Dear Shareholders:
The U.S. onshore oil and gas market faces unprecedented uncertainty in 2020 as a result of the global impacts of the
Coronavirus, along with the disruption of global energy markets emerging from the March OPEC meetings. At the time of print,
North American oil and gas operators have slashed tens of billions of dollars in capital spending and planned drilling and
completion activity in the wake of the oversupply of and reduced demand for hydrocarbons, combined with the mounting crises of
balance sheets.
Given the volatility and complexity of 2020 market conditions, Flotek Industries (“Flotek” or the “Company) is not taking a
“business-as-usual” approach to our annual shareholder letter. Rather, the Company is focusing on key highlights from 2019
and outlook into 2020, which is limited at the time of publication.
2019
A Year in Transition
Flotek executed on a number of strategic initiatives during
Flotek also took further steps in 2019 to significantly adjust its
2019 to better position the Company given the disruptive
cost structure. In addition to reducing headcount and related
environment. This included unlocking the value of Flotek’s
personnel expenses, the Company implemented strategies
consumer and industrial business through the sale of Florida
to drive increased efficiencies through value stream mapping
Chemical Company, LLC (“FCC”) to Archer-Daniels-Midland
and continuous improvement in strategic sourcing, logistics,
Company (“ADM”). With the closing of the transaction in the
field operations and facilities management.
first quarter of 2019, Flotek established itself as a pure play
and leading provider of high-performance chemistry solutions
designed for the reservoir that can reduce the total cost per
barrel of oil equivalent (“BOE”) for operators. In addition, the
Company significantly increased its financial flexibility, while
paying off all outstanding debt.
To more effectively position Flotek for long-term success, at
the conclusion of 2019, Flotek announced John W. Gibson, Jr.
would join the Company as Chairman, Chief Executive Officer
and President in January 2020. Mr. Gibson is a recognized
industry leader in energy technology, upstream, oilfield
services and environmental services.
FLOTEK INDUSTRIES 2019 ANNUAL REPORT
01
From John W. Gibson, Jr.
Chairman, CEO and President
Letter to Shareholders
Dear Fellow Shareholders,
John W. Gibson, Jr.; Chairman, CEO and President
My first priority upon joining Flotek was to identify
product lines that create a greater amount of backlog and/
additional opportunities to improve the cost structure
or annually recurring revenue, maintain differentiation
and accelerate our ability to regain profitability. A prime
of our offering from competitors, enhance our capability
example was the recent amendment of our terpene supply
to provide digital transformation of chemistry, and
agreement with Florida Chemical Company (FCC), which
strengthen our market share for our current product
represents a significant improvement in Flotek’s strategic
lines. We believe that our cash position, public equity,
relationship with FCC and our ability to manage inventory
North American presence, lack of debt, continuous focus
and ancillary costs. The original agreement required the
on cost reduction, commitment to ESG and absence of an
purchase of approximately twice the volume of terpene
IPO market make us attractive to numerous companies
required to support our current business, which resulted in
seeking liquidity.
excess inventory and storage costs. The original agreement
also had an effective price that greatly exceeded the
current market price. We worked with FCC to re-align the
terms and provisions of the agreement, which required a
one-time cash payment to FCC of $15.8 million.
In exchange for the one-time payment, we effectively
reduced our volume commitment to less than 50% of the
original agreement. The cash impact of the agreed price
and volume reduction for the purchase of terpene in the
amended contract for 2020 alone should substantially offset
the one-time payment made to FCC. I would also note in
years 2021, 2022 and 2023, the negotiated volume reduction
of approximately 50% in each year should reduce our cash
commitments proportionately. Importantly, we are now in a
position to price more competitively in the market.
Additionally, we have identified and are executing on other
opportunities to place the Company in a better position for
We are vetting opportunities to select those providing the
greatest long-term shareholder value.
Importantly, I hope you will notice a marked shift in how
we communicate with you. I am committed to greater
transparency about our business and a “no-excuse”
policy related to our business performance. What you
can expect from me is just the facts about the Company
without obfuscation related to adverse market conditions.
Additionally, I will not be sharing hopes for business
outcomes, but rather real results achieved. As a fellow
shareholder, it is the standard to which I hold leadership
teams for companies I invest in and the basis for building
long-term trusted partnerships.
We appreciate the support of our shareholders, and look
forward to keeping the investment community apprised of
our progress as we move through the year.
improved financial performance in an uncertain market.
Sincerely,
This includes rationalization and aggressive review
of all spending, including but not limited to executive
compensation, office space, personnel and legal spending.
We are taking a very considered and deliberate approach
to capital deployment in light of market conditions. Our
current evaluations include seeking growth opportunities
John W. Gibson, Jr.
that reduce our dependence on rig count, focus on
Chairman, Chief Executive Officer and President
acceleration of international opportunities, provide new
02 FLOTEK INDUSTRIES 2019 ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-13270
FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of other jurisdiction of
incorporation or organization)
10603 W. Sam Houston Parkway N. Suite 300 Houston, TX
(Address of principal executive offices)
(713) 849-9911
(Registrant’s telephone number, including area code)
90-0023731
(I.R.S. Employer
Identification No.)
77064
(Zip Code)
Title of each class
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
FTK
New York Stock Exchange
Indicate by check mark:
Securities registered pursuant to Section 12(g) of the Act:
None
• 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
No
No
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
• whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2019 (based on the closing market price on the NYSE Composite
Tape on June 28, 2019) was approximately $150,815,000. At March 3, 2020, there were 63,275,372 outstanding shares of the registrant’s common stock, $0.0001
par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of the Annual Report on Form 10-K is incorporated by reference to the registrant’s definitive proxy statement to be filed pursuant
to Regulation 14A for the registrant’s 2020 Annual Meeting of Stockholders.
EXPLANATORY NOTE
This Amendment No. 1 (this “Amendment”) to the Annual Report on Form 10-K of Flotek Industries, Inc. (the “Company”) for
the year ended December 31, 2019 (the “2019 Form 10-K”) is being filed for the purpose of correcting certain errors in the Exhibit
Index under Part IV, Item 15 “Exhibits, Financial Statement Schedules” of the 2019 Form 10-K together with each of the exhibits
filed as part of the 2019 Form 10-K, each of which has been amended and restated in its entirety. No revisions are being made to
the Company’s financial statements, and this Amendment does not reflect events occurring after the filing of the 2019 Form 10-
K, or modify or update those disclosures that may be affected by subsequent events, and no other changes are being made to any
other disclosure contained in the Form 10-K.
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
4
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
Item 4.
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
33
34
68
68
69
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
Item 10.
Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . .
70
Item 13.
Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . . . . . . . . . . . .
70
Item 14.
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”),
and in particular, Part II, Item 7 – “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations,” contains “forward-looking statements” within
the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5,
of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not historical facts but instead
represent the Company’s current assumptions and beliefs
regarding future events, many of which, by their nature, are
inherently uncertain and outside the Company’s control. The
forward-looking statements contained in this Annual Report
are based on information available as of the date of this Annual
Report. The forward looking statements relate to future
industry
forecast
trends and economic conditions,
performance or results of current and future initiatives and the
outcome of contingencies and other uncertainties that may
have a significant impact on the Company’s business, future
operating results and liquidity. These forward-looking
statements generally are identified by words such as
“anticipate,” “believe,” “estimate,” “continue,” “intend,”
“expect,” “plan,” “forecast,” “project” and
similar
expressions, or future-tense or conditional constructions such
as “will,” “may,” “should,” “could” and “would,” or the
negative thereof or other variations thereon or comparable
terminology. The Company cautions that these statements are
merely predictions and are not to be considered guarantees of
future performance. Forward-looking statements are based
upon current expectations and assumptions that are subject to
risks and uncertainties that can cause actual results to differ
materially from those projected, anticipated or implied. A
detailed discussion of potential risks and uncertainties that
could cause actual results and events to differ materially from
forward-looking statements include, but are not limited to,
those discussed in Part I, Item 1A – “Risk Factors” of this
Annual Report and periodically in future reports filed with the
Securities and Exchange Commission (the “SEC”).
The Company has no obligation to publicly update or revise
any forward-looking statements, whether as a result of new
information or future events, except as required by law.
ii
PART I
Item 1. Business.
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global,
technology-driven company that develops and supplies
chemistry and services to the oil and gas industries. Flotek
also supplied high-value compounds to companies that make
food and beverages, cleaning products, cosmetics, and other
products that are sold in consumer and industrial markets,
which became classified as discontinued operations at
December 31, 2018.
The Company was originally incorporated in the Province of
British Columbia on May 17, 1985. In October 2001, the
Company moved the corporate domicile to Delaware and
effected a 120 to 1 reverse stock split by way of a reverse
merger with CESI Chemical, Inc. Since then, the Company
has grown organically and through a series of acquisitions.
In December 2007, the Company’s common stock began
trading on the New York Stock Exchange (“NYSE”) under the
stock ticker symbol “FTK.” Annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”) are posted to the
Company’s website, www.flotekind.com, as soon as
practicable subsequent to electronically filing or furnishing to
the SEC. Information contained in the Company’s website is
not to be considered as part of any regulatory filing. As used
herein, “Flotek,” the “Company,” “we,” “our,” and “us” refers
to Flotek Industries, Inc. and/or the Company’s wholly owned
subsidiaries. The use of these terms is not intended to connote
any particular corporate status or relationship.
Recent Developments
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its Consumer and Industrial Chemistry
Technologies, (“CICT”) segment, which was completed in
the first quarter of 2019. An investment banking advisory
services firm was engaged and actively marketed this segment.
Effective December 31, 2018, the Company classified the
assets, liabilities, and results of operations for this segment as
“Discontinued Operations” for all periods presented.
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry and effective December 31, 2016
classified
the Drilling Technologies and Production
Technology segments into discontinuing operations. During
2017, the Company completed the sale of substantially all of
the assets and transfer of certain specified liabilities and
obligations of each of the Drilling Technologies and
Production Technologies segments.
Description of Operations and Segments
The Company’s continuing operations have one strategic
business segment: Energy Chemistry Technologies (“ECT”).
The CICT segment was sold in 2019, and the Drilling
Technologies, and Production Technologies segments were
sold in 2017 and all three are classified as discontinued
operations.
The Company offers competitive products and services
derived from technological advances, some of which are
patented, and experience in fluid systems applications that are
responsive to industry demands in both domestic and
international markets. Flotek operates and/or distributes its
products in seven domestic and international markets.
Financial
information about operating segments and
geographic concentration is provided in Note 17 – “Business
Segment, Geographic and Major Customer Information” in
Part II, Item 8 – “Financial Statements and Supplementary
Data” of this Annual Report.
Information about the Company’s operating segment is below.
Energy Chemistry Technologies
The ECT segment designs, develops, manufactures, packages,
distributes, delivers, and markets reservoir-centric fluid
systems, including specialty and conventional chemistries, for
use in oil and gas well drilling, cementing, completion,
remediation, and stimulation activities designed to maximize
recovery in both new and mature fields. Flotek’s specialty
chemistries possess enhanced performance characteristics and
are manufactured to perform in a broad range of basins and
reservoirs with varying downhole pressures, temperatures and
other well-specific conditions customized to customer
specifications. This segment has a research and innovation
laboratory and technical services laboratories that focus on
design improvements, development and viability testing of
new chemistry formulations, and continued enhancement of
existing products. Flotek’s flagship patented chemistry
(“CnF®
technologies
products”), Pressure reducing Fluids®, and MicroSolv™.
include Complex
nano-Fluid®
Chemistries branded as Complex nano-Fluid® technologies
are patented both domestically and internationally and are
performance additives within both oil and natural gas markets.
The CnF® product mixtures are stable mixtures of plant
derived oils, water, and surface active agents which organize
molecules into nano structures. The combined advantage of
solvents, surface active agents and water, and the resultant
nano structures, improve well treatment results as compared
to the independent use of solvents and surface active agents.
CnF® products are composed of renewable, plant-derived
ingredients and oils that are certified as biodegradable. CnF®
chemistries help achieve improved operational and financial
1
•
•
•
•
the severity and duration of winter temperatures in
North America, which impacts natural gas storage
levels, drilling activity, and commodity prices;
the timing and duration of the Canadian spring thaw
and resulting restrictions that impact activity levels;
the timing and impact of hurricanes upon coastal and
offshore operations; and
the adverse weather and disease that affect citrus crops
in Florida and Brazil which can negatively impact the
availability of citrus oils and increase raw material costs
for the ECT segment.
Product Demand and Marketing
Demand for the Company’s energy chemistry products and
services is dependent on levels of conventional and non-
conventional oil and natural gas well drilling and completion
activity, both domestically and internationally. Products in the
ECT segment are marketed directly to customers through the
Company’s own sales force and through certain contractual
agency arrangements. Established customer relationships
provide repeat sales opportunities. The Company participates
in industry trade shows and publishes technical papers and
case studies examining the performance of its chemistries and
methodologies for evaluating chemistries more effectively.
While the Company’s primary marketing efforts remain
focused in North America, a growing amount of resources and
effort are focused on emerging international markets,
especially in the Middle East and North Africa (“MENA”) and
South America. In addition
to direct marketing and
relationship development, the Company also markets products
and services through the use of third party agents primarily in
international markets.
Customers
The Company’s customers primarily include major integrated
oil and natural gas companies, oilfield service companies,
independent oil and natural gas companies, pressure pumping
service companies, and national and state-owned oil
companies. Within the ECT segment, the Company had two
major customers for the year ended December 31, 2019, which
accounted for 20% and 10%, respectively, of consolidated
revenue, two major customers for the year ended December
31, 2018, which accounted for 12% and 10%, respectively, of
consolidated revenue, and one major customer for the year
ended December 31, 2017, which accounted for 17% of
consolidated revenue. In aggregate, the Company’s largest
three customers collectively accounted for 40%, 30%, and
32% of consolidated
the years ended
revenue
December 31, 2019, 2018, and 2017, respectively.
for
results for the Company’s customers in low permeability sand
and shale reservoirs.
reducing Fluids®
Chemistries branded as Pressure
technologies (“PrF® products”) are a patented line of high
molecular weight polymers used as friction reducers that
reduce turbulence and maximize the use of the polymer at a
lower loading rate. The products have proven efficacy in a
broad range of water quality, including high brine and high
iron environments.
Introduced in April 2018, chemistries branded as MicroSolv™
are a patented line of microemulsion technologies designed to
deliver cost-effective performance.
Discontinued Operations
Consumer and Industrial Chemistry Technologies. The
CICT segment, reported as discontinued operations, sourced
citrus oil domestically and internationally and processed citrus
oils. Products produced from processed citrus oil include (1)
high value compounds used as additives by companies in the
flavors and fragrances markets and (2) environmentally
friendly chemistries for use in the oil & gas industry and
numerous other industries around the world. The CICT
segment designed, developed, and manufactured products that
were sold to companies in the flavor and fragrance industries
and specialty chemical industry. These technologies were used
within food and beverage, fragrance, and household and
industrial cleaning products industries.
Drilling Technologies. The Drilling Technologies segment
provided downhole drilling tools for use in energy and mining
activities. This segment assembled, rented, sold, inspected,
and marketed specialized equipment used in energy, mining,
and industrial drilling activities. Established tool rental
operations were located throughout the United States (the
“U.S.”) and in a number of international markets.
Production Technologies. The Production Technologies
segment provided pumping system components, electric
submersible pumps (“ESPs”), gas separators, production
valves, and complementary services. Through the Company’s
acquisition of International Artificial Lift, LLC, the Company
provided a line of next generation hydraulic pumping units
that served to increase and maximize production for oil and
natural gas wells.
Seasonality
Overall, operations are not significantly affected by
seasonality; however, winter weather conditions can pose
delays in clients’ activity levels. Certain working capital
components build and recede throughout the year in
conjunction with established purchasing and selling cycles
that can impact operations and financial position. The
performance of certain services within the Company’s
remaining ECT segment can be susceptible to both weather
and naturally occurring phenomena, including, but not limited
to, the following:
2
Research and Innovation
The Company is engaged in research and innovation activities
focused on the design of reservoir specific, customized
chemistries in the ECT segment. In this segment, for the years
ended December 31, 2019, 2018, and 2017, the Company
incurred $8.9 million, $10.4 million, and $13.1 million,
respectively, of research and innovation expense. In 2019,
research and innovation expense was approximately 7.4% of
consolidated revenue. The Company expects that its 2020
research and innovation investment will continue to remain a
significant portion of overall spending to support new product
development and customization initiatives for its clients.
Backlog
Due to the nature of the Company’s contractual customer
relationships and the way they operate, the Company has
historically not had significant backlog order activity.
Intellectual Property
The Company’s policy is to protect its intellectual property,
both within and outside of the U.S. The Company considers
patent protection for all products and methods deemed to have
commercial significance and that may qualify for patent
protection. The decision to pursue patent protection is
dependent upon several factors, including whether patent
protection can be obtained, cost effectiveness, and alignment
with operational and commercial interests. The Company
believes its patent and trademark portfolio, combined with
confidentiality agreements, trade secrets, proprietary designs,
and manufacturing and operational expertise, are necessary
and appropriate to protect its intellectual property and ensure
continued strategic advantage. Within
its continuing
operations, the Company has 82 granted patents and
approximately 50 pending patent applications filed in the U.S.
and abroad, covering various chemical compositions and
methods of use. In addition, within its continuing operations,
the Company has 60 registered trademarks in the U.S. and
abroad, covering a variety of its goods and services.
Competition
The ability to compete in the oilfield services industry is
dependent upon the Company’s ability to differentiate its
products and services, provide superior quality and service,
and maintain a competitive cost structure with sufficient raw
material supplies. Activity levels in the oil field goods and
services industry are impacted by current and expected oil and
natural gas prices, oil and natural gas drilling activity,
production levels, and customer drilling and completion
designated capital spending. Domestic and international
regions in which Flotek operates are highly competitive. The
unpredictability of the energy industry and commodity price
fluctuations creates both increased risk and opportunity for
the products and services of both the Company and its
competitors.
Certain oil and natural gas service companies competing with
the Company are larger and have access to more resources.
Such competitors could be better situated to withstand industry
downturns, compete on the basis of price, and acquire and
develop new equipment and technologies, all of which could
affect the Company’s revenue and profitability. Oil and natural
gas service companies also compete for customers and
strategic business opportunities. Thus, competition could have
a detrimental impact on the Company’s business.
Raw Materials
Materials and components used in the Company’s servicing
and manufacturing operations, as well as those purchased for
sale, are generally available on the open market from multiple
sources. When able, the Company uses multiple suppliers,
both domestically and internationally, to purchase raw
materials on the open market. The prices paid for raw materials
vary based on energy, citrus, and other commodity price
fluctuations, tariffs, duties on imported materials, foreign
currency exchange rates, business cycle position, and global
demand. Higher prices for chemistries, citrus, polymers, and
other raw materials could adversely impact future sales and
contract fulfillments.
Citrus-based terpene (d-limonene) is an important feedstock
for many of the Company’s formulations. In addition, the
Company utilizes naturally derived terpenes from other
sources and bio-based solvents from other natural sources.
The Company is diligent in its efforts to identify alternate
suppliers in its contingency planning for potential supply
shortages and in its proactive efforts to reduce costs through
competitive bidding practices.
Government Regulations
The Company is subject to federal, state, and local laws and
regulations, including laws related to the environment,
occupational safety, health, transportation, and trade within
the U.S. and other countries in which the Company does
business. These laws and regulations strictly govern the
manufacture, storage, transportation, sale, use, and disposal
of chemistry products. The Company strives to ensure full
compliance with all regulatory requirements and is unaware
of any material instances of noncompliance.
The Company continually evaluates the environmental impact
of its operations and attempts to identify potential liabilities
and costs of any environmental remediation, litigation, or
associated claims. Several products of the ECT and
discontinued CICT segments are considered hazardous
materials. In the event of a leak or spill in association with
Company operations, the Company could be exposed to risk
of material cost, net of insurance proceeds, to remediate any
contamination. No environmental claims are currently being
litigated, and the Company does not expect that costs related
to remediation requirements will have a significant adverse
effect on the Company’s consolidated financial position or
results of operations.
3
Employees
At December 31, 2019, the Company had 174 employees,
exclusive of existing worldwide agency relationships. None
of the Company’s employees are covered by a collective
bargaining agreement and labor relations are generally
positive. Certain international locations have staffing or work
arrangements that are contingent upon local work councils or
other regulatory approvals.
Available Information and Website
The Company’s website is accessible at www.flotekind.com.
Annual reports on Form 10-K, quarterly reports on Form 10-
Q, current reports on Form 8-K, and amendments to reports
filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act are available (see the “Investor Relations”
section of the Company’s website), as soon as reasonably
practicable, subsequent to electronically filing or otherwise
providing reports to the SEC. Corporate governance materials,
guidelines, by laws, and code of business conduct and ethics
are also available on the website. A copy of corporate
governance materials is available upon written request to the
Company.
Item 1A. Risk Factors.
The Company’s business, financial condition, results of
operations, and cash flows are subject to various risks and
uncertainties. Readers of this report should not consider any
descriptions of these risk factors to be a complete set of all
potential risks that could affect Flotek. These factors should
be carefully considered together with the other information
contained in this Report and the other reports and materials
filed by the Company with the SEC. Further, many of these
risks are interrelated and, as a result, the occurrence of certain
risks could trigger and/or exacerbate other risks. Such a
combination could materially increase the severity of the
impact of these risks on the Company’s business, results of
operations, financial condition, or liquidity.
This Annual Report contains “forward-looking statements,”
as defined in the Private Securities Litigation Reform Act of
1995, that involve risks and uncertainties. Forward-looking
statements discuss Company prospects, expected revenue,
expenses and profits, strategic and operational initiatives, and
other activities. Forward-looking statements also contain
suppositions regarding future oil and natural gas industry
conditions, both domestically and internationally. The
Company’s results could differ materially from those
anticipated in the forward-looking statements as a result of a
variety of factors, including risks described below and
elsewhere. See “Forward-Looking Statements” at
the
beginning of this Annual Report.
Risks Related to the Company’s Business
The Company’s business is largely dependent upon domestic
and international oil and natural gas industry spending.
The SEC maintains the www.sec.gov website, which contains
reports, proxy and information statements, and other registrant
information filed electronically with the SEC.
