Flotek Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Flotek operates Chemistry Technologies (CT) and Data Analytics (DA), providing specialty chemistry and hydrocarbon measurement and analytics. The statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $48.0 million | $12.9 million |
| Gross profit (margin) | $1.9 million (3.9%) | $(0.5) million ((3.7)%) |
| Income (loss) from operations | $18.5 million | $(10.3) million |
| Net income (loss) | $21.3 million | $(10.7) million |
| Operating cash flow | $1.1 million | $(8.5) million |
| Cash and restricted cash at quarter-end | $12.5 million | $24.9 million |
- Revenue rose 273%, chiefly because ProFrac Services, a related party, contributed $36.4 million, or 75.7% of consolidated revenue. External-customer revenue increased more modestly, to $11.7 million from $10.4 million.
- Cost of sales was $46.1 million, or 96.1% of revenue. The narrow gross margin reflects the low-margin mix and costs of fulfilling higher activity.
- Reported operating income included a $26.1 million gain from remeasurement of ProFrac contract consideration convertible notes. Net income also included $4.5 million of PPP loan forgiveness. These noncash/one-time items materially affect comparability; the filing does not present an adjusted earnings measure.
- Current assets were $81.9 million and current liabilities $98.9 million, a working-capital deficit of approximately $17.0 million. Related-party receivables were $26.2 million. Total liabilities were $106.3 million and stockholders’ equity $57.1 million.
- Cash from operations improved year over year, but working capital benefited primarily from an $8.6 million increase in accounts payable. Capital expenditures were $0.2 million.
Changes, debt and share structure
- Q1 revenue growth was concentrated in CT and the ProFrac relationship. DA external revenue grew to $2.4 million from $1.1 million, supported by sales to three new customers. CT external revenue was approximately flat at $9.2 million versus $9.3 million.
- At quarter-end, the $50 million principal Amended ProFrac contract consideration notes were carried at a fair value of $43.8 million, including accrued paid-in-kind interest. These notes are classified as current liabilities. The fair-value decrease drove the reported gain.
- Other convertible notes matured and were converted in February 2023 into common shares and near-zero-exercise-price warrants. The company also reported $0.4 million remaining on its PPP loan. Lease liabilities totaled $10.2 million.
- The 2023 debt conversions triggered an ownership change under tax rules. Flotek estimates use of existing NOLs is generally limited to about $3.5 million annually, subject to further analysis; some state NOLs and tax credits are expected to expire unused.
Outlook, risks and unusual matters
- Going concern: Management states substantial doubt exists about Flotek’s ability to continue as a going concern within one year after filing. It expects significant cash use and says available cash and forecast ProFrac-related cash flows may not meet obligations and capital needs. Potential responses include financing, asset sales and cost reductions, but there is no assurance additional liquidity will be available.
- Outlook: No quantified company revenue or earnings guidance is provided. Management expects potential 2023 energy-sector growth, particularly among independent producers, while noting demand and industry conditions can shift. It sees opportunities in digital analytics and ESG-related products.
- ProFrac dependence: The ten-year supply agreement includes minimum purchase obligations, amended ramp-up terms through May 2023, and other pricing and margin provisions. Flotek waived potential liquidated damages for shortfalls before 2023. The company’s liquidity outlook depends significantly on continued ProFrac activity and collections.
- Controls: Disclosure controls were not effective at March 31, 2023 due to an ongoing material weakness involving resourcing, risk assessment and information flow, including controls over lease modifications, prepaid assets and related-party revenue accruals. Management had begun remediation, but testing was incomplete.
- NYSE listing: In April 2023, Flotek received notice that its average share price had been below $1 for 30 consecutive days. It has six months to regain compliance; a reverse stock split is among the options it may consider.
- Other items: A Houston headquarters sublease was agreed in April, with relocation planned. Litigation related to a former CEO and former advisers remains unresolved; the timing and amount of any outcome cannot be predicted. Management reported no material subsequent events other than those disclosed.
Key facts for investors to verify
- Whether ProFrac meets the amended agreement’s activity and purchase terms, and whether its receivables are collected on schedule.
- Cash needs and forecast cash flows over the next twelve months, funding plans, and progress toward alleviating the disclosed going-concern doubt.
- The sustainability of gross margins and operating cash flow after excluding the large fair-value gain and PPP forgiveness.
- The fair-value assumptions and future accounting effects for the ProFrac notes, plus the extent of dilution from outstanding warrants and converted securities.
- Progress in remediating the material weakness and regaining NYSE minimum-price compliance within the applicable period.
- Final analysis of Section 382 limitations and potential use or expiration of tax attributes, as well as developments in the disclosed litigation.