REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Flotek Industries, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2018
, based on criteria established in
Internal Control - Integrated Framework 2013
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective control over financial reporting as of
December 31, 2018
, based on criteria established in
Internal Control - Integrated Framework 2013
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of Flotek Industries, Inc. and subsidiaries as of
December 31, 2018
and
2017
, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated
March 8, 2019
expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ MOSS ADAMS LLP
Houston, Texas
March 8, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Flotek Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries (the “Company”) as of
December 31, 2018
and
2017
, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of
December 31, 2018
and
2017
, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of
December 31, 2018
, based on criteria established in
Internal Control - Integrated Framework 2013
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 8, 2019
expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note
7
to the consolidated financial statements, the Company changed its method of accounting for recognizing revenue due to the adoption of Accounting Standards Codification Topic No. 606.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ MOSS ADAMS LLP
Houston, Texas
March 8, 2019
We have served as the Company’s independent registered public accounting firm since 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) is a global, diversified, technology-driven company that develops and supplies chemistries and services to the oil and gas industries. Flotek also supplied high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets, classified as discontinued operations at December 31, 2018.
The Company’s oilfield business includes specialty chemistries and logistics which enable its customers in pursuing improved efficiencies in the drilling and completion of their wells. The Company also provides automated bulk material handling, loading facilities, and blending capabilities. In the segment reported as discontinued operations at December 31, 2018, the Company processed citrus oil to produce (1) high value compounds used as additives by companies in the flavors and fragrances markets and (2) environmentally friendly chemistries for use in numerous
industries around the world, including the oil and gas (“O&G”) industry.
Flotek operates in over
20
domestic and international markets. Customers include major integrated O&G companies, oilfield services companies, independent O&G companies, pressure-pumping service companies, national and state-owned oil companies, and international supply chain management companies. The Company also served customers who purchase non-energy-related citrus oil and related products, including household and commercial cleaning product companies, fragrance and cosmetic companies, and food manufacturing companies, reported as discontinued operations at December 31, 2018.
Flotek was initially incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, Flotek changed its corporate domicile to the state of Delaware.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements include the accounts of Flotek Industries, Inc. and all wholly-owned subsidiary corporations. Where Flotek owns less than
100%
of the share capital of its subsidiaries, but is still considered to have sufficient ownership to control the business, results of the business operations are consolidated within the Company’s financial statements. The ownership interests held by other parties are shown as noncontrolling interests.
During the fourth quarter of 2018, the Company classified the Consumer and Industrial Chemistry Technologies segment as held for sale based on management’s intention to sell this business. In addition, during the fourth quarter of 2016, the Company classified the Drilling Technologies and Production Technologies segments as held for sale based on management’s intention to sell these businesses. The Company’s historical financial statements have been revised to present the operating results of the Consumer and Industrial Chemistry Technologies, Drilling Technologies, and Production Technologies segments as discontinued operations. The results of operations of these segments are presented as “Loss from discontinued operations” in the statement of operations and the related cash flows of these segments has been reclassified to discontinued operations for all periods presented. The assets and liabilities of the
Consumer and Industrial Chemistry Technologies segment have been reclassified to “Assets held for sale” and “Liabilities held for sale”, respectively, in the consolidated balance sheet for all periods presented.
During 2017, the Company completed the sale or disposal of the assets and transfer or liquidation of liabilities and obligations of each of the Drilling Technologies and Production Technologies segments.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.
Cash Management
The Company uses a controlled disbursement account for its main cash account. Under this system, outstanding checks can be in excess of the cash balances at the bank before the disbursement account is funded, creating a book overdraft. Book overdrafts on this account are presented as a current liability in accounts payable in the consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate provision for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible.
The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.
Changes in the allowance for doubtful accounts for continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
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
Inventories consist of raw materials, work-in-process, and finished goods and are stated at the lower of cost, determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor, and production overhead. The Company regularly reviews inventories on hand and current market conditions to determine if the cost of finished goods inventories exceeds current market prices and impairs the cost basis of the inventory accordingly. The Company records a provision for excess and obsolete inventory based primarily on forecasts of product demand, historical trends, market conditions, production, or procurement requirements and technological developments and advancements.
Property and Equipment
Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including assets held under capital leases, is calculated using the straight-line method over the asset’s estimated useful life as follows:
|
|
|
Buildings and leasehold improvements
|
2-30 years
|
Machinery and equipment
|
7-10 years
|
Furniture and fixtures
|
3 years
|
Transportation equipment
|
2-5 years
|
Computer equipment and software
|
3-7 years
|
Property and equipment are reviewed for impairment on an annual basis or whenever events or changes in circumstances
indicate the carrying amount of an asset or asset group may not be recoverable. Indicative events or circumstances include, but are not limited to, matters such as a significant decline in market value or a significant change in business climate. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows from the use of the asset and its eventual disposition. The amount of impairment loss recognized is the excess of the asset’s carrying amount over its fair value. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less cost to sell. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.
Internal Use Computer Software Costs
Direct costs incurred to purchase and develop computer software for internal use are capitalized during the application development and implementation stages. These software costs have been primarily for enterprise-level business and finance software that is customized to meet the Company’s specific operational needs. Capitalized costs are included in property and equipment and are amortized on a straight-line basis over the estimated useful life of the software beginning when the software project is substantially complete and placed in service. Costs incurred during the preliminary project stage and costs for training, data conversion, and maintenance are expensed as incurred.
The Company amortizes software costs using the straight-line method over the expected life of the software, generally
3
to
7
years. The unamortized amount of capitalized software was
$3.1 million
at
December 31, 2018
.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill is the excess of cost of an acquired entity over the amounts assigned to identifiable assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization, but is tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include an adverse change in the business climate or a change in the assessment of future operations of a reporting unit.
The Company assesses whether a goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to perform a qualitative assessment, a quantitative impairment test is performed to determine whether goodwill impairment exists at the reporting unit.
The quantitative impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of each reporting unit with goodwill to its carrying amount, including goodwill. To determine fair value estimates, the Company uses the income approach based on discounted cash flow analyses, combined, when appropriate, with a market-based approach. The market-based approach considers valuation comparisons of recent public sale transactions of similar businesses and earnings multiples of publicly traded businesses operating in industries consistent with the reporting unit. If the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.
Other Intangible Assets
The Company’s other intangible assets have finite and indefinite lives and consist of customer relationships, trademarks, brand names, and purchased patents.
The cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of economic benefit, ranging from
2
to
95 years
. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned to these intangible assets.
Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, an impairment loss is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flow models.
Intangible assets with indefinite lives are not subject to amortization, but are tested for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate a potential impairment. These circumstances may include, but are not limited to, a significant adverse change in the business climate, unanticipated competition, or a change in projected operations or results of a reporting unit.
The Company assesses whether an indefinite lived intangible impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount. If, based on this qualitative assessment, it is determined that it is not more likely than not that the fair value of the indefinite lived intangible is less than its carrying amount, the Company does not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the indefinite-lived intangible asset is impaired or if the Company elects to not perform a qualitative assessment, the Company then performs the quantitative impairment test. The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flows.
Business Combinations
The Company includes the results of operations of its acquisitions in its consolidated results, prospectively from the date of acquisition. Acquisitions are accounted for by applying the acquisition method. The Company allocates the fair value of purchase consideration to the assets acquired, liabilities assumed, and any noncontrolling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed,
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and any noncontrolling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and Flotek and the value of the acquired assembled workforce. Acquisition-related expenses are recognized separately from the business acquisition and are recognized as expenses as incurred.
Fair Value Measurements
The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions market participants would use to value an asset or liability and may be observable or unobservable. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). “Level 1” measurements are measurements using quoted prices in active markets for identical assets and liabilities. “Level 2” measurements are measurements using quoted prices in markets that are not active or that are based on quoted prices for similar assets or liabilities. “Level 3” measurements are measurements that use significant unobservable inputs which require a company to develop its own assumptions. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available.
Revenue Recognition
The Company recognizes revenues to depict the transfer of control of promised goods or services to its customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Refer to Note
7
– “Revenue from Contracts with Customers” for further discussion on Revenue.
The Company recognizes revenue based on the Accounting Standards Codification (“ASC”) 606 five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.
Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly. Deposits and other funds received in advance of delivery are deferred until the transfer of control is complete.
For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the “total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the years ended
December 31, 2018
,
2017
, and
2016
, the percentage-
of-completion revenue accounted for less than
0.1%
of total revenue during the respective time periods. This resulted in immaterial unfulfilled performance obligations and immaterial contract assets and/or liabilities for which the Company did not record adjustments to opening retained earnings as of
December 31, 2015
or for any periods previously presented.
As an accounting policy election, the Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.
Foreign Currency Translation
Financial statements of foreign subsidiaries are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.
Research and Development Costs
Expenditures for research activities relating to product development and improvement are charged to expense as incurred.
Income Taxes
During the year ended December 31, 2015, the Company restructured its legal entities such that there is only
one
U.S. tax filing group filing a single U.S. consolidated federal income tax return beginning in 2016.
