Flotek Industries, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 2021. Flotek operates Chemistry Technologies (CT), which sells specialty chemicals and related services, and Data Analytics (DA), acquired with JP3 in May 2020. Its markets include oil and gas, as well as sanitizers, cleaners and disinfectants.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $11.77 million | $19.42 million |
| Operating loss | $8.24 million | $70.09 million |
| Net loss | $8.30 million | $63.97 million |
| Loss per diluted share | $0.12 | $1.07 |
| Cash used in operating activities | $5.27 million | $23.78 million |
- Revenue fell 39.4% year over year, primarily because CT demand from oil and gas customers remained below pre-pandemic levels; CT also granted price concessions. DA contributed $1.47 million, with no comparable DA segment in Q1 2020.
- Operating margin was negative 70.0%, versus negative 361.0% in Q1 2020. The comparison is heavily affected by $57.45 million of impairment charges in Q1 2020; no impairment was recorded in Q1 2021. The filing does not provide a gross margin figure.
- Operating expenses excluding depreciation and amortization declined 39.6% to $13.80 million, broadly in line with the revenue decline. Corporate G&A was $4.36 million, or 37.1% of revenue, up from 23.1% as revenue contracted.
- Cash and cash equivalents were $33.95 million at March 31, down from $38.66 million at year-end; cash, cash equivalents and restricted cash totaled $33.99 million. Cash used in investing activities was $0.02 million and cash used in financing activities was $0.08 million.
- Total assets were $78.72 million and stockholders’ equity was $39.63 million. Debt was $5.67 million, consisting of Flotek and JP3 PPP loans; $5.02 million was classified as current. Operating lease liabilities totaled $8.70 million.
Material changes and unusual items
- Net loss improved substantially from Q1 2020, chiefly because the prior-year period included major asset impairments and a $6.17 million income tax benefit from CARES Act NOL carrybacks. Q1 2021 tax expense was minimal.
- Operating cash outflow improved year over year, reflecting lower losses and more favorable working-capital movements. The company nevertheless reported a history of losses and negative operating cash flows and expects to use a significant amount of cash in operations in the following year.
- Inventory, net, was $11.62 million, including an $11.08 million reserve for excess and obsolete inventory. The company recorded a $0.31 million Q1 2021 provision as part of product rationalization.
- Two CT customers accounted for 25.7% and 24.2% of consolidated revenue, respectively. This concentration adds customer and sector exposure.
- The company classified a warehouse facility, valued at approximately $0.5 million, as held for sale and was seeking a buyer.
Outlook, risks and contingencies
- Management expects oil demand to recover during 2021 but not reach pre-COVID levels; the duration of the recovery, customer spending and energy-sector conditions remain uncertain. Management did not provide revenue or earnings guidance.
- Management expects 2021 capital spending below $1.0 million and does not anticipate a material year-over-year increase in maintenance capital spending. Priorities include rebuilding CT customer relationships, expanding sanitation products, and pursuing DA growth, including international opportunities.
- Management believes cash on hand will fund operations and obligations, but warns that prolonged pandemic effects, slower energy-market recovery or reduced customer spending could weaken liquidity. Potential actions include asset sales, borrowing, cost reductions or equity issuance; there is no assurance these options can be completed on acceptable terms.
- Flotek and its subsidiary sued ADM, Florida Chemical Company and an individual in Texas over a terpene supply agreement; ADM and Florida Chemical subsequently sued in Delaware. The company terminated the agreement and reported a $9.38 million accrued loss on purchase commitments, whose settlement may be determined through litigation. Management said it had sufficient inventory and alternate supply sources and did not expect termination to materially affect operations or customer needs.
- The PPP loans carry a 1% interest rate and mature in 2022. At March 31, 2021, the company had not applied for or estimated potential forgiveness; eligibility and forgiveness remain subject to review and applicable criteria.
- Disclosure controls were deemed ineffective due to material weaknesses in controls over complex and nonrecurring transactions, forecasts used in business combinations and impairment evaluations, and going-concern assessments. Remediation was underway but had not been fully tested or completed.
- Other risks include COVID-19 and oil and gas demand, commodity prices, supply-chain disruption, litigation, customer concentration, and potential future impairments. The filing reported no material change to the risk factors in the 2020 Form 10-K.
Important facts for investors to verify
- Whether operating cash burn and revenue trends improve, and how long the reported cash balance can support operations.
- Progress in the terpene litigation, any settlement or change to the $9.38 million accrued commitment, and continuity of alternate supply.
- PPP loan forgiveness status and any resulting repayment obligations.
- Remediation and independent validation of the disclosed material weaknesses in internal controls.
- Revenue concentration and the pace of recovery in CT, alongside DA revenue growth and conversion to recurring subscriptions.