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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM
10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
 
90-0023731
(State of other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
10603 W. Sam Houston Parkway N.
Suite 300
Houston,
TX
77064
 
 
 
 
 
(Address of principal executive offices)
(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
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

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      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      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
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
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  
As of July 31, 2019, there were 57,697,905 outstanding shares of Flotek Industries, Inc. common stock, $0.0001 par value.





TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three and six months ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2




PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements
FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
97,509

 
$
3,044

Restricted cash
661

 

Accounts receivable, net of allowance for doubtful accounts of $1,676 and $1,190 at June 30, 2019 and December 31, 2018, respectively
30,694

 
37,047

Inventories, net
26,442

 
27,289

Income taxes receivable
3,467

 
3,161

Assets held for sale

 
118,470

Other current assets
20,406

 
5,771

Total current assets
179,179

 
194,782

Property and equipment, net
41,760

 
45,485

Operating lease right-of-use assets
17,982

 

Deferred tax assets, net
605

 
18,663

Other intangible assets, net
24,290

 
26,827

Other long-term assets

 
126

TOTAL ASSETS
$
263,816

 
$
285,883

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,858

 
$
15,011

Accrued liabilities
11,141

 
10,335

Income taxes payable
862

 

Interest payable

 
8

Liabilities held for sale

 
9,174

Current portion of lease liabilities
714

 

Long-term debt, classified as current

 
49,731

Total current liabilities
23,575

 
84,259

Long-term operating lease liabilities
18,256

 

Long-term finance lease liabilities
193

 

Deferred tax liabilities, net
116

 

Total liabilities
42,140

 
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; 62,955,872 shares issued and 57,688,578 shares outstanding at June 30, 2019; 62,162,875 shares issued and 57,342,279 shares outstanding at December 31, 2018
6

 
6

Additional paid-in capital
345,217

 
343,536

Accumulated other comprehensive loss
(998
)
 
(1,116
)
Retained earnings (accumulated deficit)
(89,171
)
 
(107,565
)
Treasury stock, at cost; 3,947,982 and 3,770,224 shares at June 30, 2019 and December 31, 2018, respectively
(33,378
)
 
(33,237
)
Total stockholders’ equity
221,676

 
201,624

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
263,816

 
$
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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
34,692

 
$
39,546

 
$
77,949

 
$
80,615

Costs and expenses:
 
 
 
 
 
 
 
Operating expenses (excluding depreciation and amortization)
38,306

 
35,544

 
82,904

 
72,199

Corporate general and administrative
6,054

 
8,665

 
13,335

 
17,158

Depreciation and amortization
2,119

 
2,343

 
4,379

 
4,676

Research and development
2,076

 
2,949

 
4,360

 
5,704

(Gain)/loss on disposal of long-lived assets
(4
)
 
5

 
1,093

 
62

Impairment of goodwill

 
37,180

 

 
37,180

Total costs and expenses
48,551

 
86,686

 
106,071

 
136,979

Loss from operations
(13,859
)
 
(47,140
)
 
(28,122
)
 
(56,364
)
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(16
)
 
(640
)
 
(2,014
)
 
(1,156
)
Loss on write-down of assets held for sale

 
(2,580
)
 

 
(2,580
)
Other income (expense), net
693

 
(2,499
)
 
800

 
(2,609
)
Total other income (expense)
677

 
(5,719
)
 
(1,214
)
 
(6,345
)
Loss before income taxes
(13,182
)
 
(52,859
)
 
(29,336
)
 
(62,709
)
Income tax benefit (expense)
192

 
(16,128
)
 
966

 
(15,807
)
Loss from continuing operations
(12,990
)
 
(68,987
)
 
(28,370
)
 
(78,516
)
Income (loss) from discontinued operations, net of tax
(1,608
)
 
(6,404
)
 
46,764

 
3,192

Net income (loss)
$
(14,598
)
 
$
(75,391
)
 
18,394

 
(75,324
)
Net income attributable to noncontrolling interests

 
357

 

 
357

Net income (loss) attributable to Flotek Industries, Inc. (Flotek)
$
(14,598
)
 
$
(75,034
)
 
$
18,394

 
$
(74,967
)
 
 
 
 
 
 
 
 
Amounts attributable to Flotek shareholders:
 
 
 
 
 
 
 
Loss from continuing operations
$
(12,990
)
 
$
(68,630
)
 
$
(28,370
)
 
$
(78,159
)
Income (loss) from discontinued operations, net of tax
(1,608
)
 
(6,404
)
 
46,764

 
3,192

Net income (loss) attributable to Flotek
$
(14,598
)
 
$
(75,034
)
 
$
18,394

 
$
(74,967
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
(0.22
)
 
$
(1.19
)
 
$
(0.49
)
 
$
(1.36
)
Discontinued operations, net of tax
(0.03
)
 
(0.11
)
 
0.80

 
0.06

Basic earnings (loss) per common share
$
(0.25
)
 
$
(1.30
)
 
$
0.31

 
$
(1.30
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
(0.22
)
 
$
(1.19
)
 
$
(0.49
)
 
$
(1.36
)
Discontinued operations, net of tax
(0.03
)
 
(0.11
)
 
0.80

 
0.06

Diluted earnings (loss) per common share
$
(0.25
)
 
$
(1.30
)
 
$
0.31

 
$
(1.30
)
 
 
 
 
 
 
 
 
Weighted average common shares:
 
 
 
 
 
 
 
Weighted average common shares used in computing basic earnings (loss) per common share
58,608

 
57,869

 
58,491

 
57,566

Weighted average common shares used in computing diluted earnings (loss) per common share
58,608

 
57,869

 
58,491

 
57,566



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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Loss from continuing operations
$
(12,990
)
 
$
(68,987
)
 
$
(28,370
)
 
$
(78,516
)
Income (loss) from discontinued operations, net of tax
(1,608
)
 
(6,404
)
 
46,764

 
3,192

Net income (loss)
(14,598
)
 
(75,391
)
 
18,394

 
(75,324
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
24

 
18

 
118

 
(161
)
Comprehensive income (loss)
$
(14,574
)
 
$
(75,373
)
 
18,512

 
(75,485
)
Net loss attributable to noncontrolling interests

 
357

 

 
357

Comprehensive income (loss) attributable to Flotek
$
(14,574
)
 
$
(75,016
)
 
$
18,512

 
$
(75,128
)


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5




FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six months ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss) attributable to Flotek Industries, Inc. (Flotek)
$
18,394

 
$
(74,967
)
Income from discontinued operations, net of tax
46,764

 
3,192

Loss from continuing operations
(28,370
)
 
(78,159
)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
 
 
 
Depreciation and amortization
4,379

 
4,676

Amortization of deferred financing costs
1,428

 
192

Provision for doubtful accounts
102

 
(471
)
Provision for excess and obsolete inventory

 
1,942

Impairment of goodwill

 
37,180

Loss on write-down of assets held for sale

 
2,580

Loss on disposal of long-lived assets
1,093

 
62

Non-cash lease expense
464

 

Stock compensation expense
1,669

 
4,385

Deferred income tax provision
17,855

 
15,459

Reduction in tax benefit related to share-based awards
24

 
72

Changes in current assets and liabilities:
 
 
 
Restricted cash
(661
)
 

Accounts receivable, net
6,289

 
5,881

Inventories, net
907

 
(2,080
)
Income taxes receivable
(281
)
 
63

Other current assets
(16,209
)
 
1,151

Accounts payable
(4,157
)
 
4,325

Accrued liabilities
(10,216
)
 
(16,889
)
Income taxes payable
1,182

 

Interest payable
(8
)
 
(19
)
Net cash used in operating activities
(24,510
)
 
(19,650
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(767
)
 
(2,631
)
Proceeds from sales of business
169,722

 

Proceeds from sale of assets
140

 
90

Purchase of patents and other intangible assets
(227
)
 