The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets and liabilities are recognized related to the anticipated future tax effects of
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
temporary differences between the financial statement basis and the tax basis of the Company’s assets and liabilities using statutory tax rates at the applicable year end. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.
A valuation allowance is recorded to reduce previously recorded tax assets when it becomes more likely than not that such assets will not be realized. The Company evaluates, at least annually, net operating loss carry forwards and other net deferred tax assets and considers all available evidence, both positive and negative, to determine whether a valuation allowance is necessary relative to net operating loss carry forwards and other net deferred tax assets. In making this determination, the Company considers cumulative losses in recent years as significant negative evidence. The Company considers recent years to mean the current year plus the two preceding years. The Company considers the recent cumulative income or loss position as objectively verifiable evidence for the projection of future income, which consists primarily of determining the average of the pre-tax income of the current and prior two years after adjusting for certain items not indicative of future performance. Based on this analysis, the Company determines whether a valuation allowance is necessary.
Historically, U.S. Federal income taxes are not provided on unremitted earnings of subsidiaries operating outside the U.S. because it is the Company’s intention to permanently reinvest undistributed earnings in the subsidiary. These earnings would become subject to income tax if they were remitted as dividends or loaned to a U.S. affiliate. Due to the 2017 Tax Cuts and Jobs Act, U.S. federal transition taxes have been recorded at December 31, 2017, for a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. Determination of the amount of unrecognized deferred U.S. income tax liability on these unremitted earnings is not practicable.
The Company has performed an evaluation and concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.
The Company’s policy is to record interest and penalties related to income tax matters as income tax expense.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) attributable to common stockholders, adjusted for the effect of assumed conversions of convertible notes and preferred stock, by the
weighted average number of common shares outstanding, including potentially dilutive common share equivalents, if the effect is dilutive. Potentially dilutive common shares equivalents consist of incremental shares of common stock issuable upon exercise of stock options and warrants, settlement of restricted stock units, and conversion of convertible notes and convertible preferred stock.
Debt Issuance Costs
Costs related to debt issuance are capitalized and amortized as interest expense over the term of the related debt using the straight-line method, which approximates the effective interest method. Upon the repayment of debt, the Company accelerates the recognition of an appropriate amount of the costs as interest expense.
Capitalization of Interest
Interest costs are capitalized for qualifying in-process software development projects. Capitalization of interest commences when activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Interest costs are capitalized until the assets are ready for their intended use. Capitalized interest is added to the cost of the underlying assets and amortized over the estimated useful lives of the assets.
Stock-Based Compensation
Stock-based compensation expense for share-based payments, related to stock options, restricted stock awards, and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.
Significant items subject to estimates and assumptions include application of the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate sale in its present condition
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale, within one year, except if events of circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
A disposal group that is classified as held for sale is initially measured at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met.
Subsequent changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying amount of the disposal group, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale, respectively, in the consolidated balance sheets.
Discontinued Operations
The results of operations of a component of the Company that can be clearly distinguished, operationally and for financial reporting purposes, that either has been disposed of or is classified as held for sale is reported in discontinued operations, if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results.
General corporate overhead is not allocated to discontinued operations for all periods presented. Interest expense on debt required to be repaid as a result of disposal transactions is allocated to discontinued operations. Interest allocated to discontinued operations totaled
$0.2 million
and
$0.4 million
for the years ended
December 31, 2017
and
2016
, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not impact net loss.
New Accounting Pronouncements
(a) Application of New Accounting Standards
Effective January 1, 2018, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2014-09, “
Revenue from Contracts with Customers
.” This standard supersedes most of the existing revenue recognition requirements in U.S. GAAP under Accounting Standards Codification (“ASC”) 605 and establishes a new revenue standard, ASC 606. This new standard requires entities to recognize revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASC 606 using the full retrospective method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Refer to Note
7
— “Revenue from Contracts with Customers” for further information surrounding adoption of this new standard.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2016-15, “
Classification of Certain Cash Receipts and Cash Payments.
” This standard addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively, where applicable, as there were no historical transactions affected by this implementation.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2017-01, “
Clarifying the Definition of a Business.
” This standard provided additional guidance on whether an integrated set of assets and activities constitutes a business. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively and, therefore, prior periods were not adjusted. In addition, the Company had no activity during the year ended
December 31, 2018
that was required to be treated differently under this ASU than previously issued guidance.
Effective January 1, 2018, the Company adopted the accounting guidance in ASU No. 2017-09, “
Scope of Modification Accounting
.” This standard provided guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. Implementation of this standard
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
did not have a material effect on the consolidated financial statements and related disclosures. The Company applied this standard prospectively and, therefore, prior periods presented were not adjusted. There were no changes to the terms or conditions of current share-based payment awards during the year ended
December 31, 2018
.
(b) New Accounting Requirements and Disclosures
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “
Leases
.” This standard (ASC 842) requires the recognition of right of use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP (ASC 840). The lease liability represents the lessee’s obligation to make lease payments arising from a lease and will be measured as the present value of the future lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. The pronouncement is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and should be applied using a modified retrospective transition approach, with early application permitted. In July 2018, the FASB issued ASU No. 2018-10 and ASU No. 2018-11, which provide codification and targeted improvements to the original guidance issued, as well as modifies the transition methods available upon adoption.
Certain practical expedients are provided when adopting the guidance. The Company plans to elect the package of practical expedients allowing the Company to not reassess whether any expired or existing contracts are, or contain, leases, the lease classification for any expired or existing leases, or initial direct costs for any expired or existing leases. The Company also plans to apply the hindsight practical expedient allowing the Company to use hindsight when determining the lease term and assessing impairment of expired or existing leases. In addition, the Company will elect to apply the short-term lease exception, and will therefore not record a ROU asset or corresponding lease liability for leases with a term of twelve months or less and instead recognize a single lease cost allocated over the lease term, generally on a straight line basis. Further, the Company plans to elect the practical expedient to not separate lease components from non-lease components and account for both as a single lease component for all asset classes.
The Company has substantially completed its evaluation of the impact on the Company’s lease portfolio. As part of the assessment, the Company formed an implementation work team, conducted training for the relevant staff regarding the potential impacts of ASC 842, and have concluded on the Company’s contract analyses and policy review. The Company engaged external resources to assist in the efforts of completing the analysis of potential changes to current accounting practices and are in the process of implementing
a new lease accounting system in connection with the adoption of the updated guidance. The impact of ASC 842 has been evaluated on the internal control over financial reporting and other changes in business practices and processes. The Company is in the process of finalizing its catalog of existing lease contracts and implementing changes to its systems.
The Company will adopt the new standard effective January 1, 2019 using the optional transition method. Consequently, the Company’s reporting for the comparative periods presented in the financial statements will continue to be in accordance with ASC 840. The adoption of this guidance will result in the addition of ROU assets and corresponding lease obligations to the consolidated balance sheet, yet the Company does not anticipate a significant impact on the consolidated statements of operations or cash flows. Upon adoption, the Company expects to record operating lease ROU assets and corresponding operating lease liabilities of approximately
$19.5 million
, representing the present value of future lease payments under operating leases with terms of greater than twelve months. The Company is continuing to evaluate the impact the pronouncement will have on the related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “
Measurement of Credit Losses on Financial Instruments
.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU No. 2018-02, “
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
.” This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The pronouncement is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted in any interim period. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07, “
Improvements to Nonemployee Share-Based Payment Accounting
.” This standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adoption permitted no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, “
Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement
.” This standard removes, modifies, and adds additional requirements for
disclosures related to fair value measurement in ASC 820. The pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted in any interim period. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
Note 3 — Discontinued Operations
During the fourth quarter of 2018, the Company initiated and began executing a strategic plan to sell its Consumer and Industrial Chemistry Technologies (“CICT”) segment. An investment banking advisory services firm was engaged and actively marketed this segment.
The Company met all of the criteria to classify the CICT segment’s assets and liabilities as held for sale in the fourth quarter 2018. The Company has classified the assets,
liabilities, and results of operations for this segment as “Discontinued Operations” for all periods presented.
Disposal of the CICT reporting segment represented a strategic shift that will have a major effect on the Company’s operations and financial results.
During the first quarter of 2019, the Company entered into a material definitive agreement and, subsequently, completed the sale of the CICT segment (see Note
21
).
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2018, 2017, and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and Industrial Chemistry Technologies
|
|
2018
|
|
2017
|
|
2016
|
Discontinued operations:
|
|
|
|
|
|
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
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2018 and 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Consumer and Industrial Chemistry Technologies
|
|
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
|
|
During the fourth quarter of 2016, the Company initiated a strategic restructuring of its business to enable a greater focus on its core businesses in energy chemistry and consumer and industrial chemistry. The Company executed a plan to sell or otherwise dispose of the Drilling Technologies and Production Technologies segments. An investment banking advisory services firm was engaged and actively marketed these segments.
The Company met all of the criteria to classify the Drilling Technologies and Production Technologies segments’ assets and liabilities as held for sale in the fourth quarter 2016. The Company has classified the assets, liabilities, and results of operations for these
two
segments as “Discontinued Operations” for all periods presented.
