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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
|
|
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☒
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the
quarterly period ended
March 31, 2020
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
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|
FLOTEK
INDUSTRIES, INC.
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(Exact name
of registrant as specified in its charter)
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|
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Delaware
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90-0023731
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(State of
other jurisdiction of
incorporation or organization)
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(I.R.S.
Employer
Identification
No.)
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|
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8846
N. Sam Houston Parkway W.
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Houston,
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TX
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77064
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(Address of
principal executive offices)
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(Zip
Code)
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(713)
849-9911
(Registrant’s
telephone number, including area code)
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|
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|
Securities registered pursuant
to Section 12(b) of the Act:
|
Title of each
class
|
Trading
Symbol(s)
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Name of each
exchange on which registered
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Common Stock, $0.0001
par value
|
FTK
|
New York Stock
Exchange
|
Indicate by check
mark 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 ☐
Indicate by check
mark 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 ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
|
|
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|
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|
Large accelerated filer
|
|
☐
|
|
Accelerated
Filer
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|
☒
|
|
|
|
|
|
|
|
Non-accelerated
filer
|
|
☐
|
|
Smaller reporting company
|
|
☒
|
|
|
|
|
|
|
|
|
|
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|
Emerging growth
company
|
|
☐
|
If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes ☐ No ☒
As of
June 10,
2020, there
were 70,430,586
outstanding shares
of Flotek Industries, Inc. common stock, $0.0001 par value.
TABLE OF
CONTENTS
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Unaudited
Condensed Consolidated Statement of Stockholders’ Equity for the
three months ended March 31, 2020 and 2019
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PART I —
FINANCIAL INFORMATION
EXPLANATORY
NOTE
As previously
disclosed in the Current Report on Form 8-K filed by Flotek
Industries, Inc. (the “Company”) with the Securities and Exchange
Commission (the “SEC”) on May 7, 2020, the filing of the Company’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2020, was delayed due to difficulties in communication between
the Company’s internal personnel and with external advisors during
the COVID-19 emergency. The Company relied on the SEC’s Order Under
Section 36 of the Securities Exchange Act of 1934 Modifying
Exemptions From the Reporting and Proxy Delivery Requirements for
Public Companies, dated March 25, 2020 (Release No. 34-88465), to
delay the filing of this Quarterly Report.
See accompanying
Notes to Unaudited Condensed Consolidated Financial
Statements.
3
Item 1.
Financial Statements
FLOTEK
INDUSTRIES, INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in
thousands, except share data)
|
|
|
|
|
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|
|
March 31,
2020
|
|
December 31,
2019
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash
equivalents
|
$
|
80,263
|
|
|
$
|
100,575
|
|
Restricted cash
|
664
|
|
|
663
|
|
Accounts
receivable, net of allowance for doubtful accounts of $1,642 and
$1,527 at March 31, 2020 and December 31, 2019,
respectively
|
13,297
|
|
|
15,638
|
|
Inventories,
net
|
16,322
|
|
|
23,210
|
|
Income taxes
receivable
|
6,635
|
|
|
631
|
|
Other current
assets
|
9,005
|
|
|
13,191
|
|
Total current
assets
|
126,186
|
|
|
153,908
|
|
Property and equipment,
net
|
7,946
|
|
|
39,829
|
|
Operating lease right-of-use
assets
|
2,473
|
|
|
16,388
|
|
Deferred tax assets,
net
|
169
|
|
|
152
|
|
Other intangible assets,
net
|
—
|
|
|
20,323
|
|
TOTAL
ASSETS
|
$
|
136,774
|
|
|
$
|
230,600
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
|
8,556
|
|
|
$
|
16,231
|
|
Accrued
liabilities
|
8,320
|
|
|
24,552
|
|
Income taxes
payable
|
72
|
|
|
—
|
|
Current portion of operating
lease liabilities
|
1,167
|
|
|
486
|
|
Current portion of finance
lease liabilities
|
56
|
|
|
55
|
|
Total current
liabilities
|
18,171
|
|
|
41,324
|
|
Long-term operating lease
liabilities
|
9,754
|
|
|
16,973
|
|
Long-term finance lease
liabilities
|
144
|
|
|
158
|
|
Deferred tax liabilities,
net
|
—
|
|
|
116
|
|
Total
liabilities
|
28,069
|
|
|
58,571
|
|
Commitments and
contingencies “See Note 16”
|
|
|
|
Stockholders’
equity:
|
|
|
|
Preferred stock,
$0.0001 par value, 100,000 shares authorized; no shares issued and
outstanding
|
—
|
|
|
—
|
|
Common stock,
$0.0001 par value, 80,000,000 shares authorized; 64,338,087 shares
issued and 59,942,270 shares outstanding at March 31, 2020;
63,656,897 shares issued and 59,511,416 shares outstanding at
December 31, 2019
|
6
|
|
|
6
|
|
Additional paid-in
capital
|
348,375
|
|
|
347,564
|
|
Accumulated other
comprehensive loss
|
(1,089
|
)
|
|
(966
|
)
|
Retained earnings
(accumulated deficit)
|
(205,058
|
)
|
|
(141,091
|
)
|
Treasury stock, at cost;
4,395,817 and 4,145,481 shares at March 31, 2020 and
December 31, 2019, respectively
|
(33,529
|
)
|
|
(33,484
|
)
|
Total stockholders’
equity
|
108,705
|
|
|
172,029
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
136,774
|
|
|
$
|
230,600
|
|
See accompanying
Notes to Unaudited Condensed Consolidated Financial
Statements.
FLOTEK
INDUSTRIES, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
|
|
|
|
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|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Revenue
|
$
|
19,416
|
|
|
$
|
43,256
|
|
Costs and
expenses:
|
|
|
|
Operating expenses
(excluding depreciation and amortization)
|
22,841
|
|
|
43,968
|
|
Corporate general and
administrative
|
4,493
|
|
|
7,281
|
|
Depreciation and
amortization
|
2,191
|
|
|
2,260
|
|
Research and
development
|
2,555
|
|
|
2,285
|
|
(Gain) loss on disposal of
long-lived assets
|
(33
|
)
|
|
1,097
|
|
Impairment of fixed and
long-lived assets
|
57,454
|
|
|
—
|
|
Total costs and
expenses
|
89,501
|
|
|
56,891
|
|
Loss from
operations
|
(70,085
|
)
|
|
(13,635
|
)
|
Other
(expense) income:
|
|
|
|
Interest
expense
|
(4
|
)
|
|
(1,998
|
)
|
Other (expense) income,
net
|
(47
|
)
|
|
110
|
|
Total other
expense
|
(51
|
)
|
|
(1,888
|
)
|
Loss before
income taxes
|
(70,136
|
)
|
|
(15,523
|
)
|
Income tax
benefit
|
6,169
|
|
|
311
|
|
Loss from
continuing operations
|
(63,967
|
)
|
|
(15,212
|
)
|
Income from
discontinued operations, net of tax
|
—
|
|
|
46,074
|
|
Net (loss)
income
|
$
|
(63,967
|
)
|
|
$
|
30,862
|
|
|
|
|
|
Amounts
attributable to Flotek shareholders:
|
|
|
|
Loss from
continuing operations
|
$
|
(63,967
|
)
|
|
$
|
(15,212
|
)
|
Income
from discontinued operations, net of tax
|
—
|
|
|
46,074
|
|
Net (loss) income
attributable to Flotek
|
$
|
(63,967
|
)
|
|
$
|
30,862
|
|
|
|
|
|
Basic
earnings (loss) per common share:
|
|
|
|
Continuing
operations
|
$
|
(1.07
|
)
|
|
$
|
(0.26
|
)
|
Discontinued operations, net
of tax
|
—
|
|
|
0.79
|
|
Basic earnings (loss) per
common share
|
$
|
(1.07
|
)
|
|
$
|
0.53
|
|
|
|
|
|
Diluted
earnings (loss) per common share:
|
|
|
|
Continuing
operations
|
$
|
(1.07
|
)
|
|
$
|
(0.26
|
)
|
Discontinued operations, net
of tax
|
—
|
|
|
0.79
|
|
Diluted earnings (loss) per
common share
|
$
|
(1.07
|
)
|
|
$
|
0.53
|
|
|
|
|
|
Weighted
average common shares:
|
|
|
|
Weighted average
common shares used in computing basic earnings (loss) per common
share
|
59,836
|
|
|
58,373
|
|
Weighted average
common shares used in computing diluted earnings (loss) per common
share
|
59,836
|
|
|
58,373
|
|
See accompanying
Notes to Unaudited Condensed Consolidated Financial
Statements.
5
FLOTEK
INDUSTRIES, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Loss from
continuing operations
|
$
|
(63,967
|
)
|
|
$
|
(15,212
|
)
|
Income
from discontinued operations, net of tax
|
—
|
|
|
46,074
|
|
Net
(loss) income
|
(63,967
|
)
|
|
30,862
|
|
Other comprehensive (loss)
income:
|
|
|
|
Foreign currency translation
adjustment
|
(123
|
)
|
|
94
|
|
Comprehensive (loss)
income
|
$
|
(64,090
|
)
|
|
$
|
30,956
|
|
See accompanying
Notes to Unaudited Condensed Consolidated Financial
Statements.
6
FLOTEK
INDUSTRIES, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Cash flows
from operating activities:
|
|
|
|
Net (loss) income attributable
to Flotek Industries, Inc. (Flotek)
|
$
|
(63,967
|
)
|
|
$
|
30,862
|
|
Less: Income from discontinued
operations, net of tax
|
—
|
|
|
46,074
|
|
Loss from
continuing operations
|
(63,967
|
)
|
|
(15,212
|
)
|
Adjustments to reconcile loss
from continuing operations to net cash used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
2,191
|
|
|
2,260
|
|
Amortization of deferred
financing costs
|
—
|
|
|
1,428
|
|
Provision for doubtful
accounts
|
597
|
|
|
366
|
|
Provision for excess and
obsolete inventory
|
529
|
|
|
—
|
|
Impairment of right-of-use
assets
|
7,434
|
|
|
—
|
|
Impairment of fixed
assets
|
30,178
|
|
|
—
|
|
Impairment of intangible
assets
|
19,842
|
|
|
—
|
|
Loss on disposal of long-lived
assets
|
(33
|
)
|
|
1,097
|
|
Non-cash lease
expense
|
184
|
|
|
230
|
|
Stock compensation
expense
|
462
|
|
|
456
|
|
Deferred income tax
provision
|
(133
|
)
|
|
17,860
|
|
Reduction in tax benefit
related to share-based awards
|
—
|
|
|
24
|
|
Changes in current assets and
liabilities:
|
|
|
|
Accounts receivable,
net
|
1,675
|
|
|
(420
|
)
|
Inventories, net
|
4,793
|
|
|
(7,661
|
)
|
Income taxes
receivable
|
(6,212
|
)
|
|
(247
|
)
|
Other current
assets
|
6,926
|
|
|
(18,199
|
)
|
Accounts payable
|
(7,666
|
)
|
|
(1,306
|
)
|
Accrued
liabilities
|
(17,522
|
)
|
|
(8,157
|
)
|
Income taxes
payable
|
226
|
|
|
2,428
|
|
Interest payable
|
—
|
|
|
(8
|
)
|
Net cash used in operating
activities
|
(20,496
|
)
|
|
(25,061
|
)
|
Cash flows
from investing activities:
|
|
|
|
Capital
expenditures
|
(42
|
)
|
|
(461
|
)
|
Proceeds from sale of
business
|
—
|
|
|
169,722
|
|
Proceeds from sale of
assets
|
34
|
|
|
132
|
|
Abandoned/(purchase) of
patents and other intangible assets
|
49
|
|
|
(103
|
)
|
Net cash (used in) provided by
investing activities
|
41
|
|
|
169,290
|
|
Cash flows
from financing activities:
|
|
|
|
Borrowings on revolving credit
facility
|
—
|
|
|
42,984
|
|
Repayments on revolving credit
facility
|
—
|
|
|
(92,715
|
)
|
Purchase of treasury stock
related to share-based awards
|
(45
|
)
|
|
(131
|
)
|
Proceeds from sale of common
stock
|
349
|
|
|
—
|
|
Payments for finance
leases
|
(51
|
)
|
|
—
|
|
Net cash provided by (used in)
financing activities
|
253
|
|
|
(49,862
|
)
|
Discontinued
operations:
|
|
|
|
Net cash used in operating
activities
|
—
|
|
|
(337
|
)
|
Net cash provided by investing
activities
|
—
|
|
|
337
|
|
Net cash flows provided by
discontinued operations
|
—
|
|
|
—
|
|
Effect of changes in exchange
rates on cash and cash equivalents
|
(109
|
)
|
|
2
|
|
Net
(decrease) increase in cash and cash equivalents and restricted
cash
|
(20,311
|
)
|
|
94,369
|
|
Cash and cash equivalents at
the beginning of period
|
100,575
|
|
|
3,044
|
|
Restricted cash at the
beginning of period
|
663
|
|
|
—
|
|
Cash and cash
equivalents and restricted cash at beginning of period
|
101,238
|
|
|
3,044
|
|
Cash and cash equivalents at
end of period
|
80,263
|
|
|
96,753
|
|
Restricted cash at the end of
period
|
664
|
|
|
660
|
|
Cash and cash
equivalents and restricted cash at the end of period
|
$
|
80,927
|
|
|
$
|
97,413
|
|
See accompanying
Notes to Unaudited Condensed Consolidated Financial
Statements.
