Flotek(FTK) - 2022 Q1 - Quarterly Report

Forward-Looking Statements This section outlines the nature of forward-looking statements within the report, emphasizing that they are based on current assumptions and beliefs about future events, inherently uncertain, and subject to risks. The company disclaims any obligation to update these statements publicly, except as required by law - Forward-looking statements are not historical facts but represent current assumptions and beliefs regarding future events, many of which are inherently uncertain and outside the Company's control[10] - These statements are identified by words such as 'anticipate,' 'believe,' 'estimate,' 'expect,' 'plan,' 'project,' and similar expressions, or future-tense constructions like 'will,' 'may,' 'should,' 'could,' and 'would'[11] - Actual results may differ materially from projections due to risks and uncertainties discussed in the Annual Report on Form 10-K for the year ended December 31, 2021[12] PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Flotek Industries, Inc., including the balance sheets, statements of operations, comprehensive loss, cash flows, and stockholders' equity, along with detailed notes explaining the company's organization, accounting policies, and specific financial items Unaudited Condensed Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | $24,835 | $11,534 | | Total current assets | $57,946 | $42,599 | | TOTAL ASSETS | $72,218 | $50,244 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $48,942 | $18,777 | | TOTAL LIABILITIES | $59,114 | $30,052 | | Total stockholders' equity | $13,104 | $20,192 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $72,218 | $50,244 | - Total assets increased by $21,974 thousand (43.7%) from December 31, 2021, to March 31, 2022, primarily driven by an increase in cash and cash equivalents and current contract assets[15] - Total current liabilities significantly increased by $30,165 thousand (160.6%), mainly due to the introduction of convertible notes payable and contingent convertible notes payable[15] Unaudited Condensed Consolidated Statements of Operations Details the company's revenues, costs, and expenses, leading to net loss for the reporting periods Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $12,879 | $11,770 | | Cost of goods sold | $13,358 | $12,080 | | Gross loss | $(479) | $(310) | | Total operating costs and expenses | $9,805 | $7,933 | | Loss from operations | $(10,284) | $(8,243) | | Net Loss | $(10,724) | $(8,300) | | Basic Loss per common share | $(0.15) | $(0.12) | | Diluted Loss per common share | $(0.15) | $(0.12) | - Total revenues increased by $1,109 thousand (9.4%) year-over-year, primarily driven by related party revenue in 2022[17] - Net Loss worsened by $2,424 thousand (29.2%) year-over-year, largely due to an increase in operating costs and expenses, including a $3,892 thousand change in fair value of contingent convertible notes payable[17] Unaudited Condensed Consolidated Statements of Comprehensive Loss Reports the net loss and other comprehensive income/loss components for the periods Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Loss | $(10,724) | $(8,300) | | Foreign currency translation adjustment | $8 | $49 | | Comprehensive Loss | $(10,716) | $(8,251) | - Comprehensive Loss increased by $2,465 thousand (29.9%) year-over-year, primarily reflecting the higher net loss[20] Unaudited Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(8,474) | $(5,265) | | Net cash provided by (used in) investing activities | $24 | $(17) | | Net cash provided by (used in) financing activities | $19,993 | $(81) | | Net change in cash, cash equivalents and restricted cash | $11,551 | $(5,340) | | Cash and cash equivalents at end of period | $24,835 | $33,945 | - Net cash used in operating activities increased by $3,209 thousand (60.9%) year-over-year[22] - Net cash provided by financing activities significantly increased to $19,993 thousand in 2022, primarily due to proceeds from the issuance of convertible notes[22] Unaudited Condensed Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts over the reporting period Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands, except shares) | Metric | Balance, Dec 31, 2021 | Net Loss | Foreign Currency Adj. | Stock Comp. Exp. | Conversion of Notes | Balance, Mar 31, 2022 | | :-------------------------------- | :-------------------- | :------- | :-------------------- | :--------------- | :------------------ | :-------------------- | | Common Stock (Shares Issued) | 79,484 | — | — | — | 2,793 | 82,564 | | Common Stock (Par Value) | $8 | — | — | — | — | $8 | | Additional Paid-in Capital | $363,417 | — | — | $739 | $2,948 | $367,104 | | Accumulated Deficit | $(309,214) | $(10,724) | — | — | — | $(319,938) | | Total Stockholders' Equity | $20,192 | $(10,724) | $8 | $739 | $2,948 | $13,104 | - Total stockholders' equity decreased from $20,192 thousand at December 31, 2021, to $13,104 thousand at March 31, 2022, primarily due to the net loss of $10,724 thousand, partially offset by the conversion of notes to common stock ($2,948 thousand) and stock compensation