Company Quick10K Filing
Quick10K
Flotek Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$3.33 58 $194
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-04-11 Officers
8-K 2019-03-19 Enter Agreement, Officers, Regulation FD, Exhibits
8-K 2019-01-10 Enter Agreement, Regulation FD, Exhibits
8-K 2018-12-20 Officers, Regulation FD, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-07-11 Officers, Regulation FD, Exhibits
8-K 2018-06-13 Enter Agreement, Exhibits
8-K 2018-06-01 Officers, Regulation FD, Exhibits
8-K 2018-05-24 Officers
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-04-27 Officers, Shareholder Vote
8-K 2018-04-23 Earnings, Exhibits
8-K 2018-03-16 Officers, Exhibits
8-K 2018-03-15 Officers, Other Events
8-K 2018-02-20 Earnings, Exhibits
8-K 2018-01-16 Regulation FD, Exhibits
NVS Novartis 188,100
VRSK Verisk Analytics 23,000
PVH PVH 9,050
NATI National Instruments 5,580
PLAN Anaplan 5,040
HSC Harsco 2,120
EGAN Egain 243
UGU UGI Utilities 0
PCV Pismo Coast Village 0
TZACU Tenzing Acquisition 0
FTK 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization and Significant Accounting Policies
Note 2 - Recent Accounting Pronouncements
Note 4 - Leases
Note 5 - Revenue From Contracts with Customers
Note 6 - Supplemental Cash Flow Information
Note 7 - Inventories
Note 8 - Property and Equipment
Note 9 - Goodwill
Note 10 - Other Intangible Assets
Note 11 - Long-Term Debt and Credit Facility
Note 12 - Earnings (Loss) per Share
Note 13 - Fair Value Measurements
Note 14 - Income Taxes
Note 15 - Common Stock
Note 16 - Business Segment, Geographic and Major Customer Information
Note 17 - Commitments and Contingencies
Note 18 - Related Party Transaction
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 exhibit101-supplyagree.htm
EX-10.2 exhibit102-supplyagree.htm
EX-31.1 exhibit311-10q03312019.htm
EX-31.2 exhibit312-10q03312019.htm
EX-32.1 exhibit321-10q03312019.htm
EX-32.2 exhibit322-10q03312019.htm

Flotek Industries Earnings 2019-03-31

FTK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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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. 377022438451730 0000928054 2019-01-01 2019-03-31 0000928054 2019-04-30 0000928054 2018-12-31 0000928054 2019-03-31 0000928054 2018-01-01 2018-03-31 0000928054 2017-12-31 0000928054 2018-03-31 0000928054 us-gaap:CommonStockMember 2018-03-31 0000928054 us-gaap:RetainedEarningsMember 2018-01-01 2018-03-31 0000928054 us-gaap:TreasuryStockMember 2017-12-31 0000928054 us-gaap:TreasuryStockMember 2018-01-01 2018-03-31 0000928054 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-03-31 0000928054 us-gaap:CommonStockMember 2017-12-31 0000928054 us-gaap:NoncontrollingInterestMember 2017-12-31 0000928054 us-gaap:TreasuryStockMember 2018-03-31 0000928054 us-gaap:RetainedEarningsMember 2017-12-31 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-13270
FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of other jurisdiction of
incorporation or organization)
 
90-0023731
(I.R.S. Employer
Identification No.)
 
 
10603 W. Sam Houston Parkway N., Suite 300
Houston, TX
(Address of principal executive offices)
 
77064
(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
x
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
FTK
New York Stock Exchange
As of April 30, 2019, there were 57,463,627 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.





TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2




PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
96,753

 
$
3,044

Restricted cash
660

 

Accounts receivable, net of allowance for doubtful accounts of $1,465 and $1,190 at March 31, 2019 and December 31, 2018, respectively
37,178

 
37,047

Inventories, net
34,358

 
27,289

Income taxes receivable
3,351

 
3,161

Assets held for sale

 
118,470

Other current assets
20,373

 
5,771

Total current assets
192,673

 
194,782

Property and equipment, net
42,989

 
45,485

Operating lease right-of-use assets
18,202

 

Deferred tax assets, net
599

 
18,663

Other intangible assets, net
24,978

 
26,827

Other long-term assets
3,351

 
126

TOTAL ASSETS
$
282,792

 
$
285,883

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,798

 
$
15,011

Accrued liabilities
12,518

 
10,335

Income taxes payable
2,054

 

Interest payable

 
8

Liabilities held for sale

 
9,174

Current portion of lease liabilities
713

 

Long-term debt, classified as current

 
49,731

Total current liabilities
29,083

 
84,259

Operating lease liabilities
18,416

 

Finance lease liabilities
130

 

Deferred tax liabilities, net
116

 

Total liabilities
47,745

 
84,259

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.0001 par value, 80,000,000 shares authorized; 62,198,912 shares issued and 57,462,355 shares outstanding at March 31, 2019; 62,162,875 shares issued and 57,342,279 shares outstanding at December 31, 2018
6

 
6

Additional paid-in capital
344,004

 
343,536

Accumulated other comprehensive income (loss)
(1,022
)
 
(1,116
)
Retained earnings (accumulated deficit)
(74,573
)
 
(107,565
)
Treasury stock, at cost; 3,845,173 and 3,770,224 shares at March 31, 2019 and December 31, 2018, respectively
(33,368
)
 
(33,237
)
Total stockholders’ equity
235,047

 
201,624

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
282,792

 
$
285,883


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3




FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
Three months ended March 31,
 
2019
 
2018
Revenue
$
43,256

 
$
41,069

Costs and expenses:
 
 
 
Operating expenses (excluding depreciation and amortization)
44,599

 
36,655

Corporate general and administrative
7,281

 
8,493

Depreciation and amortization
2,260

 
2,333

Research and development
2,285

 
2,754

Loss on disposal of long-lived assets
1,097

 
57

Total costs and expenses
57,522

 
50,292

Loss from operations
(14,266
)
 
(9,223
)
Other (expense) income:
 
 
 
Interest expense
(1,998
)
 
(516
)
Other income (expense), net
110

 
(111
)
Total other expense
(1,888
)
 
(627
)
Loss before income taxes
(16,154
)
 
(9,850
)
Income tax benefit
774

 
322

Loss from continuing operations
(15,380
)
 
(9,528
)
Income from discontinued operations, net of tax
48,372

 
9,595

Net income
$
32,992

 
$
67

 
 
 
 
Basic earnings (loss) per common share:
 
 
Continuing operations
$
(0.26
)
 
$
(0.17
)
Discontinued operations, net of tax
0.83

 
0.17

Basic earnings (loss) per common share
$
0.57

 
$

 
 
 
 
Diluted earnings (loss) per common share:
 
 
Continuing operations
$
(0.26
)
 
$
(0.17
)
Discontinued operations, net of tax
0.83

 
0.17

Diluted earnings (loss) per common share
$
0.57

 
$

 
 
 
 
Weighted average common shares:
 
 
 
Weighted average common shares used in computing basic earnings (loss) per common share
58,373

 
57,259

Weighted average common shares used in computing diluted earnings (loss) per common share
58,373

 
57,259



See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4





FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
Three months ended March 31,
 
2019
 
2018
Loss from continuing operations
$
(15,380
)
 
$
(9,528
)
Income from discontinued operations, net of tax
48,372

 
9,595

Net income
32,992

 
67

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
94

 
(179
)
Comprehensive income (loss)
$
33,086

 
$
(112
)


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5




FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three months ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
32,992

 
$
67

Income from discontinued operations, net of tax
48,372

 
9,595

Loss from continuing operations
(15,380
)
 
(9,528
)
Adjustments to reconcile loss from continuing operations to net cash used in by operating activities:
 
 
 
Depreciation and amortization
2,260

 
2,333

Amortization of deferred financing costs
1,428

 
96

Provision for doubtful accounts
366

 
(43
)
Provision for excess and obsolete inventory

 
1,305

Loss on disposal of long-lived assets
1,097

 
57

Non-cash lease expense
230

 

Stock compensation expense
456

 
1,899

Deferred income tax provision (benefit)
17,860

 
(7,662
)
Reduction in tax benefit related to share-based awards
24

 
3

Changes in current assets and liabilities:
 
 
 
Restricted cash
(660
)
 

Accounts receivable, net
(474
)
 
1,715

Inventories, net
(7,031
)
 
5,729

Income taxes receivable
(247
)
 
(1
)
Other current assets
(18,661
)
 
331

Accounts payable
(1,216
)
 
(781
)
Accrued liabilities
(8,193
)
 
(7,599
)
Income taxes payable
2,428

 

Interest payable
(8
)
 
(37
)
Net cash used in operating activities
(25,721
)
 
(12,183
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(461
)
 
(1,377
)
Proceeds from sales of business
169,722

 

Proceeds from sale of assets
132

 
80

Purchase of patents and other intangible assets
(103
)
 
(117
)
Net cash provided by (used in) investing activities
169,290

 
(1,414
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
42,984

 
76,266

Repayments on revolving credit facility
(92,715
)
 
(64,475
)
Debt issuance costs

 
(8
)
Purchase of treasury stock related to share-based awards
(131
)
 
(3
)
Proceeds from sale of common stock

 
146

Net cash provided by (used in) financing activities
(49,862
)
 
11,926

Discontinued operations:
 
 
 
Net cash (used in) provided by operating activities
(337
)
 
430

Net cash provided by (used in) investing activities
337

 
(430
)
Net cash flows provided by discontinued operations

 

Effect of changes in exchange rates on cash and cash equivalents
2

 
(48
)
Net increase (decrease) in cash and cash equivalents
93,709

 
(1,719
)
Cash and cash equivalents at the beginning of period
3,044

 
4,584

Cash and cash equivalents at the end of period
$
96,753

 
$
2,865


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6




FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
 
Three months ended March 31, 2019
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Non-controlling Interests
 
Total Equity
 
Shares
Issued
 
Par
Value
 
Shares
 
Cost
 
Balance, December 31, 2018
62,163

 
$
6

 
3,770

 
$
(33,237
)
 
$
343,536

 
$
(1,116
)
 
$
(107,565
)
 
$

 
$
201,624

Net income

 

 

 

 

 

 
32,992

 

 
32,992

Foreign currency translation adjustment

 

 

 

 

 
94

 

 

 
94

Restricted stock granted
36

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
34

 

 

 

 

 

 

Treasury stock purchased

 

 
41

 
(131
)
 

 

 

 

 
(131
)
Stock compensation expense

 

 

 

 
468

 

 

 

 
468

Balance, March 31, 2019
62,199

 
$
6

 
3,845

 
$
(33,368
)
 
$
344,004

 
$
(1,022
)
 
$
(74,573
)
 
$

 
$
235,047

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2018
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Non-controlling Interests
 
Total Equity
 
Shares
Issued
 
Par
Value
 
Shares
 
Cost
 
Balance, December 31, 2017
60,623

 
$
6

 
3,621

 
$
(33,064
)
 
$
336,067

 
$
(884
)
 
$
(37,225
)
 
$
358

 
$
265,258

Net income

 

 

 

 

 

 
67

 

 
67

Foreign currency translation adjustment

 

 

 

 

 
(179
)
 

 

 
(179
)
Stock issued under employee stock purchase plan

 

 
(28
)
 

 
146

 

 

 

 
146

Restricted stock granted
538

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
5

 

 

 

 

 

 

Treasury stock purchased

 

 
1

 
(3
)
 

 

 

 

 
(3
)
Stock compensation expense

 

 

 

 
1,924

 

 

 

 
1,924

Balance, March 31, 2018
61,161

 
$
6

 
3,599

 
$
(33,067
)
 
$
338,137

 
$
(1,063
)
 
$
(37,158
)
 
