Flotek Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Flotek operates Chemistry Technologies and Data Analytics; the latter was formed after the May 18 acquisition of JP3 Measurement. Figures below are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $12.7 | $21.9 | $41.0 | $99.8 |
| Operating loss | $(45.6) | $(11.8) | $(125.9) | $(39.1) |
| Net income (loss) | $(45.2) | $(11.0) | $(118.8) | $5.4 |
| Basic and diluted EPS | $(0.66) | $(0.19) | $(1.75) | $0.09 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(39.1) | $0.5 |
- Revenue fell 41.8% in Q3 and 58.9% for the first nine months year over year, primarily reflecting lower oil-and-gas activity and COVID-19 effects. Prior-year nine-month net income included $44.6 million from discontinued operations following the Florida Chemical sale.
- Operating margin was negative 357.9% in Q3 and negative 306.8% for the nine-month period, versus negative 53.9% and negative 39.2%, respectively, in 2019. Results included substantial impairments and inventory charges; the filing does not provide a clear adjusted or normalized margin.
- Q3 operating expenses excluding depreciation and amortization were $29.5 million, exceeding revenue. The company cited acquired Data Analytics costs, the sanitizer business, inventory obsolescence and a JP3 earn-out charge, partly offset by cost reductions.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $49.2 million, with an additional $0.7 million of restricted cash. Current assets were $79.0 million and current liabilities $23.5 million.
- Total debt was $5.7 million, consisting of $4.8 million of Flotek PPP debt and $0.9 million of JP3 PPP debt. The loans bear 1% interest, mature in two years and may qualify for forgiveness; as of quarter-end, Flotek had not applied for or estimated forgiveness.
- Nine-month cash declined $51.4 million to $49.2 million, excluding restricted cash. Operating activities used $39.1 million; investing activities used $17.1 million, including $26.3 million paid for JP3, partly offset by $9.9 million of sale-related escrow proceeds. Financing activities provided $4.9 million, primarily from the PPP loan.
- Management said available liquidity was sufficient for operations and anticipated obligations. It expected remaining-2020 capital spending of approximately $1.0 million to $2.0 million.
Material developments, outlook and risks
- JP3 was acquired for approximately $36.6 million in cash, stock and contingent consideration. Flotek issued 11.5 million shares. Q3 Data Analytics revenue was $0.7 million; management attributed weak activity to customer budget freezes, reduced oil-and-gas capital spending and limits on customer site access. A 35% segment headcount reduction followed in October.
- Q3 included $11.7 million of goodwill impairment and $12.5 million of finite-lived intangible impairment in Data Analytics. For the first nine months, impairment charges totaled $70.0 million for fixed and long-lived assets and $11.7 million for goodwill; the first-quarter impairment also included $30.2 million of fixed assets and $7.4 million of right-of-use assets. The company cited deteriorating energy-market conditions and weaker-than-expected JP3 performance.
- Inventory obsolescence provisions were $10.5 million for the first nine months, including $5.7 million in Chemistry Technologies and $3.9 million in Data Analytics in Q3. Management linked the charges to product rationalization.
- Management described sanitizer and disinfectant products as a diversification opportunity, but warned that demand could weaken with vaccine availability, changing hygiene behavior, excess industry supply or new competition. The filing provides no earnings or revenue guidance.
- Key risks include continued pandemic-related weakness and oil-price volatility, customer spending reductions, raw-material availability and cost pressures, and Data Analytics’ reliance on specialized components and future subscription-model adoption. The company also disclosed $16.8 million of raw-material supply commitments and expected $0.3 million to $0.5 million of additional costs over six months for an intellectual-property indemnity matter, potentially higher.
- Disclosure controls were deemed ineffective at September 30, 2020 because of unremediated material weaknesses involving non-routine transactions and disposal cash-flow classification, intercompany inventory profits, and impairment controls. Management was implementing remediation but had not completed effectiveness testing. No pending or threatened litigation was expected by management to materially affect the company.
Important facts for investors to verify
- Whether cash burn, customer collections and working-capital trends improve, and whether management’s liquidity assessment remains supportable.
- Whether JP3 revenue, repeat business and customer access recover, and whether further goodwill or intangible impairments are required.
- Whether the PPP loans qualify for forgiveness and whether the company’s eligibility certifications withstand any SBA review.
- Whether sanitizer demand and margins remain durable as supply normalizes and market conditions change.
- Progress and independent validation of internal-control remediation, including the disclosed cash-flow classification error.
- The status of remaining JP3 contingent consideration and the continuing terpene supply agreement obligations.