<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 August 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)
ALBERTA 77-0709256
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7030 EMPIRE CENTRAL DRIVE, HOUSTON, TEXAS 77040
(Address of principal executive offices) (zip code)
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 August 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>
August 31, February 28,
ASSETS 1998 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 69,210 $ 634,511
Accounts receivable, less allowance for doubtful
accounts of $25,569 and $25,569 469,450 427,466
Inventory 829,390 1,181,104
------------ ------------
Total current assets 1,368,050 2,243,081
FURNITURE AND EQUIPMENT 149,992 186,611
OTHER ASSETS 141,205 144,370
------------ ------------
$ 1,659,247 $ 2,574,062
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 30,000 $ 40,000
Current portion of long-term debt 766,535 771,719
Accounts payable and accrued liabilities 562,771 739,656
Accrued repurchase option 264,085 264,085
------------ ------------
Total current liabilities 1,623,391 1,815,460
LONG-TERM DEBT 12,802 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 150,313 149,113
Equity adjustment from foreign currency translation (284,622) (285,636)
Accumulated deficit (17,712,847) (16,994,423)
------------ ------------
23,054 739,264
------------ ------------
$ 1,659,247 $ 2,574,062
============ ============
</TABLE>
The accompanying notes are an integral part of these statements and should be
read in conjunction herewith.
2
<PAGE> 3
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended August 31, Ended August 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales 486,897 792,296 $ 1,216,583 $ 1,718,617
Costs and expenses:
Cost of goods sold 400,979 413,135 748,798 942,911
Selling 301,264 358,639 620,813 770,664
General and administrative 283,385 187,064 504,481 463,562
Depreciation and amortization 15,670 46,330 30,853 50,851
Research and development -- 4,521 -- 4,521
------------ ------------ ------------ ------------
1,001,298 1,009,689 1,904,945 2,232,509
Loss from operations 514,401 217,393 688,362 513,892
Other income (expense), net
Interest (42,301) (16,453) (84,737) (34,112)
Other 12,468 973 54,675 (1,201)
------------ ------------ ------------ ------------
(29,833) (15,480) (30,062) (35,313)
Net loss $ 544,234 $ 232,873 $ 718,424 $ 549,205
Basic and diluted loss per share $ 0.013 $ 0.009 $ 0.017 $ 0.021
Weighted average number of shares outstanding 43,180,795 25,744,797 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>
Six Months
Ended August 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net loss for the period $(718,424) $(549,205)
Adjustments to reconcile net losses to net cash
used in operating activities
Depreciation and amortization 30,853 50,851
Accretion of discount 44,261 --
Compensatory stock options 1,200 --
Write-off of Inventory 98,170 --
Severance provision 80,635 --
Loss on disposal of capital assets 8,931 --
Change in assets and liabilities
(Increase) Decrease in accounts receivable (41,984) 177,813
Decrease (Increase) in inventory 253,544 (130,511)
(Decrease) Increase in accounts payable and accrued
liabilities (257,520) 268,491
Increase in due to related parties -- 52,685
--------- ---------
Net cash (used) provided in operating activities (500,334) (129,876)
Cash flows from investing activities
Purchase of furniture and equipment -- (17,239)
Purchase of other assets -- (6,599)
--------- ---------
Net cash used by investing activities -- (23,838)
Cash flows from financing activities
Proceeds from long-term debt and notes payable -- 136,024
Repayment of long-term debt and notes payable (65,981) (52,899)
--------- ---------
Net cash (used) provided by financing activities (65,981) 83,125
Effect of exchange rates on cash 1,014 --
--------- ---------
Net (decrease) increase in cash (565,301) (70,589)
Cash at beginning of year 634,511 91,641
--------- ---------
Cash at end of period $ 69,210 $ 21,052
========= =========
Supplementary information
Interest paid $ 40,693 $ 3,754
Income taxes paid -- --
</TABLE>
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
4
<PAGE> 5
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 August 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.
<TABLE>
<CAPTION>
Six Months Ended August 31,
1998 1997
--------- ---------
<S> <C> <C>
Comprehensive income:
Net Loss $(718,424) $(549,205)
Cumulative translation adjustment 1,014 --
--------- ---------
Total comprehensive income $(717,410) $(549,205)
========= =========
</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 the
segment. Quarterly disclosures are not required in the first year of adoption.
5
<PAGE> 6
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
This Form 10-QSB 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
6
<PAGE> 7
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 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 and remain depressed, the Company and others in the
industry continue to experience a softening in demand for their products and
services, in particular products associated with exploration activity and oil
production. This reduction in 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. 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.