expense ($739 thousand)[23] Notes to Unaudited Condensed Consolidated Financial Statements Provides detailed explanations and additional information supporting the financial statements Note 1 — Organization and Nature of Operations Flotek Industries, Inc. is a technology-driven specialty green chemistry and data company focused on reducing the environmental impact of energy. It operates through two segments: Chemistry Technologies (CT) and Data Analytics (DA), both supported by Research & Innovation. The company has historically faced losses and negative cash flows but believes recent financing activities and asset sales will provide sufficient liquidity for the next twelve months - Flotek operates in two segments: Chemistry Technologies (CT), which develops green specialty chemicals, and Data Analytics (DA), which provides real-time hydrocarbon stream analytics[26][27] - The Company completed a PIPE transaction on February 2, 2022, issuing $21.2 million in convertible notes, resulting in $19.5 million net cash proceeds[29] - Flotek entered into a long-term supply agreement with ProFrac Services, LLC, issuing $10 million in contingent convertible notes payable, obligating ProFrac to order chemicals for at least 33% of its hydraulic fracturing fleets[29] - The company sold its Waller manufacturing facility for $4.3 million gross proceeds on April 18, 2022, and believes current cash and liquid assets are sufficient for the next twelve months[30][31] Note 2 — Summary of Significant Accounting Policies This note details the significant accounting policies used in preparing the unaudited condensed consolidated financial statements, including basis of presentation, cash equivalents, restricted cash, accounts receivable, inventories, property and equipment, liability classified convertible notes, fair value measurements, revenue recognition, foreign currency translation, comprehensive loss, R&D costs, income taxes, stock-based compensation, use of estimates, reclassifications, and recent accounting pronouncements - Restricted cash decreased from $1.8 million at December 31, 2021, to $40 thousand at March 31, 2022, primarily due to the payment of $1.75 million for a legal settlement[36] - Inventories are stated at the lower of cost (weighted-average method) or net realizable value, with provisions for excess and obsolete inventory[39] - The Company adopted ASU No. 2020-06 (Accounting for Convertible Instruments) and ASU No. 2021-10 (Government Assistance Disclosures) as of January 1, 2022, with no material impact on financial statements[63][64] - The Contingent Convertible Notes Payable are accounted for as liability classified convertible instruments, measured at fair value at each reporting date, with changes recognized in the consolidated statements of operations[44] Note 3 — Revenue from Contracts with Customers This note describes the company's revenue recognition policies, which follow a five-step model for transferring control of goods or services. Revenue is disaggregated by product sales (point-in-time) and service revenue (over-time). The company recorded $10.6 million in contract assets related to the ProFrac Agreement, which will be amortized against revenues over the three-year contract term Revenue Disaggregated by Source (in thousands) | Revenue Source | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--------------- | :-------------------------------- | :-------------------------------- | | Products | $12,199 | $11,082 | | Services | $680 | $688 | | Total | $12,879 | $11,770 | - Product revenues for 2022 include sales to a related party, contributing to the increase in product revenue[68] - Contract assets of $10.6 million were recorded for the Contingent Convertible Notes Payable issued as consideration for the ProFrac Agreement, to be amortized over the three-year contract term starting April 1, 2022[71][72] Note 4 — Inventories This note provides a breakdown of inventories, including raw materials and finished goods, and the reserve for excess and obsolete inventory. The company recorded a provision for excess and obsolete inventory for its CT segment Inventories (in thousands) | Inventory Type | March 31, 2022 | December 31, 2021 | | :--------------- | :------------- | :---------------- | | Raw materials | $5,474 | $5,610 | | Finished goods | $14,544 | $13,985 | | Inventories | $20,018 | $19,595 | | Less reserve for excess and obsolete inventory | $(9,875) | $(10,141) | | Inventories, net | $10,143 | $9,454 | - Net inventories increased by $689 thousand (7.3%) from December 31, 2021, to March 31, 2022[73] - A provision of $0.3 million for excess and obsolete inventory was recorded for the CT segment during the three months ended March 31, 2022[73] Note 5 — Property and Equipment This note details the company's property and equipment, net of accumulated depreciation. It also mentions the reclassification of certain facilities as held for sale and the subsequent sale of the Waller facility Property and Equipment, Net (in thousands) | Asset Category | March 31, 2022 | December 31, 2021 | | :--------------- | :------------- | :---------------- | | Property and