<PAGE>
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 November 30, 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 of incorporation (I.R.S. Employer
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 November 30, 1998 the number of shares of common stock outstanding was
45,680,795
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (X)
<PAGE>
Part I - Financial Information
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, February 28,
ASSETS 1998 1998
-------------------- --------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ - $ 634,511
Accounts receivable, less allowance for doubtful
accounts of $39,988 and $25,569 238,337 427,466
Inventory 861,074 1,181,104
------------ ------------
Total current assets 1,099,411 2,243,081
FURNITURE AND EQUIPMENT 111,972 186,611
OTHER ASSETS 139,195 144,370
------------ ------------
$ 1,350,578 $ 2,574,062
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 45,000 $ 40,000
Current portion of long-term debt 774,323 771,719
Accounts payable and accrued liabilities 510,517 739,656
Accrued repurchase option - 264,085
------------ ------------
Total current liabilities 1,329,840 1,815,460
LONG-TERM DEBT 10,061 19,338
COMMITMENTS - -
SHAREHOLDERS' EQUITY
Common stock no par value; 100,000,000 shares
authorized; 45,680,795 issued
and outstanding 18,134,295 17,870,210
Additional paid in capital 150,313 149,113
Equity adjustment from foreign currency translation (288,965) (285,636)
Accumulated deficit (17,984,966) (16,994,423)
------------ ------------
10,677 739,264
------------ ------------
$ 1,350,578 $ 2,574,062
============ ============
</TABLE>
The accompanying notes are an integral part of these statements and should be
read in conjunction herewith.
2
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended November 30, Ended November 30,
1998 1997 1998 1997
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Sales 357,089 822,397 $ 1,573,672 $ 2,541,014
Costs and expenses:
Cost of goods sold 220,469 453,613 969,267 1,396,524
Selling 226,458 339,226 847,271 1,109,890
General and administrative 149,920 276,967 654,401 741,984
Depreciation and amortization 13,323 14,925 43,176 65,776
Research and development - - - 3,066
----------- ----------- ----------- -----------
609,170 1,084,731 2,514,115 3,317,240
Loss from operations 252,081 262,334 940,443 776,226
Other income (expense), net
Interest (27,431) (27,759) (112,168) (61,871)
Other 7,393 10,825 62,068 9,624
----------- ----------- ----------- -----------
(20,038) (16,934) (50,100) (52,247)
Net loss $ 272,119 $ 279,268 $ 990,543 $ 828,473
Basic and diluted loss per share $0.01 $0.01 $0.02 $0.03
Weighted average number of shares
outstanding 45,680,795 25,744,797 44,014,128 25,744,797
</TABLE>
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
3
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended November 30,
1998 1997
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net loss for the period $(990,543) $ (828,473)
Adjustments to reconcile net losses to net cash
used in operating activities
Depreciation and amortization 43,176 65,776
Accretion of discount 55,326 -
Compensatory stock options 1,200 -
Write-off of Inventory 98,170 -
Severance provision 80,635 -
Loss on disposal of capital assets 24,638 -
Change in assets and liabilities
Decrease in accounts receivable 189,129 215,164
Decrease (Increase) in inventory 221,860 (213,283)
(Decrease) Increase in accounts payable and
accrued liabilities (309,774) 30,924
--------- ----------
Net cash (used) provided in operating activities (586,183) (729,893)
Cash flows from investing activities
Proceeds from sale of capital assets 12,000 -
Purchase of capital assets - (6,500)
Purchase of other assets - (7,383)
--------- ----------
Net cash provided (used) by investing activities 12,000 (13,883)
Cash flows from financing activities
Proceeds from issuance of share capital, net of costs - 1,250,000
Proceeds from long-term debt and notes payable 15,000 815,000
Repayment of long-term debt and notes payable (75,328) (330,036)
--------- ----------
Net cash (used) provided by financing activities (60,328) 1,734,964
Net (decrease) increase in cash (634,511) 991,188
Cash at beginning of year 634,511 91,641
--------- ----------
Cash at end of period $ - $1,082,829
Supplementary information
Interest paid $ 64,355 $ 66,553
Income taxes paid - -
</TABLE>
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
4
<PAGE>
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 November 30, 1998 are not necessarily
indicative of the results expected for the full year.
Note 2 - Comprehensive Income
In September 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources and includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Comprehensive income:
Net Loss $272,119 $279,268 $990,543 $828,473
Cumulative translation adjustment 4,343 - 3,329 -
-------- -------- -------- --------
Total comprehensive income $276,462 $279,268 $993,872 $828,473
======== ======== ======== ========
</TABLE>
5
<PAGE>
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.
