Flotek Industries, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; amounts below are in U.S. dollars. Flotek operates Chemistry Technologies (CT), which develops and sells specialty chemistry products, and Data Analytics (DA), which provides hydrocarbon measurement equipment and services.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $12.9 million | $11.8 million |
| Gross profit (loss) / margin | $(0.5) million / (3.7)% | $(0.3) million / (2.6)% |
| Operating loss | $(10.3) million | $(8.2) million |
| Net loss | $(10.7) million | $(8.3) million |
| Loss per share, basic and diluted | $(0.15) | $(0.12) |
| Cash used in operating activities | $(8.5) million | $(5.3) million |
Revenue increased 9.4%, but gross margin remained negative and worsened year over year. Net loss included a $3.9 million noncash fair-value expense on contingent convertible notes; a $0.6 million gain from terminating a lease partly offset costs. Interest expense was $0.7 million versus $0.02 million.
CT revenue was $11.8 million, up from $10.3 million; its operating loss was $6.1 million. DA revenue was $1.1 million, down from $1.5 million, and its operating loss was $0.8 million. The company attributed CT growth partly to related-party sales and customer consolidation; DA declined because prior-year one-time orders did not recur. Related-party revenue totaled $2.5 million, including $1.4 million of chemical sales to Confluence and $1.1 million to ProFrac.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $24.8 million at March 31, up from $11.5 million at year-end; restricted cash was $0.04 million. Operating cash outflow was $8.5 million, while financing provided $20.0 million, primarily from convertible-note proceeds.
- Total assets were $72.2 million and total liabilities were $59.1 million; stockholders’ equity was $13.1 million. Current liabilities were $48.9 million, including $17.6 million of convertible notes and $14.1 million of contingent convertible notes.
- Long-term debt was $3.2 million, plus a $1.6 million current portion, relating to the $4.8 million PPP loan. Forgiveness of substantially all of the Flotek PPP loan remained pending as of the filing date; denial could adversely affect liquidity.
- The February PIPE issued $21.2 million principal of 10% PIK convertible notes for approximately $19.5 million net cash proceeds. Notes mature in one year and have conversion provisions. A holder converted $3.0 million principal plus accrued PIK interest into approximately 2.8 million shares in March. The separate $10 million ProFrac-related contingent notes were remeasured to $14.1 million at quarter-end.
Management said cash and liquid assets, including subsequent transactions, were expected to fund operations and obligations for the next 12 months, but noted the company’s history of losses and negative operating cash flow and cautioned it could not guarantee sufficient future cash flows.
Outlook, developments and risks
- Management expected North American and international onshore activity to improve through 2022 if commodity prices stayed at or above then-current levels. It anticipated growth particularly from private E&P customers, increased indirect-channel sales, and industrial-product sales in the second half of 2022. It also expected international DA sales to benefit from newly certified analyzers. These are forward-looking expectations, not guarantees.
- The initial three-year ProFrac supply agreement began April 1, 2022 and requires minimum chemical purchases, with liquidated damages for shortfalls. A proposed expansion to a ten-year agreement, with higher purchase commitments and $50 million of additional 10% PIK convertible notes, was approved by stockholders May 9; the company expected closing in Q2 2022. The expanded terms would also give ProFrac rights to designate four of seven directors.
- The Waller manufacturing facility sale closed April 18, 2022 for $4.3 million gross proceeds. Management estimated a $1.9 million gain for Q2 and said rental income from the facility would cease. The Monahans facility was also held for sale.
- Risks include continuing operating cash burn; dependence on oil-and-gas customer activity and commodity markets; supply-chain costs and disruptions, including freight, labor and raw-material availability; customer and related-party concentration; and potential dilution from convertible notes. The company also disclosed ongoing claims and counterclaims involving its former CEO and former advisers; timing and outcome could not be predicted. The filing reports no material change in other litigation since the 2021 Form 10-K.
Most important facts for investors to verify
- Whether the ProFrac expanded transaction closed, and the final note, purchase-obligation, governance and dilution terms.
- Subsequent operating cash burn, working-capital needs and liquidity runway relative to management’s 12-month assessment.
- Status and outcome of PPP-loan forgiveness and any resulting payment obligations.
- Actual ProFrac purchases and related-party revenue, and whether revenue growth is broad-based beyond these customers.
- Conversion, fair-value and share-count effects of outstanding notes; the filing says 26.3 million shares issuable under convertible notes were excluded from diluted loss per share as anti-dilutive.
- Completion and accounting impact of asset sales, and developments in the former-CEO-related proceedings.