equipment | $16,174 | $16,396 | | Less accumulated depreciation | $(11,095) | $(11,100) | | Property and equipment, net | $5,079 | $5,296 | - Depreciation expense totaled $0.2 million for the three months ended March 31, 2022, a decrease from $0.3 million in the prior year[74] - Assets totaling $2.8 million, including the Monahans warehouse and Waller manufacturing facility, were classified as held for sale. The Waller facility was sold for $4.3 million gross proceeds on April 18, 2022[74] Note 6 — Leases This note provides information on the company's lease agreements, including rental income from leased facilities and the termination of a lease in Calgary, Alberta, which resulted in a gain. It also details lease expense components, cash flows related to leases, and maturities of lease liabilities - The Company recognized rental income of $121 thousand from its Waller facility and $185 thousand from its Monahans warehouse during the three months ended March 31, 2022[75][76] - A gain on lease termination of $0.6 million was recorded for the early termination of the Calgary facility lease in March 2022[77] Total Lease Expense (in thousands) | Lease Type | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Operating lease expense | $228 | $238 | | Finance lease expense | $7 | $7 | | Short-term lease expense | $124 | $69 | | Total lease expense | $359 | $314 | Note 7 — Accrued Liabilities This note presents a breakdown of current accrued liabilities, showing changes in severance costs, loss on purchase commitments, payroll and benefits, legal costs, contingent liability for earn-out provision, deferred revenue, and taxes Current Accrued Liabilities (in thousands) | Liability Type | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Severance costs | $2,584 | $2,581 | | Loss on purchase commitments (Note 11) | — | $1,750 | | Payroll and benefits | $993 | $1,054 | | Legal costs | $885 | $1,013 | | Contingent liability for earn-out provision | $702 | $608 | | Deferred revenue, current | $567 | $528 | | Taxes other than income taxes | $304 | $241 | | Other | $712 | $1,221 | | Total current accrued liabilities | $6,747 | $8,996 | - Total current accrued liabilities decreased by $2,249 thousand (25.0%) from December 31, 2021, to March 31, 2022, primarily due to the payment of the $1.75 million loss on purchase commitments (ADM Settlement)[82] Note 8 — Debt and Convertible Notes Payable This note details the company's debt, including the Flotek PPP loan and newly issued convertible notes. It describes the PIPE transaction, the issuance of $21.2 million in convertible notes, and the $10 million contingent convertible notes payable issued in exchange for the ProFrac Agreement, outlining their terms and conversion features - The Flotek PPP loan of $4.8 million had its maturity date extended to April 15, 2025, and an application for forgiveness is pending[88][89] - On February 2, 2022, Flotek issued $21.2 million in 10% convertible notes in a PIPE transaction, resulting in $19.5 million net cash proceeds. $3.0 million of these notes were converted into common stock by March 31, 2022[90] - The Company issued $10 million in contingent convertible notes payable to ProFrac Holdings, LLC, as consideration for a long-term supply agreement with ProFrac Services, LLC, obligating ProFrac to minimum chemical orders[93] - The Contingent Convertible Notes Payable were initially recorded at $10.0 million fair value and remeasured to $14.1 million as of March 31, 2022[95] Note 9 — Fair Value Measurements This note explains the company's fair value measurement hierarchy (Level 1, 2, and 3) and provides details on liabilities measured at fair value on a recurring basis, specifically the contingent earn-out consideration and contingent convertible notes payable. It also outlines the key inputs used in the Monte Carlo simulation models for these valuations Liabilities Measured at Fair Value on a Recurring Basis (in thousands) | Liability | March 31, 2022 (Level 3) | December 31, 2021 (Level 3) | | :-------------------------- | :----------------------- | :-------------------------- | | Contingent earnout consideration | $702 | $608 | | Contingent convertible notes | $14,050 | — | | Total | $14,752 | $608 | - The fair value of the contingent earn-out provision increased from $608 thousand to $702 thousand, valued using a Monte Carlo model with inputs like risk-free interest rate (2.45%), expected volatility (90.0%), and stock price ($1.26)[100][101] - The Contingent Convertible Notes Payable were initially valued at $10.0 million (Level 2) and remeasured to $14.1 million (Level 3) as of March 31, 2022, using a Monte Carlo simulation[101][106] Note 10 — Income Taxes This note reconciles the U.S. federal statutory tax rate to the company's effective income tax rate, highlighting the impact of state income taxes, non-U.S. income, stock-based awards, valuation allowance, and permanent differences. It also explains the recognition of deferred tax assets and liabilities Effective Income Tax Rate Reconciliation | Item | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | U.S. federal statutory tax rate | 