Flotek(FTK) - 2018 Q4 - Annual Report

PART I Business Overview Flotek Industries focuses on Energy Chemistry Technologies for oil and gas, following strategic divestitures of other segments - Flotek Industries, Inc. is a global, diversified, technology-driven company supplying chemistry and services to the oil and gas industries[13] - The Consumer and Industrial Chemistry Technologies segment was classified as discontinued operations at December 31, 2018, with the sale completed in Q1 2019[13][16] - The Drilling Technologies and Production Technologies segments were sold during 2017 and are classified as discontinued operations[17][18] - The Company's continuing operations consist of one strategic business segment: Energy Chemistry Technologies (ECT)[20] - ECT designs, develops, manufactures, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for oil and gas well activities[23] - Flotek's flagship patented chemistry technologies include Complex nano-Fluid® (CnF®), Pressure reducing Fluids® (PrF®), and MicroSolv™[24][25][26][27] - Operations are not significantly affected by seasonality, though winter weather can delay client activity in oil and gas[31] - Demand for energy chemistry products depends on oil and natural gas drilling and completion activity, marketed directly and through third-party agents, with a growing focus on international markets like MENA and South America[32][33] Revenue Concentration from Largest Three Customers (2016-2018) | Year Ended December 31, | Percentage of Consolidated Revenue | | :---------------------- | :--------------------------------- | | 2018 | 30% | | 2017 | 32% | | 2016 | 48% | Research and Innovation Expense (2016-2018) | Year Ended December 31, | R&I Expense (Millions USD) | | :---------------------- | :------------------------- | | 2018 | $10.4 | | 2017 | $13.1 | | 2016 | $9.3 | - The Company has 50 issued patents and over six dozen pending patent applications, along with 55 registered trademarks, to protect its intellectual property[38] - The oilfield services industry is highly competitive, with larger competitors having more resources to withstand downturns and compete on price[39][40] - Citrus-based terpene (d-limonene) is a critical raw material, with supply secured through a long-term agreement with Florida Chemical Company, LLC (FCC) following the CICT segment sale[42][43] - The Company is subject to federal, state, and local environmental, occupational safety, and health laws and regulations, striving for full compliance[45] - At December 31, 2018, the Company had 273 employees in continuing operations and 77 in discontinued operations, with generally positive labor relations[47] Risk Factors Risks include oil and gas industry volatility, intense competition, operational dependencies, regulatory changes, and stock market factors - The Company's business is highly dependent on domestic and international oil and natural gas industry spending, susceptible to global economic conditions, credit availability, and fluctuating prices[54][55][56][57] - Inability to develop and introduce new or differentiated products could lead to a loss of customers and negatively impact future success and profitability[59][60][61] - Increased competition, particularly from larger competitors with greater resources, could exert downward pressure on prices and adversely affect revenues and margins[62] - Failure to adequately protect intellectual property rights or being found to infringe on others' rights could significantly impair the Company's ability to compete[63][64][65] Revenue from Three Largest Customers (2016-2018) | Year Ended December 31, | Percentage of Consolidated Revenue | | :---------------------- | :--------------------------------- | | 2018 | 30% | | 2017 | 32% | | 2016 | 48% | - The Company depends on a single-source supplier (FCC) for citrus terpene (d-limonene), and the loss of this supplier or significant price fluctuations could harm the business[67][68][69][70] - The loss of key management members could hinder the Company's ability to manage operations and implement growth strategies[71] - Failure to maintain effective disclosure controls and internal controls over financial reporting could harm the Company's reputation and stock price[72] - Network disruptions, security threats, and cyber-crime pose risks to operational, reporting, and communication systems[73] - Strategic acquisitions, joint ventures, and divestitures involve risks such as unforeseen liabilities, diversion of management attention, and failure to realize anticipated returns[74][75][76] - Inadequate capital availability could adversely affect the Company's ability to grow and compete, despite having a 'universal' shelf registration for securities sales[77] - Inability to collect payments from key customers, especially international ones, could negatively impact financial results, liquidity, and cash flows[78] - Unforeseen contingencies like litigation could result in significant expenses and divert management's attention, potentially impacting financial condition[79][80] - The Company's insurance policies may not adequately cover all potential risks inherent in the oil and natural gas industry, leading to uninsured losses[81] - Regulatory pressures, environmental activism, and legislation (e.g., VOC restrictions, hydraulic fracturing, greenhouse gas regulations) could reduce demand for products, increase costs, and adversely affect the business[82][83][84][85][86][87][88][89] - Doing business outside the U.S. exposes the Company to political risk, foreign exchange risk, and other uncertainties, including compliance with laws like the FCPA[90][91][92] - Tax returns are subject to audit, and claims for back taxes, interest, and penalties could significantly drain capital