7
FLOTEK
INDUSTRIES, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31, 2020
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Retained
Earnings (Accumulated Deficit)
|
|
Total
Stockholders’ Equity
|
|
Shares
Issued
|
|
Par
Value
|
|
Shares
|
|
Cost
|
|
Balance, December 31,
2019
|
63,657
|
|
|
$
|
6
|
|
|
4,145
|
|
|
$
|
(33,484
|
)
|
|
$
|
347,564
|
|
|
$
|
(966
|
)
|
|
$
|
(141,091
|
)
|
|
$
|
172,029
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(63,967
|
)
|
|
(63,967
|
)
|
Foreign currency
translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(123
|
)
|
|
—
|
|
|
(123
|
)
|
Stock issued under
employee stock purchase plan
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Restricted stock
granted
|
681
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
338
|
|
|
—
|
|
|
—
|
|
|
338
|
|
Restricted stock
forfeited
|
—
|
|
|
—
|
|
|
241
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Treasury stock
purchased
|
—
|
|
|
—
|
|
|
22
|
|
|
(45
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(45
|
)
|
Stock compensation
expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
462
|
|
|
—
|
|
|
—
|
|
|
462
|
|
Balance, March 31,
2020
|
64,338
|
|
|
$
|
6
|
|
|
4,395
|
|
|
$
|
(33,529
|
)
|
|
$
|
348,375
|
|
|
$
|
(1,089
|
)
|
|
$
|
(205,058
|
)
|
|
$
|
108,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2019
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Retained
Earnings (Accumulated Deficit)
|
|
Total
Stockholders’ Equity
|
|
Shares
Issued
|
|
Par
Value
|
|
Shares
|
|
Cost
|
|
Balance, December 31,
2018
|
62,163
|
|
|
$
|
6
|
|
|
3,770
|
|
|
$
|
(33,237
|
)
|
|
$
|
343,536
|
|
|
$
|
(1,116
|
)
|
|
$
|
(107,176
|
)
|
|
$
|
202,013
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,862
|
|
|
30,862
|
|
Foreign currency
translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
94
|
|
|
—
|
|
|
94
|
|
Restricted stock
granted
|
36
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Restricted stock
forfeited
|
—
|
|
|
—
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Treasury stock
purchased
|
—
|
|
|
—
|
|
|
41
|
|
|
(131
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(131
|
)
|
Stock compensation
expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
468
|
|
|
—
|
|
|
—
|
|
|
468
|
|
Balance, March 31,
2019
|
62,199
|
|
|
$
|
6
|
|
|
3,845
|
|
|
$
|
(33,368
|
)
|
|
$
|
344,004
|
|
|
$
|
(1,022
|
)
|
|
$
|
(76,314
|
)
|
|
$
|
233,306
|
|
See accompanying
Notes to Unaudited Condensed Consolidated Financial
Statements.
8
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 —
Organization and Significant Accounting Policies
Organization and Nature of Operations
Flotek
Industries, Inc. (“Flotek” or the “Company”) is a global,
diversified, technology-driven company that develops and supplies
chemistry and services to the oil and gas industry.
The Company’s
Energy Chemistry Technology business designs, develops,
manufactures, packages, distributes, delivers, and markets
reservoir-centric fluid systems, including specialty and
conventional chemistries, for use in oil and gas well drilling,
cementing, completion, remediation, and stimulation activities
designed to maximize recovery in both new and mature fields. In the
segment reported as discontinued operations at December 31, 2018,
the Company processed citrus oil to produce (1) high value
compounds used as additives by companies in the flavors and
fragrances markets and (2) environmentally friendly chemistries for
use in numerous industries around the world, including the oil and
gas industry.
Flotek operates
in over seven
domestic and
international markets. Customers include major integrated oil and
gas companies, oilfield services companies, independent oil and gas
companies, pressure-pumping service companies, national and
state-owned oil companies, and international supply chain
management companies.
Flotek was
initially incorporated under the laws of the Province of British
Columbia on May 17, 1985. On October 23, 2001, Flotek changed
its corporate domicile to the state of Delaware.
Basis of Presentation
The accompanying
Unaudited Condensed Consolidated Financial Statements and
accompanying footnotes (collectively the “Financial Statements”)
reflect all adjustments, in the opinion of management, necessary
for fair presentation of the financial condition and results of
operations for the periods presented. All such adjustments are
normal and recurring in nature. The Financial Statements, including
selected notes, have been prepared in accordance with applicable
rules and regulations of the Securities and Exchange Commission
(“SEC”) regarding interim financial reporting and do not include
all information and disclosures required by accounting principles
generally accepted in the United States of America (“U.S. GAAP”)
for comprehensive financial statement reporting. These interim
Financial Statements should be read in conjunction with the audited
consolidated financial statements and notes included in the
Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2019
(“Annual
Report”).
All significant
intercompany accounts and transactions have been eliminated in
consolidation. The Company does not have investments in any
unconsolidated subsidiaries.
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.
Potential Impact of COVID-19
On March 11,
2020, the World Health Organization declared the outbreak of the
novel coronavirus (“COVID-19”) a global pandemic, which continues
to spread throughout the United States and around the world. This
outbreak has severely impacted global economic activity, and many
countries and many states in the United States have reacted to the
outbreak by instituting quarantines, mandating business and school
closures and restricting travel. In addition, global oil producers,
including the Organization of Petroleum Exporting Countries and
other oil producing nations (“OPEC”), have experienced
disagreements relating to oil production which has led to downward
pressure on commodity prices.
The effects of
the COVID-19 pandemic, including actions taken by businesses and
governments, have resulted in a significant and swift reduction in
international and U.S. economic activity. These effects and the
volatility in oil prices have materially and adversely affected,
and may continue to materially and adversely affect, the demand for
oil and natural gas, as well as for the Company’s services and
products. The decline in the Company’s customers’ demand for the
Company’s services and products is likely to have a material
adverse impact on the Company’s financial condition, results of
operations and cash flows in fiscal year 2020 and beyond. The
Company anticipates a significant decrease in revenue and, as a
result, has recorded an impairment to property, plant and
equipment, intangible assets, and operating right-of-use assets. In
addition, the Company adopted social distancing and work-from-home
procedures, which have had and may continue to have an impact on
the ability of employees
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and management of
the Company to communicate and work efficiently.
In response to
COVID-19 and volatile energy market conditions, the Company has
taken numerous actions to improve its financial flexibility which
include, but are not limited to the following:
|
|
•
|
Reduced Chief
Executive Officer’s salary by 20%
and other
executive officers by 10%
in exchange for
restricted stock,
|
|
|
•
|
Reduced Board of
Directors compensation by 20%,
|
|
|
•
|
Reduced workforce
by 35%,
|
|
|
•
|
Finalized plan to
consolidate office space to occur in the second quarter 2020,
relocating the Houston corporate headquarters personnel to the
Company’s Houston Global Resource and Innovation facility,
and
|
|
|
•
|
Decreased
discretionary spending across all business operations.
|
While the full
impact of the COVID-19 outbreak is not yet known, we are closely
monitoring the effects of the pandemic on commodity demands and on
our customers, as well as on our operations and employees. These
effects may include further adverse revenue and net income effects;
disruptions to our operations; customer shutdowns of oil and gas
exploration and production; employee impacts from illness, school
closures and other community response measures; and temporary
closures of our facilities or the facilities of our customers and
suppliers.
Reclassifications
Certain prior
period amounts have been reclassified to conform to the current
period presentation. The reclassifications did not impact
net
loss.
Note
2
— Recent
Accounting Pronouncements
Application of New Accounting Standards
Effective January
1, 2019, the Company adopted the accounting guidance in Accounting
Standards Update (“ASU”) No. 2016-02, “Leases.”
This standard (ASC 842) requires the recognition of ROU assets and
lease liabilities by lessees for those leases classified as
operating leases under previous U.S. GAAP (ASC 840). Upon adoption,
the Company recorded operating lease ROU assets and corresponding
operating lease liabilities, net of deferred rent, of
approximately $18.4
million, representing the present
value of future lease payments under operating leases with terms of
greater than twelve months. The adoption of this standard did not
have a material impact on the consolidated statements of operations
or cash flows. Refer to Note 4 — “Leases” for further
information surrounding adoption of this new standard.
Effective January
1, 2019, the Company adopted ASU No. 2018-02, “Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive
Income.”
This standard allows a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax effects
resulting from the 2017 Tax Cuts and Jobs Act. Implementation of
this standard did not have a material effect on the consolidated
financial statements and related disclosures.
Effective January
1, 2019, the Company adopted ASU No. 2018-07, “Improvements
to Nonemployee Share-Based Payment Accounting.” This standard expands the
scope of Topic 718 to include share-based payment transactions for
acquiring goods and services from non-employees. Implementation of
this standard did not have a material effect on the consolidated
financial statements and related disclosures.
New Accounting Requirements and Disclosures
Effective January
1, 2020, the Company adopted ASU No. 2018-13, “Disclosure
Framework — Changes to the Disclosure Requirements for Fair Value
Measurement.” This standard removes,
modifies, and adds additional requirements for disclosures related
to fair value measurement in ASC 820. The pronouncement is
effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years, with early
adoption permitted in any interim period. Implementation of this
standard did not have a material effect on the consolidated
financial statements and related disclosures.
New Accounting Standards to be Adopted
The Financial
Accounting Standards Board (“FASB”) issued ASU No. 2019-12,
“Income
Taxes (Topic 740): Simplifying the Accounting for Income
Taxes.”
This standard removes specific exceptions to the general principles
in Topic
740. The
pronouncement is effective for fiscal years beginning after
December 15, 2021, including interim periods within those fiscal
years, with early adoption permitted for public companies for
periods in which financial statements have not yet been issued. The
Company is currently evaluating the impact of this standard on the
consolidated financial statements and related
disclosures.
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The FASB issued
ASU No. 2016-13, “Measurement
of Credit Losses on Financial Instruments.” This standard replaces the
incurred loss impairment methodology in current U.S. GAAP with a
methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable
information to inform credit loss estimates. The pronouncement is
effective for smaller reporting companies for fiscal years
beginning after December 15, 2022. The Company is currently
evaluating the impact of this standard on the consolidated
financial statements and related disclosures.
Note 3 —
Discontinued Operations
During the fourth
quarter of 2018, the Company initiated and began executing a
strategic plan to sell its Consumer and Industrial Chemistry
Technologies (“CICT”) segment. An investment banking advisory
services firm was engaged and actively marketed this
segment.
The Company met
all of the criteria to classify the CICT segment’s assets and
liabilities as held for sale in the fourth quarter 2018. The
Company has classified the assets, liabilities, and results of
operations for this segment as “Discontinued Operations” for all
periods presented.
Disposal of the
CICT reporting segment represented a strategic shift that may have
a major effect on the Company’s operations and financial
results.
On
January 10,
2019, the
Company entered into a Share Purchase Agreement with
Archer-Daniels-Midland Company (“ADM”) for the sale of all of the
shares representing membership interests in its wholly owned
subsidiary, Florida Chemical Company, LLC (“FCC”), which
represented the CICT segment.
Effective
February 28,
2019, the
Company completed the sale of the CICT segment to ADM for
$175.0
million in cash consideration,
with $4.4
million temporarily held in escrow by
ADM for post-closing working capital adjustments for up to
90
days and $13.1
million temporarily held in escrow to
satisfy potential indemnification claims by ADM with anticipated
releases at 6
months, 12
months, and 15
months. Pursuant to the terms of
the Share Purchase Agreement, Flotek Chemistry, LLC (“Flotek
Chemistry”), a wholly owned subsidiary of the Company, entered into
a supply agreement with FCC who will supply terpene at specified
prices for specified quantities. The agreement will expire on
December 31, 2023.
As of December
31, 2019, the Company concluded that the original long-term supply
agreement met the definition of a loss contract. As such, the
Company recognized a loss as of December 31, 2019, capped by the
price paid for the terpene supply agreement amendment, executed in
February 2020, which aligned purchase commitments to expected usage
for blended products as of December 31, 2019.
Pursuant to the
post-closing working capital dispute resolution procedures set
forth in the Share Purchase Agreement, the Company and ADM engaged
a neutral third party auditor to help reach agreement on the final
post-closing working capital adjustment. In February 2020, the
third party auditor ruled in favor of awarding ADM the entire
disputed amount. As a result, the working capital adjustment escrow
balance was released to ADM and a corresponding reduction was made
to the gain on sale of business as of December 31,
2019.
On
February 26,
2020,
Flotek Chemistry, entered into an amendment to the terpene supply
agreement between Flotek Chemistry and FCC. Pursuant to the terms
and conditions of the amendment, the terpene supply agreement is
amended to, among other things, (a) reduce the minimum quantity of
terpene that Flotek Chemistry is required to purchase by
approximately 3/4ths in 2020 and by approximately half in each of
2021, 2022 and 2023, (b) provide a fixed per pound price for
terpene in 2020, (c) reduce the maximum amount of terpene subject
to the terpene supply agreement by approximately 1/3rd, and (d)
change the payment terms to net 45 days. In order to make the terms
and conditions of the amendment to the terpene supply agreement
effective, Flotek Chemistry made a one-time payment in February
2020 of $15.8
million to ADM. The expense
associated with the terpene supply agreement amendment payment was
recorded as a loss on contract purchase commitments, reported in
operating expenses in continuing operations in December
2019.
As of
March 31,
2020, the
Company recognized an additional loss of $0.8
million associated with the amended
terpene supply agreement due to adjustments in the Company’s
expected usage of terpene in blended products in 2020.
During the first
quarter 2020, as scheduled, $3.3
million of the indemnity escrow was
released to the Company.
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following
summarized financial information has been segregated from
continuing operations and reported as Discontinued Operations for
the three months ended
March 31,
2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31,
|
|
2020
|
|
2019
|
Consumer
and Industrial Chemistry Technologies
|
|
|
|
Revenue
|
$
|
—
|
|
|
$
|
11,031
|
|
Operating
expenses
|
—
|
|
|
(11,447
|
)
|
Depreciation and
amortization
|
—
|
|
|
—
|
|
Research and
development
|
—
|
|
|
(69
|
)
|
(Loss) income from
operations
|
—
|
|
|
(485
|
)
|
Other income
|
—
|
|
|
35
|
|
Gain on sale of
business
|
—
|
|
|
66,791
|
|
Income before income
taxes
|
—
|
|
|
66,341
|
|
Income tax
expense
|
—
|
|
|
(20,267
|
)
|
Net income from discontinued
operations
|
$
|
—
|
|
|
$
|
46,074
|
|
Note 4 —
Leases
Effective January
1, 2019, the Company adopted ASC 842 using the prospective method
applied to those leases which were not completed as of December 31,
2018. The Company has leases for corporate offices, research and
development facilities, warehouses, sales offices and equipment.
The leases have remaining lease terms of 1 year
to
10
years, some of which include
options to extend the leases for up to 10
years.
Upon adoption,
the Company recorded operating lease right of use (“ROU”) assets
and corresponding operating lease liabilities, net of deferred
rent, of approximately $18.4
million, representing the present
value of future lease payments under operating leases with terms of
greater than twelve months. Leases with an initial expected term of
12 months or less are not recorded on the balance sheet. The
Company recognizes lease expense for these leases on a
straight-line basis over the expected lease term.
During the first
quarter 2020, the Company made the decision to cease use of the
corporate headquarter leased offices and move corporate employees
to the Houston Global Research and Innovation Center (“GRIC”)
during second quarter of 2020. In addition, the lease term
liability for the corporate headquarters and GRIC locations and
corresponding ROU assets were remeasured to remove extensions that
would no longer be utilized and it was determined the Company was
no longer reasonably certain to utilize the extension at the GRIC
location . The remeasurement resulted in adjustments to lease
liabilities and ROU assets totaling of $6.2
million each as of March 31, 2020. In
addition, during the three months ended March 31, 2020, the Company
recorded an impairment of the ROU assets totaling
$7.4
million. See Note 9 - Impairment of
Fixed and Long-lived Assets for further discussion of the
impairment charge booked in the first quarter 2020.
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The components of
lease expense and supplemental cash flow information are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Operating lease
expense
|
$
|
570
|
|
|
$
|
653
|
|
Short-term lease
expense
|
32
|
|
|
43
|
|
Interest on lease
liabilities
|
4
|
|
|
—
|
|
Total lease
expense
|
$
|
606
|
|
|
$
|
696
|
|
|
|
|
|
Cash paid for amounts
included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from
operating leases
|
$
|
584
|
|
|
$
|
582
|
|
Operating cash flows from
finance leases
|
3
|
|
|
—
|
|
Financing cash flows from
finance leases
|
(51
|
)
|
|
—
|
|
Maturities of
lease liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years ending
December 31,
|
|
Operating
Leases
|
|
Finance
Leases
|
2020 (excluding the three
months ended March 31, 2020)
|
$
|
1,393
|
|
|
$
|
54
|
|
2021
|
|
1,957
|
|
|
71
|
|
2022
|
|
1,912
|
|
|
47
|
|
2023
|
|
1,488
|
|
|
38
|
|
2024
|
|
1,338
|
|
|
23
|
|
Thereafter
|
|
8,153
|
|
|
—
|
|
Total lease
payments
|
|
$
|
16,241
|
|
|
$
|
233
|
|
Less: Interest
|
|
(5,320
|
)
|
|
(33
|
)
|
Present value of lease
liabilities
|
|
$
|
10,921
|
|
|
$
|
200
|
|
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental
balance sheet information related to leases is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
March 31,
2020
|
December 31,
2019
|
Operating
Leases
|
|
|
Operating lease right-of-use
assets
|
$
|
2,473
|
|
$
|
16,388
|
|
|
|
|
Current portion of operating
lease liabilities
|
$
|
1,167
|
|
$
|
486
|
|
Long-term operating lease
liabilities
|
9,754
|
|
16,973
|
|
Total operating lease
liabilities
|
$
|
10,921
|
|
$
|
17,459
|
|
|
|
|
Finance
Leases
|
|
|
Property and
equipment
|
$
|
293
|
|
$
|
293
|
|
Accumulated
depreciation
|
(38
|
)
|
(28
|
)
|
Property and equipment,
net
|
$
|
255
|
|
$
|
265
|
|
|
|
|
Current portion of finance
lease liabilities
|
$
|
56
|
|
$
|
55
|
|
Long-term finance lease
liabilities
|
144
|
|
158
|
|
Total finance lease
liabilities
|
$
|
200
|
|
$
|
213
|
|
|
|
|
Weighted
Average Remaining Lease Term
|
|
|
Operating leases
|
9.2
years
|
|
16.6
years
|
|
Finance leases
|
4.3
years
|
|
4.6
years
|
|
|
|
|
Weighted
Average Discount Rate
|
|
|
Operating leases
|
8.9
|
%
|
8.9
|
%
|
Finance leases
|
8.5
|
%
|
9.0
|
%
|
Note
5
— Revenue
from Contracts with Customers
Revenues are
recognized when control of the promised goods or services is
transferred to the customer, in an amount that reflects the
consideration the Company expects to be entitled to in exchange for
those goods or services. In recognizing revenue for products and
services, the Company determines the transaction price of purchase
orders or contracts with customers, which may consist of fixed and
variable consideration. Determining the transaction price may
require significant judgment by management, which includes
identifying performance obligations, estimating variable
consideration to include in the transaction price, and determining
whether promised goods or services are distinct within the context
of the contract. Variable consideration typically consists of
product returns and is estimated based on the amount of
consideration the Company expects to receive. Revenue accruals are
recorded on an ongoing basis to reflect updated variable
consideration information.
The vast majority
of the Company’s products are sold at a point in time and service
contracts are short-term in nature. Sales are billed on a monthly
basis with payment terms customarily 30-45 days for domestic and 60
day for international from invoice receipt. In addition, sales
taxes are excluded from revenues.
Disaggregation
of Revenue
The Company has
disaggregated revenues by product sales (point-in-time revenue
recognition) and service revenue (over-time revenue recognition),
where product sales accounted for over 95%
of total revenue
for the three months ended
March 31,
2020 and 2019.
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company
differentiates revenue and operating expenses (excluding
depreciation and amortization) based on whether the source of
revenue is attributable to products or services. Revenue and
operating expenses (excluding depreciation and amortization)
disaggregated by revenue source are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Revenue:
|
|
|
|
Products
|
$
|
18,800
|
|
|
$
|
42,072
|
|
Services
|
616
|
|
|
1,184
|
|
|
$
|
19,416
|
|
|
$
|
43,256
|
|
Operating expenses (excluding
depreciation and amortization):
|
|
|
|
Products
|
$
|
22,534
|
|
|
$
|
43,447
|
|
Services
|
307
|
|
|
521
|
|
|
$
|
22,841
|
|
|
$
|
43,968
|
|
Arrangements
with Multiple Performance Obligations
The Company’s
contracts with customers may include multiple performance
obligations. For such arrangements, the total transaction price is
allocated to each performance obligation in an amount based on the
estimated relative standalone selling prices of the promised goods
or services underlying each performance obligation. Standalone
selling prices are generally determined based on the prices charged
to customers (“observable standalone price”) or an expected cost
plus a margin approach. For combined products and services within a
contract, the Company accounts for individual products and services
separately if they are distinct (i.e. if a product or service is
separately identifiable from other items in the contract and if a
customer can benefit from it on its own or with other resources
that are readily available to the customer). The consideration is
allocated between separate products and services within a contract
based on the prices at the observable standalone price. For items
that are not sold separately, the expected cost plus a margin
approach is used to estimate the standalone selling price of each
performance obligation.
