Flotek Industries, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed March 15, 2024. This is an annual filing, not a standalone fourth-quarter report. Flotek operates Chemistry Technologies (CT), specialty chemistry, and Data Analytics (DA), real-time hydrocarbon measurement and analytics.
Financial performance
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $188.1 million | $136.1 million |
| Gross profit (margin) | $24.3 million (12.9%) | $(6.7) million ((4.9)%) |
| Operating income (loss) | $23.2 million | $(35.4) million |
| Net income (loss) | $24.7 million | $(42.3) million |
| Cash used in operating activities | $11.3 million | $44.6 million |
| Capital expenditures | $1.1 million | $0.4 million |
- Revenue rose 38%, primarily reflecting a full year under the ProFrac supply agreement and higher domestic CT sales. Related-party revenue was $121.5 million, about 65% of total revenue; ProFrac Services, LLC accounted for 64.6% of revenue.
- The $20.1 million of 2023 ProFrac contract shortfall fees contributed revenue without associated product costs, materially supporting gross margin. By March 11, 2024, $10.0 million had been collected; the remaining $10.1 million was due by April 8, 2024.
- Operating income also benefited from a $30.0 million noncash fair-value gain on contract consideration convertible notes and a $4.5 million gain from PPP loan forgiveness. These unusual items mean reported earnings do not solely reflect ongoing operating performance.
- CT revenue was $179.9 million, including $120.9 million related-party revenue; CT operating income was $39.0 million. DA revenue was $8.1 million; its operating loss narrowed to $0.1 million from $2.9 million.
- Basic EPS was $1.00. Diluted EPS was reported as a loss of $0.10 because the diluted calculation included adjustments for convertible-note interest and the fair-value gain; the filing’s net income was $24.7 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $5.9 million at year-end, down from $12.3 million. Total assets were $157.5 million; total liabilities were $55.6 million; stockholders’ equity was $102.0 million.
- Year-end ABL borrowings were $7.5 million against a maximum facility availability of $13.8 million, subject to a borrowing base. The facility is a 24-month loan secured by substantially all assets, bore 11% interest at year-end, and requires minimum tangible net worth of $11 million. Flotek reported covenant compliance. Borrowings were approximately $0.5 million at March 11, 2024.
- Convertible notes and contract consideration notes matured and converted to shares or warrants during 2023, substantially reducing reported liabilities and increasing equity. Remaining PPP debt was $0.2 million at year-end. Operating lease liabilities were $10.1 million.
- Working-capital changes used $13.2 million of cash, including an $11.9 million increase in related-party receivables. Flotek reported positive net income but continued to use cash in operations.
- Net contract assets tied to the ProFrac agreement were $74.7 million, including $68.8 million long-term. Recoverability depends on forecasted revenue and costs over the agreement’s term; this was an auditor-identified critical audit matter.
Changes, outlook and key risks
- The company said the substantial doubt about its ability to continue as a going concern disclosed for 2022 no longer existed, citing expected shortfall-fee collections, cash and ABL availability. It believes resources will cover anticipated needs for the next 12 months, while cautioning that future cash flows are not guaranteed.
- The ProFrac agreement has a 10-year term and minimum purchase obligations. If annual minimums are missed, additional shortfall fees may be payable; the 2024 measurement period runs through year-end, with any fees due in the first quarter of 2025. ProFrac and affiliates held approximately 51% of Flotek’s shares and have the right to elect four of seven directors, creating customer concentration and potential conflicts of interest.
- Management described near-term energy-market conditions as volatile: it expected oil-weighted U.S. producers to maintain or increase activity and gas-weighted producers to maintain or reduce activity over the following 12 months. It cited opportunities for Verax analytics and recurring-revenue offerings, but gave no quantified financial guidance.
- Principal risks include dependence on ProFrac and timely collection of its receivables, energy-sector cyclicality, customer and supplier concentration, raw-material and freight costs, access to capital, competition, regulation and environmental liabilities, and execution of DA’s shift toward subscription revenue.
- A 1-for-6 reverse stock split took effect in September 2023 to regain NYSE minimum-share-price compliance. A 2022 material weakness involving lease accounting, prepaid assets and related-party revenue controls was reported as remediated at December 31, 2023. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not attest to internal-control effectiveness.
- KPMG issued an unqualified opinion on the consolidated financial statements. Its critical audit matters included contract-asset recoverability and the going-concern assessment. Flotek reported no pending or threatened legal matters expected to have a material financial effect, apart from matters described in the notes; certain former-adviser and auditor disputes were settled in 2023.
Investor verification priorities
- Confirm collection of the remaining $10.1 million in 2023 ProFrac shortfall fees and assess ProFrac’s ability and obligation to meet future purchase and payment commitments.
- Review the agreement’s minimum-volume terms, renewal and termination provisions, and the assumptions supporting the $74.7 million contract-asset balance.
- Separate recurring operating results from the $30.0 million fair-value gain, $4.5 million PPP forgiveness gain and contract shortfall-fee revenue; reconcile the unusual diluted EPS presentation.
- Monitor operating cash flow, related-party receivables, borrowing-base availability, ABL interest and fees, and compliance with the tangible-net-worth covenant.
- Assess the effects of ProFrac’s majority ownership, board-election rights and customer concentration on governance and commercial independence.
- Track 2024 customer activity, DA adoption and subscription-revenue progress, as well as exposure to supply disruptions, commodity-price swings and regulatory changes.