<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13270
FLOTEK INDUSTRIES INC.
(Name of small business issuer in its charter)
<TABLE>
<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>
Issuer's telephone number, including area code: (713) 849-9911
Securities registered pursuant to Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, no par Vancouver Stock Exchange
OTC Bulletin Board
</TABLE>
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 [ ]
Check if there is no disclosure of delinquent filers in response to item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues for the Company's 1998 fiscal year were $3,181,668.
The aggregate market value of Common Stock held by nonaffiliates as of May
29, 1998, determined using the share closing price on the Vancouver Stock
Exchange of $.085 (United States Dollar) on that date was $3,670,368.
There were 43,180,795 shares of the Registrant's Common Stock outstanding
on February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement issued in connection with the
Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
================================================================================
<PAGE> 2
PART I
General
This Form 10-KSB 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-KSB 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,
the condition of the capital and equity markets, and other risk factors
identified herein.
ITEM 1. DESCRIPTION OF BUSINESS.
Business
Flotek Industries Inc. (hereafter the "Company" or "Flotek") was originally
incorporated under the laws of the Province of British Columbia on May 17, 1985.
Effective September 7, 1995, the Company transferred its corporate status by
continuing under the laws of the Province of Alberta. Flotek is headquartered in
Houston, Texas and its common shares are listed on the Vancouver Stock Exchange
and the OTC Bulletin Board market.
The Company's product lines are divided into two separate segments in the
industry: drilling products and production equipment. The production equipment
division develops, manufactures and markets the Petrovalve + PlusH Pump Valve
and the Petrovalve Gas Breaker Valve, which are valves for downhole sucker-rod
pumps used in oil wells. The drilling products division manufactures and
distributes centralizers, which are spiraled vane cementing sleeves and stand
off tools that improve mud and cementation displacement in drilled oil wells.
Production Equipment
The Company has focused on the development of its proprietary and patented
technologies: the Petrovalve + PlusH Pump Valve and the Petrovalve Gas Breaker
Valve. Both patented products are valves used in bottom-hole sucker-rod pumps.
The Petrovalve Gas Breaker Valve provides a solution to gas lock problems. Both
valves offer producers operating advantages by performing more efficiently and
lasting longer than the traditional ball and seat valves. Flotek's original
technology was developed in concert with several university research
departments, including the University of Alberta and is the subject of various
patents and patent applications. In May 1997, the Company applied for a patent
on its new design of its valve technology. The Company anticipates a patent will
be granted to add to its existing valve technology patents. Flotek's production
equipment customers are the 400 North American oil producers, including 30 major
oil companies.
The Company's competition in the production equipment market is comprised
of ball-and-seat manufacturers as well as rod-pump manufacturers. There is
substantial competition in the oilfield industry which the Company assumes will
remain at current levels for the foreseeable future, however, there is no other
significant proprietary artificial lift technology in the downhole sucker-rod
pump market. The pump manufacturers manufacture the same type of equipment and
can only set themselves apart by better service, delivery and pricing.
Presently, ball-and-seat manufacturers produce the majority of ball-and-seat
valves for manufacturers of rod-pumps, yet, the rod-pump manufacturer is not
considered to be in competition with the ball-and-seat manufacturer. While the
Petrovalve Plus valve product line is manufactured by leading ball-and-seat
manufacturers, it is the rod-pump manufacturer that assumes the competitive
posture. This
2
<PAGE> 3
competition is a direct result of who controls the distribution of ball-and-seat
valves, i.e. the rod-pump manufacturer.
Flotek's largest competitors with respect to its production equipment
product line, engage primarily in the manufacturing and direct sale of new
equipment. These large manufacturers include: Harbison Fischer, Axelson,
Continental EMSCO, and EVI, Inc. within the United States. These companies tend
to concentrate on the sale of new equipment, (down-hole sucker rod pumps and
associated equipment), with sales to the customers through their regional and
local pump repair facilities.
The Company utilizes outside manufacturers under license arrangements to
manufacture its patented products. The Company currently uses: A-1 Carbide in
California, Andrews Pump & Supply in West Texas and Aves in North Texas to
manufacture the Petrovalve components. The Company's valve products are sold
directly to the end user, the oil company, and distributed through pump repair
facilities. The Company uses agents and distributors in the international arena
to market its products.
Drilling Products
Flotek's drilling products division distributes and services several
products that enhance oil and gas well cementing programs and the safety and
effectiveness of the drilling process. Its primary product is the Cementing
Turbulator, which the Company began distributing in March of 1994, when it
acquired Turbeco Inc., an oilfield service company. The Turbulator is a steel
sleeve which is placed over pipe before the cementation process of pipe or
casing. This pipe or casing is commonly cemented in the open hole section of a
recently drilled oil well. The main purpose of this tool is to provide maximum
stand-off and improve mud displacement to obtain the best cement bond. The
Company was one of the first companies to distribute spiral vaned cementing
turbulators. The Turbulator has gained widespread acceptance through its proven
ability to improve oil and gas well cementing programs and is effective in deep,
directional and horizontal well applications.
In addition, a zinc centralizer, called the Spir-O-Lizer, was introduced to
the United States market in August of 1996. The Company signed an exclusive
distribution agreement with Downhole Products (UK) Ltd. of Aberdeen to market
the Spir-O-Lizer line of products in the lower 48 states of the United States
and Canada. The Spir-O-Lizer is a patented zinc alloy positive stand-off
well-bore centralizer engineered to improve primary cementation through
utilization of many innovative features and benefits. The technology enjoys a
dominant market position in the North Sea.
Flotek's Drilling Products customers are made up of the 400 North American
oil producers, including 30 major oil companies that are involved in exploration
and the drilling and cementation of oil wells. The Company's active customer
base is well distributed between major oil companies and smaller independent
operators. The Company's main geographic area includes the Gulf of Mexico with
other business in Latin America and California. As a result of the recent
addition of the patented D-Mudder technology, the Company is currently
negotiating distribution and representation of its drilling products on a global
basis with several major oil-field service providers that have existing global
distribution. Currently the Company's primary competitors with respect to its
drilling products are: Weatherford/Enterra, Franks Casing Crews, Ray Oil Tools
and Milam Tool Company.
Product Demand
Currently, the worldwide price of oil has declined, with prices having
dropped as much as 40% to under $13 per barrel for spot deliveries and the price
of natural gas has weakened slightly on a year to year basis. These declines
have been attributed to, among other things, an excess supply of oil in the
world markets, reduced domestic demand associated with an unseasonably warm
winter and the potential for lower worldwide demand due to the impact of the
economic downturn in Southeast Asia. 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. Accordingly, a prolonged
period of low price oil can be expected to adversely affect the demand of those
products manufactured by the Company and could have a material adverse effect on
the Company's financial condition and results of operations.