The Annual Chief Executive Officer Certification required by
the NYSE was submitted on June 21, 2019. The certification
was not qualified in any respect. Additionally, the Company
has filed all principal executive officer and financial officer
certifications as required under Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002 with this Annual Report.
Information with respect to the Company’s executive officers
and directors is incorporated herein by reference to
information to be included in the proxy statement for the
Company’s 2020 Annual Meeting of Stockholders.
The Company has disclosed and will continue to disclose any
changes or amendments to the Company’s code of business
conduct and ethics as well as waivers to the code of ethics
applicable to executive management by posting such changes
or waivers on the Company’s website.
Spending could be adversely affected by industry conditions
or by new or increased governmental regulations, global
economic conditions, the availability of credit, and lower oil
and natural gas prices. All of these factors are beyond the
Company’s control. The resulting reductions in customers’
expenditures could have a significant adverse effect on
Company revenue, margins, and overall operating results.
The Company’s ECT segment is dependent upon customers’
willingness to make operating and capital expenditures for
exploration, development and production of oil and natural
gas in both North American and global markets. Customers’
expectations of a decline in future oil and natural gas market
prices could result in curtailed spending, thereby reducing
demand for the Company’s products and services. Industry
conditions are influenced by numerous factors over which the
Company has no control, including the supply of and demand
for oil and natural gas, domestic and international economic
conditions, political instability in oil and natural gas producing
countries and merger and divestiture activity among oil and
natural gas producers and service companies.
The price for oil and natural gas is subject to a variety of
factors, including, but not limited to:
•
•
global demand for energy as a result of population
growth, economic development, and general economic
and business conditions;
the ability of the Organization of Petroleum Exporting
Countries (“OPEC”) to set and maintain production
levels and the impact of non-OPEC producers on global
supply;
4
•
•
•
•
•
•
availability and quantity of natural gas storage;
import and export volumes and pricing of liquefied
natural gas;
pipeline capacity to critical markets and out of
producing regions;
political and economic uncertainty and socio-political
unrest;
cost of exploration, production and transport of oil and
natural gas;
technological advances impacting energy production
and consumption; and
• weather conditions.
The volatility of oil and natural gas prices and the
consequential effect on exploration and production activity
could adversely impact the activity levels of the Company’s
customers.
Volatile economic conditions could weaken customer
exploration and production expenditures, causing reduced
demand for the Company’s products and services and a
significant adverse effect on the Company’s operating results.
It is difficult to predict the pace of industry growth, the
direction of oil and natural gas prices, the direction and
magnitude of economic activity, and to what extent these
conditions could affect the Company. However, reduced cash
flow and capital availability could adversely impact the
financial condition of the Company’s customers, which could
result
in customer project modifications, delays or
cancellations, general business disruptions, and delay in, or
nonpayment of, amounts that are owed to the Company. This
could cause a negative impact on the Company’s results of
operations and cash flows.
Furthermore, if certain of the Company’s suppliers were to
experience significant cash flow constraints or become
insolvent as a result of such conditions, a reduction or
interruption in supplies or a significant increase in the price
of supplies could occur, adversely impacting the Company’s
results of operations and cash flows.
The Company’s reliance on unconventional oil production
could lessen the positive effects of a general recovery of the
oil and gas industry.
The majority of the Company’s current product offerings are
used in unconventional oil and gas plays. The Company has
little to no exposure to conventional or offshore sectors. In
the event that an industry recovery is disproportionately driven
by conventional and offshore oil and gas plays, the Company
may not have a resulting increase in its operational results.
The Company’s inability to develop and/or introduce new
products or differentiate existing products could have an
adverse effect on its ability to be responsive to customers’
needs and could result in a loss of customers, as well as
adversely affecting the Company’s future success and
profitability.
The oil and natural gas industry is characterized by
technological advancements that have historically resulted in,
and will likely continue to result in, substantial improvements
in the scope and quality of oilfield chemistries and their
function and performance. Consequently, the Company’s
future success is dependent, in part, upon the Company’s
continued ability to timely develop innovative products and
services. Increasingly sophisticated customer needs and the
ability to anticipate and respond to technological and
operational advances in the oil and natural gas industry is
critical. Proving up new technology requires time and
resources, and there is no assurance that the Company will be
able to commercialize new technology in a timely manner. If
the Company fails to successfully develop and introduce
innovative products and services that appeal to customers, or
if existing or new market competitors develop superior
products and services,
revenue and
profitability could deteriorate.
the Company’s
Increased competition could exert downward pressure on
prices charged for the Company’s products and services.
The Company operates in a competitive environment
characterized by large and small competitors. Competitors
with greater resources and lower cost structures or who are
trying to gain market share may be successful in providing
competing products and services to the Company’s customers
at lower prices than the Company currently charges.
Employees of the Company may leave and compete directly
with the Company. This may require the Company to lower
its prices, resulting in an adverse impact on revenues, margins,
and operating results.
If the Company is unable to adequately protect intellectual
property rights or is found to infringe upon the intellectual
property rights of others, the Company’s business is likely to
be adversely affected.
The Company relies on a combination of patents, trademarks,
copyrights, trade secrets, non-disclosure agreements, and
other security measures to establish and protect the Company’s
intellectual property rights. Although the Company believes
that existing measures are reasonably adequate to protect
intellectual property rights, there is no assurance that the
measures taken will prevent misappropriation of proprietary
information or dissuade others from independent development
of similar products or services. Moreover, there is no assurance
that the Company will be able to prevent competitors from
copying, reverse engineering, modifying, or otherwise
obtaining and/or using the Company’s technology and
proprietary rights to create competitive products or services.
The Company may not be able to enforce intellectual property
rights outside of the U.S. Additionally, the laws of certain
countries in which the Company’s products and services are
manufactured or marketed may not protect the Company’s
proprietary rights to the same extent as do the laws of the U.S.
Furthermore, other third parties may infringe, challenge,
invalidate, or circumvent the Company’s patents, trademarks,
copyrights and trade secrets. In each case, the Company’s
ability to compete could be significantly impaired.
5
A portion of the Company’s products and services are without
patent protection. The issuance of a patent does not guarantee
validity or enforceability. The Company’s patents may not
necessarily be valid or enforceable against third parties. The
issuance of a patent does not guarantee that the Company has
the right to use the patented invention. Third parties may have
blocking patents that could be used to prevent the Company
from marketing the Company’s own patented products and
services and utilizing the Company’s patented technology.
The Company is exposed and, in the future, may be exposed
to allegations of patent and other intellectual property
infringement from others. The Company may allege
infringement of its patents and other intellectual property
rights against others. Under either scenario, the Company
could become involved in costly litigation or other legal
proceedings regarding its patent or other intellectual property
rights, from both an enforcement and defensive standpoint.
Even if the Company chooses to enforce its patent or other
intellectual property rights against a third party, there may be
risk that the Company’s patent or other intellectual property
rights become invalidated or otherwise unenforceable through
legal proceedings. If intellectual property infringement claims
are asserted against the Company, the Company could defend
itself from such assertions or could seek to obtain a license
under the third party’s intellectual property rights in order to
mitigate exposure. In the event the Company cannot obtain a
license, third parties could file lawsuits or other legal
proceedings against
the Company, seeking damages
(including treble damages) or an injunction against the
manufacture, use, sale, offer for sale, or importation of the
Company’s products and services. These could result in the
Company having to discontinue the use, manufacture, and sale
of certain products and services, increase the cost of selling
certain products and services, or result in damage to the
Company’s reputation. An award of damages, including
material royalty payments, or the entry of an injunction order
against the use, manufacture, and sale of any of the Company’s
products and services found to be infringing, could have an
adverse effect on the Company’s results of operations and
ability to compete.
The loss of key customers could have an adverse impact on
the Company’s results of operations and could result in a
decline in the Company’s revenue.
The Company has critical customer relationships which are
dependent upon production and development activity related
to a handful of customers. In the continuing operations
segment reported, revenue derived from the Company’s three
largest customers as a percentage of consolidated revenue for
the years ended December 31, 2019, 2018, and 2017, totaled
40%, 30%, and 32%, respectively. Customer relationships are
historically governed by purchase orders or other short-term
contractual obligations as opposed to long-term contracts. The
loss of one or more key customers could have an adverse effect
on the Company’s results of operations and could result in a
decline in the Company’s revenue.
Loss of key suppliers, the inability to secure raw materials
on a timely basis, or the Company’s inability to pass
commodity price increases on to customers could have an
adverse effect on the Company’s ability to service customers’
needs and could result in a loss of customers.
Materials used in servicing and manufacturing operations, as
well as those purchased for sale, are generally available on the
open market from multiple sources. Acquisition costs and
transportation of raw materials to Company facilities have
historically been impacted by extreme weather conditions.
Certain raw materials used by the ECT segment are available
only from limited sources; accordingly, any disruptions to
critical suppliers’ operations could adversely impact the
Company’s operations. Prices paid for raw materials could be
affected by energy products and other commodity prices;
weather and disease associated with the Company’s crop
dependent raw materials, specifically citrus greening; tariffs
and duties on imported materials; foreign currency exchange
rates; and phases of the general business cycle and global
demand. The ECT segment secures short and long term supply
agreements for critical raw materials from both domestic and
international vendors.
The prices of key raw materials are subject to market
fluctuations, which at
times can be significant and
unpredictable. Availability of key raw materials weather
events, natural disasters and health epidemics in countries
from which the Company sources its raw materials may impact
prices. The Company may be unable to pass along price
increases to its customers, which could result in an adverse
impact on margins and operating profits. The Company
currently uses purchasing strategies designed, where possible,
to align the timing of customer demand with our supply
commitments. However, the Company currently does not
hedge commodity prices, but may consider such strategies in
the future, and there is no guarantee that the Company’s
purchasing strategies will prevent cost increases from
resulting in adverse impacts on margins and operating profits.
The Company depends on a single-source supplier for citrus
terpene, and the loss of this supplier could significantly harm
the Company’s business, financial condition, and results of
operations.
Citrus-based terpene (d-limonene) is an important feedstock
for many of the Company’s formulations. In February 2019,
the Company entered into a terpene Supply Agreement (the
“Supply Agreement”) with Flotek’s former subsidiary, Florida
Chemical Company, LLC (“FCC”), to serve as the Company’s
supplier of terpene. The Company depends on FCC to provide
it with terpene in a timely manner that meets its quality,
quantity, and cost requirements. FCC may encounter problems
that preclude it from supplying terpene on the terms set forth
in the Supply Agreement, including with respect to pricing
and production volumes. In the event that FCC encounters
such problems or otherwise breaches the Supply Agreement,
the Company’s inability to contract with alternative sources
could result in a prolonged interruption in its ability to produce
the Company’s formulations. Any such delays or interruptions
6
could ultimately result in a significant increase in the price of
the various formulations or a significant reduction in the
Company’s margins on these formulations, which could
adversely affect the Company’s business, financial condition,
and results of operations.
If the Company loses the services of key members of
management, the Company may not be able to manage
operations and implement growth strategies.
The Company depends on the continued service of the Chief
Executive Officer and President, the Chief Financial Officer
and other key members of the executive management team,
who possess significant expertise and knowledge of the
Company’s business and industry. Furthermore, the Chief
Executive Officer and President serves as Chairman of the
Board of Directors. The Company has entered
into
employment agreements with certain of these key members;
however, at December 31, 2019, the Company only carried
key man life insurance for the Chief Executive Officer and
President. Any loss or interruption of the services of key
members of the Company’s management could significantly
reduce the Company’s ability to manage operations effectively
and implement strategic business initiatives.
Removal of members of management or directors may be
difficult or costly.
The Company’s management, employees and directors may
have retention, employment or severance agreements in place.
In the event that our employees, management or directors do
not have the proper skills for management or operation of the
Company, or the Company otherwise wishes to remove them
from their position(s), the Company may be required to pay
severance or similar payments.
Removal of some
management and employees by the Company may also be
difficult and require negotiations by the Company.
Failure to maintain effective disclosure controls and
procedures and internal controls over financial reporting
could have an adverse effect on the Company’s operations
and the trading price of the Company’s common stock.
Effective internal controls are necessary for the Company to
provide reliable financial reports, effectively prevent fraud
and operate successfully as a public company. If the Company
cannot provide reliable financial reports or effectively prevent
fraud, the Company’s reputation and operating results could
be harmed. If the Company is unable to maintain effective
disclosure controls and procedures and internal controls over
financial reporting, the Company may not be able to provide
reliable financial reports, which in turn could affect the
Company’s operating results or cause the Company to fail to
meet its reporting obligations. Ineffective internal controls
could also cause investors to lose confidence in reported
financial information, which could negatively affect the
trading price of the Company’s common stock, limit the ability
of the Company to access capital markets in the future, and
require additional costs to improve internal control systems
and procedures.
Network disruptions, security threats and activity related
to global cyber-crime pose risks to the Company’s key
operational, reporting and communication systems.
The Company relies on access to information systems for its
operations. Failures of, or interference with, access to these
systems, such as network communications disruptions, could
have an adverse effect on our ability to conduct operations and
could directly impact consolidated reporting. Phishing attacks
could result in sensitive or confidential information being
released by the Company. Security breaches pose a risk to
confidential data and intellectual property, which could result
in damages to our competitiveness and reputation. The
Company’s policies and procedures, system monitoring and
data back-up processes may not prevent or mitigate the effects
of these potential disruptions or breaches. There can be no
assurance that existing or emerging threats will not have an
adverse impact on our systems or communications networks.
The Company may pursue strategic acquisitions, joint
ventures, and strategic divestitures, which could have an
adverse impact on the Company’s business.
The Company’s past and potential future acquisitions, joint
ventures, and divestitures involve risks that could adversely
affect the Company’s business. Negotiations of potential
acquisitions, joint ventures, or other strategic relationships,
integration of newly acquired businesses, and/or sales of
existing businesses could be time consuming and divert
management’s attention from other business concerns.
Acquisitions and joint ventures could also expose the
Company to unforeseen liabilities or risks associated with new
markets or businesses. Unforeseen operational difficulties
related to acquisitions and joint ventures could result in
diminished
a
disproportionate amount of the Company’s management’s
attention and resources. Additionally, acquisitions could result
in the commitment of capital resources without the realization
of anticipated returns. Divestitures could result in the loss of
future earnings without adequate compensation and the loss
of unrealized strategic opportunities.
performance
financial
require
or
Failure to manage the Company’s costs during the current
period of retraction may have a negative effect on the
Company’s ability to reach profitability.
The Company has been in a period of rapid retraction, has sold
or discontinued all but one operating segment, and is in the
process of adjusting costs and expenses to match its new
smaller size. If the Company does not manage its costs and
expenses properly, it may not be able to reach profitability.
If the Company does not manage the potential difficulties
associated with expansion successfully, the Company’s
operating results could be adversely affected.
The Company believes future success will depend, in part, on
the Company’s ability to adapt to market opportunities and
changes, to successfully integrate the operations of any
businesses acquired, expansion of existing product and service
7
lines, and potentially expand into new product and service
areas in which the Company may not have prior experience.
Factors that could result in strategic business difficulties
include, but are not limited to:
•
•
•
•
•
•
•
failure to effectively integrate acquisitions, joint
ventures or strategic alliances;
failure to effectively plan for risks associated with
expansion into areas in which management lacks prior
experience;
lack of experienced management personnel;
increased administrative burdens;
lack of customer retention;
technological obsolescence; and
infrastructure,
technological, communication and
logistical problems associated with large, expansive
operations.
If the Company fails to manage potential difficulties
successfully, the Company’s operating results could be
adversely impacted.
The Company’s ability to grow and compete could be
adversely affected if adequate capital is not available.
The ability of the Company to grow and be competitive in the
market place is dependent on the availability of adequate
capital. Access to capital is dependent, in large part, on the
Company’s cash flows and the availability of and access to
equity and debt financing. The Company cannot guarantee that
internally generated cash flows will be sufficient, or that the
Company will to be able to obtain equity or debt financing on
acceptable terms, or at all. As a result, the Company may not
be able to finance strategic growth plans, take advantage of
business opportunities, or to respond to competitive pressures.
The Company’s existing shelf registration statement expires
in September 2020, and there is no guarantee that the Company
will file a new shelf registration statement.
Failure to adapt to changing buying habits at the Company’s
potential and existing customers could have a negative effect
on the Company’s ability to attract and retain business.
The demographics and habits of the purchasing departments
of many of the Company’s customers and potential customers
is changing. Key decision makers are younger and show
different buying habits and approaches. Customers are
increasingly using advanced analytics to make purchasing
decisions. If the Company does not adapt to these changing
purchasing trends, the Company may not be able to attract or
retain business.
Failure to collect for goods and services sold to key customers
could have an adverse effect on the Company’s financial
results, liquidity and cash flows.
The Company performs credit analyses on potential
customers; however, credit analysis does not provide full
assurance that customers will be willing and/or able to pay for
the Company.
goods and services purchased
from
8
Furthermore, collectability of international sales can be
subject to the laws of foreign countries, which may provide
more limited protection to the Company in the event of a
dispute over payment. Because sales to domestic and
international customers are generally made on an unsecured
basis, there can be no assurance of collectability. If one or more
major customers are unwilling or unable to pay its debts to the
Company, it could have an adverse effect of the Company’s
financial results, liquidity and cash flows.
Unforeseen contingencies such as litigation could adversely
affect the Company’s financial condition.
The Company is, and from time to time may become, a party
to legal proceedings incidental to the Company’s business
involving alleged injuries arising from the use of Company
products, exposure
substances, patent
to hazardous
infringement, employment matters, commercial disputes, and
shareholder lawsuits. The defense of these lawsuits may
require significant expenses, divert management’s attention,
and may require the Company to pay damages that could
adversely affect the Company’s financial condition. In
addition, any insurance or indemnification rights that the
Company may have may be insufficient or unavailable to
protect against potential loss exposures.
The Company’s current insurance policies may not
adequately protect the Company’s business from all potential
risks.
The Company’s operations are subject to risks inherent in the
oil and natural gas industry, such as, but not limited to,
accidents, blowouts, explosions, fires, severe weather, oil and
chemical spills, and other hazards. These conditions can result
in personal injury or loss of life, damage to property,
equipment and the environment, as well as suspension of
customers’ oil and gas operations. These events could result
in damages requiring costly repairs, the interruption of
Company business, including the loss of revenue and profits,
and/or the Company being named as a defendant in lawsuits
asserting large claims. The Company does not have insurance
against all foreseeable risks. Consequently, losses and
liabilities arising from uninsured or underinsured events could
have an adverse effect on the Company’s business, financial
condition, and results of operations.
Regulatory pressures, environmental activism, and
legislation could result in reduced demand for the
Company’s products and services, increase the Company’s
costs, and adversely affect the Company’s business, financial
condition, and results of operations.
Regulations restricting volatile organic compounds (“VOC”)
exist in many states and/or communities which limit demand
for certain products. Although citrus oil is considered a VOC,
its health, safety, and environmental profile is preferred over
other solvents (e.g., BTEX), which is currently creating new
market opportunities around the world. Changes in the
perception of citrus oils as a preferred VOC, increased
consumer activism against hydraulic fracturing or other
regulatory or legislative actions by governments could
potentially result in materially reduced demand for the
Company’s products and services and could adversely affect
the Company’s business, financial condition, and results of
operations.
The Company is subject to complex foreign, federal, state,
and local environmental, health, and safety laws and
regulations, which expose the Company to liabilities that
could adversely affect the Company’s business, financial
condition, and results of operations.
The Company’s operations are subject to foreign, federal,
state, and local laws and regulations related to, among other
things, the protection of natural resources, injury, health and
safety considerations, chemical exposure assessment, waste
management, and transportation of waste and other hazardous
materials. The Company’s operations expose the Company to
risks of environmental liability that could result in fines,
penalties, remediation, property damage, and personal injury
liability. In order to remain compliant with laws and
regulations, the Company maintains permits, authorizations,
registrations, and certificates as required from regulatory
authorities. Sanctions for noncompliance with such laws and
regulations could include assessment of administrative, civil
and criminal penalties, revocation of permits, and issuance of
corrective action orders.
The Company could incur substantial costs to ensure
compliance with existing and future laws and regulations.
Laws protecting the environment have generally become more
stringent and are expected to continue to evolve and become
more complex and restrictive into the future. Failure to comply
with applicable laws and regulations could result in material
expense associated with future environmental compliance and
remediation. The Company’s costs of compliance could also
increase if existing laws and regulations are amended or
reinterpreted. Such amendments or reinterpretations of
existing laws or regulations, or the adoption of new laws or
regulations, could curtail exploratory or developmental
drilling for, and production of, oil and natural gas which, in
turn, could limit demand for the Company’s products and
services. Some environmental laws and regulations could also
impose joint and strict liability, meaning that the Company
could be exposed in certain situations to increased liabilities
as a result of the Company’s conduct that was lawful at the
time it occurred or conduct of, or conditions caused by, prior
operators or other third parties. Remediation expense and other
damages arising as a result of such laws and regulations could
be substantial and have a material adverse effect on the
Company’s financial condition and results of operations.
Changes in law and regulation relating to hydraulic
fracturing may have a negative effect on the Company’s
operations.
Much of the Company’s revenue is derived from customers
engaged in hydraulic fracturing services, a process that creates
fractures extending from the well bore through the rock
formation to enable natural gas or oil to flow more easily
certain non-proprietary
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. In addition,
several presidential candidates have proposed additional
restrictions on hydraulic fracturing. The adoption of any
future federal or state laws or local requirements, or the
implementation of regulations imposing reporting obligations
on, or otherwise limiting, the hydraulic fracturing process,
could increase the difficulty of oil and natural gas well
production activity and could have an adverse effect on the
Company’s future results of operations.
Regulation of greenhouse gases and/or climate change
could have a negative impact on the Company’s business.
Certain scientific studies have suggested that emissions of
certain gases, commonly referred to as “greenhouse gases,”
which include carbon dioxide, methane, and other volatile
organic compounds, may be contributory to the warming
effect of the Earth’s atmosphere and other climatic changes.
In response to such studies, the issue of climate change and
the effect of greenhouse gas emissions, in particular emissions
from fossil fuels, is attracting increasing worldwide attention.
Existing or future laws, regulations, treaties, or international
agreements related to greenhouse gases, climate change, and
indoor air quality, including energy conservation or alternative
energy incentives, could have a negative impact on the
Company’s operations, if regulations resulted in a reduction
in worldwide demand for oil and natural gas. Other results
could be increased compliance costs and additional operating
restrictions, each of which could have a negative impact on
the Company’s operations.