resources and liquidity[93] - Recent and future U.S. tax legislation, such as the Tax Cuts and Jobs Act, may adversely affect the Company's financial results[94] - General economic declines, limits to credit availability, and industry-specific factors (e.g., oil and natural gas prices, rig count) could reduce demand for the Company's products and services[95][96][97][98][99][100] - The oil and natural gas industry is highly competitive, with numerous small and large competitors, potentially leading to lower sales or higher operating costs[101] - Difficulty attracting or retaining qualified personnel due to high employee turnover and competitive labor conditions could limit growth and increase operating costs[102][103] - Severe weather conditions (e.g., hurricanes, blizzards) can disrupt services, damage facilities, and reduce customer purchases[104] - Terrorist attacks or armed conflicts could harm the business by affecting economies, causing business losses, or disrupting fuel supplies[105] - The market price of the Company's common stock has been and may continue to be volatile due to various factors, including operational results, market valuations, and external announcements[106][108][109] - Failure to meet NYSE continued listing requirements (e.g., minimum stock price) could result in delisting, negatively impacting liquidity, market price, and ability to raise equity financing[107] - The Company has no plans to pay dividends, requiring investors to rely on stock appreciation for returns[110] - Anti-takeover provisions in charter documents and Delaware law could discourage or prevent acquisitions, potentially affecting the market price of common stock[111] - Future issuance of additional common stock could dilute ownership interests and adversely affect the stock price[112][113][114] - The Company may issue preferred stock or debt securities with greater rights than common stock, potentially impacting common stockholders[115] - The ability to use net operating loss carryforwards (NOLs) and tax attributes to offset future taxable income may be limited by 'ownership changes' under Section 382 of the Internal Revenue Code and the Tax Act[116][117] Unresolved Staff Comments There are no unresolved comments from the SEC staff - The Company has no unresolved staff comments[118] Properties Flotek operates 16 manufacturing, warehouse, and research facilities globally, with 5 owned and the rest leased - At December 31, 2018, the Company operated 16 manufacturing, warehouse, and research facilities in 7 U.S. states, one research facility in Calgary, Alberta, and sales offices in Tokyo, Japan and Dubai, United Arab Emirates[119] - The Company owns 5 of these facilities, and the remainder are leased with terms expiring from 2019 through 2037[119] Facility Locations by Segment (Owned/Leased) | Segment | Owned/Leased | Location | | :------------------------ | :----------- | :----------------------- | | Energy Chemistry Technologies | Owned | Marlow, Oklahoma | | Energy Chemistry Technologies | Owned | Monahans, Texas | | Energy Chemistry Technologies | Owned | Raceland, Louisiana | | Energy Chemistry Technologies | Owned | Waller, Texas | | Energy Chemistry Technologies | Leased | Calgary, Alberta | | Energy Chemistry Technologies | Leased | Canonsburg, Pennsylvania | | Energy Chemistry Technologies | Leased | Denver, Colorado | | Energy Chemistry Technologies | Leased | Dubai, United Arab Emirates | | Energy Chemistry Technologies | Leased | Houston, Texas | | Energy Chemistry Technologies | Leased | Midland, Texas | | Energy Chemistry Technologies | Leased | Natoma, Kansas | | Energy Chemistry Technologies | Leased | Oklahoma City, Oklahoma | | Energy Chemistry Technologies | Leased | Raceland, Louisiana | | Discontinued Operations (CICT) | Owned | Winter Haven, Florida | | Discontinued Operations (CICT) | Leased | Tokyo, Japan | | Discontinued Operations (Drilling) | Leased | Wysox, Pennsylvania | Legal Proceedings The company faces ongoing derivative lawsuits and a dismissed securities class action, with no material impact expected from other litigation - A consolidated putative securities class action lawsuit filed in November 2015 was dismissed by the U.S. District Court for the Southern District of Texas on March 30, 2017, and this dismissal was affirmed by the Fifth Circuit Court of Appeals on February 7, 2019[120][122] - Three derivative lawsuits were filed in January 2016 against certain officers and directors, alleging violations of law, breaches of fiduciary duty, and unjust enrichment, which the Company believes are without merit[123][124] - An SEC inquiry related to similar issues was concluded on August 21, 2017, with the staff not intending to recommend an enforcement action against the Company[124][125] - Management is not aware of any other pending or threatened lawsuits or proceedings expected to have a material effect on the Company's financial position, results of operations, or liquidity[126][127] Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable to the Company[126] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Flotek's common stock trades on NYSE, with 57.35 million shares outstanding, no dividends, and authorized share repurchases limited by covenants - Flotek's common stock trades on the NYSE under the ticker symbol 'FTK' since December 27, 2007[129] - As of February 28, 2019, there were 57,350,015 outstanding shares of common stock held by approximately 9,800 holders of record[4][129] - The Company has never declared or paid cash dividends on common stock and intends to retain future earnings for business development and debt obligations[110][129] Equity Compensation Plan Information (as of December 31, 