UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
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)
8846 N. Sam Houston Parkway W. Houston, TX
(Address of principal executive offices)
90-0023731
(I.R.S. Employer
Identification No.)
77064
(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
Title of each class
Common Stock, $0.0001 par value
Trading Symbol(s)
FTK
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark:
• if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
• if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
• whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☐
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒
Smaller reporting company ☒ Emerging growth company ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error
to previously issued financial statements .☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to o § 240.10D-1(b). .☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2022 (based on the closing market price on the New York Stock Exchange on June 30, 2022 ) was
approximately $76 million. At March 21, 2023, there were 88,170,936 outstanding shares of the registrant’s common stock, $0.0001 par value.
Portions of the Company’s definitive proxy statement in connection with the 2023 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A are incorporated by
reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Forward-Looking Statements
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
2
3
3
3
10
24
24
25
25
25
26
27
33
34
68
68
69
69
70
70
70
70
70
71
73
74
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 of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements are not historical facts, but instead represent the current assumptions and beliefs regarding future events of Flotek
Industries, Inc. (“Flotek” or the “Company”), many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include
estimates, projections, and statements related to the Company’s business plan, objectives, expected operating results, and assumptions upon which those
statements are based. The forward-looking statements contained in this Annual Report are based on information available as of the date of this Annual Report.
The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the
outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These
forward-looking statements generally are identified by words including, but not limited to, “anticipate,” “believe,” “estimate,” “commit,” “budget,” “aim,”
“potential,” “schedule,” “continue,” “intend,” “expect,” “plan,” “forecast,” “target”, “think”, “likely”, “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
may also include statements regarding the anticipated performance under long-term supply agreements or amendments thereto and the potential value thereof or
revenue thereafter. 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 in subsequent reports filed with the Securities and Exchange
Commission (“SEC”). The Company has no obligation, and we disclaim any 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.
Item 1. Business.
General
PART I
Flotek creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and
data company, Flotek helps customers across industrial and commercial markets improve their environmental performance. The Company serves specialty
chemistry needs for both domestic and international energy markets.
The Company’s Chemistry Technologies (“CT”) segment designs, develops, manufactures, packages and distributes green, specialty chemicals that help their
customers meet their environmental, social and governance (“ESG”) and operational goals, aiming to enhance the profitability of hydrocarbon producers.
The Company’s Data Analytics (“DA”) segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics
associated with their hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and
allows users to pursue automation of their hydrocarbon streams to increase their profitability.
The Company was initially incorporated under the laws of the Province of British Columbia in 1985. In October 2001, the Company changed its corporate
domicile to the State of Delaware. 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.
3
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
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”) upon issuance of
$10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC. Under the
Initial ProFrac Agreement, ProFrac Services, LLC was obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required
for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac
Services, LLC during the term of the Initial ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to
the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of
products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year. The Initial ProFrac Agreement has a term
of 3 years from April 1, 2022.
On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac
Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable. The Initial ProFrac Agreement
was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements
and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.
On February 1, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No. 2”) dated February 2, 2022.
The Amended ProFrac Agreement No. 2 has an effective date of January 1, 2023. The ProFrac Agreement was amended to (1) provide a ramp-up period from
January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of active hydraulic fracturing fleets to 30 fleets, (2) waive any liquidated
damages payment relating to any potential order shortfall prior to January 1, 2023, (3) add additional fees to certain products, and (4) provide margin increases
based on revenue percentages from non-ProFrac customers. The Company believes the net present value of the economic benefit attributable to the Amended
ProFrac Agreement No. 2 will exceed the value of the liquidated damages payments that would have been received for the period from April 1, 2022 through
December 31, 2022.
On February 2, 2023, the Convertible Notes Payable and certain Contract Consideration Convertible Notes Payable previously issued on February 2, 2022 were
converted upon maturity into 10,355,840 shares of common stock and 25,366,561 Pre-Funded Warrants to purchase common stock for a nominal exercise price of
$0.0001 per share exercisable subject to the limitations on exercise described therein. All of the holders elected to receive shares of common stock upon
conversion except for Profrac Holdings LLC, which elected to receive the Pre-Funded Warrants.
On January 19, 2023, the Company announced the departure of John W. Gibson, Jr. from his role as Chief Executive Officer and President of the Company,
effective January 19, 2023. Mr. Gibson also stepped down from his role as Chairman of the Board of Directors (the “Board”) of the Company. Mr. Gibson’s
departure was treated as a termination without cause.
Mr. Gibson’s departure as Chairman of the Board, Chief Executive Officer and President of the Company was not due to any disagreement with the Company or
any matter relating to the Company’s operations, policies or practices.
The Board has an active search process underway to select a permanent Chief Executive Officer of the Company. During the transition period, Harsha V. Agadi,
who has served as a member of the Board since July 2020, will serve as the Company’s interim Chief Executive Officer.
Description of Operations and Segments
The Company’s operations have two business segments, CT and DA, which are both supported by the Company’s Research & Innovation (“R&I”) advanced
laboratory capabilities. Financial information about the Company’s operating segments and geographic concentration is provided in Note 19, “Business Segment,
Geographic and Major Customer and Supplier Information” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.
4
Chemistry Technologies
The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance,
lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and
technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program.
The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to
reduce the environmental impact of energy on the air, water, land and people.
Customers of the CT segment include those of energy related markets, such as our related party ProFrac Services, LLC, with whom we have a long-term supply
agreement, as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas
companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit
from our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon
intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, natural gas liquids (NGLs), natural gas, crude oil, and
condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is
processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants as well as ProFrac Services,
LLC, to whom twenty JP3 units are expected to be deployed in 2023. We have developed a line of Verax™ analyzers for deployment internationally in hazardous
locations and harsh weather conditions.
Research & Innovation
R&I supports the acceleration of ESG solutions for both business segments through green chemistry formulation and Environmental Protection Agency (“EPA”)
regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s
business segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities
concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and
manufacturing. For the years ended December 31, 2022 and 2021, the Company incurred $4.4 million and $5.5 million, respectively, of research and development
expense. The Company expects that its 2023 research and development investment will continue to support new product development, especially in support of
enhanced ESG standards, increased adoption of green chemistry and conventional customization initiatives for its clients.
Seasonality
Overall, operations generally are not significantly affected by seasonality; however, weather conditions can cause delays in clients’ activity levels. Certain
working capital components build and recede throughout the year in conjunction with established purchasing and selling cycles that can impact operating results
and financial position. The sale of the Company’s products and performance of the Company’s services can be susceptible to both weather and naturally occurring
phenomena, including, but not limited to, the following:
•
the severity and duration of winter temperatures in North America, which impacts natural gas storage levels, drilling activity, commodity prices and
operations at the Company’s facilities;
• material deviations from normal seasonality for an extended period can impact access to operations, reduced performance at manufacturing facilities,
inability to deploy required personnel, supply chain interruptions, facility damage and customer activity levels;
•
•
the timing and impact of hurricanes upon coastal and offshore operations; and
the COVID-19 pandemic or other pandemics or similar phenomena, which may impact seasonal purchasing and selling cycles.
5
Product Demand and Marketing
Demand for the Company’s energy-focused products and services in both the CT and DA segments is driven by energy supply and demand, as well as operator
desire to deploy improved ESG solutions. Demand for the Company’s energy chemistry products and services is dependent on levels of conventional and
unconventional oil and natural gas well drilling and completion activity, both domestically and internationally.
The Company markets its products to end user customers using both direct and indirect sales channels. These sales channels are accessed using a mix of in-house
sales professionals as well as certain contractual agency agreements. The Company also actively participates in industry trade shows, both live and virtual,
publishes articles in industry publications, and participates in podcasts and creates other online content to educate the market on its product and service offerings.
While the Company’s primary marketing efforts remain focused in North America, resources and efforts are also deployed on emerging international markets,
especially in the Middle East.
Product revenues include significant sales to related parties as described in Note 18, “Related Party Transactions” in Part II, Item 8 - “Financial Statements and
Supplementary Data” of this Annual Report.
Facilities and Offices
See Part 1, Item 2 - “Properties”, for information regarding our manufacturing, warehouse and research facilities and sales offices.
Intellectual Property
The Company endeavors to protect its intellectual property, both within and outside of the U.S. The Company considers patent protection for all products and
methods deemed to have commercial significance and that may qualify for patent protection. The decision to pursue patent protection is dependent upon several
factors, including whether patent protection can be obtained, cost effectiveness, and alignment with operational and commercial interests. The Company believes
its patent and trademark portfolio, combined with confidentiality agreements, EPA registrations and licensing, trade secrets, proprietary designs, and
manufacturing and operational expertise, are sufficient to protect its intellectual property and provide continued strategic advantage. As of December 31, 2022, the
Company had 136 granted patents, including 111 patents in our CT segment and 24 patents in our DA segment. In addition, the Company also had 13 pending
patent applications filed in the U.S. and abroad, including 9 for the CT segment and 4 for the DA segment. The patents of the CT segment cover various chemical
compositions and methods of use. The patents of the DA segment cover various systems and methods of use for online determination of chemical composition and
data analysis. In addition, the Company had 50 registered trademarks in the U.S. and abroad, covering a variety of its goods and services.
Competition
Our ability to compete is dependent upon the Company’s ability to differentiate its products and services by providing superior quality and service, and
maintaining a competitive cost structure with sufficient and reliable access to raw material supplies. Activity levels in the oilfield goods and services industry are
impacted by current and expected oil and natural gas prices, oil and natural gas drilling activity, production levels, customer drilling and completion-designated
capital spending, and customer commitment to improved ESG performance. The unpredictability of the energy industry and commodity price fluctuations create
both increased risk and opportunity for the products and services of both the Company and its competitors. The DA segment faces competition from other
providers of equipment and services for real-time information in the upstream, midstream, refining and distribution market.
Raw Materials
Materials and components used in the Company’s servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open
market from multiple sources. When able, the Company uses multiple suppliers, both domestically and internationally, to purchase raw materials on the open
market. The prices paid for raw materials vary based on availability, weather, other commodity price fluctuations, contractual obligations, tariffs, duties on
imported materials, foreign currency exchange rates, business cycle position and global demand. Higher prices for chemistries and certain raw materials could
adversely impact future sales, contract fulfillment and product margins. The Company is diligent in its efforts to identify alternate suppliers in its contingency
planning utilizing competitive bidding practices to proactively reduce costs and potential supply shortages. During 2022, the Company worked to broaden the
technical specifications of some products to help ensure that required molecules could be sourced from more than one supplier.
6
The DA segment currently sources spectrometers from a single supplier. Due to long lead times, supply chain disruption could adversely impact the results of the
segment in 2023 and the years beyond.
Government Regulations
The Company is subject to federal, state, and local laws and regulations, including laws related to the environment, occupational safety, health, transportation and
trade within the U.S. and other countries in which the Company does business. These laws and regulations strictly govern the manufacture, storage, transportation,
sale, use and disposal of chemistry products. The Company strives to ensure full compliance with all regulatory requirements.
The Company continually evaluates the environmental impact of its operations and attempts to identify potential liabilities and costs of any environmental
remediation, litigation or associated claims. Several products of the CT segment are considered hazardous materials. In the event of a leak or spill in association
with Company operations, the Company could be exposed to risk of material cost, net of insurance proceeds, if any, to remediate any contamination. To the
Company’s knowledge, no environmental claims are currently being litigated or investigated.
Sustainability
Flotek’s vision is to create solutions to reduce the environmental impact of energy on air, water, land and people. Our mission is to be the collaborative ESG
partner of choice for sustainable chemistry technology and digital analytics solutions. We believe that green chemistry and digital transformation reduce the total
cost of ownership and environmental risk of our customers and can transform business by reducing carbon footprints, energy consumption, emissions and overall
environmental impact.
We have green, sustainable chemistry at our core, and we focus on providing responsible specialty chemistry solutions that are environmentally friendly and cost-
competitive. Our products offered by our CT segment displace harmful chemicals such as benzene, toluene, ethylbenzene and xylenes (BTEX) in energy
production, and our logistics and delivery methodology results in lower product usage and lower carbon emissions due to delivery. The analyzers produced by our
DA segment are a closed-loop system, meaning that samples of potentially harmful gasses and fluids do not need to be routinely taken and flared, as is the case
with gas chromatographs. This results in lower emissions. In addition, our analyzers’ ability to determine the mixing of two batches of product (“transmix”) in
real-time results in less time, energy and resources spent processing the transmix.
Human Capital
Employee Overview
As of December 31, 2022, the Company had approximately 146 employees, exclusive of existing worldwide agency relationships. None of the Company’s
employees are covered by a collective bargaining agreement and labor relations are generally good.
Employees & Health, Safety & Environment
The Company is committed to acting with care to protect the health and safety of people, resources and the environment. Each employee is responsible for
working towards the health, safety and environment (“HSE”) goals, as they are not isolated to certain individuals or roles. We aim to hold each other accountable
to a high standard. Thus, every employee is empowered and expected to stop any activity, big or small, that could jeopardize people, the environment or assets.
Our safety, health and environmental goals are designed to sustain our drive to zero incidents. As a result, safety is woven into the fabric of the Company, from
our robust training programs, to our safety moments that begin team meetings, to our Hazardous Observation Card program. Our training program is fundamental
to operating safely and protecting people and the environment. The Company maintains a robust health, safety and environmental training program that includes
both classroom and online curriculum. We assign specific trainings to employees based on their role and function within the Company. Additionally, the
Company’s field and plant personnel complete more than 24 hours of training annually. We continuously monitor all operational activities and update training
programs as needed to ensure the curriculum remains relevant and effective for minimizing risk and protecting our employees and the environment.
7
We have a strong commitment to safety in all aspects of our operations through training, safety culture, and tracking of key safety metrics. In 2022, the Company
recorded a Total Recordable Incident Rate (TRIR) of 0.397. The TRIR is a key safety performance metric which calculates the number of recordable incidents per
full-time workers during a one-year period.
Compensation: Wages & Benefits
The Company’s compensation programs are designed to provide employee wages that are competitive and consistent with employee positions, skill levels,
experience, knowledge and geographic location. We align our programs to attract, retain and motivate employees to achieve high-impact results that create value
for all of our stakeholders. In addition to competitive base wages, all employees are eligible for a discretionary bonus, which is based upon individual performance
and triggered by company performance, subject to the Company’s liquidity position.
Benefits are a key component of our compensation program. We engage an outside benefits consulting firm to independently evaluate the effectiveness and
competitiveness of our employee benefits program, as well as to tailor our program to the unique needs of the Company’s employee base.
All full-time employees are eligible for comprehensive health insurance, including medical insurance, prescription drug benefits, dental insurance and vision
insurance. Additionally, the Company offers flexible spending and health savings accounts, life and disability/accident coverage, telemedicine, critical illness
insurance and paid leave. Eligible employees may elect to participate in the Company’s employee stock purchase plan and retirement plans, including its 401(k)
plan in the U.S. and its Registered Retirement Savings Plan in Canada. The Company currently matches 401(k) contributions at 100% of up to 2% of an
employee’s compensation. The Company also offers access to online and personalized financial planning services as a component of its retirement plan benefit.
The Company continues to prioritize mental health and wellness for employees, maintaining an ongoing dialogue with employees and providing resources through
its employee assistance program, which is available to all employees and their families.
Outlook
Our business is subject to numerous variables which impact our outlook and expectations given the shifting conditions of the industry. We have based our outlook
on the market conditions we perceive today. Changes often occur.
Energy
Going into 2023 we believe that we are in the early years of a tight supply cycle for oil and gas triggered by a long period of underinvestment in energy
development, infrastructure and new sources of oil and gas production. While the demand for oil and gas could fluctuate depending on the macroeconomic
condition, we believe that this tight supply cycle could last and could provide support to high oil prices for multiple years. We expect that the strongest potential
growth throughout 2023 will likely come from independent, rather than large major exploration and production companies. Independent exploration and
production companies operate the majority of U.S. land rigs and react quickly to changing commodity prices. In the current commodity price environment, we
expect these companies to increase activity and the larger companies to have modest spending increases in the year ahead.
Digital Analytics
The use of data and digital analytics is a growing trend in all industries where technology is leveraged to analyze large datasets of operational information to
improve performance, as well as for predictive maintenance, advanced safety measures and reduced environmental impact of operations. We believe Verax™
analyzers have gained a foothold in North American markets for critical applications where compositional information is needed in real-time. The technology
delivers insight on valuable operational data like vapor pressure, boiling point, flash point, octane level, API gravity, viscosity, BTU and more, simultaneously. We
continue to work with our customers to identify further facilities and applications where our technology has the highest value. To drive recurring revenue, we
continue to build on the modular nature of our sensor and analysis packages with new data processing techniques that enhance the value of our installations.
AIDA (Automated Interface Detection Algorithm) provides real-time detection of interfaces in a liquids pipeline without the need for additional sampling or
chemometric modeling. The application can identify products such as refined fuels, crude and NGLs with its advanced machine learning algorithms and detect
interfaces real-time versus traditional lab analysis. We believe this allows customers to cut batches quickly and accurately, reduce transmix and minimize off-spec
product that requires downgrades. We are also gaining traction leveraging the Verax™ in applications where operators and service companies are using field gas
as a substitute for
8
diesel in dual fuel engines as the market moves to Tier 4 equipment and eFleets. Analyzing this in real-time allows companies to maximize the substitution rate
while lowering emissions, reducing fuel consumption/costs, and protecting the equipment from damage.
ESG
ESG-focused solutions continue to be an emphasis for the Company as the energy, industrial and consumer markets are seeking to accelerate their focus on
sustainability and minimized impact on the environment. We anticipate the Company’s products and services could offer a significant benefit to businesses
seeking to improve their ESG performance, including improving safety, reliability and efficiency of their operations. The Company offers sustainable chemistry
solutions, tailoring product selection to enable operational efficiencies, improve water management and reduce greenhouse gas emissions for its customers in the
exploration and production sector of the oil and gas industry. Further, the Company’s patented line of Complex nano-Fluid® (also known as CnF®) products are
formulated with highly effective, plant-based solvents offering safer, renewable and sustainable alternatives to toxic BTEX-based (benzene, toluene, ethylbenzene
and xylene) chemicals. Additionally, we believe the Company’s real-time sensor technology helps to enable process and operational efficiencies, minimize waste
and processing and reduce emissions.
We believe the industry focus on maintaining a “social license to operate” provides the platform to accelerate the sale of our products and services that we believe
can help the customer achieve a greener goal. We believe the performance driven ESG focus of the Company assists in reducing environmental liabilities and
improving returns for our customers.
Supply Chain
The principal supply issues facing our industry for the next twelve months will include:
Fluctuating freight costs for shipping to our customers;
•
• Availability of raw materials;
• Delays due to port congestion;
•
Labor shortages; and
• Demand forecasting.
All bidding will require the risk of shipping costs and delays to be factored into proposals. Trucking availability and pricing will impact North American
opportunities while sea-freight costs will impact sales of North American manufactured goods being delivered internationally for the foreseeable future. The
import of raw materials from China will also incur price increases. Accelerating tensions between China and the U.S. could also result in supply disruption.
COVID-19
The impacts of COVID-19 pandemic continue to affect the U.S. and global economy. We believe our protocols and processes established to maintain business
continuity with COVID-19 have proven robust enough to diminish concern about business disruption unless new variants emerge. The pandemic has already
affected and may continue to affect the U.S. economy, including capital expenditures of our customers. In addition, depending upon the length and severity of the
pandemic, which cannot be predicted, we may experience disruptions to business operations in the future if new COVID-19 variants emerge.