$
358

 
$
267,213

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
7


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1 — Organization and Significant Accounting Policies
Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) is an international energy chemistry technology-driven company that develops and supplies chemistry and services to the oil and gas industry. 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 to pursue 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 15 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.
Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements and accompanying footnotes (collectively the “Financial Statements”) reflect all adjustments, in the opinion of management, necessary for fair presentation of the financial condition and results of operations for the periods presented. All such adjustments are normal and recurring in nature. The Financial Statements, including selected notes, have been prepared in accordance with applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and do not include all information and disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for comprehensive financial statement reporting. These interim Financial Statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“Annual Report”). A copy of the Annual Report is available on the SEC’s website, www.sec.gov, under the Company’s ticker symbol (“FTK”) or on Flotek’s website, www.flotekind.com. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
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. The Company’s historical financial statements have been revised to present the operating results of the Consumer and Industrial Chemistry Technologies segment as discontinued operations. The results of operations of this segment are presented as “Income from discontinued operations” in the statement of operations and the related cash flows of this segment 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.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of lease liabilities, and operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current portion of lease liabilities, and finance lease liabilities in the consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the

8


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

commencement date based on the present value of lease payments over the lease term. As the leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The lease term is modified to reflect options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has some lease agreements that contain both lease and non-lease components. The Company has elected to account for such leases as having a single lease component.
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications did not impact net loss.
Note 2Recent Accounting Pronouncements
Application of New Accounting Standards
Effective January 1, 2019, the Company adopted the accounting guidance in Accounting Standards Update (“ASU”) No. 2016-02, “Leases.” This standard (ASC 842) requires the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP (ASC 840). The Company adopted ASC 842 using the optional transition method. Consequently, the Company’s reporting for the comparative periods presented prior to 2019 in the financial statements will continue to be in accordance with ASC 840. Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of deferred rent, of approximately $18.4 million, representing the present value of future lease payments under operating leases with terms of greater than twelve months. The adoption of this standard did not have a material impact on the consolidated statements of operations or cash flows. Refer to Note 4 — “Leases” for further information surrounding adoption of this new standard.
Effective January 1, 2019, the Company adopted 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. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
Effective January 1, 2019, the Company adopted 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. Implementation of this standard did not have a material effect on the consolidated financial statements and related disclosures.
New Accounting Requirements and 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 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.

9


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.
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 interests in its wholly owned subsidiary, Florida Chemical Company, LLC, which represented 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 to satisfy potential indemnification claims by ADM with anticipated releases at 6 months, 12 months, and 15 months.
Concurrent with the closing of the sale of the CICT segment, the Company retained $11.1 million of historical inventory previously held by the CICT segment. In addition, the Company executed a long-term supply agreement for terpene product through September 2023, with an option to extend for an additional year. This agreement secures the Company’s access to a sufficient supply of terpene and includes a minimum annual purchase requirement during the term of the agreement.
The following summarized financial information has been segregated from continuing operations and reported as Discontinued Operations for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three months ended March 31,
 
2019
 
2018
Consumer and Industrial Chemistry Technologies
 
 
 
Revenue
$
11,031

 
$
19,447

Operating expenses
(11,572
)
 
(16,170
)
Depreciation and amortization

 
(669
)
Research and development
(69
)
 
(170
)
(Loss) income from operations
(610
)
 
2,438

Other income (expense)
35

 
(174
)
Gain on sale of business
69,793

 

Income before income taxes
69,218

 
2,264

Income tax (expense) benefit
(20,846
)
 
7,331

Net income from discontinued operations
$
48,372

 
$
9,595



10


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The assets and liabilities held for sale on the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, are as follows (in thousands):
 
Consumer and Industrial Chemistry Technologies
 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
Accounts receivable, net
$

 
$
10,547

Inventories, net

 
52,069

Other current assets

 
446

Property and equipment, net

 
15,899

Goodwill

 
19,480

Other intangible assets, net

 
20,029

Assets held for sale

 
118,470

Valuation allowance

 

Assets held for sale, net
$

 
$
118,470

Liabilities:
 
 
 
