Flotek(FTK) - 2023 Q4 - Annual Report

Part I Business Flotek Industries operates in Chemistry Technologies and Data Analytics, driven by the ProFrac agreement and strategic R&D - The company operates through two primary business segments: Chemistry Technologies (CT) and Data Analytics (DA), supported by a central Research & Innovation (R&I) function[16][17][23] - In 2023, the company appointed Dr. Ryan Ezell as CEO, secured an asset-based loan (ABL) of up to $13.8 million, and completed a 1-for-6 reverse stock split to regain NYSE compliance[20][21][22] | Metric | 2023 | 2022 | | :--- | :--- | :--- | | R&D Expense | $2.5 million | $4.4 million | - As of December 31, 2023, the company holds 138 granted patents (114 in CT, 24 in DA) and 41 registered trademarks[38] - The company had approximately 146 employees as of December 31, 2023, and achieved a 0.00 TRIR in 2023, indicating a strong safety performance[45][48] Risk Factors The company faces significant business, industry, and securities risks, including ProFrac reliance and NOL limitations - The company has a significant customer concentration risk, with revenues from the ProFrac Agreement representing 65% of total revenues in 2023, and termination of this agreement would have a material adverse impact[68][71] - In 2023, the company underwent an "ownership change" under Section 382 of the Internal Revenue Code, which limits its ability to use pre-change net operating losses (NOLs) and other tax attributes to offset future taxable income[96][97] - A conflict of interest may exist due to the relationship with ProFrac Services, LLC and its affiliates, which are the company's largest customer and, as of December 31, 2023, own approximately 51% of the company's common stock with the right to elect four of seven board members[122][123] - A material weakness in internal control over financial reporting identified in 2022 was remediated as of December 31, 2023[131][132] Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[138] Cybersecurity The company maintains a Cybersecurity Incident Response Team (CIRT) and reports no material cybersecurity threats as of December 31, 2023 - The company has a Cybersecurity Incident Response Team (CIRT) that reports to the Risk & Sustainability Committee of the Board of Directors[139] - As of December 31, 2023, the company has not identified any risks from known cybersecurity threats that are reasonably likely to materially affect its business, operations, or financial condition[142] Properties The company operates manufacturing, warehouse, research, and office facilities across the U.S. and internationally | Segment | Ownership | Location | | :--- | :--- | :--- | | Chemistry Technologies | Owned | Marlow, Oklahoma | | Chemistry Technologies | Owned | Raceland, Louisiana | | Chemistry Technologies | Leased | Dubai, United Arab Emirates | | Chemistry Technologies | Leased | Houston, Texas | | Data Analytics | Leased | Austin, Texas | | Corporate Headquarters | Leased | Houston, Texas | Legal Proceedings The company is not aware of any pending or threatened legal proceedings expected to materially affect its financial position or liquidity - The company states that it is not aware of any pending or threatened legal proceedings that are expected to have a material effect on its financial condition or operations[144] Mine Safety Disclosures This section is not applicable to the company - Not applicable[146] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'FTK', completed a 1-for-6 reverse stock split, and has no plans for cash dividends - The company's common stock trades on the NYSE under the ticker "FTK" A 1-for-6 Reverse Stock Split was completed on September 25, 2023[149] - The company has never declared or paid cash dividends on its common stock and has no current plans to do so[149] | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2023 | — | $ — | | Nov 2023 | 124 | $ 4.08 | | Dec 2023 | 5,627 | $ 3.83 | | Total Q4 2023 | 5,751 | | Management's Discussion and Analysis of Financial Condition and Results of Operations Flotek's 2023 financial performance significantly improved, driven by the ProFrac agreement, leading to positive gross profit and operating income Consolidated Results of Operations Consolidated revenue increased 38% to $188.1 million in 2023, resulting in a gross profit of $24.3 million and net income of $24.7 million | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Total revenues | $188,058 | $136,092 | | Cost of sales | $163,795 | $142,792 | | Gross profit (loss) | $24,263 | $(6,700) | | SG&A | $27,873 | $27,124 | | Gain in fair value of contract consideration convertible notes | $(29,969) | $(75) | | Income (loss) from operations | $23,223 | $(35,421) | | Net income (loss) | $24,713 | $(42,305) | - The improvement in operating income was primarily driven by a $31.0 million increase in gross profit, a $30.0 million gain on the fair value of Contract Consideration Convertible Notes Payable, and a $2.0 million decrease in R&D costs[166] Results by Segment In 2023, CT segment revenue grew to $179.9 million with $39.0 million operating income, and DA segment revenue increased to $7.5 million | Chemistry Technologies (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Revenue from external customers | $59,016 | $48,960 | | Revenue from related party | $120,903 | $81,618 | | Income (loss) from operations | $39,043 | $(14,729) | | Data Analytics (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Revenue from external customers | $7,502 | $5,384 | | Revenue from related party | $637 | $130 | | Loss from operations | $(53) | $(2,877) | Capital Resources and Liquidity As of December 31, 2023, the company had $5.9 million cash, secured a $13.8 million ABL, and resolved going concern doubts - The company entered into an Asset-Based Loan (ABL) in August 2023, with a maximum borrowing base of $13.8 million As of Dec 31, 2023, $7.5 million was outstanding[175][176] - The ProFrac Agreement's minimum purchase requirements were not met for the June-Dec 2023 period, resulting in $20.1 million in Contract Shortfall Fees recognized as revenue and receivable $10.0 million was collected by March 11, 2024[180] - Based on improved outlook, cash on hand, and ABL availability, management concluded that the conditions raising substantial doubt about the Company's ability to continue as a going concern (disclosed in the 2022 report) no longer exist[181][233] | Cash