21.0 % | 21.0 % | | State income taxes, net of federal benefit | 0.1 % | (0.1) % | | Non-U.S. income taxed at different rates | 0.2 % | 0.6 % | | Increase (reduction) in tax benefit related to stock-based awards | (0.1) % | 0.1 % | | Increase in valuation allowance | (20.8) % | (21.7) % | | Permanent differences | (0.4) % | — % | | Effective income tax rate | — % | (0.1) % | - The effective income tax rate was minimal for both periods, primarily due to the significant increase in valuation allowance offsetting deferred tax assets[108] Note 11 — Commitments and Contingencies This note addresses the company's legal proceedings and other commitments. It details the resolution of the terpene supply agreement lawsuit with ADM, resulting in a $1.75 million settlement payment. It also mentions ongoing arbitration and legal proceedings against the former CEO and other parties regarding irregularities - The company settled the terpene supply agreement lawsuit with ADM on October 29, 2021, resulting in a $1.75 million settlement payment from Flotek and a $7.6 million gain recorded in cost of goods sold[115] - Flotek initiated legal proceedings against its former CEO, John Chisholm, and other parties following an internal investigation into expense irregularities and related party transactions[116][117] - The company is subject to credit risk concentrations within trade accounts receivable, particularly in the cyclical energy industry, and its cash is concentrated in three major U.S. financial institutions[118] Note 12 — Stockholders' Equity This note clarifies an adjustment made in the first quarter of 2021 regarding improperly included shares in the December 31, 2020, issued share count, which was not material to the financial statements - In Q1 2021, the Company identified and adjusted 0.6 million shares improperly included in the December 31, 2020, issued share count, with no material impact on financial statements or EPS[120] Note 13 — Earnings (Loss) Per Share This note explains the calculation of basic and diluted earnings (loss) per common share. It states that potentially dilutive securities were excluded from diluted loss per share calculations for both periods due to their anti-dilutive effect - Potentially dilutive securities, including convertible notes (26.3 million shares), restricted stock units (0.8 million), and stock options (4.3 million), were excluded from diluted loss per share calculations for the three months ended March 31, 2022, because their inclusion would have an anti-dilutive effect[122] Note 14 — Supplemental Cash Flow Information This note provides supplemental cash flow information, including interest paid, income taxes received, and non-cash financing and investing activities such as the issuance and conversion of convertible notes Supplemental Cash Flow Information (in thousands) | Item | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Interest paid | $5 | $6 | | Income taxes received | — | $(351) | | Issuance of convertible notes payable for customer contract | $10,000 | — | | Conversion of convertible notes payable to common stock | $2,949 | — | Note 15 — Related Party Transaction This note details related party transactions, including an IRS matter involving the former CEO, Mr. Chisholm, and chemical sales to Confluence Resources LP (where a director is CEO) and ProFrac. It highlights the financial impact of these relationships on receivables and revenues - The Company has a $1.4 million receivable from former CEO Mr. Chisholm related to an IRS employment tax matter, which is netted against his severance liability[126] - Revenues from chemical sales to Confluence Resources LP (a related party) were $1.4 million for the three months ended March 31, 2022, with $1.4 million owed to the Company[128] - Revenues from chemical sales to ProFrac (a related party) were $1.1 million for the three months ended March 31, 2022, with $1.1 million owed to the Company[129] Note 16 — Business Segment, Geographic and Major Customer Information This note provides disaggregated financial information for the company's two reportable segments: Chemistry Technologies (CT) and Data Analytics (DA). It also presents revenue by geographic location and identifies major customers, highlighting the concentration of revenue within the oil and gas industry Segment Revenue and Loss from Operations (in thousands) | Segment | Revenue from external customers (2022) | Revenue from related party (2022) | Loss from operations (2022) | Revenue from external customers (2021) | Revenue from related party (2021) | Loss from operations (2021) | | :--------------------- | :----------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :-------------------------- | :-------------------------- | | Chemistry Technologies | $9,311 | $2,497 | $(6,057) | $10,302 | — | $(3,589) | | Data Analytics | $1,071 | — | $(808) | $1,468 | — | $(292) | | Corporate and Other | — | — | $(3,419) | — | — | $(4,362) | | Total | $10,382 | $2,497 | $(10,284) | $11,770 | — | $(8,243) | Revenue by Geographic Location (in thousands) | Country | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------- | :-------------------------------- | :-------------------------------- | | U.S. | $10,334 | $9,661 | | UAE | $1,311 | $1,103 | | Other countries | $1,234 | $1,006 | | Total revenue | $12,879 | $11,770 | Major Customer Revenue (as % of Total Revenue) | Customer | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--------- | :-------------------------------- | :-------------------------------- | | Customer B | 20.2 % | 24.2 % | | Customer C (Related Party) | 10.8 % | — % | | Customer A | — % | 25.7 % | Note 17 — Subsequent Events This note discloses significant events that occurred after March 31, 2022. It details the expansion of the ProFrac Agreement to a ten-year term, an increase in minimum purchase obligations, the issuance of an additional $50 million in convertible notes to ProFrac, and the successful stockholder approval of these transactions. It also confirms the closing of the Waller manufacturing facility sale - On February 16, 2022, the Company entered into a transaction with ProFrac Holdings, LLC to expand the ProFrac Agreement to a ten-year term and increase minimum purchase obligations to 70% of ProFrac Services' requirements or a baseline of 30 hydraulic fracturing fleets[144] - As part of the expanded ProFrac transaction, Flotek will issue an additional $50 million in 10% PIK notes convertible into common stock to ProFrac and grant ProFrac the right to designate two additional board nominees (totaling four out of seven)[144] - Stockholders approved the ProFrac transaction, authorized an increase in common stock, and a reverse stock split on May 9, 2022, with closing expected in Q2 2022[145] - The sale of the Waller manufacturing facility for $4.3 million closed on April 18, 2022, expected to result in an estimated gain on sale of $1.9 million[146] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2022, compared to the same period in 2021. It covers an executive summary, company overview, business outlook, consolidated and segment-specific financial results, and an analysis of capital resources and liquidity Executive Summary Provides a high-level overview of Flotek Industries, Inc.'s business and financial performance - Flotek Industries, Inc. is a technology-driven specialty green chemistry and data technology company focused on reducing the environmental impact of energy and improving ESG performance across industrial, commercial, and consumer markets[148] - The Company operates through two segments: Chemistry Technologies (CT) and Data Analytics (DA), both supported by Research and Innovation capabilities[149] Company Overview Describes Flotek Industries, Inc.'s business model, segments, and strategic focus Chemistry Technologies The Chemistry Technologies (CT) segment provides sustainable, optimized chemistry solutions to maximize customer value by enhancing ESG performance, lowering operational costs, and improving return on invested capital. Its proprietary green chemistries and services cater to energy-related markets, as well as consumer and industrial applications, focusing on reducing environmental impact - The CT segment offers sustainable chemistry solutions, including proprietary green chemistries, logistics, and technology services, to improve efficiencies and ESG performance for customers[151] - Customers include major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, and national/state-owned oil companies, as well as consumer and industrial sectors[152] Data Analytics The Data Analytics (DA) segment delivers real-time information and insights through its field-deployable, in-line optical near-infra-red spectrometer. This technology, combined with advanced chemometrics, AI, and machine learning, provides compositional and physical property data every 15 seconds, enabling operational optimization, emission reduction, and increased profitability for customers in the oil and gas market - The DA segment provides real-time composition and physical property data for refined fuels, NGLs, natural gas, crude oil, and condensates using an in-line optical near-infra-red spectrometer[153] - This technology, leveraging AI and machine learning, delivers insights every 15 seconds, helping customers optimize operations, reduce emissions, and increase profits[153][154] Research & Innovation The Research & Innovation (R&I) division supports both CT and DA segments by accelerating ESG solutions through green chemistry formulation, technical support, basin studies, data analytics, and new technology projects. R&I aims to enhance products and services, generate future revenues, and advise management on technology and industry trends - R&I supports both CT and DA segments by focusing on green chemistry formulation, specialty chemical formulations, regulatory guidance, technical support, and new technology projects[155] - The purpose of R&I is to supply enhanced products and services that generate current and future revenues, while advising on technology, environmental, and industry trends[155] Outlook Presents the company's expectations and projections for future market conditions and business performance Energy The company anticipates continued improvement in North