Flotek(FTK) - 2019 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements The financial statements reflect a significant structural change due to the sale of the Consumer and Industrial Chemistry Technologies (CICT) segment, now classified as discontinued operations Notes to Unaudited Condensed Consolidated Financial Statements The notes detail significant corporate events and accounting policies, including the sale of the CICT segment, debt repayment, and adoption of new lease accounting standards - On February 28, 2019, the company completed the sale of its CICT segment to Archer-Daniels-Midland Company (ADM) for $175.0 million in cash[41][42] - Concurrent with the CICT sale, the company executed a long-term supply agreement for terpene through September 2023, with a remaining minimum commitment of $72 million as of September 30, 2019[44] - On March 1, 2019, the company repaid the outstanding balance and terminated its Credit Facility with PNC Bank, expensing the remaining $1.4 million in deferred financing costs[68] - The company now operates under one reportable segment: Energy Chemistry Technologies, which generated $99.8 million in revenue and had a loss from operations of $19.0 million for the nine months ended September 30, 2019[81][85] - An IRS examination concerning employment taxes related to the CEO's compensation resulted in the company recording a liability, with the CEO's affiliated companies agreeing to indemnify the company for any such taxes[92][93] Income from Discontinued Operations (CICT Segment) (in thousands) | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Revenue | $11,031 | $56,267 | | Gain on sale of business | $67,842 | $0 | | Net income from discontinued operations | $46,881 | $4,176 | - The Consumer and Industrial Chemistry Technologies (CICT) segment was classified as held for sale in Q4 2018 and its results are presented as discontinued operations, with the sale completed on February 28, 2019[27][39][42] Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $106,994 | $3,044 | | Accounts receivable, net | $15,014 | $37,047 | | Inventories, net | $24,333 | $27,289 | | Assets held for sale | $0 | $118,470 | | Total Assets | $249,357 | $285,883 | | Liabilities & Equity | | | | Total current liabilities | $19,413 | $84,259 | | Long-term debt, classified as current | $0 | $49,731 | | Total Liabilities | $37,646 | $84,259 | | Total stockholders' equity | $211,711 | $201,624 | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $21,879 | $53,709 | $99,827 | $134,324 | | Loss from continuing operations | $(11,227) | $(4,843) | $(39,597) | $(83,432) | | Income from discontinued operations, net of tax | $117 | $911 | $46,881 | $4,176 | | Net Income (Loss) | $(11,110) | $(3,932) | $7,284 | $(79,256) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(13,685) | $(24,781) | | Net cash (used in) provided by investing activities | $167,497 | $(3,405) | | Net cash (used in) provided by financing activities | $(49,880) | $25,247 | | Net increase (decrease) in cash | $103,950 | $(2,755) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 59.3% year-over-year revenue decline to market volatility and sales organization transition, while the company's financial position strengthened significantly post-CICT sale - The decrease in revenue was attributed to a volatile macro-environment for U.S. onshore activity, transition of sales personnel, and deferral of completion activity by clients[119] - The company's strategy focuses on promoting its Complex nano-Fluid® (CnF®) chemistries and Prescriptive Chemistry Management® (PCM®) offering, targeting E&P companies that are increasingly sourcing consumables directly[111] - As of September 30, 2019, the company had $107.0 million in cash and cash equivalents and had terminated its credit facility, with a Strategic Capital Committee evaluating the deployment of net proceeds from the CICT sale[141] Consolidated Results of Operations Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Revenue | $21,879 | $53,709 | | % Change | -59.3% | | | Loss from operations | $(11,853) | $(4,080) | | Loss from continuing operations | $(11,227) | $(4,843) | North American Drilling Activity (% Change Y-o-Y) | Metric | Q3 2019 vs Q3 2018 | YTD 2019 vs YTD 2018 | | :--- | :--- | :--- | | Average U.S. Active Drilling Rigs | -12.5% | -3.3% | | Average Canada Active Drilling Rigs | -36.8% | -32.3% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes to the quantitative or qualitative disclosures about market risk from those set forth in its Annual Report - There have been no material changes to the quantitative or qualitative disclosures about market risk, which include exposure to interest rates, commodity prices, and foreign currency exchange rates[155] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control over financial reporting during the third quarter - Based on an evaluation as of September 30, 2019, the principal executive and financial officers concluded that the company's disclosure controls and procedures were effective[157] - There were no changes in the company's internal control over financial reporting during the third quarter of 2019 that had a material effect[158] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is subject to routine litigation in the normal course of business, with no pending or threatened lawsuits expected to have a material effect on its financial position - Management is not aware of any pending or threatened lawsuits expected to have a material effect on the Company's financial position, results of operations or liquidity[161] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2018 Annual Report on Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 - There have been no material changes to the risk factors detailed in the Company's 2018 Annual Report on Form 10-K and the Q1 2019 Form 10-Q[162] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of 2019, the company repurchased 29,397 shares to satisfy tax withholding requirements, with $49.7 million remaining available under the authorized repurchase program - During Q3 2019, the company repurchased 29,397 shares to satisfy tax withholding obligations related to vested restricted shares, not as part of its public repurchase program[164][165] - As of September 30, 2019, $49.7 million remained available for share repurchases under the Board's authorization from June 2015[166] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[167] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[168] Item 5. Other Information The company reports no other information for this item - None[169] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Share Purchase Agreement with ADM, corporate governance documents, officer certifications, and XBRL data files