Available Information and Website
The Company’s website is www.flotekind.com. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available (see the “Investor Relations” section of the Company’s website), as
soon as reasonably practicable, subsequent to electronically filing or otherwise providing reports to the SEC. Corporate governance materials, including but not
limited to our corporate governance guidelines, board committee charters, bylaws, certain policies, and code of business conduct and ethics are also available on
the website. A copy of corporate governance materials is also available upon written request to the Company.
The SEC maintains the www.sec.gov website, which contains reports, proxy and information statements, and other registrant information filed electronically with
the SEC.
The Company filed, or furnished, as applicable, all principal executive officer and financial officer certifications as required under Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002 with this Annual Report. Information with respect to the
9
Company’s executive officers and directors is incorporated herein by reference to information to be included in the definitive proxy statement for the Company’s
2023 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 in the “Corporate Governance” section
under “Investor Relations”or in filings with the SEC.
Item 1A. Risk Factors
The Company’s business, financial condition, results of operations, cash flows, liquidity and prospects are subject to various risks and uncertainties. Readers of
this Annual Report should not consider any descriptions of these risk factors to be a complete set of all potential risks that could affect the Company. These factors
should be carefully considered together with the other information contained in this Annual Report and the other reports and materials filed by the Company with
the SEC. Further, many of these risks are interrelated and, as a result, the occurrence of certain risks could trigger and/or exacerbate other risks. Such a
combination could materially increase the severity of the impact of these risks on the Company’s business, results of operations, financial condition, cash flows,
liquidity or prospects.
This Annual Report contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Forward-looking statements discuss Company prospects, expected revenue, expenses and profits, strategic and operational initiatives, and other activities.
Forward-looking statements also contain suppositions regarding future oil and natural gas industry and other conditions, both domestically and internationally.
The Company’s results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including risks described
below and elsewhere. See “Forward-Looking Statements” at the beginning of this Annual Report.
Risks Related to the Company’s Business
The Company’s business is largely dependent upon its customers’ spending in the oil and gas industry. Spending could be adversely affected by industry
conditions or by new or increased governmental regulations; global economic conditions; lingering sentiment surrounding the pandemic; the availability of
credit; and oil and natural gas prices.
Demand for and prices of the Company’s products are subject to a variety of factors, including, but not limited to:
•
•
•
global demand for energy as a result of population growth, economic development, and general economic and business conditions;
the timing and rate of economic recovery from the effects of the pandemic;
the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and the impact of non-OPEC producers
on global supply;
availability and quantity of natural gas storage;
import and export volumes and pricing of liquefied natural gas;
domestic and international refining activity;
pipeline capacity to critical markets and out of producing regions;
political and economic uncertainty, sociopolitical unrest including the current conflict in Ukraine and ongoing sanctions imposed on Russia;
cost of exploration, production and transport of oil and natural gas;
sustained market adoption of green chemistry solutions;
technological advances impacting energy production and consumption;
interest rates;
•
•
•
•
•
•
•
•
•
• weather conditions; and
foreign exchange rates.
•
The volatility of commodity prices and the consequential effect on the activities of the Company’s target customer base could adversely impact the activity levels
of the Company’s customers.
Demand for the Company’s goods and services may be adversely impacted if volatile economic conditions weaken customer expenditures, specifically as it
concerns the continued adoption of chemistry solutions with lower overall impact on the environment. It is difficult to predict the pace of industry growth, the
direction of oil and natural gas prices, the direction and magnitude of economic activity, the demand for professional chemistry products, and to what extent these
conditions could affect the Company. However, reduced cash flow and capital availability could adversely impact the financial condition of the
10
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 key suppliers were to experience significant cash flow constraints or become insolvent as a result of such conditions, a reduction or interruption in
supplies or a significant increase in the price of supplies could occur, adversely impacting the Company’s results of operations and cash flows.
The Company’s inability to develop and/or introduce new products or differentiate existing products could have an adverse effect on its ability to be responsive
to customers’ needs and could result in a loss of customers, as well as adversely affecting the Company’s future success and profitability.
The industries in which the Company does business are characterized by technological advancements that have historically resulted in, and will likely continue to
result in, substantial improvements in the scope and quality of specialty chemistries and analytical services. Consequently, the Company’s future success is
dependent, in part, upon the Company’s continued ability to timely develop innovative products and services. Successful introduction of new technology requires
time and resources, and there is no assurance that the Company will be able to commercialize new technology in a timely manner. If the Company fails to
successfully develop and introduce innovative products and services that appeal to customers, or if existing or new market competitors develop superior products
and services, the Company’s revenue and profitability could deteriorate.
The Company’s inability to develop green alternatives to existing conventional products could result in loss of customers, as well as adversely affecting the
Company’s future success and profitability.
The Company develops, markets and produces certain green alternatives to many existing products. If these green alternatives do not perform as well as existing
conventional products, or if existing or new market competitors develop superior products, the Company’s revenue and profitability could be adversely affected.
Reduced unconventional oil and gas drilling could lessen the positive effects of a general recovery of the oil and gas industry.
The majority of the Company’s product offerings in its CT segment, other than professional chemistry products, are used in unconventional oil and gas operations.
The Company has a small exposure to conventional oil and gas operations through activity in the Middle East and little or no exposure to the offshore sector. In
the event that an industry recovery is disproportionately driven by conventional and offshore oil and gas operations, the Company may not have a resulting
increase in its operational results.
The Company’s business, financial condition, operating results and ability to grow and compete may be affected adversely if adequate capital is not available.
The Company’s existing resources including cash on hand, may not be sufficient to finance operations and strategies. The Company may therefore need to rely on
external financing sources, including commercial borrowings and issuances of debt and equity securities. The Company’s ability to procure debt financing, is
dependent on, among other things, the willingness of banks and other financial institutions to lend into the Company’s industry and on their evaluation of the
Company’s credit risk. There is no guarantee that the Company will be able to procure debt financing or, in the event that it is able to procure debt financing, that
the financing will be on favorable terms and conditions or at favorable rates of interest. If the Company cannot access debt and equity financing on acceptable
terms when required, the Company’s business, financial conditions and operating results may be adversely affected. Further the ability of the Company to grow
and be competitive in the market place may be adversely impacted as the Company may not be able to finance strategic growth plans, take advantage of business
opportunities, or respond to competitive pressures.
Increased competition could exert downward pressure on prices charged for the Company’s products and services.
The Company operates in a competitive environment populated by large and small competitors. Competitors with greater resources and lower cost structures or
who are trying to gain market share may be successful in providing competing products and services to the Company’s customers at lower prices than the
Company currently charges. The Company operates in an environment with relatively low barriers to entry; employees of the Company may leave and compete
directly with the
11
Company. This may require the Company to lower its prices, resulting in an adverse impact on revenues, margins, and operating results. Thus, competition could
have a detrimental impact on the Company’s business.
If the Company is unable to adequately protect intellectual property rights or is found to infringe upon the intellectual property rights of others, or is unable to
maintain the registrations and certifications of its products and facilities, the Company’s business is likely to be adversely affected.
The Company relies on a combination of patents, trademarks, copyrights, trade secrets, non-disclosure agreements and other methods to access markets and create
a competitive advantage. Although the Company believes that existing measures are reasonably adequate to protect intellectual property rights, there is no
assurance that the measures taken will prevent misappropriation of proprietary information or dissuade others from independent development of similar products
or services. Moreover, there is no assurance that the Company will be able to prevent competitors from copying, reverse engineering, modifying or otherwise
obtaining, infringing and/or using the Company’s technology, intellectual property or 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. In each case, the Company’s ability
to compete could be significantly impaired.
A portion of the Company’s products and services are without patent protection. The issuance of a patent does not guarantee validity or enforceability. 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. These could result in the Company having to discontinue the use,
manufacture and sale of certain products and services, increase the cost of selling certain products and services, or result in damage to the Company’s reputation.
An award of damages, including material royalty payments, or the entry of an injunction order against the use, manufacture and sale of any of the Company’s
products and services found to be infringing, could have an adverse effect on the Company’s results of operations and ability to compete.
Certain of the Company’s products and facilities, especially those related to the professional chemistry products, have been registered with the EPA. The failure of
the Company to maintain such EPA registrations could result in the inability of the Company to market or sell its products. In the event that the Company cannot
maintain its registrations or licenses or is unable to procure new licenses or registrations for new products or in response to changes to regulatory requirements,
the ability of the Company to sell its products and obtain revenue may be adversely affected.
The Company’s reliance on the ProFrac Agreement could adversely impact our financial condition, results of operations and cash flows.
The ProFrac Agreement, still in its first year, is a major source of the Company’s liquidity and we expect it to remain so over the term of the contract. If the
Company became unable to execute the requirements of the agreement financially and operationally, from procuring inventory to meet the needs of ProFrac
Services, LLC under the ProFrac Agreement and executing timely billing and collection, the Company’s liquidity could be adversely impacted. Further, our
relationship with ProFrac Services, LLC may impact their competitors willingness to purchase products from the Company or to seek price concessions.
We are also dependent on ProFrac Services, LLC’s compliance in meeting their committed activity levels and paying for products provided in a timely basis, in
accordance with the terms of the ProFrac Agreement. Our financial condition, results of operations and cash flows may be adversely impacted if ProFrac Services,
LLC’s financial condition or its spending level under the ProFrac Agreement is negatively impacted.
ProFrac Services, LLC has the right to terminate the ProFrac Agreement, by providing written notice to the Company, after the occurrence of any of the following
events: (i) the Company’s bankruptcy; (ii) the Company’s failure to produce and deliver the product in accordance with the specifications, or failure to timely
deliver product, and the Company has been unable to cure
12
such failure within a commercially reasonable period determined by ProFrac; (iii) the Company fails to meet pricing requirements set forth in the ProFrac
Agreement; or (iv) the Company is affected by a force majeure event, and such force majeure event has not been remedied within 30 days of the initial occurrence
of such event. ProFrac also has the right to terminate the ProFrac Agreement for any other material breach of the ProFrac Agreement by the Company, if capable
of being cured, is not cured within 30 days after written notice. Termination of the ProFrac Agreement would have a material adverse impact on the Company’s
financial condition, results of operations and cash flows.
The loss of key customers could have an adverse impact on the Company’s results of operations and could result in a decline in the Company’s revenue.
In the CT segment in aggregate, revenue derived from the Company’s three largest customers as a percentage of consolidated revenue for the years ended
December 31, 2022 and 2021, totaled 73% and 44%, respectively. The Company has seen customer concentration risk increase due to the recent entry into the
long-term supply agreement with ProFrac Services LLC. Outside the ProFrac Agreement customer relationships are substantially governed by purchase orders or
other short-term contractual obligations as opposed to long-term contracts. Losses of customers also may occur due to product, service or pricing issues, as well as
industry consolidation. The Company competes in a highly competitive environment and must work diligently to create and maintain productive customer
relationships, and the failure to maintain those relationships could result in the loss of one or more key customers. The loss of one or more key customers could
have an adverse effect on the Company’s results of operations and could result in a decline in the Company’s revenue.
Loss of key suppliers, the inability to secure raw materials on a timely basis, or the Company’s inability to pass commodity price increases on to its customers
could have a material adverse effect on the Company’s ability to service its customers’ needs and could result in a significant loss of customers.
Materials used in servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open market from multiple sources.
Acquisition costs and transportation of raw materials to the Company’s facilities have historically been impacted by extreme weather conditions. Additionally,
prices paid for raw materials could be affected by energy products and other commodity prices; weather and disease associated with our crop dependent raw
materials; tariffs and duties on imported materials; evolving geopolitical risks; foreign currency exchange rates; and phases of the general business cycle and
global demand.
The prices of key raw materials are subject to market fluctuations, which at times can be significant and unpredictable. Availability of key raw materials, weather
events, natural disasters, and health epidemics in countries from which the Company sources raw materials may significantly impact prices. During a period of
scarcity of supply the Company may also be negatively impacted by prioritization decisions enacted by its suppliers.
The Company may be unable to pass along price increases to its customers, which could result in a materially adverse impact on margins and operating profits.
The Company currently does not hedge commodity prices, but may consider such strategies in the future, and there is no guarantee that the Company’s purchasing
strategies will prevent cost increases from resulting in materially adverse impacts on margins and operating profits.
The Company’s DA segment is dependent on its ability to source appropriate technical components for its Verax™ measurement system, certain of which are
specialty products that are sole-sourced and are not easily replaceable with other sources. Any inability to source appropriate components in the future could result
in significant difficulty supplying equipment or services to the Company’s customers.
Removal of members of management or directors may be difficult or costly.
The Company’s management and employees 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. In addition, the loss of key management personnel or directors and the required transition may
cause interruption in
the operations, governance, strategies or management of the Company, which may significantly reduce the Company’s ability to manage operations effectively
and implement strategic business initiatives.
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.
13
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 reporting 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 reports, the Company may not be
able to provide reliable financial reporting, 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.
Failure to collect for goods and services sold to key customers could have an adverse effect on the Company’s financial results, liquidity and cash flows.
The Company performs credit analysis on potential customers; however, credit analysis does not provide full assurance that customers will be willing and/or able
to pay for goods and services purchased from the Company. Furthermore, collectability of international sales can be subject to the laws of foreign countries, which
may provide more limited protection to the Company in the event of a dispute over payment. Because sales to domestic and international customers are generally
made on an unsecured basis, there can be no assurance of collectability. The Company’s sales revenues are concentrated among customers operating in the oil and
gas industry. Furthermore, the Company has seen an increase in concentration risk in 2022 which it anticipates to increase in 2023 and beyond as a result of the
Company’s entry into the ProFrac Agreement. If one or more major customers are unwilling or unable to pay their debts to the Company, it could have an adverse
effect of the Company’s financial results, liquidity and cash flows.
Failure to adapt to changing buying habits of the Company’s potential and existing customers could have a negative effect on the Company’s ability to attract
and retain business.
The demographics and habits of the purchasing departments of many of the Company’s customers and potential customers is changing. Key decision makers may
be less experienced and show different buying habits and approaches. Customers are increasingly requiring vendors to integrate with purchasing modules and are
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.
Cyberattacks may have a significant and adverse impact on the Company’s operations and related financial condition.
The Company relies on access to information systems for operational, reporting and communication functions. Impairments of these systems, such as ransomware
and network communications disruptions, could have an adverse effect on our ability to conduct operations and could directly impact consolidated reporting.
Phishing attacks could result in sensitive or confidential information being released by the Company. Security breaches pose a risk to confidential data and
intellectual property, which could result in damages to our competitiveness and reputation. The Company’s policies and procedures, system monitoring and data
back-up processes may not prevent or detect potential disruptions or breaches in a timely or effective manner. There can be no assurance that existing or emerging
threats will not have an adverse impact on our systems or communications networks. While the Company does carry cybersecurity insurance, the coverage and
amount of such insurance may not be sufficient to adequately compensate the Company for cybersecurity loss.
Unforeseen contingencies such as litigation could adversely affect the Company’s financial condition.
The Company is, and from time to time may become, a party to legal proceedings incidental to the Company’s business involving alleged injuries arising from the
use of Company products, exposure to hazardous substances, patent infringement, employment matters, commercial disputes, claims related to adverse physical
reactions to the Company’s products such as rashes or allergic reactions and shareholder lawsuits. The defense of these lawsuits may require significant expenses,
divert management’s attention, and may require the Company to pay damages that could adversely affect the Company’s financial condition. In addition, any
insurance or indemnification rights that the Company may have might be insufficient or unavailable to protect against potential loss exposures.
The Company’s current insurance policies may not adequately protect the Company’s business from all potential risks.
The Company’s operations are subject to risks inherent in the specialty chemical industry, such as, but not limited to, accidents, explosions, fires, severe weather,
oil and chemical spills, and other hazards. These conditions can result in personal injury or
14
loss of life, damage to property, equipment and the environment, as well as suspension of customers’ oil and gas operations. These events could result in damages
requiring costly repairs, the interruption of Company business, including the loss of revenue and profits, and/or the Company being named as a defendant in
lawsuits asserting large claims. The Company does not have insurance against all foreseeable or unforeseeable risks. Consequently, losses and liabilities arising
from uninsured or underinsured events could have an adverse effect on the Company’s business, financial condition and results of operations.
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, to enhance existing product and service lines, and potentially expand into new product and service areas in which the
Company may not have prior experience. Factors that could result in strategic business difficulties include, but are not limited to:
•
•
•
•
•
•
•
•
failure to effectively integrate acquisitions, joint ventures or strategic alliances;
failure to effectively integrate and perform on the ProFrac Agreement;
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 may pursue strategic acquisitions, joint ventures and strategic divestitures, which could have an adverse impact on the Company’s business.
The Company’s potential future acquisitions, joint ventures, and divestitures involve risks that could adversely affect the Company’s business. Negotiations of
potential acquisitions, joint ventures, or other strategic relationships, integration of newly acquired businesses, and/or sales of existing businesses could be time
consuming and divert management’s attention from other business concerns. Acquisitions and joint ventures could also expose the Company to unforeseen
liabilities or risks associated with new markets or businesses. Unforeseen operational difficulties related to acquisitions and joint ventures could result in
diminished financial performance or require a disproportionate amount of the Company’s management’s attention and resources. Additionally, acquisitions could
result in the commitment of capital resources without the realization of anticipated returns. Divestitures could result in the loss of future earnings without adequate
compensation and the loss of unrealized strategic opportunities.
The Company’s ability to use net operating losses and tax attribute carryforwards to offset future taxable income may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on the
Company’s ability to utilize pre-change net operating losses (“NOLs”), and certain other tax attributes to offset future taxable income. In general, an ownership
change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage
ownership during the testing period (generally three years). An ownership change could limit the Company’s ability to utilize existing NOLs and tax attribute
carryforwards for taxable years including or following an identified “ownership change.” Transactions involving the Company’s common stock, even those
outside the Company’s control, such as purchases or sales by investors, within the testing period could result in an “ownership change.” Moreover, we believe the
convertible notes and warrants transactions with ProFrac Holdings, LLC may substantially impact our ability to use NOLs.
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.
15
The Company is subject to complex foreign, federal, state and local environmental, health, and safety laws and regulations, which expose the Company to
liabilities that could adversely affect the Company’s business, financial condition, and results of operations.
The Company’s operations are subject to foreign, federal, state, and local laws and regulations related to, among other things, the protection of natural resources,
injury, health and safety considerations, chemical exposure assessment, waste management, and transportation of waste and other hazardous materials. The
Company’s operations are exposed to risks of environmental liability that could result in fines, penalties, remediation, property damage, and personal injury
liability. Sanctions for noncompliance with such laws and regulations could include assessment of administrative, civil and criminal penalties, revocation of
permits, and issuance of corrective action orders.
The Company could incur substantial costs to ensure compliance with existing and future laws and regulations. Laws protecting the environment have generally
become more stringent and are expected to continue to evolve and become more complex and restrictive in the future. Failure to comply with applicable laws and
regulations could result in material expense associated with future environmental compliance and remediation. The Company’s costs of compliance could also
increase if existing laws and regulations are amended or reinterpreted. Such amendments or reinterpretations of existing laws or regulations, or the adoption of
new laws or regulations, could curtail exploratory or developmental drilling for, and production of, oil and natural gas which, in turn, could limit demand for the
Company’s products and services. Some environmental laws and regulations could also impose joint and strict liability, meaning that the Company could be
exposed in certain situations to increased liabilities as a result of the Company’s conduct that was lawful at the time it occurred or conduct of, or conditions caused
by, prior operators or other third parties. Remediation expense and other damages arising as a result of such laws and regulations could be substantial and have a
material adverse effect on the Company’s financial condition and results of operations.
