Flotek Industries, Inc. — Q3 2021 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2021. Flotek operates Chemistry Technologies (CT), providing specialty chemistry products and services, and Data Analytics (DA), providing real-time hydrocarbon measurement and analytics.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $10.2 million | $12.7 million | $31.1 million | $41.0 million |
| Operating income (loss) | $0.6 million | $(45.6) million | $(15.1) million | $(125.9) million |
| Net income (loss) | $0.5 million | $(45.2) million | $(14.3) million | $(118.8) million |
| Diluted earnings (loss) per share | $0.01 | $(0.66) | $(0.21) | $(1.75) |
| Cash used in operating activities | Not separately presented for the quarter | $(18.3) million | $(39.1) million |
Q3 operating margin was 6.2%, compared with negative 357.9% in Q3 2020; the nine-month operating margin was negative 48.4%, compared with negative 306.8%. These comparisons are heavily affected by prior-year impairment charges and the 2021 settlement-related expense benefit discussed below.
Q3 revenue from external customers was $8.8 million, with an additional $1.3 million of related-party revenue. Revenue fell 20.1% year over year; nine-month revenue fell 24.2%. CT revenue was $9.4 million in Q3, including the related-party sale, and DA revenue was $0.8 million. The filing reports no material capital additions in Q3 and $31,000 of additions for the nine months.
At September 30, cash and cash equivalents were $20.5 million, down from $38.7 million at December 31, 2020; cash, cash equivalents and restricted cash totaled $20.6 million. Total assets were $64.6 million and stockholders’ equity was $35.3 million. Total debt was $4.8 million, comprising the Flotek PPP loan; $1.3 million was current and $3.5 million long-term after a subsequent maturity extension. Operating lease liabilities totaled $8.5 million. No borrowing facility is reported.
Material changes and unusual items
- Revenue declines reflected the loss of two major energy customers following ownership changes, lower sanitizer demand, reduced citrus terpene sales, and price concessions. DA revenue increased year to date, but comparison is affected by JP3’s May 2020 acquisition and partial-year inclusion.
- Q3 and nine-month operating expenses included a $7.6 million benefit from recognizing the ADM settlement as a subsequent event. The settlement resolves related claims, terminates the terpene supply agreement, and eliminates the prior requirement to purchase 10.5 million pounds through 2023. Flotek agreed to pay ADM $1.75 million by January 3, 2022.
- Q3 2020 included $24.2 million of impairment charges; the nine months of 2020 included $81.7 million. There were no comparable 2021 impairment charges.
- The JP3 PPP loan and accrued interest were forgiven in 2021, generating $0.9 million of other income. The SBA had not reached a conclusion on forgiveness of Flotek’s PPP loan by the filing date. In October 2021, the loan maturity was extended from April 2022 to April 2025.
- A $2.9 million employee retention credit was recorded in 2021. The company also recognized $1.3 million of Q3 revenue under a bill-and-hold transaction with a company led by a Flotek director; the amount was due from that customer at quarter-end.
Outlook, risks and controls
Management expects North American and international onshore activity to improve over the next 12 months if commodity prices remain at or above current levels. It anticipates industrial-market sales acceleration in the second half of 2022 through sales representatives, and expects international DA sales to increase following certification of new analyzers. Management expected 2021 capital spending below $1.0 million. These expectations are conditional, not quantified revenue or earnings guidance.
Management says the company expects to use a significant amount of cash as it closes out 2021 and enters 2022. It believes existing cash and liquid assets will fund operations and obligations, but warns that slower energy-market recovery or reduced customer spending could harm liquidity. Potential measures include equity or debt financing, asset sales, lease actions, and cost reductions; there is no assurance these steps would be available on acceptable terms.
Risks highlighted include customer and oil-and-gas industry concentration, commodity and market conditions, supply-chain cost increases and delays, COVID-19 effects, weather, and access to capital. One customer represented 29.9% of Q3 revenue; the related-party customer represented 13.1%. The filing reports no material change to previously disclosed risk factors.
Disclosure controls were deemed ineffective at September 30, 2021 because of material weaknesses in internal control over financial reporting involving complex/nonrecurring transactions, forecasts used in business combinations and impairment assessments, and going-concern analysis. Management described remediation efforts and expected full remediation by year-end 2021; that outcome was not yet established in this filing.
Important facts for investors to verify
- Whether the ADM settlement payment was made by the January 3, 2022 deadline and whether ending the terpene purchase obligation produces the expected economic benefit.
- The SBA’s final decision on forgiveness of Flotek’s PPP loan and the loan’s repayment terms following the maturity extension.
- Subsequent cash use, operating cash flow, and whether liquidity remains adequate without new financing or asset sales.
- Whether customer losses, price concessions, energy-market recovery, and major-customer concentration affect revenue and margins going forward.
- Whether internal-control material weaknesses were fully remediated and independently tested after the stated year-end target.
- The sustainability of reported Q3 profitability, given the settlement benefit and the absence of prior-year impairment charges in the comparison.