Accounts payable
$

 
$
8,883

Accrued liabilities

 
291

Liabilities held for sale
$

 
$
9,174


Note 4 Leases
Effective January 1, 2019, the Company adopted ASC 842 using the prospective method applied to those leases which were not completed as of December 31, 2018. The Company has operating leases for corporate offices, research and development facilities, warehouses, and sales offices. The leases have remaining lease terms of 1 year to 19 years, some of which include options to extend the leases for up to 10 years. In addition, the Company has finance leases for equipment. These leases commenced on March 31, 2019 and have remaining lease terms of 64 months. There have been no payments or any expense recognized in connection with these finance leases as of March 31, 2019.
Upon adoption, the Company recorded operating lease ROU assets and corresponding operating lease liabilities, net of deferred rent, of approximately $18.4 million, representing the present value of future lease payments under operating leases with terms of greater than twelve months. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
 
Three months ended March 31,
 
2019
Operating lease expense
$
653

Short-term lease expense
43

Total lease expense
$
696

 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
582



11


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Maturities of lease liabilities are as follows (in thousands):
Year ending December 31,
 
Operating Leases
 
Finance Leases
2019 (excluding the three months ended March 31, 2019)
$
1,756

 
$
29

2020
 
2,346

 
39

2021
 
2,305

 
39

2022
 
2,269

 
39

2023
 
2,178

 
39

Thereafter
 
25,859

 
22

Total lease payments
 
$
36,713

 
$
207

Less: Interest
 
(17,621
)
 
(40
)
Present value of lease liabilities
 
$
19,092

 
$
167


Supplemental balance sheet information related to leases is as follows (in thousands):
 
March 31, 2019
Operating Leases
 
Operating lease right-of-use assets
$
18,202

 
 
Current portion of lease liabilities
$
676

Operating lease liabilities
18,416

Total operating lease liabilities
$
19,092

 
 
Finance Leases
 
Property and equipment
$
210

Accumulated depreciation

Property and equipment, net
$
210

 
 
Current portion of lease liabilities
$
37

Finance lease liabilities
130

Total finance lease liabilities
$
167

 
 
Weighted Average Remaining Lease Term
 
Operating leases
15.7 years

Finance leases
5.3 years

 
 
Weighted Average Discount Rate
 
Operating leases
8.9
%
Finance leases
8.5
%

Note 5Revenue from Contracts with Customers
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 identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services are distinct within 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.

12


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 three months ended March 31, 2019 and 2018, 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 three months ended March 31, 2019 and 2018.
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):
 
Three months ended March 31,
 
2019
 
2018
Revenue:
 
 
 
Products
$
42,072

 
$
39,929

Services
1,184

 
1,140

 
$
43,256

 
$
41,069

Operating expenses (excluding depreciation and amortization):
 
 
 
Products
$
44,078

 
$
35,181

Services
521

 
1,474

 
$
44,599

 
$
36,655


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.

13


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
 
Three months ended March 31,
 
2019
 
2018
Supplemental cash payment information:
 
 
 
Interest paid
$
578

 
$
457

Income taxes paid, net of refunds
22

 
71


Note 7 — Inventories
Inventories are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Raw materials
$
19,636

 
$
10,608

Work-in-process

 

Finished goods
16,138

 
18,798

Inventories
35,774

 
29,406

Less reserve for excess and obsolete inventory
(1,416
)
 
(2,117
)
Inventories, net
$
34,358

 
$
27,289


Note 8 — Property and Equipment
Property and equipment are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Land
$
4,372

 
$
4,372

Buildings and leasehold improvements
37,742

 
37,719

Machinery and equipment
26,601

 
26,995

Fixed assets in progress
888

 
581

Furniture and fixtures
1,574

 
1,573

Transportation equipment
1,665

 
1,852

Computer equipment and software
5,401

 
9,370

Property and equipment
78,243

 
82,462

Less accumulated depreciation
(35,254
)
 
(36,977
)
Property and equipment, net
$
42,989

 
$
45,485


Depreciation expense totaled $1.8 million and $2.0 million for the three months ended March 31, 2019 and 2018, respectively.
During the three months ended March 31, 2019 and 2018, no impairments were recognized related to property and equipment.
Note 9Goodwill
The Company has no reporting units which had a goodwill balance at December 31, 2018, and there were no acquisitions during the three months ended March 31, 2019.