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.
Less than 10 % of the Company’s revenue for the year ended December 31, 2022 was from customers based outside of the U.S. The Company and its customers
are subject to risks inherent in doing business outside of the U.S., including, but not limited to:
governmental instability;
corruption;
•
•
• war and other international conflicts;
•
•
•
•
•
•
civil and labor disturbances;
requirements of local ownership;
cartel behavior;
partial or total expropriation or nationalization;
currency devaluation; and
foreign laws and policies, each of which can limit the movement of assets or funds or result in the deprivation of contractual rights or appropriation of
property without fair compensation.
Collections from international customers could also prove difficult due to inherent uncertainties in foreign law and judicial procedures. The Company could
experience significant difficulty with collections or recovery due to the political or judicial climate in foreign countries where Company operations occur or in
which the Company’s products are sold.
The Company’s international operations must be compliant with the Foreign Corrupt Practices Act and other applicable U.S. laws. The Company could become
liable under these laws for actions taken by employees. 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 current sanctions imposed on trade with Russia does not currently impact because the Company does not have any
activity within that Region. 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.
16
Regulatory pressures, environmental activism, and legislation could result in reduced demand for the Company’s products and services, increase the
Company’s costs, and adversely affect the Company’s business, financial condition and results of operations.
Regulations restricting volatile organic compounds (“VOC”) exist in many states and/or communities which limit demand for certain products. Although citrus oil
is considered a VOC, its health, safety, and environmental profile is preferred over other solvents (e.g., benzene, toluene, ethylbenzene and xylene), which is
currently creating new market opportunities around the world. Changes in the perception of citrus oils as a preferred VOC, increased consumer activism against
hydraulic fracturing or other regulatory or legislative actions by governments could potentially result in materially reduced demand for the Company’s products
and services and could adversely affect the Company’s business, financial condition, and results of operations.
Perceptions and related usage of chemistry solutions that are currently considered safe and acceptable, within specified parameters, may be subject to change in
future periods as research and testing of environmental impacts mature.
Changes in laws and regulations relating to hydraulic fracturing may have a negative effect on the Company’s operations.
Much of the Company’s revenue in its CT segment is derived from customers engaged in hydraulic fracturing services. Some states have adopted regulations
which require operators to publicly disclose certain non-proprietary information. These regulations could require the reporting and public disclosure of the
Company’s proprietary chemistry formulas. The adoption of any future federal or state laws or local requirements, or the implementation of regulations imposing
reporting obligations on, or otherwise limiting, the hydraulic fracturing process, could increase the difficulty of oil and natural gas production activity and could
have an adverse effect on the Company’s future results of operations.
Climate change, environmental, social and governance and sustainability initiatives may result in regulatory or structural industry changes that could require
significant operational changes and expenditures, reduce demand for the Company’s products and services and adversely affect the Company’s business,
financial condition, results of operations, stock price or access to capital markets.
Climate change, environmental, social and governance (“ESG”) initiatives and sustainability are a growing global movement. Continuing political and social
attention to these issues has resulted in both existing and pending international agreements and national, regional and local legislation, regulatory measures,
reporting obligations and policy changes. Also, there is increasing societal pressure in some of the areas where the Company operates, to limit greenhouse gas
emissions as well as other global initiatives. These agreements and measures, including the Paris Climate Accord, may require, or could result in future
legislation, regulatory measures or policy changes that would require, significant equipment modifications, operational changes, taxes, or purchases of emission
credits to reduce emission of greenhouse gases from the Company’s operations or those of our customers, which may result in substantial capital expenditures and
compliance, operating, maintenance and remediation costs. As a result of heightened public awareness and attention to these issues as well as continued political
and regulatory initiatives to reduce the reliance upon oil and natural gas, demand for hydrocarbons may be reduced, which could have an adverse effect on the
Company’s business, financial condition, and results of operations. The imposition and enforcement of stringent greenhouse gas emissions reduction requirements
could severely and adversely impact the oil and natural gas industry and therefore significantly reduce the value of the Company’s business.
Certain financial institutions, institutional investors and other sources of capital have begun to limit or eliminate their investment in financing of conventional
energy-related activities due to concerns about climate change, which could make it more difficult for our customers and for the Company to finance our
respective businesses. Increasing attention to climate change, ESG and sustainability has resulted in governmental investigations, and public and private litigation,
which could increase the Company’s costs or otherwise adversely affect our business or results of operations.
In addition, some organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating
companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings
may lead to increased negative investor sentiment toward the Company and our industry and to the diversion of investment to other companies or industries,
which could have a negative impact on the price of the Company’s securities and our access to and cost of capital.
Any or all of these ESG and sustainability initiatives may result in significant operational changes and expenditures, reduced demand for the Company’s products
and services, and could materially adversely affect the Company’s business, financial condition, results of operations, stock price or access to capital markets.
17
The persistence and/or emergence of new pandemic threats can significantly reduce demand for our services and adversely impact our financial condition,
results of operations and cash flows.
Actions taken by businesses and governments in efforts to mitigate pandemic threats have the potential to negatively impact international and U.S. economic
activity for an indeterminable duration. These effects can directly impact the demand for oil and natural gas, as well as our oil and gas related services and
products. Furthermore, pandemic conditions can create disruptions in raw materials, logistics, and access to other critical resources such as human capital and
financial markets.
Risks Related to the Company’s Industry
General economic declines or recessions, limits to credit availability, and industry specific factors could have an adverse effect on energy industry activity
resulting in lower demand for the Company’s products and services.
Worldwide economic uncertainty can reduce the availability of liquidity and credit markets to fund the continuation and expansion of industrial business
operations worldwide. The shortage of liquidity and credit combined with pressure on worldwide equity markets could continue to impact the worldwide
economic climate. Geopolitical unrest around the world may also impact demand for the Company’s products and services both domestically and internationally.
Demand for many of the Company’s products and services is dependent on oil and natural gas industry activity and expenditure levels that are directly affected by
trends in oil and natural gas prices. Demand for the Company’s products and services is particularly sensitive to levels of activity in the upstream, downstream and
midstream sectors, and the corresponding capital spending by oil and natural gas companies, including national oil companies. While capital spending programs
for domestic producers appear to be improving, uncertainties around the potential for longer-term weakness in oil and natural gas prices could reduce or defer
major expenditures given the long-term nature of many large-scale development projects. Lower levels of activity could result in a corresponding decline in the
demand for the Company’s oil and natural gas related products and services, which could have a material adverse effect on the Company’s revenue and
profitability.
Events in global credit markets can significantly impact the availability of credit and associated financing costs for many of the Company’s customers. Many of
the Company’s upstream customers finance their drilling and completion programs through third-party lenders or public debt offerings. Lack of available credit or
increased costs of borrowing may cause customers to reduce spending on drilling programs, thereby reducing demand and potentially resulting in lower prices for
the Company’s products and services. Also, the credit and economic environment could significantly impact the financial condition of some customers over a
prolonged period, leading to business disruptions and restricted ability to pay for the Company’s products and services.
A continuous period of swings in oil and natural gas prices could result in further reductions in demand for the Company’s products and services and
adversely affect the Company’s business, financial condition, and results of operations.
The markets for the Company’s products, especially oil and gas markets, have historically been volatile. Such volatility in oil and natural gas prices, or the
perception by the Company’s customers of unpredictability in oil and natural gas prices, could adversely affect spending levels. The oil and natural gas markets
may be volatile in the future. The demand for the Company’s products and services is, in large part, driven by general levels of exploration and production
spending and drilling activity by its customers. Future declines in oil or gas prices could adversely affect the Company’s business, financial condition, and results
of operations. The Company presently does not hedge oil and natural gas prices.
New and existing competitors within the Company’s industries could have an adverse effect on results of operations.
The industries in which the Company competes are highly competitive. The Company’s principal competitors include numerous small companies capable of
competing effectively in the Company’s markets on a local basis, as well as a number of large companies that possess substantially greater financial and other
resources. 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.
18
The Company’s industry has a high rate of employee turnover. Difficulty attracting or retaining personnel or agents could adversely affect the Company’s
business.
The Company operates in an industry that has historically been highly competitive in securing qualified personnel with the required technical skills and
experience. The Company’s services require skilled personnel able to perform physically demanding work. Due to industry volatility, the demanding nature of the
work, and the need for industry specific knowledge and technical skills, current employees could choose to pursue employment opportunities outside the
Company that offer a more desirable work environment and/or higher compensation than is offered by the Company. As a result of these competitive labor
conditions, the Company may not be able to find qualified labor, which could limit the Company’s growth. In addition, the cost of attracting and retaining
qualified personnel has increased over the past several years due to competitive pressures. In order to attract and retain qualified personnel, the Company may be
required to offer increased wages and benefits. If the Company is unable to increase the prices of products and services to compensate for increases in
compensation including inflation, or is unable to attract and retain qualified personnel, operating results could be adversely affected.
Our DA segment may be materially and negatively affected by government regulations and/or facility disruptions.
The demand for our equipment and services offerings in our DA segment could be materially affected by additional regulations on the upstream, midstream, and
downstream portions of the oil and gas sectors. Additional regulation on oil and gas production, transportation, or processing of hydrocarbons may result in
significantly reduced demand for our offerings, either individually or as a result of a decline in the overall oil and gas markets in the United States and abroad. In
addition, our products are subject to export control laws and regulations, and changes to those laws and regulations may negatively impact our ability to pursue
international opportunities. Disruptions to pipelines and refineries, whether due to regulation, weather, demand, or other factors, may also have a materially
adverse effect on our ability to derive revenue from our DA segment. Adjustments to our DA segment’s commercial strategy, with a shift towards subscription
revenue and away from equipment sales, and the market’s response to that strategy, may materially and adversely affect revenues in the near term, even if the
strategic shift is successful, due to longer payback periods on subscription models.
Investor sentiment and public perception related to the oil and natural gas industry and to ESG initiatives could increase costs of capital and reporting
requirements and impact operations.
There are increasing financial risks for oil and natural gas producers, as stockholders and bondholders currently invested in oil and natural gas companies and
concerned about the potential effects of climate change, ESG and other sustainability-related issues may elect in the future to shift some or all of their investments
into non-fossil fuel energy related sectors, or into competitors who are perceived to have stronger ESG practices and disclosures. The Company’s ESG practices
and disclosures may not satisfy investor requirements or their requirements may not be made known to the Company. The Company may continue to face
increasing pressure regarding our ESG practices and disclosures, which pressures have intensified recently in connection with significant societal events and
worldwide efforts to mitigate climate change.
The Company has developed, and will continue to develop, goals and other objectives related to ESG and sustainability matters. Statements related to these goals
and objectives reflect the Company’s current plans and do not constitute a guarantee that they will be achieved. The Company’s ability to achieve any stated goal
or objective is subject to numerous factors and conditions, some of which are outside of the Company’s control. The Company’s efforts to accurately report on
ESG and sustainability matters, including our efforts to research, establish, accomplish and accurately report on goals and objectives, expose us to numerous
operational, reputational, financial, legal, and other risks. Standards for tracking and reporting on ESG and sustainability matters, including climate-related
matters, have not been harmonized and continue to evolve. The Company’s processes and controls for reporting on ESG and sustainability matters, including our
goals and objectives, may not always comply with evolving and disparate standards for identifying, measuring, and reporting such metrics, including any climate
change and sustainability-related public company disclosure requirements adopted by the SEC, and such standards may change over time, which could result in
significant revisions to the Company’s current ESG practices and disclosures.
The lending and investment practices of institutional lenders and investors have been the subject of intensive lobbying efforts in recent years, oftentimes public in
nature, not to provide funding for oil and natural gas producers, and some lenders and insurers have announced that they will not lend to or provide insurance for
oil and natural gas companies. Limitation of investments in and financings for oil and natural gas could result in the restriction, delay, or cancellation of drilling
and completion programs or development of production activities. An increasing number of the Company’s customers consider sustainability factors in awarding
work. If the Company is unable to meet the ESG standards or investment criteria set by our customers, investors and other parties, which continue to evolve, if we
are unable to successfully continue our sustainability enhancement efforts, or if,
19
notwithstanding our own efforts, our industry becomes the focus of increasing ESG and sustainability related pressures, the Company may lose customers and
investors and/or the Company’s cost of capital may increase.
Severe weather could have an adverse impact on the Company’s business.
The Company’s business could be materially and adversely affected by severe weather conditions. Hurricanes, tropical storms, flash floods, blizzards, cold
weather, and other severe weather conditions could result in curtailment of services, damage to equipment and facilities, interruption in transportation of products
and materials, and loss of productivity. If the Company’s customers are unable to operate or are required to reduce operations due to severe weather conditions,
and as a result curtail purchases of the Company’s products and services, the Company’s business could be adversely affected.
A terrorist attack or armed conflict could harm the Company’s business.
Terrorist activities, anti-terrorist efforts, and other armed conflicts involving the U.S. could adversely affect the U.S. and global economies and could prevent the
Company from meeting financial and other obligations. The Company could experience loss of business, delays or defaults in payments from payors, or
disruptions of fuel supplies and markets if pipelines, production facilities, processing plants, or refineries are direct targets or indirect casualties of an act of terror
or war. Such activities could reduce the overall demand for oil and natural gas which, in turn, could also reduce the demand for the Company’s products and
services. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect the Company’s results of
operations, impair the ability to raise capital, or otherwise adversely impact the Company’s ability to realize certain business strategies. The armed conflict in
Ukraine could affect regions in which the Company does business directly or indirectly and could harm the Company’s ability to sell its good and services in those
regions.
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 is subject to significant fluctuations. The following factors, among others, could cause the price of the
Company’s common stock to fluctuate:
•
•
•
•
•
•
•
•
•
variations in the Company’s quarterly results of operations;
changes in market valuations of companies within the Company’s industry;
fluctuations in stock market prices and volume;
fluctuations in oil and natural gas prices;
issuances of common stock or other securities in the future, including debt or warrants convertible into the Company’s common stock and earnings per
share;
additions or departures of key personnel;
inability to perform the ProFrac Agreement
announcements by the Company or the Company’s competitors of new business, acquisitions, or joint ventures; and
negative statements made by external parties about the Company’s business in public forums.
The stock market has experienced significant price and volume fluctuations in recent years that have affected the price of common stock of companies within
many industries including the oil and natural gas industry. The price of the Company’s common stock could fluctuate based upon factors that have little to do with
the Company’s operational performance, and these fluctuations could materially reduce the Company’s stock price. The Company could be a defendant in a legal
case related to a significant loss of value for the shareholders. This could be expensive and divert management’s attention and Company resources, as well as have
an adverse effect on the Company’s business, operating results, cash flows, financial condition or securities.
An active market for the Company’s common stock may not continue to exist or may not continue to exist at current trading levels.
Trading volume for the Company’s common stock historically has been very volatile when compared to companies with larger market capitalization. The
Company cannot presume that an active trading market for the Company’s common stock will continue or be sustained. Sales of a significant number of shares of
the Company’s common stock in the public market could lower the market price of the Company’s stock.
20
If the Company cannot meet the New York Stock Exchange (“NYSE”) continued listing requirements, the NYSE may delist the Company’s common stock.
The Company’s common stock is currently listed on the NYSE. In the future, if it is not able to meet the continued listing requirements of the NYSE, which
require, among other things, that the average closing price of our common stock be above $1.00 over 30 consecutive trading days, the Company’s common stock
may be delisted. If the Company is unable to satisfy the NYSE criteria for continued listing, its common stock would be subject to delisting. A delisting of its
common stock could negatively impact the Company by, among other things, reducing the liquidity and market price of its common stock; reducing the number of
investors willing to hold or acquire the Company’s common stock, which could negatively impact its ability to raise equity financing; decreasing the amount of
news and analyst coverage of the Company; and limiting the Company’s ability to issue additional securities or obtain additional financing in the future. In
addition, delisting from the NYSE might negatively impact the Company’s reputation and, as a consequence, its business, operating results, cash flows, financial
condition or securities. As of the date of filing our consolidated financial statements, the Company’s common stock price is less than $1.00.
The Company’s relationship with ProFrac Services LLC and certain of its affiliates may create a conflict of interest.
The Company derived 59% of its revenue for the year ended December 31, 2022 from ProFrac Services LLC. In addition to being the Company’s largest
customer, certain affiliates of ProFrac Services LLC, entered into various convertible debt transactions with the Company during 2022 (see Note 10, “Debt and
Convertible Notes Payable” and Note 18, “Related Party Transactions,” in Part II, Item 8 - “Financial Statements and Supplementary Data” of this Annual
Report). During 2023, the convertible debt instruments are expected to be converted into the Company’s common shares and pre-funded warrants. ProFrac
Holdings, LLC also has the right to elect four out of seven Board members and currently consolidates Flotek in their financial results.
In connection with the conversion of the convertible debt, ProFrac Holdings, LLC or its affiliates are expected to become the Company’s largest shareholder
during 2023. As a result of the operational and financial relationship with ProFrac Services LLC and its affiliates, as both a significant customer and a majority
shareholder, certain conflicts of interest may occur.
Future issuance of additional shares of common stock could cause dilution of ownership interests and adversely affect the Company’s common stock price.
The Company is currently authorized to issue up to 240,000,000 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 convertible debt securities, equity compensation plans or through the exercise of currently outstanding equity awards. The potential issuance of
additional shares of common stock may create downward pressure on the trading price of the Company’s common stock. The Company may also issue additional
shares of common stock or other securities that are convertible into or exercisable for common stock in order to raise capital or effectuate other business purposes.
Future sales of substantial amounts of common stock, or the perception that sales could occur, could have an adverse effect on the price of the Company’s
common stock.
The Company may issue a substantial amount of securities in connection with future acquisitions, and the sale of those securities could adversely affect the
trading price of our common stock or other securities.
As part of our growth strategy, we may issue additional securities, or securities that have rights, preferences, and privileges senior to our other securities. We may
file future shelf registration statements with the SEC that we may use to sell securities from time to time in connection with acquisitions. To the extent that we are
able to grow through acquisitions and are able to pay for such acquisitions with shares of our common stock or other securities, the number of outstanding shares
of common stock or other securities that will be eligible for sale in the future is likely to increase substantially. Persons receiving shares of our common stock or
other securities in connection with these acquisitions may be more likely to sell large quantities of their common stock or other securities, which may influence the
price of our common stock or other securities. In addition, the potential issuance of additional shares of common stock or other securities in connection with
anticipated acquisitions could lessen demand for our common stock or other securities and result in a lower price than would otherwise be obtained.
21
The Company may issue shares of preferred stock or debt securities with greater rights than the Company’s common stock.
Subject to the rules of the NYSE, the Company’s certificate of incorporation authorizes the board of directors to issue one or more additional series of preferred
stock and to set the terms of the issuance without seeking approval from holders of common stock. Currently, there are 100,000 preferred shares authorized, with
no shares currently outstanding. Any preferred stock that is issued may rank senior to common stock in terms of dividends, priority and liquidation premiums, and
may have greater voting rights than holders of common stock.
If securities or industry analysts do not publish research or reports about the Company’s business or publish negative reports, the Company’s securities prices
and trading volumes could decline and affect the price at which investors could sell securities.
The trading market for the Company’s securities may be affected by the research and reports that industry or securities analysts publish about the Company or its
business. The Company does not have any control over these analysts. If analysts do not cover the Company on a regular basis or if one or more analysts cease
coverage of the Company or fail to regularly publish reports about the Company, the Company could lose visibility in the financial markets, which in turn could
cause the Company’s securities prices or trading volumes to decline. If one or more of such analysts publish negative reports about the Company, the Company’s
securities prices would likely decline. These occurrences could have an effect on the price investors could receive from the sale of the Company’s securities.