The Company and the Company’s customers are subject to
risks associated with doing business outside of the U.S.,
including political risk, foreign exchange risk, and other
uncertainties.
The Company and its customers are subject to risks inherent
in doing business outside of the U.S., including, but not limited
to:
•
•
governmental instability;
corruption;
• war and other international conflicts;
civil and labor disturbances;
requirements of local ownership;
cartel behavior;
partial or total expropriation or nationalization;
currency devaluation; and
foreign laws and policies, each of which can limit the
movement of assets or funds or result in the deprivation
of contractual rights or appropriation of property
without fair compensation.
•
•
•
•
•
•
9
Collections from international customers and agents could
also prove difficult due to inherent uncertainties in foreign law
and judicial procedures. The Company could experience
significant difficulty with collections or recovery due to the
political or judicial climate in foreign countries where
Company operations occur or in which the Company’s
products are used.
The Company’s international operations must be compliant
with the Foreign Corrupt Practices Act (the “FCPA”) and other
applicable U.S. laws. The Company could become liable under
these laws for actions taken by employees or agents.
Compliance with international laws and regulations could
become more complex and expensive thereby creating
increased risk as the Company’s international business
portfolio grows. Further, the U.S. periodically enacts laws and
imposes regulations prohibiting or restricting trade with
certain nations. The U.S. government could also change these
laws or enact new laws that could restrict or prohibit the
Company from doing business in identified foreign countries.
The Company conducts, and will continue to conduct,
business in currencies other than the U.S. dollar. Historically,
the Company has not hedged against foreign currency
fluctuations. Accordingly, the Company’s profitability could
be affected by fluctuations in foreign exchange rates.
The Company has no control over and can provide no
assurances that future laws and regulations will not materially
impact the Company’s ability to conduct international
business.
The Company’s tax returns are subject to audit by tax
authorities. Taxing authorities may make claims for back
taxes, interest, and penalties.
The Company is subject to income, property, excise,
employment, and other taxes in the U.S. and a variety of other
jurisdictions around the world. Tax rules and regulations in
the U.S. and around the world are complex and subject to
interpretation. From time to time, taxing authorities conduct
audits of the Company’s tax filings and may make claims for
increased taxes and, in some cases, assess interest and
penalties. The assessments for back taxes, interest, and
penalties could be significant. If the Company is unsuccessful
in contesting these claims, the resulting payments could result
in a drain on the Company’s capital resources and liquidity.
Recent U.S. tax legislation, as well as future U.S. tax
legislation, may adversely affect our business, results of
operations, financial condition and cash flow.
Comprehensive tax reform legislation enacted in December
2017, commonly referred to as the Tax Cuts and Jobs Act (the
“2017 Tax Act”), made significant changes to U.S. federal
income 2017 tax laws. The 2017 Tax Act, among other things,
reduced the corporate income tax rate to 21%, partially limits
the deductibility of business interest expense and net operating
losses, imposed a one-time tax on unrepatriated earnings from
certain foreign subsidiaries, taxes offshore earnings at reduced
rates regardless of whether they are repatriated and allows the
10
immediate deduction of certain new investments instead of
deductions for depreciation expense over time. The 2017 Tax
Act is complex and far-reaching, and the Company continues
to evaluate the actual impact of its enactment on the Company.
There may be material adverse effects resulting from the 2017
Tax Act that have not been identified and that could have an
adverse effect on the Company’s business, results of
operations, financial condition and cash flow.
Risks Related to the Company’s Industry
General economic declines (recessions), limits to credit
availability, and industry specific factors could have an
adverse effect on energy industry activity resulting in lower
demand for the Company’s products and services.
Worldwide economic uncertainty can reduce the availability
of liquidity and credit markets to fund the continuation and
expansion of industrial business operations worldwide. The
shortage of liquidity and credit combined with pressure on
worldwide equity markets could continue to impact the
worldwide economic climate. Geopolitical unrest around the
world may also impact demand for the Company’s products
and services both domestically and internationally.
Demand for the Company’s ECT segment’s products and
services is dependent on oil and natural gas industry activity
and expenditure levels that are directly affected by trends in
oil and natural gas prices. Demand for the Company’s products
and services is particularly sensitive to levels of exploration,
development, and production activity of, and
the
corresponding capital spending by, oil and natural gas
companies, including national oil companies. One indication
of drilling and completion activity and spending is rig count,
which the Company monitors to gauge market conditions. In
addition, the U.S. Energy Information Administration (“EIA”)
and other industry data sources report completion activity
which is utilized by the Company. Any prolonged reduction
in oil and natural gas prices or drop in rig and/or completion
count could depress current
levels of exploration,
development, and production activity. Perceptions of longer-
term lower oil and natural gas prices by oil and natural gas
companies could similarly reduce or defer major expenditures
given the long-term nature of many large-scale development
projects. Lower levels of activity could result in a
corresponding decline in the demand for the Company’s oil
and natural gas well products and services, which could have
a material adverse effect on the Company’s revenue and
profitability.
Events in global credit markets can significantly impact the
availability of credit and associated financing costs for many
of the Company’s customers. Many of the Company’s
customers finance their drilling and completion programs
through third-party lenders or public debt offerings. Lack of
available credit or increased costs of borrowing could cause
customers to reduce spending on drilling programs, thereby
reducing demand and potentially resulting in lower prices for
the Company’s products and services. Also, the credit and
the
economic environment could significantly
impact
financial condition of some customers over a prolonged
period, leading to business disruptions and restricted ability
to pay for the Company’s products and services. The
Company’s forward-looking statements assume that the
Company’s lenders, insurers, and other financial institutions
will be able to fulfill their obligations under various credit
agreements, insurance policies, and contracts. If any of the
Company’s significant lenders, insurers and others are unable
to perform under such agreements, and if the Company was
unable to find suitable replacements at a reasonable cost, the
Company’s results of operations, liquidity, and cash flows
could be adversely impacted.
A continuing period of depressed oil and natural gas prices
could result in further reductions in demand for the
Company’s products and services and adversely affect the
Company’s business, financial condition, and results of
operations.
The markets for oil and natural gas have historically been
volatile. Such volatility in oil and natural gas prices, or the
perception by the Company’s customers of unpredictability in
oil and natural gas prices, could adversely affect spending
levels. The oil and natural gas markets may be volatile in the
future. The demand for the Company’s products and services
is, in large part, driven by general levels of exploration and
production spending and drilling activity by its customers.
Future declines in oil or natural gas prices could adversely
affect the Company’s business, financial condition, and results
of operations.
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,
in
damage
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,
New and existing competitors within the Company’s industry
could have an adverse effect on results of operations.
A terrorist attack or armed conflict could harm the
Company’s business.
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
Terrorist activities, anti-terrorist efforts, and other armed
conflicts involving the U.S. could adversely affect the U.S.
and global economies and could prevent the Company from
meeting financial and other obligations. The Company could
experience loss of business, delays or defaults in payments
from payors, or disruptions of fuel supplies and markets if
pipelines, production facilities, processing plants, or refineries
are direct targets or indirect casualties of an act of terror or
war. Such activities could reduce the overall demand for oil
and natural gas which, in turn, could also reduce the demand
for the Company’s products and services. Terrorist activities
and the threat of potential terrorist activities and any resulting
economic downturn could adversely affect the Company’s
results of operations, impair the ability to raise capital, or
otherwise adversely impact the Company’s ability to realize
certain business strategies.
The Company may be adversely affected by the recent
coronavirus outbreak.
In December 2019, a novel strain of coronavirus was reported
to have surfaced in Wuhan, China. While we do not have any
operations in China, our operations could be adversely
affected to the extent that coronavirus or any other epidemic
harms world economy in general and global demand for oil
and gas in particular. Our operations may experience
11
disruptions in the event of a global pandemic or restriction on
travel that results from a global pandemic, which may
materially and adversely affect our business, financial
condition and results of operations. The duration of the
business disruption and related financial impact cannot be
reasonably estimated at this time but may materially affect our
ability to operate our business and result in additional costs.
The extent to which the coronavirus or other health epidemic
may impact our results will depend on future developments,
which are highly uncertain and cannot be predicted.
Risks Related to the Company’s Securities
The market price of the Company’s common stock has been
and may continue to be volatile.
The market price of the Company’s common stock has
historically been subject to significant fluctuations. The
following factors, among others, could cause the price of the
Company’s common stock to fluctuate due to:
•
•
•
•
•
•
•
•
variations in the Company’s quarterly results of
operations;
changes in market valuations of companies in the
Company’s industry;
fluctuations in stock market prices and volume;
fluctuations in oil and natural gas prices;
issuances of common stock or other securities in the
future;
additions or departures of key personnel;
announcements by the Company or the Company’s
competitors of new business, acquisitions, or joint
ventures; and
negative statements made by external parties about the
Company’s business in public forums.
The stock market has experienced significant price and
volume fluctuations in recent years that have affected the price
of common stock of companies within many industries
including the oil and natural gas industry. The price of the
Company’s common stock could fluctuate based upon factors
that have little to do with the Company’s operational
performance, and these fluctuations could materially reduce
the Company’s stock price. The Company could be a defendant
in a legal case related to a significant loss of value for the
shareholders. This could be expensive and divert
management’s attention and Company resources, as well as
have an adverse effect on the Company’s business, financial
condition, and results of operations.
If the Company cannot meet the New York Stock Exchange
continued listing requirements, the NYSE may delist the
Company’s common stock.
The Company’s common stock is currently listed on the
NYSE. In the future, if it is not able to meet the continued
listing requirements of the NYSE, which require, among other
things, that the average closing price of our common stock be
above $1.00 over 30 consecutive trading days, the Company’s
common stock may be delisted. The Company’s closing stock
price on March 3, 2020 was $1.47, and on December 31, 2019,
closed at $2.00. If the Company is unable to satisfy the NYSE
criteria for continued listing, its common stock would be
subject to delisting. A delisting of its common stock could
negatively impact the Company by, among other things,
reducing the liquidity and market price of the its common
stock; reducing the number of investors willing to hold or
acquire
the Company’s common stock, which could
negatively impact its ability to raise equity financing;
decreasing the amount of news and analyst coverage of the
Company; and limiting the Company’s ability to issue
additional securities or obtain additional financing in the
future. In addition, delisting from the NYSE might negatively
impact the Company’s reputation and, as a consequence, its
business.
An active market for the Company’s common stock may not
continue to exist or may not continue to exist at current
trading levels.
Trading volume for the Company’s common stock historically
has been very volatile when compared to companies with
larger market capitalizations. The Company cannot presume
that an active trading market for the Company’s common stock
will continue or be sustained. Sales of a significant number of
shares of the Company’s common stock in the public market
could lower the market price of the Company’s stock.
The Company has no plans to pay dividends on the
Company’s common stock, and, therefore, investors will
have to look to stock appreciation for return on investments.
capital
condition,
The Company does not anticipate paying any cash dividends
on the Company’s common stock within the foreseeable
future. Any payment of future dividends will be at the
discretion of the Company’s board of directors and will
depend, among other things, on the Company’s earnings,
financial
level of
indebtedness, statutory and contractual restrictions applying
to the payment of dividends, and other considerations deemed
relevant by the board of directors. Investors must rely on sales
of common stock held after price appreciation, which may
never occur, in order to realize a return on their investment.
The lack of plans for dividends may make the stock of the
Company an unattractive investment for investors who are
seeking regular yield.
requirements,
Certain anti-takeover provisions of the Company’s charter
documents and applicable Delaware law could discourage
or prevent others from acquiring the Company, which may
adversely affect the market price of the Company’s common
stock.
The Company’s certificate of incorporation and bylaws
contain provisions that:
•
permit the Company to issue, without stockholder
approval, up to 100,000 shares of preferred stock, in
one or more series and, with respect to each series, to
12
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.
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 2017 Tax Act, the ability to carry back
NOLs to prior taxable years is generally eliminated, and while
NOLs arising in tax years beginning after 2017 may be carried
forward indefinitely, these post-2017 NOLs may only reduce
80% of the Company’s taxable income in a tax year.
Limitations imposed on the ability to use NOLs and tax credits
to offset future taxable income could reduce or eliminate the
benefit of the NOLs and tax attributes and could require the
Company to pay U.S. federal income taxes in excess of that
which would otherwise be required if such limitations were
not in effect. Similar rules and limitations may apply for state
income tax purposes.
Disclaimer of Obligation to Update
Except as required by applicable law or regulation, the
Company assumes no obligation (and specifically disclaims
any such obligation) to update these risk factors or any other
forward-looking statement contained in this Annual Report to
reflect actual results, changes in assumptions, or other factors
affecting such forward-looking statements.
•
•
•
•
fix the designation, powers, preferences, and rights of
the shares of the series;
prohibit stockholders from calling special meetings;
limit the ability of stockholders to act by written
consent;
prohibit cumulative voting; and
require advance notice for stockholder proposals and
nominations for election to the board of directors to be
acted upon at meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation
Law limits business combinations with owners of more than
15% of the Company’s stock without the approval of the board
of directors. Aforementioned provisions and other similar
provisions make it more difficult for a third party to acquire
the Company exclusive of negotiation. The Company’s board
of directors could choose not to negotiate with an acquirer
deemed not beneficial to or synergistic with the Company’s
strategic outlook. If an acquirer were discouraged from
offering to acquire the Company or prevented from
successfully completing a hostile acquisition by these anti-
takeover measures, stockholders could lose the opportunity to
sell their shares at a favorable price.
Future issuance of additional shares of common stock could
cause dilution of ownership interests and adversely affect
the Company’s stock price.
The Company is currently authorized to issue up to 80,000,000
shares of common stock. The Company may, in the future,
issue previously authorized and unissued shares of common
stock, which would result in the dilution of current
stockholders ownership interests. Additional shares are
subject to issuance through various equity compensation plans
or through the exercise of currently outstanding options. The
potential issuance of additional shares of common stock may
create downward pressure on the trading price of the
Company’s common stock. The Company may also issue
additional shares of common stock or other securities that are
convertible into or exercisable for common stock in order to
raise capital or effectuate other business purposes. Future sales
of substantial amounts of common stock, or the perception
that sales could occur, could have an adverse effect on the
price of the Company’s common stock.
The Company may issue shares of preferred stock or debt
securities with greater rights than the Company’s common
stock.
Subject to the rules of the NYSE, the Company’s certificate
of incorporation authorizes the board of directors to issue one
Item 1B. Unresolved Staff Comments.
Not applicable.
13
The Company considers owned and leased facilities to be in
good condition and suitable for the conduct of business.
Item 2. Properties.
At December 31, 2019, the Company operated five and two
manufacturing, warehouse, and research facilities in the U.S.
and internationally, respectively. Additionally, the Company
has one research facility in Calgary, Alberta, Canada and one
warehouse in Dubai, United Arab Emirates. The Company
also has sales offices are located in Denver, Colorado,
Midland, Texas, Oklahoma City, Oklahoma, and Dubai,
United Arab Emirates. The Company owns four of these
facilities and the remainder are leased with lease terms that
expire from 2020 through 2030. In addition, the Company’s
corporate office is a leased facility located in Houston, Texas.
The following table sets forth facility locations:
Segment
Energy Chemistry
Technologies
Owned/
Leased
Location
Owned Marlow, Oklahoma
Owned Monahans, Texas
Owned Raceland, Louisiana
Owned Waller, Texas
Leased Dubai, United Arab Emirates
Leased Houston, Texas
Leased Midland, Texas
Leased Oklahoma City, Oklahoma
Leased Raceland, Louisiana
Leased Calgary, Alberta
Leased Denver, Colorado
Item 3. Legal Proceedings.
Other Litigation
The Company is subject to routine litigation and other claims
that arise in the normal course of business. Management is not
aware of any pending or threatened lawsuits or proceedings
that are expected to have a material effect on the Company’s
financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures.
Not applicable.
14
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
The Company’s common stock began trading on the NYSE
on December 27, 2007, under the stock ticker symbol “FTK.”
As of the close of business on March 3, 2020, there were
63,275,372 shares of common stock outstanding held by
approximately 7,900 holders of record. The Company’s
closing sale price of the common stock on the NYSE on
March 3, 2020 was $1.47. The Company has never declared
or paid cash dividends on common stock. While the Company
regularly assesses the dividend policy, the Company has no
current plans to declare dividends on its common stock and
intends, subject to Board approval.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity compensation plan information relating to equity securities authorized for issuance under individual compensation
agreements at December 31, 2019 is as follows:
Plan Category
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)
2,097,494
4,141,168
6,238,662
$
$
$
1.22
1.33
1.29
3,858,783
—
3,858,783
(1) Includes shares for outstanding stock options (3,000,000 shares), restricted stock awards (1,629,020 shares), restricted stock unit share equivalents
(1,038,474 shares), and the right to purchase (572,168 shares).
(2) The weighted-average exercise price is for outstanding stock options only and does not include outstanding restricted stock awards. restricted stock unit
equivalents, and rights that have no exercise price.
15
Issuer Purchases of Equity Securities
In November 2012, the Company’s Board of Directors authorized the repurchase of up to $25 million of the Company’s common
stock. Repurchases may be made in open market or privately negotiated transactions. Through December 31, 2019, the Company
has repurchased $25 million of its common stock under this repurchase program.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional $50 million of the Company’s
common stock. Repurchases may be made in open market or privately negotiated transactions. Through December 31, 2019, the
Company has repurchased $0.3 million of its common stock under this authorization and $49.7 million may yet be used to purchase
shares.
Repurchases of the Company’s equity securities during the three months ended December 31, 2019 are as follows:
Total
Number
of Shares
Purchased (1)
3,410
$
— $
$
$
16,336
19,746
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
2.09
—
2.00
2.02
— $
— $
— $
—
49,704,947
49,704,947
49,704,947
October 1 to October 31, 2019
November 1 to November 30, 2019
December 1 to December 31, 2019
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.
16
Item 6. Selected Financial Data.
The following table sets forth certain selected historical
financial data and should be read in conjunction with Part II,
Item 7 – “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Part II, Item 8 –
“Financial Statements and Supplementary Data” of this
Annual Report. The selected operating and financial position
data as of and for each of the five years presented has been
derived from audited consolidated Company financial
statements, some of which appear elsewhere in this Annual
Report. Financial data has been adjusted for discontinued
operations, as indicated.
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its CICT segment, which was completed
in the first quarter of 2019. An investment banking advisory
services firm was engaged and actively marketed this segment.
Effective December 31, 2018, the Company classified the
assets, liabilities, and results of operations for this segment as
“Discontinued Operations.”
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. During 2017, the Company completed
the sale of substantially all of the assets and transfer of certain
specified liabilities and obligations of each of the Drilling
Technologies and Production Technologies segments.
2019
As of and for the year ended December 31,
2017
(in thousands, except per share data)
2018
2016
2015
Operating Data
Revenue (1)
(Loss) income from operations (1)
(Loss) income from continuing operations (1)
Income (loss) from discontinued operations, net of tax
Net loss
(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
$ 119,353
(76,625)
$ 177,773
(69,811)
$ 243,106
(10,320)
$ 188,233
(16,968)
$ 213,593
3,536
$ (76,735) $ (73,441) $ (17,504) $
2,743
1,489
(14,951)
$ (32,279) $ (70,698) $ (27,395) $ (49,130) $ (13,462)
(4,447) $
(44,683)
(9,891)
44,456
$
$
$
$
(1.31) $
0.76
(0.55) $
(1.31) $
0.76
(0.55) $
(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)
Financial Position Data
Total assets
Convertible senior notes, long-term debt, and capital
lease obligations, less discount and current portion
Stockholders’ equity
$ 231,847
$ 285,883
$ 329,888
$ 383,215
$ 403,090
—
—
—
7,833
173,276
201,624
264,900
287,343
18,255
293,651
17
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
The following discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and
the related Notes to the Consolidated Financial Statements
included elsewhere in this Annual Report. The following
information contains forward-looking statements, which are
subject to risks and uncertainties. Should one or more of these
risks or uncertainties materialize, actual results could differ
from those expressed or implied by the forward-looking
statements. See “Forward-Looking Statements” at
the
beginning of this Annual Report.
Basis of Presentation
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its CICT segment, which was completed
in the first quarter of 2019. Effective December 31, 2018, the
Company classified the assets, liabilities, and results of
operations for this segment as “Discontinued Operations” for
all periods presented.
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. During 2017, the Company completed
the sale of substantially all of the assets and transfer of certain
specified liabilities and obligations of each of the Drilling
Technologies and Production Technologies segments.
The results of operations of these segments are presented as
“Income from discontinued operations” in the statement of
operations and the related cash flows of these segments has
been reclassified to discontinued operations for all periods
presented. The assets and liabilities of these segments have
been reclassified to “Assets held for sale” and “Liabilities held
for sale”, respectively, in the consolidated balance sheet for
all periods presented, as applicable.
Executive Summary
Flotek is a global, technology-driven company that develops
and supplies chemistries and services to the oil and gas
industries. Flotek also supplied high value compounds to
companies that make food and beverages, cleaning products,
cosmetics, and other products that are sold in consumer and
industrial markets, classified as discontinued operations at
December 31, 2018. Flotek operates in seven domestic and
international markets.
The Company’s business includes specialty chemistries and
logistics which enable its customers to pursue improved
efficiencies in the drilling and completion of their wells.
Customers include major integrated oil and gas oil and gas
companies, oilfield services companies, independent oil and
gas companies, pressure-pumping service companies, and
national and state-owned oil companies. Additionally, the
18
Company also provides automated bulk material handling,
loading facilities, and blending capabilities.
Continuing Operations
The operations of the Company are categorized into one
reportable segment: Energy Chemistry Technologies.
Energy Chemistry Technologies designs, develops,
manufactures, packages, and markets specialty chemistries
used in oil and gas well drilling, cementing, completion, and
stimulation. These technologies developed by Flotek’s
Research and Innovation team enable customers to pursue
improved efficiencies in the drilling and completion of wells.
Discontinued Operations
In 2018, the CICT segment qualified for classification as a
discontinued operation. The Drilling Technologies and
Production Technologies segments were sold during 2017 and
are classified as discontinued operations, as well.
Market Conditions
The Company’s success is sensitive to a number of factors,
which include, but are not limited to, drilling and well
completion activity, customer demand for its advanced
technology products, market prices for raw materials, and
governmental actions.
