<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended May 31, 1998
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (no fee required)
Commission file number 1-13270
FLOTEK INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
ALBERTA 77-0709256
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
7030 EMPIRE CENTRAL DRIVE, HOUSTON, TEXAS 77040
(Address of principal executive offices) (zip code)
</TABLE>
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE
(713) 849-9911
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 and 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 ( )
As of May 31, 1998 the number of shares of common stock outstanding was
43,180,795
(Exhibit Index located on page 12)
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (x)
<PAGE> 2
Part I - Financial Information
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, February 28,
ASSETS 1998 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 25,211 $ 634,511
Accounts receivable, less allowance for doubtful
accounts of $25,569 and $25,569 570,870 427,466
Inventory 1,348,559 1,181,104
------------ ------------
Total current assets 1,944,640 2,243,081
FURNITURE AND EQUIPMENT 173,370 186,611
OTHER ASSETS 142,428 144,370
------------ ------------
$ 2,260,438 $ 2,574,062
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 30,000 $ 40,000
Current portion of long-term debt 770,788 771,719
Accounts payable and accrued liabilities 623,546 739,656
Accrued repurchase option 264,085 264,085
------------ ------------
Total current liabilities 1,688,419 1,815,460
LONG-TERM DEBT 12,090 19,338
COMMITMENTS -- --
SHAREHOLDERS' EQUITY
Common stock - no par value; 100,000,000 shares
authorized; 43,180,795 issued
and outstanding 17,870,210 17,870,210
Additional paid in capital 149,113 149,113
Equity adjustment from foreign currency translation (290,781) (285,636)
Accumulated deficit (17,168,613) (16,994,423)
------------ ------------
559,929 739,264
------------ ------------
$ 2,260,438 $ 2,574,062
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
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FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended May 31,
1998 1997
------------ ------------
<S> <C> <C>
Sales $ 729,686 $ 926,321
Costs and expenses:
Cost of goods sold 347,819 529,776
Selling 319,549 412,025
General and administrative 221,096 253,101
Depreciation and amortization 15,183 23,364
Research and development -- 4,521
------------ ------------
903,647 1,222,787
------------ ------------
Loss from operations 173,961 296,466
Other income (expense), net
Interest (42,436) (17,659)
Other 42,207 (1,232)
------------ ------------
(229) (18,891)
------------ ------------
Net loss $ 174,190 $ 315,357
============ ============
Basic and diluted loss per share $ .004 $ .01
============ ============
Weighted average number of shares outstanding 43,180,795 25,744,797
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
3
<PAGE> 4
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended May 31,
1998 1997
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<S> <C> <C>
Cash flows from operating activities
Net loss for the period $(174,190) $(315,357)
Adjustments to reconcile net losses to net cash
used in operating activities
Depreciation and amortization 15,183 23,364
Accretion of discount 12,130 --
Change in assets and liabilities
(Increase) Decrease in accounts receivable (143,404) 169,964
(Increase) Decrease in inventory (167,455) 25,115
(Decrease) Increase in accounts payable and accrued
liabilities (116,110) 96,697
Increase in due to related parties -- 7,800
--------- ---------
Net cash (used) provided in operating activities (573,846) 7,583
Cash flows from investing activities
Purchase of furniture and equipment -- (20,551)
Purchase of other assets -- (4,823)
--------- ---------
Net cash used by investing activities -- (25,374)
Cash flows from financing activities
Proceeds from long-term debt and notes payable -- 65,000
Repayment of long-term debt and notes payable (30,309) (20,977)
--------- ---------
Net cash (used) provided by financing activities (30,309) 44,023
Effect of exchange rates on cash (5,145) --
--------- ---------
Net (decrease) increase in cash (609,300) 26,232
Cash at beginning of year 634,511 91,641
--------- ---------
Cash at end of period $ 25,211 $ 117,873
========= =========
Supplementary information
Interest paid $ 19,755 $ 3,754
Income taxes paid -- --
</TABLE>
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
The unaudited consolidated condensed financial statements included
herein have been prepared by Flotek Industries Inc. (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission. These
financial statements reflect all adjustments which the Company considers
necessary for the fair presentation of such financial statements for the interim
periods presented. Although the Company believes that the disclosures in these
financial statements are adequate to make the interim information presented not
misleading, certain information relating to the Company's organization and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted in this Form 10-QSB pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended February 28, 1998. The results of operations
for the three month period ended May 31, 1998 are not necessarily indicative of
the results expected for the full year.
Note 2 - Comprehensive Income
Comprehensive income as defined by Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, is net income plus
direct adjustments to stockholders' equity. The cumulative translation
adjustment of certain foreign entities is the only such direct adjustment
recorded by the Company.
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<CAPTION>
Three Months Ended May 31,
1998 1997
---- ----
<S> <C> <C>
Comprehensive income:
Net Loss $(174,190) $(315,357)
Cumulative translation adjustment (5,145) --
--------- ---------
Total comprehensive income $(179,335) $(315,357)
========= =========
</TABLE>
Note 3 - Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131"), Disclosures About Segments of an Enterprise and
Related Information, in the first quarter of 1998. SFAS No. 131 requires segment
information to be reported on a basis consistent with that used internally for
evaluating segment performance and deciding how to allocate resources to
segment. Quarterly disclosures are not required in the first year of adoption.
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Note 4 - Reclassifications and Restatements
Certain reclassifications of prior year balances have been made to
conform such amounts to corresponding 1998 classifications.
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MD&A includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate," "believe,"
"expect," "plan," "intend," "project," "forecasts," "could" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-QSB regarding
the Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, no assurance can be given that actual
results may not differ materially from those in the forward-looking statements
herein for reasons including the effect of competition, the level of petroleum
industry exploration and production expenditures, world economic conditions,
prices of, and the demand for crude oil and natural gas, drilling activity,
weather, the legislative environment in the United States and other countries,
and the condition of the capital and equity markets.
Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and the related notes thereto.
Business Environment
Flotek Industries Inc. (the "Company") is a supplier of engineered
oilfield tools and equipment. The Company's products are used both for the
drilling and production phases of oil and natural gas wells. The Company's
product lines are divided into two separate segments in the industry: drilling
products and production equipment. The production equipment segment develops,
manufactures and markets the Petrovalve + Plus(R) Pump Valve and the Petrovalve
Gas Breaker Valve, which are valves for downhole sucker-rod pumps used in oil
wells. The drilling products segment manufactures and distributes centralizers,
which are spiraled vane cementing sleeves and stand off tools that improve mud
and cementation displacement in drilled oil wells.
The business environment for oilfield operations and its
corresponding operating results are affected significantly by petroleum industry
exploration and production expenditures. These expenditures are influenced
strongly by oil company expectations as to energy prices and the supply and
demand for crude oil and natural gas. Petroleum supply and demand, and pricing,
in turn, are influenced by numerous factors including, but not limited to, the
effect of competition, the level of petroleum industry exploration and
production expenditures, world economic conditions, prices of, and the demand
for crude oil and natural gas, drilling activity,
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weather, the legislative environment in the United States and other countries,
and the condition of the capital and equity markets.
While the Company anticipates continued long-term growth in the
worldwide demand for hydrocarbons will result in increased spending by oil and
gas companies for the development of the hydrocarbon supply, in recent years,
oil and natural gas prices have reacted to actual and perceived changes in the
supply of and demand for oil and natural gas, which has resulted in volatile
levels of oil and gas exploration and drilling activity. This price volatility
has created some market uncertainties. Historically, crude oil prices, natural
gas prices and the number of rotary rigs in operation have been a significant
factor in determining the amount of worldwide exploration and production
expenditures. Lower oil prices have resulted in a reduction in the rig count and
related drilling activity in the United States, and reductions in the
exploration and development budgets of producers. As prices for oil have
continued to decline, the Company and others in the industry have begun to
experience a softening in demand for their products and services, in particular
products associated with exploration activity and oil production. This reduction
oil prices has particularly affected the demand for many of the Company's
centralizer products. A significant or prolonged decline in future oil and
natural gas prices would likely result in reduced exploration and development of
oil and gas and a decline in the demand for the Company's drilling products and
production equipment and could have an adverse financial effect on the Company.
While these indicators are still very important, the Company believes a number
of new trends are emerging which could positively affect the market for the
Company's products. One of those trends is the expanded use of technology aimed
at reducing the finding costs of oil and gas and the use of technology to
extract that oil and gas from the well. Because of these and other industry
trends, even with a limited decrease in both rig count and the price of oil and
gas, the Company anticipates an increase in the acceptance of and use of its
technologies. The Company's ability to benefit from the increased acceptance of
its technologies will depend upon its ability to maintain adequate working
capital.
RESULTS OF OPERATIONS
Revenue by Operating Segment:
<TABLE>
<CAPTION>
Three months ended May 31,
-------------------------
1998 1997
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REVENUES
Drilling products segment $517,681 $796,847
Production equipment segment 212,005 129,474
-------- --------
Consolidated Revenues $729,686 $926,321
======== ========
</TABLE>
Consolidated revenues were down 21% for the period ended May 31, 1998, as
compared to the same period in 1997. Revenues from the drilling products segment
decreased 35% as compared to the same period in 1997. Lower oil prices have
resulted in a reduction in the rig count and related drilling activity in the
United States and reductions in the exploration and development budgets of
producers. This reduction in oil prices has particularly affected the demand for
many of the Company's centralizer products, which are used in the drilling
process. Revenues from the production equipment segment increased 64% for the
year as compared to the same period in
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1997. These improvements were due to the growth in the Latin American markets
and redesign of the Petrovalve technology during fiscal year 1998. Although the
Company believes that demand for these products should increase with any
material increases in oil prices from their current low levels, there can be no
assurance as to the timing or extent of such improvements. In addition, the
Company's ability to benefit from the increased acceptance of its technologies
will depend on its ability to maintain adequate working capital.
Costs and Expenses
The Company's consolidated gross margins increased from 43% in the first quarter
of 1997 to 52% in the first quarter of 1998, primarily due to the sale of higher
margin products. The Company's drilling products segment's gross margins
declined from 44% in the first quarter of 1997 to 40% in the first quarter of
1998 due to increased pricing on the Company's products, primarily the Company's
Spir-O-Lizer line of products. The cost of these premium zinc centralizers are
significantly higher than the Company's other centralizer products, as the
Spir-O-Lizer line of products are manufactured in Scotland which results in
higher transportation costs. The Company's production equipment segment's gross
margins increased from 38% in the first quarter of 1997 to 83% in the first
quarter of 1998 primarily due to the Company's sale of certain inventory
components from inventory quantities that were previously written-off in fiscal
year 1998. The Company does not expect to maintain these current margins in the
production equipment segment over an extended period of time.
Selling expenses, which consist primarily of the salaries, wages, and benefits
of the Company's salesmen, rent, insurance, and other direct selling costs, were
down 22% as compared to the same period in 1997. This decrease was primarily
attributed to the Company's on-going efforts to reduce marketing expenditures to
acceptable levels. In connection with these efforts, the Company downsized its
international salesforce, primarily in Canada during fiscal year 1998.
General corporate expenses were down 13% as compared to the same period in 1997.
The decrease was the result of the Company's ongoing reduction of corporate
overhead expenses. The administrative expense reduction effort is on-going and
is designed to reduce redundant costs and improve the Company's ability to
deliver higher levels of operational efficiency.
Interest Expenses
The increase in interest expense in the first quarter 1998, as compared to the
first quarter 1997, reflects the issuance by the Company of a convertible loan
in the principal amount of $750,000 in October 1997.
8
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CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its growth to date from stock offerings,
subordinated borrowings, and internally generated funds. The principal uses of
its cash have been to fund the working capital needs of the Company.
The Company had cash and cash equivalents of $25,211 at May 31,
1998, as compared to cash and cash equivalents of $634,511 at February 28, 1998.
The overall decrease in the Company's working capital during the current period
is attributed to an overall decrease in its cash balance. Cash flow used in
operating activities was $573,846 primarily as a result of increased inventory
levels, increased accounts receivable levels, and an overall decrease in
accounts payable levels.
The Company has sustained substantial operating losses in recent
years. In addition, the Company has used substantial amounts of working capital
in its operations. Further, the Company has a debt payment of $750,000 due in
October 1998. In view of these matters, realization of a major portion of the
assets in the accompanying balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon the Company's ability to meet
its financing requirements, and the success of its future operations. Management
believes that actions presently being taken to revise the Company's operating
and financial requirements provide the opportunity for the Company to continue
as a going concern. Management is taking the following steps to provide the
Company with adequate working capital:
o Management continues to reduce selling, general and administrative
expenses.
o Management is adding complementary products lines to help diversify the
Company's product mix, without increasing supporting expenditures.
o Management intends to secure new long-term equity financing for working
capital purposes.
o Management intends to pursue with the lender the conversion of the
existing $750,000 debt obligation to equity.
Risk Factors
The following risk factors, among others, may cause the Company's
operating results and/or financial position to be adversely affected:
o The Company's ability to raise additional working capital could be limited
due to future operating losses and the existing level of short-term debt.
Without the ability to raise operating capital, there would be substantial
doubt about the Company's ability to continue as a going concern.
o Competitive factors including, but not limited to, the Company's
limitations with respect to financial resources and its ability to compete
against companies with substantially greater resources.
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<PAGE> 10
o The Company's ability to control the amount of operating expenses.
o A significant portion of the Company's consolidated revenues are generated
by the Company's drilling products segment. A further reduction in
drilling activity could adversely affect future operating results.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (incorporated by reference to the Company's
Form 10-Q for the quarter ended November 30, 1997)
3.2 By-laws (incorporated by reference to the Company's Form 10-Q for the
quarter ended November 30, 1997)
3.3 Amendment to Registrant's Bylaws (incorporated by reference to the
Company's Form 10-KSB for the fiscal year ended February 28, 1998)
4.1 Shareholders Protection Rights Plan (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the fiscal quarter ended May 31, 1998, the Registrant filed no reports on
Form 8-K.
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Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Flotek Industries Inc.
(Registrant)
Date: July 15, 1998 By: /s/ William G. Jayroe
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 15, 1998 By: /s/ Scott W. Cook
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer)
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Exhibit Index
3.1 Articles of Incorporation (incorporated by reference to the Company's
Form 10-Q for the quarter ended November 30, 1997)
3.2 By-laws (incorporated by reference to the Company's Form 10-Q for the
quarter ended November 30, 1997)
3.3 Amendment to Registrant's Bylaws (incorporated by reference to the
Company's Form 10-KSB for the fiscal year ended February 28, 1998)
4.1 Shareholders Protection Rights Plan (incorporated by reference to the
Company's Form 10-Q for the quarter ended November 30, 1997)
27.1 Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-1-1998
<PERIOD-END> MAY-31-1998
<CASH> 25,211
<SECURITIES> 0
<RECEIVABLES> 570,870
<ALLOWANCES> 25,569
<INVENTORY> 1,348,559
<CURRENT-ASSETS> 1,944,640
<PP&E> 173,370
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,260,438
<CURRENT-LIABILITIES> 1,688,419
<BONDS> 0
0
0
<COMMON> 17,870,210
<OTHER-SE> (17,310,281)
<TOTAL-LIABILITY-AND-EQUITY> 2,260,438
<SALES> 729,686
<TOTAL-REVENUES> 729,686
<CGS> 347,819
<TOTAL-COSTS> 903,647
<OTHER-EXPENSES> 229
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,436
<INCOME-PRETAX> (174,190)
<INCOME-TAX> 0
<INCOME-CONTINUING> (174,190)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (174,190)
<EPS-PRIMARY> (.004)
<EPS-DILUTED> (.004)
</TABLE>
