Flotek Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Flotek provides specialty chemistry and data analytics through its Chemistry Technologies (CT) and Data Analytics (DA) segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $29.4 | $9.2 | $42.3 | $20.9 |
| Gross loss (margin) | $(2.3) (-7.9%) | $(1.6) (-17.6%) | $(2.8) (-6.6%) | $(1.9) (-9.2%) |
| Operating income (loss) | $8.0 | $(7.5) | $(2.2) | $(15.7) |
| Net income (loss) | $6.2 | $(6.5) | $(4.5) | $(14.8) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(23.9) | $(11.2) |
Q2 basic earnings per share were $0.08; diluted loss per share was $0.05. For the first half, basic and diluted loss per share were $0.06 and $0.12, respectively. Q2 operating income included a $17.2 million favorable fair-value change in contract consideration convertible notes and a $1.9 million gain on asset sale. The first-half operating loss also reflects these nonrecurring valuation and sale gains; the business continued to report a gross loss.
Liquidity, debt and capital
- Cash and cash equivalents were $33.1 million at June 30, versus $11.5 million at year-end 2021. Current assets were $80.5 million and current liabilities $115.0 million.
- First-half cash use from operations was $23.9 million, up from $11.2 million in the prior year. Investing provided $4.2 million, mainly from the Waller facility sale; financing provided $39.4 million, principally from note and warrant proceeds.
- At June 30, liabilities included $18.3 million of cash-issued convertible notes and $67.2 million of contract consideration convertible notes, both classified as current, plus $4.8 million of PPP debt (including current portion). The cash-issued notes accrue 10% paid-in-kind interest and mature one year after issuance. Flotek’s PPP loan forgiveness request remained unresolved.
- Flotek issued $79.5 million principal amount of contract consideration convertible notes in connection with the ProFrac supply agreements, recorded at $67.2 million fair value at quarter-end. The associated contract assets were $82.3 million, including $76.1 million classified long term; these depend on forecasted future ProFrac revenues and are subject to recoverability assessment.
- ProFrac-related warrant and equity transactions brought in $19.5 million cash. Prefunded warrants allow purchase of 13.1 million shares at $0.0001 per share, subject to the terms disclosed in the filing.
Changes, business drivers and outlook
- Revenue rose 220.5% in Q2 and 101.8% in the first half year over year, driven mainly by ProFrac activity beginning in Q2. Q2 related-party revenue was $16.5 million, or 56% of total revenue.
- CT first-half revenue increased to $40.5 million from $18.0 million, while DA revenue declined to $1.8 million from $2.9 million; DA cited fewer orders and delayed projects. DA operating losses widened.
- Cost of goods sold increased with volume and included one-time costs to ramp ProFrac activity. SG&A rose 76.8% in Q2, primarily due to professional fees associated with the ProFrac and PIPE transactions and higher employee costs.
- The ProFrac agreement was amended in May: minimum annual purchases increased to the greater of 70% of ProFrac Services’ requirements or a baseline tied to its first 30 fleets, and the agreement term increased to 10 years. The original agreement began with a three-year term and lower minimums.
- Management expected North American and international onshore activity to improve through 2022 if commodity prices remained at or above then-current levels; it anticipated second-half industrial sales growth from new sales representation and higher international analytics sales over the next 12 months. These are forward-looking expectations, not guarantees.
- Management said cash and liquid assets were expected to fund operations and obligations for the next 12 months, while also warning of expected significant cash use, historical operating losses and negative operating cash flow, and potential liquidity pressure if energy markets weaken or customers reduce spending.
Risks, contingencies and unusual items
- Customer concentration is significant: a related-party customer represented 52.2% of Q2 revenue; the filing also reports major-customer concentrations of 38.9% for the first half. Dependence on ProFrac and the oil and gas industry increases credit and business risk.
- Supply-chain risks include rising freight costs, port delays, labor shortages, raw-material price increases and potential disruption related to U.S.-China tensions.
- Flotek is pursuing arbitration or other proceedings against its former CEO, former outside counsel and former audit firm over alleged historical misconduct; the former CEO has counterclaimed for severance. The timing and amount of any outcome cannot be predicted.
- The Company disclosed no material changes to previously reported risk factors or market-risk disclosures. No material subsequent events were reported through the filing date.
Investor verification points
- Assess whether ProFrac’s purchase commitments and actual purchases support the $82.3 million contract asset and related long-term revenue assumptions.
- Review the concentration and collectability of ProFrac receivables, including the $11.6 million balance at June 30, and reconcile customer concentration disclosures with reported related-party revenue.
- Track operating cash burn, working-capital needs, and the company’s ability to meet obligations given current liabilities exceeding current assets.
- Confirm the status of PPP loan forgiveness and monitor the 10% convertible notes’ maturity, conversion and dilution implications, as well as the prefunded warrants.
- Separate recurring operating performance from gains or losses due to convertible-note fair-value remeasurement and asset sales; monitor whether gross margins improve as ProFrac activity scales.