RESULTS OF OPERATIONS
Revenue by Operating Segment:
<TABLE>
<CAPTION>
Three months ended August 31,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES
Drilling products segment $419,942 $654,993
Production equipment segment 66,955 137,303
-------- --------
Consolidated Revenues $486,897 $792,296
======== ========
</TABLE>
Consolidated revenues were down $305,399, or 39% for the quarter ended
August 31, 1998, as compared to the same period in 1997. Revenues from the
drilling products segment decreased 36% 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
decreased 51% for the second quarter as compared to the same period in 1997. The
overall decrease was attributed to a decline in demand for the Company's
artificial lift products due to lower oil prices and an associated drop in heavy
oil drilling activity primarily in Canada and other marginal oil production
activity. Comparing the Company's second quarter in 1998 to the same period in
7
<PAGE> 8
1997, the North American active rotary rig count as reported by Baker Hughes
decreased 20%. The average international rig count declined slightly in the
second quarter of 1998, as compared to the second quarter of 1997.
Costs and Expenses
The Company's consolidated gross margins decreased from 48% in the
quarter ended August 31, 1997 to 18% in the quarter ended August 31, 1998. The
Company's drilling products segment gross margins declined from 44% in the
quarter ended August 31, 1997 to 17% in the quarter ended August 31, 1998. The
overall decline was attributed to freight charges that were written-off in the
Company's drilling products segment as a result of the termination of it's
exclusive distribution agreement with Downhole Products Plc., the Company's
supplier of it's Spir-O-Lizer line of products. As stated in the distribution
agreement, Downhole Products Plc. was required to repurchase the Company's
entire Spir-O-Lizer inventory at the original invoice price, excluding all
transportation costs incurred by the Company for transporting the inventory from
Scotland to it's Houston facility. As a result of the termination of the
distribution agreement, $98,170 in freight costs were charged against cost of
sales during the quarter.
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 16% in the second quarter 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 increased in the second quarter by $96,321,
or 51% as compared to the same period in 1997. The increase was attributed to a
severance provision of $80,635 for the departure of William G. Jayroe, the
Company's President and Chief Executive Officer. In addition, the Company
incurred additional legal expenses associated with the Company's change in
reporting requirements in the United States. When the Company ceased to be a
foreign private issuer, it was no longer eligible to utilize Form 20-F and 6-K
or other forms utilized under the integrated disclosure system for foreign
private issuers. The Company must now comply with the reporting requirements
required by the Securities and Exchange Act of 1934.
Interest Expenses
The increase in interest expense in the quarter ended August 31, 1998,
as compared to the quarter ended August 31, 1997, reflects the issuance by the
Company of a convertible loan in the principal amount of $750,000 on October 16,
1997.
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.
8
<PAGE> 9
The Company had cash and cash equivalents of $69,210 at August 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 balances, decreased inventory
levels as a result of Downhole Products Plc.'s requirement to repurchase the
Company's entire Spir-O-Lizer inventory, and the increase in short term debt.
Cash flow used in operating activities was $500,334 primarily as a result of
it's net loss for the period.
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 on October
16, 1998. Management is currently negotiating with the lender for an extension
of the debt obligation. 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 is negotiating with the lender an extension or 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.
o The Company's ability to control the amount of operating expenses.
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<PAGE> 10
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
* filed herewith
(b) Reports on Form 8-K
During the fiscal quarter ended August 31, 1998, the Registrant filed no
reports on Form 8-K.
10
<PAGE> 11
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: October 15, 1998 By: /s/ Jerry Dumas
President and Chief Executive Officer
(Principal Executive Officer, Principal
Financial Officer, Principal Accounting
Officer)
11
<PAGE> 12
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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
</TABLE>
* filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 69,210
<SECURITIES> 0
<RECEIVABLES> 469,450
<ALLOWANCES> 25,569
<INVENTORY> 469,450
<CURRENT-ASSETS> 1,368,050
<PP&E> 149,992
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,659,247
<CURRENT-LIABILITIES> 1,623,391
<BONDS> 0
0
0
<COMMON> 17,870,210
<OTHER-SE> (16,210,963)
<TOTAL-LIABILITY-AND-EQUITY> 1,659,247
<SALES> 1,216,583
<TOTAL-REVENUES> 1,216,583
<CGS> 748,798
<TOTAL-COSTS> 1,904,945
<OTHER-EXPENSES> 30,062
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,737
<INCOME-PRETAX> (718,424)
<INCOME-TAX> 0
<INCOME-CONTINUING> (718,424)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (718,424)
<EPS-PRIMARY> (.017)
<EPS-DILUTED> (.017)
</TABLE>