(181
)
Net cash provided by (used in) investing activities
168,868

 
(2,722
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
42,984

 
146,038

Repayments on revolving credit facility
(92,715
)
 
(124,862
)
Debt issuance costs

 
(98
)
Purchase of treasury stock related to share-based awards
(142
)
 
(24
)
Proceeds from sale of common stock

 
247

Payments for finance leases
(38
)
 

Loss from noncontrolling interest

 
(357
)
Net cash (used in) provided by financing activities
(49,911
)
 
20,944

Discontinued operations:
 
 
 
Net cash (used in) provided by operating activities
(321
)
 
644

Net cash provided by (used in) investing activities
337

 
(630
)
Net cash flows provided by discontinued operations
16

 
14

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

 
(74
)
Net increase (decrease) in cash and cash equivalents
94,465

 
(1,488
)
Cash and cash equivalents at the beginning of period
3,044

 
4,584

Cash and cash equivalents at the end of period
$
97,509

 
$
3,096


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 June 30, 2019
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Non-controlling Interests
 
Total Stockholders’ Equity
 
Shares
Issued
 
Par
Value
 
Shares
 
Cost
 
Balance, March 31, 2019
62,199

 
$
6

 
3,845

 
$
(33,368
)
 
$
344,004

 
$
(1,022
)
 
$
(74,573
)
 
$

 
$
235,047

Net income

 

 

 

 

 

 
(14,598
)
 

 
(14,598
)
Foreign currency translation adjustment

 

 

 

 

 
24

 

 

 
24

Restricted stock granted
757

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
99

 

 

 

 

 

 

Treasury stock purchased

 

 
4

 
(10
)
 

 

 

 

 
(10
)
Stock compensation expense

 

 

 

 
1,213

 

 

 

 
1,213

Balance, June 30, 2019
62,956

 
$
6

 
3,948

 
$
(33,378
)
 
$
345,217

 
$
(998
)
 
$
(89,171
)
 
$

 
$
221,676


 
Three months ended June 30, 2018
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Non-controlling Interests
 
Total Stockholders’ Equity
 
Shares
Issued
 
Par
Value
 
Shares
 
Cost
 
Balance, March 31, 2018
61,161

 
$
6

 
3,599

 
$
(33,067
)
 
$
338,137

 
$
(1,063
)
 
$
(37,158
)
 
$
358

 
$
267,213

Net loss

 

 

 

 

 

 
(75,034
)
 
(357
)
 
(75,391
)
Foreign currency translation adjustment

 

 

 

 

 
18

 

 

 
18

Stock issued under employee stock purchase plan

 

 
(36
)
 

 
100

 

 

 

 
100

Restricted stock granted
481

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
39

 

 

 

 

 

 

Treasury stock purchased

 

 
5

 
(21
)
 

 

 

 

 
(21
)
Stock compensation expense

 

 

 

 
2,381

 

 

 

 
2,381

Balance, June 30, 2018
61,642

 
$
6

 
3,607

 
$
(33,088
)
 
$
340,618

 
$
(1,045
)
 
$
(112,192
)
 
$
1

 
$
194,300
























See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
7




FLOTEK INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands)

 
Six months ended June 30, 2019
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Non-controlling Interests
 
Total Stockholders’ 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

 

 

 

 

 

 
18,394

 

 
18,394

Foreign currency translation adjustment

 

 

 

 

 
118

 

 

 
118

Restricted stock granted
793

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
133

 

 

 

 

 

 

Treasury stock purchased

 

 
45

 
(141
)
 

 

 

 

 
(141
)
Stock compensation expense

 

 

 

 
1,681

 

 

 

 
1,681

Balance, June 30, 2019
62,956

 
$
6

 
3,948

 
$
(33,378
)
 
$
345,217

 
$
(998
)
 
$
(89,171
)
 
$

 
$
221,676


 
Six months ended June 30, 2018
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Non-controlling Interests
 
Total Stockholders’ 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 loss

 

 

 

 

 

 
(74,967
)
 
(357
)
 
(75,324
)
Foreign currency translation adjustment

 

 