Drilling and well completion activity levels are influenced by
a number of factors, including the number of rigs in operation
and the geographical areas of rig activity. Additional factors
that influence the level of drilling and well completion activity
include:
• Historical, current, and anticipated future oil and gas
prices,
•
Federal, state, and local governmental actions that
may encourage or discourage drilling activity,
• Customers’ strategies relative to capital funds
allocations,
• Weather conditions, and
• Technological changes to drilling and completion
methods and economics.
Customers’ demand for advanced technology products and
services provided by the Company are dependent on their
recognition of the value of:
• Chemistries that improve the economics of their oil
and gas operations, and
• Chemistries that are economically viable, socially
responsible, and ecologically sound.
Market prices for commodities, including citrus oils, can be
influenced by:
• Historical, current, and anticipated future production
levels of the global citrus (primarily orange) crops,
• Weather related risks,
• Health and condition of citrus trees (e.g., disease and
•
pests),
International competition and pricing pressures
resulting
from natural and artificial pricing
influences, and
• market demand for orange juice.
Governmental actions may restrict the future use of hazardous
chemicals, including, but not limited to, the following
industrial applications:
• Oil and gas drilling and completion operations,
• Oil and gas production operations, and
• Non-oil and gas industrial solvents.
The chart below reflects the trend of total completions, drilling
but uncompleted wells (“ DUCs”) and rig count over the last
three years.
Source: Rig counts and DUCs are per Baker Hughes (www.bakerhughes.com); Rig counts are the annual average of the reported weekly rig count activity.
Completions are per the U.S. Energy Information Administration (https:www.eia.gov/petroleum/drilling/) as of January 21, 2020.
19
Outlook for 2020
The current consensus is there will be further softening in the
U.S. onshore oil and gas market in 2020. However, we believe
an increase in the adoption of specialty chemicals could more
than offset the decrease in drilling and completions activity.
Our key sales focus is growing market share by improving
returns for our current customers, rebuilding relationships with
past customers and identifying new customers that could
benefit from our chemistry solutions. Additionally, we are
catalyzing focus on total cost of recovery per BOE, rather than
initial cost, as well as strengthening the publicly available
evidence for the efficacy of using advanced CnF® products
to materially impact oil and gas recovery and profitability for
operators.
As a result of the pivot we made from an indirect sales channel
to a direct sales channel, the Company lost nearly all sales
persons by April 2019. The organization has been rebuilt and
new sales processes have been implemented. We expect that
market segmentation improvements currently underway will
better focus sales personnel on higher probability customers.
We intend to expand sales efforts to include reestablishing an
indirect sales channel for specific customers and markets. A
blended approach of indirect and direct sales is expected to
increase the sales funnel for existing products and services.
A second sales challenge involves customer procurement
strategies that utilize integrated single supplier contracting
methodologies. This “bundled-lowest-cost” strategy provides
efficiency but diminishes focus on effectiveness and
potentially compromises both production rates and ultimate
recovery. We do not intend to focus on customers that use
“bundled-lowest-cost” methodologies, enabling our sales
force to focus on those customers with the desire to achieve
the highest return on capital rather than the lowest cost per
activity.
During 2020, we intend to invest in analytics, both internally
and externally, demonstrating the value and benefits of our
products. Our efforts are expected to include partnering with
specific clients willing to share the required data to validate
publicly the increased profitability of wells using Flotek’s
proprietary chemistry. We are also exploring relationships with
third-party digital fluid flow modeling experts to provide
production forecast for wells with and without treatment.
We continue to pursue patents associated with our core
business to ensure our ability to provide uninterrupted
products and services to our customers. Our creation of
intellectual property associated with chemistry supports our
belief that the manipulation of subsurface flow conditions
through chemistry-coupled with advances in proppant
loading, fluid loading and increases in lateral length will yield
the most profitable results for our customers. We also believe
that to maintain premium pricing and differentiation, our
research group must continually position the company as a
leader in advanced chemicals.
Building upon significant efforts and progress made in 2019,
Flotek will continue to focus on operational excellence as a
means for driving efficiencies, cost savings and differentiation
in the marketplace. Our emphasis in 2020 will remain on
consistent execution, underpinned by our relentless focus on
safety.
We do not anticipate a material escalation in our maintenance
capital year-over-year. We have numerous evaluations
underway to determine the best possible use of our cash in
2020. These include seeking growth opportunities that reduce
our dependence on rig count; working on developing lines that
create a greater amount of backlog and/or annually recurring
revenue; increasing efforts to differentiate our offering from
competitors, while enhancing our capability to provide digital
transformation of chemistry; striving to strengthen our market
share for our current product lines; and evaluating a special
distribution to shareholders.
We believe that our cash position, public equity, strong market
presence in North America, debt-free status, continuous focus
on cost reduction, commitment to environmental, social and
governance (“ESG”) matters and strong governance make us
attractive to numerous privately held companies seeking
liquidity, as well as to independent and major operators who
are seeking to increase production for an overall lower cost-
per-barrel.
20
Results of Continuing Operations (in thousands):
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
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)
$
$
Years ended December 31,
2018
177,773
159,808
$
$
2019
119,353
149,225
125.0 %
27,975
23.4 %
8,465
8,863
1,450
—
(76,625)
(64.2)%
—
—
(311)
(76,936)
201
(76,735)
44,456
(32,279)
—
(32,279)
$
$
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)
$
$
2017
243,106
188,744
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)
Results for 2019 compared to 2018—Consolidated
Consolidated revenue for the year ended December 31, 2019,
decreased $58.4 million, or 32.9%, from 2018. The decrease
in revenue was due to changes in product mix and continued
volatile macro-environment for U.S. onshore drilling and
completion activity, the transition of personnel in the
Company’s sales organization as well as the ongoing transition
related to the Company selling progressively more to oil and
gas company end users rather than through energy service
companies.
Consolidated operating expenses for
the year ended
December 31, 2019, decreased $10.6 million, or 6.6%, from
2018, and, as a percentage of revenue, increased to 125.0%
for the year ended December 31, 2019, from 89.9% in 2018.
The decrease in expenses was primarily attributable to
decreased sales, improved logistical and supply chain costs,
lower inventory adjustments, and decreased headcount,
partially offset by the loss on the purchase commitment
associated with the terpene supply agreement, excess and
obsolete inventory costs, lower plant utilization and a one-
time charge related to the termination of an operations related
contract.
Corporate general and administrative (“CG&A”) expenses are
not directly attributable to products sold or services provided.
CG&A costs decreased $3.5 million, or 11.1%, for the year
ended December 31, 2019, from 2018. As a percentage of
revenue, CG&A rose from 17.7% to 23.4% for the year ended
December 31, 2019, compared to 2018. The decrease in
CG&A costs was primarily due to continuing aggressive cost
reduction measures which began in the last quarter of 2017,
lower incentive and stock compensation expense, lower
professional fees as well as decreased headcount and software
licensing fees, partially offset by costs associated with
legal fees, and certain shareholder-related
severance,
activities.
Depreciation and amortization expense for the year ended
December 31, 2019, decreased by $0.8 million, or 8.1%, from
2018.
Research and Innovation (“R&I”) expense for the year ended
December 31, 2019, decreased $1.5 million, or 14.4%, from
2018. The decrease in R&I is primarily attributable to lower
headcount.
During the second quarter of 2018, the Company recognized
a goodwill impairment charge of $37.2 million in the Energy
Chemistry Technologies reporting unit, which resulted from
sustained under-performance, lower expectations for the
reporting unit.
During the second quarter of 2018, the Company committed
to a plan to divest the revenue generating assets associated
21
with the Dalton, Georgia facility within the Energy Chemistry
Technologies segment. As a result of this planned divestiture,
the Company recorded a loss on write-down of assets held for
sale of $2.6 million for the three months ended June 30, 2018.
During the third quarter of 2018, the Company completed the
sale and recorded a loss on the sale of the business of $0.4
million for the three months ended September 30, 2018.
Loss on disposal of long-lived assets increased $1.9 million
primarily due to the disposal of certain corporate software.
Interest and other expense decreased $7.6 million for the year
ended December 31, 2019, compared to 2018, primarily due
to nonrecurring $1.2 million and $1.9 million write-offs
associated with the discontinuation of certain corporate
projects during the second and fourth quarter of 2018,
respectively, $3.4 million related to moving from an interest
expense position to an interest income position as a result of
the sale of the CICT segment and subsequent termination of
the PNC Bank Credit Facility and $2.6 million associated with
a write-down of assets held for sale associated with the Dalton,
Georgia facility within the Energy Chemistry Technologies
segment offset by acceleration of $1.4 million of unamortized
debt issuance costs associated with PNC Bank Credit Facility
upon termination of the facility.
The Company recorded an income tax benefit of $0.2 million,
yielding an effective tax benefit rate of 0.3%, for the year ended
December 31, 2019, compared to an income tax benefit of $7.2
million, yielding an effective tax rate of 8.9%, in 2018. In the
second quarter of 2018, the Company determined that it was
more likely than not that it will not realize the benefits of its
gross deferred tax assets and, therefore, recorded a $15.5
million valuation allowance against the carrying value of net
deferred tax assets. As all available evidence should be taken
into consideration when assessing the need for a valuation
allowance, the subsequent events that occurred in the first
quarter of 2019 provided a source of income to support the
release of $11.5 million of the valuation allowance. As such,
the Company reversed this portion of the valuation allowance
during the fourth quarter of 2018.
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its Consumer and Industrial Chemistry
Technologies segment, which was completed in the first
quarter of 2019. The Company recorded net income from
discontinued operations of $44.5 million for the year ended
December 31, 2019.
Results for 2018 compared to 2017—Consolidated
Consolidated revenue for the year ended December 31, 2018,
decreased $65.3 million, or 26.9%, from 2017. The decrease
in revenue was due to changes in product mix and ongoing
transition related to the Company selling progressively more
to oil and gas company end users rather than through energy
service companies.
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
the year ended December 31, 2018, from 77.6% in 2017. The
decrease in expenses was primarily attributable to decreased
sales, lower stock compensation expense, and decreased
headcount, partially offset by increased freight and other direct
costs associated with manufacturing.
CG&A expenses are not directly attributable to products sold
or services provided. CG&A costs decreased $10.0 million,
or 24.2%, for the year ended December 31, 2018 from 2017.
As a percentage of revenue, CG&A rose from 17.1% to 17.7%
for the year ended December 31, 2018, compared to 2017. The
decrease in CG&A costs was primarily due to aggressive cost
reduction measures which began in the last quarter of 2017,
as well as lower incentive and stock compensation expense.
Depreciation and amortization expense for the year ended
December 31, 2018, decreased $0.6 million, or 5.7%, from
2017.
Research and Innovation (“R&I”) expense for the year ended
December 31, 2018, decreased $2.8 million, or 21.1%, from
2017. The decrease in R&I is primarily attributable to
reallocating personnel into operational roles.
During the second quarter of 2018, the Company recognized
a goodwill impairment charge of $37.2 million in the Energy
Chemistry Technologies reporting unit, which resulted from
sustained under-performance, lower expectations for the
reporting unit.
During the second quarter of 2018, the Company committed
to a plan to divest the revenue generating assets associated
with the Dalton, Georgia facility within the Energy Chemistry
Technologies segment. As a result of this planned divestiture,
the Company recorded a loss on write-down of asses held for
sale of $2.6 million for the three months ended June 30, 2018.
During the third quarter of 2018, the Company completed the
sale and recorded a loss on the sale of the business of $0.4
million for the three months ended September 30, 2018.
Interest and other expense increased $6.8 million for the year
ended December 31, 2018, compared to 2017, primarily due
to $1.2 million and $1.9 million write-offs associated with the
discontinuation of certain corporate projects during the second
and fourth quarter of 2018, respectively, expenses related to
winding down of certain business ventures, changes in foreign
currency exchange rates, and increased borrowing on the PNC
Bank Credit Facility throughout 2018.
The Company recorded an income tax benefit of $7.2 million,
yielding an effective tax benefit rate of 8.9%, for the year ended
December 31, 2018, compared to an income tax provision of
$6.1 million, yielding an effective tax provision rate of 53.7%,
in 2017. In the second quarter of 2018, the Company
determined that it was more likely than not that it will not
realize the benefits of its gross deferred tax assets and,
therefore, recorded a $15.5 million valuation allowance
against the carrying value of the net deferred tax assets. As
all available evidence should be taken into consideration when
22
assessing the need for a valuation allowance, the subsequent
events that occurred in the first quarter of 2019 provided a
source of income to support the release of $11.5 million of the
valuation allowance. As such, the Company reversed this
portion of the valuation allowance during the fourth quarter
of 2018.
Technologies segment, which was completed in the first
quarter of 2019. The Company recorded net income from
discontinued operations of $2.7 million for the year ended
December 31, 2018 for the classification of this segment as
held for sale. The sale was completed during the first quarter
of 2019 as expected.
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its Consumer and Industrial Chemistry
Results by Segment
Energy Chemistry Technologies (“ECT”)
(dollars in thousands)
Revenue
(Loss) income from operations
Income from operations - excluding impairment
Operating margin % - excluding impairment
$
Years ended December 31,
2018
2019
$
119,353
(46,485)
(46,485)
(38.9)%
$
177,773
(36,817)
363
0.2%
2017
243,106
33,611
33,611
13.8 %
Results for 2019 compared to 2018—Energy Chemistry
Technologies
ECT revenue for the year ended December 31, 2019,
decreased $58.4 million, or 32.9%, from 2018. ECT’s under-
performance when compared to these market indicators were
primarily attributable to product mix and continued volatile
macro-environment for U.S. onshore drilling and completion
activity, the transition of personnel in the Company’s sales
organization as well as the ongoing transition related to the
Company selling progressively more to oil and gas company
end users rather than through energy service companies.
Income from operations for the ECT segment decreased $9.7
million for the year ended December 31, 2019, compared to
2018. This decrease is primarily a result of the loss on the
terpene supply agreement, excess and obsolete inventory
costs, lower plant utilization and a one-time charge related to
the termination of an operations related contract. The loss is
partially offset by improved logistical and supply chain costs,
lower inventory adjustments, and decreased headcount,
partially offset by lower plant utilization and a one-time charge
related to the termination of an operations related contract.
Discontinued Operations
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its Consumer and Industrial Chemistry
Technologies segment, which was completed in the first
quarter of 2019. During 2017, the Company completed the
Results for 2018 compared to 2017—Energy Chemistry
Technologies
ECT revenue for the year ended December 31, 2018, decreased
$65.3 million, or 26.9% from 2017. ECT’s under-performance
when compared to these market indicators was primarily
attributable to product mix and an ongoing transition related
to the Company selling progressively more to oil and gas
company end users rather than through energy service
companies.
Income from operations for the ECT segment decreased $70.4
million for the year ended December 31, 2018, compared to
2017, partially due to the $37.2 million goodwill impairment
charge taken in the second quarter of 2018. Income from
operations, excluding impairment, decreased $33.2 million,
or 98.9%, for the year ended December 31, 2018, compared
to 2017. This decrease is primarily a result of gross margin
compression caused by reduced sales activity coupled with
increases in material and labor costs, inventory reserve
adjustments, and higher logistics expenditures, partially offset
by a reduction in overhead expenses.
sale or disposal of the assets and transfer or liquidation of
liabilities and obligations of the Drilling Technologies and
Production Technologies segments.
23
Consumer and Industrial Chemistry Technologies (“CICT”)
(dollars in thousands)
Revenue
Income (loss) from operations
Operating margin %
Years ended December 31,
2018
2017
2019
$
$
11,031
(610)
(5.5)%
$
$
72,344
3,054
$
$
4.2%
73,992
7,465
10.1%
Results for 2019 compared to 2018—Consumer and
Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2019,
decreased $61.3 million, or 84.8%, from 2018, primarily due
to the sale of the segment as of February 28, 2019.
Income from operations for the CICT segment decreased $3.7
million, or 120.0%, for the year ended December 31, 2019,
from 2018, primarily due to the sale of the segment as of
February 28, 2019.
Results for 2018 compared to 2017—Consumer and
Industrial Chemistry Technologies
CICT revenue for the year ended December 31, 2018,
decreased $1.6 million, or 2.2%, from 2017, primarily due to
a decline in the value of terpenes and some softness for flavor
ingredients. The market of citrus oils was affected by the
historic high prices experienced in 2017 and 2018, which
limited market activity and top line revenue. Citrus greening
reduced citrus crops globally, thereby limiting the Company’s
performance in comparison to the growth experienced in 2016
and 2017.
Income from operations for the CICT segment decreased $4.4
million, or 59.1%, for the year ended December 31, 2018, from
2017, primarily due to higher raw material costs and reduced
by-product sales, as well as increased expenses related to
operations of the new still put into production in the third
quarter of 2018.
Drilling Technologies
(dollars in thousands)
Revenue
Loss from operations
Loss from operations - excluding impairment
Operating margin % - excluding impairment
Results for 2018 compared to 2017—Drilling Technologies
On May 22, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
the Company’s Drilling
liabilities and obligations of
Technologies segment to National Oilwell Varco, L.P.
(“NOV”) for $17.0 million in cash consideration.
Production Technologies
(dollars in thousands)
Revenue
Loss from operations
Loss from operations - excluding impairment
Operating margin % - excluding impairment
Years ended December 31,
2018
2017
2019
— $
— $
— $
—%
— $
— $
— $
—%
11,534
(2,646)
(2,646)
(22.9)%
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.
Years ended December 31,
2018
2017
2019
— $
— $
— $
—%
— $
— $
— $
—%
4,002
(1,357)
(1,357)
(33.9)%
$
$
$
$
$
$
24
Results for 2018 compared to 2017—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
Upon closing of the sale of the CICT segment, the Company
repaid the outstanding balance, interest, and fees related on
the PNC Bank Credit Facility on March 1, 2019 and
subsequently terminated the PNC Bank Credit Facility. As of
December 31, 2019, the Company has no debt outstanding.
During 2019, the Company funded capital requirements
primarily with cash on hand, including proceeds from the sale
of the CICT segment.
At December 31, 2019, the Company remained compliant
with the continued listing standards of the NYSE.
Cash and cash equivalents totaled $100.6 million at
December 31, 2019. The Company used $18.8 million of cash
outflows from continuing operations (including $17.1 million
expended in working capital), $2.4 million for capital
expenditures, and $0.6 million for purchases of various patents
and other intangible assets. Offsetting these cash outflows, the
Company received $49.7 million for repayments of debt, net
of borrowings, $169.8 million for sale of CICT, and $0.2
million as proceeds from sale of assets.
Liquidity
The Company expects maintenance capital spending to be
between $2 million and $4 million in 2020 and does not have
any specific growth capital projects currently committed.
During 2020, the Company expects to use cash on hand and
internally generated funds to fund operations and capital
expenditures. With the proceeds from the sale of the CICT
segment, the Company paid off its credit facility balance and
began evaluation of the manner in which the remaining net
proceeds from the sale will be deployed. During 2019,
management and the board of directors reviewed options
associated with the proceeds from the sale of CICT to include
organic and inorganic growth projects, short to mid-term
retention of capital, special dividends, and share buybacks,
bearing in mind issues related to the optimal timing of capital
deployment.
25
Net Debt
Net debt represents total debt less cash and cash equivalents and combines the Company’s indebtedness and the cash and cash
equivalents that could be used to repay that debt. Components of net debt are as follows (in thousands):
December 31, 2019 December 31, 2018
Cash and cash equivalents
Current portion of long-term debt
Net debt
$
$
100,575
—
100,575
$
$
3,044
(49,731)
(46,687)
Cash Flows
Cash flow metrics from the consolidated statements of cash flows are as follows (in thousands):
Years ended December 31,
2018
2017
2019
Net cash (used in) provided by operating activities
Net cash provided (used in) by investing activities
Net cash (used in) provided financing activities
Net cash flows provided by (used in) provided by discontinued
operations
Effect of changes in exchange rates on cash and cash equivalents
Net change in cash, cash equivalents and restricted cash
$
$
(18,769) $
166,937
(49,994)
15
5
98,194
$
(20,816) $
(2,109)
21,480
(7)
(88)
(1,540) $
12,345
14,526
(27,285)
24
151
(239)
share-based awards and $0.2 million for provisions related to
accounts receivables, partially offset by $0.2 million for
changes to deferred income taxes.
During 2019, changes in working capital provided $17.1
million in cash, primarily resulting from increasing accounts
receivables and income taxes receivable by $8.4 million and
decreasing accrued liabilities and interest payable by $0.0
million, partially offset by decreasing inventories and other
current assets by $23.5 million and increasing accounts
payable by $2.0 million.
resulting
During 2018, changes in working capital used $2.1 million in
cash, primarily
from decreasing accounts
receivables, income taxes receivable, and other current assets
by $5.8 million, partially offset by increasing inventories by
$3.7 million and decreasing accounts payable and accrued
liabilities by $8.8 million.
During 2017, changes in working capital provided $6.0
million in cash, primarily resulting from increasing accounts
relatively
remained
liabilities
payable while accrued
unchanged, partially offset by
increasing accounts
receivables, inventories, income taxes receivable, and other
current assets by $3.4 million and decreasing income taxes
payable and interest payable by $14.7 million.
Operating Activities
During 2019, 2018, and 2017, cash (used in) operating
activities totaled $18.8 million, $20.8 million, and $12.3
million, respectively. Consolidated net loss for 2019, 2018,
and 2017 totaled $76.7 million, $73.1 million and $17.5
million, respectively.
Net non-cash contributions to net income in 2019, totaled
$40.8 million. Contributory non-cash
items consisted
primarily of $9.9 million for depreciation and amortization
expense, $4.2 million for stock compensation expense, $18.3
million for changes to deferred income taxes and $1.5 million
for net gain on sale of assets.
Net non-cash contributions to net income in 2018, totaled
$54.4 million. Contributory non-cash
items consisted
primarily of $9.6 million for depreciation and amortization
expense, $37.2 million for the impairment of goodwill,
intangible assets or fixed assets, $7.1 million for stock
compensation expense, $2.6 million for the loss on write down
of assets held for sale, $0.7 million for reduction in incremental
tax benefit related to share-based awards, $3.3 million for
provisions related to accounts receivables and inventory
reserves, $(0.4) million for net loss on sale of assets, and $(6.0)
million for changes to deferred income taxes.