Note 4 - Reclassifications and Restatements
Certain reclassifications of prior year balances have been made to conform such
amounts to corresponding 1998 classifications. These reclassifications had no
impact on net income or shareholders' equity.
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
6
<PAGE>
segment manufactures and distributes centralizers, which are spiraled vane
cementing sleeves and stand off tools that improve mud and cementation
displacement in drilled oil wells.
The business environment for oilfield operations and its corresponding operating
results are affected significantly by petroleum industry exploration and
production expenditures. These expenditures are influenced strongly by oil
company expectations as to energy prices and the supply and demand for crude oil
and natural gas. Petroleum supply and demand, and pricing, in turn, are
influenced by numerous factors including, but not limited to, the effect of
competition, the level of petroleum industry exploration and production
expenditures, world economic conditions, prices of, and the demand for crude oil
and natural gas, drilling activity, weather, the legislative environment in the
United States and other countries, and the condition of the capital and equity
markets.
The worldwide price of oil has declined significantly since late 1997, with
prices having dropped as much as 40% to under $13 per barrel for spot
deliveries. This decline has attributed to, among other things, an excess
supply of oil in the world markets, reduced domestic demand associated with an
unseasonably warm winter, and high inventory levels of oil and gas. The
depressed economic conditions in Southeast Asia also have had a negative effect
on the economies in other regions around the world and the associated demand for
oil in those regions. These conditions have resulted in substantially lower rig
utilization rates in the United States and Canadian land markets as well as less
dramatic declines in the United States offshore markets as the Company's
customers have begun to reevaluate their exploration and development plans for
1998 in light of current lower oil prices. The above factors have particularly
affected the demand for many of the Company's centralizer products. A 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 could have an adverse financial effect on the
Company.
Within the United States and Canada, the Company's artificial lift segment has
experienced declines in revenue as demand and pricing has fallen with the lower
rig count and oil production activity. The artificial lift segment has been
particularly affected by large declines in demand for its equipment used for the
production of heavy oil and other wells that are highly dependent on oil prices.
If crude oil prices remain at or below current levels for a prolonged period of
time, management believes demand for products and services could continue to be
adversely impacted in the U.S. and certain other markets. The Company currently
anticipates that under current market conditions the demand for its current
products and services will decline during the remainder of fiscal year 1999.
The declines will be most significant in the Company's drilling products
segment.
In response to the current industry conditions, the Company has implemented
various actions directed at reducing costs to be in line with the reduced
operating activities. These actions include reductions in employment, the
reduction of certain operating expenses, and disposal of certain lower margin
product lines.
7
<PAGE>
RESULTS OF OPERATIONS
Revenue by Operating Segment:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
----------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Drilling Products $321,684 $725,521 $1,259,307 $2,156,621
Production Equipment 35,405 96,876 314,365 384,393
-------- -------- ---------- ----------
$357,089 $822,397 $1,573,672 $2,541,014
======== ======== ========== ==========
</TABLE>
Consolidated revenues were down $465,308, or 57% for the quarter ended November
30, 1998, as compared to the same period in 1997, primarily due to the effect of
lower oil prices resulting in certain customers' decision to limit investments
in exploration, drilling and production activities. Revenues from the drilling
products segment decreased 56% in the quarter 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 63% in the 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, an associated drop in heavy
oil drilling activity primarily in Canada and other marginal oil production
activity. There were only 190 rigs drilling for U.S. oil in November 1998, the
lowest number on record and a 50 percent decline since November 1997, according
to the latest Baker-Hughes Inc. rig count.
Costs and Expenses
The Company's consolidated gross margins decreased from 45% in the quarter ended
November 30, 1997 to 38% in the quarter ended November 30, 1998. The Company's
drilling products segments gross margins declined from 43% in the quarter ended
November 30, 1997 to 36% in the quarter ended November 30, 1998. The decline in
gross margins is attributed to pricing pressures in the Company's centralizer
line of products. The worldwide price of oil has declined significantly since
late 1997. These price declines have resulted in substantially lower rig
utilization rates in the United States offshore markets as the Company's
customers have begun to reevaluate their exploration and development plans for
1998 in light of current lower oil prices. This has particularly affected the
demand for many of the Company's centralizer products. As a result, the Company
has been forced to reduce the selling price of such products. The Company's
production equipment segments gross margins increased from 57% in the quarter
ended November 30, 1997 to 63% in the quarter ended November 30, 1998 due to the
Company's sale of certain inventory components from inventory quantities that
were previously written-off in fiscal year 1998.
8
<PAGE>
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 $112,768, or 33% in the third quarter as compared to the same period in
1997. In response to the current industry conditions, the Company has
implemented various actions directed at reducing costs to be in line with the
reduced operating activities. These actions include reductions in the Company's
sales-force.
General corporate expenses decreased in the third quarter by $127,047, or 46% as
compared to the same period in 1997. In response to the current industry
conditions, the Company has implemented various actions directed at reducing
costs to be in line with the reduced operating activities. These actions
include reductions in the Company's corporate overhead.
Interest Expenses
Overall interest expense for the quarter ended November 30, 1998 remained
relatively consistent with interest expense for the quarter ended November 30,
1997, as overall debt level remained relatively constant.
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its growth to date from stock offerings, subordinated
borrowings, and internally generated funds. The principal uses of its cash have
been to fund the working capital needs of the Company.
The Company had no cash on hand at November 30, 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.
YEAR 2000 ISSUE
The Year 2000 issue is the risk that information systems, computers, equipment
and products using date-sensitive software or containing computer chips with
two-digit date fields will be unable to correctly process the Year 2000 date
change. If not identified and corrected prior to the Year 2000, failures could
occur in the software, hardware, equipment and products of the Company and its
suppliers, vendors and customers that could result in interruptions of the
Company's business. Any of such failures could have a material impact on the
Company.
The Company is currently assessing the cost and uncertainties related to the
Year 2000 issue using internal and external resources. Based on preliminary
information, the Company currently believes that it has substantially addressed
the Year 2000 issues with respect to its software, hardware and products without
significant impact on its operations. The estimated costs associated with
achieving Year 2000 compliance are not expected to have a material impact on the
Company's financial condition or results of operations. There is inherent
uncertainty in the Year 2000 problem due to the possibility of unanticipated
failures by third party customers and suppliers. Accordingly, the Company is
unable, at this time, to assess the extent and resulting materiality of the
impact of possible Year 2000 failures on its operations, liquidity or financial
position. The Company has designated personnel responsible to identify and
respond to these
9
<PAGE>
issues and once all identifications and reviews are completed, a contingency
plan will be developed to mitigate the risk of business interruption.
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 January
14, 1999. 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:
. Management continues to reduce selling, general and administrative expenses.
. Management intends to secure new long-term equity financing for working
capital purposes.
. 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:
. 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.
. The Company's drilling products segment generates a significant portion of
the Company's consolidated revenues. A further reduction in drilling activity
could adversely affect future operating results.
10
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (incorporated by 10-Q for the quarter ended
November 30, 1997) reference to the Company's Form
3.2 By-laws (incorporated by reference to the quarter ended November 30,
1997) Company's Form 10-Q for the
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 November 30, 1998, the Company filed no reports
on Form 8-K.
11
<PAGE>
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: January 15, 1998 By: /s/ Jerry Dumas
President and Chief Executive Officer
(Principal Executive Officer, Principal
Financial Officer, Principal Accounting
Officer)
12
<PAGE>
Exhibit Index
3.1 Articles of Incorporation (incorporated by reference to
the Company's Form 10-Q for the quarter ended November 30, 1997)
3.2 By-laws (incorporated by reference to the Company's Form
10-Q for the quarter ended November 30, 1997)
3.3 Amendment to Registrant's Bylaws (incorporated by
reference to the Company's Form 10-KSB for the fiscal year ended
February 28, 1998)
4.1 Shareholders Protection Rights Plan (incorporated by
reference to the Company's Form 10-Q for the quarter ended
November 30, 1997)
*27.1 Financial Data Schedule
* filed herewith
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 238,337
<ALLOWANCES> 39,988
<INVENTORY> 861,074
<CURRENT-ASSETS> 1,099,411
<PP&E> 111,972
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,350,578
<CURRENT-LIABILITIES> 1,329,840
<BONDS> 0
0
0
<COMMON> 18,134,295
<OTHER-SE> (18,123,618)
<TOTAL-LIABILITY-AND-EQUITY> 1,350,578
<SALES> 1,573,672
<TOTAL-REVENUES> 1,573,672
<CGS> 969,267
<TOTAL-COSTS> 2,514,115
<OTHER-EXPENSES> 50,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,168
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (990,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (990,543)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
