Flotek Industries, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The interim financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context
Flotek develops specialty green chemistry and data analytics products and services through its Chemistry Technologies (CT) and Data Analytics (DA) segments. CT serves energy, industrial, commercial and consumer markets; DA provides hydrocarbon measurement equipment, analytics and related services. The company says energy-market activity and customer spending remained affected by the pandemic, while it is pursuing growth in cleaners and disinfectants, green chemistry and data analytics.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $9.2 | $8.9 | $20.9 | $28.3 |
| Operating loss | $(7.5) | $(10.2) | $(15.7) | $(80.3) |
| Operating margin | (81.4)% | (115.2)% | (75.0)% | (283.8)% |
| Net loss | $(6.5) | $(9.6) | $(14.8) | $(73.5) |
| Loss per share, diluted | $(0.09) | $(0.14) | $(0.22) | $(1.17) |
| Operating cash flow | Not separately presented for the quarter | $(11.2) | $(29.2) |
Q2 revenue increased 3.2% year over year, partly reflecting a full quarter of DA/JP3 revenue; CT revenue fell as two major energy customers changed ownership. First-half revenue declined 26.0%, principally reflecting weaker CT activity and the prior-year comparison. The much smaller first-half operating and net losses primarily reflect the absence of the $57.5 million long-lived-asset impairment recorded in 2020; 2021 results also included $0.9 million of JP3 PPP loan forgiveness and a $1.9 million employee retention credit.
Q2 revenue was $7.7 million from CT and $1.5 million from DA; segment operating losses were $3.8 million and $0.8 million, respectively. For the first half, CT revenue was $18.0 million and DA revenue $2.9 million. CT revenue was down 34.3% year over year, while DA revenue reflects the May 2020 acquisition of JP3.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $27.8 million at June 30, 2021, down from $38.7 million at year-end 2020. Cash, cash equivalents and restricted cash declined $11.5 million during the first half.
- Current assets were $52.9 million and current liabilities $29.3 million. Total liabilities were $37.5 million; stockholders’ equity was $33.9 million.
- The balance sheet reports $4.8 million of current debt, representing Flotek’s PPP loan; the JP3 PPP loan and accrued interest were forgiven in June. Flotek’s forgiveness request remained pending at filing. Operating lease liabilities totaled $8.6 million.
- Operating activities used $11.2 million of cash in the first half. Investing activities provided $0.04 million and financing activities used $0.3 million. Capital expenditures were $0.03 million.
- Inventory, net, was $11.5 million, including an $11.9 million reserve for excess and obsolete inventory.
Outlook, risks and unusual items
- Management expects to use a significant amount of cash in operations over the following year, while stating that available cash is expected to fund operations and anticipated obligations. It cautions that this depends on market recovery and cash flows. If needed, possible actions include asset sales, borrowing, cost reductions or equity financing; there is no assurance these can be completed on acceptable terms.
- Management expected 2021 capital spending to be less than $1.0 million. It gave no specific revenue or earnings forecast. Its outlook cited improving oil prices and economic indicators, but noted that customer budgets remained generally unchanged and recovery timing was uncertain.
- Key risks include COVID-19 and energy-market uncertainty, reduced customer spending, customer concentration and the loss of two major CT customers. Management warned that a slower recovery could harm liquidity and lead to further impairments.
- Flotek and its supplier-counterparty are pursuing litigation concerning the terpene supply agreement. The company recorded a $9.4 million accrued liability for expected excess terpene purchases; settlement, if any, is expected to be determined through litigation. Flotek says it has sufficient inventory and alternate supply for the foreseeable future.
- Disclosure controls were deemed ineffective at June 30 due to material weaknesses involving complex transactions, impairment-related controls, forecasting and going-concern assessment. Management expected remediation by year-end 2021.
- Subsequent to quarter-end, Flotek entered a long-term rental agreement with Resolute Oil for its Waller, Texas campus, with renewal options through 2036.
Important facts for investors to verify
- Progress on PPP forgiveness and the timing and extent of any required repayment of the $4.8 million Flotek loan.
- Cash burn, liquidity needs and whether management’s planned remediation of internal-control material weaknesses is completed.
- Outcome and potential financial exposure from the terpene litigation and the related $9.4 million accrual.
- Whether CT customer losses and energy-market weakness persist, and whether DA and non-energy chemistry initiatives generate sustainable growth.