American and International onshore activity throughout 2022, provided commodity prices remain stable. Private exploration and production companies are expected to drive the strongest growth, with modest increases from publicly traded companies. Sales through indirect channels are also projected to accelerate - North American and International onshore activity is expected to improve throughout 2022, contingent on stable commodity prices[157] - Private exploration and production companies are anticipated to lead growth, with publicly traded companies showing modest spending increases[157] Industrial Flotek launched a diversified line of EPA and FDA compliant products for industrial, agricultural, and consumer markets, focusing on sustainability. The company has signed four manufacturing sales representation groups covering 48 states, expecting accelerated sales in the second half of 2022 after training - The Company launched a diversified line of EPA and FDA compliant products for industrial, agricultural, and consumer markets, including adjuvants, disinfectants, and cleaners[158][159] - Four manufacturing sales representation groups covering 48 states have been signed, with anticipated sales acceleration in the second half of 2022 following training[159] Digital Analytics The Digital Analytics segment continues to gain traction in North America with its real-time Verax analyzer technology, providing critical compositional information for operational optimization and emission reduction. The company expects to expand its international customer base with newly certified analyzers designed for extreme outdoor environments and anticipates increased international sales over the next twelve months - Verax analyzers provide real-time insights on valuable operations data like vapor pressure, boiling point, and octane level, enabling process and operational efficiencies[160] - New generation, internationally certified online analyzers are expected to increase international sales over the next twelve months, designed for extreme outdoor environments[160] - AIDA (Automated Interface Detection Algorithm) enhances value by providing real-time detection of interfaces in liquid pipelines, reducing transmix and off-spec products[160] ESG ESG-focused solutions remain a key emphasis for Flotek, as its products and services help customers improve safety, reliability, and efficiency while reducing environmental impact. The company's plant-based Complex nano-Fluid® (CnF®) products offer sustainable alternatives to toxic chemicals, and its real-time sensor technology minimizes waste and emissions, aligning with the industry's focus on a 'social license to operate' - ESG-focused solutions are a core emphasis, with products and services designed to improve safety, reliability, and efficiency while reducing environmental impact[161] - The patented Complex nano-Fluid® (CnF®) products use plant-based solvents as safer, renewable alternatives to toxic BTEX-based chemicals[161] - Real-time sensor technology contributes to process efficiencies, waste minimization, and emission reduction[161] Supply Chain The company anticipates ongoing supply chain challenges in 2022, including rising freight costs, port congestion, labor shortages, and demand forecasting issues. These factors will impact bidding, shipping costs, and raw material imports, with potential disruptions from accelerating U.S.-China tensions - Anticipated supply chain issues for the next twelve months include rising freight costs, delays due to port congestion, labor shortages, and demand forecasting challenges[163] - Shipping costs and delays will need to be factored into proposals, impacting North American opportunities and international sales of manufactured goods[163][164] Weather No major weather events materially impacted the company's first-quarter results in 2022 - No major weather events had a material impact on first-quarter results for 2022[165] COVID-19 The company believes its established COVID-19 protocols have been robust enough to mitigate business disruption, unless new variants emerge. The resumption of in-person customer visits, which accelerated in Q1 2022, is expected to continue - COVID-19 protocols have proven robust enough to diminish concern about business disruption, assuming no new variants emerge[166] - In-person customer visits, which accelerated in Q1 2022, are expected to continue to increase[166] Consolidated Results of Operations Consolidated revenue increased by 9.4% year-over-year, driven by the CT segment and related party activity, partially offset by a decrease in the DA segment. Gross loss worsened, and loss from operations increased by 24.8%, primarily due to the revaluation of convertible notes payable, despite reductions in SG&A, depreciation, and R&D expenses Consolidated Results of Operations (in thousands) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $12,879 | $11,770 | | Cost of goods sold | $13,358 | $12,080 | | Gross loss | $(479) | $(310) | | Selling general and administrative | $4,879 | $6,082 | | Research and development | $1,415 | $1,542 | | Change in fair value of convertible notes