Flotek Industries, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, not a quarterly report. Flotek operates Chemistry Technologies (CT), focused on specialty chemicals including oilfield and sanitation products, and Data Analytics (DA), formed after acquiring JP3 in May 2020.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $53.1 million | $119.4 million |
| Operating loss | $143.6 million | $75.5 million |
| Operating margin | (270.3)% | (63.3)% |
| Loss from continuing operations | $136.5 million | $76.1 million |
| Net loss | $136.5 million | $33.9 million |
| Cash used in operating activities | $47.8 million | $4.5 million |
| Cash and cash equivalents at year-end | $38.7 million | $100.6 million |
- FY2019 net loss was reduced by $42.2 million of income from discontinued operations, including the gain on sale of the CICT business.
- FY2020 revenue fell 55.5%. CT revenue was $50.3 million, down 57.8%; DA contributed $2.8 million from its May acquisition through year-end.
- FY2020 included $70.0 million of impairment charges on fixed and long-lived assets and $11.7 million of goodwill impairment. The company also recorded $12.3 million of excess and obsolete inventory provision.
- Year-end current assets were $66.5 million and current liabilities $28.9 million. Debt totaled $5.7 million, primarily PPP loans; $4.0 million was current and $1.6 million long-term. Operating lease liabilities totaled $9.0 million.
- Stockholders’ equity decreased to $47.2 million from $172.0 million. Shares issued increased substantially, including 11.5 million shares issued in the JP3 acquisition.
Changes, outlook and risks
- Management attributed weaker results to COVID-19, lower oil-and-gas activity and customer spending, supply-chain disruption, and reduced access to customer sites. New sanitation products and JP3 partially offset the decline.
- Management expects energy markets to remain challenged and said oil demand could recover in 2021 without reaching pre-pandemic levels. It did not provide revenue or earnings guidance; expected 2021 capital spending was less than $1.0 million.
- Management expects significant cash use in operations in the following year. It said current cash and liquid assets should fund operations and obligations, but warned prolonged pandemic effects, slower energy recovery or lower customer spending could pressure liquidity. Potential responses include asset sales, borrowing, equity issuance and further cost reductions.
- COVID-19 and market weakness drove asset write-downs. Further impairments may occur if operating results or assumptions deteriorate. The amended terpene supply agreement produced a $9.9 million FY2020 loss and a $9.4 million accrued liability at year-end.
- Customer concentration increased: the three largest CT customers represented 50% of consolidated revenue versus 40% in 2019; two customers represented 24% and 18% in 2020.
- The JP3 acquisition was valued at approximately $36.6 million, including cash and stock. Its results were below expectations; the company impaired DA goodwill and intangible assets during 2020. DA is transitioning toward subscription revenue, which may reduce near-term revenue during the transition.
- The company reported ineffective internal control over financial reporting. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the FY2020 financial statements. Material weaknesses involved complex/nonrecurring transactions, impairment and forecasting controls, and going-concern assessments; remediation testing was incomplete.
- Other material risks include dependence on volatile energy markets, raw-material availability and pricing, regulatory and environmental requirements, and the ability to secure capital. No material pending litigation was identified by management; the company expects additional, uncertain intellectual-property indemnification costs in 2021.
Investor verification priorities
- Assess cash runway and financing needs against operating cash burn, the company’s stated expected cash use, and its available financing alternatives.
- Check the status and potential forgiveness of the $5.7 million in PPP loans, including the assumed JP3 loan.
- Track remediation and independent testing of the disclosed material weaknesses and any subsequent audit-control opinion.
- Review customer concentration, CT demand, sanitation-product sales, and DA’s progress toward recurring subscription revenue.
- Validate the assumptions behind major impairments and the remaining terpene commitment liability.
- Monitor dilution and potential equity issuance, including acquisition-related shares and outstanding equity awards.