2018) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) (c) | | :---------------------------------- | :------------------------------------------------------------------------------------------ | :------------------------------------------------------------------------------ | :---------------------------------------------------------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 1,352,138 | $— | 1,492,737 | | Equity compensation plans not approved by security holders | — | $— | — | | Total | 1,352,138 | $— | 1,492,737 | - The Company's Board authorized a $25 million common stock repurchase program in November 2012, which was fully utilized by December 31, 2018[133] - An additional $50 million repurchase program was authorized in June 2015, under which $0.3 million was repurchased by December 31, 2018, leaving $49.7 million available[134] Issuer Purchases of Equity Securities (Q4 2018) | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (2) | | :-------------------------- | :----------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------------- | | October 1 to October 31, 2018 | 1,639 | $2.44 | — | $49,704,947 | | November 1 to November 30, 2018 | — | $— | — | $49,704,947 | | December 1 to December 31, 2018 | 71,303 | $1.09 | — | $49,704,947 | | Total | 72,942 | $1.12 | — | | - At December 31, 2018, a covenant under the Company's Credit Facility did not permit additional share repurchases, but the Credit Facility was paid off on March 1, 2019[135] Selected Financial Data Provides a five-year summary of financial data, adjusted for reclassified discontinued operations, impacting comparability - The Consumer and Industrial Chemistry Technologies segment was classified as 'Discontinued Operations' effective December 31, 2018, for all periods presented[137] - The Drilling Technologies and Production Technologies segments were classified as 'Discontinued Operations' for all periods presented, following their sale or disposal in 2017[138] Selected Financial Data (2014-2018, in thousands, except per share data) | Operating Data (1) | 2018 | 2017 | 2016 | 2015 | 2014 | | :---------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Revenue | $177,773 | $243,106 | $188,233 | $213,593 | $268,761 | | (Loss) income from operations | $(69,811) | $(10,320) | $(16,968) | $3,536 | $52,057 | | (Loss) income from continuing operations | $(73,441) | $(17,504) | $(4,447) | $1,489 | $33,260 | | Income (loss) from discontinued operations, net of tax | $2,743 | $(9,891) | $(44,683) | $(14,951) | $20,343 | | Net (loss) income | $(70,698) | $(27,395) | $(49,130) | $(13,462) | $53,603 | | Per Share Data | | | | | | | Basic earnings (loss) per share: | | | | | | | Continuing operations | $(1.26) | $(0.30) | $(0.08) | $0.03 | $0.61 | | Discontinued operations, net of tax | $0.05 | $(0.17) | $(0.80) | $(0.27) | $0.37 | | Basic earnings (loss) per share | $(1.21) | $(0.47) | $(0.88) | $(0.24) | $0.98 | | Diluted earnings (loss) per share: | | | | | | | Continuing operations | $(1.26) | $(0.30) | $(0.08) | $0.03 | $0.60 | | Discontinued operations, net of tax | $0.05 | $(0.17) | $(0.80) | $(0.27) | $0.37 | | Diluted earnings (loss) per share | $(1.21) | $(0.47) | $(0.88) | $(0.24) | $0.97 | | Financial Position Data | | | | | | | Total assets | $285,883 | $329,888 | $383,215 | $403,090 | $423,276 | | Convertible senior notes, long-term debt, and capital lease obligations, less discount and current portion | $— | $— | $7,833 | $18,255 | $25,398 | | Stockholders' equity | $201,624 | $264,900 | $287,343 | $293,651 | $306,003 | Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes financial condition and operations, including market outlook, segment performance, capital, liquidity, and critical accounting policies - The Consumer and Industrial Chemistry Technologies (CICT), Drilling Technologies, and Production Technologies segments have been reclassified as discontinued operations for all periods presented[142][143] - Flotek is a global, diversified, technology-driven company supplying chemistries and services to the oil and gas industries, with its core business in Energy Chemistry Technologies (ECT)[144][146] - The Company's success is sensitive to drilling and well completion activity, demand for advanced technology products, raw material prices, and governmental actions[149] Average North American Active Drilling Rigs (2016-2018) | Category | 2018 | 2017 | 2016 | 2018 vs. 2017 % Change | 2017 vs. 2016 % Change | | :------------------------------------- | :---- | :---- | :---- | :--------------------- | :--------------------- | | Total North American Active Drilling Rigs | 1,223 | 1,082 | 639 | 13.0% | 69.3% | | United States | 1,032 | 876 | 509 | 17.8% | 72.1% | | Canada | 191 | 206 | 130 | (7.3)% | 58.5% | | Average U.S. Active Drilling Rigs by Type | | | | | | | Vertical | 63 | 70 | 60 | (10.0)% | 16.7% | | Horizontal | 900 | 736 | 400 | 22.3% | 84.0% | | Directional | 69 | 70 | 49 | (1.4)% | 42.9% | | Average North American Drilling Rigs by Product | | | | | | | Oil | 961 | 812 | 471 | 18.3% | 72.4% | | Natural Gas | 262 | 270 | 168 | (3.0)% | 60.7% | - U.S. rig activity increased by 17.8% in 2018 compared to 2017, and 72.1% from 2016 to 2017; U.S. completions increased 25.4% in 2018 compared to 2017[155] - For 2019, the Company expects global oilfield activity to remain stable, with continued market penetration of its Complex nano-Fluid® (CnF®) chemistries and Prescriptive Chemistry Management® (PCM®) offering[156][157] - The Company anticipates maintenance capital spending of $5 million to $9 million in 2019, with potential growth capital projects totaling $20 million to $30 million[161] Results of Continuing Operations (2016-2018, in thousands) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Revenue | $177,773 | $243,106 | $188,233 | | Operating expenses (excluding D&A) | $159,808 | $188,744 | $143,983 | | Operating expenses % | 89.9% | 77.6% | 76.5% | | Corporate general and administrative costs | $31,467 | $41,492 | $43,745 | | Corporate general and administrative costs % | 17.7% | 17.1% | 23.2% | | Depreciation and amortization | $9,216 | $9,768 | $8,172 | | Research and development costs | $10,356 | $13,130 | $9,319 | | Impairment of goodwill | $37,180 | $— | $— | | Loss from operations | $(69,811) | $(10,320) | $(16,968) | | Operating margin % | (39.3)% | (4.2)% | (9.0)% | | Loss from continuing operations | $(73,441) | $(17,504) | $(4,447) | | Income (loss) from discontinued operations, net of tax | $2,743 | $(9,891) | $(44,683) | | Net loss | $(70,698) | $(27,395) | $(49,130) | - Consolidated revenue decreased by $65.3 million (26.9%) in 2018 compared to 2017, primarily due to changes in product mix and a shift towards selling directly to oil and gas end-users[165] - Consolidated operating expenses decreased by $28.9 million (15.3%) in 2018, but increased as a percentage of revenue to 89.9% from 77.6% in 2017[166] - Corporate general and administrative (CG&A) costs decreased by $10.0 million (24.2%) in 2018, but rose as a percentage of revenue to 17.7% from 17.1% in 2017[167] - A goodwill impairment charge of $37.2 million was recognized in the Energy Chemistry Technologies (ECT) segment in Q2 2018 due to sustained under-performance and lower expectations[169] - ECT revenue decreased by $65.3 million (26.9%) in 2018 compared to 2017, underperforming market indicators due to product mix and a transition in sales channels[183] - ECT income from operations decreased by $70.4 million in 2018, including a $37.2 million goodwill impairment charge; excluding impairment, it decreased by $33.2 million (98.9%) due to gross margin compression and increased costs[184] - The Consumer and Industrial Chemistry Technologies (CICT) segment's revenue decreased by $1.6 million (2.2%) in 2018, and income from operations decreased by $4.4 million (59.1%) due to higher raw material costs and reduced by-product sales[190][191] - The Company's primary source of debt financing was a $75 million Credit Facility with PNC Bank, with $49.7 million outstanding at December 31, 2018; this facility was repaid on March 1, 2019, using proceeds from the CICT segment sale[200][202] Net Debt (in thousands) | Metric | December 31, 2018 | December 31, 2017 | | :------------------------ | :---------------- | :---------------- | | Cash and cash equivalents | $3,044 | $4,584 | | Current portion of long-term debt | $(49,731) | $(27,950) | | Net debt | $(46,687) | $(23,366) | Cash Flows (2016-2018, in thousands) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Net cash (used in) provided by operating activities | $(20,816) | $12,345 | $1,192 | | Net cash (used in) provided by investing activities | $(2,109) | $14,526 | $(21,419) | | Net cash provided by (used in) financing activities | $21,480 | $(27,285) | $22,851 | | Net cash flows (used in) provided by discontinued operations | $(7) | $24 | $(6) | | Net (decrease) increase in cash and cash equivalents | $(1,540) | $(239) | $2,615 | - Operating activities used $20.8 million in cash in 2018, compared to providing $12.3 million in 2017, primarily due to a net loss and changes in working capital[206][210] - Investing activities used $2.1 million in cash in 2018, including capital expenditures and patent purchases, partially offset by proceeds from asset sales[213] - Financing activities generated $21.5 million in cash in 2018, mainly from debt borrowings, net of repayments[216] - The Company has no material off-balance sheet arrangements or commitments[219][220] Contractual Obligations (as of December 31, 2018, in thousands) | Type of Obligation | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | | :--------------------------------- | :---------- | :--------------- | :---------- | :---------- | :---------------- | | Borrowings under revolving credit facility (1) | $49,731 | $49,731 | $— | $— | $— | | Operating lease obligations | $19,458 | $2,562 | $4,290 | $3,352 | $9,254 | | Total | $69,189 | $52,293 | $4,290 | $3,352 | $9,254 | - Critical accounting policies include revenue recognition (ASC 606 adopted in 2018), allowance for doubtful accounts, inventory reserves, business combinations, goodwill impairment, long-lived assets, fair value measurements, income taxes, share-based compensation, and loss contingencies[225][227][232][237][241][243][270][293][294][300][303] - The Company recorded a $37.2 million goodwill impairment charge in the ECT reporting unit in Q2 2018 due to under-performance and lower expectations[254] - A valuation allowance of $15.5 million was recorded against net deferred tax assets in Q2 2018, with $11.5 million reversed in Q4 2018 due to subsequent events providing a source of income[297][298] Quantitative and Qualitative Disclosures About Market Risk Flotek faces market risks from interest rates, foreign currency, and commodity prices, particularly citrus oil, with mitigation strategies in place - The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, and commodity prices[301] - Interest rate risk primarily arises from outstanding indebtedness under the revolving credit facility, which has a variable interest rate (e.g., LIBOR plus 2.5% to 3.0%)[302][305] - At December 31, 2018, $49.7 million was outstanding under the revolving credit facility, with a weighted-average interest rate of 5.51% for LIBOR loans[224][305] - The Company has limited exposure to foreign currency risk, with approximately 3.0% of 2018 revenue in non-U.S. dollar currencies, but this exposure is likely to increase with international operations[307][308] - Commodity risk is inherent in orange