Contract
Balances
Under revenue
contracts for both products and services, customers are invoiced
once the performance obligations have been satisfied, at which
point payment is unconditional. Accordingly, no revenue contracts
give rise to contract assets or liabilities under ASC
606.
Note 6 —
Supplemental Cash Flow Information
Supplemental cash
flow information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Supplemental cash payment
information:
|
|
|
|
Interest paid
|
$
|
4
|
|
|
$
|
578
|
|
Income taxes paid, net of
refunds
|
(32
|
)
|
|
22
|
|
Note 7 —
Inventories
Inventories are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Raw materials
|
$
|
3,983
|
|
|
$
|
4,339
|
|
Finished goods
|
17,287
|
|
|
24,569
|
|
Inventories
|
21,270
|
|
|
28,908
|
|
Less reserve for excess and
obsolete inventory
|
(4,948
|
)
|
|
(5,698
|
)
|
Inventories, net
|
$
|
16,322
|
|
|
$
|
23,210
|
|
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company
periodically reviews the value of items in inventory and provides
write-downs or write-offs of inventory based on an assessment of
market values. Write-downs of inventory are charged to cost of
goods sold. Obsolete inventory or inventory in excess of
management's estimated usage requirement is written down to its
estimated market value if those amounts are determined to be less
than cost.
Note 8 —
Property and Equipment
Property and
equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Land
|
$
|
3,261
|
|
|
$
|
4,440
|
|
Buildings and leasehold
improvements
|
6,045
|
|
|
38,741
|
|
Machinery and
equipment
|
6,848
|
|
|
27,694
|
|
Fixed assets in
progress
|
21
|
|
|
—
|
|
Furniture and
fixtures
|
1,359
|
|
|
1,671
|
|
Transportation
equipment
|
1,292
|
|
|
1,440
|
|
Computer equipment and
software
|
1,464
|
|
|
3,348
|
|
Property and
equipment
|
20,290
|
|
|
77,334
|
|
Less accumulated
depreciation
|
(12,344
|
)
|
|
(37,505
|
)
|
Property and equipment,
net
|
$
|
7,946
|
|
|
$
|
39,829
|
|
Depreciation
expense totaled $1.7
million and $1.8
million for the three months ended March 31,
2020 and 2019, respectively.
During the three
months ended March 31, 2020 an impairment was recognized for
$30.2
million. No
impairment was
recognized for the three months December 31, 2019. Refer to Note 9
- Impairment of Fixed and Long-lived Assets within this Quarterly
Report.
Note
9
— Impairment
of Fixed and Long-lived Assets
During the first
quarter 2020, the price of crude oil declined by over 50%, trading
below $25 per barrel, causing a significant disruption across the
industry, which began to negatively impact the Company’s results of
operations. These declines of results of operations were driven by
an oversupply of oil, insufficient storage, and demand destruction
resulting from the reaction to COVID-19. Based on these factors,
the Company concluded that a triggering event occurred and,
accordingly, an interim quantitative impairment test was performed
as of March 31, 2020.
As of March 31,
2020, the Company had one
single reporting
unit, ECT (“Asset Group”), which has historically been identified
for purposes of long-lived asset impairment assessments. The
Company identified the patents and technology as the primary asset
within the Asset Group. Management considered the existing
formulation/intellectual property portfolio to be the primary cash
generating long-lived asset being amortized, given the specialty
nature of their use and applications for the oil and gas industry.
The formulations are designed to maximize recovery in both new and
mature fields. Management believes the formulations are the primary
reason for maintaining existing customer relationships, as well as
establishing new customers.
The first step in
the impairment test is to determine whether the Asset Group is
recoverable. Using the income approach, the fair value of the Asset
Group was determined based on the present value of future cash
flows. The Company utilized internal forecast trends and potential
growth rates to estimate future cash flows of the Asset Group.
Based on the results of the quantitative assessment, the Company
concluded the carrying value of the Asset Group exceeded its fair
value as of March 31, 2020 and an impairment loss of
$57.5
million was recorded as a result of
the adverse effect of the COVID-19 pandemic and the related impact
on oil and natural gas prices on projections of future cash
flows.
The Company
recorded impairment charges during the three months ended March 31,
2020 as follows (in thousands):
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Property and equipment,
net
|
$
|
30,178
|
|
Operating lease right-of-use
assets
|
7,434
|
|
|
|
Other
Intangibles:
|
|
Patents
|
9,902
|
|
Customer Lists
|
9,165
|
|
Intangibles assets in
progress
|
596
|
|
Trademarks and brand
names
|
179
|
|
Total Other
Intangibles
|
19,842
|
|
|
|
Total Long-lived
Assets
|
$
|
57,454
|
|
Note 10 —
Other Intangible Assets
Other intangible
assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Cost
(1)
|
|
Accumulated
Amortization
|
|
Cost
|
|
Accumulated
Amortization
|
Finite-lived intangible
assets:
|
|
|
|
|
|
|
|
Patents and
technology
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,493
|
|
|
$
|
6,715
|
|
Customer lists
|
—
|
|
|
—
|
|
|
15,367
|
|
|
6,013
|
|
Trademarks and brand
names
|
—
|
|
|
—
|
|
|
1,351
|
|
|
1,160
|
|
Intangible assets in
progress
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total finite-lived intangible
assets
|
$
|
—
|
|
|
—
|
|
|
$
|
34,211
|
|
|
13,888
|
|
|
|
|
|
|
|
|
|
Carrying value:
|
|
|
|
|
|
|
|
Other intangible assets,
net
|
$
|
—
|
|
|
|
|
$
|
20,323
|
|
|
|
(1)
During the three
months ended March 31, 2020, after $0.5
million of amortization expense was
recorded, the Company recorded impairment charges to patents
of $9.9
million, customer lists of
$9.2
million, intangibles in progress
of $0.6
million and trademarks and brand names
of $0.2
million. See Note 9 - Impairment of
Fixed and Long-lived Assets.
Amortization of
finite-lived intangible assets acquired totaled $0.5
million and $0.5
million for the three months ended March 31,
2020 and 2019, respectively.
Note 11 —
Earnings (Loss) Per Share
Basic
earnings
(loss) per
common share is calculated by dividing net income (loss)
by the weighted
average number of common shares outstanding for the period.
Diluted earnings (loss)
per common share
is calculated by dividing net income (loss)
by the weighted
average number of common shares outstanding combined with dilutive
common share equivalents outstanding, if the effect is
dilutive.
Potentially
dilutive securities were excluded from the calculation of diluted
loss per share for the three months ended
March 31,
2020 and 2019, since including them would
have an anti-dilutive effect on loss per share due to the net loss
incurred during the periods. Securities convertible into shares of
common stock that were not considered in the diluted loss per share
calculations were 0.4
million restricted stock units
and 3.0
million stock options for the
three
months
ended March 31, 2020
and
0.2
million restricted stock units for
the three months ended
March 31,
2019.
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 12 —
Fair Value Measurements
Fair value is
defined as the amount that would be received for selling an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The Company
categorizes financial assets and liabilities into the three levels
of the fair value hierarchy. The hierarchy prioritizes the inputs
to valuation techniques used to measure fair value and bases
categorization within the hierarchy on the lowest level of input
that is available and significant to the fair value
measurement.
|
|
•
|
Level 1 — Quoted
prices in active markets for identical assets or
liabilities;
|
|
|
•
|
Level 2 —
Observable inputs other than Level 1, such as quoted prices for
similar assets or liabilities, quoted prices in markets that are
not active, or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities; and
|
|
|
•
|
Level 3 —
Significant unobservable inputs that are supported by little or no
market activity or that are based on the reporting entity’s
assumptions about the inputs.
|
Fair Value of Other Financial Instruments
The carrying
amounts of certain financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, and accrued
expenses, approximate fair value due to the short-term nature of
these accounts. The Company had total cash of $80.3
million, which consisted of cash
equivalents of $25.1
million in a
government money market account and cash deposits of
$45.9
million in an
interest bearing demand deposit account and $9.3
million in
operating cash accounts, at March 31,
2020,
and $100.6
million, which consisted of cash
equivalents of $48.4
million in a
government money market account and cash deposits of
$45.7
million in an interest bearing demand
deposit and $6.5
million in
operating cash accounts, at December 31,
2019.
Liabilities Measured at Fair Value on a Recurring
Basis
At March 31, 2020
and December 31, 2019, no liabilities were required to be measured
at fair value on a recurring basis. There were no transfers in or
out of either Level 1, Level 2, or Level 3 fair measurements during
the periods ending March 31, 2020 and December 31,
2019.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s
non-financial assets, including property and equipment, and other
intangible assets are measured at fair value on a non-recurring
basis and are subject to fair value adjustment in certain
circumstances. During the three months ended March 31, 2020, the
Company recorded an impairment of $57.5
million for impairment on long-lived
assets. Management inputs used in fair value measurement were
classified as Level 3.
Note 13 —
Income Taxes
A reconciliation
of the U.S. federal statutory tax rate to the Company’s effective
income tax rate is as follows:
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
U.S. federal statutory tax
rate
|
21.0
|
%
|
|
21.0
|
%
|
State income taxes, net of
federal benefit
|
(0.1
|
)
|
|
0.5
|
|
Non-U.S. income taxed at
different rates
|
0.1
|
|
|
1.3
|
|
Reduction in tax benefit
related to stock-based awards
|
(0.2
|
)
|
|
(2.3
|
)
|
Non-deductible
expenses
|
(0.1
|
)
|
|
(0.6
|
)
|
Research and development
credit (expense)
|
0.1
|
|
|
0.8
|
|
Increase in valuation
allowance
|
(15.0
|
)
|
|
(18.5
|
)
|
Effect of tax rate
differences of NOL carryback
|
3.0
|
|
|
—
|
|
Other
|
—
|
|
|
(0.2
|
)
|
Effective income tax
rate
|
8.8
|
%
|
|
2.0
|
%
|
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 27,
2020, the Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”) was enacted in response to the COVID-19 pandemic.
Among other things, the CARES Act provided the ability for
taxpayers to carryback a net operating loss (“NOL”) arising in a
taxable year beginning after December 31, 2017 and before January
1, 2021 to each of the five years preceding the year of the loss.
Based on the Company’s analysis of the extended NOL carryback
provision, it recorded a tax receivable of $6.1
million and filed Form 1139 for a
tentative refund of the same amount in April 2020. The refund
reflects $4.0
million related to the carrying back
of 2018 NOLs to 2013 and $2.1
million in tax benefit relating to
the difference in the current U.S. federal tax rate of 21% and the
tax rate of 35% applicable in 2013.
Fluctuations in
effective tax rates have historically been impacted by permanent
tax differences with no associated income tax impact, changes in
the valuation allowance, changes in state apportionment factors,
including the effect on state deferred tax assets and liabilities,
and non-U.S. income taxed at different rates, except for the NOL
carryback claim discussed above.
Deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted rates and laws that will be in effect
when the differences are expected to reverse. ASC 740, Income
Taxes, provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. In assessing
the need for a valuation allowance, the Company considers all
available objective and verifiable evidence, both positive and
negative, including historical levels of pre-tax income (loss) both
on a consolidated basis and tax reporting entity basis, legislative
developments, and expectations and risks associated with estimates
of future pre-tax income.
As of December
31, 2019, the Company determined that it was more likely than not
that it would not realize the benefits of certain deferred tax
assets and, therefore, it recorded a $19.9
million valuation allowance against
the carrying value of net deferred tax assets, except for deferred
tax liabilities related to certain state jurisdictions. As a result
of the NOL carryback allowed by the CARES Act, the Company released
a valuation allowance of $4.0
million related to its deferred tax
assets attributable to its U.S. federal NOLs. The Company continues
to have a full valuation allowance against net deferred tax
liabilities as it is not more-likely-than-not they will be
utilized.
Note 14 —
Common Stock
As of March 31,
2020, the Company’s Amended and Restated Certificate of
Incorporation, as amended on November 9, 2009, authorized the
Company to issue up to 80
million shares of common stock, par
value $0.0001
per share,
and 100,000
shares of
one
or more series of
preferred stock, par value $0.0001
per share. On May
5, 2020, shareholders approved an increase in the number of
authorized shares by 60.0
million to 140.0
million.
A reconciliation
of changes in common shares issued during the three months ended March 31,
2020 is as
follows:
|
|
|
|
Shares issued at December 31,
2019
|
63,656,897
|
|
Issued as restricted stock
award grants
|
681,190
|
|
Shares issued at March 31,
2020
|
64,338,087
|
|
Stock Repurchase Program
In June 2015, the
Company’s Board of Directors authorized the repurchase of up
to $50
million of the Company’s common
stock. Repurchases may be made in the open market or through
privately negotiated transactions. Through March 31,
2020, the
Company had repurchased $0.3
million of its common stock under
this authorization in June 2015. During the three months ended
March 31,
2020 and 2019, the Company did
not
repurchase any shares of its outstanding common stock under this
authorization.
At
March 31,
2020, the
Company has $49.7
million remaining repurchase capacity
under its share repurchase program.
Note 15 —
Business Segment, Geographic and Major Customer
Information
Segment Information
Operating
segments are defined as components of an enterprise for which
separate financial information is available that is regularly
evaluated by chief operating decision-makers in deciding how to
allocate resources and assess performance. The operations of the
Company are categorized into
one reportable segment: Energy
Chemistry Technologies.
Energy Chemistry
Technologies business designs, develops, manufactures, packages,
distributes, delivers, and markets reservoir-centric fluid systems,
including specialty and conventional chemistries, for use in oil
and gas well drilling, cementing, completion, remediation, and
stimulation activities designed to maximize recovery in both new
and mature fields. Activities in this segment
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
also include
construction and management of automated material handling
facilities as well as management of loading facilities and blending
operations for oilfield services companies.
The Company
evaluates performance based upon a variety of criteria. The primary
financial measure is segment operating income. Various functions,
including certain sales and marketing activities and general and
administrative activities, are provided centrally by the corporate
office. Costs associated with corporate office functions, other
corporate income and expense items, and income taxes are not
allocated to the reportable segment.
Summarized
financial information of the reportable segments is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three months ended March 31,
|
Energy
Chemistry Technologies
|
|
Corporate
and Other
|
|
Total
|
2020
|
|
|
|
|
|
Net revenue from external
customers
|
$
|
19,416
|
|
|
$
|
—
|
|
|
$
|
19,416
|
|
Loss from operations,
including impairment
|
(70,269
|
)
|
|
184
|
|
|
(70,085
|
)
|
Depreciation and
amortization
|
1,809
|
|
|
382
|
|
|
2,191
|
|
Capital
expenditures
|
42
|
|
|
—
|
|
|
42
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
Net revenue from external
customers
|
$
|
43,256
|
|
|
$
|
—
|
|
|
$
|
43,256
|
|
Loss from
operations
|
(4,703
|
)
|
|
(8,932
|
)
|
|
(13,635
|
)
|
Depreciation and
amortization
|
1,785
|
|
|
475
|
|
|
2,260
|
|
Capital
expenditures
|
461
|
|
|
—
|
|
|
461
|
|
Assets of the
Company by reportable segments are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
Energy Chemistry
Technologies
|
$
|
45,883
|
|
|
$
|
116,110
|
|
Corporate and
Other
|
90,891
|
|
|
114,490
|
|
Total assets
|
136,774
|
|
|
230,600
|
|
Geographic Information
Revenue by
country is based on the location where services are provided and
products are used. No individual country other than the United
States (“U.S.”) accounted for more than 10% of revenue. Revenue by
geographic location is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
U.S.
|
$
|
15,775
|
|
|
$
|
38,875
|
|
Other countries
|
3,641
|
|
|
4,381
|
|
Total
|
$
|
19,416
|
|
|
$
|
43,256
|
|
Long-lived assets
held in countries other than the U.S. are not considered material
to the consolidated financial statements.
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Major Customers
Revenue from
major customers, as a percentage of consolidated revenue, is as
follows:
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Customer A
|
39.9
|
%
|
|
*
|
|
Customer B
|
17.9
|
%
|
|
19.0
|
%
|
Customer C
|
*
|
|
|
12.6
|
%
|
* This customer
did not account for more than 10% of revenue.
Note 16 —
Commitments and Contingencies
Class Action Litigation
On March 30,
2017, the U.S. District Court for the Southern District of Texas
granted the Company’s motion to dismiss the four
consolidated
putative securities class action lawsuits that were filed in
November 2015, against the Company and certain of its officers. The
lawsuits were previously consolidated into a single case, and a
consolidated amended complaint had been filed. The consolidated
amended complaint asserted that the Company made false and/or
misleading statements, as well as failed to disclose material
adverse facts about the Company’s business, operations, and
prospects. The complaint sought an award of damages in an
unspecified amount on behalf of a putative class consisting of
persons who purchased the Company’s common stock between October
23, 2014 and November 9, 2015, inclusive. The lead plaintiff
appealed the District Court’s decision granting the motion to
dismiss. On February 7, 2019, a three-judge panel of the United
States Court of Appeals for the Fifth Circuit issued a unanimous
opinion affirming the District Court’s judgment of dismissal in its
entirety.
Other Litigation
The Company is
subject to routine litigation and other claims that arise in the
normal course of business. Management is not aware of any pending
or threatened lawsuits or proceedings that are expected to have a
material effect on the Company’s financial position, results of
operations or liquidity.
Concentrations and Credit Risk
The majority of
the Company’s revenue is derived from the oil and gas industry.
Customers include major oilfield services companies, major
integrated oil and natural gas companies, independent oil and
natural gas companies, pressure pumping service companies, and
state-owned national oil companies. This concentration of customers
in one industry increases credit and business risks.
The Company is
subject to concentrations of credit risk within trade accounts
receivable, as the Company does not generally require collateral as
support for trade receivables. In addition, the majority of the
Company’s cash is invested in accounts in two major financial
institutions and balances often exceed insurable
amounts.
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 17 —
Related Party Transaction
In January 2017,
the Internal Revenue Service (“IRS”) notified the Company that it
was examining the Company’s federal tax returns for the year ended
December 31, 2014. As a result of this examination, the IRS
informed the Company on May 1, 2019 that certain employment taxes
related to the compensation of our former CEO, Mr. Chisholm, were
not properly withheld in 2014 and proposed an adjustment. Mr.
Chisholm’s affiliated companies through which he provided his
services have agreed to indemnify the Company for any such taxes,
and Mr. Chisholm has executed a personal guaranty in favor of the
Company, supporting this indemnification.
At June 30, 2019,
the Company recorded a liability of $2.4
million related to the estimated
employment tax under-withholding for the years 2014 through 2018.
By September 30, 2019, the liability totaled $1.8
million, after the Company
paid $0.6
million to the IRS for these taxes
and made an additional accrual covering the estimated
under-withholding tax liability through 2019. In addition, at
September 30, 2019 the Company recorded a receivable from the
affiliated companies totaling $2.4
million. In October 2019, an
amendment to the employment agreement was executed, giving the
Company the contractual right of offset for any amounts owed to the
Company against, and giving the Company the right to withhold
payments equal to amounts reasonably estimated to potentially
become due to the Company by the affiliated companies from any
amounts owed under the employment agreement. During the three
months ended March 31, 2020, an additional accrual was recorded
for $0.2
million related to potential
penalties and interest on the IRS obligation. As of March 31, 2020,
the receivable from Mr. Chisholm was $2.3
million, which is equal to the
payable to the IRS and was netted with Mr. Chisholm’s severance
liability. Both the IRS and severance liabilities are recorded in
accrued liabilities on the consolidated balance sheet.
On January 5,
2020, Mr. Chisholm ceased to be an employee of the
Company.
Note 18 —
Revision of Prior Financial Statements
During the review
of the Consolidated Balance Sheet during the three months ended
March 31, 2020, management noted two
separate errors
that impact prior periods as follows:
|
|
•
|
Trademarks and
brand names with a carrying value of $2.8
million that were transferred in the
sale of Florida Chemical to ADM on February 28, 2019 were not
removed from the Consolidated Balance Sheet at the time of the
sale.
|
|
|
•
|
Gross profit in
intercompany inventory was not properly relieved and recorded as a
reduction in cost of sales when the related inventory was sold to
third parties.