3
<PAGE> 4
International Operations
The Company's operations are subject to the risks inherent in doing
business in multiple countries with various legal and political policies. These
risks include war, boycotts, political changes, and changes in currency exchange
rates. Although it is impossible to predict the likelihood of such occurrences
or their effect on the Company, management believes these risks to be
acceptable. However, there can be no assurance that an occurrence of any one of
these events would not have a material adverse effect on its operations.
Employees
As of February 28, 1998, the Company employed approximately 16 employees.
The Company considers its relations with its employees to be generally
satisfactory.
Operating Risks and Insurance
The Company's products are used for the exploration and production of oil
and natural gas. Such operations are subject to hazards inherent in the oil and
gas industry, such as fires, explosions, blowouts and oil spills, that can cause
personal injury or loss of life, damage to or destruction of property,
equipment, the environment and marine life, and suspension of operations.
Litigation arising from an occurrence at a location where the Company's products
or services are used or provided may in the future result in the Company being
named as a defendant in lawsuits asserting potentially large claims. The Company
maintains insurance coverage that it believes to be customary in the industry
against these hazards.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases 12,964 square feet of space at 7030 Empire Central
Drive, in Houston, Texas, where the Company's headquarters are located. In
addition, the Company leases two small sales offices in Edmonton, Alberta and
Lafayette, Louisiana with 3,750 and 2,000 square feet respectively. The Company
believes that its manufacturing, distribution, and sales facilities are adequate
for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material claim, suit, or complaint
related to products and services provided by the Company, nor is it aware of any
such proceedings being contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 1998 fiscal year.
4
<PAGE> 5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Vancouver Stock Exchange in
Vancouver, British Columbia, under the symbol "FTK". The Company's common shares
commenced trading on the Vancouver Stock Exchange in June 1986. The high and low
closing sale prices as quoted in Canadian dollars as reported by the Vancouver
Stock Exchange, were as follows for the quarterly periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Year Ended February 28, 1998
Fiscal Quarter Ended May 31, 1997........................... .40 .24
Fiscal Quarter Ended August 31, 1997........................ .34 .13
Fiscal Quarter Ended November 30, 1997...................... .50 .14
Fiscal Quarter Ended February 28, 1998...................... .23 .11
Year Ended February 28, 1997
Fiscal Quarter Ended May 31, 1996........................... 1.40 .55
Fiscal Quarter Ended August 31, 1996........................ .94 .65
Fiscal Quarter Ended November 30, 1996...................... .74 .47
Fiscal Quarter Ended February 28, 1997...................... .50 .35
</TABLE>
Holders of Record
At February 28, 1998, the Company had approximately 104 holders of record
of the Company's common stock.
Dividends
The Company has not declared a cash dividend during the last two fiscal
years. In addition, there is a convertible loan agreement dated October 16,
1997, from TOSI LLP which prohibits the Company from declaring or paying any
dividends.
Recent Sales of Unregistered Securities
On September 16, 1997 the Company issued common shares for consideration of
two short term loans made by Stanberry Investment, Inc. and James Mott-Smith in
the amount of $50,000 and $15,000 respectively. The following number of common
shares were issued:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME DATED ISSUED ISSUED
- ---- ------------ ----------------
<S> <C> <C>
Stanberry Investment, Inc........................ September 16, 1997 10,000
James Mott-Smith................................. September 16, 1997 2,500
</TABLE>
On November 4, 1997, the Company closed a private placement of 11,666,667
units (one common share with a warrant attached) at $0.15 CND per unit. Each
warrant entitles the holder to purchase one common share at $0.15 CND for the
first year and at $0.17 CND during the second year. Of the 11,666,667 units
privately placed, Charles Dickinson received 2,333,333 units in exchange for
consideration of $250,000. An investment group, Marlin Investors LLC, purchased
the additional 9,333,334 units in exchange for consideration of $1,000,000. In
connection with this private placement, three individuals were issued shares as
a finders
5
<PAGE> 6
fee for consummating the transaction. The individuals and the number of shares
issued to each of them are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME DATE ISSUED ISSUED
- ---- ----------- ----------------
<S> <C> <C>
Tom Panos......................................... November 4, 1997 345,833
Adam Weiss........................................ November 4, 1997 233,333
James Mott-Smith.................................. November 4, 1997 112,500
</TABLE>
On November 4, 1997, the Company closed a second private placement of a
$750,000 convertible loan with 7,000,000 detachable warrants. The loan matures
on October 16, 1998, and can be converted into common shares of the Company at
$0.15 CND per share at any time prior to maturity, at the option of the lender.
The loan accrues interest at the rate of 10% per annum, and is secured by a lien
on certain assets of Flotek and its subsidiaries. Each detachable warrant
entitles the holder to purchase one common share at $0.15 CND. In connection
with the above transaction, 350,000 common shares were issued to David Hunt on
November 4, 1997, as a finders fee.
On November 21, 1997, the Company converted a portion of its trade and
short-term debt into common shares of the Company. The Company issued 4,715,165
common shares to retire $516,135 in trade and short-term debt. Included in the
common shares issued were 1,531,419 shares issued to a director, Wallace
Robertson, to retire trade debt of $175,019, and 2,405,832 common shares to
Camuri Holdings LTD, a security holder known to own more than five percent of
the Company's outstanding common shares, to retire short-term debt and accrued
interest of $257,768.
Each of the above issuances of securities was exempt from registration
under the Securities Act of 1933, pursuant to section 4(2) thereof, as a
transaction by the issuer not involving any public offering. All of the above
transactions were previously reported in the Company's November 30, 1997, Form
10-Q in Canadian dollars and are restated herein in United States dollars.
6
<PAGE> 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Business Environment
Flotek consists of two divisions which provide products and services used
in the drilling and production of oil and gas 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,
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 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. 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. While declines in
the oil and natural gas prices in the last quarter of fiscal year 1997 did not
significantly affect the Company's operations, any prolonged depression in oil
and natural gas prices 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>
YEAR ENDED FEBRUARY 28,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
Drilling products segment................................. 2,700,245 2,592,491
Production equipment segment.............................. 481,423 766,256
--------- ---------
Consolidated Revenues....................................... 3,181,668 3,358,747
========= =========
</TABLE>
Consolidated revenues were down 5% for the year ended February 28, 1998, as
compared to the same period in 1997. Revenues from the drilling products segment
increased 4% as compared to the same period in 1997. The deployment of new
technology aimed at reducing the cost to drill and complete a well, coupled with
increased drilling activity around the world contributed to this moderate
revenue gain. Revenues from the production equipment segment were down 37% for
the year as compared to the same period in 1997. During the Company's 1998
fiscal year, the Petrovalve technology was redesigned to improve its reliability
and performance. During this redesign process, the Company had to re-qualify the
suppliers responsible for manufacturing the components of the redesigned valve.