Disposal of the Drilling Technologies and Production Technologies reporting segments represented a strategic shift that would have a major effect on the Company’s operations and financial results.
On
December 30, 2016
, the Company sold a portion of its Drilling Technologies segment and recorded a loss of
$1.2 million
which is included in the loss from discontinued operations for the year ended December 31, 2016.
On
May 22, 2017
, the Company completed the sale of substantially all of the assets and transfer of certain specified
liabilities and obligations of the Company’s Drilling Technologies segment to National Oilwell Varco, L.P. (“NOV”) for
$17.0 million
in cash consideration, subject to normal working capital adjustments, with
$1.5 million
held back by NOV for up to
18 months
to satisfy potential indemnification claims.
On
May 23, 2017
, the Company completed the sale of substantially all of the assets and transfer of certain specified liabilities and obligations of the Company’s Production Technologies segment to Raptor Lift Solutions, LLC (“Raptor Lift”) for
$2.9 million
in cash consideration, with
$0.4 million
held back by Raptor Lift to satisfy potential indemnification claims.
On
August 16, 2017
, the Company completed the sale of substantially all of the remaining assets of the Company’s Drilling Technologies segment to Galleon Mining Tools, Inc. for
$1.0 million
in cash consideration and a note receivable of
$1.0 million
due in one year.
The sale or disposal of the assets and transfer or liquidation of liabilities and obligations of these segments was completed in 2017. The Company has no continuing involvement with the discontinued operations.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the years ended December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling Technologies
|
|
Production Technologies
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Discontinued operations:
|
|
|
|
|
|
|
|
Revenue
|
$
|
11,534
|
|
|
$
|
27,627
|
|
|
$
|
4,002
|
|
|
$
|
8,292
|
|
Cost of revenue
|
(7,309
|
)
|
|
(18,667
|
)
|
|
(3,236
|
)
|
|
(7,881
|
)
|
Selling, general and administrative
|
(6,963
|
)
|
|
(15,285
|
)
|
|
(1,759
|
)
|
|
(3,790
|
)
|
Depreciation and amortization
|
—
|
|
|
(1,714
|
)
|
|
—
|
|
|
(584
|
)
|
Research and development
|
(5
|
)
|
|
(64
|
)
|
|
(364
|
)
|
|
(888
|
)
|
Gain (loss) on disposal of long-lived assets
|
97
|
|
|
103
|
|
|
—
|
|
|
(50
|
)
|
Impairment of inventory and long-lived assets
|
—
|
|
|
(36,522
|
)
|
|
—
|
|
|
(3,913
|
)
|
Loss from operations
|
(2,646
|
)
|
|
(44,522
|
)
|
|
(1,357
|
)
|
|
(8,814
|
)
|
Other expense
|
(96
|
)
|
|
(412
|
)
|
|
(52
|
)
|
|
(96
|
)
|
Loss on sale of businesses
|
(1,600
|
)
|
|
(1,199
|
)
|
|
(479
|
)
|
|
—
|
|
Loss on write-down of assets held for sale
|
(6,831
|
)
|
|
(18,971
|
)
|
|
(9,718
|
)
|
|
(6,161
|
)
|
Loss before income taxes
|
(11,173
|
)
|
|
(65,104
|
)
|
|
(11,606
|
)
|
|
(15,071
|
)
|
Income tax benefit
|
4,138
|
|
|
23,661
|
|
|
4,299
|
|
|
5,477
|
|
Net loss from discontinued operations
|
$
|
(7,035
|
)
|
|
$
|
(41,443
|
)
|
|
$
|
(7,307
|
)
|
|
$
|
(9,594
|
)
|
At December 31, 2017, all remaining assets and liabilities of the discontinued operations were assumed by the Company’s continuing operations. These balances included
$0.3 million
of net accounts receivable,
$1.4 million
of sales price hold-back that was received during 2018, and
$1.4 million
of accrued liabilities partially settled in 2018, with the remainder to be settled in 2019.
Note 4 — Impairment of Inventory and Long-Lived
Assets for Discontinued Operations
During the three months ended
March 31, 2016
, as a result of changes in the oil and gas industry that occurred since the beginning of 2016 and the corresponding impact on the Company’s business outlook, the Company evaluated the direction of its business activities. Crude oil prices, which appeared to have stabilized during the fourth quarter of 2015, fell further during the first quarter of 2016, decreasing approximately
21%
from average prices seen in the fourth quarter of 2015. The U.S. drilling rig count declined from
698
at December 31, 2015 to
450
at April 1, 2016, a decline of
35.5%
.
Due to the decreased rig activity and its impact on management’s expectations for future market activity, the Company further refocused operations of its Drilling Technologies segment. The Company decided to exit the business of building and repairing motors in all domestic markets. In addition, changes in drilling technique, including further escalation of the move to a dominance of pad drilling, reduced the marketability of certain other inventory items. The focus of the Production Technologies segment shifted to its new technologies for electric submersible pumps for the oil and gas industry and for hydraulic pumping units. Inventory
associated with older technologies for these items has been evaluated for impairment. As a result of these changes in focus and projected declines in asset utilization, the Company recorded a pre-tax impairment of inventories as noted below.
Changes in the business climate noted above and increasing operating losses experienced within the Drilling Technologies and Production Technologies segments during the three months ended
March 31, 2016
, caused the Company to test asset groups within these
two
segments for recoverability. Recoverability of the carrying amount of the asset groups was based upon estimated future cash flows while taking into consideration various assumptions and estimates, including future use of the assets, remaining useful life of the assets, and eventual disposition of the assets. Undiscounted estimated cash flows of two asset groups associated with domestic operations in the Drilling Technologies segment did not exceed the carrying amount of the respective asset groups. Therefore, the Company performed an analysis of discounted future cash flows to determine the fair value of each of these two asset groups. As a result of this testing, the Company recorded a pre-tax impairment of long-lived assets as noted below.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded impairment charges during the three months ended
March 31, 2016
, as follows (in thousands):
|
|
|
|
|
Drilling Technologies:
|
|
Inventories
|
$
|
12,653
|
|
Long-lived assets:
|
|
Property and equipment
|
14,642
|
|
Intangible assets other than goodwill
|
9,227
|
|
Production Technologies:
|
|
Inventories
|
3,913
|
|
Total impairment
|
$
|
40,435
|
|
Based on the changes in the business climate discussed above and continuing operating losses experienced during the three months ended
March 31, 2016
,
June 30, 2016
,
September 30, 2016
, and
December 31, 2016
, goodwill within the Teledrift and Production Technologies reporting units was tested for impairment. However,
no
impairments of goodwill were recorded based upon this testing.
Note 5 — Assets Held for Sale
During the second quarter of 2018, the Company committed to a plan to divest the revenue generating assets associated with the Dalton, Georgia facility within the Energy Chemistry Technologies segment. The Company determined that the divestiture of this business line did not meet the criteria for discontinued operations presentation, as the commitment to divest this business line does not represent a strategic shift that will have a major effect on its operations and financial results. These assets were available for immediate sale in their present condition, subject to only usual and customary terms. During the three months ended June 30, 2018, a loss on write-down of assets held for sale of
$2.6 million
was recorded to state the assets at fair value less costs to sell.
The assets classified as held for sale at December 31, 2017 is as follows (in thousands):
|
|
|
|
|
Property and equipment, net
|
$
|
4,998
|
|
Valuation allowance
|
—
|
|
Assets held for sale, net
|
$
|
4,998
|
|
On
September 10, 2018
, the Company completed the sale of the assets of the Dalton, Georgia facility to T&L Properties of Dalton, LLC for
$1.8 million
in cash consideration. The Company recorded a loss on the sale of the business of
$0.4 million
for the three months ended
September 30, 2018
.
Note 6 — Acquisitions
On July 27, 2016, the Company acquired
100%
of the stock and interests in International Polymerics, Inc. (“IPI”) and related entities for
$7.9 million
in cash consideration, net of cash acquired, and
247,764
shares of the Company’s common
stock. IPI is a U.S. based manufacturer of high viscosity guar gum and guar slurry for the oil and gas industry with a wide selection of stimulation chemicals.
Note
7
— Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted ASC 606 using the full retrospective method applied to those contracts which were not completed as of December 31, 2015. As a result of electing the full retrospective adoption approach, results for reporting periods beginning after December 31, 2015 are presented under ASC 606.
There was no material impact upon the adoption of ASC 606. As revenue is primarily related to product sales accounted for at a point in time and service contracts that are primarily short-term in nature (typically less than 30 days), the Company did
not record any adjustments to retained earnings at December 31, 2015 or for any periods previously presented.
Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. In recognizing revenue for products and services, the Company determines the transaction price of purchase orders or contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require significant judgment by management, which includes
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract. Variable consideration typically consists of product returns and is estimated based on the amount of consideration the Company expects to receive. Revenue accruals are recorded on an
ongoing basis to reflect updated variable consideration information.