 

 

 
(161
)
 

 

 
(161
)
Stock issued under employee stock purchase plan

 

 
(65
)
 

 
247

 

 

 

 
247

Restricted stock granted
1,019

 

 

 

 

 

 

 

 

Restricted stock forfeited

 

 
45

 

 

 

 

 

 

Treasury stock purchased

 

 
6

 
(24
)
 

 

 

 

 
(24
)
Stock compensation expense

 

 

 

 
4,304

 

 

 

 
4,304

Balance, June 30, 2018
61,642

 
$
6

 
3,607

 
$
(33,088
)
 
$
340,618

 
$
(1,045
)
 
$
(112,192
)
 
$
1

 
$
194,300


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
8


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 and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ended 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 (loss) from discontinued operations” in the statement of operations and the related cash flows of this segment have 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

9


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.


10


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.
As of June 30, 2019, the Company and ADM had not reached an agreement on the post-closing working capital adjustment. As of this filing, the Company is in process of engaging a third party to assist with reaching a conclusion.
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, which serves as a feedstock to some of the Company’s key value-added products. The term of the agreement runs 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 at variable prices 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 and six months ended June 30, 2019 and 2018 (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Consumer and Industrial Chemistry Technologies
 
 
 
 
 
 
 
Revenue
$

 
$
19,540

 
$
11,031

 
$
38,987

Operating expenses

 
(18,066
)
 
(11,572
)
 
(34,236
)
Depreciation and amortization

 
(682
)
 

 
(1,351
)
Research and development

 
(153
)
 
(69
)
 
(322
)
(Loss) income from operations

 
639

 
(610
)
 
3,078

Other income

 
366

 
35

 
192

Gain (Loss) on sale of business
(2,100
)
 

 
67,694

 

(Loss) income before income taxes
(2,100
)
 
1,005

 
67,119

 
3,270

Income tax benefit (expense)
492

 
(7,409
)
 
(20,355
)
 
(78
)
Net income (loss) from discontinued operations
$
(1,608
)
 
$
(6,404
)
 
$
46,764

 
$
3,192



11


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

The assets and liabilities held for sale on the Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018, are as follows (in thousands):
 
Consumer and Industrial Chemistry Technologies
 
June 30, 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 leases for corporate offices, research and development facilities, warehouses, sales offices and equipment. 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.
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 expected 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 expected lease term.
The components of lease expense and supplemental cash flow information are as follows (in thousands):
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019
Operating lease expense
$
653

 
$
1,306

Finance lease expense:
 
 
 
Amortization of right-of-use assets
220

 
220

Interest on lease liabilities
3

 
3

Total finance lease expense
223

 
223

Short-term lease expense
32

 
75

Total lease expense
$
908

 
$
1,604

 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
583

 
$
1,165

Operating cash flows from finance leases
3

 
3

Financing cash flows from finance leases
38

 
38



12


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 June 30, 2019)
$
1,174

 
$
20

2020
 
2,348

 
71

2021
 
2,307

 
71

2022
 
2,270

 
39

2023
 
2,180

 
39

Thereafter
 
25,877

 
23

Total lease payments
 
$
36,156

 
$
263

Less: Interest
 
(17,213
)
 
(43
)
Present value of lease liabilities
 
$
18,943

 
$
220


Supplemental balance sheet information related to leases is as follows (in thousands):
 
June 30, 2019
Operating Leases
 
Operating lease right-of-use assets
$
17,982

 
 
Current portion of lease liabilities
$
687

Long-term operating lease liabilities
18,256

Total operating lease liabilities
$
18,943

 
 
Finance Leases
 
Property and equipment
$
297

Accumulated depreciation
(10
)
Property and equipment, net
$
287

 
 
Current portion of lease liabilities
$
27

Long-term finance lease liabilities
193

Total finance lease liabilities
$
220

 
 
Weighted Average Remaining Lease Term
 
Operating leases
15.8 years

Finance leases
5.1 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.

13


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 and six months ended June 30, 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 and six months ended June 30, 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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue: