Flotek Industries, Inc. — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022; filed March 22, 2023. This is an annual filing, and the supplied text does not provide standalone fourth-quarter results. Dollar amounts below are U.S. dollars.
Business context
Flotek provides specialty chemistry products through Chemistry Technologies (CT) and real-time hydrocarbon measurement and analytics through Data Analytics (DA). Both segments are supported by research and innovation. FY2022 results were materially shaped by the ProFrac long-term supply agreement, which began in 2022 and made ProFrac a major customer and related party.
Financial performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $136.1 million | $43.3 million |
| Gross profit (loss) | $(6.7) million; (4.9)% margin | $3.3 million; 7.5% margin |
| Operating loss | $(35.4) million | $(31.5) million |
| Net loss | $(42.3) million; $(0.57) per share | $(30.5) million; $(0.42) per share |
| Cash flow from operations | $(44.6) million | $(25.8) million |
- Revenue rose 215%, principally from ProFrac and increased activity with other CT customers. Related-party revenue was $81.7 million, including $80.4 million from ProFrac; external revenue was $54.3 million.
- Cost of sales increased to $142.8 million, exceeding revenue. Management cited ProFrac activity, higher freight and equipment-rental costs, low contract-related margins, startup costs, early-payment discounts, contract-asset amortization, and a $1.0 million hand-sanitizer inventory write-down.
- CT reported a $14.7 million operating loss, versus a $5.5 million loss in 2021. DA revenue increased 24% to $5.5 million and its operating loss narrowed to $2.9 million from $12.2 million, largely because 2021 included an $8.1 million goodwill impairment.
- Cash and cash equivalents were $12.3 million at year-end, compared with $11.5 million in 2021. Investing activities provided $5.3 million, largely from $5.8 million in facility-sale proceeds; financing activities provided $38.3 million, primarily from convertible notes and warrants.
- Current assets were $81.1 million versus current liabilities of $151.4 million. Stockholders’ equity was $2.6 million. The balance sheet included $19.8 million of convertible notes payable and $83.6 million of contract-consideration convertible notes payable, both classified as current, plus $4.8 million of PPP debt. Operating lease liabilities totaled $11.4 million.
Changes, unusual items and outlook
- Compared with 2021, revenue expanded sharply, but gross margin turned negative and net loss and operating cash use increased. The 2021 comparison included a $7.6 million cost-of-sales credit from the ADM settlement and an $8.1 million DA goodwill impairment; these items affect year-over-year comparability.
- Flotek recorded $2.9 million of gains from facility sales and a $0.6 million gain on lease termination in 2022. Interest expense rose to $7.1 million, mainly due to paid-in-kind interest and issuance-cost amortization on convertible instruments.
- The ProFrac agreement was amended in February 2023 to provide a fleet ramp-up through May, waive potential liquidated damages for pre-2023 shortfalls, add certain product fees, and provide margin increases linked to revenue from non-ProFrac customers. Management stated it expects the amendment’s economic benefit to exceed the waived liquidated damages.
- Management described a potentially tight oil-and-gas supply cycle and expects comparatively stronger 2023 activity from independent producers. It gave no quantitative revenue or earnings guidance. It also highlighted continued development of Verax analyzers and data applications.
- On February 2, 2023, convertible notes and certain contract-consideration notes issued in 2022 converted into 10.36 million common shares and 25.37 million pre-funded warrants. The filing also reports that $4.4 million of PPP principal and $0.1 million of accrued interest were forgiven in January 2023, with the expected $4.5 million gain to be recorded in Q1 2023.
- CEO and President John Gibson departed in January 2023; Harsha Agadi became interim CEO while the Board searched for a permanent replacement. Gibson’s separation agreement provides $1.5 million in payments.
Liquidity, risks and controls
- Going concern: Management and the auditor identified substantial doubt about Flotek’s ability to continue as a going concern within one year after issuance of the financial statements. The company reported recurring losses and negative operating cash flows and said it may need additional liquidity. Potential actions include equity or debt financing, asset sales and cost reductions; there is no assurance funding will be available on acceptable terms.
- ProFrac reliance and concentration: ProFrac accounted for 59% of FY2022 revenue. The three largest CT customers represented 73% of consolidated revenue, up from 44% in 2021. Flotek also depends on ProFrac’s activity, timely payments and contract performance. ProFrac affiliates hold significant financial and governance ties; the filing says ProFrac Holdings has the right to elect four of seven directors and consolidates Flotek in its financial results.
- Contract-asset exposure: Net contract assets tied to the ProFrac agreement were $79.7 million. Their recoverability depends on forecasts of future revenue and costs; the auditor identified this estimate as a critical audit matter.
- Internal controls: Management found a material weakness involving lease accounting, prepaid assets and related-party revenue, and concluded disclosure controls and internal control over financial reporting were ineffective at year-end. Corrected misstatements occurred; remediation was underway but not yet tested as effective. The auditor did not attest to internal-control effectiveness.
- Other risks include energy-market and commodity-price volatility, raw-material and freight costs, customer collections, a single-source spectrometer supplier, environmental and regulatory exposure, dilution, and possible NYSE delisting. The filing stated the stock price was below $1.00 as of the filing date.
- Flotek is pursuing arbitration or other proceedings related to alleged historical misconduct by a former CEO and former advisers; outcomes and timing could not be predicted. Management said routine other litigation was not expected to materially affect financial position, results or liquidity.
Important facts for investors to verify
- Whether ProFrac meets its purchase and fleet commitments, pays receivables promptly, and generates adequate margin and cash flow for Flotek.
- Whether the $79.7 million ProFrac contract asset remains recoverable under updated revenue and cost forecasts.
- Flotek’s near-term cash needs, financing plans and ability to address the going-concern uncertainty.
- The full dilution and governance effects of the February 2023 note conversions and pre-funded warrants, including ProFrac-affiliate ownership and board rights.
- Progress in remediating and independently validating controls, and the CEO succession process.
- The final accounting and cash impact of PPP-loan forgiveness, the Gibson separation payments, and pending legal matters.