For certain contracts, the Company recognizes revenue under the percentage-of-completion method of accounting, measured by the percentage of “costs incurred to date” to the “total estimated costs of completion.” This percentage is applied to the “total estimated revenue at completion” to calculate proportionate revenue earned to date. For the years ended
December 31, 2018
,
2017
, and
2016
, the percentage-of-completion revenue accounted for less than
0.1%
of total revenue during the respective time periods. This resulted in
immaterial unfulfilled performance obligations and immaterial contract assets and/or liabilities for which the Company did not record adjustments to opening retained earnings as of
December 31, 2015
or for any periods previously presented.
The vast majority of the Company’s products are sold at a point in time and service contracts are short-term in nature. Sales are billed on a monthly basis with payment terms customarily 30 days from invoice receipt. In addition, sales taxes are excluded from revenues.
Disaggregation of Revenue
The Company has disaggregated revenues by product sales (point-in-time revenue recognition) and service revenue (over-time revenue recognition), where product sales accounted for over
95%
of total revenue for the years ended
December 31, 2018
,
2017
, and
2016
.
The Company differentiates revenue and operating expenses (excluding depreciation and amortization) based on whether the source of revenue is attributable to products or services. Revenue and operating expenses (excluding depreciation and amortization) disaggregated by revenue source are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenue:
|
|
|
|
|
|
Products
|
$
|
172,412
|
|
|
$
|
237,211
|
|
|
$
|
182,294
|
|
Services
|
5,361
|
|
|
5,895
|
|
|
5,939
|
|
|
$
|
177,773
|
|
|
$
|
243,106
|
|
|
$
|
188,233
|
|
Operating expenses (excluding depreciation and amortization):
|
|
|
|
|
|
Products
|
$
|
152,846
|
|
|
$
|
182,330
|
|
|
$
|
140,108
|
|
Services
|
6,962
|
|
|
6,414
|
|
|
3,875
|
|
|
$
|
159,808
|
|
|
$
|
188,744
|
|
|
$
|
143,983
|
|
Arrangements with Multiple Performance Obligations
The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Standalone selling prices are generally determined based on the prices charged to customers (“observable standalone price”) or an expected cost plus a margin approach. For combined products and services within a contract, the Company accounts for individual products and services separately if they are distinct (i.e. if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration is allocated between separate products and services within a contract based on the prices at the observable standalone price. For items that are not sold
separately, the expected cost plus a margin approach is used to estimate the standalone selling price of each performance obligation.
Contract Balances
Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Accordingly, no revenue contracts give rise to contract assets or liabilities under ASC 606.
Practical Expedients and Exemptions
The Company has elected to apply several practical expedients as discussed below:
|
|
•
|
Sales commissions are expensed when incurred because the amortization period would have been one
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
year or less. These costs are recorded within segment selling and administrative expenses.
|
|
•
|
The majority of the Company’s services are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14, exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
|
|
|
•
|
The Company’s payment terms are short-term in nature with settlements of one year or less. The Company has utilized the practical expedient in ASC 606-10-32-18, exempting the Company from adjusting the promised amount of consideration for the effects of a significant financing component given that the period between when the Company transfers a promised good or service
|
to a customer and when the customer pays for that good or service will be one year or less.
|
|
•
|
In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date. For these contracts, the Company has utilized the practical expedient in ASC 606-10-55-18, allowing the Company to recognize revenue in the amount to which it has a right to invoice.
|
Accordingly, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
Note 8 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
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:
|
|
|
|
|
|
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
Inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
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
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Property and equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31
|
|
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 totaled
$7.8 million
,
$8.4 million
, and
$6.6 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
During the years ended
December 31, 2018
,
2017
, and
2016
,
no
impairments were recognized related to property and equipment.
Note
11
— Goodwill
The Company has
no
reporting units which have a goodwill balance at
December 31, 2018
.
Goodwill is tested for impairment annually in the fourth quarter, or more frequently if circumstances indicate a potential impairment. During the fourth quarter of 2017, the Company adopted ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. If the carrying amount exceeds the reporting unit’s fair value, the Company will recognize an impairment charge for the excess amount.
During the second quarter of
2018
, the Company recognized a goodwill impairment charge of
$37.2 million
in the Energy Chemistry Technologies (“ECT”) reporting unit, which resulted from sustained under-performance and lower expectations related to the reporting unit. As a result of these factors, a qualitative analysis, and additional risks associated with the business, the Company concluded that sufficient indicators existed to require an interim quantitative assessment of goodwill for that reporting unit as of
June 30, 2018
. The fair value of the reporting unit was estimated based on an
analysis of the present value of future discounted cash flows. The significant estimates used in the discounted cash flows model included the Company’s weighted average cost of capital, projected cash flows and the long-term rate of growth. The assumptions were based on the actual historical performance of the reporting unit and took into account a recent weakening of operating results in an improving market environment. The excess of the reporting unit’s carrying value over the estimated fair value was recorded as the goodwill impairment charge during the three months ended
June 30, 2018
and represented all of the ECT reporting unit’s goodwill.
During annual goodwill impairment testing for the year ended
December 31, 2017
, the Company first assessed the qualitative factors and was unable to conclude that it was not more likely than not that fair value of the ECT reporting unit exceeded the carrying amount of the reporting unit. Therefore, the Company performed the quantitative impairment test. The result of this testing indicated that the fair value of the ECT reporting unit exceeded the carrying amount, including goodwill, of the reporting unit.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During annual goodwill impairment testing for the year ended
December 31, 2016
, the Company first assessed qualitative factors to determine whether it was necessary to perform the two-step goodwill impairment test that the Company has historically used. The Company concluded that it was not more
likely than not that goodwill was impaired as of the fourth quarter of
2016
, and therefore, further testing was not required.
No
impairments of goodwill were recognized during the years ended
December 31, 2017
and
2016
.
Changes in the carrying amount of goodwill for the ECT reporting unit are as follows (in thousands):
|
|
|
|
|
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
Other intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
Cost
|
|
Accumulated
Amortization
|
|
Cost
|
|
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
|
|
|
|
|
2,760
|
|
|
|
Total other intangible assets
|
$
|
40,420
|
|
|
|
|
$
|
30,907
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount:
|
|
|
|
|
|
|
|
Other intangible assets, net
|
$
|
26,827
|
|
|
|
|
$
|
22,048
|
|
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets acquired are amortized on a straight-line basis over
two
to
95
years. Amortization of intangible assets acquired totaled
$1.4 million
,
$1.4 million
, and
$1.5 million
for the years end ended
December 31, 2018
,
2017
, and
2016
, respectively.
Amortization of deferred financing costs totaled
$0.4 million
,
$0.5 million
, and
$0.4 million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
Estimated future amortization expense for other finite lived intangible assets, including deferred financing costs, at
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
|
2019
|
|
$
|
2,351
|
|
2020
|
|
2,324
|
|
2021
|
|
2,315
|
|
2022
|
|
2,048
|
|
2023
|
|
1,821
|
|
Thereafter
|
|
13,208
|
|
Other amortizable intangible assets, net
|
|
$
|
24,067
|
|
During the years ended
December 31, 2018
,
2017
, and
2016
,
no
impairments were recognized related to other intangible assets.
Note
13
— Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Long-term debt, classified as current:
|
|
|
|
Borrowings under revolving credit facility
|
$
|
49,731
|
|
|
$
|
27,950
|
|
Borrowing under the revolving credit facility is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause.
Credit Facility
On May 10, 2013, the Company and certain of its subsidiaries (the “Borrowers”) entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement (as amended, the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”). The Company may borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. The Credit Facility continues in effect until
May 10, 2022
. Under terms of the Credit Facility, as amended, the Company has total borrowing availability of
$75 million
under a revolving credit facility. A term loan was repaid in May 2017 and may not be re-borrowed. In addition, the Company repaid the outstanding balance of the revolving credit facility on
March 1, 2019
(see Note
21
).
The Credit Facility was secured by substantially all of the Company’s domestic real and personal property, including accounts receivable, inventory, land, buildings, equipment and
other intangible assets. The Credit Facility contained customary representations, warranties, and both affirmative and negative covenants. The Company was in compliance with all debt covenants at
December 31, 2018
. In the event of default, PNC Bank may accelerate the maturity date of any outstanding amounts borrowed under the Credit Facility.
Effective
June 13, 2018
, the Company entered into an Eleventh Amendment to the Credit Facility which, among other things, maintained the maximum revolving advance amount at
$75 million
, but added a collateral block equal to
$10 million
minus the amount of any collateral value in excess of
$75 million
and, to the extent not duplicated, any inventory collateral in excess of
$52 million
. Compliance with the fixed charge coverage ratio and the leverage ratio was suspended through December 31, 2018, as long as there was not a financial covenant trigger event, which occurs if undrawn availability is less than
$15 million
at any month-end through December 31, 2018. At
December 31, 2018
, undrawn availability for this calculation was
$25.1 million
.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Credit Facility contained financial covenants to maintain a fixed charge coverage ratio and a leverage ratio, as well as establishes an annual limit on capital expenditures. The fixed charge coverage ratio is the ratio of (a) earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted for non-cash stock-based compensation, during the period to (b) all debt payments during the period. The fixed charge coverage ratio requirement was to begin for the quarter ended March 31, 2019 at
1.10
to
1.00
, and for each annualized fiscal quarter in 2019 and thereafter. The leverage ratio (funded debt to adjusted EBITDA) requirement was to begin for the quarter ended March 31, 2019, at not greater than
3.00
to
1.00
, and for each annualized fiscal quarter in 2019 and thereafter. These financial covenants would be tested earlier if a financial covenant trigger event occurs. Following a triggering event, the fixed charge coverage ratio must be maintained at no less than
1.10
to
1.00
and the leverage ratio must be maintained at no greater than
3.00
to
1.00
as of the last day of the quarter. The annual limit on capital expenditures for 2018 and each fiscal year thereafter was
$26 million
. The annual limit on capital expenditures is reduced if the undrawn availability under the revolving credit facility falls below
$15 million
at any month-end.
The Credit Facility restricted the payment of cash dividends on common stock and limited the amount that may be used to repurchase common stock and preferred stock.
Beginning with fiscal year 2017, the Credit Facility included a provision that
25%
of EBITDA minus cash paid for taxes, dividends, debt payments, and unfunded capital expenditures, not to exceed
$3.0 million
for any year, be paid on the outstanding balance within
75 days
of the fiscal year end. For the year ended
December 31, 2018
, there was no additional payment required based on this provision.
Each of the Company’s domestic subsidiaries was fully obligated for Credit Facility indebtedness as a borrower or as a guarantor.
(a) Revolving Credit Facility
Under the revolving credit facility, the Company may borrow up to
$75 million
through
May 10, 2022
. This included a
sublimit of
$10 million
that may be used for letters of credit. The revolving credit facility was secured by substantially all of the Company’s domestic accounts receivable and inventory.
At
December 31, 2018
, eligible accounts receivable and inventory securing the revolving credit facility provided total borrowing capacity of
$66.6 million
under the revolving credit facility. Available borrowing capacity, net of outstanding borrowings, was
$16.8 million
at
December 31, 2018
.
The interest rate on advances under the revolving credit facility varied based on the fixed charge coverage ratio. Rates ranged (a) between PNC Bank’s base lending rate plus
1.5%
to
2.0%
or (b) between the London Interbank Offered Rate (LIBOR) plus
2.5%
to
3.0%
. PNC Bank’s base lending rate was
5.5%
at
December 31, 2018
. The Company was required to pay a monthly facility fee of
0.25%
per annum on any unused amount under the commitment based on daily averages. At
December 31, 2018
,
$49.7 million
was outstanding under the revolving credit facility, with
$(0.3) million
borrowed as base rate loans at an interest rate of
7.5%
and
$50.0 million
borrowed as LIBOR loans at an interest rate of
5.51%
.
On
March 1, 2019
, the Company repaid the outstanding balance of the Credit Facility (see Note
21
).
(b) Term Loan
The amount borrowed under the term loan was reset to
$10 million
effective as of
September 30, 2016
. Monthly principal payments of
$0.2 million
were required. On
May 22, 2017
, the Company repaid the outstanding balance of the term loan. No additional amount may be re-borrowed under the term loan.
Debt Maturities
At
December 31, 2018
, borrowing under the revolving credit facility, which matures on
May 10, 2022
, is classified a current debt, and therefore, the entire balance is considered to mature in
2019
.
Note 14 — Fair Value Measurements
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
•
|
Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.
|
Liabilities Measured at Fair Value on a Recurring Basis
At
December 31, 2018
and
2017
, no liabilities were required to be measured at fair value on a recurring basis.
There were no transfers in or out of either Level 1, Level 2, or Level 3 fair value measurements during the years ended
December 31, 2018
,
2017
, and
2016
.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company’s non-financial assets, including property and equipment, goodwill, and other intangible assets are measured at fair value on a non-recurring basis and are subject to fair value adjustment in certain circumstances. During the three
months ended June 30, 2018, the Company recorded an impairment of
$37.2 million
for goodwill in the ECT reporting unit (see Note
11
).
No
impairments of goodwill were recognized during the years ended
December 31, 2017
and
2016
.
No
impairment of property and equipment or other intangible assets were recognized during the years ended
December 31, 2018
,
2017
, and
2016
.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the short-term nature of these accounts. The Company had
no
cash equivalents at
December 31, 2018
or
2017
.
The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Borrowings under revolving credit facility
|
$
|
49,731
|
|
|
$
|
49,731
|
|
|
$
|
27,950
|
|
|
$
|
27,950
|
|
The carrying amount of borrowings under the revolving credit facility approximates its fair value because the interest rate is variable.
Note 15 — Earnings (Loss) Per Share
Basic
earnings (loss)
per common share is calculated by dividing net
income (loss)
by the weighted average number of common shares outstanding for the period. Diluted
earnings (loss)
per common share is calculated by dividing net
income (loss)
by the weighted average number of common shares outstanding combined with dilutive common share equivalents outstanding, if the effect is dilutive.
Potentially dilutive securities were excluded from the calculation of diluted loss per share for the years ended
December 31, 2018
,
2017
, and
2016
, since including them
would have an anti-dilutive effect on loss per share due to the loss from continuing operations incurred during the period. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were
0.3 million
restricted stock units for the year ended
December 31, 2018
,
0.7 million
stock options, before they were converted into common shares during 2017, and
0.7 million
restricted stock units for the year ended
December 31, 2017
, and
0.7 million
stock options and
0.8 million
restricted stock units for the year ended
December 31, 2016
.
A reconciliation of the number of shares used for the basic and diluted
earnings (loss)
per common share computations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Weighted average common shares outstanding - Basic
|
57,995
|
|
|
57,580
|
|
|
56,087
|
|
Assumed conversions:
|
|
|
|
|
|
Incremental common shares from stock options
|
—
|
|
|
—
|
|
|
—
|
|
Incremental common shares from restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding - Diluted
|
57,995
|
|
|
57,580
|
|
|
56,087
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — Income Taxes
Components of the income tax (benefit) expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
(1,126
|
)
|
|
$
|
(3,325
|
)
|
State
|
97
|
|
|
587
|
|
|
(126
|
)
|
Foreign
|
(740
|
)
|
|
488
|
|
|
(526
|
)
|
Total current
|
(643
|
)
|
|
(51
|
)
|
|
(3,977
|
)
|
Deferred:
|
|
|
|
|
|
Federal
|
(6,585
|
)
|
|
5,994
|
|
|
1,904
|
|
State
|
(89
|
)
|
|
214
|
|
|
(85
|
)
|
Foreign
|
101
|
|
|
(45
|
)
|
|
(46
|
)
|
Total deferred
|
(6,573
|
)
|
|
6,163
|
|
|
1,773
|
|
Income tax (benefit) expense
|
$
|
(7,216
|
)
|
|
$
|
6,112
|
|
|
$
|
(2,204
|
)
|
The components of (loss) income before income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
United States
|
$
|
(80,034
|
)
|
|
$
|
(10,025
|
)
|
|
$
|
(5,292
|
)
|
Foreign
|
(623
|
)
|
|
(1,367
|
)
|
|
(1,359
|
)
|
(Loss) income before income taxes
|
$
|
(80,657
|
)
|
|
$
|
(11,392
|
)
|
|
$
|
(6,651
|
)
|
A reconciliation of the U.S. federal statutory tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Federal statutory tax rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
0.8
|
|
|
(3.2
|
)
|
|
2.5
|
|
Non-U.S. income taxed at different rates
|
0.8
|
|
|
(4.3
|
)
|
|
(0.6
|
)
|
(Increase) decrease in valuation allowance
|
(3.6
|
)
|
|
0.1
|
|
|
(0.2
|
)
|
Impact of 2017 Tax Cuts and Jobs Act
|
—
|
|
|
(64.2
|
)
|
|
—
|
|
Net operating loss carryback adjustment
|
—
|
|
|
—
|
|
|
(4.7
|
)
|
Reduction in tax benefit related to stock-based awards
|
(1.0
|
)
|
|
(16.9
|
)
|
|
—
|
|
Non-deductible expenditures and goodwill
|
(9.0
|
)
|
|
(3.9
|
)
|
|
(6.1
|
)
|
Research and development credit
|
0.3
|
|
|
3.6
|
|
|
5.7
|
|
Other
|
(0.4
|
)
|
|
0.1
|
|
|
1.5
|
|
Effective income tax rate
|
8.9
|
%
|
|
(53.7
|
)%
|
|
33.1
|
%
|
Fluctuations in effective tax rates have historically been impacted by permanent tax differences with no associated income tax impact, changes in state apportionment factors, including the effect on state deferred tax assets and liabilities, and non-U.S. income taxed at different rates.
