (Nos. 333-161552, 333-166442,
333-166443, 333-173806, 333-174199, 333-189555, 333-212864 and 333-219618) of Flotek Industries, Inc. and subsidiaries (the
“Company”) of our reports dated February 8, 2017, relating to the consolidated financial statements of the Flotek Industries, Inc.
and subsidiaries and the effectiveness of internal control over financial reporting of the Flotek Industries, Inc. and subsidiaries,
appearing in the Annual Report on Form 10-K of Flotek Industries, Inc. and subsidiaries for the year ended December 31, 2018.
We also consent to the reference to our firm under the heading “Experts” in such Registration Statements.
EXHIBIT 23.2
/s/ Hein & Associates LLP
Houston, Texas
March 8, 2019
Exhibit 31.1
I, John W. Chisholm, certify that:
1. I have reviewed this Annual Report on Form 10-K of Flotek Industries, Inc.;
CERTIFICATION
2. To the best of my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. To the best of my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 8, 2019
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
Exhibit 31.2
I, Elizabeth T. Wilkinson, certify that:
1. I have reviewed this Annual Report on Form 10-K of Flotek Industries, Inc.;
CERTIFICATION
2. To the best of my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. To the best of my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 8, 2019
/s/ ELIZABETH T. WILKINSON
Elizabeth T. Wilkinson
Executive Vice President and
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Flotek Industries, Inc. (the “Company”) on Form 10-K for the year ended December 31,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies,
pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 8, 2019
/s/ JOHN W. CHISHOLM
John W. Chisholm
President, Chief Executive Officer and
Chairman of the Board
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Flotek Industries, Inc. (the “Company”) on Form 10-K for the year ended December 31,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies,
pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 8, 2019
/s/ ELIZABETH T. WILKINSON
Elizabeth T. Wilkinson
Executive Vice President and
Chief Financial Officer
2018
Flotek Industries
A N N U A L M E E T I N G
B O A R D O F D I R E C T O R S
L E A D E R S H I P T E A M
John W. Chisholm,
Chief Executive Officer and
President
Member, Strategic Capital
Committee
Elizabeth T. Wilkinson
Chief Financial Officer
Member, Strategic Capital
Committee
William York
Chief Administrative Officer
Danielle Allen
Senior Vice President,
Global Communications
& Technology
Commercialization
James Silas
Senior Vice President,
Research and Innovation
* Effective as of the 2019 Annual Meeting on
May 24, 2019
**Effective March 2019
Friday, May 24, 2019
10:00 am CDT
Flotek Industries
Global Headquarters
10603 W Sam Houston
Pkwy North
Suite 300
Houston, TX 77064
S T O C K E XC H A N G E
L I S T I N G
John W. Chisholm
Outgoing Chairman of the
Board*
Member, Strategic Capital
Committee
David Nierenberg
Incoming Chairman
of the Board*
Member, Governance &
Nominating Committee
Member, Compensation
Committee
Chair, Strategic Capital
Committee
The company’s common stock
trades on the New York Stock
Exchange, under the symbol
“FTK”.
L.V. “Bud” McGuire,
Lead Director
Member, Audit Committee
Member, Governance &
Nominating Committee
T R A N S F E R A G E N T
American Stock Transfer &
Trust Company
6201 15th Ave.
Brooklyn, New York 11219
800-937-5449
A U D I T O R S
Moss Adams, LLP
500 Dallas St., Suite 2500
Houston, TX 77002
713-850-9814
Michelle M. Adams, Director
Chair, Compensation
Committee
Member, Governance &
Nominating Committee
Ted D. Brown, Director
Chair, Governance &
Nominating Committee
Member, Audit Committee
Member, Compensation
Committee
Member, Strategic Capital
Committee
L. Melvin Cooper, Director
Chair, Audit Committee
Member, Compensation
Committee
Paul W. Hobby, Director**
Member, Governance &
Nominating Committee
Member, Strategic Capital
Committee
Kate Richard, Outgoing
Director*
Member, Strategic Capital
Committee
© FLOTEK INDUSTRIES 2019