Net non-cash contributions to net income in 2017, totaled
$23.9 million. Contributory non-cash
items consisted
primarily of $10.2 million for depreciation and amortization
expense, $10.6 million for stock compensation expense, $2.0
million for reduction in incremental tax benefit related to
26
Investing Activities
Net cash provided by investing activities was $166.9 million
during 2019. Cash provided by investing activities included
$169.7 million of proceeds received from the sale of revenue
generating assets associated with a business line within the
ECT segment and $0.2 million of proceeds received from the
sale of fixed assets, partially offset by $2.4 million for capital
expenditures and $0.6 million for the purchase of various
patents and other intangible assets.
Net cash used in investing activities was $2.1 million during
2018. Cash used in investing activities primarily included $1.7
million of proceeds received from the sale of the Drilling
Technologies and Production Technologies segments and $1.4
million of proceeds received from the sale of fixed assets,
partially offset by $3.6 million for capital expenditures and
$1.6 million for the purchase of various patents and other
intangible assets.
Net cash provided by investing activities was $14.5 million
during 2017. Cash provided by investing activities primarily
included $4.2 million for capital expenditures, $0.5 million
for the purchase of patents and intangible assets offset by $18.5
million of proceeds from sale of business and $0.7 million of
proceeds from sales of assets.
Financing Activities
Net cash used in financing activities was $50.0 million during
2019, primarily due to using $49.7 million for repayments of
debt, net of borrowings.
Net cash generated through financing activities was $21.5
million during 2018, due to receiving $21.8 million for
borrowings of debt, net of repayments, $0.2 million for
purchases of treasury stock for tax withholding purposes
related to the vesting of restricted stock awards and the
exercise of non-qualified stock options, and $0.1 million for
payments of debt issuance costs. Cash generated through
financing activities was partially offset by receiving $0.3
million in proceeds from the sale of common stock.
During 2017, net cash used in financing activities was $27.3
million. Cash used in financing activities was primarily due
to receiving $0.7 million in proceeds from the sale of common
stock, inclusive of $30.1 million, net of issuance costs, from
the private placement of 2.5 million common shares on
July 27, 2016. Cash used in financing activities was partially
offset by using $20.4 million for repayments of debt, net of
borrowings, purchases of treasury stock for tax withholding
purposes related to the vesting of restricted stock awards and
the exercise of non-qualified stock options of $1.7 million,
and payments of debt issuance costs of $0.6 million.
Off-Balance Sheet Arrangements
There have been no transactions that generate relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as “structured finance” or “special
purpose entities” (“SPEs”), established for the purpose of
facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of December 31,
2019, the Company was not involved in any unconsolidated
SPEs.
The Company has not made any guarantees to customers or
vendors nor does the Company have any off-balance sheet
arrangements or commitments that have, or are reasonably
likely to have, a current or future effect on the Company’s
financial condition, change in financial condition, revenue,
expenses, results of operations, liquidity, capital expenditures,
or capital resources that are material to investors.
Contractual Obligations
Cash flows from operations are dependent on a variety of
factors, including fluctuations in operating results, accounts
receivable collections, inventory management, and the timing
of payments for goods and services. Correspondingly, the
impact of contractual obligations on the Company’s liquidity
and capital resources in future periods is analyzed in
conjunction with such factors.
Material
commitments, operating and finance lease obligations.
contractual obligations
consist of
supply
Contractual obligations at December 31, 2019 are as follows (in thousands):
Finance lease obligation
Operating lease obligations
Supply commitments for raw materials
Total
.
Payments Due by Period
Total
$
249
33,599
72,020
$ 105,868
Less than
1 year
$
$
70
2,036
18,005
20,111
1 - 3 years
117
$
3,878
54,015
58,010
$
3 -5 years
62
$
3,993
—
4,055
$
More than
5 years
$
$
—
23,692
—
23,692
27
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
Preparation of these statements requires management to make
judgments, estimates and assumptions that affect the amounts
of assets and liabilities in the financial statements and revenue
and expenses during the reporting period. Significant
accounting policies are described in Note 2 – “Summary of
Significant Accounting Policies” in Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
The Company believes the following accounting policies are
critical due to the significant, subjective, and complex
judgments and estimates required when preparing the
consolidated financial statements. The Company regularly
reviews judgments, assumptions, and estimates to the critical
accounting policies.
Basis of Presentation
During the fourth quarter of 2018, the Company initiated a
strategic plan to sell its CICT segment, which was completed
in the first quarter of 2019. Effective December 31, 2018, the
Company classified the assets, liabilities, and results of
operations for this segment as “Discontinued Operations” for
all periods presented.
Amounts previously reported have been reclassified to
conform to this presentation to allow for meaningful
comparison of continuing operations.
During the fourth quarter of 2016, the Company initiated a
strategic restructuring of its business to enable a greater focus
on its core businesses in energy chemistry and consumer and
industrial chemistry. During 2017, the Company completed
the sale of substantially all of the assets and transfer of certain
specified liabilities and obligations of each of the Drilling
Technologies and Production Technologies segments.
Revenue Recognition
The Company recognizes revenues to depict the transfer of
control of promised goods or services to its customers in an
amount that reflects the consideration to which it expects to
be entitled in exchange for those goods or services. Refer to
Note 4 — “Revenue from Contracts with Customers” for
further discussion on Revenue.
The Company recognizes revenue based on the Accounting
Standards Codification (“ASC”) 606 five-step model when all
of the following criteria have been met: (i) a contract with a
customer exists, (ii) performance obligations have been
identified, (iii) the price to the customer has been determined,
(iv) the price to the customer has been allocated to the
performance obligations, and (v) performance obligations are
satisfied.
Products and services are sold with fixed or determinable
prices. Certain sales include right of return provisions, which
are considered when recognizing revenue and deferred
28
accordingly. Deposits and other funds received in advance of
delivery are deferred until the transfer of control is complete.
For certain contracts, the Company recognizes revenue under
the percentage-of-completion method of accounting,
measured by the percentage of “costs incurred to date” to the
“total estimated costs of completion.” This percentage is
applied to the “total estimated revenue at completion” to
calculate proportionate revenue earned to date. For the years
ended December 31, 2019, 2018, and 2017, the percentage-
of-completion revenue accounted for less than 0.1% of total
revenue during the respective time periods.
As an accounting policy election, the Company excludes from
the measurement of the transaction price all taxes assessed by
a governmental authority that are both imposed on and
concurrent with a specific revenue-producing transaction and
collected by the entity from a customer.
Shipping and handling costs associated with outbound freight
after control over a product has transferred to a customer are
accounted for as a fulfillment cost and are included in cost of
revenues.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of
customers and grants credit based upon historical payment
history, financial condition, and industry expectations, as
available. Determination of the collectability of amounts due
from customers requires the Company to use estimates and
make judgments regarding future events and trends, including
monitoring customers’ payment history and current credit
worthiness, in order to determine that collectability is
reasonably assured. The Company also considers the overall
business climate in which its customers operate.
These uncertainties require the Company to make frequent
judgments and estimates regarding a customers’ ability to pay
amounts due in order to assess and quantify an appropriate
allowance for doubtful accounts. The primary factors used to
quantify the allowance are customer delinquency, bankruptcy,
and the Company’s estimate of its ability to collect outstanding
receivables based on the number of days a receivable has been
outstanding.
The majority of the Company’s customers operate in the
energy industry. The cyclical nature of the industry may affect
customers’ operating performance and cash flows, which
could impact the Company’s ability to collect on these
obligations. Additionally, some customers are located in
international areas that are inherently subject to risks of
economic, political, and civil instability.
The Company continues to monitor the economic climate in
which its customers operate and the aging of its accounts
receivable. The allowance for doubtful accounts is based on
the aging of accounts and an individual assessment of each
invoice. At December 31, 2019, the allowance was 8.9% of
gross accounts receivable, compared to an allowance of 3.1%
a year earlier. While credit losses have historically been within
expectations and the provisions established, should actual
write-offs differ from estimates, revisions to the allowance
would be required.
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.
Inventory Reserves
Goodwill
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.
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.
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.
impairments during
Significant changes have not been made in the methodology
used to estimate the reserve for excess and obsolete inventory
or
the past four years. Specific
assumptions are updated at the date of each evaluation to
consider Company experience and current industry trends.
Significant judgment is required to predict the potential impact
which the current business climate and evolving market
conditions could have on the Company’s assumptions.
Changes which may occur in the energy industry are hard to
predict, and they may occur rapidly. To the extent that changes
in market conditions result in adjustments to management
assumptions, impairment losses could be realized in future
periods.
At December 31, 2019 and 2018, the reserve for excess and
obsolete inventory was $5.7 million and $2.1 million, or 20.8%
and 7.2% of inventory, respectively.
Business Combinations
The Company allocates
the fair value of purchase
consideration to the assets acquired, liabilities assumed, and
any non-controlling interests in the acquired entity generally
based on their fair values at the acquisition date. The excess
of the fair value of purchase consideration over the fair value
of these assets acquired, liabilities assumed, and any non-
controlling interests in the acquired entity is recorded as
goodwill. The primary items that generate goodwill include
the value of the synergies between the acquired company and
Flotek and the value of the acquired assembled workforce.
Acquisition-related expenses are recognized separately from
the business acquisition and are recognized as expenses as
incurred.
During the annual testing, the Company assesses whether a
goodwill impairment exists using both qualitative and
quantitative assessments. The qualitative assessment involves
determining whether events or circumstances exist that
indicate it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including
goodwill. If, based on this qualitative assessment, it is
determined that it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, the
Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely
than not that the fair value of a reporting unit is less than its
carrying amount or if the Company elects not to perform a
qualitative assessment, a quantitative impairment test is
performed to determine whether goodwill impairment exists
at the reporting unit.
During annual goodwill impairment testing in 2018 and 2017,
the Company first assessed qualitative factors to determine
whether it was necessary to perform the quantitative
impairment test. During annual goodwill impairment testing
in 2017, the Company first assessed qualitative factors to
determine whether it was necessary to perform the two-step
goodwill impairment test.
As of the fourth quarter of 2018, the Company concluded it
was not more-likely-than-not that there was an impairment of
goodwill for the CICT reporting unit based on the assessment
of qualitative factors. During the fourth quarter of 2018, the
final criterion was met for classifying the CICT reporting unit
as held for sale. Therefore, the CICT reporting unit was
reported as discontinued operations. After receiving initial
interests from potential buyers, it was determined that the
disposal proceeds, after considering selling costs, would result
in excess over book value. As this was in-line with quantitative
impairment tests performed in previous quarters for the CICT
reporting unit, no further impairment assessment was needed.
For the second quarter of 2018, the Company was not able to
conclude that it was not more-likely-than-not that the
estimated fair value of the Energy Chemistry Technologies
(“ECT”) reporting unit exceeded the carrying amount.
29
Therefore, the Company performed a quantitative impairment
test for the reporting unit. The results of the impairment test
indicated that the carrying amount of the ECT reporting unit
exceeded the estimated fair value of the reporting unit by
approximately $37.8 million, or 25.6% of the carrying amount.
To evaluate the sensitivity of the fair value calculations for the
ECT reporting units, the Company applied a hypothetical
0.5% unfavorable change in the weighted average cost of
capital, which would have reduced the estimated fair value of
the ECT reporting unit by approximately $5.7 million.
Additionally, reducing the revenue projections by 1.0% and
holding gross margins steady reduced the estimated fair value
approximately $4.4 million. These sensitivity analyses
confirmed the need for an impairment for the ECT reporting
unit. The Company recorded a full impairment of the goodwill
for $37.2 million in the ECT reporting unit during the second
quarter of 2018.
At December 31, 2019, no goodwill was reported on the
balance sheet.
Long-Lived Assets Other than Goodwill
Long-lived assets other than goodwill consist of property and
equipment and intangible assets that have determinable and
indefinite lives. The Company makes judgments and estimates
regarding the carrying amount of these assets, including
amounts to be capitalized, depreciation and amortization
methods to be applied, estimated useful lives, and possible
impairments. Property and equipment and intangible assets
with determinable lives are tested for impairment whenever
events or changes in circumstances indicate the carrying
amount of the asset may not be recoverable.
For property and equipment, events or circumstances
indicating possible impairment may include a significant
decrease in market value or a significant change in the business
climate. An impairment loss is recognized when the carrying
amount of an asset exceeds the estimated undiscounted future
cash flows expected to result from the use of the asset and its
eventual disposition. The amount of the impairment loss is the
excess of the asset’s carrying amount over its fair value. Fair
value is generally determined using an appraisal by an
independent valuation firm or by using a discounted cash flow
analysis.
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
internally manage
projections
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
30
climate result in adjustments to management projections,
impairment losses may be recognized in future periods.
There are significant inherent uncertainties and judgments
involved in estimating fair value. The Company cannot predict
the occurrence of events or circumstances that could adversely
affect the fair value of the asset group. Such events may
include, but are not limited to, deterioration of the economic
environment, increases in the Company’s WACC, material
negative changes in relationships with significant customers,
reductions in valuations of other public companies in the
Company’s industry, or strategic decisions made in response
to economic and competitive conditions. If actual results are
not consistent with the Company’s current estimates and
assumptions, additional impairment of long-lived assets could
be required.
In 2019, 2018, and 2017, while testing annual indefinite lived
intangible assets for impairment, the Company first assessed
qualitative factors to determine whether it was necessary to
perform the impairment test. Based on its qualitative
assessment, the Company concluded there was no indication
of the need for an impairment of indefinite lived intangibles,
and therefore no further testing was required.
No impairment was recorded for property and equipment and
intangible assets with determinable or indefinite lives during
2019 and 2018.
Fair Value Measurements
Fair value is defined as the amount that would be received for
the sale of an asset or paid for the transfer of a liability in an
orderly transaction between unrelated third party market
participants at the measurement date. In determination of fair
value measurements for assets and liabilities, the Company
considers the principal, or most advantageous, market and
assumptions that market participants would use when pricing
the asset or liability. The Company categorizes financial assets
and liabilities using a three-tiered fair value hierarchy, based
upon the nature of the inputs used in the determination of fair
value. Inputs refer broadly to the assumptions that market
participants would use in pricing an asset or liability and may
be observable or unobservable. Significant judgments and
estimates are required, particularly when inputs are based on
pricing for similar assets or liabilities, pricing in non-active
markets, or when unobservable inputs are required.
Income Taxes
The Company’s tax provision is subject to judgments and
estimates necessitated by
the complexity of existing
regulatory tax statutes and the effect of these upon the
Company due to operations in multiple tax jurisdictions.
Income tax expense is based on taxable income, statutory tax
rates, and tax planning opportunities available in the various
jurisdictions in which the Company operates. The Company’s
income tax expense will fluctuate from year to year as the
amount of pretax income fluctuates. Changes in tax laws and
the Company’s profitability within and across the jurisdictions
may impact the Company’s tax liability. While the annual tax
provision is based on the best information available to the
Company at the time of preparation, several years may elapse
before the ultimate tax liabilities are determined.
The Company uses the liability method in accounting for
income taxes. Deferred tax assets and liabilities are
recognized for temporary differences between financial
statement carrying amounts and the tax bases of assets and
liabilities and are measured using the tax rates expected to be
in effect when the differences reverse. Deferred tax assets are
also recognized for operating loss and tax credit carry
forwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation
allowance is used to reduce deferred tax assets when
uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously
recorded tax assets when it becomes more likely than not such
assets will not be realized. The Company evaluates, at least
annually, net operating loss carry forwards and other net
deferred tax assets and considers all available evidence, both
positive and negative, to determine whether a valuation
allowance is necessary relative to net operating loss carry
forwards and other net deferred tax assets. In making this
determination, the Company considers cumulative losses in
recent years as significant negative evidence. The Company
considers recent years to mean the current year plus the two
preceding years. The Company considers
the recent
cumulative income or loss position of its filings groups as
objectively verifiable evidence for the projection of future
income, which consists primarily of determining the average
of the pre-tax income of the current and prior two years after
adjusting for certain
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 provided a source of income to support
the release of $11.5 million of the valuation allowance. As
such, the Company reversed this portion of the valuation
allowance during the fourth quarter of 2018.
The Company periodically identifies and evaluates uncertain
tax positions. This process considers the amounts and
31
probability of various outcomes that could be realized upon
final settlement. Liabilities for uncertain tax positions are
based on a two-step process. The actual benefits ultimately
realized may differ from the Company’s estimates. Changes
in facts, circumstances, and new information may require a
change in recognition and measurement estimates for certain
individual tax positions. Any changes in estimates are
recorded in results of operations in the period in which the
change occurs. At December 31, 2019, the Company
performed an evaluation of its various tax positions and
concluded that it did not have significant uncertain tax
positions requiring disclosure. The Company’s policy is to
record interest and penalties related to income tax matters as
income tax expense.
Share-Based Compensation
The Company has stock-based incentive plans which are
authorized to issue stock options, restricted stock, and other
incentive awards. Stock-based compensation expense for
stock options and restricted stock is determined based upon
estimated grant-date fair value. This fair value for the stock
options is calculated using the Black-Scholes option-pricing
model and is recognized as expense over the requisite service
period. The option-pricing model requires the input of highly
subjective assumptions, including expected stock price
volatility and expected option life. For all stock-based
incentive plans, the Company estimates an expected forfeiture
rate and recognizes expense only for those shares expected to
vest. The estimated forfeiture rate is based on historical
experience. To the extent actual forfeiture rates differ from the
estimate, stock-based compensation expense is adjusted
accordingly.
Loss Contingencies
The Company is subject to a variety of loss contingencies that
could arise during the Company’s conduct of business.
Management considers the likelihood of a loss or impairment
of an asset or the incurrence of a liability, as well as the
Company’s ability to reasonably estimate the amount of loss,
in determining potential loss contingencies. An estimated loss
contingency is accrued when it is probable that a liability has
been incurred or an asset has been impaired and the amount
of loss can be reasonably estimated. Accruals for loss
contingencies have not been recorded during the past three
years. The Company regularly evaluates current information
available to determine whether such accruals should be made
or adjusted.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the
Company are described in Note 2 – “Summary of Significant
Accounting Policies”
in Part II, Item 8 – “Financial
Statements and Supplementary Data” of this Annual Report.
32
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
The Company is exposed to market risk from changes in
foreign currency exchange rates, and commodity prices.
Market risk is measured as the potential negative impact on
earnings, cash flows, or fair values resulting from a
hypothetical change in interest rates, commodity prices, or
foreign currency exchange rates over the next year. The
Company manages exposure to market risks at the corporate
level. The portfolio of interest-sensitive assets and liabilities
is monitored and adjusted to provide liquidity necessary to
satisfy anticipated short-term needs. The Company’s risk
management policies allow the use of specified financial
instruments for hedging purposes only. Speculation on interest
rates or foreign currency rates is not permitted. The Company
does not consider any of these risk management activities to
be material.
Foreign Currency Exchange Risk
The Company presently has limited exposure to foreign
currency risk. As a global company, Flotek operates in seven
domestic and international markets. Flotek’s functional
currency
the U.S. dollar. During 2019,
approximately 4.0% of revenue was denominated in non-U.S.
dollar currencies and virtually all assets and liabilities of the
Company are denominated in U.S. dollars. However, as the
is primarily
Company expands its international operations, non-U.S.
denominated activity is likely to increase. The Company has
historically performed no swaps and no foreign currency
hedges. The Company may utilize swaps or foreign currency
hedges in the future.
Commodity Risk
The Company purchases raw materials derived from citrus
oils and, therefore, has a commodity risk inherent in orange
harvests. In recent years, citrus greening has disrupted citrus
fruit production in Florida and Brazil which caused raw
material feedstock cost to increase. Tropical storms and
hurricanes, as experienced during 2017, can also impact the
future citrus crop yields in growing regions. The Company
believes that adequate global supply is available to meet the
Company’s needs. The Company primarily relies upon long-
term strategic supply relationships to meet many of its raw
material needs which are expected to remain in place for the
foreseeable future. Price increases have been passed along to
the Company’s customers, where applicable. The Company
presently does not have any commodity futures contracts but
may consider utilizing forms of hedging from time to time in
the future.
33
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries (the “Company”) as of
December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity and
cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the
“consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework
(2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 6 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019
due to the adoption of Accounting Standards Codification Topic No. 842.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
34
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ MOSS ADAMS LLP
Houston, Texas
March 6, 2020
We have served as the Company’s auditor since 2017.
35
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
2019
2018
Current assets:
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $1,527 and
$1,190 at December 31, 2019 and 2018, respectively
Inventories, net
Income taxes receivable
Assets held for sale
Other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Deferred tax assets, net
Other intangible assets, net
Other long-term assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Interest payable
Liabilities held for sale
Current portion of lease liabilities
Long-term debt, classified as current
Total current liabilities and total liabilities
Long-term operating lease liabilities
Long-term finance lease liabilities
Deferred tax liabilities, net
TOTAL LIABILITIES
Commitments and contingencies (Note16)
Stockholders’ Equity:
$
$
$
100,575
663
$
15,638
21,697
631
—
13,191
152,395
39,829
16,388
152
23,083
—
231,847
16,231
24,552
—
—
541
—
41,324
16,973
158
116
58,571
$
$
3,044
—
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
—
—
84,259
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares
issued and outstanding
Common stock, $0.0001 par value, 80,000,000 shares authorized; 63,656,897
shares issued and 57,882,396 shares outstanding at December 31, 2019;
62,162,875 shares issued and 57,342,279 shares outstanding at
December 31, 2018
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Treasury stock, at cost; 4,145,481 and 3,770,224 shares at December 31, 2019
and 2018, respectively
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
—
—
6
347,564
(966)
(139,844)
(33,484)
173,276
231,847
$
6
343,536
(1,116)
(107,565)
(33,237)
201,624
285,883
See accompanying Notes to Consolidated Financial Statements.
36
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
Other (expense) income, net
Total other expense
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,
2018
2017
2019
$
119,353
$
177,773
$
243,106
149,225
27,975
8,465
8,863
1,450
—
195,978
(76,625)
(2,019)
—
—
1,708
(311)
(76,936)
201
(76,735)
44,456
(32,279)
—
(32,279) $
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)
(76,735) $
44,456
(32,279) $
(73,083) $
2,743
(70,340) $
(17,504)
(9,891)
(27,395)
(1.31) $
0.76
(0.55) $
(1.31) $
0.76
(0.55) $
(1.26) $
0.05
(1.21) $
(1.26) $
0.05
(1.21) $
(0.30)
(0.17)
(0.47)
(0.30)
(0.17)
(0.47)
$
$
$
$
$
$
$
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
58,750
58,750
57,995
57,995
57,580
57,580
See accompanying Notes to Consolidated Financial Statements.