Comprehensive tax reform legislation enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Acts (“2017 Tax Act”), makes significant changes to U.S. federal income tax laws. The 2017 Tax Act, among other things, reduces the corporate income tax rate from
35%
to
21%
, partially limits the deductibility of business interest expense and net operating losses, provides additional limitations on the deductibility of executive compensation, imposes a one-time tax on unrepatriated earnings from certain foreign subsidiaries, taxes offshore earnings at reduced rates regardless of whether they are repatriated, and allows the immediate deduction of certain new investments instead of deductions for depreciation expense over time. The Company had not completed its determination of the 2017 Tax Act and recorded provisional amounts in its financial statements as of December 31, 2017. The Company recorded a provisional expense for the effects of the 2017 Tax Act of
$7.3 million
. The effects of the 2017
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Act on the Company include three main categories: 1) remeasurement of the net deferred tax assets from
35%
to
21%
, which resulted in tax expense of
$5.5 million
; 2) a one-time tax on unrepatriated earnings from certain foreign subsidiaries of
$0.2 million
; and 3) additional limitations on the deductibility of executive compensation, which resulted in tax expense of
$1.6 million
. The Company completed its review of the 2017 Tax Act in 2018, and there were no material changes in the measurement period.
Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. The components of deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
30,241
|
|
|
$
|
24,569
|
|
Allowance for doubtful accounts
|
1,073
|
|
|
981
|
|
Inventory valuation reserves
|
1,057
|
|
|
827
|
|
Equity compensation
|
548
|
|
|
685
|
|
Goodwill
|
1,089
|
|
|
—
|
|
Accrued compensation
|
342
|
|
|
222
|
|
Foreign tax credit carryforward
|
4,041
|
|
|
3,955
|
|
Interest expense limitation
|
534
|
|
|
—
|
|
Other
|
50
|
|
|
—
|
|
Total gross deferred tax assets
|
38,975
|
|
|
31,239
|
|
Valuation allowance
|
(4,042
|
)
|
|
(1,187
|
)
|
Total deferred tax assets, net
|
34,933
|
|
|
30,052
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
(6,613
|
)
|
|
(6,216
|
)
|
Intangible assets
|
(9,657
|
)
|
|
(10,084
|
)
|
Goodwill
|
—
|
|
|
(365
|
)
|
Convertible debt
|
—
|
|
|
(619
|
)
|
Unearned revenue
|
—
|
|
|
(52
|
)
|
Prepaid insurance and other
|
—
|
|
|
(3
|
)
|
Total gross deferred tax liabilities
|
(16,270
|
)
|
|
(17,339
|
)
|
Net deferred tax assets
|
$
|
18,663
|
|
|
$
|
12,713
|
|
As of
December 31, 2018
, the
Company had U.S. net operating loss carryforwards of
$127.5 million
, including
$106.7 million
expiring in various amounts in
2029
through
2037
which can offset
100%
of taxable income and
$20.8 million
that has an indefinite carryforward period which can offset
80%
of taxable income per year. The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo an “ownership change” for purposes of Section 382 of the Tax Code.
Net deferred tax assets arise due to the recognition of income and expense items for tax purposes, which differ from those used for financial statement purposes. ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. In assessing the need for a valuation allowance in the second quarter of 2018, the Company considered all available objective and
verifiable evidence, both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, and expectations and risks associated with estimates of future pre-tax income. As a result of this analysis, the Company determined that it is more likely than not that it will not realize the benefits of certain deferred tax assets and, therefore, recorded a
$15.5 million
valuation allowance against the carrying value of net deferred tax assets, except for deferred tax liabilities related to non-amortizable intangible assets and certain state jurisdictions. As all available evidence should be taken into consideration when assessing the need for a valuation allowance, the subsequent events that occurred in the first quarter of 2019 (Note
21
) provided a source of income to support the release of
$11.5 million
of the valuation allowance which resulted in a deferred tax asset of
$18.7 million
. As such, the Company reversed this portion of the valuation allowance during the fourth quarter of 2018.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has not calculated U.S. taxes on unremitted earnings of certain non-U.S. subsidiaries due to the Company’s intent to reinvest the unremitted earnings of the non-U.S. subsidiaries. At
December 31, 2018
, the Company had approximately
$3.2 million
in unremitted earnings for one of its foreign jurisdictions, which were not included for U.S. tax purposes. Due to the 2017 Tax Act, U.S. federal transition taxes have been recorded for a one-time U.S. tax liability on these earnings which have not previously been repatriated to the U.S. However, certain withholding taxes will need to be paid upon repatriation. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.
The Company has performed an evaluation and concluded there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the tax years which remain
subject to examination by tax jurisdictions as of
December 31, 2018
, which are the years ended December 31, 2015 through
December 31, 2018
for U.S. federal taxes and the years ended December 31, 2014 through
December 31, 2018
for state tax jurisdictions.
At
December 31, 2018
, the Company had
no
unrecognized tax benefits.
In January 2017, the Internal Revenue Service notified the Company that it will examine the Company’s federal tax returns for the year ended December 31, 2014. No adjustments have been asserted and management believes that sustained adjustments, if any, would not have a material effect on the Company’s financial position, results of operations or liquidity.
Note 17 — Common Stock
The Company’s Certificate of Incorporation, as amended November 9, 2009, authorizes the Company to issue up to
80 million
shares of common stock, par value
$0.0001
per share, and
100,000
shares of
one
or more series of preferred stock, par value
$0.0001
per share.
A reconciliation of the changes in common shares issued is as follows:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
Shares issued at the beginning of the year
|
60,622,986
|
|
|
59,684,669
|
|
Issued as restricted stock award grants
|
1,539,889
|
|
|
275,029
|
|
Issued upon exercise of stock options
|
—
|
|
|
663,288
|
|
Shares issued at the end of the year
|
62,162,875
|
|
|
60,622,986
|
|
Stock-Based Incentive Plans
Stockholders approved long term incentive plans in 2018, 2014, 2010, and 2007 (the “2018 Plan,” the “2014 Plan,” the “2010 Plan,” and the “2007 Plan,” respectively) under which the Company may grant equity awards to officers, key employees, non-employee directors, and service providers in the form of stock options, restricted stock, and certain other incentive awards. The maximum number of shares that may be issued under the 2018 Plan, 2014 Plan, 2010 Plan, and 2007 Plan are
3.0 million
,
5.2 million
,
6.0 million
, and
2.2 million
, respectively. At
December 31, 2018
, the Company had a total of
1.5 million
shares remaining to be granted under the 2018 Plan, 2014 Plan, and 2010 Plan. Shares may no longer be granted under the 2007 Plan.
Stock Options
All stock options are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant. Options expire no later than
ten years
from the date of grant and generally vest in
four years
or less. Proceeds
received from stock option exercises are credited to common stock and additional paid-in capital, as appropriate. The Company uses historical data to estimate pre-vesting option forfeitures. Estimates are adjusted when actual forfeitures differ from the estimate. Stock-based compensation expense is recorded for all equity awards expected to vest.
The fair value of stock options at the date of grant is calculated using the Black-Scholes option pricing model. The risk free interest rate is based on the implied yield of U.S. Treasury zero-coupon securities that correspond to the expected life of the option. Volatility is estimated based on historical and implied volatilities of the Company’s stock and of identified companies considered to be representative peers of the Company. The expected life of awards granted represents the period of time the options are expected to remain outstanding. The Company uses the “simplified” method which is permitted for companies that cannot reasonably estimate the expected life of options based on historical share option exercise experience. The Company does not expect to pay dividends on common stock. No options were granted to employees during
2018
,
2017
, and
2016
.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Black-Scholes option valuation model was developed to estimate the fair value of traded options that have no vesting restrictions and are fully-transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value calculation. The Company’s options are not characteristic of traded options; therefore, the option valuation models do not necessarily provide a reliable measure of the fair value of options.
The total intrinsic value of stock options exercised during the years ended
December 31, 2017
and
2016
was
$2.3 million
and
$1.0 million
, respectively.
No
stock options vested during the years ended
December 31, 2018
,
2017
, and
2016
.
At
December 31, 2017
, the Company had
no
remaining outstanding stock options.
Restricted Stock
The Company grants employees either time-vesting or performance-based restricted shares in accordance with terms specified in the Restricted Stock Agreements (“RSAs”). Time-vesting restricted shares vest after a stipulated period of time has elapsed subsequent to the date of grant, generally
three years
. Certain time-vested shares have also been issued with a portion of the shares granted vesting immediately. Performance-based restricted shares are issued with performance criteria defined over a designated performance period and vest only when, and if, the outlined performance criteria are met. During the year ended
December 31, 2018
,
84%
of the restricted shares granted were time-vesting and
16%
were performance-based. Grantees of restricted shares retain voting rights for the granted shares.
Restricted stock share activity for the year ended
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
Restricted Stock Shares
|
|
Shares
|
|
Weighted-
Average Fair
Value at Date of
Grant
|
Non-vested at January 1, 2018
|
|
246,258
|
|
|
$
|
12.24
|
|
Granted to employees
|
|
1,287,484
|
|
|
3.67
|
|
RSAs converted from 2016 restricted stock units
|
|
252,405
|
|
|
12.02
|
|
Vested
|
|
(578,114
|
)
|
|
10.82
|
|
Forfeited
|
|
(157,661
|
)
|
|
5.52
|
|
Non-vested at December 31, 2018
|
|
1,050,372
|
|
|
$
|
3.47
|
|
The weighted-average grant-date fair value of restricted stock granted during the years ended
December 31, 2018
,
2017
, and
2016
was
$3.67
,
$10.62
, and
$11.92
per share, respectively. The total fair value of restricted stock that vested during the years ended
December 31, 2018
,
2017
, and
2016
was
$6.3 million
,
$8.6 million
, and
$15.4 million
, respectively.