14


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 — Other Intangible Assets
Other intangible assets are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Cost
 
Accumulated Amortization
 
Cost
 
Accumulated Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
Patents and technology
$
18,941

 
$
6,955

 
$
18,884

 
$
6,689

Customer lists
15,367

 
5,447

 
15,367

 
5,259

Trademarks and brand names
1,473

 
1,161

 
1,485

 
1,149

Total finite-lived intangible assets acquired
35,781

 
13,563

 
35,736

 
13,097

Deferred financing costs

 

 
1,924

 
496

Total amortizable intangible assets
35,781

 
$
13,563

 
37,660

 
$
13,593

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
Trademarks and brand names
2,760

 
 
 
2,760

 
 
Total other intangible assets
$
38,541

 
 
 
$
40,420

 
 
 
 
 
 
 
 
 
 
Carrying value:
 
 
 
 
 
 
 
Other intangible assets, net
$
24,978

 
 
 
$
26,827

 
 

Finite-lived intangible assets acquired are amortized on a straight-line basis over two to 20 years. Amortization of finite-lived intangible assets acquired totaled $0.5 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively.
Amortization of deferred financing costs totaled $1.4 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively.
Note 11Long-Term Debt and Credit Facility
Long-term debt is as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Long-term debt, classified as current:
 
 
 
Borrowings under revolving credit facility
$

 
$
49,731


Borrowing under the revolving credit agreement was 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 could borrow under the Credit Facility for working capital, permitted acquisitions, capital expenditures and other corporate purposes. The Credit Facility was to continue in effect until May 10, 2022. Under terms of the Credit Facility, the Company had total borrowing availability of $75 million under a revolving credit facility, including a sublimit of $10 million that could be used for letters of credit. On March 1, 2019, the Company repaid the outstanding balance, interest, and fees related to the revolving credit facility, and simultaneously terminated the Credit Facility with PNC Bank.
Note 12 — 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 three months ended March 31, 2019 and 2018, since including them would have an anti-dilutive effect on loss per share due to the net loss incurred during the periods. Securities convertible into shares of common stock that were not considered in the diluted loss per share calculations were

15


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

0.2 million restricted stock units for the three months ended March 31, 2019, and 0.5 million restricted stock units for the three months ended March 31, 2018.
A reconciliation of the number of shares used for the basic and diluted earnings (loss) per common share computations is as follows (in thousands):
 
Three months ended March 31,
 
2019
 
2018
Weighted average common shares outstanding - Basic
58,373

 
57,259

Assumed conversions:
 
 
 
Incremental common shares from stock options

 

Incremental common shares from restricted stock units

 

Weighted average common shares outstanding - Diluted
58,373

 
57,259


Note 13 — 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
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.
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 total cash of $96.8 million, which consisted of cash equivalents of $49.0 million in a government money market account and cash deposits of $45.0 million in an interest bearing demand deposit account and $2.8 million in operating cash accounts, at March 31, 2019, and $3.0 million, which consisted of no cash equivalents and cash deposits of $3.0 million in operating cash accounts, at December 31, 2018.
The carrying amount and estimated fair value of the Company’s long-term debt are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Carrying
Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
Borrowings under revolving credit facility

 

 
49,731

 
49,731

 
The carrying amount of borrowings under the revolving credit facility approximates its fair value because the interest rates are variable.
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. No impairments of any of these assets were recognized during the three months ended March 31, 2019 and 2018.