In addition, while redesigning the valve, the Company was not actively marketing
the valve. Once the redesign of the valve was complete, the Company's lack of
sufficient working capital for inventory requirements and marketing hindered the
sales effort. The Company's
7
<PAGE> 8
ability to benefit from the increased acceptance of its technologies will depend
on its ability to maintain adequate working capital.
Costs and Expenses
In the fourth quarter of 1998, the Company decided to write-down the cost
of a portion of its Petrovalve inventory due to the redesign and improvement of
its Petrovalve technology. In fiscal year 1998, the majority of the Petrovalve
inventory consisted of components to be utilized in the old design of the
Petrovalve. The inventory components that could not be utilized in the newly
redesigned valve were written down in the fourth quarter of fiscal year 1998. In
connection with this decision, the Company incurred a charge of $604,765 which
is included in the Company's consolidated cost of goods sold. During 1997, the
Company took a charge against earnings of $308,119 to write-down the cost of its
small bore, cast cobalt Petrovalve inventory to its net realizable value.
Excluding the write-down of Petrovalve inventory during both 1998 and 1997, the
Company's consolidated gross margins decreased from 46% in 1997 to 42% in 1998.
The overall decline in gross margin percentages is attributed to increased costs
associated with its Spir-O-Lizer line of products. During 1997, the Spir-O-Lizer
line of products represented approximately 13% of consolidated revenue, while
representing 36% of consolidated revenue during 1998. However, the gross margin
attributed to this product line decreased from 41% in 1997 to 35% in 1998. To
address the decline in margins, the Company has adopted a number of strategies,
including utilizing a different freight forwarding company for delivery of the
Spir-O-Lizer line of products from Scotland to the United States. In addition,
the Company is in the process of qualifying a new manufacturer for the
components used in the Petrovalve product line. Flotek operates in a very
aggressive pricing environment that will continue to put pressure on gross
margins. Despite this pressure, the Company expects that the combination of
changes in product mix, continued improvements in asset management, reductions
in the cost of certain inventory items, and higher margins on new products will
allow Flotek to maintain relatively stable gross margin levels in fiscal year
1999.
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 31%, as compared to the same period in 1997. This decrease was
primarily attributed to the redesign and improvements to its Petrovalve
technology. Specifically, as the Company was not actively marketing the valve
during the redesign process, it downsized its international salesforce,
primarily in Canada. In addition, once the Petrovalve was redesigned, the
Company did not have adequate resources to actively market the new valve due to
the Company's lack of sufficient working capital.
General and administrative expenses were down 1% as compared to the same
period in 1997. Included in general and administrative expenses are several
non-reoccurring charges. Effective March 8, 1994, the Company acquired 100% of
the outstanding common shares of Turbeco. The Turbeco purchase agreement
contained a repurchase option which could be triggered upon the occurrence of
certain events. During fiscal year 1998, the Company reached an agreement to
purchase the repurchase option for 2,500,000 shares of the Company's common
stock and has accrued $264,085 at February 28, 1998, which is included in
general and administrative expense. In addition, included in general and
administrative expenses are compensation costs charged to operations for stock
options granted to non-employees in the amount of $60,592. The Company
anticipates that in fiscal year 1999, general and administrative expense will
decrease in absolute dollars in an effort to achieve profitability.
In the fourth quarter of fiscal year 1998, the Company adopted a plan to
close its Edmonton facility. The Company incurred a charge of approximately
$73,000 with this closure.
Interest Expenses
Interest expense for 1998 was $123,562 compared to $317,600 for 1997. The
decrease in interest expense in 1998, as compared to 1997, reflects the
Company's overall decrease in indebtedness during fiscal year 1998. During
fiscal year 1997, the Company converted $3,375,000 in debentures into common
stock of the Company.
8
<PAGE> 9
NEW ACCOUNTING PRONOUNCEMENTS
In 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings per Share,
which replaces primary earnings per share with basic earnings per share and
requires dual presentation of basic and diluted earnings per share. The Company
adopted SFAS No. 128 in the fourth quarter of fiscal 1998. Historical earnings
per share data has been restated to reflect the adoption of SFAS No. 128.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting of comprehensive income and its
components in a full set of general-purpose financial statements and is
effective for years beginning after December 15, 1997. The Company will adopt
SFAS No. 130 in the first quarter of fiscal year 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131"), Disclosures About Segments of an Enterprise and
Related Information. SFAS No. 131, effective for years beginning after December
15, 1997, 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 segments. The Company adopted SFAS No. 131 in 1998.
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its growth to date from stock offerings,
subordinated borrowings and internally generated funds. The principal use of its
cash has been to fund the working capital needs of the Company.
Operating Activities
Substantially all of the Company's customers are engaged in the energy
industry. This concentration of customers may impact the Company's overall
exposure to credit risk, either positively or negatively, in that customers may
be similarly affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers and does not
generally require collateral in support of its trade receivables. The Company
maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations.
The Company's cash and cash equivalents increased to $634,511 at February
28, 1998, from $91,641 at February 28, 1997, primarily due to additional debt
and equity financing during fiscal year 1998. Accounts receivable decreased to
$427,466 at February 28, 1998, from $807,934 at February 28, 1997, primarily as
a result of improved asset management. Inventory levels decreased to $1,181,104
at February 28, 1998, from $1,324,300 at February 28, 1997, primarily as a
result of the Company's decision to writedown a portion of its Petrovalve
inventory during the fourth quarter of fiscal year 1998. Excluding this one time
charge, overall inventory levels increased 35%. The Company expects to fund
liquidity needs from a combination of available cash balances, internally
generated funds and future financing arrangements.
Investing Activities
The Company does not intend to make any material capital expenditures
during the up coming fiscal year. However, any capital expenditures that are
made will be funded with available cash, cash flow from operations, or future
financing arrangements.
Financing Activities
Cash flows from financing activities increased from $1,419,887 in fiscal
year 1997 to $1,648,792 in fiscal year 1998. This increase is primarily
attributed to the following; the $750,000 convertible loan which closed November
4, 1997, a private placement of 11,666,667 units (one common share with a
warrant attached) at $0.15 CND per unit which generated total proceeds of
$1,250,000, and the conversion of $516,135 of its trade and short-term debt into
common shares of the Company.
9
<PAGE> 10
At February 28, 1998, the Company had working capital of $427,621 and cash
of $634,511, as compared to working capital of $940,107 and cash of $91,641 at
February 28, 1997. The overall decrease in the Company's working capital during
the current fiscal year is attributed to an overall increase in short-term debt.
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:
- Management continues to reduce selling, general and administrative
expenses.
- Management is adding complementary products lines to help diversify the
Company's product mix, without increasing supporting expenditures.
- Management intends to secure new long-term equity financing for working
capital purposes.
- 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:
- 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.
- 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.
- The Company's ability to control the amount of operating expenses.
- A significant portion of the Company's consolidated revenues are
generated by the Company's drilling products segment. A change in
drilling activity could adversely affect future operating results.
- In managing inventory requirements, Flotek must forecast customer demand
for its products. Should the Company underestimate the supplies needed to
meet demand, it could be unable to meet customer demand. Should the
Company overestimate the supplies needed to meet customer demand, its
working capital could be adversely affected. If the Company is unable to
manage purchases and utilization of the its inventory to maintain low
inventory levels immediately prior to major price declines, Flotek could
be unable to take immediate advantage of such declines to lower product
costs, which could adversely affect its sales and gross margins.
- The year 2000 issue (i.e., the ability of computer systems to accurately
identify and process dates beginning with year 2000 and beyond) affects
virtually all companies and organizations. Recognizing the need to limit
problems associated with year 2000 software failures, the Company has
developed a plan to address this potential exposure. Key financial
information and operational systems are being assessed and detailed plans
have been developed. The Company is also communicating with its suppliers
to determine their plans to limit problems associated with the year 2000
issue. Despite these efforts, the year 2000 issue is complex and may
present unforeseen problems in the Company's systems and from third
parties with which the Company deals, such as third party payers.
10
<PAGE> 11
ITEM 7. FINANCIAL STATEMENTS.
The following documents are filed as a part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 12
Consolidated Financial Statements:
Consolidated Balance Sheets............................... 13
Consolidated Statements of Operations..................... 14
Consolidated Statement of Stockholder's (Deficit) 15
Equity.................................................
Consolidated Statements of Cash Flows..................... 16
Notes to Consolidated Financial Statements................ 17
</TABLE>
11
<PAGE> 12
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Flotek Industries Inc. and Subsidiaries
We have audited the consolidated balance sheets of Flotek Industries Inc.
and Subsidiaries as of February 28, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of Flotek
Industries Inc. and Subsidiaries as of February 28, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has experienced recurring operating losses.
This factor, and others discussed in Note B, raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Grant Thornton LLP
Houston, Texas
April 24, 1998
12
<PAGE> 13
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28,
Expressed in United States Dollars
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 634,511 $ 91,641
Accounts receivable, less allowance for doubtful accounts
of $25,569 and $5,211.................................. 427,466 807,934
Inventory................................................. 1,181,104 1,324,300
------------ ------------
Total current assets.............................. 2,243,081 2,223,875
FURNITURE AND EQUIPMENT..................................... 186,611 303,714
OTHER ASSETS................................................ 144,370 150,013
------------ ------------
$ 2,574,062 $ 2,677,602
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable.............................................. $ 40,000 $ 250,000
Current portion of long-term debt......................... 771,719 140,399
Accounts payable and accrued liabilities.................. 739,656 693,369
Accrued repurchase option................................. 264,085 --
Due to related party...................................... -- 200,000
------------ ------------
Total current liabilities......................... 1,815,460 1,283,768
LONG-TERM DEBT.............................................. 19,338 60,961
COMMITMENTS................................................. -- --
SHAREHOLDERS' EQUITY
Common stock -- no par value; 100,000,000 shares
authorized; 43,180,795 and 25,744,797 issued and
outstanding in 1998 and 1997........................... 17,870,210 16,171,467
Additional paid in capital................................ 149,113 --
Equity adjustment from foreign currency translation....... (285,636) (276,975)
Accumulated deficit....................................... (16,994,423) (14,561,619)
------------ ------------
739,264 1,332,873
------------ ------------
$ 2,574,062 $ 2,677,602
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE> 14
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 28,
Expressed in United States Dollars
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Sales....................................................... $3,181,668 $3,358,747
Costs and expenses:
Cost of goods sold........................................ 2,438,720 2,121,167
Selling................................................... 1,530,574 2,213,525
General and administrative................................ 1,393,903 1,403,695
Depreciation and amortization............................. 93,103 146,412
Research and development.................................. 4,158 71,858
---------- ----------
5,460,458 5,956,657
---------- ----------
Loss from operations.............................. 2,278,790 2,597,910
Other expense, net
Interest.................................................. 123,562 317,600
Other..................................................... 30,452 25,338
---------- ----------
154,014 342,938
---------- ----------
Net loss.......................................... $2,432,804 $2,940,848
========== ==========
Basic and diluted loss per share............................ $ .08 $ .16
========== ==========
Weighted average number of shares outstanding............... 31,150,755 18,794,530
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE> 15
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
YEARS ENDED FEBRUARY 28,
Expressed in United States Dollars
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM TOTAL
COMMON STOCK ADDITIONAL FOREIGN STOCKHOLDERS'
------------------------ PAID-IN ACCUMULATED CURRENCY (DEFICIT)
SHARES AMOUNT CAPITAL DEFICIT TRANSLATION EQUITY
---------- ----------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1996.... 15,492,691 $11,178,885 $ -- $(11,620,771) $(233,191) $ (675,077)
Issuance of common stock on
private placement......... 3,178,250 1,289,969 -- -- -- 1,289,969
Conversion of debentures.... 7,073,856 3,702,613 -- -- -- 3,702,613
Equity adjustment from
foreign currency
translation............... -- -- -- -- (43,784) (43,784)
Net loss.................... -- -- -- (2,940,848) -- (2,940,848)
---------- ----------- -------- ------------ --------- -----------
Balance at February 28,
1997...................... 25,744,797 16,171,467 -- (14,561,619) (276,975) 1,332,873
Issuance of common stock on
private placement......... 12,708,333 1,182,608 -- -- -- 1,182,608
Settlement of liabilities
through issuance of common
stock..................... 4,727,665 516,135 -- -- -- 516,135
Issuance of stock options to
non-employees............. -- -- 60,592 -- -- 60,592
Issuance of detachable stock
warrants.................. -- -- 88,521 -- -- 88,521
Equity adjustment from
foreign currency
translation............... -- -- -- -- (8,661) (8,661)
Net loss.................... -- -- -- (2,432,804) -- (2,432,804)
---------- ----------- -------- ------------ --------- -----------
Balance at February 28,
1998...................... 43,180,795 $17,870,210 $149,113 $(16,994,423) $(285,636) $ 739,264
========== =========== ======== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
15
<PAGE> 16
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28,
Expressed in United States Dollars
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss for the year....................................... $(2,432,804) $(2,940,848)
Adjustments to reconcile net losses to net cash used in
operating activities...................................
Depreciation and amortization............................... 93,103 146,412
Bad debt expense....................................... 102,683 43,011
Accretion of discount.................................. 17,034 --
Accrued repurchase option.............................. 264,085 --
Compensatory stock options............................. 60,592 --
Write-off of inventory and other....................... 604,765 513,296
Write-off of furniture and equipment................... 50,604 119,341
Change in assets and liabilities
Decrease in accounts receivable...................... 277,785 123,791
Increase in inventory................................ (461,569) (202,766)
Increase in accounts payable and accrued
liabilities......................................... 325,010 185,058
Increase in due to related parties................... 22,412 191,993
----------- -----------
Net cash used in operating activities............. (1,076,300) (1,820,712)
Cash flows from investing activities
Purchase of furniture and equipment......................... (18,960) (12,443)
Purchase of other assets.................................. (2,001) --
----------- -----------
Net cash used by investing activities............. (20,961) (12,443)
Cash flows from financing activities
Issuance of common stock, net of costs.................... 1,182,608 1,289,969
Proceeds from long-term debt and notes payable............ 1,122,061 763,981
Repayment of long-term debt and notes payable............. (655,877) (634,063)
----------- -----------
Net cash provided by financing activities......... 1,648,792 1,419,887
Effect of exchange rates on cash............................ (8,661) (43,784)
----------- -----------
Net increase (decrease) in cash............................. 542,870 (457,052)
Cash at beginning of year................................... 91,641 548,693
----------- -----------
Cash at end of year......................................... $ 634,511 $ 91,641
=========== ===========
Supplementary information
Interest paid............................................. $ 91,265 $ 28,388
Income taxes paid......................................... -- --
Non cash activities
Settlement of debenture and accrued interest for stock.... -- 3,702,613
Settlement for payables for stock......................... 278,723 --
Settlement of due to related party for stock.............. 222,412 --
Settlement of note payable for stock...................... 15,000 --
Issuance of detachable stock warrants..................... 88,521 --
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 17
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND 1997
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Flotek Industries, Inc. was originally incorporated under the laws of the
Province of British Columbia on May 17, 1985. Effective September 7, 1995, the
Company transferred its corporate status under the law of continuance to the
laws of the Province of Alberta. The Company consists of two divisions which
provide proprietary and patented products and services used in the drilling and
production of oil and gas wells. One of the Company's divisions carries on the
business of developing, manufacturing and marketing the Petrovalve + PlusH Pump
Valve and the Petrovalve Gas Breaker Valve, which are valves for downhole
sucker-rod pumps used in oil wells. The other division manufacturers and
distributes centralizers, which are a spiraled vane cementing sleeves and stand
off tools that improves mud and cementation displacement in drilled oil wells.
The Company sells its products primarily to companies in the oil and gas
industry in North America.
1. PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and, its direct and indirect wholly-owned subsidiaries Petrovalve International
Inc. ("Petrovalve"), USA Petrovalve, Inc., Turbeco, Inc., Petrovalve
International (Barbados) Inc. and Petrovalve Canada Limited. All material
intercompany transactions have been eliminated.
2. CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity at
the date of purchase of three months or less to be cash equivalents.
The Company maintains cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company also maintains money market funds with a
brokerage firm which are insured by the Securities Investor Protection
Corporation for up to $500,000, including a maximum of $100,000 for cash. As of
February 28, 1998, the Company had $82,256 in excess of insured limits. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
3. REVENUE RECOGNITION
The Company recognizes revenue when products have been delivered and all
significant risks and rewards of ownership have passed to customers. Funds
received on deposit in advance of delivery are deferred until the ultimate
transfer of ownership.
4. INVENTORY
Inventory, which primarily comprises finished goods, is stated at the lower
of cost, determined on a first-in, first-out basis, or net realizable value.
Included in cost of goods sold for the year ended February 28, 1998, is a
$604,765 write-down of petrovalve components to its net realizable value.
Included in cost of goods sold for the year ended February 28, 1997, is a
$308,119 write-down of small bore, cast cobalt Petrovalve inventory to its net
realizable value.
17
<PAGE> 18
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost and depreciated using the
following annual rates:
<TABLE>
<S> <C>
Automotive equipment.................................... 30% declining balance
Computer equipment...................................... 30% declining balance
Furniture and equipment................................. 20% declining balance
Moulds.................................................. straight-line over seven years
Leasehold improvements.................................. straight-line over lease terms
</TABLE>
6. INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense is the result of changes in deferred tax assets
and liabilities. When management determines that it is more likely than not that
a deferred tax asset will not be realized, a valuation allowance is established.
7. FOREIGN CURRENCY TRANSLATION
The assets and liabilities denominated in foreign currency are translated
into U.S. dollars at the current rate of exchange existing at period end and
revenues and expenses are translated at average monthly exchange rates. Related
translation adjustments are reported as separate component of stockholders'
equity, whereas, gains or losses resulting from foreign currency transactions
are included in results of operations.
8. LOSS PER SHARE
Effective February 28, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share. All periods have been restated
for the adoption of this statement.
Basic loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding. Dilutive loss per share is
calculated by dividing net loss by the weighted average number of common shares
and dilutive potential common shares outstanding. Diluted loss per share has not
been presented as the effect of the outstanding share purchase warrants, options
and convertible debt is anti-dilutive.
9. RECENT PRONOUNCEMENTS
The FASB issued Statement of Financial Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information (SFAS 131). SFAS 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires the
reporting of selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic area, and major customers.
SFAS 131 is effective for periods beginning after December 15, 1997. Management
has elected to early adopt this statement in fiscal year 1998 and has provided
fiscal year 1997 segment data in accordance with SFAS 131 for comparative
purposes.
The FASB issued Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which is effective for financial statements issued for
periods beginning after December 15, 1997. The new standard requires an entity
to report and display comprehensive income and its components. Currently for the
Company, comprehensive income will include net income plus the equity adjustment
from foreign currency translation.
18
<PAGE> 19
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
11. RECLASSIFICATIONS
Certain of the 1997 amounts have been reclassified to conform to the 1998
presentation.
NOTE B -- GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, 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:
- Management continues to reduce selling, general and administrative
expenses.
- Management will add complementary products lines to help diversify the
Company's product mix, without increasing supporting expenditures.
- Management intends to secure new long-term equity financing for working
capital purposes.
- Management intends to pursue with the lender the conversion of the
existing $750,000 debt obligation to equity.
19
<PAGE> 20
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- FURNITURE AND EQUIPMENT
As at February 28, furniture and equipment comprised the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Automotive equipment........................................ $224,115 $255,542
Computer equipment.......................................... 73,244 133,912
Furniture and equipment..................................... 112,517 162,336
Moulds...................................................... 64,329 66,724
Leasehold improvements...................................... -- 4,154
-------- --------
474,205 622,668
Accumulated depreciation and amortization................. 287,594 318,954
-------- --------
$186,611 $303,714
======== ========
</TABLE>
NOTE D -- OTHER ASSETS
Included in other assets are patents which are amortized over the life of
the patent. Petrovalve received a United States patent on the design of its
Petrovalve Plus valve on June 2, 1992 and on the Petrovalve Gas Breaker valve on
October 5, 1993. In addition, filings were made in the United States to protect
improvements to the core technology. Original filings were also made in Canada,
Venezuela and Mexico.
Also included in other assets is goodwill of $84,535 and $90,061 net of
accumulated amortization of $9,631 and $7,543 in 1998 and 1997. Goodwill, which
represents the excess of the cost of the purchased company over the fair value
on the company's net assets at the date of acquisition, is being amortized on
the straight-line method over 40 years.
NOTE E -- NOTES PAYABLE
The note payable at February 28, 1997 in the amount of $250,000 was paid in
full in September 1997.
During the year ended February 28, 1998, the Company entered into and paid
in full two notes payable totaling $308,000.
At February 28, 1998, the note payable in the original amount of $50,000 is
due to an individual with interest at 10%, due in 5 monthly installments of
$10,000 and accrued interest due as the sixth monthly installment. The
individual also received 10,000 shares of stock and 10,000 warrants at $0.60
(Canadian), which expire in March 1999.
20
<PAGE> 21
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Convertible debt with interest at 10%, payable quarterly
with the balance due in October 1998, net of unamortized
discount of $55,326 attributable to 7,000,000 detachable
stock warrants at $.15 (Canadian) expiring October 1998;
secured by a senior exclusive lien on all of the assets of
the Company; the debt is convertible at the discretion of
the lender until maturity into 7,000,000 shares of common
stock; the agreement prohibits the Company from declaring
or paying any dividends................................... $694,674 $ --
Government of Canada, Department of Western Economic
Diversification; interest at 6.5% payable in monthly
installments of $2,535; balance due on November 15,
1998...................................................... $ 27,890 $ 58,836
Other notes payable collateralized by automobiles payable in
aggregate monthly installments of approximately $2,600,
including interest ranging from 8.9% to 12.35%, maturing
May 2000.................................................. 27,598 68,024
Obligations under capital leases............................ 40,895 74,500
-------- --------
791,057 201,360
Less current portion...................................... 771,719 140,399
-------- --------
$ 19,338 $ 60,961
======== ========
Long-term debt is due as follows:
2000...................................................... $ 18,065
2001...................................................... 1,273
</TABLE>
NOTE G -- DUE TO RELATED PARTY
Due to related party at February 28, 1997 represented amounts due to a
company controlled by a director of the Company. In November 1997, the due to
related party balance of $257,768 including accrued interest of $15,356 and
$20,000 of costs paid on behalf of the Company by a director were converted into
2,405,832 shares of common stock.
NOTE H -- WARRANTS
At February 28, 1998, the following share purchase warrants were
outstanding:
<TABLE>
<CAPTION>
CONVERSION PRICES
PER SHARE (IN
CANADIAN
NUMBER DOLLARS) EXPIRATION DATES
------ ----------------- ------------------
<S> <C> <C>
12,500 $ 0.60 March 18, 1999
11,666,667 $0.15/$0.17 September 14, 1999
1,199,000 $ 0.83 April 18, 1998
2,062,500 $ 0.60 October 16, 1998
7,000,000 $ 0.15 October 16, 1998
- ----------
21,940,667
==========
</TABLE>
In March 1997, the Company issued 12,500 warrants in connection with two
notes payable at $0.60 (Canadian) that expire March 1999. In September 1997, the
Company issued 11,666,667 warrants in connection with private placements at
$0.15 (Canadian) for the first year and $0.17 (Canadian) thereafter
21
<PAGE> 22
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expiring September 1999. In October 1997, the Company issued in connection with
the $750,000 convertible debt 7,000,000 warrants at $0.15 (Canadian) that expire
in October 1998.
At February 28, 1997, the following share purchase warrants, issued in
connection with private placements, were outstanding:
<TABLE>
<CAPTION>
CONVERSION PRICES
PER SHARE (IN
CANADIAN
NUMBER DOLLARS) EXPIRATION DATES
------ ----------------- --------------------
<S> <C> <C>
78,125 $ 1.47 March 24, 1997
1,125,000 $ 1.81 September 30, 1997
1,199,000 $0.72/$0.83 April 18, 1997/98
2,062,500 $0.52/$0.60 October 16, 1997/98
- ---------
4,464,625
=========
</TABLE>
Warrants are issued at prices based on the market value of the shares at
the date of issuance of the warrants.
NOTE I -- STOCK OPTIONS
During the year ended February 28, 1998, all outstanding options were
cancelled and replaced by an incentive stock option plan. Under the plan, the
Company may grant options for up to 3,945,000 shares of common stock. The
exercise price of each option is equal to the market price of the Company's
stock on the date of grant. The term of the options is five years, and they are
100% vested on the grant date. The shares are restricted, as they have not been
registered with the United States Securities and Exchange Commission.
The Company applies APB Opinion 25 in accounting for its incentive stock
option plan. Compensation cost charged to operations for options granted to
non-employees was $60,592 and $0 for the years ended February 28, 1998 and 1997.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, stock-based compensation costs would have increased loss
for the year by approximately $93,000 and $342,000 in 1998 and 1997. Basic and
diluted loss per share would have been $.08 and $.17 per share in 1998 and 1997.
The pro forma disclosures only include the effects of options granted since
March 1, 1995.
Director and employee share purchase options are granted at prices based
upon Board approval, but not less than the market value of the share at the date
of grant. During the year ended February 28, 1997, all outstanding options were
repriced to $0.50 (Canadian) per share and the expiration dates were extended to
January 7, 2002. At February 28, 1997, 2,480,000 director and employee share
purchase options were outstanding.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Expected life............................................ 1.6 years 2.5years
Interest rate............................................ 5.78% 6.71%
Volatility............................................... 79.61% 65.5%
Dividend yield........................................... 0% 0%
</TABLE>
22
<PAGE> 23
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the stock option plan follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE PRICE
OPTIONS (IN CANADIAN DOLLARS)
---------- ---------------------
<S> <C> <C>
1998
Outstanding at beginning of year.......................... 2,480,000 $0.50
Cancelled................................................. (2,480,000) 0.50
Granted................................................... 3,945,000 0.17
Exercised................................................. -- --
Forfeited................................................. -- --
---------- -----
Outstanding at end of year................................ 3,945,000 $0.17
========== =====
1997
Outstanding at beginning of year.......................... 1,261,500 $1.63
Granted................................................... 1,479,500 0.50
Exercised................................................. -- --
Forfeited................................................. (261,000) 1.63
---------- -----
Outstanding at end of year................................ 2,480,000 $0.50*
========== =====
</TABLE>
- ---------------
* Reflects repricing of options during 1997. All options outstanding as of
February 28, 1998 and 1997 were exercisable.
NOTE J -- RELATED PARTY TRANSACTIONS
Related party transactions not disclosed elsewhere in the financial
statements are as follows:
The Company has an agreement with a corporation whose president is a
director of the Company. The agreement calls for the promotion of Turbeco sales
in exchange for $12,500 a month through December 1998. The Company incurred
charges of $196,472 of which $101,500 was settled in exchange for 1,531,419
shares of common stock during the year ended February 28, 1998.
In September 1997, the Company entered into a three year employment
agreement with the president of the company. The agreement calls for a base
salary of $150,000 per year and bonuses up to $150,000 based upon the net income
of the Company. The agreement also provides for the issuance of up to 600,000
options based upon the net income of the Company or at the compensation
committee's discretion. The options, when granted, will vest at a rate of 4.17%
per month and have a maximum term of the earlier of five years or his last day
of employment.
NOTE K -- INCOME TAXES
At February 28, 1998, the Company together with its subsidiaries, have
significant non-capital losses available. These losses expire at various dates
through the year 2004, for which the potential income tax benefit has not been
recorded in the accounts. Deferred tax assets created by these net operating
loss carryforwards and temporary differences have been reduced to zero by a
valuation allowance due to the uncertainty of their ultimate realization.
NOTE L -- COMMITMENTS
Effective March 8, 1994, Petrovalve acquired 100% of the outstanding common
shares of Turbeco. The purchase agreement contains a repurchase option which
could be triggered upon the occurrence of certain events. Management has reached
an agreement to purchase the aforementioned repurchase option for 2,500,000
shares of stock at $0.15 (Canadian), and has accrued $264,085 at February 28,
1998, which is included in general and administrative expense in the
accompanying consolidated statements of operations.
23
<PAGE> 24
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Petrovalve was engaged in ongoing research in conjunction with the Alberta
Research Council ("ARC"). On April 1, 1991, Petrovalve, entered into a two year
joint venture agreement with the ARC which provided for a total budget of
$847,000 (Canadian) for research and development of the Petrovalve Plus. The
joint venture agreement was extended until December 31, 1994, with an additional
budget of $400,000 (Canadian), to be jointly provided as per the terms of the
original agreement. The extension was subject to a payback clause, whereby if
Petrovalve moved its sales and distribution offices outside Alberta or if
Petrovalve is sold, two times the total investment of the ARC in the project,
equal to $1,247,000 (Canadian), must be paid back to the ARC, by way of monthly
payments equal to 2% of all proceeds received by Petrovalve in the immediately
proceeding month on sales of the Petrovalve Plus until the amount is fully paid.
No amount has been accrued in the accompanying consolidated financial statements
as the Company believes no liability triggering event has occurred since
inception of this research agreement.
The Company and its subsidiaries have entered into capital lease and
operating lease arrangements that expire at various dates through 2001. Rent
expense for the year ended February 28, 1998 was $116,200. Minimum lease
payments for the next five years are approximately as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1999........................................................ $28,979 $108,579
2000........................................................ 11,916 91,564
2001........................................................ -- 2,337
2002........................................................ -- --
</TABLE>
NOTE M -- SEGMENT INFORMATION
The Company has two reportable segments: drilling products and production
equipment. The drilling products segment manufactures and distributes
centralizers, which are a spiraled vane cementing sleeve and stand off tool that
improves mud and cementation displacement in drilled oil wells. The production
equipment segment carries on the business of developing, manufacturing and
marketing valves for downhole sucker-rod pumps used in oil wells.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations not including nonrecurring
gains and losses and foreign exchange gains and losses.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
The Company operates primarily in the United States and Canada. As of
February 28, 1998 and 1997, and for each of the years then ended, the Company
has operated in two industry segments, drilling products and production
equipment, for which revenues, depreciation expense, operating loss, interest
expense, net loss, and total assets are as follows:
For fiscal year ended February 28, 1998:
<TABLE>
<CAPTION>
DRILLING PRODUCTION
PRODUCTS EQUIPMENT OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................. $2,700,245 $ 481,423 $ -- $3,181,668
Depreciation expense..................... 22,043 58,366 12,694 93,103
Operating loss........................... 92,614 1,145,100 1,041,076 2,278,790
Interest expense......................... 7,171 9,309 107,082 123,562
Assets................................... 1,357,076 528,680 688,306 2,574,062
</TABLE>
24
<PAGE> 25
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For fiscal year ended February 28, 1997:
<TABLE>
<CAPTION>
DRILLING PRODUCTION
PRODUCTS EQUIPMENT OTHER TOTAL
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues.................................. $2,592,491 $ 766,256 $ -- $3,358,747
Depreciation expense...................... 26,333 94,586 25,493 146,412
Operating (income) loss................... (199,633) 1,837,678 959,865 2,597,910
Interest expense.......................... 6,769 15,696 295,135 317,600
Assets.................................... 1,074,028 1,452,778 150,796 2,677,602
</TABLE>
Information on the Company's geographic segments, based on the locations of
the Company's operations, are as follows:
For fiscal year ended February 28, 1998:
<TABLE>
<CAPTION>
CANADA U.S. OTHER TOTAL
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Revenues..................................... $139,610 $3,042,058 $ -- $3,181,668
Operating loss............................... 328,468 1,929,037 21,285 2,278,790
Assets....................................... 127,343 2,446,719 -- 2,574,062
</TABLE>
For fiscal year ended February 28, 1997:
<TABLE>
<CAPTION>
CANADA U.S. OTHER TOTAL
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues.................................... $291,836 $3,002,310 $ 64,601 $3,358,747
Operating loss.............................. 883,067 1,513,938 200,905 2,597,910
Assets...................................... 495,620 2,160,697 21,285 2,677,602
</TABLE>
NOTE N -- SIGNIFICANT CUSTOMER AND MAJOR SUPPLIERS
Sales to a significant customer in the drilling products segment
represented 23% of total sales for the year ended February 28, 1998. At February
28, 1998, amounts due from that customer included in receivables were $57,436.
Purchases from two principal suppliers, which were in excess of 10% of
total direct costs for materials during the year ended February 28, 1998, were
35% and 28% of total purchases.
Purchases from a principal supplier, which were in excess of 10% of total
direct costs for materials during the year ended February 28, 1997, were 62% of
total purchases.
25
<PAGE> 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The report of Grant Thornton LLP dated April 24, 1998 did not contain an
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
audit scope or accounting principles; however, the report was qualified due to
uncertainties resulting from going concern issues.
PART III
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on July 29, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Directors and Executive Officers of the Registrant" information required by
Item 9 of Form 10-KSB as to directors and certain executive officers of the
Company and is incorporated herein by reference.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on July 29, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption
"Beneficial Ownership Reporting Compliance" information required by Item 9 of
Form 10-KSB as compliance with Section 16(a) of the Exchange Act and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on July 29, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Executive Compensation" information required by Item 10 of Form 10-KSB as to
directors and certain executive officers of the Company and is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on July 29, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Security Ownership of Certain Beneficial Owners, Directors, and Management"
information required by Item 11 of Form 10-KSB as to directors and certain
executive officers of the Company and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Proxy Statement issued in connection with the Annual Meeting of
Stockholders to be held on July 29, 1998, to be filed with the Securities and
Exchange Commission pursuant to Rule 14a-6(c), contains under the caption,
"Certain Relationships and Related Transactions" information required by Item 12
of Form 10-KSB as to directors and certain executive officers of the Company and
is incorporated herein by reference.
26
<PAGE> 27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
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
4.1 -- Shareholders Protection Rights Plan (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.1 -- Distribution Agreement -- Downhole Products (UK), LTD
(incorporated by reference to the Company's Form 10-Q for
the quarter ended November 30, 1997)
10.2 -- Wallace Robertson Inc. Consulting Agreement (incorporated
by reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.3 -- Bill Jayroe Employment Agreement (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.4 -- Convertible Loan Agreement between the Company and TOSI,
L.P. dated October 16, 1997 (incorporated by reference to
the Company's Form 10-Q for the quarter ended November
30, 1997)
10.5 -- Form of Warrant Agreement dated October 16,
1997 -- Marlin Investors, L.L.C. (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.6 -- Form of Warrant Agreement dated October 16,
1997 -- Charles A. Dickinson (incorporated by reference
to the Company's Form 10-Q for the quarter ended November
30, 1997)
10.7 -- License Agreement -- Harlan King (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.8 -- Form of Subscription Agreement by and between the Company
and certain shareholders, dated September 16,
1997 -- Marlin Investors, L.L.C. (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.9 -- Form of Subscription Agreement by and between the Company
and certain shareholders, dated September 16,
1997 -- Charles A. Dickinson (incorporated by reference
to the Company's Form 10-Q for the quarter ended November
30, 1997)
21.1 -- List of Operating Subsidiaries (incorporated by reference
to the Company's Form 10-Q for the quarter ended November
30, 1997)
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith
(b) Reports on Form 8-K
During the fiscal quarter ended February 28, 1998, the Registrant filed no
reports on Form 8-K.
27
<PAGE> 28
SIGNATURES
In accordance with Section 13 or 15(d) of the 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)
By: /s/ WILLIAM G. JAYROE
----------------------------------
William G. Jayroe
President and Chief Executive
Officer
June 11, 1998 (Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM G. JAYROE President, Chief Executive June 11, 1998
- ----------------------------------------------------- Officer, and Director
William G. Jayroe (Principal Executive Officer)
/s/ SCOTT W. COOK Executive Vice President and June 11, 1998
- ----------------------------------------------------- Chief Financial Officer
Scott W. Cook (Principal Financial Officer,
Principal Accounting Officer)
/s/ GARY M. PITTMAN Director June 11, 1998
- -----------------------------------------------------
Gary M. Pittman
/s/ WALLACE ROBERTSON Director June 11, 1998
- -----------------------------------------------------
Wallace Robertson
/s/ DAVID A. SPENCER Director June 11, 1998
- -----------------------------------------------------
David A. Spencer
/s/ LARRY R. SHABEN Director June 11, 1998
- -----------------------------------------------------
Larry R. Shaben
</TABLE>
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
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
4.1 -- Shareholders Protection Rights Plan (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.1 -- Distribution Agreement -- Downhole Products (UK), LTD
(incorporated by reference to the Company's Form 10-Q for
the quarter ended November 30, 1997)
10.2 -- Wallace Robertson Inc. Consulting Agreement (incorporated
by reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.3 -- Bill Jayroe Employment Agreement (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.4 -- Convertible Loan Agreement between the Company and TOSI,
L.P. dated October 16, 1997 (incorporated by reference to
the Company's Form 10-Q for the quarter ended November
30, 1997)
10.5 -- Form of Warrant Agreement dated October 16,
1997 -- Marlin Investors, L.L.C. (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.6 -- Form of Warrant Agreement dated October 16,
1997 -- Charles A. Dickinson (incorporated by reference
to the Company's Form 10-Q for the quarter ended November
30, 1997)
10.7 -- License Agreement -- Harlan King (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.8 -- Form of Subscription Agreement by and between the Company
and certain shareholders, dated September 16,
1997 -- Marlin Investors, L.L.C. (incorporated by
reference to the Company's Form 10-Q for the quarter
ended November 30, 1997)
10.9 -- Form of Subscription Agreement by and between the Company
and certain shareholders, dated September 16,
1997 -- Charles A. Dickinson (incorporated by reference
to the Company's Form 10-Q for the quarter ended November
30, 1997)
21.1 -- List of Operating Subsidiaries (incorporated by reference
to the Company's Form 10-Q for the quarter ended November
30, 1997)
*27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith
<PAGE> 1
EXHIBIT 3.3
AMENDMENT NUMBER 1
TO THE BYLAWS
OF
FLOTEK INDUSTRIES INC.
---------------------------------------------
4.2 QUALIFICATION. No person shall be qualified for election as a Director if he
is less than 18 years of age; if he is of unsound mind and has been so found by
a court in Canada or elsewhere; if he is not an individual; or if he has the
status of a bankrupt. A Director need not be a Shareholder. A majority of the
Directors all be resident Canadians. SUBJECT TO SUBSECTION 100(4) OF THE ACT, AT
LEAST HALF OF THE DIRECTORS OF THE CORPORATION MUST BE RESIDENT CANADIANS. At
least two of the Directors shall not be officers or employees of the Corporation
or any of its affiliates.
4.8 Delete this section in its entirety and replace with the following: Canadian
Presence at Meetings. The Board shall not transact business at meeting, other
than filling a vacancy in the Board unless at least one-third of the Directors
present are resident Canadians, except where a resident Canadian Director who is
unable to be present approves in writing or by telephone, electronic or other
means of communication the business to be transacted at the Meeting.
Dated effective as of October 15, 1997
/s/ BROOKII WOOTTON
-------------------------------------------------
Brookii Wootton, Corporate Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-1-1997
<PERIOD-END> FEB-28-1998
<CASH> 634,511
<SECURITIES> 0
<RECEIVABLES> 453,035
<ALLOWANCES> 25,569
<INVENTORY> 1,181,104
<CURRENT-ASSETS> 2,243,081
<PP&E> 474,205
<DEPRECIATION> 287,594
<TOTAL-ASSETS> 2,574,062
<CURRENT-LIABILITIES> 1,815,460
<BONDS> 0
0
0
<COMMON> 17,870,210
<OTHER-SE> (17,130,946)
<TOTAL-LIABILITY-AND-EQUITY> 2,574,062
<SALES> 3,181,668
<TOTAL-REVENUES> 3,181,668
<CGS> 2,438,720
<TOTAL-COSTS> 5,460,458
<OTHER-EXPENSES> 30,452
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,562
<INCOME-PRETAX> (2,432,804)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,432,804)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,432,804)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