Certain anti-takeover provisions of the Company’s certificate of incorporation and applicable Delaware law could discourage or prevent others from
acquiring the Company, which may adversely affect the market price of the Company’s common stock.
The Company’s certificate of incorporation and bylaws contain provisions that, among other things:
•
•
•
•
•
permit the Company to issue, without stockholder approval, shares of preferred stock, in one or more series and, with respect to each series, to fix the
designation, powers, preferences, and rights of the shares of the series;
prohibit stockholders from calling special meetings;
limit the ability of stockholders to act by written consent;
prohibit cumulative voting; and
require advance notice for stockholder proposals and nominations for election to the board of directors to be acted upon at meetings of stockholders.
In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more than 15% of the Company’s voting stock
without the approval of the board of directors. Aforementioned provisions and other similar provisions make it more difficult for a third party to acquire the
Company exclusive of negotiation. The Company’s board of directors could choose not to negotiate with an acquirer deemed not beneficial to or synergistic with
the Company’s strategic outlook. If an acquirer were discouraged from offering to acquire the Company or prevented from successfully completing a hostile
acquisition by these anti-takeover measures, stockholders could lose the opportunity to sell their shares at a favorable price.
The Company has no plans to pay dividends on the Company’s common stock, and, therefore, investors will have to look to stock appreciation for return on
investments.
The Company does not anticipate paying any cash dividends on the Company’s common stock within the foreseeable future. Any payment of future dividends
will be at the discretion of the Company’s board of directors and will depend, among other things, on the Company’s earnings, financial condition, capital
requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations deemed relevant by the
board of directors. Investors must rely on sales of common stock held after price appreciation, which may never occur, in order to realize a return on their
investment. The lack of plans for dividends may make the common stock of the Company an unattractive investment for investors who are seeking dividends.
22
We identified a material weakness in our internal control over financial reporting. If we are unable to remediate this material weakness, or if we experience
additional material weaknesses or other deficiencies in the future, or otherwise fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately or timely report our financial results, which could result in loss of investor confidence and adversely impact our
stock price.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act, the Dodd-Frank Act and other applicable securities rules and regulations. In particular, we are subject to reporting obligations under
Section 404 of the Sarbanes-Oxley Act that require us to include a management report on our internal control over financial reporting in our annual report, which
contains management’s assessment of the effectiveness of our internal control over financial reporting.
Internal controls must be evaluated continuously and be properly designed and executed by a sufficient level of properly trained staff to maintain adequate internal
control over financial reporting. As disclosed in Part II, Item 9A, during the fourth quarter of 2022, management identified a material weakness in the design and
operation of internal controls related to accounting for leases, prepaid assets and related-party revenues. We have begun designing and implementing measures to
improve our internal controls over financial reporting and to remediate this material weakness. Our ability to comply with the annual internal control report
requirements will depend on the effectiveness of our financial reporting controls across our company. We expect these systems and controls to involve significant
expenditures and to may become more complex as our business grows. To effectively manage this complexity, we will need to continue to improve our
operational, financial, and management controls, and our reporting systems and procedures. Our inability to successfully remediate our existing or any future
material weaknesses or other deficiencies in our internal control over financial reporting or any failure to implement required new or improved controls, or
difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to meet our financial reporting
obligations or result in material misstatements in our financial statements, which could limit our liquidity and access to capital markets, adversely affect our
business and investor confidence in our financial statements, and adversely impact our stock price.
General Risk Factors
If the Company loses the services of key members of management, the Company may not be able to manage operations and implement growth strategies.
The Board is currently searching for the Company’s next Chief Executive Officer and the length of time taken to select and appoint the appropriate person could
adversely impact our operations and strategic business initiatives. The Company depends on the continued service of the President, and 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. The
Company has entered into employment agreements with certain of these key members. Any loss or interruption of the services of key members of the Company’s
management could significantly reduce the Company’s ability to manage operations effectively and implement strategic business initiatives.
The Company’s tax returns are subject to audit by tax authorities. Taxing authorities may make claims for back taxes, interest and penalties. Changes in U.S.
tax legislation may adversely affect our business, results of operations, financial condition and cash flows.
The Company is subject to income, property, excise, employment, and other taxes in the U.S. and a variety of other jurisdictions around the world. Tax rules and
regulations in the U.S. and around the world are complex and subject to interpretation. From time to time, taxing authorities conduct audits of the Company’s tax
filings and may make claims for increased taxes and, in some cases, assess interest and penalties. The assessments for back taxes, interest, and penalties could be
significant. If the Company is unsuccessful in contesting these claims, the resulting payments could result in a drain on the Company’s capital resources and
liquidity. In addition, there may be material adverse effects resulting from new or future U.S. tax reforms that have not been identified and that could have an
adverse effect on the Company’s business, results of operations, financial condition and cash flows.
The Company maintains cash in excess of Federal Deposit Insurance Corporation (“FDIC”) protections therefore we may be at risk of losing cash on hand
as a result of financial institution insolvency, which may be exacerbated by the recent unstable market and economic conditions and adverse developments
with respect to the financial institutions.
The closures of Silicon Valley Bank (“SVB”) and Signature Bank and their placement into receivership with the FDIC created bank-specific and broader financial
institution liquidity risk and concerns. The Department of the Treasury, the Federal
23
Reserve, and the FDIC jointly released a statement that depositors at SVB and Signature Bank would have access to their funds, even those in excess of the
standard FDIC insurance limits. As of the date of this Annual Report on Form 10-K, our exposure to SVB and Signature Bank is immaterial, however, we
maintain cash balances at third-party financial institutions in excess of FDIC insurance protections. If the financial institution with which we deposit our cash
were to become insolvent or were to be placed into receivership, we may be unable to access our capital or adequately fund our business for a prolonged period of
time, or at all. If the equity and credit markets deteriorate, or if adverse developments are experienced by financial institutions, it may cause short-term liquidity
risk and also make any necessary debt or equity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely
manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price.
The consolidated financial statements included in this Annual Report have been prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
The Company currently funds its operations from cash on hand and other current assets. The Company has a history of losses and negative cash flows from
operations and expects to utilize a significant amount of cash within one year after the date of filing the consolidated financial statements included in this Annual
Report. The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement
(see Note 18, “Related Party Transactions” in Part II, Item 8 - “Financial Statements and Supplementary Data” of this Annual Report). It is not certain that the
Company’s cash and other current assets and forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac
Agreement will provide the Company with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they
become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently
alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within
one year after the date that the consolidated financial statements contained in this Annual Report are issued.
Our independent registered public accounting firm has included an explanatory paragraph in its opinion on the Company’s consolidated financial statements with
respect to the substantial doubt about the Company’s ability to continue as a going concern.
The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity
financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales
from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company may be unable to access further equity or debt financing
when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.
The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that
may be necessary if the Company were unable to continue as a going concern.
Disclaimer of Obligation to Update
Except as required by applicable law or regulation, the Company assumes no obligation (and specifically disclaims any such obligation) to update these risk
factors or any other forward-looking statement contained in this Annual Report to reflect actual results, changes in assumptions, or other factors affecting such
forward-looking statements.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
As of December 31, 2022, the Company operates two manufacturing, warehouse and research facilities in the U.S. Internationally, the Company has a warehouse
and research facility in Calgary, Alberta, Canada and a warehouse in Dubai, United Arab Emirates. The Company also has sales offices in Dubai, United Arab
Emirates and Calgary, Alberta, Canada. The Company owns two of these facilities and the remainder are leased with lease terms that expire from 2023 through
2030. In
24
addition, the Company’s corporate office is a leased facility located in Houston, Texas. The following table sets forth facility locations:
Segment
Chemistry Technologies
Chemistry Technologies
Chemistry Technologies
Chemistry Technologies
Chemistry Technologies
Chemistry Technologies
Data Analytics
Owned/Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Location
Marlow, Oklahoma
Raceland, Louisiana
Dubai, United Arab Emirates
Calgary, Alberta
Raceland, Louisiana
Houston, Texas
Austin, Texas
The Company sold its Waller, Texas facility on April 18, 2022 and its warehouse facility in Monahans, Texas on December 22, 2022.
Item 3. Legal Proceedings
Litigation
During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (Flotek’s previous CEO) due to
irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing,
inappropriate personal expenses, and general corporate waste. Flotek’s board engaged a third party to review the findings of the investigation. After the third-party
review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current
management were implicated in any way.
Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration or other legal proceedings against, John Chisholm, Casey
Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover
damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the
Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any
outcome cannot reasonably be predicted.
On October 29, 2021, the Company reached an agreement (“the ADM Settlement) with Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company
(“FCC”) and other parties to pay $1.75 million and resolve all claims between the parties in relation to lawsuit claiming damages relating to the terpene supply
agreement between Flotek Chemistry, LCC (“Flotek Chemistry”), a wholly owned subsidiary of the Company and FCC. The one-time payment of $1.75 million
from Flotek to ADM was paid on January 3, 2022 and the terpene supply agreement is confirmed terminated, eliminating the prior obligation to purchase 10.5
million pounds of terpene through 2023.
The Company is subject to other 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.
See Note 13, “Commitments and Contingencies” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this
Annual Report.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
25
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
13, 2023, there were approximately 8,782 holders of record. The Company’s closing sale price of the common stock on the NYSE on March 21, 2023 was $0.84.
The Company has never declared or paid cash dividends on common stock. While the Company regularly assesses the dividend policy, the Company has no
current plans to declare dividends on its common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity compensation plan information relating to equity securities authorized for issuance under individual compensation agreements at December 31, 2022, is as
follows:
Plan Category
Equity compensation plans approved by security
holders
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
(1)
Warrants and Rights
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)
5,849,554 $
1.16
2,767,906
(1) Includes shares for outstanding stock options (3,821,875 shares), restricted stock awards (2,299,679 shares), and restricted stock unit share equivalents (228,000 shares).
(2) The weighted-average exercise price is for outstanding stock options only and does not include outstanding restricted stock awards, restricted stock unit equivalents, and rights that have no
exercise price.
Unregistered Sales of Equity Securities
The PIPE transaction, Contract Consideration Convertible Notes Payable and Prefunded Warrants (Note 10, “Debt and Convertible Notes Payable” and Note 14,
“Stockholders’ Equity” of the Notes to Consolidated Financial Statements contained in Part II, Item 8) were exempted from the registration under the Securities
Act of 1933, as amended (the “Securities Act”) in reliance on Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, and in reliance on
similar exemptions under applicable state securities laws.
Issuer Purchases of Equity Securities
The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to non-qualified stock options
exercised or restricted stock vested or to pay the exercise price of the options. When this settlement method is elected by the employee, the Company repurchases
the shares withheld upon vesting of the award stock. Repurchases of the Company’s equity securities during the three months ended December 31, 2022, that the
Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act are as follows:
Period
Total Number of Shares
Purchased
(1)
October 1, 2022 to October 31, 2022
November 1, 2022 to November 30, 2022
December 1, 2022 to December 31, 2022
Total
1,624
—
27,759
29,383
Average Price Paid per Share
$1.00
—
$1.12
(1) The Company purchases shares of its common stock (a) to satisfy tax withholding requirements and payment remittance obligations related to period vesting of restricted shares
and exercise of non-qualified stock options and (b) to satisfy payments required for common stock upon the exercise of stock options.
Item 6. [Reserved]
26
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial
statements and related notes thereto, which have been prepared in accordance with U.S. GAAP, included elsewhere in this Annual Report. Some of the
information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for
our business and related financing, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those
sections. As a result of many risks and uncertainties, including those factors set forth in Item 1A -Risk Factors of this Annual Report, our actual results could
differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. For more
information, see “Forward-Looking Statements.” These forward-looking statements are made as of the date of this report, and we do not intend, and do not
assume any obligation, to update these forward-looking statements, except as required by applicable law. All dollar amounts stated herein are in U.S. dollars
unless specified otherwise.
Executive Summary
Flotek creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and
data company, Flotek helps customers across industrial and commercial markets improve their environmental performance. The Company serves specialty
chemistry needs for both domestic and international energy markets.
The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation advanced laboratory
capabilities.
The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their
ESG and operational goals, and aim to enhance the profitability of hydrocarbon producers.
The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated
with the streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing, and allows users to pursue
automation of their hydrocarbon streams to maximize their profitability.
During 2022 the Company entered into the ProFrac Agreement, (see Note 10, “Debt and Convertible Notes Payable” and Note 18, “Related Party Transactions”)
which has resulted in a significant increase in revenue for the year ended December 31, 2022.
Company Overview
Chemistry Technologies
We believe that the Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG
performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries,
logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical
applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing
sustainability practices to reduce the environmental impact of energy on the air, water, land and people.
Customers of the CT segment include those of energy related markets, such as our related party ProFrac Services, LLC, as well as consumer and industrial
applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies,
geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from our best-in-class technology, field operations, and
continuous improvement exercises that go beyond existing sustainability practices.
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon
intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, natural gas liquids (“NGLs”), natural gas, crude oil,
and condensates using the industry’s only field-
27
deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling,
artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
We believe customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates
stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing
giveaways i.e., providing higher value products at the lower value products prices. More efficient operations have the benefit of reducing their carbon footprint
e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the
largest midstream companies and large gas processing plants. We have developed a line of Verax™ analyzers for deployment internationally which was certified
for compliance in hazardous locations and harsh weather conditions.
Research & Innovation
R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, EPA regulatory
guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments
with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology,
environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.
Consolidated Results of Operations (in thousands)
Revenue
Revenue from external customers
Revenue from related party
Total revenues
Cost of sales
Cost of sales %
Gross profit (loss)
Gross profit (loss) %
Selling, general and administrative
Selling, general and administrative %
Depreciation
Research and development
Gain on disposal of property and equipment
Gain on lease termination
Gain in fair value of contract consideration convertible notes payable
Impairment of goodwill
Loss from operations
Operating margin %
Paycheck protection plan loan forgiveness
Interest expense and other income, net
Loss before income taxes
Income tax benefit
Net loss
Net loss %
28
Years ended December 31,
2022
2021
$
$
54,344
81,748
136,092
142,792
104.9 %
(6,700)
(4.9)%
27,124
19.9 %
734
4,438
(2,916)
(584)
(75)
—
(35,421)
(26.0)%
—
(6,906)
(42,327)
22
(42,305)
(31.1)%
$
$
39,627
3,641
43,268
40,012
92.5 %
3,256
7.5 %
20,166
46.6 %
1,011
5,537
(94)
—
—
8,092
(31,456)
(72.7)%
881
9
(30,566)
40
(30,526)
(70.6)%
Consolidated revenue for the year ended December 31, 2022, increased $92.8 million, or 215% versus the same period of 2021. The significant increase in
revenue during the year ended December 31, 2022 is driven primarily by activity under the ProFrac Agreement which commenced in the second quarter of 2022
and continued increased activity with new and existing customers both domestic and international, particularly in the CT segment.
Consolidated cost of sales for the year ended December 31, 2022, increased $102.8 million, or 257% versus the same period of 2021 .The increase is primarily
driven by the activity with ProFrac Services, LLC and higher freight and equipment rental costs due to the increased volume of business. Cost of sales in 2021
was positively impacted by the release of accrued costs of $7.6 million subsequent to the agreement of a settlement with ADM, see Note 13, “Commitments and
Contingencies”.
Selling general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided. SG&A expenses for the year ended
December 31, 2022, increased $7.0 million, or 35%, versus the same period of 2021. The increase in SG&A expenses is driven primarily by higher personnel
costs to facilitate the increase in operational activity, and professional fees. For the year ended December 31, 2021, personnel costs were lower due to the receipt
of a $2.9 million payroll tax credit from the Employee Retention Credit, (“ERC”) a provision set up to assist employers during the pandemic. The increase in
professional fees of $1.8 million is attributable mainly to fees incurred in assessing alternative strategies to raise capital, partially offset by lower legal fees.
Depreciation expense decreased $0.3 million, or 27% for the year ended December 31, 2022, versus the same period of 2021 partially driven by the assets held for
sale that were ultimately sold during the year ended December 31, 2022 and also by assets becoming fully depreciated.
Research and development (“R&D”) costs decreased $1.1 million, or 20% for the year ended December 31, 2022, versus the same period of 2021 driven by lower
personnel costs as a result of headcount reductions from 2021 to 2022.
Loss from operations increased by $4.0 million, or 13% for the year ended December 31, 2022, versus the same period in 2021. Loss from operations for the year
ended December 31, 2021 was positively impacted by the release of accrued costs of $7.6 million subsequent to the agreement of a settlement with ADM, see
Note 13, “Commitments and Contingencies”. Excluding the ADM credit, loss from operations decreased $3.6 million, or 9% year on year. The improvement is
driven by increased revenue and gross margin, the gain on disposal of property and equipment from the sale of the Waller, Texas and Monahans, Texas facilities
and the gain on lease termination partially offset by increased SG&A expenses.
Loss before income taxes for the year ended December 31, 2022, was impacted by interest charges of $7.1 million compared to $0.1 million for the same period in
2021. The increased interest cost is driven by paid-in-kind interest on the Convertible Notes Payable issued in connection with the PIPE transaction conducted in
February 2022 and the Contract Consideration Convertible Notes Payable. Loss before income taxes for the year ended December 31, 2021was positively
impacted by a $0.9 million gain from the forgiveness of the JP3 Paycheck Protection Program (“PPP”) loan.
Results by Segment (in thousands):
Chemistry Technologies Results of Operations:
Revenue from external customers
Revenue from related party
Loss from operations
$
48,960 $
81,618
(14,729)
35,288
3,641
(5,466)
Years ended December 31,
2022
2021
CT revenue from external customers for the year ended December 31, 2022, increased $13.7 million, or 39%, compared to 2021 due to increased domestic and
international sales with both new and existing customers. Revenue from related parties increased $78.0 million, or 2,142% driven by the ProFrac Agreement
which commenced in the second quarter of 2022.
Loss from operations for the CT segment for the year ended December 31, 2022 increased $9.3 million, or 169%, compared to 2021. The decline is driven by the
low gross margin due to amortization of the contract asset, early payment discounts given to customers, start up costs relating to the ProFrac Agreement and a one
time inventory write down of $1.0 million relating to the decision to cease the manufacture and sale of hand sanitizers. Cost of sales for the year ended December
31, 2021 benefited
29
from the release of accrued costs relating to the ADM settlement of $7.6 million, see Note 13, “Commitments and Contingencies”.
Data Analytics Results of Operations:
Revenue from external customers
Revenue from related party
Loss from operations
$
5,384 $
130
(2,877)
4,339
—
(12,168)
Years ended December 31,
2022
2021
DA revenue for the year ended December 31, 2022, increased $1.0 million, or 24%, compared to revenue for 2021. The increase is driven by significant revenues
with three new customers and several existing customers. Related party revenue has increased by $0.1 million compared to 2021 relating to services provided to
ProFrac Services, LLC.
Loss from operations for the DA segment for the year ended December 31, 2022 decreased $9.3 million, or 76%, compared to 2021. The improvement is
primarily due to 2021 being impacted by a goodwill impairment charge of $8.1 million and the increase in revenue and gross margin for the year ended
December 31, 2022.