16


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Income Taxes
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
 
Three months ended March 31,
 
2019
 
2018
U.S. federal statutory tax rate
21.0
 %
 
21.0
 %
State income taxes, net of federal benefit
0.5

 
(7.5
)
Non-U.S. income taxed at different rates
1.3

 
20.7

Reduction in tax benefit related to stock-based awards
(2.3
)
 
(44.2
)
Non-deductible expenses
(0.6
)
 
(8.3
)
Research and development credit
0.8

 
24.7

Increase in valuation allowance
(15.7
)
 
(3.1
)
Other
(0.2
)
 

Effective income tax rate
4.8
 %
 
3.3
 %

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.
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 was more likely than not that it would 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 sale of the CICT segment 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. The increase in the valuation allowance during the three months ended March 31, 2019, reflects management’s evaluation of deferred tax assets more-likely-than-not to be used after giving consideration to the gain from the sale of the CICT segment and anticipated results of operations.
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. The examination included (1) the corporate returns and (2) employment tax matters. The IRS fieldwork has been completed in relation to the corporate returns with no adverse findings. Further discussion of the employment tax matter can be found in Note 18 — “Related Party Transaction”.
Note 15 — 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 changes in common shares issued during the three months ended March 31, 2019 is as follows:
Shares issued at December 31, 2018
62,162,875

Issued as restricted stock award grants
36,037

Shares issued at March 31, 2019
62,198,912


Stock Repurchase Program
In June 2015, the Company’s Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock. Repurchases may be made in the open market or through privately negotiated transactions. Through December 31, 2017, the

17


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Company had repurchased $0.3 million of its common stock under this authorization. During the three months ended March 31, 2019 and 2018, the Company did not repurchase any shares of its outstanding common stock under this authorization.
At March 31, 2019, the Company has $49.7 million remaining under its share repurchase programs.
Note 16 — 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 segment: Energy Chemistry Technologies.
Energy Chemistry Technologies designs, develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas (“O&G”) well drilling, cementing, completion, remediation, and stimulation activities designed to maximize recovery in both new and mature fields. 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 the reportable segment.
Summarized financial information of the reportable segments is as follows (in thousands):
For the three months ended March 31,
Energy Chemistry Technologies
 
Corporate and Other
 
Total
2019
 
 
 
 
 
Net revenue from external customers
$
43,256

 
$

 
$
43,256

Income (loss) from operations
(5,334
)
 
(8,932
)
 
(14,266
)
Depreciation and amortization
1,785

 
475

 
2,260

Capital expenditures
461

 

 
461

 
 
 
 
 
 
2018
 
 
 
 
 
Net revenue from external customers
$
41,069

 
$

 
$
41,069

Income (loss) from operations
(166
)
 
(9,057
)
 
(9,223
)
Depreciation and amortization
1,769

 
564

 
2,333

Capital expenditures
1,011

 
366

 
1,377

 
 
 
 
 
 
 
 

Assets of the Company by reportable segments are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Energy Chemistry Technologies
$
157,636

 
$
139,205

Corporate and Other
125,156

 
28,208

Total segments
282,792

 
167,413

Held for sale

 
118,470

Total assets
$
282,792

 
$
285,883



18


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, except as noted below. Revenue by geographic location is as follows (in thousands):
 
Three months ended March 31,
 
2019
 
2018
U.S.
$
38,875

 
$
36,710

Other countries
4,381

 
4,359

Total
$
43,256

 
$
41,069


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:
 
Three months ended March 31,
 
2019
 
2018
Customer A
19.0
%
 
*

Customer B
12.6
%
 
*

Customer C
*

 
10.7
%

* This customer did not account for more than 10% of revenue.
Note 17 — 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.
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.
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.

19


FLOTEK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 18Related Party Transaction
In January 2017, the Internal Revenue Service (“IRS”) notified the Company that it was examining the Company’s federal tax returns for the year ended December 31, 2014. As a result of this examination, the IRS informed the Company on May 1, 2019 that certain employment taxes related to the CEO’s compensation were not properly withheld in 2014 and proposed an adjustment. As the Company has a statutory obligation to collect and withhold employment taxes, management reviewed the CEO’s compensation for tax year 2014, as well as tax years 2015 through 2018, in order to estimate the Company’s potential outstanding employment tax liability in connection with this matter. Upon completion of this review, management believes the Company’s total potential exposure in this matter for 2014 through 2018 is approximately $2.4 million. The CEO’s affiliated companies through which he provided his services have agreed to indemnify the Company for such taxes, and the CEO has executed a personal guaranty in favor of Flotek, supporting this indemnification. As such, the Company recorded an accrued liability for the potential exposure to the IRS in the amount of $2.4 million, with a corresponding receivable, recorded in other current assets, from the CEO’s affiliated companies for the same amount relating to such indemnification obligation during the three months ended March 31, 2019.