37
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
Years ended December 31,
2018
2017
2019
$
$
(76,735) $
44,456
(32,279)
(73,441) $
2,743
(70,698)
150
(32,129)
—
(32,129) $
(232)
(70,930)
358
(70,572) $
(17,504)
(9,891)
(27,395)
72
(27,323)
—
(27,323)
See accompanying Notes to Consolidated Financial Statements.
38
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED
DECEMBER 31, 2019, 2018 AND 2017
(in thousands)
Common Stock
Treasury Stock
Shares
Issued
Par
Value
Shares
Cost
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Non-
controlling
Interests
Total
Stockholders
’ Equity
Balance, December 31, 2016
59,685
$
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 awards granted
Restricted stock forfeited
Treasury stock purchased
Stock surrendered for exercise of stock options
Stock compensation expense
Repurchase of common stock
Balance, December 31, 2017
Net loss
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
Restricted stock awards granted
Restricted stock forfeited
Treasury stock purchased
Stock compensation expense
Balance, December 31, 2018
Net loss
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
Restricted stock awards granted
Restricted stock forfeited
Restricted stock units granted
Treasury stock purchased
Stock compensation expense
—
—
—
—
663
275
—
—
—
—
—
60,623
$
—
—
—
1,540
—
—
—
62,163
$
—
—
—
924
—
570
—
—
Balance, December 31, 2019
63,657
$
6
—
—
—
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
6
2,029
$ (20,269)
$
318,392
$
(956)
$
(9,830)
$
358
$
287,701
—
—
(113)
—
—
—
122
200
478
—
905
—
—
—
—
—
—
—
(1,729)
(5,863)
—
—
654
188
5,884
—
—
—
—
—
10,949
(5,203)
—
—
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
—
—
(18)
—
299
—
94
—
—
—
—
—
—
—
(247)
—
—
—
35
—
—
—
—
3,993
—
150
—
—
—
—
—
—
(32,279)
(32,279)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
150
35
—
—
—
(247)
3,993
4,145
$ (33,484)
$
347,564
$
(966)
$
(139,844)
$
— $
173,276
See accompanying Notes to Consolidated Financial Statements.
39
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
Non-cash lease expense
Changes in current assets and liabilities:
Accounts receivable, net
Inventories
Income taxes receivable
Other current assets
Accounts payable
Accrued liabilities
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
Purchase of patents and other intangible assets
Net cash provided (used in) by investing activities
Cash flows from financing activities:
Repayments of indebtedness
Borrowings on revolving credit facility
Repayments on revolving credit facility
Debt issuance costs
Payments for finance leases
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 (used in) provided financing activities
Discontinued operations:
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash flows provided by (used in) provided by discontinued operations
Effect of changes in exchange rates on cash and cash equivalents
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Years ended December 31,
2019
2018
2017
$
(32,279) $
44,456
(76,735)
(70,340) $
2,743
(73,083)
(27,395)
(9,891)
(17,504)
8,465
1,428
512
5,659
—
—
1,450
—
4,235
18,307
24
740
20,993
(65)
2,546
(8,359)
1,131
908
(8)
(18,769)
(2,411)
169,722
240
(614)
166,937
—
42,984
(92,715)
—
(51)
(247)
35
—
—
—
(49,994)
(322)
337
15
5
98,194
3,044
101,238
$
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
1,296
(1,303)
(7)
(88)
(1,540)
4,584
3,044
$
$
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)
4,102
(4,078)
24
151
(239)
4,823
4,584
See accompanying Notes to Consolidated Financial Statements.
40
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 designs, develops,
manufactures, packages, distributes, delivers, and markets
reservoir-centric fluid systems, including specialty and
conventional chemistries, for use in oil and gas well drilling,
cementing, completion,
stimulation
activities designed to maximize recovery in both new and
mature fields. Activities in this segment also include
construction and management of automated material handling
facilities as well as management of loading facilities and
blending operations for oilfield services companies. In the
segment reported as discontinued operations at December 31,
2018, the Company processed citrus oil to produce (1) high
remediation, and
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, which occurred in January 2019. The Company’s
historical financial statements have been revised to present the
operating results of the Consumer and Industrial Chemistry
Technologies segment as discontinued operations. The results
of operations of this segment are presented as “Income (loss)
from discontinued operations” in the statement of operations
and the related cash flows of this segment have been
reclassified to discontinued operations for all periods
presented. The assets and liabilities of the Consumer and
Industrial Chemistry Technologies segment have been
reclassified to “Assets held for sale” and “Liabilities held for
41
value compounds used as additives by companies in the flavors
and fragrances markets and (2) environmentally friendly
chemistries for use in numerous industries around the world,
including the oil and gas industry.
Flotek operates in seven domestic and international markets.
Customers include major integrated oil and gas companies,
oilfield services companies,
independent oil and gas
companies, pressure-pumping service companies, national
and state-owned oil companies, and international supply chain
management companies. The Company also served customers
who purchase non-energy-related citrus oil and related
products, including household and commercial cleaning
product companies, fragrance and cosmetic companies, and
food manufacturing companies, in the segment reported as
discontinued operations at December 31, 2018.
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.
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.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable arise from product sales and services and
are stated at estimated net realizable value. This value
incorporates an allowance for doubtful accounts to reflect any
loss anticipated on accounts receivable balances. The
Company regularly evaluates its accounts receivable to
estimate amounts that will not be collected and records the
appropriate provision for doubtful accounts as a charge to
operating expenses. The allowance for doubtful accounts is
based on a combination of the age of the receivables, individual
customer circumstances, credit conditions, and historical
write-offs and collections. The Company writes off specific
accounts receivable when they are determined to be
uncollectible.
The majority of the Company’s customers are engaged in the
energy industry. The cyclical nature of the energy industry may
affect customers’ operating performance and cash flows,
which directly impact the Company’s ability to collect on
outstanding obligations. Additionally, certain customers are
located in international areas that are inherently subject to risks
of economic, political, and civil instability, which can impact
the collectability of receivables.
Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
Years ended December 31,
2018
2017
2019
Balance, beginning of year
Charged to provision for doubtful accounts, net of
recoveries
Write-offs
Balance, end of year
$
$
1,190
$
512
(175)
1,527
$
673
$
839
(322)
1,190
$
579
157
(63)
673
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 quarterly
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. Obsolete inventory or inventory in
excess of management’s estimated usage requirement is
written down to its estimated market value if those amounts
are determined to be less than cost.
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
quarterly basis or whenever events or changes
in
circumstances indicate the carrying amount of an asset or asset
group may not be recoverable. Indicative events or
circumstances include, but are not limited to, matters such as
a significant decline in market value or a significant change
in business climate. An impairment loss is recognized when
the carrying amount of an asset exceeds the estimated
undiscounted future cash flows from the use of the asset and
its eventual disposition. The amount of impairment loss
recognized is the excess of the asset’s carrying amount over
its fair value. Assets to be disposed of are reported at the lower
of the carrying amount or the fair value less cost to sell. Upon
sale or other disposition of an asset, the Company recognizes
a gain or loss on disposal measured as the difference between
the net carrying amount of the asset and the net proceeds
received.
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.
42
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company amortizes software costs using the straight-line
method over the expected life of the software, generally three
to seven years. The unamortized amount of capitalized
software was $1.0 million at December 31, 2019.
benefit, ranging from two 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.
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
43
Intangible assets with finite lives are tested for impairment
whenever events or changes in circumstances indicate the
carrying amount may not be recoverable. These conditions
may include a change in the extent or manner in which the
asset is being used or a change in future operations. The
Company assesses the recoverability of the carrying amount
by preparing estimates of future revenue, margins, and cash
flows. If the sum of expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount,
an impairment loss is recognized. The impairment loss
recognized is the amount by which the carrying amount
exceeds the fair value. Fair value of these assets may be
determined by a variety of methodologies, including
discounted cash flow models.
Intangible assets with indefinite lives are not subject to
amortization, but are tested for impairment annually during
the fourth quarter, or more frequently if an event occurs or
circumstances change that would indicate a potential
impairment. These circumstances may include, but are not
limited to, a significant adverse change in the business climate,
unanticipated competition, or a change in projected operations
or results of a reporting unit.
The Company assesses whether an indefinite lived intangible
impairment exists using both qualitative and quantitative
assessments. The qualitative assessment involves determining
whether events or circumstances exist that indicate it is more
likely than not that the fair value of the indefinite lived
intangible is less than its carrying amount. If, based on this
qualitative assessment, it is determined that it is not more likely
than not that the fair value of the indefinite lived intangible is
less than its carrying amount, the Company does not perform
a quantitative assessment.
If the qualitative assessment indicates that it is more likely
than not that the indefinite-lived intangible asset is impaired
or if the Company elects to not perform a qualitative
assessment, the Company then performs the quantitative
impairment test. The quantitative impairment test for an
indefinite-lived intangible asset consists of a comparison of
the fair value of the asset with its carrying amount. If the
carrying amount of an intangible asset exceeds its fair value,
an impairment loss is recognized in an amount equal to that
excess. Fair value of these assets may be determined by a
variety of methodologies, including discounted cash flows.
Business Combinations
The Company includes the results of operations of its
acquisitions in its consolidated results, prospectively from the
date of acquisition. Acquisitions are accounted for by applying
the acquisition method. The Company allocates the fair value
of purchase consideration to the assets acquired, liabilities
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assumed, and any noncontrolling interests in the acquired
entity generally based on their fair values at the acquisition
date. The excess of the fair value of purchase consideration
over the fair value of these assets acquired, liabilities assumed,
and any noncontrolling interests in the acquired entity is
recorded as goodwill. The primary items that generate
goodwill include the value of the synergies between the
acquired company and Flotek and the value of the acquired
assembled workforce. Acquisition-related expenses are
recognized separately from the business acquisition and are
recognized as expenses as incurred.
Fair Value Measurements
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 4 – “Revenue from Contracts with Customers” for further
discussion on Revenue.
The Company recognizes revenue based on the Accounting
Standards Codification (“ASC”) 606 five-step model when all
of the following criteria have been met: (i) a contract with a
customer exists, (ii) performance obligations have been
identified, (iii) the price to the customer has been determined,
(iv) the price to the customer has been allocated to the
performance obligations, and (v) performance obligations are
satisfied.
Products and services are sold with fixed or determinable
prices. Certain sales include right of return provisions, which
are considered when recognizing revenue and deferred
accordingly. Deposits and other funds received in advance of
delivery are deferred until the transfer of control is complete.
For certain contracts, the Company recognizes revenue under
the percentage-of-completion method of accounting,
measured by the percentage of “costs incurred to date” to the
44
“total estimated costs of completion.” This percentage is
applied to the “total estimated revenue at completion” to
calculate proportionate revenue earned to date. For the years
ended December 31, 2019, 2018, and 2017, the percentage-
of-completion revenue accounted for less than 0.1% of total
revenue during the respective time periods.
As an accounting policy election, the Company excludes from
the measurement of the transaction price all taxes assessed by
a governmental authority that are both imposed on and
concurrent with a specific revenue-producing transaction and
collected by the entity from a customer.
Shipping and handling costs associated with outbound freight
after control over a product has transferred to a customer are
accounted for as a fulfillment cost and are included in cost of
revenues.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using
the currency of the primary economic environment of the
foreign subsidiaries as the functional currency. Assets and
liabilities of foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect as of the end of identified
reporting periods. Revenue and expense transactions are
translated using the average monthly exchange rate for the
reporting period. Resultant translation adjustments are
recognized as other comprehensive income (loss) within
stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in
stockholders’ equity, except those arising from investments
from and distributions to stockholders. The Company’s
comprehensive income (loss) includes net income (loss) and
foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product
development and improvement are charged to expense as
incurred.
Income Taxes
The Company uses the liability method in accounting for
income taxes. Deferred tax assets and liabilities are recognized
for temporary differences between financial statement
carrying amounts and the tax bases of assets and liabilities and
are measured using the tax rates expected to be in effect when
the differences reverse. Deferred tax assets and liabilities are
recognized related to the anticipated future tax effects of
temporary differences between the financial statement basis
and the tax basis of the Company’s assets and liabilities using
statutory tax rates at the applicable year end. Deferred tax
assets are also recognized for operating loss and tax credit
carry forwards. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the results of operations
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the period that includes the enactment date. A valuation
allowance is used to reduce deferred tax assets when
uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously
recorded tax assets when it becomes more likely than not that
such assets will not be realized. The Company evaluates, at
least annually, net operating loss carry forwards and other net
deferred tax assets and considers all available evidence, both
positive and negative, to determine whether a valuation
allowance is necessary relative to net operating loss carry
forwards and other net deferred tax assets. In making this
determination, the Company considers cumulative losses in
recent years as significant negative evidence. The Company
considers recent years to mean the current year plus the two
preceding years. The Company considers
the recent
cumulative income or loss position as objectively verifiable
evidence for the projection of future income, which consists
primarily of determining the average of the pre-tax income of
the current and prior two years after adjusting for certain items
not indicative of future performance. Based on this analysis,
the Company determines whether a valuation allowance is
necessary.
Historically, U.S. Federal income taxes are not provided on
unremitted earnings of subsidiaries operating outside the U.S.
because it is the Company’s intention to permanently reinvest
undistributed earnings in the subsidiary. These earnings would
become subject to income tax if they were remitted as
dividends or loaned to a U.S. affiliate. Due to the 2017 Tax
Act, U.S. federal transition taxes have been recorded at
December 31, 2017, for a one-time U.S. tax liability on those
earnings which have not previously been repatriated to the
U.S. Determination of the amount of unrecognized deferred
U.S. income tax liability on these unremitted earnings is not
practicable.
The Company has performed an evaluation and concluded that
there are no significant uncertain tax positions requiring
recognition in the Company’s 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
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
45
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is expected to qualify for recognition as a completed sale,
within one year, except if events of circumstances beyond the
Company’s control extend the period of time required to sell
the disposal group beyond one year; (5) the disposal group is
being actively marketed for sale at a price that is reasonable
in relation to its current fair value; and (6) actions required to
complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be
withdrawn.
A disposal group that is classified as held for sale is initially
measured at the lower of its carrying amount or fair value less
any costs to sell. Any loss resulting from this measurement is
recognized in the period in which the held for sale criteria are
met.
Subsequent changes in the fair value of a disposal group less
any costs to sell are reported as an adjustment to the carrying
amount of the disposal group, as long as the new carrying
amount does not exceed the carrying amount of the asset at
the time it was initially classified as held for sale. Upon
determining that a disposal group meets the criteria to be
classified as held for sale, the Company reports the assets and
liabilities of the disposal group for all periods presented in the
line items assets held for sale and liabilities held for sale,
respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that
can be clearly distinguished, operationally and for financial
reporting purposes, that either has been disposed of or is
classified as held for sale is reported in discontinued
operations, if the disposal represents a strategic shift that has,
or will have, a major effect on the Company’s operations and
financial results.
Reclassifications
Certain prior year amounts have been reclassified to conform
to the current year presentation. The reclassifications did not
impact net loss.
New Accounting Pronouncements
(a) Application of New Accounting Standards
Effective January 1, 2019, the Company adopted the
in Accounting Standards Update
accounting guidance
(“ASU”) No. 2016-02, “Leases” This standard (ASC 842)
requires the recognition of Right of Use (“ROU”) assets and
lease liabilities by lessees for those leases classified as
operating leases under previous U.S. GAAP (ASC 840). The
Company adopted ASC 842 using the optional transition
method. Consequently, the Company’s reporting for the
comparative periods presented prior to 2019 in the financial
statements will continue to be in accordance with ASC 840.
Upon adoption, the Company recorded operating lease ROU
assets and corresponding operating lease liabilities, net of
deferred rent, of approximately $18.4 million, representing the
present value of future lease payments under operating leases
with terms of greater than twelve months. Refer to Note 6 -
“Leases” for further information surrounding adoption of this
new standard.
a
reclassification
Effective January 1, 2019, the Company adopted ASU No.
2018-02, “Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income.” This standard
accumulated other
allows
comprehensive income to retained earnings for stranded tax
effects resulting from the 2017 Tax Cuts and Jobs Act.
Implementation of this standard did not have a material effect
the consolidated financial statements and related
on
disclosures.
from
Effective January 1, 2019, the Company adopted ASU No.
to Nonemployee Share-Based
2018-07, “Improvements
Payment Accounting.” This standard expands the scope of
Topic 718 to include share-based payment transactions for
acquiring goods and
from non-employees.
services
Implementation of this standard did not have a material effect
on
the consolidated financial statements and related
disclosures.
Effective January 1, 2018, the Company adopted the
in Accounting Standards Update
accounting guidance
(“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 4 —
“Revenue from Contracts with Customers” for further
information surrounding adoption of this new standard.
Effective January 1, 2018, the Company adopted the
accounting guidance in ASU No. 2016-15, “Classification of
Certain Cash Receipts and Cash Payments.” This standard
addressed eight specific cash flow issues with the objective of
reducing the existing diversity in practice. Implementation of
this standard did not have a material effect on the consolidated
financial statements and related disclosures. The Company
applied this standard prospectively, where applicable, as there
were no historical
this
implementation.
affected by
transactions
Effective January 1, 2018, the Company adopted the
accounting guidance in ASU No. 2017-01, “Clarifying the
46
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Definition of a Business.” This standard provided additional
guidance on whether an integrated set of assets and activities
constitutes a business. Implementation of this standard did not
have a material effect on the consolidated financial statements
and related disclosures. The Company applied this standard
prospectively and, therefore, prior periods were not adjusted.
In addition, the Company had no activity during the year ended
December 31, 2019 that was required to be treated differently
under this ASU than previously issued guidance.
Effective January 1, 2018, the Company adopted the
accounting guidance in ASU No. 2017-09, “Scope of
Modification Accounting.” This standard provided guidance
about which changes to the terms or conditions of a share-
based payment award require an entity to apply modification
accounting under Topic 718. Implementation of this standard
did not have a material effect on the consolidated financial
statements and related disclosures. The Company applied this
standard prospectively and, therefore, prior periods presented
were not adjusted. There were no changes to the terms or
conditions of current share-based payment awards during the
year ended December 31, 2019.
(b) New Accounting Requirements and Disclosures
In June 2016, the FASB issued ASU No. 2016-13,
“Measurement of Credit Losses on Financial Instruments.”
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,
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.
On January 10, 2019, the Company entered into a Share
Purchase Agreement with Archer-Daniels-Midland Company
(“ADM”) for the sale of all of the shares representing
membership interests in its wholly owned subsidiary, Florida
Chemical Company, LLC, which represented 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
47
the
loss
incurred
impairment
This standard replaces
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 August 2018, the FASB issued ASU No. 2018-13,
“Disclosure Framework — Changes to the Disclosure
Requirements for Fair Value Measurement.” This standard
removes, modifies, and adds additional requirements for
disclosures related to fair value measurement in 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.
by ADM for post-closing working capital adjustments for up
to 90 days and $13.1 million temporarily held in escrow to
satisfy potential indemnification claims by ADM with
anticipated releases at 6 months, 12 months, and 15 months.
As of December 31, 2019, the escrow balance including
interest was $9.9 million reflected in other current assets.
Concurrent with the closing of the sale of the CICT segment,
the Company retained $11.1 million of historical inventory
previously held by the CICT segment. In addition, the
Company executed a long-term supply agreement for terpene.
The term of the agreement runs through December 2023, with
an option to extend for an additional year. The remaining
minimum commitment of the agreement at December 31, 2019
is $72 million. Pursuant to the post-closing working capital
dispute resolution procedures set forth in the Share Purchase
Agreement, the Company and ADM engaged a neutral third
party arbitrator to help reach agreement on the final post-
closing working capital adjustment. In February 2020, the
third party arbitrator ruled in favor of awarding ADM for the
entire $4.1 million disputed amount resulting in a reduction to
the gain on the sale of the business as of December 31, 2019.
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, 2019, 2018, and 2017 (in thousands):
Consumer and Industrial Chemistry Technologies
2019
2018
2017
Discontinued operations:
Revenue
Operating expenses
Depreciation and amortization
Research and development
Income from operations
Other income (expense)
Gain on sale of businesses
Income before income taxes
Income tax expense
$
11,031
$
(11,572)
—
(69)
(610)
35
64,160
63,585
(19,129)
72,344
$
(65,940)
(2,760)
(590)
3,054
341
—
3,395
(652)
Net income (loss) from discontinued operations
$
44,456
$
2,743
$
73,992
(63,621)
(2,391)
(515)
7,465
(284)
—
7,181
(2,730)
4,451
The assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2019 and 2018 are as follows (in
thousands):
Consumer and Industrial Chemistry Technologies
2019
2018
Assets:
Accounts receivable, net
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
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.
these
— $
—
—
—
—
—
—
— $
—
— $
10,547
52,069
446
15,899
19,480
20,029
118,470
8,883
291
9,174
Disposal of the Drilling Technologies and Production
Technologies reporting segments represented a strategic shift
that would have a major effect on the Company’s operations
and financial results.
On May 22, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of
the Company’s Drilling
Technologies segment to National Oilwell Varco, L.P.
(“NOV”) for $17.0 million in cash consideration, subject to
normal working capital adjustments, with $1.5 million held
back by NOV for up to 18 months to satisfy potential
indemnification claims.
$
$
$
48
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 23, 2017, the Company completed the sale of
substantially all of the assets and transfer of certain specified
liabilities and obligations of the Company’s Production
Technologies segment to Raptor Lift Solutions, LLC (“Raptor
Lift”) for $2.9 million in cash consideration, with $0.4 million
held back by Raptor Lift to satisfy potential indemnification
claims.
On August 16, 2017, the Company completed the sale of
substantially all of the remaining assets of the Company’s
Drilling Technologies segment to Galleon Mining Tools, Inc.
for $1.0 million in cash consideration and a note receivable of
$1.0 million due in one year.