Corporate and Other Results of Operations:
Loss from operations
$
(17,815) $
(13,822)
Years ended December 31,
2022
2021
Loss from operations for the year ended December 31, 2022 increased by $4.0 million, or 29% compared to 2021 attributable to an increase in personnel costs and
professional fees. Personnel costs in 2021 included a $2.9 million payroll tax credit from the ERC provision. Increased professional fees were driven by fees
incurred in assessing alternative strategies to raise capital, partially offset by lower legal fees.
Capital Resources and Liquidity
Overview
The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and to the funding of working capital requirements. During
2022, the Company funded working capital requirements with net cash proceeds from the issuance of Convertible Notes Payable for $20.1 million, prefunded
warrants issued for $19.5 million, and cash on hand.
As of December 31, 2022, the Company had unrestricted cash and cash equivalents of $12.3 million, as compared to $11.5 million at December 31, 2021. During
the year ended December 31, 2022, the Company had an operating loss of $35.4 million, $44.6 million of cash used in operating activities, $5.3 million of cash
provided by investing activities and $38.3 million of cash provided by financing activities.
Going Concern
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)
assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
The Company currently funds its operations from cash on hand and other current assets. The Company has a history of losses and negative cash flows from
operations and expects to utilize a significant amount of cash within one year after the date of filing the consolidated financial statements. The availability of
capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 18, “Related Party
Transactions”). It is not
30
certain that the Company’s cash and other current assets and our forecasted operating cash flows currently expected to be generated from the ongoing execution of
the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet our capital requirements and anticipated
obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months
to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going
concern within one year after the date that the consolidated financial statements are issued.
The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity
financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales
from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company may be unable to access further equity or debt financing
when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.
The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that
may be necessary if the Company were unable to continue as a going concern.
Cash Flows
Consolidated cash flows by type of activity are noted below (in thousands):
Net cash used in operating activities
Net cash provided by investing activities
Net cash provided by (used in) financing activities
Effect of changes in exchange rates on cash and cash equivalents
Net change in cash, cash equivalents and restricted cash
Operating Activities
Years ended December 31,
2022
2021
(44,632) $
5,331
38,267
100
(934) $
(25,840)
112
(372)
100
(26,000)
$
$
Net cash used in operating activities was $44.6 million and $25.8 million during the year ended December 31, 2022 and 2021, respectively. Consolidated net loss
for the year ended December 31, 2022 and 2021, were $42.3 million and $30.5 million, respectively.
During the year ended December 31, 2022, non-cash positive adjustments to net loss totaled $12.8 million as compared to $4.2 million for the same period of
2021.
•
•
For the year ended December 31, 2022, non-cash positive adjustments included paid-in-kind interest on the Convertible Notes Payable and Contract
Consideration Convertible Notes Payable of $6.0 million, amortization of contract assets and convertible note issuance costs of $3.4 million and
$1.0 million, respectively and stock compensation expense of $3.3 million. The non-cash adjustment for the provision for excess and obsolete inventory
was $1.7 million and depreciation was $0.7 million. These were offset by adjustments for the gain on sale of property and and equipment of $2.9 million,
attributable to the facility sales and the gain on lease termination of $0.6 million relating to the early termination of a lease on a Canadian facility.
For the year ended December 31, 2021, non-cash adjustments included a $7.6 million benefit related to the ADM settlement and $8.1 million of
impairment charges. The non-cash adjustment for the provision of excess and obsolete inventory was $0.6 million and depreciation was $1.0 million.
Other non-cash adjustments included stock based compensation of $3.8 million, JP3 PPP loan forgiveness of $0.9 million and $0.8 million related to the
change in fair value of contingent consideration.
During the year ended December 31, 2022, changes in working capital used $15.2 million of cash as compared to providing $0.5 million for the same period of
2021.
•
For the year ended December 31, 2022, changes in working capital resulted primarily from increases in accounts receivable including related party and
inventories of $28.7 million and $7.9 million, respectively, due to the significant increase in revenues. Contract assets increased $3.6 million related to
transaction fees paid, associated with Contract
31
Consideration Notes Payable. This is partially offset by an increase of accounts payable of $25.8 million, attributable to the increase in activity.
•
For the year ended December 31, 2021, changes in working capital resulted primarily from increases in accounts receivable and other current assets of
$2.0 million and accounts payable of $1.8 million. This has been offset by decreases in inventories and income taxes receivable of $2.1 million and
accrued liabilities of $1.4 million.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2022 was $5.3 million primarily from the sale of the facilities in Waller, Texas and
Monahans, Texas which closed on April 18, 2022 and December 22, 2022, respectively, resulting in cash proceeds of $5.8 million, partially offset by capital
additions. Net cash provided by investing activities for the year ended December 31, 2021 was immaterial.
Financing Activities
Net cash provided by financing activities was $38.3 million for the year ended December 31, 2022, primarily from the proceeds of the issuance of convertible
notes of $21.2 million and prefunded warrants of $19.5 million, partially offset by issuance costs of $2.3 million. Net cash used in financing activities was $0.4
million for the year ended December 31, 2021, primarily for purchases of common stock related to tax withholding requirements.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion
and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the
amounts reported. 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 related to the critical accounting policies.
Contract Assets
The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in
Note 10, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement. The contract assets are amortized over
the term of the ProFrac Agreement (10 years) based on forecasted revenues. As goods are transferred to ProFrac Services, LLC, the amortization is presented as a
reduction of the transaction price included in related party revenue in the consolidated statements of operations. The contract assets are tested for recoverability on
a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of
consideration the Company expects to receive in the future for the transfer of goods under the contract less the direct costs that relate to providing those goods in
the future. Significant or unanticipated changes to our forecast could impact the recoverability of the contract assets.
Reserve for Excess and Obsolete Inventory
Inventories consist of raw materials and finished goods and are stated at the lower of cost, or market determined using the weighted-average cost method, or net
realizable value. Finished goods inventories include raw materials, direct labor and production overhead.
The Company reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current
market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is
written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of sales.
At December 31, 2022 and 2021, the reserve for excess and obsolete inventory was $8.2 million and $10.1 million, or 34.3% and 51.8% of inventory, respectively.
Significant or unanticipated changes to our estimates and forecasts could impact the amount and timing of any additional provisions for excess and obsolete
inventory.
Fair Value of Contract Consideration Convertible Notes Payable
32
The Company accounts for the Contract Consideration Convertible Notes Payable as discussed in Note 10, “Debt and Convertible Notes Payable” issued related
to obtaining the ProFrac Agreement, as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation”. Under ASC 718,
liability classified convertible instruments are measured at fair value at the grant date and at each reporting date with the change in fair value included in the
consolidated statements of operations. The Company estimates the fair value of the Contract Consideration Convertible Notes Payable by means of a Monte Carlo
simulation which utilizes key inputs such as the risk-free interest rate, stock price, expected volatility and term until liquidation. Significant changes to the key
inputs such as the Company’s stock price and volatility would impact the estimated fair value.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2, “Summary of Significant Accounting Policies - Recent Accounting
Pronouncements,” in Part II, Item 8 — “Financial Statements” of this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is primarily exposed to market risk from changes in raw material prices, freight costs, and foreign currency exchange rates. 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’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and has limited exposure to foreign
currency risk in its international operations. During 2022, approximately 0.74% of revenue was denominated in non-U.S. dollar currencies and substantially all
assets and liabilities of the Company are denominated in U.S. dollars. However, as the Company expands its international operations, non-U.S. denominated
activity is likely to increase. The Company has not historically used swaps or foreign currency hedges, however, the Company may utilize swaps or foreign
currency hedges in the future.
Commodity Risk
The Company, and the CT segment in particular, primarily relies upon supply relationships to meet many of its raw material needs. Price increases are passed
along to the Company’s customers, where applicable or possible. The Company presently does not utilize commodity derivative instruments but may consider
utilizing forms of hedging to mitigate the effects of rising commodity prices on its supplies, 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 Flotek Industries, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the
related consolidated statements of operations, comprehensive loss, cash flows, and stockholders’ equity for each of the years in the two-year period ended
December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of
the years in the two-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring operating losses and negative cash flows from operations that raise substantial doubt
about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for convertible instruments as of January 1,
2022 due to the adoption of ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements 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 audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or
34
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Recoverability of contract assets
As described in Note 2 to the Company’s consolidated financial statements, the Company’s contract assets represent consideration issued in the form of
convertible notes and other incremental costs related to obtaining a contract with ProFrac Services, LLC, a related party customer. The contract assets are
tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract
assets exceeds the amount of revenue the Company expects to receive in the future for the transfer of goods under the long-term supply agreement and
the amendment to that agreement (collectively, the ProFrac Agreement) less the direct costs that relate to providing those goods in the future. As
described in Note 4, the Company had recorded contract assets, net of $79.7 million as of December 31, 2022.
We identified the evaluation of the recoverability of contract assets as a critical audit matter. There was subjective auditor judgement in evaluating the
key assumptions used in the Company’s contract asset recoverability assessment, specifically the forecasted product revenue and related forecasted costs
to provide products over the term of the ProFrac Agreement.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls related to
the Company’s contract assets recoverability assessment, including controls over the development of forecasted revenue and costs over the term of the
ProFrac Agreement. To assess the Company’s ability to forecast revenue and costs, we compared revenue and cost forecasts for the current year to actual
results. We performed sensitivity analyses over the Company’s contract asset recoverability assessment by evaluating the effect of changes in the
forecasted revenue and costs over the term of the ProFrac Agreement. We assessed the reasonableness of forecasted revenue and costs by considering
whether such amounts were consistent with evidence obtained in other areas of the audit.
/s/ KPMG LLP
We have served as the Company’s auditor since 2021.
Houston, Texas
March 22, 2023
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
2022
2021
Current assets:
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $623 and $659 at December
31, 2022 and December 31, 2021, respectively
Accounts receivable, related party
Inventories, net
Other current assets
Current contract assets
Assets held for sale
Total current assets
Long-term contract assets
Property and equipment, net
Operating lease right-of-use assets
Deferred tax assets, net
Other long-term assets
TOTAL ASSETS
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable
Accrued liabilities
Income taxes payable
Interest payable
Current portion of operating lease liabilities
Current portion of finance lease liabilities
Current portion of long-term debt
Convertible notes payable
Contract consideration convertible notes payable
Total current liabilities
Deferred revenue, long-term
Long-term operating lease liabilities
Long-term finance lease liabilities
Long-term debt
TOTAL LIABILITIES
Stockholders’ equity:
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and
outstanding
Common stock, $0.0001 par value, 240,000,000 shares authorized; 83,915,918 shares issued
and 77,788,391 shares outstanding at December 31, 2022; 79,483,837 shares issued and
73,461,203 shares outstanding at December 31, 2021
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Treasury stock, at cost; 6,127,527 and 6,022,634 shares at December 31, 2022 and
December 31, 2021, respectively
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
$
$
$
12,290
100
$
$
$
19,136
22,683
15,720
4,045
7,113
—
81,087
72,576
4,826
5,900
404
17
164,810
33,375
8,984
97
130
3,328
36
2,052
19,799
83,570
151,371
44
8,044
19
2,736
162,214
—
8
388,177
181
(351,519)
(34,251)
2,596
164,810
$
11,534
1,790
11,997
1,300
9,454
3,762
—
2,762
42,599
—
5,296
2,041
279
29
50,244
7,616
8,996
4
82
602
41
1,436
—
—
18,777
91
7,779
53
3,352
30,052
—
8
363,417
81
(309,214)
(34,100)
20,192
50,244
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
2022
2021
Revenue:
Revenue from external customers
Revenue from related party
Total revenues
Cost of sales
Gross profit (loss)
Operating costs and expenses:
Selling, general, and administrative
Depreciation
Research and development
Gain on disposal of property and equipment
Gain on lease termination
Gain on fair value of contract consideration convertible notes payable
Impairment of goodwill
Total operating costs and expenses
Loss from operations
Other income (expense):
Paycheck protection plan loan forgiveness
Interest expense
Other income, net
Total other income (expense)
Loss before income taxes
Income tax benefit
Net loss
Loss per common share:
Basic
Diluted
Weighted average common shares:
Weighted average common shares used in computing basic loss per common share
Weighted average common shares used in computing diluted loss per common share
$
$
$
$
54,344 $
81,748
136,092
142,792
(6,700)
27,124
734
4,438
(2,916)
(584)
(75)
—
28,721
(35,421)
—
(7,051)
145
(6,906)
(42,327)
22
(42,305) $
(0.57) $
(0.57) $
74,425
74,425
39,627
3,641
43,268
40,012
3,256
20,166
1,011
5,537
(94)
—
—
8,092
34,712
(31,456)
881
(78)
87
890
(30,566)
40
(30,526)
(0.42)
(0.42)
73,361
73,361
The accompanying Notes are an integral part of these Consolidated Financial Statements.
37
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Other comprehensive income:
Foreign currency translation adjustment
Comprehensive Loss
Years ended December 31,
2022
2021
$
$
(42,305) $
100
(42,205) $
(30,526)
100
(30,426)
The accompanying Notes are an integral part of these Consolidated Financial Statements.
38
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Change in fair value of contingent consideration
Change in fair value of contract consideration convertible notes payable
Amortization of convertible note issuance cost
Paid-in-kind interest expense
Amortization of contract assets
Depreciation
Provision for doubtful accounts, net of recoveries
Inventory purchase commitment settlement
Provision for excess and obsolete inventory
Impairment of goodwill
Gain on sale of property and equipment
Gain on lease termination
Non-cash lease expense
Stock compensation expense
Deferred income tax benefit
Paycheck protection plan loan forgiveness
Changes in current assets and liabilities:
Accounts receivable
Accounts receivable, related party
Inventories
Income taxes receivable
Other assets
Contract assets
Accounts payable
Accrued liabilities
Operating lease liabilities
Income taxes payable
Interest payable
Net cash used in operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of assets
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of convertible notes
Payment of issuance costs of convertible notes
Proceeds from issuance of warrants
Payment of issuance costs of stock warrants
Payments to tax authorities for shares withheld from employees
Proceeds from issuance of stock
Payments for finance leases
Net cash provided by (used in) financing activities
Effect of changes in exchange rates on cash and cash equivalents
Net change in cash, cash equivalents and restricted cash
Cash and cash equivalents at the beginning of period
Restricted cash at the beginning of period
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents at end of period
Restricted cash at the end of period
Cash, cash equivalents and restricted cash at end of period
Years ended December 31,
2022
2021
$
(42,305) $
(30,526)
(25)
(75)
1,002
5,956
3,371
734
203
—
1,734
—
(2,916)
(584)
226
3,325
(125)
—
(7,342)
(21,383)
(7,917)
14
(285)
(3,600)
25,760
(34)
(507)
93
48
(44,632)
(421)
5,752
5,331
21,150
(1,084)
19,500
(1,170)
(224)
133
(38)
38,267
100
(934)
11,534
1,790
13,324
12,290
100
12,390 $
(808)
—
—
—
—
1,011
(127)
(7,633)
623
8,092
(94)
—
279
3,757
(56)
(881)
(106)
(1,300)
1,760
381
(609)
—
1,829
(860)
(603)
(17)
48
(25,840)
(39)
151
112
—
—
—
—
(390)
80
(62)
(372)
100
(26,000)
38,660
664
39,324
11,534
1,790
13,324
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
39
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2022 and 2021
(In thousands of U.S. dollars and shares)
Balance, December 31, 2021
Net loss
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
Restricted stock granted
Restricted stock forfeited
Restricted stock units vested
Stock compensation expense
Shares withheld to cover taxes
Issuance of stock warrants, net of transaction fee
Equity contribution
Conversion of notes to common stock
$
Shares
Issued
79,484
—
—
—
1,533
(3)
144
—
(35)
—
—
2,793
Balance, December 31, 2022
83,916
$
Common Stock
Treasury Stock
Par
Value
Shares
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total Stockholders’
Equity
$
6,022
—
—
(40)
—
30
—
—
115
—
—
—
$
Cost
(34,100)
—
—
—
—
—
—
—
(151)
—
—
—
$
363,417
—
—
140
—
—
(31)
3,325
(42)
9,930
8,400
3,038
6,127
$
(34,251)
$
388,177
$
81
—
100
—
—
—
—
—
—
—
—
—
181
$
$
(309,214)
(42,305)
—
—
—
—
—
—
—
—
—
—
$
(351,519)
$
20,192
(42,305)
100
140
—
—
(31)
3,325
(193)
9,930
8,400
3,038
2,596
Balance, December 31, 2020
Net loss
Foreign currency translation adjustment
Stock issued under employee stock purchase plan
Restricted stock granted
Restricted stock forfeited
Restricted units vested
Stock compensation expense
Shares withheld to cover taxes
Other (1)
Common Stock
Par
Value
$
Shares
Issued
78,669
—
—
—
1,702
(284)
86
—
(76)
(613)
Treasury Stock
$
Shares
5,581
—
—
(136)
—
422
—
—
155
—
$
Cost
(33,851)
—
—
—
—
—
—
—
(273)
24
$
359,721
—
—
80
—
—
—
3,757
(150)
9
Balance, December 31, 2021
79,484
$
(1) See Note 14, “Stockholders’ Equity” for further discussion.
6,022
$
(34,100)
$
363,417
$
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total Stockholders’
Equity
(19)
—
100
—
—
—
—
—
—
81
$
$
(278,688)
(30,526)
—
—
—
—
—
—
—
$
(309,214)
$
47,171
(30,526)
100
80
—
—
—
3,757
(423)
33
20,192
The accompanying Notes are an integral part of these Consolidated Financial Statements.
40
8
—
—
—
—
—
—
—
—
—
—
—
8
8
—
—
—
—
—
—
—
—
—
8
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
General
Flotek Industries, Inc. (“Flotek” or the “Company”) creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A
technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial and commercial markets improve their environmental
performance.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim
to enhance the profitability of hydrocarbon producers.
The Company’s Data Analytics (“DA”) segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics
associated with their hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and
allows users to pursue automation of their hydrocarbon streams to maximize their profitability.
The Company’s two operating segments, CT and DA, are both supported by its Research & Innovation advanced laboratory capabilities. For further discussion of
our operations and segments, see Note 19, “Business Segment, Geographic and Major Customer Information.”
Going Concern
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)
assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
The Company currently funds its operations from cash on hand and other current assets. The Company has a history of losses and negative cash flows from
operations and expects to utilize a significant amount of cash within one year after the date of filing the consolidated financial statements. The availability of
capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 18, “Related Party
Transactions”). It is not certain that the Company’s cash and other current assets and our forecasted operating cash flows currently expected to be generated from
the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet our capital
requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations
over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s
ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.
The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity
financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales
from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company may be unable to access further equity or debt financing
when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.
The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that
may be necessary if the Company were unable to continue as a going concern.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP. The consolidated financial statements include the accounts
of Flotek Industries, Inc. and subsidiaries it controls.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated
subsidiaries.
41
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
Restricted Cash
The Company’s restricted cash is $0.1 million and $1.8 million as of December 31, 2022 and December 31, 2021, respectively. The Company’s restricted cash as
of December 31, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a
financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in
escrow of $1.75 million for amounts due under the terms of the legal settlement discussed in Note 13, “Commitments and Contingencies”.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable and Accounts receivable, related party, 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 allowance 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 recovery of accounts receivable
previously written off is recorded as a reduction to the allowance for doubtful accounts charged to operating expense.
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 are as follows (in thousands):
Balance, beginning of year
Charges to provision for doubtful accounts, net of recoveries
Write-offs
Balance, end of year
Years ended December 31,
2022
2021
659 $
203
(239)
623 $
1,316
(127)
(530)
659
$
$
As of December 31, 2022 and 2021 the Company has not recorded an allowance for doubtful accounts for the related party accounts receivable, including ProFrac
Services, LLC.
