Flotek Industries, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are to FY2020. This is an annual report, not a standalone fourth-quarter filing. Flotek operates Chemistry Technologies (CT), a specialty chemistry business, and Data Analytics (DA), which provides real-time hydrocarbon measurement and analytics.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $43.3 million | $53.1 million |
| Gross profit (loss) | $3.3 million; 7.5% margin | $(28.7) million; (54.0)% margin |
| Operating loss | $(31.5) million | $(143.6) million |
| Net loss | $(30.5) million; $(0.42) per share | $(136.5) million; $(2.00) per share |
| Cash used in operating activities | $(25.8) million | $(47.8) million |
| Cash and cash equivalents at year-end | $11.5 million | $38.7 million |
Revenue fell 18.6%. CT revenue was $38.9 million, down from $50.3 million; DA revenue rose to $4.3 million from $2.8 million, though 2020 included only post-acquisition results. CT and DA operating losses were $5.5 million and $12.2 million, respectively; corporate and other operating loss was $13.8 million.
The operating-loss improvement largely reflects lower impairment charges: FY2021 included an $8.1 million goodwill impairment, while FY2020 included $81.7 million of total impairment charges. FY2021 results also included a $7.6 million benefit from resolving the terpene supply commitment, $0.9 million of PPP loan forgiveness, and $2.9 million of employee-retention tax credits recorded against SG&A. These items do not represent recurring operating performance.
Balance sheet and liquidity
At December 31, 2021, total assets were $50.2 million, total liabilities $30.1 million, and stockholders’ equity $20.2 million. Debt was $4.8 million, consisting of the Flotek PPP loan; $1.4 million was classified as current. The PPP loan had been extended to 2025, but forgiveness had not been confirmed as of the filing. Operating lease liabilities totaled $8.4 million. Restricted cash was $1.8 million, including the amount set aside for the $1.75 million settlement payment due to ADM.
Cash, cash equivalents and restricted cash declined by $26.0 million during 2021. Management said cash and liquid assets, including subsequent transactions, should fund operations and obligations for the following 12 months, but also cautioned it cannot guarantee future cash flows. The auditor identified liquidity and the going-concern assessment as a critical audit matter; its report did not provide an opinion on internal control effectiveness.
Changes, outlook and material developments
- Drivers of lower revenue: CT sales were affected by customer ownership changes and market consolidation, lower sanitizer demand, reduced international activity, and nonrecurring terpene sales. Price concessions were made to retain and gain market share.
- Cost and margin actions: Flotek reduced personnel and facility costs and continued consolidating facilities. Gross margin recovered to positive territory, but the company remained loss-making and cash-consuming.
- Management outlook: Flotek expected North American and international onshore activity to improve during 2022 if commodity prices remained at or above then-current levels. It anticipated industrial-channel sales growth in the second half of 2022 and increased international DA sales from newly certified analyzers. These are forward-looking expectations, not reported results.
- Financing and ProFrac agreements after year-end: On February 2, 2022, Flotek issued $21.2 million of convertible notes for approximately $19.5 million of net cash proceeds. The notes bear 10% paid-in-kind interest and mature in one year, with specified conversion prices. A separate $10 million of convertible notes was associated with a three-year ProFrac chemical supply agreement beginning April 1, 2022. Flotek estimated $225 million of contracted revenue backlog over three years. A proposed expansion, subject to shareholder approval and other conditions, could increase estimated backlog to $1 billion–$2.1 billion over ten years and give ProFrac the right to appoint four of seven directors in total. Additional note issuance and conversions could dilute shareholders and may limit use of tax attributes under Section 382.
- Asset sale: A contract to sell the Waller facility for $4.2 million was expected to close in April 2022. Monahans was also classified as held for sale, but the filing does not state a completed sale agreement for that facility.
- Terpene settlement and litigation: Flotek settled disputes with ADM and its subsidiary, terminated the terpene supply agreement, and paid $1.75 million on January 3, 2022. Following an investigation of the former CEO’s 2014–2018 activities, the company pursued recovery claims against the former CEO, former outside counsel and former auditor. Outcomes and recoveries could not be predicted; the former CEO also counterclaimed for severance.
- Concentration and supply risks: The three largest CT customers represented 44% of consolidated revenue in 2021, versus 50% in 2020. A DA spectrometer component is sourced from a single supplier. The company also cited raw-material, freight, labor and broader supply-chain cost and availability risks.
- Controls and unusual items: Management said previously reported material weaknesses in internal controls were remediated as of year-end 2021. Its assessment was not subject to auditor attestation. The company reported no environmental claims then being litigated or investigated to its knowledge.
Key investor verification points
- Track operating cash burn and available liquidity, including the timing and net proceeds of financing and facility sales.
- Confirm the status, minimum-purchase performance and actual revenue realization of the ProFrac agreements; distinguish contractual backlog estimates from recognized revenue.
- Assess potential dilution, conversion terms, governance changes and any Section 382 limitation on tax attributes from the convertible notes and proposed expansion.
- Monitor CT customer concentration, related-party sales and collections, and the $1.3 million receivable from Confluence, a company led by a Flotek director.
- Verify PPP loan forgiveness status and follow the outcomes of the former-CEO-related claims and counterclaim.
- Evaluate whether revenue, gross margin and cash generation improve without reliance on settlements, tax credits, impairment comparisons or other unusual items.