harvests, as citrus oils are key raw materials; citrus greening disease has caused price increases, which have been passed to customers[309] - The Company relies on long-term strategic supply relationships for raw materials and may consider hedging strategies in the future for commodity prices[309] Financial Statements and Supplementary Data Presents audited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes on accounting policies and disclosures - Moss Adams LLP issued an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2018, based on COSO criteria[312] - Moss Adams LLP also issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2018 and 2017, in conformity with U.S. GAAP[313][320] - Hein & Associates LLP issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2016, in conformity with U.S. GAAP[329] - The Company changed its method of accounting for revenue recognition due to the adoption of ASC Topic No. 606, effective January 1, 2018, using the full retrospective method, with no material impact[322][410][447][448] Consolidated Balance Sheets (as of December 31, 2018 and 2017, in thousands) | ASSETS | 2018 | 2017 | | :---------------------------------------- | :---------- | :---------- | | Cash and cash equivalents | $3,044 | $4,584 | | Accounts receivable, net | $37,047 | $34,897 | | Inventories, net | $27,289 | $32,460 | | Income taxes receivable | $3,161 | $2,826 | | Assets held for sale (current) | $118,470 | $54,508 | | Other current assets | $5,771 | $8,649 | | Total current assets | $194,782 | $137,924 | | Property and equipment, net | $45,485 | $52,786 | | Goodwill | $— | $37,180 | | Deferred tax assets, net | $18,663 | $12,713 | | Other intangible assets, net | $26,827 | $22,048 | | Other long-term assets | $126 | $527 | | Assets held for sale (non-current) | $— | $66,710 | | TOTAL ASSETS | $285,883| $329,888| | LIABILITIES AND EQUITY | | | | Accounts payable | $15,011 | $10,394 | | Accrued liabilities | $10,335 | $13,793 | | Interest payable | $8 | $43 | | Liabilities held for sale | $9,174 | $12,450 | | Long-term debt, classified as current | $49,731 | $27,950 | | Total current liabilities and total liabilities | $84,259 | $64,630 | | Stockholders' equity | $201,624 | $264,900 | | Noncontrolling interests | $— | $358 | | Total equity | $201,624 | $265,258 | | TOTAL LIABILITIES AND EQUITY | $285,883| $329,888| Consolidated Statements of Operations (Years Ended December 31, 2018, 2017, and 2016, in thousands, except per share data) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Revenue | $177,773 | $243,106 | $188,233 | | Operating expenses (excluding D&A) | $159,808 | $188,744 | $143,983 | | Corporate general and administrative | $31,467 | $41,492 | $43,745 | | Depreciation and amortization | $9,216 | $9,768 | $8,172 | | Research and development | $10,356 | $13,130 | $9,319 | | Impairment of goodwill | $37,180 | $— | $— | | Loss from operations | $(69,811) | $(10,320) | $(16,968) | | Loss from continuing operations | $(73,441) | $(17,504) | $(4,447) | | Income (loss) from discontinued operations, net of tax | $2,743 | $(9,891) | $(44,683) | | Net loss | $(70,698) | $(27,395) | $(49,130) | | Basic earnings (loss) per common share: | | | | | Continuing operations | $(1.26) | $(0.30) | $(0.08) | | Discontinued operations, net of tax | $0.05 | $(0.17) | $(0.80) | | Basic earnings (loss) per common share | $(1.21) | $(0.47) | $(0.88) | | Diluted earnings (loss) per common share: | | | | | Continuing operations | $(1.26) | $(0.30) | $(0.08) | | Discontinued operations, net of tax | $0.05 | $(0.17) | $(0.80) | | Diluted earnings (loss) per common share | $(1.21) | $(0.47) | $(0.88) | Consolidated Statements of Cash Flows (Years Ended December 31, 2018, 2017, and 2016, in thousands) | Cash Flows from Operating Activities: | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Net cash (used in) provided by operating activities | $(20,816) | $12,345 | $1,192 | | Cash Flows from Investing Activities: | | | | | Net cash (used in) provided by investing activities | $(2,109) | $14,526 | $(21,419) | | Cash Flows from Financing Activities: | | | | | Net cash provided by (used in) financing activities | $21,480 | $(27,285) | $22,851 | | Discontinued Operations: | | | | | Net cash flows (used in) provided by discontinued operations | $(7) | $24 | $(6) | | Net (decrease) increase in cash and cash equivalents | $(1,540) | $(239) | $2,615 | | Cash and cash equivalents at end of year | $3,044 | $4,584 | $4,823 | - The Company adopted ASU No. 2016-02, 'Leases' (ASC 842), effective January 1, 2019, which will result in the addition of approximately $19.5 million in ROU assets and corresponding lease liabilities to the consolidated balance sheet, with no significant impact on the statements of operations or cash flows[416][420] - On February 28, 2019, the Company completed the sale of its CICT segment (Florida Chemical Company, LLC) to Archer Daniels-Midland Company (ADM) for $175.0 million in cash consideration, expecting a gain of approximately $62 million to $66 million[569][570] - Upon closing the CICT sale, the Company repaid the outstanding balance of its revolving credit facility on March 1, 2019, and terminated the Credit Facility with PNC Bank[571] Note 1 — Organization and Nature of Operations Describes Flotek Industries as a global, technology-driven company focused on oil and gas chemistries and services - Flotek Industries, Inc. is a global, diversified, technology-driven company supplying chemistries and services to the oil and gas industries[345] - The Consumer and Industrial Chemistry Technologies segment was classified as discontinued operations at December 31, 2018[345] - The Company's oilfield business includes specialty chemistries and logistics for drilling and completion, along