The sale or disposal of the assets and transfer or liquidation of
liabilities and obligations of these segments was completed in
2017. The Company has no continuing involvement with the
discontinued operations.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued
Operations for the years ended December 31, 2018 and 2017 (in thousands):
Drilling Technologies
Production Technologies
2018
2017
2018
2017
Discontinued operations:
Revenue
Cost of revenue
Selling, general and administrative
Research and development
Gain (loss) on disposal of 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
$
— $
—
—
—
—
—
—
—
—
—
—
(7,309)
(6,963)
(5)
97
(2,646)
(96)
(1,600)
(6,831)
(11,173)
4,138
—
—
—
—
—
—
—
—
—
—
Net loss from discontinued operations
$
— $
(7,035)
$
— $
4,002
(3,236)
(1,759)
(364)
—
(1,357)
(52)
(479)
(9,718)
(11,606)
4,299
(7,307)
At December 31, 2017, all remaining assets and liabilities of the discontinued operations were assumed by the Company’s continuing
operations. These balances included $0.3 million of net accounts receivable, $1.4 million of sales price hold-back that was received
during 2018, and $1.4 million of accrued liabilities partially settled in 2018, with the remainder to be settled in 2019.
Note 4 — 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
49
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
includes
judgment by management, which
significant
identifying performance obligations, estimating variable
consideration to include in the transaction price, and
determining whether promised goods or services can be
distinguished in the context of the contract. Variable
consideration typically consists of product returns and is
estimated based on the amount of consideration the Company
expects to receive. Revenue accruals are recorded on an
ongoing basis to reflect updated variable consideration
information.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For certain contracts, the Company recognizes revenue under
the percentage-of-completion method of accounting,
measured by the percentage of “costs incurred to date” to the
“total estimated costs of completion.” This percentage is
applied to the “total estimated revenue at completion” to
calculate proportionate revenue earned to date. For the years
ended December 31, 2019, 2018, and 2017, the percentage-
of-completion revenue accounted for less than 0.1% of total
revenue during the respective time periods. This resulted in
immaterial unfulfilled performance obligations
and
immaterial contract assets and/or liabilities for which the
Company did not record adjustments to opening retained
earnings as of December 31, 2015 or for any periods
previously presented.
The vast majority of the Company’s products 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
30-45 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,
2019, 2018, and 2017.
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
Years ended December 31,
2018
2017
2019
$
$
$
$
115,471
3,882
119,353
147,709
1,516
149,225
$
$
$
$
172,412
5,361
177,773
152,846
6,962
159,808
$
$
$
$
237,211
5,895
243,106
182,330
6,414
188,744
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
year or less. These costs are recorded within segment
selling and administrative expenses.
• The majority of the Company’s services are short-term
in nature with a contract term of one year or less. For
those contracts, the Company has utilized the practical
expedient in ASC 606-10-50-14, exempting the
Company from disclosure of the transaction price
allocated to remaining performance obligations if the
50
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
performance obligation is part of a contract that has an
original expected duration of one year or less.
• The Company’s payment terms are short-term in nature
with settlements of one year or less. The Company has
utilized the practical expedient in ASC 606-10-32-18,
exempting the Company from adjusting the promised
amount of consideration for the effects of a significant
financing component given that the period between
when the Company transfers a promised good or service
to a customer and when the customer pays for that good
or service will be one year or less.
•
In most service contracts, the Company has the right to
consideration from a customer in an amount that
Note 5 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
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.
Years ended December 31,
2018
2017
2019
Supplemental non-cash investing and financing activities:
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
$
599
(699)
$
2,502
(139)
1,851
(10,195)
Note 6— Leases
Effective January 1, 2019, the Company adopted ASC 842 using the prospective method applied to those leases which were not
completed as of December 31, 2018. The Company has leases for corporate offices, research and development facilities, warehouses,
sales offices and equipment. The leases have remaining lease terms of 1 year to 19 years, some of which include options to extend
the leases for up to 10 years.
Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of deferred
rent, of approximately $18.4 million, representing the present value of future lease payments under operating leases with terms of
greater than twelve months. Leases with an initial expected term of 12 months or less are not recorded on the balance sheet. The
Company recognizes lease expense for these leases on a straight-line basis over the expected lease term.
51
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of lease expense and supplemental cash flow information are as follows (in thousands):
Operating lease expense
Finance lease expense:
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease expense
Short-term lease expense
Total lease expense
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
$
$
For the years ending
December 31,
2019
2018
2,609
$
$
1,237
10
1,247
123
3,979
2,336
10
51
—
—
—
—
—
—
—
—
—
Maturities of lease liabilities are as follows (in thousands):
Years ending December 31,
Operating Leases
Finance Leases
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
2,012
1,962
1,916
1,976
2,017
23,692
33,575
(16,116)
17,459
$
$
$
$
70
70
47
40
23
—
250
(37)
213
52
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows (in thousands):
Operating Leases
Operating lease right-of-use assets
Current portion of lease liabilities
Long-term operating lease liabilities
Total operating lease liabilities
Finance Leases
Property and equipment
Accumulated depreciation
Property and equipment, net
Current portion of lease liabilities
Long-term finance lease liabilities
Total finance lease liabilities
Weighted Average Remaining Lease Term
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
Note 7 — Inventories
Inventories are as follows (in thousands):
December 31, 2019
$
$
$
$
$
$
$
16,388
486
16,973
17,459
293
(28)
265
55
158
213
16.6 years
4.6 years
8.9%
9.0%
Raw materials
Work-in-process
Finished goods
Inventories
Less reserve for excess and obsolete inventory
Inventories, net
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
December 31,
2019
2018
4,339
—
23,056
27,395
(5,698)
21,697
$
$
10,608
—
18,798
29,406
(2,117)
27,289
$
$
Balance, beginning of year
Charged to provisions
Deductions for disposals
Balance, end of the year
2019
2018
2017
2,117
5,659
(2,078)
5,698
$
$
368
2,418
(669)
2,117
$
$
50
388
(70)
368
$
$
53
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based
on an assessment of market values. Write-downs or write-offs of inventory are charged to cost of goods sold. At December 31,
2019, the Company recorded a reserve for excess terpene of $4.4 million.
Note 8 — Property and Equipment
Property and equipment are as follows (in thousands):
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
2019
2018
$
$
4,440
38,741
27,694
—
1,671
1,440
3,348
77,334
(37,505)
39,829
$
$
4,372
37,719
26,995
581
1,573
1,852
9,370
82,462
(36,977)
45,485
Depreciation expense totaled $6.5 million, $7.8 million, and $8.4 million for the years ended December 31, 2019, 2018, and 2017,
respectively.
During the years ended December 31, 2019, 2018, and 2017, no impairments were recognized related to property and equipment.
Note 9— Goodwill
The Company has no reporting units which have a goodwill
balance at December 31, 2019.
Goodwill is tested for impairment annually in the fourth
quarter, or more frequently if circumstances indicate a
potential impairment. During the fourth quarter of 2017, the
Company adopted ASU 2017-04, which eliminates Step 2
from the goodwill impairment test. If the carrying amount
exceeds the reporting unit’s fair value, the Company will
recognize an impairment charge for the excess amount.
During the second quarter of 2018, 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.
54
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the carrying amount of goodwill for the ECT reporting unit are as follows (in thousands):
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
Activity during the year 2019:
Goodwill impairment recognized
Acquisition goodwill recognized
Balance at December 31, 2019:
Goodwill
Accumulated impairment losses
Goodwill balance, net
$
$
37,180
—
37,180
(37,180)
—
37,180
(37,180)
—
—
—
—
—
—
Note 10 — 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
$
$
$
December 31,
2019
2018
Cost
Accumulated
Amortization
Cost
Accumulated
Amortization
$
$
17,493
15,367
1,351
34,211
—
34,211
2,760
36,971
23,083
6,715
6,013
1,160
13,888
—
13,888
$
$
$
$
$
18,884
15,367
1,485
35,736
1,924
37,660
2,760
40,420
26,827
6,689
5,259
1,149
13,097
496
13,593
Intangible assets acquired are amortized on a straight-line
basis over two to 95 years. Amortization of intangible assets
acquired totaled $2.0 million, $1.4 million, and $1.5 million
for the years end ended December 31, 2019, 2018, and 2017,
respectively.
Amortization of deferred financing costs totaled $1.4 million,
$0.4 million, and $0.5 million for the years ended
December 31, 2019, 2018, and 2017, respectively.
55
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated future amortization expense for other finite lived intangible assets, including deferred financing costs, at December 31,
2019 is as follows (in thousands):
Year ending December 31,
2020
2021
2022
2023
2024
Thereafter
Other amortizable intangible assets, net
$
$
1,941
1,935
1,915
1,858
1,854
10,109
19,612
During the years ended December 31, 2019, 2018, and 2017, no impairments were recognized related to other intangible assets.
Note 11 — 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,
2019
2018
$
— $
49,731
On March 1, 2019, the Company repaid the outstanding balance of the Credit Facility.
Note 12 — Fair Value Measurements
Fair value is defined as the amount that would be received for
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date. The Company categorizes financial assets and liabilities
into the three levels of the fair value hierarchy. The hierarchy
prioritizes the inputs to valuation techniques used to measure
fair value and bases categorization within the hierarchy on the
lowest level of input that is available and significant to the fair
value measurement.
• Level 1 — Quoted prices in active markets for identical
assets or liabilities;
• Level 2 — Observable inputs other than Level 1, such
as quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable
market data for substantially the full term of the assets
or liabilities; and
• Level 3 — Significant unobservable inputs that are
supported by little or no market activity or that are based
on the reporting entity’s assumptions about the inputs.
Liabilities Measured at Fair Value on a Recurring Basis
At December 31, 2019 and 2018, 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,
2019, 2018, and 2017.
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 9). No impairments of goodwill were
recognized during the years ended December 31, 2019,and
2017. No impairment of property and equipment or other
intangible assets were recognized during the years ended
December 31, 2019, 2018, and 2017.
56
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments,
including cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, approximate fair
value due to the short-term nature of these accounts. The
Company had no cash equivalents at December 31, 2019 or
2018.
The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
December 31,
2019
2018
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Borrowings under revolving credit facility
$
— $
— $
49,731
$
49,731
The carrying amount of borrowings under the revolving credit facility approximates its fair value because the interest rate is
variable.
Note 13 — Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by
dividing net income (loss) by the weighted average number of
common shares outstanding for the period. Diluted earnings
(loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares
outstanding combined with dilutive common
share
equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the
calculation of diluted loss per share for the years ended
December 31, 2019, 2018, and 2017, since including them
would have an anti-dilutive effect on loss per share due to the
loss from continuing operations incurred during the period.
Securities convertible into shares of common stock that were
not considered in the diluted loss per share calculations were
0.1 million restricted stock units and 3.0 million stock options
for the year ended December 31, 2019, and 0.7 million
restricted stock units for the year ended December 31, 2018,
and 0.7 million stock options and 0.8 million restricted stock
units for the year ended December 31, 2017.
A reconciliation of the number of shares used for the basic and diluted earnings (loss) per common share computations is as follows
(in thousands):
Weighted average common shares outstanding - Basic
58,750
57,995
57,580
Assumed conversions:
Incremental common shares from stock options
Incremental common shares from restricted stock units
Weighted average common shares outstanding - Diluted
—
—
58,750
—
—
57,995
—
—
57,580
Years ended December 31,
2018
2019
2017
57
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — 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
Years ended December 31,
2018
2017
2019
$
(22,923) $
(2,295)
(238)
(25,456)
23,910
1,345
—
25,255
$
(201) $
— $
97
(740)
(643)
(6,585)
(89)
101
(6,573)
(7,216) $
(1,126)
587
488
(51)
5,994
214
(45)
6,163
6,112
The components of (loss) income before income taxes are as follows (in thousands):
United States
Foreign
Loss before income taxes
Years ended December 31,
2018
2017
2019
$
$
(76,758) $
(178)
(76,936) $
(80,034) $
(623)
(80,657) $
(10,025)
(1,367)
(11,392)
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,
2018
2017
2019
21.0%
0.6
0.5
(19.9)
—
—
(0.1)
—
0.2
(2.0)
0.3%
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)%
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
58
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
Settlement liability
Lease liability
Interest expense limitation
Other
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets, net
Deferred tax liabilities:
Property and equipment
Intangible assets
ROU asset
Prepaid insurance and other
Total gross deferred tax liabilities
Net deferred tax assets
December 31,
2019
2018
$
$
17,248
1,037
629
353
965
587
3,894
3,530
3,992
—
96
32,331
(19,878)
12,453
(3,696)
(4,597)
(3,793)
(331)
(12,417)
36
$
$
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
As of December 31, 2019, the Company had U.S. net
operating loss carryforwards of $68.9 million, including $49.6
million expiring in various amounts in 2035 through 2037
which can offset 100% of taxable income and $19.3 million
that has an indefinite carryforward period which can offset
80% of taxable income per year. The ability to utilize net
operating losses and other tax attributes could be subject to a
significant limitation if the Company were to undergo an
“ownership change” for purposes of Section 382 of the Tax
Code.
Net deferred tax assets arise due to the recognition of income
and expense items for tax purposes, which differ from those
used for financial statement purposes. ASC 740, Income
Taxes, provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. In assessing
the need for a valuation allowance in the second quarter of
2018, the Company 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 provided a source of income to support
the release of $11.5 million of the valuation allowance which
resulted in a deferred tax asset of $18.7 million. As such, the
Company reversed this portion of the valuation allowance
during the fourth quarter of 2018. At December 31, 2019, the
59
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
valuation allowance against the net federal and state deferred
tax assets was $19.9 million.
The Company has not calculated U.S. taxes on unremitted
earnings of certain non-U.S. subsidiaries due to the Company’s
intent to reinvest the unremitted earnings of the non-U.S.
subsidiaries. At December 31, 2019, the Company had
approximately $2.3 million in unremitted earnings for one of
its foreign jurisdictions, which were not included for U.S. tax
purposes. Due to the 2017 Tax Act, U.S. federal transition taxes
have been recorded for a one-time U.S. tax liability on these
earnings which have not previously been repatriated to the
U.S. However, certain withholding taxes will need to be paid
upon repatriation. It is not practicable to estimate the amount
of the deferred tax liability on such unremitted earnings.
The Company has performed an evaluation and concluded
there are no significant uncertain tax positions requiring
recognition in the Company’s financial statements. The
evaluation was performed for the tax years which remain
subject to examination by tax jurisdictions as of December 31,
2019, which are the years ended December 31, 2015 through
December 31, 2019 for U.S. federal taxes and the years ended
December 31, 2014 through December 31, 2019 for state tax
jurisdictions.
At December 31, 2019, the Company had no unrecognized tax
benefits.
In January 2017, the Internal Revenue Service notified the
Company that it would examine the Company’s “IRS” federal
tax returns for the year ended December 31, 2014. The
examination included (1) the corporate returns and (2)
employment tax matters. The IRS fieldwork has been
completed in relation to the corporate returns with no adverse
findings. Further discussion of the employment tax matter can
be found in Note 19 ---“Related Party Transaction.”
Note 15 — Common Stock
The Company’s 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 as restricted stock unit grants
Shares issued at the end of the year
Stock-Based Incentive Plans
Year ended December 31,
2018
2019
62,162,875
924,022
570,000
63,656,897
60,622,986
1,539,889
—
62,162,875
Stockholders approved long term incentive plans in 2019,
2018, 2014, 2010, and 2007 (the “2019 Plan”, the “2018 Plan,”
the “2014 Plan,” the “2010 Plan,” and the “2007 Plan,”
respectively) under which the Company may grant equity
awards to officers, key employees, non-employee directors,
and service providers in the form of stock options, restricted
stock, and certain other incentive awards. The maximum
number of shares that may be issued under the 2019 Plan, 2018
Plan, 2014 Plan, 2010 Plan, and 2007 Plan are 1.0 million 3.0
million, 5.2 million, 6.0 million, and 2.2 million, respectively.
At December 31, 2019, the Company had a total of 3.9 million
shares remaining to be granted under the 2019 Plan, 2018 Plan,
2014 Plan, and 2010 Plan. Shares may no longer be granted
under the 2007 Plan.
60
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of
grant. During the fourth quarter 2019, 3.0 million stock options were granted, 1.0 million time-vested and 2.0 million performance-
based. The time-vested stock options will vest equally over the next five years. The performance-based options are restricted until
performance criteria defined in the agreement are met. Proceeds received from stock option exercises are credited to common
stock and additional paid-in capital, as appropriate. The Company uses historical data to estimate pre-vesting option forfeitures.
Estimates are adjusted when actual forfeitures differ from the estimate. Stock-based compensation expense is recorded for all
equity awards expected to vest.
No stock options vested during the years ended December 31, 2019, 2018, and 2017.
Stock Options
Outstanding as of January 1, 2019
Granted
Exercised
Forfeited
Expired
Outstanding as of
December 31, 2019
Vested or expected to vest at
December 31, 2019
Options exercisable as of
December 31, 2019
Weighted-
Average
Exercise
Price
—
1.22
—
—
—
Shares
— $
3,000,000
—
—
—
3,000,000
$
1.22
— $
— $
—
—
The following table sets forth significant assumptions used in the Black-Scholes model for time-vested options and the Monte
Carlo model for performance-based options to determine the fair value of the options at December 31, 2019.
Risk-free interest rate
Expected volatility of common stock
Expected life of options in years
Dividend yield
Vesting period in years
Time-Vested
Options
Performance-
Based Options
1.81%
73.59%
5.0
—%
5.0
1.84%
71.57%
7.0
—%
7.0
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
61
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years. Certain time-vested shares have also been issued with
a portion of the shares granted vesting immediately.
Performance-based
issued with
performance criteria defined over a designated performance
period and vest only when, and if, the outlined performance
restricted shares are
criteria are met. During the year ended December 31, 2019,
63% of the restricted shares granted were time-vesting and
37% were performance-based. Grantees of restricted shares
retain voting rights for the granted shares.
Restricted stock share activity for the year ended December 31, 2019 is as follows:
Restricted Stock Shares
Non-vested at January 1, 2019
Granted to employees
Vested
Forfeited
Non-vested at December 31, 2019
Weighted-
Average Fair
Value at Date of
Grant
3.47
2.62
3.72
3.16
2.66
Shares
1,050,372
1,494,022
(615,941)
(299,433)
1,629,020
$
$
The weighted-average grant-date fair value of restricted stock
granted during the years ended December 31, 2019, 2018, and
2017 was $2.62, $10.62, and $11.92 per share, respectively.
The total fair value of restricted stock that vested during the
years ended December 31, 2019, 2018, and 2017 was $6.3
million, $8.6 million, and $15.4 million, respectively.
At December 31, 2019, there was $1.8 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, 2019, the Company
granted performance-based restricted stock units (“RSUs”) for
1,071,530 shares equivalents. The performance period for
these share equivalents continues until December 31, 2024.
During the year ended December 31, 2018, the Company
granted performance-based RSUs
for 604,682 share
equivalents, which had a performance period through
December 31, 2019. No RSUs were earned during this
performance period.
Restricted stock units activity for the year ended December 31, 2019 is as follows:
Restricted Stock Units
RSU equivalents at January 1, 2019
2018 equivalents forfeited
Total equivalents
2019 equivalents granted
2019 equivalents forfeited
RSU equivalents at December 31, 2019
Weighted-
Average Fair
Value at Date of
Grant
3.94
6.39
—
3.75
1.66
3.24
Units
301,766
(272,046)
29,720
1,071,530
(62,776)
1,038,474
$
$
At December 31, 2019, there was $2.1 million of unrecognized
compensation expense related to 2019 and 2018 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
62
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to purchase common stock at a purchase price equal to 85%
of the fair market value of the common stock on the last
business day of a three-month offering period which coincides
with calendar quarters. Payroll deductions may not exceed
10% of an employee’s compensation and participants may not
purchase more than 1,000 shares in any one offering period.
In addition, for each calendar year, an employee may not be
granted purchase rights for Flotek Stock valued over $25,000,
as determined at the time such purchase right is granted. The
fair 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, 2019, 2018, and 2017,
respectively. The total fair value of the shares purchased under
the plan during the years ended December 31, 2019, 2018, and
2017 was $0.1 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. Following shareholder approval for additional shares,
the Company initiated the ESPP during the second quarter
2019.
Share-Based Compensation Expense
Non-cash share-based compensation expense related to
restricted stock, restricted stock unit grants, and stock
purchased under the Company’s ESPP was $7.1 million, $10.6
million, and $11.4 million during
the years ended
December 31, 2019, 2018, and 2017, respectively.
Treasury Stock
The Company accounts for treasury stock using the cost
method and includes treasury stock as a component of
stockholders’ equity. During the years ended December 31,
2019, 2018, and 2017, the Company purchased 93,977 shares,
199,644 shares, and 238,216 shares, respectively, of the
Company’s common stock at market value as payment of
income tax withholding owed by employees upon the vesting
of restricted shares and the exercise of stock options. Shares
issued as restricted stock awards to employees that were
forfeited are accounted for as treasury stock. During the year
ended December 31, 2019, there were no shares surrendered
for the exercise of stock options. During the years ended
December 31, 2018 and 2017, shares surrendered for the
exercise of stock options were 478,287 and 3,225,
respectively. These surrendered shares are also accounted for
as treasury stock.
Stock Repurchase Program
In November 2012, the Company’s Board of Directors
authorized the repurchase of up to $25 million of the
Company’s common stock. Repurchases may be made in the
open market or through privately negotiated transactions.
Through December 31, 2019, the Company has repurchased
$25 million of its common stock under this authorization.
In June 2015, the Company’s Board of Directors authorized
the repurchase of up to an additional $50 million of the
Company’s common stock. Repurchases may be made in the
open market or through privately negotiated transactions.
Through December 31, 2019, the Company repurchased $0.3
million of its common stock under this authorization.
During the year ended December 31, 2018, the Company did
not repurchase any shares of its outstanding common stock.
During the year ended December 31, 2017, the Company
repurchased 905,000 shares of its outstanding common stock
on the open market at a cost of $5.2 million, inclusive of
transaction costs, or an average price of $5.75 per share.
During the year ended December 31, 2016, the Company did
not repurchase any shares of its outstanding common stock.
At December 31, 2019, the Company had $49.7 million
remaining under its share repurchase program. A covenant
under the Company’s Credit Facility limited the amount that
may be used to repurchase the Company’s common stock. At
December 31, 2019, this covenant did not permit additional
share repurchases.
63
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — Commitments and Contingencies
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern
District of Texas granted the Company’s motion to dismiss the
four consolidated putative securities class action lawsuits that
were filed in November 2015, against the Company and certain
of its officers. The lawsuits were previously consolidated into
a single case, and a consolidated amended complaint had been
filed. The consolidated amended complaint asserted that the
Company made false and/or misleading statements, as well as
failed to disclose material adverse facts about the Company’s
business, operations, and prospects. The complaint sought an
award of damages in an unspecified amount on behalf of a
putative class consisting of persons who purchased the
Company’s common stock between October 23, 2014 and
November 9, 2015, inclusive. The lead plaintiff appealed the
District Court’s decision granting the motion to dismiss. On
February 7, 2019, a three-judge panel of the United States
Court of Appeals for the Fifth Circuit issued a unanimous
opinion affirming the District Court’s judgment of dismissal
in its entirety.
Other Litigation
The Company is subject to routine litigation and other claims
that arise in the normal course of business. Management is not
aware of any pending or threatened lawsuits or proceedings
that are expected to have a material effect on the Company’s
financial position, results of operations or liquidity.
Other Commitments
Rent expense under operating leases totaled $2.9 million, $2.9
million, and $3.3 million during the years ended December 31,
2019, 2018, and 2017, respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for the
benefit of eligible employees in the U.S. All employees are
eligible to participate in the plan upon employment. On
January 1, 2015, the Company implemented a new matching
program. The Company matches contributions at 100% of up
to 2% of an employee’s compensation and, if greater, the
Company matches contributions at 50% from 5% to 8% of an
employee’s compensation.
During the years ended December 31, 2019, 2018, and 2017,
compensation expense included $0.7 million, $1.0 million and
$1.0 million, respectively, related to the Company’s 401(k)
match.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from the
oil and gas industry. Customers include major oilfield services
companies, major integrated oil and natural gas companies,
independent oil and natural gas companies, pressure pumping
service companies, and state-owned national oil companies.
This concentration of customers in one industry increases
credit and business risks.
The Company is subject to concentrations of credit risk within
trade accounts receivable, as the Company does not generally
require collateral as support for trade receivables. In addition,
the majority of the Company’s cash is maintained at a major
financial institution and balances often exceed insurable
amounts.
Note 17 — 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 segment: Energy Chemistry Technologies.
Energy Chemistry Technologies designs, develops,
manufactures, packages, and markets specialty chemistries
used in oil and natural gas well drilling, cementing,
completion, and stimulation. In addition, the Company’s
chemistries are used in specialized enhanced and improved oil
recovery markets. Activities in this segment also include
construction and management of automated material handling
facilities and management of loading facilities and blending
operations for oilfield services companies.
The Company evaluates performance based upon a variety of
criteria. The primary financial measure is segment operating
income. Various functions, including certain sales and
marketing activities and general and administrative activities,
are provided centrally by the corporate office. Costs associated
with corporate office functions, other corporate income and
expense items, and income taxes are not allocated to reportable
segments.
64
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of the reportable segments is as follows (in thousands):
As of and for the years ended December 31,
Energy Chemistry
Technologies
Corporate and
Other
Total
2019
Net revenue from external customers
Loss from operations
Depreciation and amortization
Capital expenditures
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
$
$
$
$
$
$
119,353
(46,485)
7,439
2,411
177,773
(36,817)
7,107
2,733
243,106
33,611
7,323
3,279
— $
(30,140)
1,026
—
— $
(32,994)
2,109
826
— $
(43,931)
2,445
918
119,353
(76,625)
8,465
2,411
177,773
(69,811)
9,216
3,559
243,106
(10,320)
9,768
4,197
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, 2019
December 31, 2018
$
$
117,357
$
114,490
231,847
—
231,847
$
139,205
28,208
167,413
118,470
285,883
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
Years ended December 31,
2018
2017
2019
$
$
104,786
14,567
119,353
$
$
146,421
31,352
177,773
$
$
219,517
23,589
243,106
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
65
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
Years ended December 31,
2018
*
12.23%
10.1%
*
2017
*
*
*
16.7%
2019
20.4%
10.3%
*
*
Customer A
Customer B
Customer C
Customer D
66
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Quarterly Financial Data (Unaudited)
First
Quarter
Second
Quarter
Third
Quarter
(in thousands, except per share data)
Fourth
Quarter
Total
2019
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 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
2018
Revenue (1)
(Loss) income from operations (1)
Loss from continuing operations (1)
(Loss) income from discontinued operations, net of tax
Net loss (income)
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
$
$
43,256
(14,266)
$
34,692
(13,859)
$
21,879
(11,853)
19,526
(36,647)
$ 119,353
(76,625)
$ (15,380) $ (12,990) $ (11,227) $ (37,138) $ (76,735)
44,456
(32,279)
—
$ (14,598) $ (11,110) $ (39,563) $ (32,279)
48,372
32,992
—
32,992
(2,425)
(39,563)
—
(1,608)
(14,598)
—
117
(11,110)
—
$
$ (15,380) $ (12,990) $ (11,227) $ (37,138) $ (76,735)
44,456
$ (14,598) $ (11,110) $ (39,563) $ (32,279)
48,372
32,992
(2,425)
(1,608)
117
$
$
$
$
$
$
$
$
$
$
$
$
(0.26) $
0.83
0.57
$
(0.26) $
0.83
0.57
$
(0.22) $
(0.03)
(0.25) $
(0.22) $
(0.03)
(0.25) $
(0.19) $
—
(0.19) $
(0.19) $
—
(0.19) $
(0.64) $
(0.04)
(0.68) $
(0.64) $
(0.04)
(0.68) $
(1.31)
0.76
(0.55)
(1.31)
0.76
(0.55)
$
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
(6,404)
$ (75,391) $
(4,869) $
937
(3,932) $
9,943
(1,385)
8,558
$ (73,441)
2,743
$ (70,698)
(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) $
0.18
(0.02)
0.16
0.18
(0.02)
0.16
$
$
$
$
(1.26)
0.05
(1.21)
(1.26)
0.05
(1.21)
(1) Amounts exclude impact of discontinued operations.
(2) The sum of the quarterly earnings (loss) per share (basic and diluted) may not agree to the earnings (loss) per share for the year due to the timing of
common stock issuances.
67
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 — Related Party Transaction
In January 2017, the IRS notified the Company that it was
examining the Company’s federal tax returns for the year
ended December 31, 2014. As a result of this examination,
the IRS informed the Company on May 1, 2019 that certain
employment taxes related to the compensation of our CEO,
Mr. Chisholm, were not properly withheld in 2014 and
proposed an adjustment. Mr. Chisholm’s affiliated
companies through which he provided his services have
agreed to indemnify the Company for any such taxes, and
Mr. Chisholm has executed a personal guaranty in favor of
the Company, supporting this indemnification.
At June 30, 2019, the Company recorded a liability of $2.4
million related to the estimated employment tax under-
withholding for the years 2014 through 2018. By September
30, 2019, the liability totaled $1.8 million, after the Company
paid $0.6 million to the IRS for these taxes and made an
additional accrual covering the estimated under-withholding
Note 20 — Subsequent Events
On February 26, 2020, Flotek Chemistry, LLC, a wholly-
owned subsidiary of the Company, entered into an amendment
to the terpene supply agreement between Flotek Chemistry
and Florida Chemical Company, LLC. Pursuant to the terms
and conditions of the amendment, the terpene supply
agreement is amended to, among other things, (a) reduce the
minimum quantity of terpene that Flotek Chemistry is required
to purchase by approximately 3/4ths in 2020 and by
approximately half in each of 2021, 2022 and 2023, (b) provide
a fixed per pound price for terpene in 2020, (c) reduce the
maximum amount of terpene subject to the terpene supply
Agreement by approximately 1/3rd, and (d) change the
payment terms to net 45 days. In order to make the terms and
conditions of the Amendment effective, Flotek Chemistry
made a one-time payment of $15.8 million to Florida Chemical
Company, LLC, which is included in accrued liabilities at
December 31, 2019.
As of December 31, 2019, the Company concluded that the
amended long-term supply agreement met the definition of a
tax liability through 2019. In addition, at June 30, 2019 the
the affiliated
Company recorded a receivable from
companies totaling $2.4 million. In October 2019, an
amendment to the employment agreement was executed,
giving the Company the contractual right of offset for any
amounts owed to the Company against, and giving the
Company the right to withhold payments equal to amounts
reasonably estimated to potentially become due to the
Company by the affiliated companies from, any amounts
owed under the employment agreement. The Company
netted the related party receivable against the severance
payable as of December 31, 2019. At December 31, 2019,
the Company recorded $1.8 million for potential liability to
the IRS.
loss contract. As such, the Company recognized a loss as of
December 31, 2019 equal to the price paid for terpene supply
agreement amendment which aligns purchase commitments
to expected usage for blended products.
Pursuant to the post-closing working capital dispute resolution
procedures set forth in the Share Purchase Agreement, the
Company and ADM engaged a neutral third party auditor to
help reach agreement on the final post-closing working capital
adjustment. In February 2020, the third party auditor ruled in
favor of awarding ADM for the entire $4.1 million disputed
amount resulting in a reduction to the gain on the sale of the
business as of December 31, 2019.
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
68
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, 2019,
as required by Rule 13a-15(e) of the Exchange Act. Based
upon that evaluation, the principal executive and principal
financial officers have concluded that the Company’s
disclosure controls and procedures were effective as of
December 31, 2019.
Management’s Report on Internal Control over Financial
Reporting
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.
including
The Company’s management,
the principal
executive and principal financial officers, assessed the
effectiveness of internal control over financial reporting as of
December 31, 2019, 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, 2019.
The effectiveness of the Company’s internal control over
financial reporting as of December 31, 2019 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, 2019 that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
69
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 2020 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 2020 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 2020 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 2020 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 2020 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of year end.
70
Item 15. Exhibits and Financial Statement Schedules.
PART IV
EXHIBIT INDEX
Exhibit
Number
2.1
3.1
3.2
3.3
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Exhibit Title
Share Purchase Agreement, dated as of January 10, 2019, by and between the Company and Archer-Daniels-
Midland Company (portions of this exhibit have been omitted pursuant to a confidential treatment request,
which has been granted) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on March
4, 2019).
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).
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).
* Description of Capital Stock of the Company.
†
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 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).
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).
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).
2018 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company’s definitive proxy
statement on Schedule 14A filed on March 30, 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).
2019 Non-Employee Director Incentive Plan (incorporated by reference to Exhibit A to the Company’s definitive
proxy statement on Schedule 14A filed on April 24, 2019).
†
†
†
†
†
†
†
10.9
† Amendment to 2012 Employee Stock Purchase Plan (incorporated by reference to Exhibit B to the Company’s
definitive proxy statement on Schedule 14A filed on April 24, 2019).
10.10
† Amendment to 2018 Long-Term Incentive Plan (incorporated by reference to Exhibit C to the Company’s
definitive proxy statement on Schedule 14A filed on April 24, 2019).
10.11
10.12
10.13
10.14
10.15
*** Supply Agreement (Terpene), dated as of February 28, 2019, by and among the Company, Florida Chemical
Company, LLC and Archer-Daniels-Midland Company (incorporated by reference to Exhibit 10.1 to the
Company’s Form 10-Q for the quarter ended March 31, 2019).
*** Supply Agreement (Citrus Burst), dated as of February 28, 2019, by and between Florida Chemical Company,
LLC and Flotek Chemistry, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for
the quarter ended March 31, 2019).
Cooperation Agreement, dated as of March 19, 2019, by and among the Company and BLR Partners LP and
its affiliates (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 20, 2019).
Employment Agreement, dated effective as of April 1, 2019, by and between the Company and John W. Chisholm
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 24, 2019).
First Amended and Restated Employment Agreement, dated effective as of April 1, 2019, by and between the
Company and Elizabeth T. Wilkinson (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K
filed on May 24, 2019).
†
†
10.16
†
Termination and Release Agreement, dated as of May 20, 2019, by and among the Company, John W. Chisholm,
Protechnics II, Inc. and Chisholm Management, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s
Form 10-Q for the quarter ended June 30, 2019).
71
Exhibit
Number
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
104
*
**
***
†
†
†
†
†
*
*
*
*
**
**
*
*
*
*
*
*
†
†
†
Exhibit Title
Stand-Alone Cash-Settled Restricted Stock Unit Agreement, dated as of May 20, 2019, by and between the
Company and John W. Chisholm (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q for
the quarter ended June 30, 2019).
Restricted Stock Agreement, dated as of May 24, 2019, by and between the Company and John W. Chisholm
(incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended June 30, 2019).
Form of Restricted Stock Agreement pursuant to the Company’s 2018 Long-Term Incentive Plan (incorporated
by reference to Exhibit 10.6 to the Company’s Form 10-Q for the quarter ended June 30, 2019).
†
Form of Restricted Stock Agreement pursuant to the Company’s 2019 Non-Employee Director Incentive Plan
(incorporated by reference to Exhibit 10.7 to the Company’s Form 10-Q for the quarter ended June 30, 2019).
† Amendment No. 1 to Employment Agreement, dated October 18, 2019, by and between the Company and John
W. Chisholm (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 24, 2019).
† Guaranty, dated May 8, 2019, by John W. Chisholm in favor of the Company (incorporated by reference to
Exhibit 10.2 to the Company’s Form 8-K filed on October 24, 2019).
Employment Agreement, dated effective as of December 22, 2019, by and between the Company and John W.
Gibson, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 27, 2019).
Stand-Alone Restricted Stock Unit Award Agreement, dated as of December 22, 2019, by and between the
Company and John W. Gibson, Jr. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed
on December 27, 2019).
Stand-Alone Time-Based Stock Option Award Agreement, dated as of December 22, 2019, by and between the
Company and John W. Gibson, Jr. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed
on December 27, 2019).
Stand-Alone Performance-Based Stock Option Award Agreement, dated as of December 22, 2019, by and
between the Company and John W. Gibson, Jr. (incorporated by reference to Exhibit 10.4 to the Company’s
Form 8-K filed on December 27, 2019).
List of Subsidiaries.
Consent of Moss Adams, 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.
Inline XBRL Instance Document.
Inline XBRL Schema Document.
Inline XBRL Calculation Linkbase Document.
Inline XBRL Label Linkbase Document.
Inline XBRL Presentation Linkbase Document.
Inline XBRL Definition Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
Filed with this Form 10-K/A.
Furnished with this Form 10-K/A, not filed.
Portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K in order for them
to remain confidential.
Management contracts or compensatory plans or agreements.
72
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. Gibson Jr.
John W. Gibson Jr.
President, Chief Executive Officer and Chairman of the Board
Date: March 13, 2020
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. GIBSON JR.
John W. Gibson Jr.
President, Chief Executive Officer and Chairman of the Board
March 13, 2020
(Principal Executive Officer)
/s/ ELIZABETH T. WILKINSON
Elizabeth T. Wilkinson
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
March 13, 2020
/s/ MICHELLE M. ADAMS
Michelle M. Adams
/s/ TED D. BROWN
Ted D. Brown
/s/ L. MELVIN COOPER
L. Melvin Cooper
/s/ PAUL W. HOBBY
Paul W. Hobby
/s/ L.V. “BUD” MCGUIRE
L.V. “Bud” McGuire
/s/ DAVID NIERENBERG
David Nierenberg
Director
Director
Director
Director
Director
Director
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
73
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DESCRIPTION OF CAPITAL STOCK
EXHIBIT 4.2
The following description of capital stock of Flotek Industries, Inc. (the “Company,” “we” or “us”) is a summary and
does not purport to be complete. It is subject to and qualified in its entirety by reference to the Company’s Amended and Restated
Certificate of Incorporation, the Certificate of Amendment to the Amended and Restated Certificate of Incorporation (collectively,
the “Certificate of Incorporation”) and the Company’s Second Amended and Restated Bylaws (the “Bylaws”), each of which are
incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.2 is a part. We encourage you
to read the Certificate of Incorporation, the Bylaws and the applicable provisions of the Delaware General Corporation Law (the
“DGCL”), for additional information.
General
Our authorized capital stock consists of:
•
•
80,000,000 shares of common stock, $0.0001 par value; and
100,000 shares of preferred stock, $0.0001 par value.
The following summary of the rights, preferences and privileges of our capital stock, our Certificate of Incorporation and our
Bylaws does not purport to be complete and is qualified in its entirety by reference to the provisions of applicable law and to our
Certificate of Incorporation and Bylaws.
Common Stock
Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Because holders
of common stock do not have cumulative voting rights, the holders of a majority of the shares of common stock can elect all of
the members of the board of directors standing for election. The holders of common stock are entitled to receive dividends as may
be declared by the board of directors. Upon our liquidation, dissolution or winding up, and subject to any prior rights of outstanding
preferred stock, the holders of our common stock will be entitled to share pro rata in the distribution of all of our assets available
for distribution to our stockholders after satisfaction of all of our liabilities and the payment of the liquidation preference of any
preferred stock that may be outstanding. There are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable. The holders of our common stock have no preemptive or
other subscription rights to purchase our common stock.
Preferred Stock
Subject to the provisions of the Certificate of Incorporation and limitations prescribed by law, the board of directors has the
authority to issue up to 100,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, dividend rates, conversion rates, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting any series or the designation of the series, which
may be superior to those of the common stock, without further vote or action by the stockholders.
One of the effects of undesignated preferred stock may be to enable the board of directors to render more difficult or to discourage
an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise and, as a result, protect the
continuity of our management. The issuance of shares of the preferred stock under the board of directors’ authority described
above may adversely affect the rights of the holders of common stock. For example, preferred stock issued by us may rank prior
to the common stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be
convertible into shares of common stock. Accordingly, the issuance of shares of preferred stock may discourage bids for the
common stock or may otherwise adversely affect the market price of the common stock.
Delaware Anti-Takeover Law, Certificate of Incorporation and Bylaw Provisions
We are subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation
from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed
manner.
Section 203 defines a “business combination,” among other things, as a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholders. Section 203 defines an “interested stockholder” as a person who, together with affiliates
and associates, owns, or, in some cases, within three years prior, did own, 15% or more of the corporation’s voting stock. Under
Section 203, a business combination between us and an interested stockholder is prohibited unless:
•
•
•
our board of directors approved either the business combination or the transaction that resulted in the stockholder becoming
an interested stockholder prior to the date the person attained the status;
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding, for
purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers and
employee stock plans, under which employee participants do not have the right to; or
the business combination is approved by our board of directors on or subsequent to the date the person became an interested
stockholder and authorized at an annual or special meeting of the stockholders by the affirmative vote of the holders of
at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
This provision has an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including
discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock. With
approval of our stockholders, we could amend our Certificate of Incorporation or Bylaws in the future to elect not to be governed
by the anti-takeover law. This election would generally be effective 12 months after the adoption of the amendment and would
not apply to any business combination between us and any person who became an interested stockholder on or before the adoption
of the amendment.
Provisions of Our Certificate of Incorporation and Bylaws
Our Certificate of Incorporation and Bylaws provide that any action required or permitted to be taken by our stockholders may
be taken at a duly called meeting of stockholders or by written consent of the holders of all of the outstanding stock entitled to
vote on such action. Under Delaware law, the power to adopt, amend or repeal Bylaws is conferred upon the stockholders. A
corporation may, however, in its Certificate of Incorporation also confer upon the board of directors the power to adopt, amend
or repeal its Bylaws. Our Certificate of Incorporation and Bylaws grant our board the power to adopt, amend and repeal our Bylaws
on the affirmative vote of a majority of the directors then in office. Our stockholders may adopt, amend or repeal our Bylaws, but
only at any regular or special meeting of stockholders by the holders of not less than a majority of the outstanding shares of stock
entitled to vote. Also, our Bylaws do not grant our stockholders the ability to call special meetings of stockholders. Advance notice
is required for stockholders to nominate directors or to submit proposals for consideration at meetings of stockholders.
The foregoing provisions of our Certificate of Incorporation and Bylaws and the provisions of Section 203 of the DGCL could
have the effect of delaying, deferring or preventing a change in control of the Company.
Liability and Indemnification of Officers and Directors
Our Certificate of Incorporation and Bylaws provide that indemnification shall be to the fullest extent permitted by the DGCL for
all current or former directors or officers of the Company. As permitted by the DGCL, the Certificate of Incorporation provides
that directors of the Company will not be liable to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent of the law of the State of Delaware. If the DGCL is amended to authorize the further
elimination or limitation of directors’ liability, then the liability of our directors will automatically be limited to the fullest extent
provided by law.
We have also agreed to obtain and maintain director and officer liability insurance for the benefit of each of our officers and
directors. These policies include coverage for losses for wrongful acts. Each of our officers and directors is named as an insured
under such policies and provided with the same rights and benefits as are accorded to the most favorably insured of our directors
and officers.
Exclusive Forum Provision
Our Bylaws provide that, unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery
(the “Chancery Court”) of the State of Delaware (or, in the event that the Chancery Court does not have jurisdiction, the federal
district court for the District of Delaware or other state courts of the State of Delaware) shall, to the fullest extent permitted by
law, be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Company, (b) any action
asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company
or to the Company’s stockholders, (c) any action arising pursuant to any provision of the DGCL or the Certificate of Incorporation
or the Bylaws (as either may be amended from time to time), or (d) any action asserting a claim against the Company governed
by the internal affairs doctrine.
Listing of Common Stock
Our common stock is currently listed on the New York Stock Exchange under the symbol “FTK.”
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock Transfer & Trust Company, LLC.
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FLOTEK INDUSTRIES, INC.
LIST OF SUBSIDIARIES
EXHIBIT 21.1
Flotek Chemistry, LLC
Oklahoma Limited Liability Company
Flotek Paymaster, Inc.
Texas 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, 333-225865, and 333-231749) 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 6,
2020, 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, 2019.
EXHIBIT 23.1
/s/ Moss Adams LLP
Houston, Texas
March 6, 2020
EXHIBIT 31.1
I, John W. Gibson Jr., 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 13, 2020
/s/ John W. Gibson Jr.
John W. Gibson Jr.
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 13, 2020
/s/ ELIZABETH T. WILKINSON
Elizabeth T. Wilkinson
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,
2019, 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 13, 2020
/s/John W. Gibson Jr.
John W. Gibson Jr.
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,
2019, 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 13, 2020
/s/ ELIZABETH T. WILKINSON
Elizabeth T. Wilkinson
Chief Financial Officer
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