Flows (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11,297) | $(44,632) | | Net cash (used in) provided by investing activities | $(1,014) | $5,331 | | Net cash provided by financing activities | $5,928 | $38,267 | Critical Accounting Estimates Management identifies critical accounting estimates for Contract Assets, Inventory Reserve, and Fair Value of Convertible Notes Payable - Critical accounting estimates include: - Contract Assets: Amortized over the ProFrac Agreement term based on forecasted revenues and tested for recoverability - Reserve for Excess and Obsolete Inventory: Inventory is written down to net realizable value based on usage estimates The reserve was $6.1 million at year-end 2023 - Fair Value of Contract Consideration Convertible Notes Payable: Valued using a Monte Carlo simulation until their conversion in 2023[191][192][195] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are raw material prices, freight costs, and foreign currency, with no current use of hedging instruments - The company is primarily exposed to market risk from raw material prices, freight costs, and foreign currency exchange rates[198] - The company does not currently use financial instruments for hedging purposes but may do so in the future[198][200] Financial Statements and Supplementary Data This section presents audited consolidated financial statements, KPMG's unqualified opinion with two CAMs, and notes detailing the company's financial turnaround Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the financial statements, highlighting two Critical Audit Matters: contract asset recoverability and going concern assessment - The auditor, KPMG LLP, issued an unqualified (clean) opinion on the consolidated financial statements[203] - The audit identified two Critical Audit Matters (CAMs): 1. Recoverability of contract assets: Evaluating the key assumptions in the recoverability assessment, specifically forecasted revenue and costs under the ProFrac Agreement 2. Going concern: Evaluating management's assessment of its ability to continue as a going concern, particularly the forecasted cash flows[208][211] Consolidated Financial Statements The consolidated financial statements reflect significant improvement in 2023, showing total assets of $157.5 million, reduced liabilities, and a net income of $24.7 million | Selected Balance Sheet Data (in thousands) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $76,447 | $80,074 | | Total Assets | $157,513 | $164,810 | | Total Current Liabilities | $47,782 | $151,371 | | Total Liabilities | $55,553 | $162,214 | | Total Stockholders' Equity | $101,960 | $2,596 | | Selected Operations Data (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenues | $188,058 | $136,092 | | Gross Profit (Loss) | $24,263 | $(6,700) | | Net Income (Loss) | $24,713 | $(42,305) | | Basic EPS | $1.00 | $(3.41) | Notes to Consolidated Financial Statements Notes detail accounting policies, resolution of going concern, ProFrac agreement revenue, convertible note conversion, reverse stock split, and NOL limitations - Going Concern (Note 1): Management concluded that substantial doubt about the Company's ability to continue as a going concern, which was disclosed for FY 2022, no longer exists as of December 31, 2023[233] - Debt (Note 9): All convertible notes payable, including those issued as contract consideration to ProFrac, were converted into common stock or warrants during 2023, significantly deleveraging the balance sheet[319][324][327] - Income Taxes (Note 11): An ownership change in 2023 resulted in a Section 382 limitation on the future use of the company's $192.9 million in U.S. net operating loss carryforwards (NOLs)[345] - Stockholders' Equity (Note 13): The company completed a 1-for-6 reverse stock split on September 25, 2023 All share and per-share data have been retroactively adjusted[354] - Related Party Transactions (Note 17): Revenue from ProFrac Services, LLC was $121.5 million in 2023 (64.6% of total revenue), which includes $20.1 million in Contract Shortfall Fees because minimum purchase volumes were not met[408][409][425] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section is not applicable, indicating no changes or disagreements with the company's accountants - Not Applicable[429] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023, having remediated a prior material weakness - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[431] - A material weakness reported for the year ended December 31, 2022, related to controls over lease accounting, prepaid assets, and related-party revenue accruals, was remediated as of December 31, 2023[432][433][435] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[438] Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q4 2023 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fourth quarter of 2023[440] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[444] Executive Compensation Executive compensation information is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[445] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and related stockholder matters are incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[446] Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence details are incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[447] Principal Accountant Fees and Services Information on principal accountant fees and services by KPMG LLP is incorporated by reference from the 2024 Proxy Statement - The company's independent registered public accounting firm is KPMG LLP[448] - Information on fees and services is incorporated by reference from the Company's Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[448] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate documents, material contracts, and management compensatory plans - Lists key corporate documents, including the Amended and Restated Certificate of Incorporation (Exhibit 3.1) and Second Amended and Restated Bylaws (Exhibit 3.5)[450] - Includes material contracts such as the Revolving Loan and Security Agreement (Exhibit 10.7) and the Chemical Products Supply Agreement with ProFrac Services, LLC (Exhibit 10.15)[450][451] - Contains management compensatory plans and agreements, including employment agreements for the CEO and CFO, and various long-term incentive plan documents[450][451][452] Form 10-K Summary The company indicates no Form 10-K summary is provided - None[453]