with automated bulk material handling and blending capabilities[346] - Flotek operates in over 20 domestic and international markets, serving major integrated O&G companies, oilfield services companies, and national oil companies[351] Note 2 — Summary of Significant Accounting Policies Outlines the company's key accounting policies, including consolidation, discontinued operations, revenue recognition, and impairment testing - The consolidated financial statements are prepared in accordance with U.S. GAAP and include all wholly-owned subsidiaries[347][348] - The Consumer and Industrial Chemistry Technologies, Drilling Technologies, and Production Technologies segments are presented as discontinued operations for all periods[349][353] - Cash equivalents are highly liquid investments with maturities of three months or less[355] - Book overdrafts from the controlled disbursement account are presented as a current liability in accounts payable[356] - Allowance for doubtful accounts is based on receivable age, customer circumstances, credit conditions, and historical write-offs, with the majority of customers in the cyclical energy industry[357][359][360] Changes in Allowance for Doubtful Accounts (Continuing Operations, in thousands) | Metric | 2018 | 2017 | 2016 | | :------------------------------ | :----- | :----- | :----- | | Balance, beginning of year | $673 | $579 | $716 | | Charged to provision for doubtful accounts | $839 | $157 | $482 | | Write-offs | $(322) | $(63) | $(619) | | Balance, end of year | $1,190 | $673 | $579 | - Inventories are stated at the lower of cost (weighted-average method) or net realizable value, with provisions for excess or obsolete inventory based on demand forecasts and market conditions[362] - Property and equipment are stated at cost and depreciated using the straight-line method over estimated useful lives (e.g., 2-30 years for buildings, 7-10 years for machinery)[363] - Goodwill is not amortized but tested for impairment annually or more frequently if indicators arise, using qualitative and quantitative assessments (discounted cash flow and market-based approaches)[368][369][370][371] - Other intangible assets with finite lives are amortized over 2 to 95 years and tested for impairment when circumstances indicate, while indefinite-lived intangibles are tested annually for impairment[372][373][374][375][376] - Business combinations are accounted for using the acquisition method, allocating fair value of consideration to assets acquired and liabilities assumed, with any excess recorded as goodwill[377][379] - Fair value measurements categorize financial assets and liabilities into a three-tier hierarchy (Level 1, 2, 3) based on the observability of inputs[380] - Revenue is recognized based on ASC 606's five-step model when control of goods or services is transferred to the customer, with most sales recognized at a point in time[381][382][383][384][385] - Foreign currency translation adjustments are recognized as other comprehensive income (loss) within stockholders' equity[386] - Research and development costs are expensed as incurred[388] - Income taxes are accounted for using the liability method, recognizing deferred tax assets and liabilities for temporary differences, with a valuation allowance recorded when realization is uncertain[390][391][392] - Basic and diluted earnings (loss) per common share are calculated based on net income (loss) and weighted average common shares outstanding, with potentially dilutive securities excluded if anti-dilutive[396] - Debt issuance costs are capitalized and amortized as interest expense over the debt term[397] - Stock-based compensation expense for equity awards is recognized based on grant-date fair values over the requisite service period, net of estimated forfeitures[399] - Assets and liabilities held for sale are classified when specific criteria are met, measured at the lower of carrying amount or fair value less costs to sell[402][405][406] - Discontinued operations are reported for components representing a strategic shift, with general corporate overhead not allocated and specific interest expense allocated[407][408] - The Company adopted new accounting standards in 2018, including ASC 606 (Revenue from Contracts with Customers), ASU 2016-15 (Cash Flow Classification), ASU 2017-01 (Definition of a Business), and ASU 2017-09 (Modification Accounting), none of which had a material effect[410][411][412][413][415] - Upcoming accounting standards include ASU 2016-02 (Leases, effective Jan 1, 2019), ASU 2016-13 (Credit Losses), ASU 2018-02 (Tax Effects from AOCI), and ASU 2018-07 (Nonemployee Share-Based Payment Accounting), which are being evaluated[416][421][422][423] Note 3 — Discontinued Operations Details the financial impact and reclassification of the CICT, Drilling Technologies, and Production Technologies segments as discontinued operations - The Consumer and Industrial Chemistry Technologies (CICT) segment was classified as held for sale in Q4 2018 and its assets, liabilities, and results of operations are reported as 'Discontinued Operations' for all periods presented[426][427] CICT Discontinued Operations Financial Information (2016-2018, in thousands) | Metric | 2018 | 2017 | 2016 | | :-------------------------------- | :----- | :----- | :----- | | Revenue | $72,344| $73,992| $74,599| | Operating expenses | $(65,940)| $(63,621)| $(62,673)| | Depreciation and amortization | $(2,760)| $(2,391)| $(2,257)| | Research and development | $(590) | $(515) | $(1) | | Income from operations | $3,054 | $7,465 | $9,668 | | Other income (expense) | $341 | $(284) | $127 | | Income before income taxes | $3,395 | $7,181 | $9,795 | | Income tax expense | $(652) | $(2,730)| $(3,441)| | Net income from discontinued operations | $2,743 | $4,451 | $6,354 | CICT Assets and Liabilities Held for Sale (as of December 31, 2018 and 2017, in thousands) | Category | 2018 | 2017 | | :------------------------ | :---------- | :---------- | | Assets: | | | | Accounts receivable, net | $10,547 | $11,121 | | Inventories, net | $52,069 | $43,299 | | Other current assets | $446 | $88 | | Property and equipment, net | $15,899 | $16,049 | | Goodwill | $19,480 | $19,480 | | Other intangible assets, net | $20,029 | $26,183 | | Assets held for sale | $118,470 | $116,220 | | Liabilities: | | | | Accounts payable | $8,883 | $11,654 | | Accrued liabilities | $291 | $796 | | Liabilities held for sale | $9,174 | $12,450 | - The Drilling Technologies and Production Technologies segments were classified as held for sale in Q4 2016 and their assets, liabilities, and results of operations are reported as 'Discontinued Operations' for all periods presented[431] - The sale or disposal of the Drilling Technologies and Production Technologies segments was completed in 2017, with no continuing involvement from the Company[435] Drilling Technologies and Production Technologies Discontinued Operations Financial Information (2016-2017, in thousands) | Metric | Drilling Technologies 2017 | Drilling Technologies 2016 | Production Technologies 2017 | Production Technologies 2016 | | :-------------------------------- | :------------------------- | :------------------------- | :--------------------------- | :--------------------------- | | Revenue | $11,534 | $27,627 | $4,002 | $8,292 | | Loss from operations | $(2,646) | $(44,522) | $(1,357) | $(8,814) | | Net loss from discontinued operations | $(7,035) | $(41,443) | $(7,307) | $(9,594) | Note 4 — Impairment of Inventory and Long-Lived Assets for Discontinued Operations Discusses impairment charges recorded in Q1 2016 for inventory and long-lived assets within discontinued Drilling and Production Technologies segments - In Q1 2016, due to declining crude oil prices and U.S. drilling rig counts, the Company refocused its Drilling Technologies and Production Technologies segments, leading to impairment evaluations[438][439] - The Company exited the motor building and repair business in domestic markets and evaluated inventory associated with older technologies for impairment[439][440] - Operating losses in Q1 2016 for Drilling Technologies and Production Technologies segments triggered recoverability tests for asset groups[441] Impairment Charges (Q1 2016, in thousands) | Segment | Category | Amount | | :------------------------ | :---------------------------- | :----- | | Drilling Technologies | Inventories | $12,653| | Drilling Technologies | Property and equipment | $14,642| | Drilling Technologies | Intangible assets other than goodwill | $9,227 | | Production Technologies | Inventories | $3,913 | | Total impairment | | $40,435| - No goodwill impairments were recorded for the Teledrift and Production Technologies reporting units based on testing in 2016[443] Note 5 — Assets Held for Sale Details the divestiture of Dalton, Georgia facility assets in 2018, resulting in a $2.6 million write-down and $0.4 million loss on sale - In Q2 2018, the Company committed to divesting revenue-generating assets of the Dalton, Georgia facility within the Energy Chemistry Technologies segment[444] - A loss on write-down of assets held for sale of $2.6 million was recorded in Q2 2018 to state assets at fair value less costs to sell[444] Assets Held for Sale (as of December 31, 2017, in thousands) | Category | Amount | | :------------------------ | :----- | | Property and equipment, net | $4,998 | | Valuation allowance | $— | | Assets held for sale, net | $4,998 | - The sale of the Dalton, Georgia facility assets was completed on September 10, 2018, for $1.8 million in cash, resulting in a loss on sale of business of $0.4 million[445] Note 6 — Acquisitions Describes the acquisition of International Polymerics, Inc. (IPI) in 2016 for $7.9 million cash and common stock - On July 27, 2016, the Company acquired 100% of International Polymerics, Inc. (IPI) for $7.9 million in cash and 247,764 shares of common stock[446] - IPI is a U.S.-based manufacturer of high viscosity guar gum and guar slurry, along with stimulation chemicals for the oil and gas industry[446] Note 7 — Revenue from Contracts with Customers Explains the adoption of ASC 606 for revenue recognition, with most sales recognized at a point in time and no material financial impact - The Company adopted ASC 606, 'Revenue from Contracts with Customers,' effective January 1, 2018, using the full retrospective method, with no material impact on financial statements[447][448] - Revenue is recognized when control of promised goods or services is transferred to the customer, based on a five-step model, with most products sold at a point in time and services being short-term[449][451][453] - For certain contracts, revenue is recognized using the percentage-of-completion method, which accounted for less than 0.1% of total revenue in 2016-2018[452] Disaggregated Revenue and Operating Expenses by Source (2016-2018, in thousands) | Category | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Revenue: | | | | | Products | $172,412 | $237,211 | $182,294 | | Services | $5,361 | $5,895 | $5,939 | | Total Revenue | $177,773| $243,106| $188,233| | Operating expenses (excluding D&A): | | | | | Products | $152,846 | $182,330 | $140,108 | | Services | $6,962 | $6,414 | $3,875 | | Total Operating Expenses (excluding D&A) | $159,808| $188,744| $143,983| - The Company's contracts may include multiple performance obligations, with transaction prices allocated based on estimated relative standalone selling prices[456] - No revenue contracts give rise to contract