payable | $3,892 | — | | Loss from operations | $(10,284) | $(8,243) | | Net Loss | $(10,724) | $(8,300) | - Consolidated revenue increased by $1.1 million (9.4%) year-over-year, driven by the CT segment and increased related party activity, partially offset by a $0.4 million decrease in the DA segment[167] - Loss from operations worsened by $2.0 million (24.8%), primarily due to the $3.9 million revaluation of convertible notes payable, despite a $1.2 million decrease in SG&A expenses[168][172] Results by Segment Analyzes the financial performance of the Chemistry Technologies and Data Analytics segments Chemistry Technologies Results of Operations CT segment revenue increased by $1.5 million compared to 2021, driven by industry consolidation and related party activity. However, the loss from operations worsened by $2.4 million, primarily due to the $3.9 million revaluation of the convertible note, partially offset by increased revenues and lower personnel/rental costs Chemistry Technologies Segment Performance (in thousands) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------ | :-------------------------------- | :-------------------------------- | | Revenue | $11,808 | $10,302 | | Loss from operations | $(6,057) | $(3,589) | - CT revenue increased by $1.5 million, driven by industry consolidation and increased related party activity[174] - Loss from operations worsened by $2.4 million (68.8%), primarily due to the $3.9 million revaluation of the convertible note, partially offset by increased revenues and lower operating costs[175] Data Analytics Results of Operations DA segment revenue decreased by $0.4 million compared to 2021 due to non-recurring orders in the prior year. The loss from operations worsened by $0.5 million, primarily as a result of this revenue decrease and the fair value adjustment of the JP3 earnout Data Analytics Segment Performance (in thousands) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :------------------ | :-------------------------------- | :-------------------------------- | | Revenue | $1,071 | $1,468 | | Loss from operations | $(808) | $(292) | - DA revenue decreased by $0.4 million due to one-time orders in 2021 not repeated in 2022[176] - Loss from operations worsened by $0.5 million (176.7%), primarily due to decreased revenues and the fair value adjustment of the JP3 earnout[176] Capital Resources and Liquidity Discusses the company's financial resources, funding strategies, and ability to meet short-term obligations Overview The company's capital requirements primarily involve equipment acquisition, maintenance, and working capital. In Q1 2022, these needs were funded by convertible note proceeds and existing cash. As of March 31, 2022, cash and cash equivalents stood at $24.8 million, with an operating loss of $10.7 million and $20.0 million cash provided by financing activities - Capital requirements are primarily for equipment acquisition, maintenance, and working capital, funded by convertible note proceeds and cash on hand in Q1 2022[177] - As of March 31, 2022, cash and cash equivalents were $24.8 million, up from $11.5 million at December 31, 2021[178] - The company reported an operating loss of $10.7 million, $8.5 million cash used in operating activities, and $20.0 million cash provided by financing activities for the three months ended March 31, 2022[178] Liquidity Flotek funds operations primarily from cash on hand, with access to capital dependent on operating cash flows and debt/equity financing. Despite a history of losses and negative operating cash flows, the company believes its current cash and liquid assets, including recent financing and asset sales, will be sufficient for the next 12 months, though market uncertainties could impact this - The company funds operations primarily from cash on hand, with access to capital dependent on operating cash flows and debt/equity financing[179] - A PIPE transaction on February 2, 2022, generated $19.5 million net cash proceeds from $21.2 million in convertible notes[179] - The long-term supply agreement with ProFrac Services, LLC, involved the issuance of $10 million in convertible notes, with minimum purchase obligations and liquidated damages clauses[179] - The sale of the Waller manufacturing facility for $4.3 million gross proceeds closed in April 2022[180] Cash Flows Net cash used in operating activities increased to $8.5 million in Q1 2022 from $5.3 million in Q1 2021, driven by a higher net loss and changes in working capital. Net cash provided by financing activities significantly increased to $20.0 million due to proceeds from convertible notes, offsetting the operating cash outflow Consolidated Cash Flows (in thousands) | Activity | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(8,474) | $(5,265) | | Net cash provided by (used in) investing activities | $24 | $(17) | | Net cash provided by (used in) financing activities | $19,993 | $(81) | | Net change in cash, cash equivalents and restricted cash | $11,551 | $(5,340) | - Net cash used in operating activities increased by $3.2 million, primarily due to a higher net loss ($10.7 million in 2022 