Flotek(US:FTK)2023-08-08 16:00PART I - FINANCIAL INFORMATION Financial Statements This section presents Flotek Industries' unaudited condensed consolidated financial statements for Q2 and H1 2023, including balance sheets, statements of operations, cash flows, and notes, with a key disclosure on going concern Unaudited Condensed Consolidated Balance Sheets This section presents the company's unaudited condensed consolidated balance sheets as of June 30, 2023, and December 31, 2022, highlighting changes in liabilities and equity Condensed Consolidated Balance Sheet Data (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $8,841 | $12,290 | | Total current assets | $78,994 | $81,087 | | TOTAL ASSETS | $158,030 | $164,810 | | Liabilities & Equity | | | | Total current liabilities | $53,257 | $151,371 | | TOTAL LIABILITIES | $60,028 | $162,214 | | Total stockholders' equity | $98,002 | $2,596 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $158,030 | $164,810 | - Total liabilities significantly decreased from $162.2 million at year-end 2022 to $60.0 million as of June 30, 2023, primarily due to the conversion of convertible notes payable, consequently, total stockholders' equity increased from $2.6 million to $98.0 million16 Unaudited Condensed Consolidated Statements of Operations This section presents the company's unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022, detailing revenue, gross profit, and net income trends Condensed Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $50,594 | $29,373 | $98,602 | $42,252 | | Gross profit (loss) | $3,904 | $(2,305) | $5,785 | $(2,784) | | Income (loss) from operations | $672 | $8,039 | $19,184 | $(2,245) | | Net income (loss) | $(21) | $6,240 | $21,322 | $(4,484) | - Revenue for Q2 2023 increased 72% YoY to $50.6 million, driven by a significant increase from a related party, shifting from a gross loss to a gross profit, while H1 2023 net income was $21.3 million, a substantial improvement from a $4.5 million net loss in H1 2022, largely due to fair value gains and PPP loan forgiveness17 Unaudited Condensed Consolidated Statements of Cash Flows This section presents the company's unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2023 and 2022, detailing cash movements across operating, investing, and financing activities Condensed Consolidated Statements of Cash Flow (in thousands) | Cash Flow Activity | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,234) | $(23,915) | | Net cash (used in) provided by investing activities | $(292) | $4,189 | | Net cash (used in) provided by financing activities | $(888) | $39,431 | | Net change in cash and cash equivalents | $(3,448) | $19,800 | - Cash used in operating activities significantly decreased to $2.2 million in H1 2023 from $23.9 million in H1 2022, with the prior year period benefiting from $39.4 million in cash from financing activities, primarily from convertible notes and warrants issuance22 Notes to Unaudited Condensed Consolidated Financial Statements These notes provide critical details on accounting policies, financial statement items, and key disclosures, including the going concern uncertainty, revenue disaggregation, debt and convertible note conversions, PPP loan forgiveness, related-party transactions, and segment performance - The company has substantial doubt about its ability to continue as a going concern due to a history of losses and negative cash flows, with future operations highly dependent on cash flows from the ProFrac Agreement and potential capital raises3637 - On January 5, 2023, the company received notice that $4.5 million of its Paycheck Protection Program (PPP) loan and accrued interest was forgiven, recorded as a gain100 - In Q1 and Q2 2023, various convertible notes, including those related to the ProFrac Agreement, were converted into common stock and pre-funded warrants upon maturity, significantly altering the company's capital structure103108111 - A settlement with former CEO John Chisholm resulted in the reversal of $2.3 million of accrued severance costs during Q2 2023136 Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial performance and condition, detailing significant Q2 2023 revenue growth driven by the ProFrac agreement, segment results, liquidity challenges, going concern uncertainty, and material weakness in internal controls Company Overview This section provides an overview of Flotek's operations, which are structured into two segments: Chemistry Technologies and Data Analytics - Flotek operates through two segments: Chemistry Technologies (CT), providing sustainable specialty chemistry solutions, and Data Analytics (DA), delivering real-time information to optimize energy customer operations183184186 Outlook This section outlines management's perspective on industry trends, including the oil and gas market, the growing adoption of data analytics, and the company's focus on ESG-focused solutions - Management believes the oil and gas industry is in the early stages of a tight supply cycle due to underinvestment, potentially supporting high oil prices for multiple years190 - The company observes growing trends in leveraging data analytics to improve performance and reduce environmental impact, with its Verax™ analyzers gaining traction in North America191 - ESG-focused solutions remain a key emphasis, as the company's products are designed to help customers improve sustainability and operational efficiency192 Consolidated Results of Operations This section presents a summary of the company's consolidated financial performance, highlighting key revenue, gross profit, and net income trends for the three and six months