20




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”), and in particular, Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995 (“Reform Act”). Forward-looking statements are not historical facts, but instead represent Flotek Industries, Inc.’s (“Flotek” or “Company”) current assumptions and beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside the Company’s control. Such statements include estimates, projections, and statements related to the Company’s business plan, objectives, expected operating results, and assumptions upon which those statements are based. The forward-looking statements contained in this Quarterly Report are based on information available as of the date of this Quarterly Report.
The forward-looking statements relate to future industry trends and economic conditions, forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on the Company’s business, future operating results and liquidity. These forward-looking statements generally are identified by words including, but not limited to, “anticipate,” “believe,” “estimate,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project,” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” “could,” etc. The Company cautions that these statements are merely predictions and are not to be considered guarantees of future performance. Forward-looking statements are based upon current expectations and assumptions that are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated, or implied.
A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from forward-looking statements is included in Part I, Item 1A — “Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2018 (“Annual Report”) and periodically in subsequent reports filed with the Securities and Exchange Commission (“SEC”). The Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto of this Quarterly Report, as well as the Annual Report. Phrases such as “Company,” “we,” “our,” and “us” refer to Flotek Industries, Inc. and its subsidiaries.
Basis of Presentation
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. The Company’s historical financial statements have been revised to present the operating results of the Consumer and Industrial Chemistry Technologies segment as discontinued operations. The results of operations of this segment are presented as “Income from discontinued operations” in the statement of operations and the related cash flows of this segment 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 sheets for all periods presented. During the first quarter of 2019, the Company completed the sale of this segment.
Executive Summary
Flotek is an international energy chemistry technology-driven company that develops and supplies chemistries and services to the oil and gas industry. Through February 28, 2019, Flotek also provided high value compounds to companies that make food and beverages, cleaning products, cosmetics, and other products that are sold in consumer and industrial markets. Flotek operates in over 15 domestic and international markets.
The Company’s oilfield business includes specialty chemistries and logistics which enable its customers to pursue improved efficiencies in the drilling and completion of their wells. Customers include major integrated oil and gas (“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. Through February 28, 2019, the Company also produced non-energy-related citrus oil and related products, classified as discontinued operations, including (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 O&G industry. Additionally, the Company also provides automated bulk material handling, loading facilities, and blending capabilities.

21




Continuing Operations
The operations of the Company are categorized into one reportable segment: Energy Chemistry Technologies (“ECT”).
Energy Chemistry Technologies designs, develops, manufactures, packages, distributes, delivers, and markets reservoir-centric fluid systems, including specialty and conventional chemistries, for use in oil and gas (“O&G”) well drilling, cementing, completion, remediation, and stimulation activities designed to maximize recovery in both new and mature fields. Flotek’s specialty chemistries possess enhanced performance characteristics and are manufactured to perform in a broad range of basins and reservoirs with varying downhole pressures, temperatures and other well-specific conditions customized to customer specifications. This segment has technical services laboratories and a research and innovation laboratory that focus on design improvements, development and viability testing of new chemistry formulations, and continued enhancement of existing products.
Discontinued Operations
In the first quarter of 2019, the Consumer and Industrial Chemistry Technologies segment was sold and is classified as discontinued operations.
Consumer and Industrial Chemistry Technologies designed, developed, and manufactured products that are sold to companies in the flavor and fragrance industries and specialty chemical industry. These technologies are used by beverage and food companies, fragrance companies, and companies providing household and industrial cleaning products.
Market Conditions
The Company’s success is sensitive to a number of factors, which include, but are not limited to, drilling and well completion activity, customer demand for its advanced technology products, market prices for raw materials, and governmental actions.
Drilling and well completion activity levels are influenced by a number of factors, including the number of rigs in operation and the geographical areas of rig activity. Additional factors that influence the level of drilling and well completion activity include: