Item 1. Business
Item 1. Business.
General
Flotek Industries, Inc. creates solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data technology company, Flotek helps customers across industrial, commercial, and consumer markets improve their ESG performance. The Company serves specialty chemistry needs for both domestic and international energy markets as well as applications of U.S. manufactured surface cleaners, disinfectants for industrial, commercial and consumer use.
The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers and markets green, specialty chemicals that help their customers meet their ESG and operational goals, enhancing the profitability of hydrocarbon producers and supplying professional chemistries that clean surfaces in both commercial and personal settings to help reduce the spread of bacteria, viruses and germs.
The Company’s Data Analytics (“DA”) segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. These real-time data and analytics prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability, thereby improving ESG performance. During the second quarter of 2020, the Company acquired 100% ownership of JP3 in a cash-and-stock transaction. JP3’s real-time data platforms combine the energy industry’s only field-deployable, inline optical analyzer with proprietary cloud visualization and analytics, delivers increased profitability for its customers. In conjunction with the acquisition of JP3, the Company created the DA segment.
The Company was initially incorporated under the laws of the Province of British Columbia in 1985. In October 2001, the Company changed its corporate domicile to the State of Delaware. In December 2007, the Company’s common stock began trading on the New York Stock Exchange (“NYSE”) under the stock ticker symbol “FTK.” Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
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Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are posted to the Company’s website, www.flotekind.com , as soon as practicable subsequent to electronically filing or furnishing to the SEC. Information contained in the Company’s website is not to be considered as part of any regulatory filing.
As used herein, “Flotek,” the “Company,” “we,” “our” and “us” refers to Flotek Industries, Inc. and/or the Company’s wholly-owned subsidiaries. The use of these terms is not intended to connote any particular corporate status or relationship.
Recent Developments
On February 2, 2022, Flotek entered into a Private Investment in Public Equity (PIPE) transaction with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE transaction on February 2, 2022, Flotek issued $21.2 million aggregate initial principal amount of convertible notes for net cash proceeds of approximately $19 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The convertible notes accrue paid-in-kind interest at a rate of 10% per annum, have a maturity of one year, and are converted into common stock of Flotek (a) at the holder's option at any time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $0.8705. The issuance of the additional shares may trigger a change in ownership defined as 50% or more under IRC Section 382 that will limit the amount of net operating losses deductible and tax credits allowable starting in 2022.
Also on February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “ProFrac Agreement”) in exchange for $10 million of convertible notes with terms substantially the same as those described above. Under the ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of their hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC. The term of the ProFrac Agreement is three years starting April 1, 2022.
On February 16, 2022, the Company entered into an amended agreement with ProFrac Holdings, LLC to expand the Profrac Agreement. Closing of the transaction is expected to occur in the second quarter of 2022 and is subject to a vote of the shareholders of Flotek’s common stock, as well as other customary conditions. It is anticipated that the expansion of the Profrac Agreement will increase revenue backlog by at least $1 billion, and up to $2.1 billion, over the next ten years. As part of the transaction, at closing Flotek would (a) issue to ProFrac notes convertible into Flotek’s common stock with a maturity of one year, with the amount of notes based on the size of expansion, and (b) grant ProFrac the right to appoint two members to Flotek’s board of directors, for a total of four out of seven directors. Conversion price of the convertible notes is $ 1.088125 per share under certain conditions prior to maturity, or $ 0.8705 per share at maturity. The convertible notes contain other terms and conditions similar to the convertible notes issued to Profrac on February 2, 2022.
Subsequent to December 31, 2021, the Company entered into a contract to sell the Waller manufacturing facility for proceeds of $4.2 million. The transaction is expected to close in April 2022.
Description of Operations and Segments
The Company’s continuing operations has two business segments, CT and DA, which are both supported by the Company’s Research & Innovation (“R&I”) advanced laboratory capabilities. Financial information about the Company’s operating segments and geographic concentration is provided in Note 21, “Business Segment, Geographic and Major Customer Information” in Part II, Item 8 – “Financial Statements and Supplementary Data” of this Annual Report.
Chemistry Technologies
The Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.
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Customers of the CT segment include those of energy related markets as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices
Data Analytics
The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, NGLs, natural gas, crude oil, and condensates using the industry’s only field-deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.
Customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations has the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We have developed a new line of Verax analyzers for deployment internationally which was recently certified for compliance in hazardous locations and harsh weather conditions
Research & Innovation
R&I supports both segments through green chemistry formulation, specialty chemical formulations, Food and Drug Administration (“FDA”) and Environmental Protection Agency (“EPA”) regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing. For the years ended December 31, 2021 and 2020, the Company incurred $5.5 million and $7.2 million respectively of research and development expense. In 2021, research and development expense was approximately 12.8% of consolidated revenue. The Company expects that its 2022 research and development investment will continue to support new product development, especially in support of enhanced environmental, social and governance (“ESG”) standards, increased adoption of green chemistry and conventional customization initiatives for its clients.
Seasonality
Overall, operations are not significantly affected by seasonality; however, weather conditions can pose delays in clients’ activity levels. Certain working capital components build and recede throughout the year in conjunction with established purchasing and selling cycles that can impact operating results and financial position. The performance of the Company’s services can be susceptible to both weather and naturally occurring phenomena, including, but not limited to, the following:
• the severity and duration of winter temperatures in North America, which impacts natural gas storage levels, drilling activity, commodity prices and operations at the Company’s facilities;
• material deviations from normal seasonality for an extended period can impact access to operations, reduced performance at manufacturing facilities, inability to deploy required personnel, supply chain interruptions, facility damage and customer activity levels;
• the timing and duration of the Canadian spring thaw and resulting restrictions that impact activity levels;
• the timing and impact of hurricanes upon coastal and offshore operations; and
• the COVID-19 pandemic or other pandemics or similar phenomena, which may impact seasonal purchasing and selling cycles.
Product Demand and Marketing
Demand for the Company’s energy-focused products and services in both the CT and DA segments is driven by energy supply and demand, as well as operator desire to deploy improved ESG solutions. Demand for the Company’s energy chemistry
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products and services is dependent on levels of conventional and unconventional oil and natural gas well drilling and completion activity, both domestically and internationally.
The Company markets its products to end use customers using both direct and indirect sales channels. These sales channels are accessed using a mix of in-house sales professionals as well as certain contractual agency agreements. The Company also actively participates in industry trade shows, both live and virtual, publishes articles in industry publications, and participates in podcasts and creates other online content to educate the market on its product and service offerings. While the Company’s primary marketing efforts remain focused in North America, resources and effort are also focused on emerging international markets, especially in the Middle East. In addition to direct marketing and relationship development, the Company also markets products and services through the use of third-party agents, primarily in international markets.
Backlog
The Company estimates that entry into the ProFrac Agreement has resulted in a backlog of $225 million of contracted revenue over the next three years, which is expected to increase to at least $1 billion, and up to $2.1 billion, over the next ten years in the event that the ProFrac Amendment Transaction closes. This is all subject to macro- environmental factors and geo-political stability.
Intellectual Property
The Company endeavors to protect its intellectual property, both within and outside of the U.S. The Company considers patent protection for all products and methods deemed to have commercial significance and that may qualify for patent protection. The decision to pursue patent protection is dependent upon several factors, including whether patent protection can be obtained, cost effectiveness, and alignment with operational and commercial interests. The Company believes its patent and trademark portfolio, combined with confidentiality agreements, FDA and EPA registrations and licensing, trade secrets, proprietary designs, and manufacturing and operational expertise, are sufficient to protect its intellectual property and provide continued strategic advantage. As of December 31, 2021, the Company had 128 granted patents, including 104 patents in our CT segment and 23 patents in our DA segment. In addition, the Company also had 26 pending patent applications filed in the U.S. and abroad, including 21 for the CT segment and 5 for the DA segment. The patents of the CT segment cover various chemical compositions and methods of use. The patents of the DA segment cover various systems and methods of use for online determination of chemical composition and data analysis. In addition, the Company had 54 registered trademarks in the U.S. and abroad, covering a variety of its goods and services.
Competition
The ability to compete is dependent upon the Company’s ability to differentiate its products and services by providing superior quality and service, and maintaining a competitive cost structure with sufficient raw material supplies. Activity levels in the oilfield goods and services industry are impacted by current and expected oil and natural gas prices, oil and natural gas drilling activity, production levels, customer drilling and completion-designated capital spending, and customer commitment to improved ESG performance. The unpredictability of the energy industry and commodity price fluctuations creates both increased risk and opportunity for the products and services of both the Company and its competitors. The Company’s CT segment also competes with established companies and brands in the sanitizers, surface cleaners and disinfectants market. The DA segment faces competition from other providers of equipment and services for real-time information in the upstream, midstream, refining and distribution market.
Raw Materials
Materials and components used in the Company’s servicing and manufacturing operations, as well as those purchased for sale, are generally available on the open market from multiple sources. When able, the Company uses multiple suppliers, both domestically and internationally, to purchase raw materials on the open market. The prices paid for raw materials vary based on availability, weather, other commodity price fluctuations, contractual obligations, tariffs, duties on imported materials, foreign currency exchange rates, business cycle position and global demand. Higher prices for chemistries and certain raw materials could adversely impact future sales, contract fulfillment and product margins. The Company is diligent in its efforts to identify alternate suppliers in its contingency planning by reducing the number of contractually obligated volumes and utilizing competitive bidding practices to proactively reduce costs and potential supply shortages.
The DA segment currently sources spectrometers from a single supplier. Due to long lead times, supply chain disruption could adversely impact the results of the segment in the years 2022 and beyond, although re-ordering for 2022 has already begun.
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Government Regulations
The Company is subject to federal, state, and local laws and regulations, including laws related to the environment, occupational safety, health, transportation and trade within the U.S. and other countries in which the Company does business. These laws and regulations strictly govern the manufacture, storage, transportation, sale, use and disposal of chemistry products. The Company strives to ensure full compliance with all regulatory requirements.
The Company continually evaluates the environmental impact of its operations and attempts to identify potential liabilities and costs of any environmental remediation, litigation or associated claims. Several products of the CT segment are considered hazardous materials. In the event of a leak or spill in association with Company operations, the Company could be exposed to risk of material cost, net of insurance proceeds, if any, to remediate any contamination. No environmental claims are currently being litigated or investigated (to the Company’s knowledge), and the Company does not expect that costs related to remediation requirements will have a significant adverse effect on the Company’s consolidated financial position or results of operations.
Sustainability
Flotek’s vision is to create solutions to reduce the environmental impact of energy on air, water, land and people. Our mission is to be the collaborative ESG partner of choice for sustainable chemistry technology and digital analytics solutions. We believe that green chemistry and digital transformation reduce the total cost of ownership and environmental risk of our customers and can transform business by reducing carbon footprints, energy consumption, emissions and overall environmental impact.
We have green, sustainable chemistry at our core, and we focus on providing responsible specialty chemistry solutions that are environmentally friendly and cost-competitive. Our products offered by our CT segment displace harmful chemicals such as BTEX in energy production, and our logistics and delivery methodology results in lower product usage and lower carbon emissions due to delivery. The analyzers produced by our DA segment are a closed-loop system, meaning that samples of potentially harmful gasses and fluids do not need to be routinely taken and flared, as is the case with gas chromatographs. This results in lower emissions. In addition, our analyzers’ ability to determine the mixing of two batches of product (“transmix”) in real time results in less time, energy and resources spent processing transmix.
Human Capital
Employee Overview
As of December 31, 2021, the Company had approximately 131 employees, exclusive of existing worldwide agency relationships. None of the Company’s employees are covered by a collective bargaining agreement and labor relations are generally good.
Employees & Health, Safety & Environment
The Company is committed to acting with care to protect the health and safety of people, resources and the environment. Each of us owns health, safety and environment (“HSE”), as it is not isolated to certain individuals or roles. We aim to hold each other accountable to a high standard. Thus, every employee is empowered and expected to stop any activity, big or small, that could jeopardize people, the environment or assets.
Our safety, health and environmental goals are designed to sustain our drive to zero incidents. As a result, safety is woven into the fabric of the Company, from our robust training programs to our ESG moments that begin team meetings, to our Hazardous Observation Card program. Our training program is fundamental to operating safely and protecting people and the environment. The Company maintains a robust health, safety and environmental training program that includes both classroom and online curriculum. We assign specific trainings to employees based on their role and function within the Company. Additionally, the Company’s field and plant personnel complete more than 24 hours of training annually. We continuously monitor all operational activities and update training programs as needed to ensure the curriculum remains relevant and effective for minimizing risk and protecting our employees and the environment.
We have a strong company commitment to safety in all aspects of our operations through training, safety culture, and tracking of key safety metrics. In 2021, we realized our goal of 0.0 Total Recordable Incident Rate (TRIR) company wide. The TRIR is a key safety performance metric which calculates the number of recordable incidents per full-time workers during a one-year
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period. When comparing to the safety record of the chemical manufacturing sector, Flotek’s safety performance is an industry leader. This achievement is the result of the focus of our entire organization on building and sustaining a safety culture.
Compensation: Wages & Benefits
The Company’s compensation programs are designed to provide employee wages that are competitive and consistent with employee positions, skill levels, experience, knowledge and geographic location. We align our programs to attract, retain and motivate employees to achieve high-impact results that create value for all of our stakeholders. In addition to competitive base wages, all employees are eligible for a discretionary bonus, which is based upon individual and triggered by company performance.
A key component of our compensation program is benefits. We engage an outside benefits consulting firm to independently evaluate the effectiveness and competitiveness of our employee benefits program, as well as to tailor our program to the unique needs of the Company’s employee base.
All full-time employees are eligible for comprehensive health insurance, including medical insurance, prescription drug benefits, dental insurance and vision insurance. Additionally, the Company offers flexible spending and health savings accounts, life and disability/accident coverage, telemedicine, critical illness insurance and paid leave. Eligible employees may elect to participate in the Company’s employee stock purchase plan and retirement plans, including its 401(k) plan in the U.S. and its Registered Retirement Savings Plan in Canada. The Company currently matches 401(k) contributions at 100 % of up to 2 % of an employee’s compensation. The Company also offers access to online and personalized financial planning services as a component of its retirement plan benefit.
The Company continues to prioritize mental health and wellness for employees, maintaining an ongoing dialogue with employees and providing resources through its employee assistance program, which is available to all employees and their families.
Available Information and Website
The Company’s website is www.flotekind.com . Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available (see the “Investor Relations” section of the Company’s website), as soon as reasonably practicable, subsequent to electronically filing or otherwise providing reports to the SEC. Corporate governance materials, guidelines, by laws, and code of business conduct and ethics are also available on the website. A copy of corporate governance materials is available upon written request to the Company.
The SEC maintains the www.sec.gov website, which contains reports, proxy and information statements, and other registrant information filed electronically with the SEC.
The Company filed, or furnished, as applicable, all principal executive officer and financial officer certifications as required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with this Annual Report. Information with respect to the Company’s executive officers and directors is incorporated herein by reference to information to be included in the proxy statement for the Company’s 2022 Annual Meeting of Stockholders.
The Company has disclosed and will continue to disclose any changes or amendments to the Company’s code of business conduct and ethics as well as waivers to the code of ethics applicable to executive management by posting such changes or waivers on the Company’s website or in filings with the SEC.