assets or liabilities under ASC 606, as customers are invoiced once performance obligations are satisfied[457] - The Company elected practical expedients for short-term contracts (one year or less) and contracts where revenue is recognized at the amount to which it has a right to invoice[458][460] Note 8 — Supplemental Cash Flow Information Provides supplemental non-cash investing and financing activities and cash payment details for interest and income taxes Supplemental Non-Cash Investing and Financing Activities (2016-2018, in thousands) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------- | :--- | :----- | :----- | | Value of common stock issued in acquisitions | $— | $— | $3,268 |\ | Value of common stock issued in payment of accrued liability | $— | $188 | $— |\ | Exercise of stock options by common stock surrender | $— | $5,863 | $50 | Supplemental Cash Payment Information (2016-2018, in thousands) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------- | :----- | :------- | :----- | | Interest paid | $2,502 | $1,851 | $2,024 |\ | Income taxes (received, net of payments) paid, net of refunds | $(139) | $(10,195)| $333 | Note 9 — Inventories Details inventory composition, valuation at lower of cost or net realizable value, and changes in the reserve for excess and obsolete inventory Inventories (as of December 31, 2018 and 2017, in thousands) | Category | 2018 | 2017 | | :-------------------------------------- | :---------- | :---------- | | Raw materials | $10,608 | $13,462 | | Work-in-process | $— | $3 | | Finished goods | $18,798 | $19,363 | | Inventories | $29,406 | $32,828 | | Less reserve for excess and obsolete inventory | $(2,117) | $(368) | | Inventories, net | $27,289 | $32,460 | Changes in Reserve for Excess and Obsolete Inventory (2016-2018, in thousands) | Metric | 2018 | 2017 | 2016 | | :------------------------------ | :----- | :----- | :----- | | Balance, beginning of year | $368 | $50 | $50 | | Charged to costs and expenses | $2,418 | $388 | $— | | Deductions | $(669) | $(70) | $— | | Balance, end of the year | $2,117 | $368 | $50 | Note 10 — Property and Equipment Presents the composition of property and equipment, accumulated depreciation, and annual depreciation expense, with no impairments recorded Property and Equipment (as of December 31, 2018 and 2017, in thousands) | Category | 2018 | 2017 | | :-------------------------------- | :---------- | :---------- | | Land | $4,372 | $4,008 | | Buildings and leasehold improvements | $37,719 | $37,786 | | Machinery and equipment | $26,995 | $25,762 | | Fixed assets in progress | $581 | $3,573 | | Furniture and fixtures | $1,573 | $1,869 | | Transportation equipment | $1,852 | $1,802 | | Computer equipment and software | $9,370 | $12,044 | | Property and equipment | $82,462 | $86,844 | | Less accumulated depreciation | $(36,977) | $(34,058) |\ | Property and equipment, net | $45,485 | $52,786 | Depreciation Expense (2016-2018, in thousands) | Year Ended December 31, | Depreciation Expense | | :---------------------- | :------------------- | | 2018 | $7,800 | | 2017 | $8,400 | | 2016 | $6,600 | - No impairments were recognized related to property and equipment during 2018, 2017, and 2016[466] Note 11 — Goodwill Explains the annual goodwill impairment testing and the $37.2 million impairment charge recognized in Q2 2018 for the ECT reporting unit - The Company had no reporting units with a goodwill balance at December 31, 2018[467] - Goodwill is tested for impairment annually in Q4, or more frequently if circumstances indicate potential impairment; the Company adopted ASU 2017-04 in Q4 2017, eliminating Step 2 of the impairment test[468] - In Q2 2018, a goodwill impairment charge of $37.2 million was recognized in the Energy Chemistry Technologies (ECT) reporting unit due to sustained under-performance and lower expectations[469][470] - No impairments of goodwill were recognized during the years ended December 31, 2017 and 2016[475] Changes in Carrying Amount of Goodwill for ECT Reporting Unit (in thousands) | Metric | Amount | | :------------------------------------ | :----- | | Balance at December 31, 2016: | | | Goodwill | $37,180| | Accumulated impairment losses | $— | | Goodwill balance, net | $37,180| | Activity during the year 2017: | | | Goodwill impairment recognized | $— | | Acquisition goodwill recognized | $— | | Balance at December 31, 2017: | | | Goodwill | $37,180| | Accumulated impairment losses | $— | | Goodwill balance, net | $37,180| | Activity during the year 2018: | | | Goodwill impairment recognized | $(37,180)| | Acquisition goodwill recognized | $— | | Balance at December 31, 2018: | | | Goodwill | $37,180| | Accumulated impairment losses | $(37,180)| | Goodwill balance, net | $— | Note 12 — Other Intangible Assets Details the cost, accumulated amortization, and estimated future amortization of finite-lived intangible assets, with no impairments recorded Other Intangible Assets (as of December 31, 2018 and 2017, in thousands) | Category | 2018 Cost | 2018 Accumulated Amortization | 2017 Cost | 2017 Accumulated Amortization | | :-------------------------------- | :-------- | :---------------------------- | :-------- | :---------------------------- | | Finite lived intangible assets: | | | | | | Patents and technology | $18,884 | $6,689 | $9,457 | $3,144 | | Customer lists | $15,367 | $5,259 | $15,367 | $4,505 | | Trademarks and brand names | $1,485 | $1,149 | $1,532 | $1,114 | | Total finite lived intangible assets acquired | $35,736 | $13,097 | $26,356 | $8,763 | | Deferred financing costs | $1,924 | $496 | $1,791 | $96 | | Total amortizable intangible assets | $37,660 | $13,593 | $28,147 | $8,859 | | Indefinite lived intangible assets: | | | | | | Trademarks and brand names | $2,760 |