At
December 31, 2018
, there was
$2.7 million
of unrecognized compensation expense related to non-vested restricted stock. The unrecognized compensation expense is expected to be recognized over a weighted-average period of
2.0 years
.
Restricted Stock Units
During the year ended
December 31, 2018
, the Company granted performance-based restricted stock units (“RSUs”) for
407,698
shares equivalents. The performance period for these share equivalents continues until
December 31, 2019
.
During the year ended
December 31, 2017
, the Company granted performance-based RSUs for
604,682
share equivalents, which had a performance period through
December 31, 2018
. No RSUs were earned during this performance period.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted stock unit share activity for the year ended
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
Restricted Stock Unit Shares
|
|
Shares
|
|
Weighted-
Average Fair
Value at Date of
Grant
|
RSU share equivalents at January 1, 2018
|
|
725,331
|
|
|
$
|
16.41
|
|
2016 RSUs converted to RSAs in 2018
|
|
(252,405
|
)
|
|
12.02
|
|
2017 share equivalents forfeited
|
|
(121,514
|
)
|
|
19.33
|
|
2017 share equivalents not earned
|
|
(351,412
|
)
|
|
18.56
|
|
2017 share equivalents
|
|
—
|
|
|
—
|
|
2018 share equivalents granted
|
|
407,698
|
|
|
3.95
|
|
2018 share equivalents forfeited
|
|
(105,932
|
)
|
|
3.95
|
|
RSU share equivalents at December 31, 2018
|
|
301,766
|
|
|
$
|
3.95
|
|
At
December 31, 2018
, there was
$3.2 million
of unrecognized compensation expense related to
2018
and
2017
restricted stock units. The unrecognized compensation expense is expected to be recognized over a weighted-average period of
1.3 years
.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (“ESPP”) was approved by stockholders on May 18, 2012. The Company registered
500,000
shares of its common stock, currently held as treasury shares, for issuance under the ESPP. The purpose of the ESPP is to provide employees with an opportunity to purchase shares of the Company’s common stock through accumulated payroll deductions. The ESPP allows participants to purchase common stock at a purchase price equal to
85%
of the fair market value of the common stock on the last business day of a
three
-month offering period which coincides with calendar quarters. Payroll deductions may not exceed
10%
of an employee’s compensation and participants may not purchase more than
1,000
shares in any one offering period. In addition, for each calendar year, an employee may not be granted purchase rights for Flotek Stock valued over
$25,000
, as determined at the time such purchase right is granted. The fair value of the discount associated with shares purchased under the plan is recognized as share-based compensation expense and was
$0.1 million
,
$0.1 million
, and
$0.1 million
during the years ended
December 31, 2018
,
2017
, and
2016
, respectively. The total fair value of the shares purchased under the plan during the years ended
December 31, 2018
,
2017
, and
2016
was
$0.4 million
,
$0.8 million
, and
$1.0 million
, respectively. The employee payment associated with participation in the plan was satisfied through payroll deductions. Effective after the third quarter 2018 purchase, the Company temporarily suspended the ESPP due to lack of shares.
Share-Based Compensation Expense
Non-cash share-based compensation expense related to restricted stock, restricted stock unit grants, and stock
purchased under the Company’s ESPP was
$7.1 million
,
$10.6 million
, and
$11.4 million
during the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
Treasury Stock
The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. During the years ended
December 31, 2018
,
2017
, and
2016
, the Company purchased
102,333
shares,
199,644
shares, and
238,216
shares, respectively, of the Company’s common stock at market value as payment of income tax withholding owed by employees upon the vesting of restricted shares and the exercise of stock options. Shares issued as restricted stock awards to employees that were forfeited are accounted for as treasury stock. During the year ended
December 31, 2018
, there were
no
shares surrendered for the exercise of stock options. During the years ended
December 31, 2017
and
2016
, shares surrendered for the exercise of stock options were
478,287
and
3,225
, respectively. These surrendered shares are also accounted for as treasury stock.
Stock Repurchase Program
In November 2012, the Company’s Board of Directors authorized the repurchase of up to
$25 million
of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through
December 31, 2018
, the Company has repurchased
$25 million
of its common stock under this authorization.
In June 2015, the Company’s Board of Directors authorized the repurchase of up to an additional
$50 million
of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through
December 31, 2018
, the Company has repurchased
$0.3 million
of its common stock under this authorization.
During the year ended December 31, 2018, the Company did
no
t repurchase any shares of its outstanding common stock.
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2017, the Company repurchased
905,000
shares of its outstanding common stock on the open market at a cost of
$5.2 million
, inclusive of transaction costs, or an average price of
$5.75
per share. During the year ended December 31, 2016, the Company did
no
t repurchase any shares of its outstanding common stock.
At
December 31, 2018
, the Company has
$49.7 million
remaining under its share repurchase program. A covenant under the Company’s Credit Facility limited the amount that may be used to repurchase the Company’s common stock. At
December 31, 2018
, this covenant did not permit additional share repurchases.
Note 18 — Commitments and Contingencies
Class Action Litigation
On March 30, 2017, the U.S. District Court for the Southern District of Texas granted the Company’s motion to dismiss the
four
consolidated putative securities class action lawsuits that were filed in November 2015, against the Company and certain of its officers. The lawsuits were previously consolidated into a single case, and a consolidated amended complaint had been filed. The consolidated amended complaint asserted that the Company made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint sought an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between October 23, 2014 and November 9, 2015, inclusive. The lead plaintiff appealed the District Court’s decision granting the motion to dismiss. On February 7, 2019, a three-judge panel of the United States Court of Appeals for the Fifth Circuit issued a unanimous opinion affirming the District Court’s judgment of dismissal in its entirety.
In January 2016,
three
derivative lawsuits were filed,
two
in the District Court of Harris County, Texas (which have since been consolidated into
one
case), and
one
in the United States District Court for the Southern District of Texas, on behalf of the Company against certain of its officers and its current directors. The lawsuits allege violations of law, breaches of fiduciary duty, and unjust enrichment against the defendants.
The Company believes the lawsuits are without merit and intends to vigorously defend against all claims asserted. Discovery has not yet commenced. At this time, the Company is unable to reasonably estimate the outcome of this litigation.
In addition, as previously disclosed, the U.S. Securities and Exchange Commission had opened an inquiry related to similar issues to those raised in the above-described litigation. On August 21, 2017, the Company received a letter from the staff of the SEC stating that the inquiry has been concluded and that the staff does not intend to recommend an enforcement action against the Company.
Other Litigation
The Company is subject to routine litigation and other claims that arise in the normal course of business. Management is not
aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.
Legal Settlement
In December 2016, the Company reached a settlement with a stockholder related to disgorgement of potential short-swing profits under Section 16(b) of the Securities Exchange Act of 1934 in connection with purchases and sales of Company securities. As a result of the settlement, the Company recorded a gain of
$12.7 million
.
Operating Lease Commitments
The Company has operating leases for office space, vehicles, and equipment. Future minimum lease payments under operating leases at
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
|
Minimum
Lease
Payments
|
2019
|
|
$
|
2,562
|
|
2020
|
|
2,256
|
|
2021
|
|
2,034
|
|
2022
|
|
2,001
|
|
2023
|
|
1,351
|
|
Thereafter
|
|
9,254
|
|
Total
|
|
$
|
19,458
|
|
Rent expense under operating leases totaled
$2.9 million
,
$2.9 million
, and
$3.3 million
during the years ended
December 31, 2018
,
2017
, and
2016
, respectively.
401(k) Retirement Plan
The Company maintains a 401(k) retirement plan for the benefit of eligible employees in the U.S. All employees are eligible to participate in the plan upon employment. On January 1, 2015, the Company implemented a new matching program. The Company matches contributions at
100%
of up to
2%
of an employee’s compensation and, if greater, the Company matches contributions at
50%
from
5%
to
8%
of an employee’s compensation.
During the years ended
December 31, 2018
,
2017
, and
2016
, compensation expense included
$0.7 million
,
$1.0 million
and
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1.0 million
, respectively, related to the Company’s 401(k) match.
Concentrations and Credit Risk
The majority of the Company’s revenue is derived from the oil and gas industry. Customers include major oilfield services companies, major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies, and state-owned national oil companies.
This concentration of customers in one industry increases credit and business risks.
The Company is subject to concentrations of credit risk within trade accounts receivable, as the Company does not generally require collateral as support for trade receivables. In addition, the majority of the Company’s cash is maintained at a major financial institution and balances often exceed insurable amounts.