Contract Assets
The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in
Note 10, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement. The contract assets are amortized over
the term of the ProFrac Agreement (10 years) based on forecasted revenues as goods are transferred to ProFrac Services, LLC and the amortization is presented as
a reduction of the transaction price included in related party revenue in the consolidated statements of operations.
The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of
the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the ProFrac Agreement less
the direct costs that relate to providing those goods in the future. Based on our tests of recoverability, we did not identify an impairment of the contract assets
during the year ended December 31, 2022.
Inventories
Inventories consist of raw materials 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 periodically reviews inventories on hand and current
market conditions to determine if the cost of raw
42
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in
excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs
or write-offs of inventory are charged to cost of sales.
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 operating lease right-of-use assets (“ROU”), is
calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows:
Buildings and leasehold improvements
Machinery and equipment
Furniture and fixtures
Land improvements
Transportation equipment
Computer equipment and software
2-30 years
7-10 years
3 years
20 years
2-5 years
3-7 years
Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an
asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable,
the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and
eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the
use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the
excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash
flow models, quoted market values, and third-party independent appraisals, as considered necessary. There were no impairments of property and equipment and
ROU assets during the years ended December 31, 2022 and 2021.
Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and depreciation is ceased.
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.
Leases
The Company leases certain facilities, land, vehicles, and equipment. The Company determines if an arrangement is classified as a lease at inception of the
arrangement.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the
related lease. Finance leases are under the current and non-current liabilities and the underlying assets are included in property and equipment on the consolidated
balance sheet.
As most of the Company’s leases do not provide an implicit rate of return, on a quarterly basis, the Company’s incremental borrowing rate is used, together with
the lease term information available at commencement date of the lease, in determining the present value of lease payments. Operating lease liabilities include
related options to extend or terminate lease terms that are reasonably certain of being exercised.
Leases with an initial term of 12 months or less (“short term leases”) are not recorded on the balance sheet; and the lease expense on short-term leases is
recognized on a straight-line basis over the lease term.
Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable
The Company accounts for the Convertible Notes Payable at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.
The Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration related to a related party contract (see Note 10, “Debt
and Convertible Notes Payable”), as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under
ASC 718, liability classified convertible instruments are
43
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
measured at fair value at the grant date and at each reporting date (see Note 11, “Fair Value Measurements”) with the change in fair value included in the
consolidated statements of operations.
Fair Value Measurements
The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value.
Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the
fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 11, “Fair Value Measurements.”
Revenue Recognition
The Company only has revenue from customers. The Company recognizes revenue when it satisfies performance obligations under the terms of the contract with
a customer, and control of the promised goods are transferred to the customer or services are performed, in an amount that reflects the consideration the Company
expects to be entitled in exchange for those goods or services.
The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii)
performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the
performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue
and deferred accordingly, and discounts offered to customers for prompt payment. The Company does not act as an agent in any of its revenue arrangements.
In recognizing revenue for products and services, the Company determines the transaction price of contracts with customers, which may consist of fixed and
variable consideration. Determining the transaction price may require judgment by management, which includes identifying performance obligations, estimating
variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract.
The majority of the CT segment revenue is chemical products that are sold at a point in time based on when control transfers to the customer determined by agreed
upon delivery terms. Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product
purchased. Additionally, the CT segment offers various services associated to products sold which includes field services, installation, maintenance, and other
functions. These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the
Company has a right to invoice the customer.
The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on agreed upon delivery
terms. Additionally, the Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions.
Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. There may be additional
performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time
throughout the contract period. Additionally, the Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is
recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type
arrangements and revenue not yet recognizable is reported under accrued liabilities and deferred revenue on the consolidated balance sheets. Subscription-type
arrangements were not a material revenue stream in the years ended December 31, 2022 and 2021.
Payment terms for both the CT and DA segments are customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. Under revenue
contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional.
Contract assets associated with incomplete performance obligations are not material.
The Company applies several practical expedients including:
•
•
Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or
less.
The Company’s payment terms are short-term in nature with settlements of one year or less. As a result, the Company does not adjust the promised
amount of consideration for the effects of a significant financing component.
44
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
•
In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the
customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right
to invoice.
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. Such taxes are included in accrued liabilities on our
consolidated balance sheet until remitted to the governmental agency.
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 sales in our consolidated statement of operations.
Foreign Currency Translation
The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and substantially all assets and liabilities
of the Company are denominated in U.S. dollars. Financial statements of foreign subsidiaries that are not U.S. dollar functional currency are prepared using the
currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of those 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 Loss
Comprehensive loss encompasses all changes in stockholders’ equity, except those arising from investments and distributions to stockholders. The Company’s
comprehensive loss includes consolidated net loss and foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities
and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit
carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the
enactment date.
A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a
valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and
verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions
are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which
the change in judgment occurs.
The Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense.
Stock-Based Compensation
Stock-based compensation expense, 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.
Stock Warrants
45
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluated the Prefunded Warrants issued in June 2022 (see Note 14, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s
Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the Prefunded
Warrants within additional paid in capital in the consolidated balance sheets.
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 the useful lives of property and equipment; long lived asset impairment assessments; stock-based
compensation expense; valuation allowances for accounts receivable, inventories, and deferred tax assets; recoverability and timing of the realization of contract
assets; and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified stock warrants.
Recent Accounting Pronouncements
Changes to U.S. GAAP are established by the FASB. We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not
listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.
New Accounting Standards Issued and Adopted as of January 1, 2022
The FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This standard changes the accounting for
convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to be classified in equity and amends
diluted earnings per share calculations for certain convertible debt instruments. The pronouncement is effective for smaller reporting companies for fiscal years
beginning after December 15, 2023, with early adoption allowed for fiscal years beginning after December 15, 2020. The Company adopted this standard as of
January 1, 2022, and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.
The FASB issued ASU No. 2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.” This standard
provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The
pronouncement is effective for fiscal years beginning after December 15, 2021.The Company adopted this standard as of January 1, 2022 and the adoption did not
have a material impact on the Company’s consolidated financial statements and related disclosures.
New Accounting Standards Issued But Not Adopted as of December 31, 2022
The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology
in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on
historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal
years beginning after December 15, 2022. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the
appropriate allowance for doubtful accounts as a charge to operating expenses therefore the Company does not expect the adoption of this standard to have a
material impact on the consolidated financial statements and related disclosures.
Note 3 — Revenue from Contracts with Customers
Disaggregation of Revenue
The Company differentiates revenue based on whether the source of revenue is attributable to product sales or service revenue.
46
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total revenue disaggregated by revenue source is as follows (in thousands):
Revenue:
Products (1)
Services
Years ended December 31,
2022
2021
$
$
132,521 $
3,571
136,092 $
40,265
3,003
43,268
(1) Product revenues include sales to related parties as described in Note 18, “Related Party Transactions.”
Disaggregation of Cost of Sales
The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be
directly attributable to either tangible goods or services.
Total cost of sales disaggregated is as follows (in thousands):
Cost of sales:
Tangible goods sold
Services
Other
Years ended December 31,
2022
2021
$
$
$
126,914 $
285
15,593 $
142,792 $
24,083
532
15,397
40,012
Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services.
Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs. Cost of sales for the year ended December 31, 2021
included a one time credit of $7.6 million (shown in Other and below in cost of sales for external customers), related to the release of accrued costs subsequent to
the ADM settlement (see Note 13, “Commitments and Contingencies”).
Cost of sales split between external and related party sales is as follows (in thousands):
Cost of sales:
Cost of sales for external customers
Cost of sales for related parties
Note 4 - Contract Assets
Contract assets are as follows (in thousands):
Contract assets
Less accumulated amortization
Contract assets, net
Less current contract assets
Contract assets, long term
Years ended December 31,
2022
2021
$
$
56,844 $
85,948
142,792 $
36,646
3,366
40,012
December 31,
2022
2021
$
$
83,060 $
(3,371)
79,689
(7,113)
72,576 $
—
—
—
—
—
47
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with entering into the ProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 10, “Debt and Convertible Notes Payable”
and Note 18, “Related Party Transactions”, the Company recognized contract assets of $10.0 million and $69.5 million, respectively, and associated fees of $3.6
million. As of December 31, 2022, $72.6 million of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the
ProFrac Agreement which will not be realized within the next twelve months of the ProFrac Agreement.
During the year ended December 31, 2022 the Company recognized $3.4 million of contract assets amortization which is recorded as a reduction of the transaction
price included in the related party revenue in the consolidated statement of operations. The below table reflects our estimated amortization per year (in thousands)
based on the Company’s current forecasted revenues from the ProFrac Agreement.
Years ending December 31,
2023
2024
2025
2026
2027
Thereafter through May 2032
Total contract assets
Note 5 — Inventories
Inventories are as follows (in thousands):
Raw materials
Finished goods
Inventories
Less reserve for excess and obsolete inventory
Inventories, net
$
$
$
$
Amortization
7,113
8,456
8,845
8,845
8,845
37,585
79,689
December 31,
2022
2021
5,800 $
18,130
23,930
(8,210)
15,720 $
5,610
13,985
19,595
(10,141)
9,454
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
Balance, beginning of year
Charged to provisions
Deductions for sales and disposals
Balance, end of the year
Years ended December 31,
2022
2021
10,141 $
1,734
(3,665)
8,210 $
11,058
623
(1,540)
10,141
$
$
The provisions recorded in the year ended December 31, 2022 were $1.6 million for the CT segment and $0.1 million for the DA segment. The CT segment
provision includes $1.0 million for the exit of the hand sanitizers business line. The provisions recorded in the year ended December 31, 2021 were $0.6 million
for the CT segment and nil for the DA segment.
48
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Property and Equipment
Property and equipment are as follows (in thousands):
Land
Land improvements
Buildings and leasehold improvements
Machinery and equipment
Furniture and fixtures
Transportation equipment
Computer equipment and software
Property and equipment
Less accumulated depreciation
Property and equipment, net
December 31,
2022
2021
$
$
886 $
520
5,356
6,758
532
784
1,425
16,261
(11,435)
4,826 $
886
520
5,473
6,843
620
878
1,176
16,396
(11,100)
5,296
Depreciation expense totaled $0.7 million and $1.0 million for the years ended December 31, 2022 and 2021, respectively.
During 2022, the Company sold its two facilities that were classified as held for sale as of December 31, 2021 for proceeds of $5.8 million resulting in a net gain
of $2.9 million.
Note 7 — Leases
Rental income recognized from leasing manufacturing facilities was $375 thousand and $197 thousand for the years ended December 31, 2022 and December 31,
2021, respectively, and is included in other income in the consolidated statement of operations. As discussed in Note 6, “Property and Equipment” these facilities
were sold in 2022 and the lease agreements between the tenants and the Company terminated.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
Operating lease expense
Finance lease expense:
Amortization of 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
49
$
$
$
Years ended December 31,
2021
2022
2,393
$
15
12
27
341
2,761
2,934
39
6
$
$
797
15
12
27
267
1,091
1,107
62
8
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities as of December 31, 2022 are as follows (in thousands):
Years ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
Supplemental balance sheet information related to leases is as follows (in thousands):
Operating Leases
Operating lease right-of-use assets
Current portion of operating 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 finance 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 8 - Goodwill
$
$
$
$
$
$
$
$
$
$
Operating Leases
Finance Leases
4,159 $
2,676
1,391
1,418
1,339
3,444
14,427 $
(3,055)
11,372 $
39
20
—
—
—
—
59
(4)
55
December 31, 2022
December 31, 2021
$
$
$
$
$
$
$
5,900
3,328
8,044
11,372
147
(55)
92
36
19
55
5.3 years
1.6 years
9.3 %
8.9 %
2,041
602
7,779
8,381
147
(33)
114
41
53
94
9.1 years
2.9 years
8.9 %
8.9 %
Based upon the results of our annual quantitative impairment test for the year ended December 31, 2021, the Company concluded that the carrying value of the
DA reporting unit exceeded its estimated fair value as of the testing date, which resulted in goodwill impairment charges of $8.1 million and reduced the goodwill
balance to $0 as of December 31, 2021. The goodwill impairment was calculated as the amount that the carrying value of the DA reporting unit, including any
goodwill, exceeded its fair value.
50
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Accrued Liabilities
Current accrued liabilities are as follows (in thousands):
Severance costs (see Note 13, “Commitments and Contingencies”)
Loss on purchase commitments (Note 13, “Commitments and Contingencies”)
Payroll and benefits
Legal costs
Contingent liability for earn-out provision
Deferred revenue, current
Taxes other than income taxes
Other
Total current accrued liabilities
$
$
Note 10 — Debt and Convertible Notes Payable
Long Term Debt
Paycheck Protection Program Loans
December 31,
2022
2021
2,617 $
—
684
447
583
655
1,884
2,114
8,984 $
2,581
1,750
1,054
1,013
608
528
241
1,221
8,996
In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In October 2021,
the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025. On January 5, 2023 the Company received notice from the SBA that
$4.4 million of the $4.8 million principal amount and accrued interest to this date of $0.1 million, was forgiven. The remaining principal amount of $0.4 million
and accrued interest, will be repaid over the remaining term of the loan through April 15, 2025 beginning on March 15, 2023. The forgiveness of the Flotek PPP
loan will be accounted for as an extinguishment of the debt and will result in the Company recording a $4.5 million gain in the first quarter of 2023 comprising the
principal amount forgiven of $4.4 million and accrued interest of $0.1 million.
In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior
to its acquisition by Flotek. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest were fully forgiven. Accordingly,
during the year ended December 31, 2021, the Company recorded $0.9 million for the amount of principal and accrued interest forgiven associated with the JP3
PPP loan in other income on the consolidated statements of operations.
Long-term debt, including current portion, is as follows (in thousands):
Flotek PPP loan
Less current maturities
Total long-term debt, net of current portion
December 31,
2022
2021
$
$
4,788 $
(2,052)
2,736 $
4,788
(1,436)
3,352
51
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Notes Payable
On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure
growth capital for the Company. Pursuant to the PIPE Transaction, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable
for net cash proceeds of approximately $20.1 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound
Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The
Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum, have a maturity of one year, and are converted into common stock of Flotek or
pre-funded warrants to purchase common stock of Flotek, (a) at the holder's option at any time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's
option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 for 20 trading days during a 30 consecutive trading day
period, or (c) at maturity, at a price of $0.8705. The issuance cost of $1.1 million is amortized on a straight line basis over the term of the Convertible Notes
Payable and the amortization is included in interest expense in the consolidated statements of operations.
On March 21, 2022, $3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into
approximately 2.8 million shares of common stock resulting in a 3.0 million credit to additional paid-in-capital in stockholders’ equity.
As of December 31, 2022, the remaining Convertible Notes Payable are recorded at carrying value of $19.8 million, including accrued paid-in-kind interest of
$1.8 million, and net of unamortized issuance costs of $0.1 million. The estimated fair value of the Convertible Notes Payable at December 31, 2022 was $25.8
million.
Interest expense for the year ended December 31, 2022 includes $1.8 million of accrued paid-in-kind interest and $1.0 million of issuance cost amortization
related to these Convertible Notes Payable. Interest expense relating to the Convertible Notes Payable held by ProFrac Holdings, LLC (related party) is $1.0
million for the year ended December 31, 2022.
Initial ProFrac Agreement Contract Consideration Convertible Notes Payable
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”), a subsidiary of
ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Initial ProFrac
Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE Transaction described
above, including the paid-in-kind interest at a rate of 10% per annum and conversion features.
The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments and were
initially recorded at fair value of $10.0 million on the issuance date with a corresponding contract asset. The Initial ProFrac Agreement Contract Consideration
Convertible Notes Payable were remeasured to fair value of $14.2 million as of December 31, 2022 which includes paid-in-kind interest of $1.0 million. The fair
value adjustment increased the carrying amount of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable by $3.3 million during the
year ended December 31, 2022 and is recognized in gain on fair value of contract consideration convertible notes payable, net on our consolidated statements of
operations. See Note 11, “Fair Value Measurements”.
Amended ProFrac Agreement Contract Consideration Convertible Notes Payable
On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac
Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement
Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC. The Amended ProFrac Agreement Contract Consideration Convertible Notes
Payable accrue paid-in-kind interest at a rate of 10% per annum and may be converted at any time prior to the maturity date, which is one year from the date of
issuance under the same conversion terms as the Convertible Notes Payable issued in the PIPE Transaction described above.
52
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments and were
initially recorded at fair value of $69.5 million on the issuance date with a corresponding contract asset. The Amended ProFrac Agreement Contract Consideration
Convertible Notes Payable were remeasured to fair value of $69.4 million as of December 31, 2022 which includes paid-in-kind interest of $3.2 million The fair
value adjustment resulted in a $3.3 million decrease during the year ended December 31, 2022 and is recognized in gain on fair value of contract consideration
convertible notes payable, net on our consolidated statement of operations. See Note 11, “Fair Value Measurements”.
Note 11 — Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs
to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the
fair value measurement.
•
•
•
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or
other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about
the inputs.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts
payable approximate fair value due to the short-term nature of these accounts.
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in
thousands):
Level 1
Level 2
Level 3
December 31,
2022
Level 1
Level 2
Level 3
December 31,
2021
Contingent earnout
consideration
Initial ProFrac Agreement
contract consideration
convertible notes
Amended ProFrac Agreement
contract consideration
convertible notes
Total
$
— $
— $
583 $
583
$
— $
— $
608 $
—
—
14,220
14,220
—
—
—
—
— $
—
— $
69,350
84,153 $
$
69,350
84,153
$
—
— $
—
— $
—
608 $
608
—
—
608
Contingent Earnout Consideration Key Inputs
The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of
December 31, 2022 and 2021. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing
20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.
53
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risk-free interest rate
Expected volatility
Term until liquidation (years)
Stock price
Discount rate
December 31,
2022
4.34%
100.0%
2.38
$1.12
9.95%
2021
1.02%
90.0%
3.38
$1.13
6.71%
Initial ProFrac Agreement Contract Consideration Notes Payable Key Inputs
The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Initial
ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $10.0 million on February 2, 2022. The Initial ProFrac
Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price
for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 due to the use of unobservable inputs. The estimated value of the
Initial ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation.
The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable
maturing February 2, 2023, as of December 31, 2022 were as follows:
Risk-free interest rate
Expected volatility
Term until liquidation (years)
Stock price
Discount rate
December 31, 2022
4.12%
100.0%
0.09
$1.12
4.12%
Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs
On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a
Monte Carlo simulation at an estimated fair value of $69.5 million. The Company reduced the discount rate assumed due to the reduced likelihood of occurrence
of any of the default events in the shorter term remaining on the notes. The estimated value of the Amended ProFrac Agreement Contract Consideration
Convertible Notes Payable as at December 31, 2022 was valued using a Monte Carlo simulation.