ended June 30, 2023 and 2022 Consolidated Results of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $50,594 | $29,373 | $98,602 | $42,252 | | Gross profit (loss) | $3,904 | $(2,305) | $5,785 | $(2,784) | | Net income (loss) | $(21) | $6,240 | $21,322 | $(4,484) | - Consolidated revenue for Q2 2023 increased by 72% YoY, and for H1 2023 increased by 133% YoY, primarily driven by related party activity under the ProFrac Agreement which began in Q2 2022197198 - Severance costs for Q2 2023 showed a credit of $2.3 million due to the reversal of an accrual related to the settlement of a lawsuit with former CEO John Chisholm202 Results by Segment This section details the financial performance of the company's two operating segments: Chemistry Technologies (CT) and Data Analytics (DA), highlighting revenue and operational income trends Chemistry Technologies (CT) Segment Results (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue from external customers | $15,469 | $12,111 | $24,693 | $21,422 | | Revenue from related party | $32,617 | $16,549 | $68,883 | $19,046 | | Income from operations | $3,795 | $14,944 | $27,174 | $8,887 | Data Analytics (DA) Segment Results (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue (external & related) | $2,508 | $713 | $5,026 | $1,784 | | Income (loss) from operations | $129 | $(1,198) | $587 | $(2,006) | - The CT segment's revenue growth was primarily driven by the ProFrac agreement, while the DA segment also saw significant revenue growth of 230% in Q2 2023 YoY, turning an operating loss into operating income206211213 Capital Resources and Liquidity This section discusses the company's financial resources and liquidity position, including cash balances, the ongoing going concern uncertainty, and strategies for securing additional funding - As of June 30, 2023, the Company had $8.8 million in unrestricted cash and cash equivalents, a decrease from $12.3 million at December 31, 2022216 - Management reiterates substantial doubt about the Company's ability to continue as a going concern, citing a history of losses and dependence on cash flow from the ProFrac Agreement218219 - The Company is evaluating strategies for additional funding, including a potential asset-based loan (ABL), equity financing, or issuing debt, though success is not assured217220 Quantitative and Qualitative Disclosures about Market Risk The company reports no material changes to its market risk exposures, including interest rates, commodity prices, and foreign currency exchange rates, since its 2022 Annual Report - There have been no material changes to the quantitative or qualitative disclosures about market risk since the company's 2022 Annual Report228 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2023, due to a material weakness in internal control over financial reporting, stemming from insufficient resources, inadequate risk assessment, and ineffective communication, with remediation efforts ongoing - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2023, due to a material weakness in internal control over financial reporting231 - The material weakness arises from insufficient resources, inadequate risk assessment, and ineffective information/communication processes, leading to control deficiencies in areas such as lease accounting, prepaid assets, and related party revenue accrual235238 - A remediation plan is in progress, focusing on revising the financial control risk assessment process and enhancing internal communication, but the material weakness is not yet fully remediated238239 PART II - OTHER INFORMATION Legal Proceedings This section reports no material changes in legal proceedings from the 2022 Annual Report, except for the previously disclosed settlement with the former CEO - There have been no material changes in legal proceedings, with the exception of the settlement with former CEO John Chisholm, which resulted in a reversal of $2.3 million in accrued severance costs136243 Risk Factors The company highlights a new material risk factor concerning its non-compliance with NYSE's continued listing requirements due to its common stock price falling below the $1.00 minimum, posing a delisting risk - A new risk factor has emerged: on April 12, 2023, the company received a notice from the NYSE for non-compliance with the minimum $1.00 average closing price requirement over 30 consecutive days245 - The company has a six-month cure period to regain compliance, as failure to do so could result in the delisting of its common stock, negatively affecting liquidity, stock price, and the ability to raise capital245246 Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities, detailing issuer repurchases conducted to satisfy employee tax withholding obligations related to stock compensation Issuer Repurchases of Equity Securities (Q2 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | 26,426 | $0.69 | | May 2023 | 15,263 | $0.66 | | June 2023 | 1,730 | $0.71 | | Total | 43,419 | | - The company repurchased 43,419 shares during the quarter to satisfy tax withholding requirements for employees related to stock compensation plans247249 Defaults Upon Senior Securities The company reports no defaults upon its senior securities during the period - None250 Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable251 Other Information The company reports no other information required to be disclosed in this section - None252 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, agreements, and required officer certifications - The report includes standard exhibits such as officer certifications (Rule 13a-14(a) and Section 1350) and Inline XBRL data files254