Note
19
— Business Segment, Geographic and Major Customer Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by chief operating decision-makers in deciding how to allocate resources and assess performance. The operations of the Company are categorized into
one
reportable segments: Energy Chemistry Technologies.
|
|
•
|
Energy Chemistry Technologies designs, develops, manufactures, packages, and markets specialty chemistries used in oil and natural gas well drilling, cementing, completion, and stimulation. In addition, the Company’s chemistries are used in specialized enhanced and improved oil recovery markets. Activities in this segment also include construction and
|
management of automated material handling facilities and management of loading facilities and blending operations for oilfield services companies.
The Company evaluates performance based upon a variety of criteria. The primary financial measure is segment operating income. Various functions, including certain sales and marketing activities and general and administrative activities, are provided centrally by the corporate office. Costs associated with corporate office functions, other corporate income and expense items, and income taxes are not allocated to reportable segments.
Summarized financial information of the reportable segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31,
|
|
Energy Chemistry Technologies
|
|
Corporate and
Other
|
|
Total
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
177,773
|
|
|
$
|
—
|
|
|
$
|
177,773
|
|
Income (loss) from operations
|
|
(36,817
|
)
|
|
(32,994
|
)
|
|
(69,811
|
)
|
Depreciation and amortization
|
|
7,107
|
|
|
2,109
|
|
|
9,216
|
|
Capital expenditures
|
|
2,733
|
|
|
826
|
|
|
3,559
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
243,106
|
|
|
$
|
—
|
|
|
$
|
243,106
|
|
Income (loss) from operations
|
|
33,611
|
|
|
(43,931
|
)
|
|
(10,320
|
)
|
Depreciation and amortization
|
|
7,323
|
|
|
2,445
|
|
|
9,768
|
|
Capital expenditures
|
|
3,279
|
|
|
918
|
|
|
4,197
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
Net revenue from external customers
|
|
$
|
188,233
|
|
|
$
|
—
|
|
|
$
|
188,233
|
|
Income (loss) from operations
|
|
29,014
|
|
|
(45,982
|
)
|
|
(16,968
|
)
|
Depreciation and amortization
|
|
5,935
|
|
|
2,237
|
|
|
8,172
|
|
Capital expenditures
|
|
10,674
|
|
|
2,398
|
|
|
13,072
|
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets of the Company by reportable segments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Energy Chemistry Technologies
|
$
|
139,205
|
|
|
$
|
172,799
|
|
Corporate and Other
|
28,208
|
|
|
35,871
|
|
Total segments
|
167,413
|
|
|
208,670
|
|
Held for sale
|
118,470
|
|
|
121,218
|
|
Total assets
|
$
|
285,883
|
|
|
$
|
329,888
|
|
Geographic Information
Revenue by country is based on the location where services are provided and products are used. No individual country other than the United States (“U.S.”) accounted for more than 10% of revenue. Revenue by geographic location is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S.
|
$
|
146,421
|
|
|
$
|
219,517
|
|
|
$
|
164,596
|
|
Other countries
|
31,352
|
|
|
23,589
|
|
|
23,637
|
|
Total
|
$
|
177,773
|
|
|
$
|
243,106
|
|
|
$
|
188,233
|
|
Long-lived assets held in countries other than the U.S. are not considered material to the consolidated financial statements.
Major Customers
Revenue from major customers, as a percentage of consolidated revenue, is as follows:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Customer A
|
12.2%
|
|
*
|
|
*
|
Customer B
|
10.1%
|
|
*
|
|
16.4%
|
Customer C
|
*
|
|
16.7%
|
|
21.9%
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 — Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
(in thousands, except per share data)
|
2018
|
|
|
|
|
|
|
|
|
|
Revenue
(1)
|
$
|
41,069
|
|
|
$
|
39,546
|
|
|
$
|
53,709
|
|
|
$
|
43,449
|
|
|
$
|
177,773
|
|
Loss from operations
(1)
|
(9,223
|
)
|
|
(47,140
|
)
|
|
(4,080
|
)
|
|
(9,368
|
)
|
|
(69,811
|
)
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
(1)
|
$
|
(9,528
|
)
|
|
$
|
(68,987
|
)
|
|
$
|
(4,869
|
)
|
|
$
|
9,943
|
|
|
$
|
(73,441
|
)
|
Income (loss) from discontinued operations, net of tax
|
9,595
|
|
|
(6,404
|
)
|
|
937
|
|
|
(1,385
|
)
|
|
2,743
|
|
Net (loss) income
|
67
|
|
|
(75,391
|
)
|
|
(3,932
|
)
|
|
8,558
|
|
|
(70,698
|
)
|
Net loss attributable to noncontrolling interests
|
—
|
|
|
357
|
|
|
—
|
|
|
1
|
|
|
358
|
|
Net loss attributable to Flotek Industries, Inc. (Flotek)
|
$
|
67
|
|
|
$
|
(75,034
|
)
|
|
$
|
(3,932
|
)
|
|
$
|
8,559
|
|
|
$
|
(70,340
|
)
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Flotek shareholders:
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
(1)
|
$
|
(9,528
|
)
|
|
$
|
(68,630
|
)
|
|
$
|
(4,869
|
)
|
|
$
|
9,944
|
|
|
$
|
(73,083
|
)
|
Income (loss) from discontinued operations, net of tax
|
9,595
|
|
|
(6,404
|
)
|
|
937
|
|
|
(1,385
|
)
|
|
2,743
|
|
Net income (loss) attributable to Flotek
|
$
|
67
|
|
|
$
|
(75,034
|
)
|
|
$
|
(3,932
|
)
|
|
$
|
8,559
|
|
|
$
|
(70,340
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.17
|
)
|
|
$
|
(1.19
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.17
|
|
|
$
|
(1.26
|
)
|
Discontinued operations
|
0.17
|
|
|
(0.11
|
)
|
|
0.02
|
|
|
(0.02
|
)
|
|
0.05
|
|
Basic earnings (loss) per common share
|
$
|
—
|
|
|
$
|
(1.30
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.15
|
|
|
$
|
(1.21
|
)
|
Diluted earnings (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.17
|
)
|
|
$
|
(1.19
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.17
|
|
|
$
|
(1.26
|
)
|
Discontinued operations
|
0.17
|
|
|
(0.11
|
)
|
|
0.02
|
|
|
(0.02
|
)
|
|
0.05
|
|
Diluted earnings (loss) per common share
|
$
|
—
|
|
|
$
|
(1.30
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.15
|
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Revenue
(1)
|
$
|
60,765
|
|
|
$
|
65,875
|
|
|
$
|
61,167
|
|
|
$
|
55,299
|
|
|
$
|
243,106
|
|
(Loss) income from operations
(1)
|
(4,326
|
)
|
|
(2,469
|
)
|
|
(4,088
|
)
|
|
563
|
|
|
(10,320
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
(1)
|
$
|
(3,041
|
)
|
|
$
|
(1,835
|
)
|
|
$
|
(4,275
|
)
|
|
$
|
(8,353
|
)
|
|
$
|
(17,504
|
)
|
(Loss) income from discontinued operations, net of tax
|
(8,937
|
)
|
|
(1,991
|
)
|
|
1,173
|
|
|
(136
|
)
|
|
(9,891
|
)
|
Net loss
|
$
|
(11,978
|
)
|
|
$
|
(3,826
|
)
|
|
$
|
(3,102
|
)
|
|
$
|
(8,489
|
)
|
|
$
|
(27,395
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.30
|
)
|
Discontinued operations
|
(0.15
|
)
|
|
(0.03
|
)
|
|
0.02
|
|
|
—
|
|
|
(0.17
|
)
|
Basic earnings (loss) per common share
|
$
|
(0.20
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.47
|
)
|
Diluted earnings (loss) per common share
(2)
:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.30
|
)
|
Discontinued operations
|
(0.15
|
)
|
|
(0.03
|
)
|
|
0.02
|
|
|
—
|
|
|
(0.17
|
)
|
Diluted earnings (loss) per common share
|
$
|
(0.20
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts exclude impact of discontinued operations.
|
(2) The sum of the quarterly earnings (loss) per share (basic and diluted) may not agree to the earnings (loss) per share for the year due to the timing of common stock issuances.
|
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
21
— Subsequent Events
On
January 10, 2019
, the Company entered into a Share Purchase Agreement with Archer Daniels-Midland Company (“ADM”) for the sale of all of the shares representing membership interest in its wholly owned subsidiary, Florida Chemical Company, LLC, which represents the CICT segment.
Effective
February 28, 2019
, the Company completed the sale of the CICT segment to ADM for
$175.0 million
in cash consideration, with
$4.4 million
temporarily held in escrow by ADM for post-closing working capital adjustments for up
to
90 days
and
$13.1 million
temporarily held in escrow by ADM with releases at
6 months
,
12 months
, and
15 months
to satisfy potential indemnification claims. The Company expects to recognize a gain on the sale of approximately
$62 million
to
$66 million
, pending post-closing adjustments.
Upon closing of the above transaction, the Company repaid the outstanding balance, interest, and fees related to the revolving credit facility on
March 1, 2019
, and subsequently terminated the Credit Facility with PNC Bank.