Flotek Industries, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Flotek provides specialty chemistry and data analytics products and services, principally to energy customers. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $47.3 | $45.6 | $145.9 | $87.9 |
| Gross profit (loss) | $9.0 | ($1.8) | $14.8 | ($4.6) |
| Gross margin | 19.1% | (4.0%) | 10.2% | (5.3%) |
| Operating income (loss) | $1.6 | ($16.3) | $20.8 | ($18.5) |
| Net income (loss) | $1.3 | ($18.8) | $22.6 | ($23.3) |
Q3 revenue increased 4%, mainly on higher external-customer sales, while ProFrac-related revenue declined 3%. Nine-month revenue rose 66%, largely due to higher ProFrac activity and expected Contract Shortfall Fees under the ProFrac supply agreement. Related-party revenue was $29.5 million in Q3 and $98.6 million year to date—62% and 68% of total revenue, respectively.
Reported nine-month operating income and net income include a $30.0 million noncash gain from fair-value changes in ProFrac contract consideration convertible notes and a $4.5 million gain from forgiveness of a PPP loan. The notes were converted to equity during 2023. Nine-month diluted loss per share was reported as $0.18, despite positive net income, reflecting the filing’s diluted EPS adjustments for convertible-note interest and fair-value gains; basic EPS was $0.97.
Cash, debt and liquidity
- Cash and cash equivalents were $4.5 million at September 30, 2023, down from $12.3 million at year-end 2022; cash including restricted cash was $4.6 million.
- Operating activities used $9.2 million of cash in the first nine months, versus $47.2 million used in the prior-year period. Investing activities used $0.5 million; financing activities provided $1.9 million.
- Total liabilities were $52.9 million, down from $162.2 million at December 31, 2022, principally following conversion of convertible and contract consideration notes into shares and warrants. Stockholders’ equity increased to $99.6 million from $2.6 million.
- The company had $3.4 million drawn under a new asset-based revolving loan (ABL) at September 30. The ABL had an 11.0% interest rate, a 24-month term and a blanket security interest in substantially all company assets. Its maximum borrowing base was increased from $10.0 million to $13.8 million on October 5; management reported $6.4 million of availability on November 6. Flotek reported compliance with ABL covenants at quarter-end.
- The remaining PPP loan balance was $0.3 million. Operating lease liabilities totaled $10.3 million.
Going concern: Management states that substantial doubt exists about Flotek’s ability to continue as a going concern for the year following filing. Despite nine-month net income, the company has a recent history of losses and negative operating cash flows, expects to use significant cash within a year, and cannot be certain that cash, ABL availability and forecast cash flows will cover obligations and capital needs. Additional financing may be needed and may not be available on acceptable terms.
Material changes, outlook and risks
- ProFrac concentration and contract: ProFrac Services accounted for 67.6% of nine-month revenue. Flotek reported $24.8 million in related-party receivables at quarter-end. The company does not expect ProFrac to meet minimum purchase requirements for the June–December 2023 measurement period; reported revenue includes expected Contract Shortfall Fees. The agreement’s economics and collections are therefore important to results and liquidity.
- Operating trends: CT external revenue increased 21% in Q3, while DA external revenue declined 13% in Q3 amid lower customer volumes. Nine-month DA external revenue increased 80%, driven by higher equipment sales. Management cites energy-market, weather and macroeconomic uncertainty, and identifies freight costs, raw-material availability, labor and demand forecasting as supply-chain risks.
- Management outlook: No quantified earnings or revenue guidance is provided. Management expects energy-service demand to remain supported by industry fundamentals, while acknowledging recent weakness in onshore activity. It sees potential growth in data analytics and ESG-related solutions and says it is pursuing further Verax analyzer applications and recurring revenue.
- Other notable items: A 1-for-6 reverse stock split was completed September 25, 2023; the NYSE notified the company on October 2 that it had regained minimum-share-price compliance. Debt conversions and warrant exercises substantially increased shares outstanding, to 29.6 million at September 30 from 13.0 million at year-end 2022.
- Controls and legal: Disclosure controls were not effective at quarter-end due to a continuing material weakness involving financial-reporting resources, risk assessment, information flow, lease-modification accounting, prepaid assets and related-party revenue accruals. Management is implementing remediation, but testing remains ongoing. The filing also reports settlements involving a former CEO and former advisers; it does not describe these as expected to have a material effect on financial position, results or liquidity.
Most important facts for investors to verify
- Whether ProFrac meets the amended agreement’s purchase requirements, pays any Contract Shortfall Fees, and pays its substantial receivable balance.
- Whether cash generation and available ABL borrowing capacity are sufficient to address the stated going-concern uncertainty and near-term obligations.
- How much reported profitability depends on noncash fair-value changes, contract shortfall accruals and the one-time PPP loan forgiveness.
- Whether the material weakness is remediated and controls operate effectively, particularly for related-party revenue and lease accounting.
- The impact of note conversions, warrant exercises and the reverse split on share count, dilution and per-share results.