The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes
Payable, on the issuance date of May 17, 2022, and as of December 31, 2022 were as follows:
Risk-free interest rate
Expected volatility
Term until liquidation (years)
Stock price
Discount rate
May 17, 2022
2.16%
90.0%
1.00
$1.29
8.40%
December 31, 2022
4.59%
100.0%
0.38
$1.12
4.59%
54
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment and operating lease ROU assets, are measured at fair value on a non-recurring basis and
are subject to adjustment to their fair value in certain circumstances. Impairment of goodwill of $8.1 million was recorded during the year ended December 31,
2021. See Note 8, “Goodwill”.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the changes in balances of liabilities for the years ended December 31, 2022 and 2021 classified as Level 3 balances (in thousands):
Years ended December 31,
2022
2021
Balance - beginning of period
Transfer of Initial ProFrac Agreement contract consideration convertible notes payable from Level 2
Issuance of Amended ProFrac Agreement contract consideration convertible notes payable
Increase in principle of Initial ProFrac Agreement contract consideration convertible notes payable for paid-
in-kind interest
Increase in principle of Amended ProFrac Agreement contract consideration convertible notes payable for
paid-in-kind interest
Change in fair value of contingent earnout consideration
Change in fair value of Initial ProFrac Agreement contract consideration convertible notes payable
Change in fair value of Amended ProFrac Agreement contract consideration convertible notes payable
Balance - end of period
Note 12 — Income Taxes
Components of the income tax benefit are as follows (in thousands):
$
$
1,416
—
—
—
—
(808)
—
—
608
608 $
10,000
69,460
954
3,231
(25)
3,266
(3,341)
84,153 $
—
16
—
16
—
(56)
—
(56)
(40)
Years ended December 31,
2022
2021
101 $
2
—
103
—
(125)
—
(125)
(22) $
Years ended December 31,
2022
2021
$
$
(42,242) $
(85)
(42,327) $
(30,037)
(529)
(30,566)
Current:
Federal
State
Foreign
Total current expense
Deferred:
Federal
State
Foreign
Total deferred benefit
Income tax benefit
The components of loss before income taxes are as follows (in thousands):
United States
Foreign
Loss before income taxes
$
$
55
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax benefit differed from the amounts computed by applying the U.S. federal income tax rate of 21% respectively, to loss before income tax for the
reasons set forth below:
U.S. federal statutory tax rate
State income taxes, net of federal benefit
Non-U.S. income taxed at different rates
Increase in tax benefit related to stock-based awards
Increase in valuation allowance
Permanent differences related to CARES Act
Other
Effective income tax rate
Years ended December 31,
2021
2022
21.0 %
0.2
(0.1)
(0.4)
(21.8)
—
1.2
0.1 %
21.0 %
0.1
0.5
0.1
(24.9)
2.6
0.7
0.1 %
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 movement in the temporary differences
for the year ended December 31, 2022 does not affect the estimated annual effective tax rate as it is offset by a corresponding change in the valuation allowance.
The component of deferred tax assets and liabilities are as follows (in thousands):
December 31,
2022
2021
Deferred tax assets:
Net operating loss carryforwards
Intangible assets
Tax credit carryforwards
Goodwill
Property and equipment
Lease liability
Inventory valuation reserves
Allowance for doubtful accounts
Accrued liabilities
Accrued compensation
Equity compensation
Interest limitation
Other
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets, net
Deferred tax liabilities:
ROU asset
Prepaid insurance and other
Total gross deferred tax liabilities
Net deferred tax assets
$
$
41,453 $
4,066
4,011
4,920
3,644
2,634
2,033
1,180
320
491
536
1,616
230
67,134
(64,960)
2,174
(1,377)
(393)
(1,770)
404 $
33,166
2,916
4,001
5,284
3,229
1,750
2,675
1,184
569
401
399
13
291
55,878
(54,875)
1,003
(453)
(271)
(724)
279
As of December 31, 2022, the Company had U.S. net operating loss carryforwards of $176 million, including $46.4 million expiring in various amounts from
2029 through 2037 which can offset 100% of taxable income and $129.6 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 a
change in control as defined for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. The Company performed a study in which it
determined that no ownership change has occurred as of December 31, 2022. However, the Company anticipates that a change in control will occur in the near
term when certain convertible notes are converted during the year ended 2023. Although the
56
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
change in control will significantly limit the ability of the Company to utilize the pre-change net operating losses and credits, the Company does not expect a
significant impact to their financial statements given the valuation allowance that is recorded to estimate the realizability of the deferred tax assets.
The Company’s cumulative recent losses (before permanent items) of $215.5 million in the recent thirty-six months are negative evidence that it will not likely
generate sufficient future income to utilize its deferred tax assets. Therefore, the Company believes that it is not more likely than not that it will realize its deferred
tax assets in all taxing jurisdictions with the exception of a portion of Louisiana and Texas. Therefore, the Company recorded a valuation allowance for the years
ended December 31, 2022 and December 31, 2021 to reflect the estimated amount of deferred tax asset realizability.
The Company intends to reinvest the unremitted earnings of its non-U.S. subsidiaries. As of December 31, 2022 and 2021, the Company had approximately $7.4
million and $8.5 million, respectively, in unremitted earnings from its foreign jurisdictions. As a result of the 2017 Tax Act these earnings have been previously
taxed in the U.S. although they have not been repatriated. However, certain withholding taxes may need to be paid upon repatriation depending on the US treaty
with the applicable country. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.
The Company has performed an analysis of its tax positions for the year ended December 31, 2022, concluding all tax positions taken were highly certain.
Note 13 — Commitments and Contingencies
Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Except as disclosed below, 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.
Former CEO (J Chisholm) Matter
During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (a previous CEO of Flotek) due to
irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing,
inappropriate personal expenses, and general corporate waste. Flotek’s Board engaged a third party to review the findings of the investigation. After the third-
party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of
current management were implicated in any way.
Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration and other legal proceedings against, John Chisholm, Casey
Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover
damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the
Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any
outcome cannot reasonably be predicted.
Terpene Supply Agreement
On October 29, 2021, the Company reached agreement (“the ADM Settlement) with Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company
(“FCC”) and other parties to pay $1.75 million and resolve all claims between the parties in relation to lawsuit claiming damages relating to the terpene supply
agreement between Flotek Chemistry, LCC (“Flotek Chemistry”), a wholly owned subsidiary of the Company and FCC. The one-time payment of $1.75 million
from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the consolidated balance sheet as of December 31, 2021. A credit of
$7.6 million was recorded in cost of sales in the consolidated statements operations for the year ended December 31, 2021 relating to the release of excess costs
accrued for this matter.
Other Commitments and Contingencies
The Company is subject to concentrations of credit risk within trade accounts receivable, and related party accounts receivable, as the Company does not generally
require collateral as support for trade receivables. In addition, the majority of the Company’s cash is invested in three major U.S. financial institutions and
balances often exceed insurable amounts.
57
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Stockholders’ Equity
On March 21, 2022, Convertible Notes Payable pursuant to the PIPE Transaction discussed in Note 10, “Debt and Convertible Notes Payable”, which had been
purchased by certain funds associated with one of the Company’s directors including the D3 Family Fund and the D3 Bulldog Fund, which aggregated
$3.0 million plus $39 thousand of accrued interest, were converted into 2,793,030 shares of the Company’s common stock.
On June 21, 2022, ProFrac Holdings II, LLC paid $19.5 million for PreFunded Warrants of the Company. The PreFunded Warrants were recorded in equity at
their fair value of $11.1 million, estimated using a Black-Scholes Option Pricing model, less $1.2 million of transaction costs paid. The remaining cash received of
$8.4 million was recognized as an equity contribution. The Prefunded Warrants permit ProFrac Holdings II, LLC to purchase 13,104,839 shares of common stock
of the Company at an exercise price equal to $0.0001 per share, representing a 20% premium to the 30-day volume average price of the Company’s common stock
at the close of business on the day prior to the date of the issuance of the Prefunded Warrants. The Prefunded Warrants, net of transaction fees of $1.1 million, and
the equity contribution of $8.4 million from ProFrac Holdings, II, LLC are included in additional paid-in capital as of December 31, 2022.
The key inputs into the Black-Scholes Option Pricing Model used to estimate the fair value of the Pre-Funded Warrants as of the issuance on June 21, 2022 were
as follows:
Risk-free interest rate
Expected volatility
Term until liquidation (years)
Stock price
Strike price (exercise fee)
3.21%
90.0%
2.00
$1.11
$4.5 million
ProFrac Holdings II, LLC and its affiliates may not receive any voting or consent rights in respect of the Prefunded Warrants or the underlying shares unless and
until (i) the Company has obtained approval from a majority of its shareholders excluding ProFrac Holdings II, LLC and its affiliates and (ii) ProFrac Holdings II,
LLC has paid an additional $4.5 million to the Company. The additional $4.5 million will be accounted for as an equity contribution if received.
During the first quarter of 2021, the Company identified 613,000 shares that were improperly included in the December 31, 2020 issued share count, and the
Company adjusted the issued share count presented on the statement of stockholders’ equity. This adjustment was not material to the December 31, 2020
consolidated financial statements or basic and diluted earnings per share.
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, 2022 and 2021, the Company withheld 114,797 shares and 155,317 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 under the 2018 long-term incentive plan that were forfeited were 39,547 and 135,092 during the years ended December 31, 2022 and 2021,
respectively, are accounted for as treasury stock. During the years ended December 31, 2022 and 2021, forfeited stock awards returned to treasury stock were
30,055 shares and 421,389 shares, respectively.
Note 15 — Stock-Based Compensation and Other Benefit Plans
Stock-Based Incentive Plans
Stockholders approved long-term incentive plans in 2020, 2019 and 2018 (the “2020 Plan”, the “2019 Plan,” and the “2018 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,
restricted stock units, and certain other incentive awards. The maximum number of shares that may be issued under the 2020 Plan, 2019 Plan and 2018 Plan are 3
million, 1.0 million, and 8.5 million, respectively. At December 31, 2022 and 2021, the Company had a total of 2.8 million and 4.2 million shares remaining,
respectively, to be granted under the 2020 Plan, 2019 Plan and 2018 Plan.
58
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 year ended
December 31, 2022 no market-based stock options were granted compared to 1.4 million during the year ended December 31, 2021. The market-based options are
restricted until criteria defined in the agreements are met. Proceeds received from stock option exercises are credited to common stock and additional paid-in
capital, as appropriate. The Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the
estimate. Stock-based compensation expense is recorded for all equity awards expected to vest. During the years ended December 31, 2022 and 2021, 0.5 million
and 0.2 million stock options vested, respectively. During the year ended December 31, 2022, no stock options were forfeited compared to 0.8 million for the year
ended December 31, 2021. The total fair value of the stock options that vested was $0.3 million and $0.2 million for the years ended December 31, 2022 and
2021, respectively.
Stock option activity for the years ended December 31, 2022 and 2021, are as follows:
Outstanding as of December 31, 2020
Granted
Forfeited
Expired
Outstanding as of December 31, 2021
Expired
Outstanding as of December 31, 2022
Weighted-
Average
Exercise
Price
Weighted-
Average
Fair Value
Shares
3,660,000
1,448,959
$
(777,084)
(50,000)
4,281,875
(120,000)
4,161,875
$
1.07
1.02
0.52
$
0.72
$
0.88
0.52
0.52
0.10
.
Vested or expected to vest at December 31, 2022
3,889,147
The below table shows the aggregate intrinsic value and weighted average remaining contractual term of share options outstanding, currently exercisable and
vested or expected to vest.
Number
Weighted-average exercise price
Aggregate intrinsic value ($000’s)
Weighted-average remaining contractual term in years
Share Options
Outstanding
Share Options
Currently
Exercisable
Share Options
Vested or Expected
to Vest
$
4,161,875
1.19
121
3.41
$
840,000
1.28
24
2.15
$
3,889,147
1.19
114
3.43
The following table sets forth significant assumptions used in the Monte Carlo model for market-based options to determine the fair value of the options at the
date of grant for the year ended December 31, 2021. There were no options granted during the year ended December 31, 2022.
Risk-free interest rate
Expected volatility of common stock
Expected life of options in years
Dividend yield
Year Ended December
31, 2021
1.61 %
90.00 %
10
— %
59
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2022 and 2021, the unrecognized compensation cost related to stock options was $2.1 million and $3.3 million, respectively. Upon the departure
of the Company’s Chief Executive Officer and President effective January 19, 2023, 3,000,000 of the outstanding stock options were forfeited (see Note 20,
“Subsequent Events”). The unrecognized compensation expense related to these forfeited options was $1.8 million.
Restricted Stock
The Company grants employees and directors either time-vesting or market-based restricted shares in accordance with terms specified in the Restricted Stock
Agreements. During the years ended December 31, 2022 and 2021, all of the restricted stock granted were time-vesting restricted shares. Grantees of restricted
shares retain voting rights for the granted shares.
•
Time-vesting restricted shares vest after a stipulated period has elapsed after the date of grant, generally three years. Certain time-vested shares have also
been issued with a portion of the shares granted vesting immediately.
• Market-based restricted shares are issued with criteria defined over a designated period and vest only when, and if, the outlined criteria are met.
Restricted stock share activity for the years ended December 31, 2022 and 2021, are as follows:
Restricted Stock Shares
Non-vested at December 31, 2020
Granted
Vested
Forfeited
Non-vested at December 31, 2021
Granted
Vested
Forfeited
Non-vested at December 31, 2022
Shares
2,795,100 $
1,702,289
(1,453,854)
(1,275,172)
1,768,363
1,532,926
(967,684)
(33,926)
2,299,679 $
Weighted-
Average Fair
Value at Date of
Grant
1.00
1.73
1.24
1.36
1.61
1.32
1.77
1.69
1.37
The total fair value of restricted stock that vested during the years ended December 31, 2022 and 2021 was $1.3 million and $2.5 million, respectively.
At December 31, 2022 and 2021, unrecognized compensation expense related to non-vested restricted stock was $2.0 million and $1.9 million, respectively. The
unrecognized compensation expense is expected to be recognized over a weighted-average period of 1.7 years.
Restricted Stock Units
No RSU’s were granted during the years ended December 31, 2022 and 2021.
Restricted stock units activity for the years ended December 31, 2022 and 2021, are as follows:
Restricted Stock Units
RSUs at December 31, 2020
Vested
Forfeited
RSUs at December 31, 2021
Vested
Forfeited
RSUs at December 31, 2022
Units
1,141,144 $
(186,901)
(184,173)
770,070
(500,868)
(41,202)
228,000 $
$
Weighted-
Average Fair
Value at Date of
Grant
2.30
—
2.61
1.91
1.90
1.92
1.93
60
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2022 and 2021, unrecognized compensation expense related to restricted stock units was $0.4 million and $1.0 million. Upon the departure of
the Company’s Chief Executive Officer and President effective January 19, 2023, all the unvested restricted stock units outstanding as of December 31, 2022 were
forfeited (see Note 20, “Subsequent Events”).
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders in 2012. The Company registered 500,000 shares of its common stock,
currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the
Company’s common stock through accumulated payroll deductions. The ESPP allows participants to purchase common stock at a purchase price equal to 85% of
the fair market value of the common stock on the last business day of a three-month offering period which coincides with calendar quarters. Payroll deductions
may not exceed 10% of an employee’s compensation and participants may not purchase more than 1,000 shares in any one offering period. In addition, for each
calendar year, an employee may not be granted purchase rights valued over $25,000, as determined at the time such purchase right is granted. The fair value of the
discount associated with shares purchased under the plan is recognized as stock-based compensation expense and was $10.2 thousand and $23.6 thousand for the
years ended December 31, 2022 and 2021, respectively. The total fair value of the shares purchased under the plan during each of the years ended December 31,
2022 and 2021 was $0.1 million and $0.2 million, respectively. The employee payment associated with participation in the plan occurs through payroll
deductions.
Stock-Based Compensation Expense
Non-cash stock-based compensation expense related to stock options, restricted stock, restricted stock unit grants and stock purchased under the Company’s ESPP
was $3.3 million and $3.8 million during the years ended December 31, 2022 and 2021, 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. The Company currently matches contributions at 100% of up to 2% of an employee’s compensation.
During the years ended December 31, 2022 and 2021, compensation expense included $0.3 million and $0.2 million, respectively, related to the Company’s
401(k) match.
Note 16 — Loss Per Share
Basic loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per
common share is calculated by dividing the adjusted net loss by the weighted average number of common shares outstanding combined with dilutive common
share equivalents outstanding, if the effect is dilutive. Potentially dilutive common share equivalents consist of incremental shares of common stock issuable upon
conversion of convertible notes payable, exercise of stock warrants and vesting and settlement of stock awards. The dilutive effect of non-vested stock issued
under share‑based compensation plans, shares issuable under the Employee Stock Purchase Plan (ESPP), employee stock options outstanding, and the prefunded
stock warrants are computed using the treasury stock method. The dilutive effect of the Convertible Notes is computed using the if converted method in
accordance with ASU 2020-06, which was adopted by the Company on January 1, 2022 (see Note 2, “Summary of Significant Accounting Policies”).
The calculation of the basic and diluted loss per share for the years ended December 31, 2022 and 2021 is as follows (in thousands):
61
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31,
2022
2021
(42,305)
$
(30,526)
Numerator:
Net loss for basic earnings per share
Anti-dilutive adjustment to net income available to shareholders excluded from numerator for diluted
earnings computation
$
Paid-in-Kind interest expense on convertible notes payable and contract
consideration convertible notes payable, net of tax
Valuation gain on convertible notes carried at fair value, net of tax
Total numerator adjustment excluded from diluted earnings computation
$
Denominator:
Basic and diluted weighted average shares outstanding
Anti-dilutive incremental shares excluded from denominator for diluted earnings computation
Average number of diluted shares for convertible notes payable and contract
consideration convertible notes payable
Average number of diluted shares for stock warrants
Average number of diluted shares for stock options and restricted stock
5,956
(75)
5,881
$
74,425
54,649
4,814
598
Basic and diluted loss per share
$
(0.57)
$
—
—
—
73,361
—
—
906
(0.42)
For the year ended December 31, 2022 paid-in-kind interest expense, net of tax, on Convertible Notes Payable and the change in fair value related to the Contract
Consideration Convertible Notes Payable, net of tax, were not included in the dilution calculation since including them would have an anti-dilutive effect on the
loss per share due to the net loss incurred during the periods. For the year ended December 31, 2022 weighted average shares for convertible notes payable,
weighted average shares for stock warrants and weighted average shares for employee stock awards were not included in the dilution calculation since including
them would have an anti-dilutive effect on the loss per share due to the net loss incurred during the period.
For the year ended December 31, 2021, potentially dilutive securities were excluded from the calculation of diluted loss per share, since including them would
have an anti-dilutive effect on loss per share due to the net loss incurred during the year.
Note 17 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
Supplemental cash payment information:
Interest paid
Income taxes received
Supplemental non-cash financing and investing activities:
Issuance of convertible notes payable as consideration for ProFrac Agreement
Conversion of convertible notes payable to common stock
.
62
Years ended December 31,
2021
2022
$
$
45 $
—
79,460 $
3,038 $
26
(351)
—
—
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Related Party Transaction
On February 2, 2022, the Company entered into the Initial ProFrac Agreement, upon issuance of $10 million in aggregate principal amount of the convertible
notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 10, “Debt and Convertible Notes Payable”). Under the Initial
ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of
ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC
during the term of the Initial ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as
liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products
comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year.
On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac
Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 10, “Debt and
Convertible Notes Payable”). The Initial ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to
the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services LLC’s first 30 hydraulic fracturing fleets, and (b)
increase the term to 10 years.
During the years ended December 31, 2022 and 2021, the Company’s revenues from ProFrac Services LLC were $80.4 million and zero, respectively. For the year
ended December 31, 2022, these revenues were net of amortization of contract assets of $3.4 million. Cost of sales attributable to these revenues were $84.5
million and nil, respectively, for the years ended December 31, 2022 and 2021. As of December 31, 2022 and 2021 our accounts receivable from ProFrac
Services, LLC was $22.7 million and zero, respectively which is recorded in accounts receivable, related party on the consolidated balance sheet.