|
The revisions
discussed above impacted the financial statements as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March
31, 2019
|
|
|
As
previously reported
|
Revisions
|
As
revised
|
Inventories, net
|
|
$
|
34,358
|
|
$
|
1,019
|
|
$
|
35,377
|
|
Other intangible assets,
net
|
|
24,978
|
|
(2,760
|
)
|
22,218
|
|
Total Assets
|
|
282,792
|
|
(1,741
|
)
|
281,051
|
|
Total Liabilities and
Stockholders' Equity
|
|
282,792
|
|
(1,741
|
)
|
281,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three months ended March 31, 2019
|
|
|
As
previously reported
|
Revisions
|
As
revised
|
Operating
expenses
|
|
$
|
44,599
|
|
$
|
(631
|
)
|
$
|
43,968
|
|
Income tax
benefit
|
|
774
|
|
(463
|
)
|
311
|
|
Loss from continuing
operations
|
|
(15,380
|
)
|
168
|
|
(15,212
|
)
|
Income from discontinued
operations, net of tax
|
|
48,372
|
|
(2,298
|
)
|
46,074
|
|
Net income
|
|
32,992
|
|
(2,130
|
)
|
30,862
|
|
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June
30, 2019
|
|
|
As
previously reported
|
Revisions
|
As
revised
|
Inventories, net
|
|
$
|
26,442
|
|
$
|
1,204
|
|
$
|
27,646
|
|
Other intangible assets,
net
|
|
24,290
|
|
(2,760
|
)
|
21,530
|
|
Total Assets
|
|
263,816
|
|
(1,556
|
)
|
262,260
|
|
Total Liabilities and
Stockholders' Equity
|
|
263,816
|
|
(1,556
|
)
|
262,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three months ended June 30, 2019
|
|
For the six
months ended June 30, 2019
|
|
|
As
previously reported
|
Revisions
|
As
revised
|
|
As
previously reported
|
Revisions
|
As
revised
|
Operating
expenses
|
|
$
|
38,306
|
|
$
|
(185
|
)
|
$
|
38,121
|
|
|
$
|
82,905
|
|
$
|
(816
|
)
|
$
|
82,089
|
|
Income tax
benefit
|
|
192
|
|
—
|
|
192
|
|
|
966
|
|
(463
|
)
|
503
|
|
Loss from continuing
operations
|
|
(12,990
|
)
|
185
|
|
(12,805
|
)
|
|
(28,370
|
)
|
353
|
|
(28,017
|
)
|
(Loss) income from
discontinued operations, net of tax
|
|
(1,608
|
)
|
—
|
|
(1,608
|
)
|
|
46,764
|
|
(2,298
|
)
|
44,466
|
|
Net (loss)
income
|
|
(14,598
|
)
|
185
|
|
(14,413
|
)
|
|
18,394
|
|
(1,945
|
)
|
16,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2019
|
|
|
As
previously reported
|
Revisions
|
As
revised
|
Inventories, net
|
|
$
|
24,333
|
|
$
|
1,271
|
|
$
|
25,604
|
|
Other intangible assets,
net
|
|
23,578
|
|
(2,760
|
)
|
20,818
|
|
Total Assets
|
|
249,357
|
|
(1,489
|
)
|
247,868
|
|
Total Liabilities and
Stockholders' Equity
|
|
249,357
|
|
(1,489
|
)
|
247,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three months ended September 30, 2019
|
|
For the nine
months ended September 30, 2019
|
|
|
As
previously reported
|
Revisions
|
As
revised
|
|
As
previously reported
|
Revisions
|
As
revised
|
Operating
expenses
|
|
$
|
23,689
|
|
$
|
(67
|
)
|
$
|
23,622
|
|
|
$
|
106,594
|
|
$
|
(883
|
)
|
$
|
105,711
|
|
Income tax
benefit
|
|
191
|
|
—
|
|
191
|
|
|
1,157
|
|
(463
|
)
|
694
|
|
Loss from continuing
operations
|
|
(11,227
|
)
|
67
|
|
(11,160
|
)
|
|
(39,597
|
)
|
420
|
|
(39,177
|
)
|
Income from discontinued
operations, net of tax
|
|
117
|
|
—
|
|
117
|
|
|
46,881
|
|
(2,298
|
)
|
44,583
|
|
Net (loss)
income
|
|
(11,110
|
)
|
67
|
|
(11,043
|
)
|
|
7,284
|
|
(1,878
|
)
|
5,406
|
|
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
|
As
previously reported
|
Revisions
|
As
revised
|
Inventories, net
|
|
$
|
21,697
|
|
$
|
1,513
|
|
$
|
23,210
|
|
Other intangible assets,
net
|
|
23,083
|
|
(2,760
|
)
|
20,323
|
|
Total Assets
|
|
231,847
|
|
(1,247
|
)
|
230,600
|
|
Total Liabilities and
Stockholders' Equity
|
|
231,847
|
|
(1,247
|
)
|
230,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three months ended December 31, 2019
|
|
For the year
ended December 31, 2019
|
|
|
As
previously reported
|
Revisions
|
As
revised
|
|
As
previously reported
|
Revisions
|
As
revised
|
Operating
expenses
|
|
$
|
42,631
|
|
$
|
(242
|
)
|
$
|
42,389
|
|
|
$
|
149,225
|
|
$
|
(1,125
|
)
|
$
|
148,100
|
|
Income tax (expense)
benefit
|
|
(956
|
)
|
—
|
|
(956
|
)
|
|
201
|
|
(463
|
)
|
(262
|
)
|
Loss from continuing
operations
|
|
(37,138
|
)
|
242
|
|
(36,896
|
)
|
|
(76,735
|
)
|
662
|
|
(76,073
|
)
|
(Loss) income from
discontinued operations, net of tax
|
|
(2,425
|
)
|
—
|
|
(2,425
|
)
|
|
44,456
|
|
(2,298
|
)
|
42,158
|
|
Net loss
|
|
(39,563
|
)
|
242
|
|
(39,321
|
)
|
|
(32,279
|
)
|
(1,636
|
)
|
(33,915
|
)
|
Management evaluated the
impact on previously issued financial statements and concluded the
impact was not material.
FLOTEK
INDUSTRIES, INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 19 —
Subsequent Events
In April 2020,
the Company was notified by the New York Exchange (“NYSE”) that the
average closing stock price had fallen below the minimum average
closing price required to maintain listing on the NYSE. The Company
initially had until October 2020 to regain compliance with the
minimum share price requirement, but due to recent market turmoil,
the NYSE has filed a rule change related to the compliance periods
for price-based listing requirements through June 30, 2020, which
extended the Company’s compliance period to December
2020.
In April 2020,
the Company filed a Form 1139 for a tentative tax refund of
$6.1
million pursuant to the CARES Act
that extended NOL carryback provisions and recorded an income tax
receivable of the same amount at March 31, 2020.
In April 2020,
the Company received a $4.8
million loan under the Paycheck
Protection Program (“PPP”) which was created through the
Coronavirus Aid, Relief, and Economic Act (“CARES Act”) and is
administered by the U.S. Small Business Administration (“SBA”). The
loan has a fixed interest rate of 1%, matures in two years and
payments are deferred for six months.
A portion of the
loan is eligible for forgiveness by the SBA depending upon the
extent of proceeds used for payroll costs and other designated
expenses incurred for up to 24 weeks following loan origination,
subject to adjustments for headcount reductions and compensation
limits and provided that at least 60% of the eligible costs
incurred are used for payroll. Receipt of these funds requires the
Company to, in good faith, certify that the current economic
uncertainty made the loan request necessary to support ongoing
operations of the Company. This certification further requires the
Company to take into account current business activity and the
ability to access other sources of liquidity sufficient to support
ongoing operations in a manner that is not significantly
detrimental to the business.
At the annual
shareholders’ meeting held on May 5, 2020, the shareholders
approved an increase in the number of authorized shares by
60.0
million to 140.0
million. The additional authorized
shares of common stock will be available for corporate purposes,
including acquisitions of other companies, products, technologies
or businesses.
On May 18, 2020,
the Company announced the acquisition of 100%
of the equity
interests in JP3 Measurement, LLC (“JP3”), a privately held leading
data and analytics technology company, in exchange for
cash-and-stock valued at approximately $34.4
million and the assumption of
$1.3
million of debt. JP3’s innovative,
real-time data platforms combine the energy industry’s only
field-deployable, inline optical analyzer with proprietary cloud
visualization and analytics to radically increase processing
efficiencies and valuation of natural gas, crude oil and refined
fuels. The transaction positions Flotek for accelerated growth and
diversifies the Company’s business across all segments of the
hydrocarbon value chain, while enhancing existing chemistry
applications and broadening its customer reach across the midstream
and downstream sectors.
In May 2020, the
Company finalized a contract to terminate the lease of its Houston
corporate headquarters office in exchange for a one-time payment
of $1.0
million.
On June 9, 2020,
the board of directors of the Company rescinded the authorization
to repurchase the Company’s stock that had been previously approved
in June 2015.
Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This Quarterly
Report on Form 10-Q (“Quarterly Report”), and in particular, Part
I, Item 2 — “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contains “forward-looking
statements” within the meaning of the safe harbor provisions, 15
U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of
1995 (“Reform Act”). Forward-looking statements are not historical
facts, but instead represent Flotek Industries, Inc.’s (“Flotek” or
“Company”) current assumptions and beliefs regarding future events,
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 Quarterly Report are based on information
available as of the date of this Quarterly 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,”
“continue,” “intend,” “expect,” “plan,” “forecast,” “project,” and
similar expressions, or future-tense or conditional constructions
such as “will,” “may,” “should,” “could,” etc. The Company cautions
that these statements are merely predictions and are not to be
considered guarantees of future performance. Forward-looking
statements are based upon current expectations and assumptions that
are subject to risks and uncertainties that can cause actual
results to differ materially from those projected, anticipated, or
implied.
A detailed
discussion of potential risks and uncertainties that could cause
actual results and events to differ materially from forward-looking
statements is included in Part I, Item 1A — “Risk Factors” of
the Annual Report on Form 10-K for the year ended
December 31,
2019 (“Annual Report”) and
periodically in subsequent reports filed with the Securities and
Exchange Commission (“SEC”). The Company has no obligation to
publicly update or revise any forward-looking statements, whether
as a result of new information or future events, except as required
by law.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) should be read in conjunction with the
unaudited condensed consolidated financial statements and the
related notes thereto of this Quarterly Report, as well as the
Annual Report. Phrases such as “Company,” “we,” “our,” and “us”
refer to Flotek Industries, Inc. and its subsidiaries.
Basis of Presentation
During the fourth
quarter of 2018, the Company classified the Consumer and Industrial
Chemistry Technologies segment as held for sale based on
management’s intention to sell this business. The Company’s
historical financial statements have been revised to present the
operating results of the Consumer and Industrial Chemistry
Technologies segment as discontinued operations. The results of
operations of this segment are presented as “Income from
discontinued operations” in the statement of operations and the
related cash flows of this segment have been reclassified to
discontinued operations for all periods presented. The assets and
liabilities of the Consumer and Industrial Chemistry Technologies
segment have been reclassified to “Assets held for sale” and
“Liabilities held for sale,” respectively, in the consolidated
balance sheets for all periods presented. During the first quarter
of 2019, the Company completed the sale of this
segment.
Executive Summary
Flotek is an
international energy chemistry technology-driven company that
develops and supplies chemistries and services to the oil and gas
industry. Through February 28, 2019, the date the segment was sold,
Flotek also provided high value compounds to companies that make
food and beverages, cleaning products, cosmetics, and other
products that are sold in consumer and industrial markets. Flotek
operates in over seven domestic and international
markets.
The Company’s
oilfield business includes specialty chemistries and logistics
which enable its customers to pursue improved efficiencies in the
drilling and completion of their wells. Customers include major
integrated oil and gas companies, oilfield services companies,
independent oil and gas companies, pressure-pumping service
companies, national and state-owned oil companies, and
international supply chain management companies. Through February
28, 2019, the Company also produced non-energy-related citrus oil
and related products, classified as discontinued operations,
including (1) high value compounds used as additives by companies
in the flavors and fragrances markets and (2) environmentally
friendly chemistries for use in numerous industries around the
world, including the oil and gas industry. Additionally, the
Company also provides automated bulk material handling, loading
facilities, and blending capabilities.
Continuing Operations
The operations of
the Company are categorized into one reportable segment: Energy
Chemistry Technologies (“ECT”).
Energy Chemistry
Technologies designs, develops, manufactures, packages,
distributes, delivers, and markets reservoir-centric fluid systems,
including specialty and conventional chemistries, for use in oil
and gas well drilling, cementing, completion, remediation, and
stimulation activities designed to maximize recovery in both new
and mature fields. Flotek’s specialty chemistries possess enhanced
performance characteristics and are manufactured to perform in a
broad range of basins and reservoirs with varying downhole
pressures, temperatures and other well-specific conditions
customized to customer specifications. This segment has technical
services laboratories and a research and innovation laboratory that
focus on design improvements, development and viability testing of
new chemistry formulations, and continued enhancement of existing
products.
Discontinued Operations
In the first
quarter of 2019, the Consumer and Industrial Chemistry Technologies
segment was sold and is classified as discontinued
operations.
Consumer and
Industrial Chemistry Technologies designed, developed, and
manufactured products that are sold to companies in the flavor and
fragrance industries and specialty chemical industry. These
technologies are used by beverage and food companies, fragrance
companies, and companies providing household and industrial
cleaning products.
Market Conditions
The Company’s
success is sensitive to a number of factors, which include, but are
not limited to, drilling and well completion activity, customer
demand for its advanced technology products, market prices for raw
materials, and governmental actions.