vs. $8.3 million in 2021) and a $3.3 million cash usage from changes in working capital[183][185] - Net cash provided by financing activities was $20.0 million, mainly from the issuance of convertible notes, a significant increase from $0.1 million used in the prior year[187] Off-Balance Sheet Arrangements The company has no off-balance sheet arrangements, guarantees to customers or vendors, or commitments that are reasonably likely to have a material effect on its financial condition, other than the long-term terpene agreement discussed in Note 11 - The Company has no off-balance sheet arrangements, guarantees to customers or vendors, or material commitments other than the long-term terpene agreement discussed in Note 11[188][189] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that there have been no material changes to the company's quantitative or qualitative disclosures about market risk, which include exposure to changes in interest rates, commodity prices, and foreign currency exchange rates, as previously reported in its Annual Report - The Company is exposed to market risk from changes in interest rates, commodity prices, and foreign currency exchange rates[190] - There have been no material changes to the quantitative or qualitative disclosures about market risk since the Company's Annual Report[190] Item 4. Controls and Procedures This section confirms that the company's disclosure controls and procedures were effective as of March 31, 2022, providing reasonable assurance that information is recorded, processed, and reported timely. It also states that there have been no material changes in internal controls over financial reporting during the quarter - The Company's disclosure controls and procedures were effective as of March 31, 2022, ensuring timely and accurate financial reporting[191][192] - No material changes in the Company's internal control over financial reporting occurred during the three months ended March 31, 2022[192] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section states that there have been no material changes to the company's legal proceedings since its Annual Report on Form 10-K filed on March 31, 2022 - No material changes in legal proceedings have occurred since the Annual Report on Form 10-K filed on March 31, 2022[194] Item 1A. Risk Factors This section refers readers to the Risk Factors discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2021, for a detailed discussion of potential risks and uncertainties - Risk factors are discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2021[12] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section incorporates by reference disclosures from the Notes to Unaudited Condensed Consolidated Financial Statements regarding unregistered sales of equity securities, specifically convertible notes. It also details the company's repurchases of equity securities to satisfy tax liabilities related to stock compensation plans - Disclosures regarding unregistered sales of equity securities, including convertible notes, are incorporated by reference from Note 8 and Note 17[195] Issuer Purchases of Equity Securities | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------------------ | :----------------------------- | :--------------------------- | | January 1, 2022 to January 31, 2022 | 5,853 | $1.11 | | February 1, 2022 to February 28, 2022 | 2,471 | $0.82 | | March 1, 2021 to March 31, 2022 | 28,206 | $1.41 | | Total | 36,530 | | - Shares are repurchased to satisfy tax withholding requirements and payment remittance obligations related to restricted shares and stock options[196] Item 3. Defaults Upon Senior Securities This section states that there have been no defaults upon senior securities - There are no defaults upon senior securities[197] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[198] Item 5. Other Information This section states that there is no other information to report - No other information is reported in this section[198] Item 6. Exhibits This section provides a list of exhibits filed with the Form 10-Q, including organizational documents, forms of convertible notes and warrants, and various agreements such as the Note Purchase Agreement, Registration Rights Agreement, Chemical Products Supply Agreement, and Master Transaction Agreement - Key exhibits include Amended and Restated Certificate of Incorporation, Second Amended and Restated Bylaws, Form of Convertible Note, Note Purchase Agreement, Registration Rights Agreement, Chemical Products Supply Agreement, and Master Transaction Agreement[200] - Certifications by the Principal Executive Officer and Principal Financial Officer (Rule 13a-14(a) and Section 1350) are also filed or furnished[200] SIGNATURES This section contains the signatures of the registrant's authorized officers, including the President, Chief Executive Officer, Chairman of the Board, and Chief Financial Officer, confirming the due submission of the report - The report is signed by John W. Gibson, Jr., President, Chief Executive Officer, and Chairman of the Board, and Michael E. Borton, Chief Financial Officer, on May 16, 2022[203][204]