Also during 2022, we entered into the following related party transactions with ProFrac Holdings, LLC and ProFrac Holdings II, LLC:
•
•
PIPE Transaction (see Note 10, “Debt and Convertible Notes Payable”)
PreFunded Warrants (see Note 14, “Stockholders’ Equity)
On March 21, 2022, the Convertible Notes Payable which had been purchased by certain funds associated with one of the Company’s directors including the D3
Family Fund and the D3 Bulldog Fund, which aggregated $3.0 million plus $39 thousand of accrued interest and amortization of issuance costs of $90 thousand,
were converted into 2,793,030 shares of the Company’s common stock.
Mr. Ted D. Brown was a Director of the Company beginning in November of 2013 and is the President and CEO of Confluence Resources LP (“Confluence”), a
private oil and gas exploration and production company. As of April 15, 2022 Mr. Brown stepped down from being a Director of the Company and Confluence is
no longer be considered a related party as of April 15, 2022. The Company’s revenues and related cost of sales for product sales to Confluence were $1.4 million
and $1.4 million, respectively, through April 15, 2022. The accounts receivable balance from Confluence as at December 31, 2021 was $1.3 million. The
Company’s revenues and related cost of sales from chemical sales to Confluence for the year ended December 31, 2021 were $3.6 million and $3.4 million,
respectively.
Note 19 — Business Segment, Geographic and Major Customer and Supplier Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief
operating decision-maker in deciding how to allocate resources and assess performance. The operations of the Company are categorized into the following
reportable segments:
Chemistry Technologies. The CT segment includes green specialty chemistries, logistics and technology services, which enable its customers to pursue improved
efficiencies and performance throughout the life cycle of their wells, helping customers improve their ESG and operational goals. Customers of the CT segment
include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, and
international supply chain management companies.
63
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Data Analytics. The DA segment includes the design, development, production, sale and support of equipment and services that create and provide valuable
information on the composition and properties of energy customers’ hydrocarbon fluids. The company markets products and services that support in-line data
analysis of hydrocarbon components and properties. Customers of the DA segment span across the entire oil and gas market, from upstream production to
midstream facilities to refineries and distribution networks.
Performance is based upon a variety of criteria. The primary financial measure is segment operating income (loss). Various functions, including certain sales and
marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other
corporate income and expense items, and income taxes are not allocated to the reportable segment.
Summarized financial information of the reportable segments is as follows (in thousands):
As of and for the years ended December 31,
2022
Revenue from external customers
Products
Services
Total revenue from external customers
Revenue from related party
Products
Services
Total revenue from related parties
Gross profit (loss)
Change in fair value of contract consideration convertible notes
Loss from operations
Paid-in-kind interest on contract consideration convertible notes
payable
Paid-in-kind interest on convertible notes payable
Depreciation
Additions to long-lived assets
2021
Revenue from external customers
Product
Service
Total revenue from external customers
Revenue from related party
Product
Service
Total revenue from related parties
Gross profit (loss)
Loss from operations (1)
Depreciation
Additions to long-lived assets
Chemistry
Technologies
Data Analytics
Corporate and
Other
Total
$
$
$
$
47,004
1,956
48,960
81,614
4
81,618
(7,317)
(75)
(14,729)
4,185
—
668
56
32,984
2,304
35,288
3,641
—
3,641
5,430
(5,466)
939
39
3,903
1,481
5,384
—
130
130
617
—
(2,877)
—
—
63
134
$
$
—
—
—
—
—
—
—
—
(17,815)
—
1,771
3
231
$
3,640
699
4,339
$
—
—
—
—
—
—
(2,174)
(12,168)
70
—
—
—
—
—
(13,822)
2
—
50,907
3,437
54,344
81,614
134
81,748
(6,700)
(75)
(35,421)
4,185
1,771
734
421
36,624
3,003
39,627
3,641
—
3,641
3,256
(31,456)
1,011
39
(1) CT loss from operations includes a credit of $7.6 million from the release of accrued costs relating to the ADM settlement, see Note 13, “Commitments and Contingencies”.
64
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segments are as follows (in thousands):
Chemistry Technologies
Data Analytics
Corporate and Other
Total assets
December 31,
2022
2021
$
$
146,542 $
5,645
12,623
164,810 $
34,387
7,329
8,528
50,244
The increase in Chemistry Technologies assets is primarily due to contract asset of $79.7 million
Geographic Information
Revenue by country is based on the location where services are provided and products are sold. For the year ended December 31, 2022 no individual countries
other than the U.S accounted for more than 10% of revenue. For the year ended December 31, 2021 no individual countries other than the U.S and United Arab
Emirates (“UAE”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
U.S. (1)
UAE
Other countries
Total revenue
Years ended December 31,
2022
2021
$
$
124,399 $
9,257
2,436
136,092 $
33,187
4,512
5,569
43,268
(1) Includes revenue from related parties of $81,748 and $3,641, respectively.
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 (in thousands):
Year ended December 31, 2022
Customer A (related party - ProFrac Services, LLC)
Customer B
Year ended December 31, 2021
Customer B
Revenue
% of Total Revenue
$
$
80,359
14,395
11,632
59.0 %
10.6 %
26.0 %
The concentration with ProFrac Services, LLC and in the oil and gas industry increases credit, commodity and business risk.
Major Suppliers
Expenditure with major suppliers, as a percentage of consolidated supplier expenditure, is as follows (in thousands):
Year ended December 31, 2022
Supplier A
Supplier B
Supplier C
Year ended December 31, 2021
Supplier C
Supplier D
Expenditure
% of Total
Expenditure
$
$
25,057
15,302
15,255
3,643
4,562
27.7 %
16.9 %
16.8 %
17.0 %
21.3 %
66
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 — Subsequent Events
We have evaluated the effects of events that have occurred subsequent to December 31, 2022, and there have been no material events that would require
recognition in the 2022 consolidated financial statements or disclosure in the notes to the consolidated financial statements, except as disclosed below.
On January 19, 2023, the Company announced the departure of John W. Gibson, Jr. from his role as Chief Executive Officer and President of the Company,
effective January 19, 2023. Mr. Gibson also stepped down from his role as Chairman of the Board of Directors (the “Board”) of the Company.
In connection with his separation, the Company and Mr. Gibson have entered into a Separation Agreement and General Release (the “Separation Agreement”)
pursuant to which Mr. Gibson will receive $1,500,000 payable in four installments and being fully paid by April 2023. As part of the Separation Agreement, Mr.
Gibson has agreed to forfeit all of his outstanding options and unvested restricted stock units. In addition, Mr. Gibson has agreed to a 6-month lock up period with
respect to 250,000 shares of common stock owned by Mr. Gibson, which will prohibit Mr. Gibson from selling those shares during the lock up period.
On February 1, 2023, the Company entered into an amendment to the ProFrac Agreement (the “Amended ProFrac Agreement No. 2”) between Flotek Chemistry
and ProFrac Services, LLC dated February 2, 2022. The Amended ProFrac Agreement No. 2 has an effective date of January 1, 2023. Pursuant to the Amended
ProFrac Agreement No. 2, the Parties agree (1) to a ramp-up period from January 1, 2023 to May 31, 2023 for ProFrac Services, LLC to increase the number of
active fleets to 30 fleets, (2) that the potential liquidated damages payment relating to order shortfall, prior to January 1, 2023 is waived for that period, (3) to add
additional fees to certain products, and (4) to provide margin increases based on revenue percentages from non-ProFrac customers.
On February 2, 2023, the Convertible Notes Payable and certain Contract Consideration Convertible Notes previously issued on February 2, 2022 were converted
upon maturity into 10,355,840 shares of common stock and 25,366,561 Pre-Funded Warrants to purchase common stock for a nominal exercise price of $0.0001
per share exercisable subject to the limitations on exercise described therein. All of the holders elected to receive shares of common stock upon conversion except
for ProFrac Holdings LLC, which elected to receive the Pre-Funded Warrants.
67
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated
to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There
are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or
overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control
objectives are attained.
Based upon this evaluation, our interim Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure
controls and procedures were not effective because of a material weakness in our internal control over financial reporting described below.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange
Act, as amended.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management, including the Interim Chief Executive and the Chief Financial Officer, we conducted an
evaluation to assess the effectiveness of our internal control over financial reporting as of December 31, 2022, based upon criteria set forth in the Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon our assessment, we
believe that, as of December 31, 2022, our internal control over financial reporting was not effective because of the material weakness described below.
Specifically, (i) the Company did not have sufficient resources in place throughout the reporting period with the appropriate training and knowledge of internal
controls over financial reporting in order to establish the Company’s financial reporting processes to design, implement and operate an effective system of internal
control over financial reporting; (ii) the Company did not conduct an adequate continuous risk assessment over financial reporting to identify and analyze risks of
financial misstatement due to error and/or fraud and to identify and assess necessary changes in financial reporting processes and internal controls impacted by
significant changes in the business and increase in transactions; and (iii) the Company did not have an effective information and communication process that
ensured appropriate and accurate information was available to financial reporting personnel on a timely basis in order that they could fulfill their roles and
responsibilities.
Accordingly, the Company did not establish appropriate control activities through policies and procedures to mitigate risk to the achievement of the Company’s
financial reporting objectives, as follows:
a. The Company did not design effective controls over the identification and subsequent accounting for modifications to lease agreements;
b. The Company did not design effective controls over the accuracy of prepaid asset accounts;
c. The Company did not design effective controls over the completeness and accuracy of the related party revenue accrual at period end to ensure all sales
were are properly accounted for.
68
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These control deficiencies resulted in several material and immaterial misstatements that were corrected prior to the issuance of the consolidated financial
statements.
The Company believes that, notwithstanding the material weakness mentioned above, the consolidated financial statements contained in this Form 10-K present
fairly, in all material respects, the consolidated balance sheets, statements of operations, comprehensive loss, cash flows, and stockholders’ equity of the Company
and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated therein.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to
provide only management’s report in this Annual Report.
Remediation Plan and Status
The Company will implement the following plans of action and will continue to evaluate and adjust remediation actions as needed to ensure the elements of the
remediation plan remain appropriate and are sustainable. These elements include:
•
•
Implementing a revised FY2023 financial control risk assessment process based on changes in process that have impacted the Company as well as a
regularly recurring assessment process focused on identifying and analyzing risks of financial misstatements due to changes in our business or the nature
of transactions; and
Enhancing the information and communication processes to ensure the organization communicates information internally in a timely manner, including
information regarding objectives, responsibilities and the functioning of internal controls over financial reporting. Changes will include more frequent
discussion of significant business transactions and the impact of these transactions on the Company’s financial reporting, and improving communication
to employees regarding their responsibilities for ensuring that effective internal controls are maintained.
The Company believes that the actions listed above will provide appropriate remediation of the material weakness; however, the testing of the effectiveness of the
controls has not been completed by the Company. Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate
and test the design and effectiveness of the controls, no assurance can be given as to the timing for completion of remediation. The material weakness will be fully
remediated when the Company concludes that the controls have been operating for sufficient time and independently validated by management.
Changes in Internal Control over Financial Reporting
Except for the items described above, there have been no changes in the Company’s system of internal control over financial reporting (as defined Rule 13a-15(f)
and Rule 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2022, that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
69
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders to
be filed with the SEC within 120 days of year end.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 2023 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 2023 Annual Meeting of Stockholders to
be filed with the SEC within 120 days of year end.
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 2023 Annual Meeting of Stockholders to
be filed with the SEC within 120 days of year end.
Item 14. Principal Accountant Fees and Services.
Our independent registered public accounting firm is KPMG LLP, Houston, TX, Auditor Firm ID: 185
The information required by this Item is incorporated by reference to the Company’s Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders to
be filed with the SEC within 120 days of year end.
70
Item 15. Exhibits and Financial Statement Schedules
Exhibit
Number
2.1
2.2
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Description of Exhibit
†† Share Purchase Agreement, dated as of January 10, 2019, by and between the Company and ADM (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).
†† Membership Interest Purchase Agreement, dated as of May 18, 2020, by and between the Company, JP3 Measurement, LLC, the Sellers
party thereto, and John A. Cardwell, as Seller Representative) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on
May 19, 2020).
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).
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Flotek Industries, Inc. (incorporated by reference to
Exhibit 3.1 to the Company’s Form 8-K filed on May 7, 2020).
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Flotek Industries, Inc. (form of which is
incorporated by reference to Appendix B to the Company’s Proxy Statement filed on April 5, 2022).
Second Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.4 to the Company’s Form 10-K filed on March
16, 2021).
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 (incorporated by reference to Exhibit 4.2 to the Company’s Form 10-K filed on March 31,
2022).
Form of Convertible Note (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on February 4, 2022).
Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on February 4, 2022).
10% Convertible PIK Note dated May 17, 2022 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on May 18,
2022).
Form of Pre-Funded Warrants (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on June 23, 2022).
Employment Agreement, dated May 18, 2020, between Flotek Industries, Inc. and Matthew R. Thomas (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 19, 2020)
Employment Agreement dated October 15, 2021, between the Company and Michael Borton (incorporated by reference to Exhibit 10.1 to
the Company’s Form 8-K on October 20, 2021.)
Purchase Agreement, dated January 10, 2020, between the Company and John W. Gibson, Jr. (incorporated by reference to Exhibit 10.1 to
the Company’s Form 8-K filed on January 13, 2020).
Employment Agreement dated October 15, 2021, between the Company and TengBeng Koid (incorporated by reference to Exhibit 10.2 to
the Company’s Form 8-K on October 20, 2021.)
Employment Agreement between Flotek Industries, Inc. and Ryan Ezell effective as of January 1, 2021 (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K filed on January 6, 2021)
Flotek Industries, Inc. Employment Inducement Plan (incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 filed on June
17, 2020)
Form of Stock Option Grant Notice and Stock Option Agreement under Flotek Industries, Inc. Employment Inducement Plan (incorporated
by reference to Exhibit 99.3 to the Company’s Form S-8 filed on June 17, 2020)
Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under Flotek Industries, Inc. Employment
Inducement Plan (incorporated by reference to Exhibit 99.2 to the Company’s Form S-8 filed on June 17, 2020)
Separation and Release Agreement, dated July 28, 2020, between the Company and Elizabeth Wilkinson (incorporated by reference to
Exhibit 10.4 to the Company’s Form 10-Q filed on August 17, 2020)
Promissory Note dated April 16, 2020 in favor of PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on April 17, 2020)
†
†
†
†
†
†
†
†
†
*** Chemical Products Supply Agreement between Flotek Chemistry, LLC and ProFrac Services, LLC, dated February 2, 2022 (incorporated by
reference to Exhibit 10.3 to the Company’s Form 8-K filed on February 4, 2022).
71
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
*** Amendment No. 1 to Chemical Products Supply Agreement between Flotek Chemistry, LLC and ProFrac Services, LLC dated May 17,
2022 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 18, 2022).
*** Amendment to Supply Agreement between Flotek Chemistry, LLC and Florida Chemical Company, LLC dated February 26, 2020
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 3, 2020)
Registration Rights Agreement, by and between Flotek Industries, Inc. and ProFrac Holdings II, LLC dated May 17, 2022 (incorporated by
reference to Exhibit 10.2 to the Company’s Form 8-K filed on May 18, 2022).
Amendment No. 1 to Registration Rights Agreement Flotek Industries, Inc. and ProFrac Holdings II, LLC dated June 21, 2022
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on June 23, 2022).
Letter Agreement between Flotek Industries, Inc. and North Sound Management, Inc. dated December 2, 2020 (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K filed on December 2, 2020).
*** 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)
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)
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)
Flotek Industries, Inc. 2018 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report Form 8-K filed on June 7, 2021).
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)
†
†
†
†
†
†
†
†
†
†
†
†† Securities Purchase Agreement dated February 16, 2022 by and between Flotek Industries, Inc. and ProFrac Holdings, LLC (incorporated
by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 22, 2022)
Master Transaction Agreement between Flotek Industries, Inc. and ProFrac Holdings, LLC, dated February 2, 2022 (incorporated by
reference to Exhibit 10.4 to the Company’s Form 8-K filed on February 4, 2022).
72
10.35
10.36
10.37
10.38
10.39
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
*
**
***
†
††
†
†
†
†† Note Purchase Agreement, dated February 2, 2022, by and among Flotek Industries, Inc. and the Purchasers party thereto (incorporated by
††
reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 4, 2022)
Employment Agreement between Flotek Industries, Inc. and Seham S. Carson effective as of August 5, 2022 (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K filed on August 9, 2022)
Separation and Release Agreement between Michael E. Borton and Flotek Industries, Inc. dated July 4, 2022 (incorporated by reference to
Exhibit 10.6 to the Company’s Form 10-Q filed of August 11, 2022)
Employment Agreement dated December 19, 2022 between Flotek Industries, Inc. and Bond Clement (incorporated by reference to Exhibit
10.1 to the Company’s Form 8-K filed on December 19, 2022)
Securities Purchase Agreement between Flotek Industries, Inc. and ProFrac Holdings II, LLC dated June 17, 2022 (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 23, 2022).
*
List of Subsidiaries
* Consent of KPMG 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 - The instance document does not appear in the interactive data file because its XBRL tags are embedded
within the inline XBRL 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.
Furnished with this Form 10-K, not filed.
Certain identified information has been excluded from this exhibit because it is not material and is the type of information that the Company
customarily and actually treats as private and confidential. Redacted information is indicated by [***]
Management contracts or compensatory plans or agreements.
Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments have been omitted. The Company hereby agrees to
furnish a copy of any omitted schedule or attachment to the Securities and Exchange Commission upon request.
*
*
*
*
*
Item 16. Form 10-K Summary
None.
73
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/ Harsha V. Agadi
Harsha V. Agadi
Interim Chief Executive Officer and Director
Date: March 22, 2023
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.
SIGNATURES
/s/ Harsha V. Agadi
Harsha V. Agadi
/s/ Bond Clement
Bond Clement
/s/ David Nierenberg
David Nierenberg
/s/ Evan Farber
Evan Farber
/s/ Michael Fucci
Michael Fucci
/s/ Lisa Mayr
Lisa Mayr
/s/ Matt D. Wilks
Matt D. Wilks
Interim Chief Executive Officer and Director
(Principal Executive Officer)
TITLE
Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman of the Board
Director
Director
Director
Director
74
DATE
March 22, 2023
March 22, 2023
March 22, 2023
March 22, 2023
March 22, 2023
March 22, 2023
March 22, 2023
Flotek Chemistry, LLC
Oklahoma Limited Liability Company
Flotek Paymaster, Inc.
Texas Corporation
Flotek Industries, Inc.
List of Subsidiaries
JP3 Measurement, LLC
Texas Limited Liability Company
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in the registration statements (Nos. 333-183617, 333-225865, 333-231749, 333-239244 and 333-264865) on Form S-
8 and in the registration statements (Nos. 333-251043, 333-264875, and 333-267916) on Form S-3 of our report dated March 22, 2023, with respect to the
consolidated financial statements of Flotek Industries, Inc..
/s/ KPMG LLP
Houston, Texas
March 22, 2023
Exhibit 31.1
I, Harsha V. Agadi, 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 22, 2023
/s/ HARSHA V. AGADI
Harsha V. Agadi
Interim Chief Executive Officer
Exhibit 31.2
I, Bond Clement, 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 22, 2023
/s/ BOND CLEMENT
Bond Clement
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, 2022, 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 22, 2023
/s/ HARSHA V. AGADI
Harsha V. Agadi
Interim Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Flotek Industries, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, 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 22, 2023
/s/ BOND CLEMENT
Bond Clement
Chief Financial Officer