Drilling and well
completion activity levels are influenced by a number of factors,
including the number of rigs in operation and the geographical
areas of rig activity. Additional factors that influence the level
of drilling and well completion activity include:
|
|
•
|
Availability of
transportation and storage for oil and gas,
|
|
|
•
|
Historical,
current, and anticipated future oil and gas prices,
|
|
|
•
|
Federal, state,
and local governmental actions that may encourage or discourage
drilling activity, including any shut-downs or lock-downs of
economic activities in response to the COVID-19
pandemic,
|
|
|
•
|
Customers’
strategies relative to capital funds allocations,
|
|
|
•
|
Weather
conditions, and
|
|
|
•
|
Technological
changes to drilling and completion methods and
economics.
|
Customers’ demand
for advanced technology products and services provided by the
Company are dependent on their recognition of the value
of:
|
|
•
|
Chemistries that
improve the economics of their oil and gas operations,
and
|
|
|
•
|
Chemistries that
are economically viable, socially responsible, and ecologically
sound.
|
Market prices for
commodities, including citrus oils, which are a major raw material
used by the Company in its operations, can be influenced
by:
|
|
•
|
Historical,
current, and anticipated future production levels of the global
citrus (primarily orange) crops,
|
|
|
•
|
Health and
condition of citrus trees (e.g., disease and pests),
|
|
|
•
|
International
competition and pricing pressures resulting from natural and
artificial pricing influences, and
|
|
|
•
|
market demand for
orange juice.
|
Governmental
actions may restrict the future use of hazardous chemicals,
including, but not limited to, the following industrial
applications:
|
|
•
|
Oil and gas
drilling and completion operations,
|
|
|
•
|
Oil and gas
production operations, and
|
|
|
•
|
Non-oil and gas
industrial solvents.
|
Company Outlook
In late Q1 2020,
the oil and gas market experienced unprecedented disruption - the
oil price crash, compounded by reduced global energy demand due to
the reaction by governments to COVID-19, triggered North American
oil and gas operators to dramatically cut spending and operations,
which is expected to continue indefinitely. By early May 2020,
operators had announced budget reductions of more than 40%, or $42
billion year-over-year, according to RS Energy Group.
Anticipating
ongoing volatility, Flotek implemented changes to further reduce
its cost structure to meet anticipated market activity levels and
reduce the Company’s break-even levels: (1) Effective on April 1,
2020, each of the executive officers of Flotek reduced his or her
base salary in exchange for restricted stock in the Company. John
W. Gibson, Jr. reduced his salary by 20%, and all other executive
officers agreed to a reduction of 10%, through December 31, 2020.
(2) Also effective April 1, 2020 and extending through December 31,
2020, the Board approved a 20% reduction to the fees to be paid to
the directors of the Company. (3) On March 30, 2020, the Company
executed a reduction in headcount totaling 35% of its workforce.
(4)The Company put in motion a plan to rationalize office by
consolidating the Company’s footprint without impacting market
presence (5) The Company focused on reducing the Company’s legal
expenses by bringing more legal work in-house and only using
outside advisors when necessary and cost-effective.
Additionally, in
February 2020, the Company amended its terpene supply agreement
with Florida Chemical Company (“FCC”) to better manage the
Company’s inventory and costs. In exchange for a one-time payment
of $15.8 million to FCC, the Company substantially reduced its
terpene volumes it was required to purchase through 2023, and
secured an all-in fixed price-per-pound for terpene in 2020 that is
45% below the price of the original agreement. These changes
effectively reduced the Company’s commitment to purchase less than
50% of the original contract based on current market pricing, which
should substantially offset the one-time payment, while positioning
the Company to be more competitive in the market and opening
opportunities to pursue new channels to market.
Within this
environment, the Company focused to align its efforts to support
customers’ ongoing needs to create greater return on capital
invested through chemistry solutions, including supporting ongoing
domestic completions activities and enhanced oil recovery programs.
Further, the Company leveraged its international footprint to focus
on Middle East activity to include unconventional, EOR and
conventional programs. In addition, as the domestic market shifted
to shutting in activity, the Company expanded its product and
services to offer competitively priced chemistry solutions that
enable near wellbore protection and mitigate damage mechanisms and
other risk factors during well shut-ins to preserve well
integrity.
Simultaneously,
the Company has proactively sought opportunities to strategically
diversify its business and accelerate its growth strategy through
deployment of its capital. Key tenets of capital deployment
included focusing on digital transformation of chemistry and
product lines with a greater opportunity to secure annually
recurring revenue, among other factors.
On May 18, 2020,
the Company announced the purchase of JP3, an equipment and data
company that automates real-time data and analytics to the energy
industry to maximize the value of their hydrocarbons. With a proven
platform and customer validation contributing to a CAGR of 58% over
the last four years, JP3 is positioned for high growth in future
years through its Data as a Service (DaaS) offerings. As a new
division of Flotek, JP3 will focus on accelerating adoption of its
annually recurring revenue streams both domestically and
internationally.
Capital
expenditures for continuing operations totaled $0.0 million and
$0.5 million for the three months ended March 31, 2020 and 2019,
respectively. The Company expects capital expenditures for its ECT
business to total approximately $2.0 to $3.0 million for 2020.
Capital spending related to JP3 is under evaluation, but not
anticipated to exceed a range of $1.0 million to $2.0
million.
The Company will
remain nimble in its core capital expenditure plans, adjusting as
market conditions warrant, and will focus any growth capital
spending program on uses that generate positive returns and to
areas that pose a strategic long-term benefit.
Changes to
geopolitical, global economic, and industry trends could have an
impact, either positive or negative, on the Company’s business. In
the event of significant adverse changes to the demand for oil and
gas production, the market price for oil and gas, weather patterns,
and/or the availability of citrus crops, the market conditions
affecting the Company could change rapidly and materially. Should
such adverse changes to market conditions occur, management
believes the Company has adequate liquidity to withstand the impact
of such changes while continuing to make strategic capital
investments and acquisitions, if opportunities arise. In addition,
management believes the Company is well-positioned to take
advantage of significant increases in demand for its products
should market conditions improve dramatically in the near
term.
Results of Continuing Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Revenue
|
$
|
19,416
|
|
|
$
|
43,256
|
|
Operating expenses (excluding
depreciation and amortization)
|
22,841
|
|
|
43,968
|
|
Operating expenses
%
|
117.6
|
%
|
|
101.6
|
%
|
Corporate general and
administrative
|
4,493
|
|
|
7,281
|
|
Corporate general and
administrative %
|
23.1
|
%
|
|
16.8
|
%
|
Depreciation and
amortization
|
2,191
|
|
|
2,260
|
|
Research and development
costs
|
2,555
|
|
|
2,285
|
|
(Gain) loss on disposal of
long-lived assets
|
(33
|
)
|
|
1,097
|
|
Impairment of fixed assets
and long-lived assets
|
57,454
|
|
|
—
|
|
Loss from
operations
|
(70,085
|
)
|
|
(13,635
|
)
|
Operating margin
%
|
(361.0
|
)%
|
|
(31.5
|
)%
|
Interest and other income
(expense), net
|
(51
|
)
|
|
(1,888
|
)
|
Loss
before income taxes
|
(70,136
|
)
|
|
(15,523
|
)
|
Income tax
benefit
|
6,169
|
|
|
311
|
|
Loss from
continuing operations
|
(63,967
|
)
|
|
(15,212
|
)
|
Income
from discontinued operations, net of tax
|
—
|
|
|
46,074
|
|
Net (loss)
income
|
$
|
(63,967
|
)
|
|
$
|
30,862
|
|
Net
(loss) income %
|
(329.5
|
)%
|
|
(35.2
|
)%
|
Consolidated
Results of Operations:
Three
Months Ended
March 31, 2020,
Compared to the
Three
Months Ended
March 31, 2019
Consolidated
revenue for the three months ended
March 31,
2020, decreased $23.8
million,
or 55.1%, versus the same period
of 2019. The decrease in revenue was
largely a result of the continued volatile macro-environment for
U.S. onshore drilling and completion activity, impacted by
political and economic events in foreign markets. In addition,
concerns related to the COVID-19 virus impacted productivity and
customers demand for products.
Consolidated
operating expenses (excluding depreciation and amortization) for
the three months ended
March 31,
2020, decreased $21.1
million,
or 48.1%, compared to the same period
of 2019, and, as a percentage of
revenue, increased to 117.6%, for the three months ended
March 31,
2020,
and 101.6% in the same period of
2019. The decrease in operating
expenses is primarily due to the lower cost of sales as a result of
reduced revenues and lower freight, personnel, and travel and
entertainment expenses.
Corporate general
and administrative (“CG&A”) expenses are not directly
attributable to products sold or services provided. CG&A
costs decreased $2.8
million,
or 38.3%, for the three months ended
March 31,
2020,
versus the same period of 2019. As a percentage of revenue,
CG&A increased 6.3% for the three months ended
March 31,
2020. The
decrease in CG&A costs were primarily due to lower personnel
costs, lower software licensing fees, lower stock based
compensation and lower professional fees.
Depreciation and
amortization expense decreased $0.1
million,
or 3.1%, for the three months ended
March 31,
2020,
versus the same period of 2019.
Research and
development costs increased $0.3
million,
or 11.8%, for the three months ended
March 31,
2020,
compared to the same period of 2019 primarily due to severance
costs.
Loss on disposal
of long-lived assets decreased $1.1 million
for the
three months
ended March 31, 2020, compared to the same period
of 2019, primarily due to the
disposal of certain corporate software in the first quarter of
2019.
Impairment of
fixed asset and long-lived assets was $57.5 million
due to a
write-down of fixed assets, operating right-of-use (“ROU”) assets
and intangible assets to estimated fair market value.
Income (loss)
from operations decreased by $56.5 million and for the
three
months
ended March 31, 2020
versus the same
period in 2019. The change in loss is
primarily the result of the impairment charges and lower margins
due to sales volumes and lower plant utilization, partially offset
by lower personnel costs.
Interest and
other expense decreased $1.8 million
for the
three
months
ended March 31,
2020,
versus the same period of 2019, primarily due to the
termination of the Amended and Restated Revolving Credit, Term Loan
and Security Agreement (as amended, the “Credit Facility”) with PNC
Bank in the first quarter 2019.
The Company
recorded an income tax benefit of $6.2
million,
primarily as a result of the extended net operating loss carryback
provisions included in the CARES Act, yielding an effective
tax benefit rate and 8.8%, for the three months ended
March 31,
2020,
compared to an income tax benefit of $0.3
million,
yielding an effective tax benefit rate 2.0%, for the comparable period
in 2019.
Off-Balance Sheet Arrangements
There have been
no transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred
to as “structured finance” or “special purpose entities” (“SPEs”),
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As
of
March 31, 2020, the Company was not
involved in any unconsolidated SPEs.
The Company has
not made any guarantees to customers or vendors nor does the
Company have any off-balance sheet arrangements or commitments that
have, or are reasonably likely to have, a current or future effect
on the Company’s financial condition, change in financial
condition, revenue, expenses, results of operations, liquidity,
capital expenditures, or capital resources that would be material
to investors other than the long term terpene agreement discussed
in Note 3 in Part I, Item I - Financial Statements of this
Quarterly Report.
Critical Accounting Policies and Estimates
The Company’s
Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”). Preparation of these statements requires
management to make judgments, estimates, and assumptions that
affect the amounts reported in the financial statements and
accompanying footnotes. Part II, Item 8 — Financial Statements
and Supplementary Data, Note 2 of “Notes to Consolidated
Financial Statements” and Part II, Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of
Operations, “Critical Accounting Policies and Estimates” of the
Company’s Annual Report, and the “Notes to Unaudited Condensed
Consolidated Financial Statements” of this Quarterly Report
describe the significant accounting policies and critical
accounting estimates used to prepare the consolidated financial
statements. Critical accounting policies and estimates are defined
as those that are both most important to the portrayal of the
Company’s financial condition and results of operations and require
management’s most subjective judgments. The Company regularly
reviews and challenges judgments, assumptions, and estimates
related to critical accounting policies. The Company’s estimates
and assumptions are based on historical experience and expected
changes in the business environment; however, actual results may
materially differ from the estimates. There have been no
significant changes in the Company’s critical accounting policies
and estimates during the three months ended March 31,
2020.
However, during the three months ended March 31,
2020, the
Company evaluated and recorded remeasurement and impairment charges
on right of use assets and fixed assets, respectively.
Recent Accounting Pronouncements
Recent accounting
pronouncements which may impact the Company are described in
Note 2 — “Recent Accounting
Pronouncements” in Part I, Item 1 — “Financial Statements” of this
Quarterly Report.
Capital Resources and Liquidity
Overview
The Company’s
ongoing capital requirements arise from the Company’s need to
acquire and maintain equipment, fund working capital requirements,
and when the opportunities arise, to make strategic acquisitions
and repurchase Company stock. During the first three months of 2020, the Company funded capital
requirements primarily with cash from operations and cash on hand,
including proceeds from the sale of the CICT segment, received on
March 1, 2019.
Historically, the
Company’s primary source of debt financing was its
$75
million Credit Facility with PNC
Bank. Upon closing of the sale of the CICT segment, on
March 1,
2019, the
Company repaid the outstanding balance, interest, and fees related
to the revolving credit facility, and subsequently terminated the
Credit Facility.
The Company
believes it has adequate liquidity to fund its ongoing operations
and capital expenditures. As of March 31,
2020, the
Company had available cash and cash equivalents of
$80.3
million.
For the remainder of 2020, the Company expects capital
spending of approximately $2.0 million
to
$3.0
million for the Company’s energy
chemistry business. The Company expects to fund operations and
capital expenditures with internal cash on hand, $4.8 million of
proceeds from the PPP SBA loan funded in April 2020, the tentative
tax refund expected in the second or third quarter 2020, and the
release of $6.6 million from the indemnity escrow established
pursuant to the sale of FCC to ADM effective February 28,
2019.
Any excess cash
generated may be used for outside growth opportunities or retained
for future use.
Cash Flows
Consolidated cash
flows by type of activity are noted below (in
thousands):
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
2020
|
|
2019
|
Net cash used in operating
activities
|
$
|
(20,496
|
)
|
|
$
|
(25,061
|
)
|
Net cash (used in) provided
by investing activities
|
41
|
|
|
169,290
|
|
Net cash provided by (used
in) financing activities
|
253
|
|
|
(49,862
|
)
|
Effect of changes in exchange
rates on cash and cash equivalents
|
(109
|
)
|
|
2
|
|
Net
(decrease) increase in cash and cash equivalents and restricted
cash
|
$
|
(20,311
|
)
|
|
$
|
94,369
|
|
Operating
Activities
Net cash
used in
operating
activities was $20.5 million
and
$25.1
million during the
three months
ended March 31, 2020 and 2019, respectively. Consolidated
net loss for the three months ended March 31,
2020 and 2019, totaled $64.0 million
and
$15.2
million,
respectively. The cash used in operating activities is primarily
due to two one-time payments, one to FCC to amend the Company’s
long-term terpene supply agreement and one to ADM related to the
final post-closing working capital adjustment.
During the
three months
ended March 31, 2020, non-cash adjustments to net
income totaled $61.3
million.
Contributory non-cash items consisted primarily of a $57.5 million
impairment charge consisting of $30.2 million impairment on fixed
assets, $19.9 million on impairment of intangibles, and $7.4
million impairment on ROU assets. Additional non-cash charges
included $2.2 million
for depreciation
and amortization, $0.6 million for allowance for doubtful
accounts,$0.5 million
for stock
compensation expense, and $0.5 million for provision for excess and
obsolete inventory.
During the
three months
ended March 31, 2019, non-cash adjustments to net
income totaled $23.7
million.
Contributory non-cash items consisted primarily of
$17.9
million for changes to deferred
income taxes driven by the valuation allowance recorded against
deferred tax assets, $3.7 million
for depreciation
and amortization, $1.1 million on loss of disposal of assets,
and $0.5
million for stock compensation
expense.
During the
three months
ended March 31, 2020, changes in working
capital used $17.8 million
in cash,
primarily resulting from a decrease in accrued liabilities and
accounts payable of $25.1 million, partially offset by a reduction
in other current assets, inventories, and accounts receivable by
$13.3 million, and increasing income tax receivable by $6.2
million.
During the
three months
ended March 31, 2019, changes in working
capital used $33.6 million in cash,
primarily resulting from increasing accounts receivable, inventory,
income tax receivable, and other current assets by $26.5 million
and decreasing accounts payable, accrued liabilities and interest
payable by $9.5 million, partially offset by and increasing income
tax payable by $2.4 million.
Investing
Activities
Net cash
provided
by investing activities
was $0.0
million for the three months ended March 31,
2020.
Net cash
provided
by investing activities
was $169.3
million for the three months ended March 31,
2019.
Cash provided by
investing
activities primarily included $169.7 million of proceeds from sale
of business and $0.1 million
of proceeds
received from the sale of assets, partially offset by $0.4 million
for capital expenditures and $0.1 million
for the purchase
of various patents.
Financing
Activities
Net cash
generated
through financing activities
was $0.3
million for the three months ended March 31,
2020, due
to the proceeds from sale of common stock.
Net cash
used in
financing
activities was $49.9 million
for the
three months
ended March 31, 2019, primarily due to
using
$92.7
million for repayments
of debt, offset
by borrowings on revolving credit facility of $42.9
million.
Contractual
Obligations
Cash flows from
operations are dependent on a variety of factors, including
fluctuations in operating results, accounts receivable collections,
inventory management, and the timing of payments for goods and
services. Correspondingly, the impact of contractual obligations on
the Company’s liquidity and capital resources in future periods is
analyzed in conjunction with such factors.
Material
contractual obligations consist of payments of finance and
operating lease obligations. Contractual obligations at
March 31,
2020, are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
by Period
|
|
Total
|
|
Less than 1
year
|
|
1 - 3
years
|
|
3 - 5
years
|
|
More than 5
years
|
Finance lease
obligations
|
$
|
233
|
|
|
$
|
71
|
|
|
$
|
110
|
|
|
$
|
52
|
|
|
$
|
—
|
|
Operating lease
obligations
|
16,241
|
|
|
2,014
|
|
|
3,855
|
|
|
2,683
|
|
|
7,689
|
|
Supply commitments for raw
materials
|
18,000
|
|
|
2,250
|
|
|
15,750
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
34,474
|
|
|
$
|
4,335
|
|
|
$
|
19,715
|
|
|
$
|
2,735
|
|
|
$
|
7,689
|
|
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk
The Company is
exposed to market risk from changes in interest rates, commodity
prices, and foreign currency exchange rates. There have been no
material changes to the quantitative or qualitative disclosures
about market risk set forth in Part II, Item 7A of the
Company’s Annual Report.
Item 4.
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.
Subsequent to the
filing of its Annual Report on 10-K for the fiscal year ended
December 31, 2019, the Company identified two material weaknesses
in its internal control over financial reporting.
Specifically, the Company’s management determined that the Company
did not, as of December 31, 2019, design and maintain effective
internal controls over the elimination of intercompany profits in
inventory reported between September 1, 2018 and December 31, 2019,
or the recording of legal rights to certain intangible assets
related to the sale of Florida Chemical Company on February 28,
2019.
The Company does
not believe that the control deficiencies resulted in a material
misstatement of the Company’s previously issued consolidated
financial statements, which the Company has revised as disclosed
within the Quarterly Report on Form 10-Q.
In addition to
the material weaknesses mentioned above, during the first quarter
2020, but before the filing of this Form 10-Q, the Company
identified a material weakness in its internal control over
financial reporting related to the operating effectiveness of the
accuracy of the Company’s impairment analysis of fixed and
long-lived assets.
The Company
believes that, notwithstanding the material weaknesses mentioned
above, the consolidated financial statements contained in this Form
10-Q present fairly, in all material respects, the consolidated
financial positions, results of operations and cash flows 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.
The Company’s
management, including its principal executive officer and principal
financial officer, have evaluated the effectiveness of the
Company’s disclosure controls and procedures, as required by Rule
13a-15(e) of the Exchange Act as of March 31, 2020
and has concluded
that the Company’s disclosure controls and procedures were not
effective as of March 31, 2020
due to the
material weaknesses in internal control over financial reporting
described above.
Remediation Plan
The Company is
currently evaluating necessary actions needed to remediate these
material weaknesses.
Changes in Internal Control Over Financial Reporting
Except as noted
above, there have been no changes in the Company’s system of
internal control over financial reporting during the three months
ended March 31,
2020, that
have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
PART II -
OTHER INFORMATION
Item 1.
Legal Proceedings
Other Litigation
The Company is
subject to routine litigation and other claims that arise in the
normal course of business. Management is not aware of any pending
or threatened lawsuits or proceedings that are expected to have a
material effect on the Company’s financial position, results of
operations or liquidity.
Item 1A.
Risk Factors
The following
risk factor supplements the “Risk Factors” section in Part 1, Item
1A of the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 filed on March 16, 2020:
The COVID-19 pandemic has significantly reduced demand for our
services and may have a material adverse impact on our financial
condition, results of operations and cash flows.
The effects of
the COVID-19 (coronavirus) pandemic, including actions taken by
businesses and governments, have resulted in a significant and
swift reduction in international and U.S. economic activity. These
effects have materially and adversely affected, and may continue to
materially and adversely affect, the demand for oil and natural
gas, as well as for our services and products. The decline in our
customers’ demand for our services and products is likely to have a
material adverse impact on our financial condition, results of
operations and cash flows. In addition, we have adopted social
distancing and work-from-home procedures, which have had and may
continue to have an impact on the ability of employees and
management of the Company to communicate and work
efficiently.
While the full
impact of the COVID-19 outbreak is not yet known, we are closely
monitoring the effects of the pandemic on commodity demands and on
our customers, as well as on our operations and employees. These
effects may include adverse revenue and net income effects;
disruptions to our operations; customer shutdowns of oil and gas
exploration and production; employee impacts from illness, school
closures and other community response measures; and temporary
closures of our facilities or the facilities of our customers and
suppliers.
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
None.
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 March 31,
2020 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)
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans or Programs
|
|
Maximum
Dollar Value of Shares that May Yet be
Purchased Under the Plans or Programs (2)
|
January 1, 2020 to January
31, 2020
|
22,106
|
|
|
$
|
2.05
|
|
|
—
|
|
|
$
|
49,704,947
|
|
February 1, 2020 to February
29, 2020
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
49,704,947
|
|
March
1, 2020 to March 31, 2020
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
49,704,947
|
|
Total
|
22,106
|
|
|
|
|
|
—
|
|
|
|
|
|
|
(1)
|
The Company
purchases shares of its common stock (a) to satisfy tax withholding
requirements and payment remittance obligations related to period
vesting of restricted shares and exercise of non-qualified stock
options, (b) to satisfy payments required for common stock upon the
exercise of stock options, and (c) as part of a publicly announced
repurchase program on the open market.
|
|
|
(2)
|
In June 2015, the
Company’s Board of Directors authorized the repurchase of up to an
additional $50 million
of the Company’s
common stock. Repurchases may be made in open market or privately
negotiated transactions. Through March 31,
2020, the
Company has repurchased $0.3 million
of its common
stock under this authorization. The Company’s Board of Directors
rescinded the share repurchase authorization on June 9,
2020.
|
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not
applicable.
Item 5.
Other Information
None.
Item 6.
Exhibits
|
|
|
|
Exhibit
Number
|
|
Description
of Exhibit
|
2.1
|
|
|
3.1
|
|
|