<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 May 31, 2000
( ) 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 ( ) No (x)
As of May 31, 2000 the number of shares of common stock outstanding was
50,243,295
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>
May 31, February 29,
ASSETS 2000 2000
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 47,800 $ 128,184
Accounts receivable, less allowance for doubtful
accounts of $24,000 397,668 296,172
Inventory 845,591 860,872
------------ ------------
Total current assets 1,291,059 1,285,228
FURNITURE AND EQUIPMENT 245,279 253,153
OTHER ASSETS 555,618 392,545
------------ ------------
$ 2,091,956 $ 1,930,926
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 456,000 $ 36,000
Current portion of long-term debt 1,721,359 1,765,367
Accounts payable and accrued liabilities 750,314 1,146,439
Due to related party 210,829 210,829
------------ ------------
Total current liabilities 3,138,502 3,158,635
LONG-TERM DEBT 190,366 190,366
SHAREHOLDERS' EQUITY
Common stock - no par value; 100,000,000 shares
authorized; 50,243,295 and 48,493,295 issued
and outstanding at May 31 and February 29, 2000, respectively 18,574,920 18,399,920
Additional paid in capital 163,813 163,813
Equity adjustment from foreign currency translation (272,811) (287,784)
Accumulated deficit (19,702,834) (19,694,024)
------------ ------------
(1,236,912) (1,418,075)
------------ ------------
$ 2,091,956 $ 1,930,926
============ ============
</TABLE>
The accompanying notes are an integral part of these statements and should be
read in conjunction herewith.
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months
Ended May 31,
2000 1999
(unaudited) (unaudited)
Sales $ 656,434 $ 304,653
Costs and expenses:
Cost of goods sold 296,637 186,771
Selling 176,754 236,129
General and administrative 155,054 111,122
Depreciation and amortization 19,801 10,730
Research and development 7,740 -
----------- -----------
655,986 544,752
----------- -----------
Income (loss) from operations 448 (240,099)
Other income (expense), net
Interest (58,562) (33,404)
Other 49,304 87,356
----------- -----------
(9,258) (53,952)
----------- -----------
Net loss $ (8,810) $ (186,147)
=========== ===========
Basic and diluted net loss per share $ (0.0002) $ (0.04)
Weighted average number of shares outstanding 50,243,295 45,680,795
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
<PAGE>
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended May 31,
2000 1999
--------- ---------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $ (8,810) $(186,147)
Adjustments to reconcile net loss to cash used in operations
used in operating activities
Depreciation and amortization 19,801 10,730
Accretion of discount - 6,916
Change in operating assets and liabilities:
Accounts receivable (101,496) (151,945)
Inventory 15,281 18,872
Due to related parties - 54,000
Notes payable - -
Accounts payable and accrued liabilities (396,125) 48,177
--------- ---------
Net cash used in operating activities (471,349) (199,397)
Cash flows from financing activities
Proceeds from long-term debt and notes payable 420,000 162,228
Repayment of long-term debt and notes payable (44,008) -
--------- ---------
Net cash (used) provided by financing activities 375,992 162,228
Effect of exchange rates on cash 14,973 -
--------- ---------
Net decrease in cash (80,384) (37,169)
Cash and cash equivalents - beginning of period 128,184 50,492
--------- ---------
Cash and cash equivalents - end of period $ 47,800 $ 13,323
========= =========
Supplementary information
Interest paid $ 8,228 $ 1,789
Income taxes paid - -
Non-cash investing and financing activities
Patent acquired for common stock $ 175,000 -
</TABLE>
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
<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 29, 2000. The results of operations
for the three-month period ended May 31, 2000 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.
Three Months Ended
May 31,
2000 1999
------- ---------
Comprehensive income (loss):
Net Loss $(8,810) $(186,147)
Cumulative translation adjustment 14,973 45,666
------- ---------
Total comprehensive income (loss) $ 6,163 $(140,481)
======= =========
<PAGE>
RESULTS OF OPERATIONS
Revenue by Operating Segment:
Three Months Ended
May 31,
2000 1999
-------- --------
Drilling Products $417,076 $224,677
Production Equipment 239,358 79,976
-------- --------
$656,434 $304,653
======== ========
Consolidated revenues were up 115% for the three months ended May 31, 2000 as
compared to the same period in 1999. Revenues from the drilling products segment
reflected an improvement in drilling rig activity from the record low North
American rig counts in 1999. Revenues from the production equipment segment were
higher for the year as compared to the same period in 1999, reflecting increased
acceptance of our production valve products.
Costs and Expenses
Consolidated gross margins increased from 39% in 1999 to 55% in 2000, reflecting
a better mix in the more profitable production equipment segment and increased
profitability in the drilling products segment resulting from the reduction in
cost of sales in 2000 from the purchase of Trinity Tools, Inc. (Previously the
Company purchased products from Trinity).
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
as compared to the same period in 1999. This decrease was primarily attributable
to the selective reduction of the work force in response to the 1999 reduction
in exploration and development activity, and changes in compensation
arrangements. The reduced staffing continues to be adequate for the current
level of sales. The Company also increased in-house sales, which have lower
selling costs. The Company now uses in-house printing for catalogs and
brochures, significantly reducing their cost.
General and administrative expense increased by approximately $46,000 reflecting
an increase in legal fees and personnel cost and the reclassification of rent
from selling to General and Administrative.
The $9,000 increase in depreciation & amortization resulted primarily from the
acquisition of Trinity and reflects depreciation of its assets and amortization
of goodwill in 2000.
Interest Expense
Interest expense for fiscal 2000 was $58,563 compared to $33,404, an increase of
75%. The increase in interest expense reflects the increase in the Company's
overall indebtedness in 2000.
Other Income (expense)
Included in other income in 1999 was a gain of approximately $80,000
representing the reduction of a severance provision set up in the prior year
for the departure of William G. Jayroe, the Company's former president and chief
executive officer. Included in other income in 2000 were amounts totaling
approximately $49,000 representing negotiated reductions for cash payments to
settle accounts payable and accrued liabilities.
<PAGE>
Certain reclassifications of prior year balances have been made to conform such
amounts to corresponding 2000 classifications. These reclassifications had no
impact on net loss 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, the condition
of the capital and equity markets, and other risk factors identified herein.
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
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 have been listed
on the OTC Bulletin Board market. The Company's common stock is traded in the
United States on 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 + Plus(R) Pump Valves
that include the Petrovalve Gas Breaker Valve, the Standing Valve for use with
electric DH pumps, the Petrovalve Injector 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 casing centralizers,
which are vaned cementing sleeves and integral joint 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 + Plus(R) Pump Valve and the Petrovalve
Gas Breaker Valve. Both patented products are valves used in down-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. The Company's production equipment
customers are the North American oil producers, and international energy
companies.
<PAGE>
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 oil field 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 an inferior ball & seat
and can only set themselves apart by 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. The Petrovalve Plus valve product is
manufactured by leading manufacturers to our controlled specifications.
The Company'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 Halliburton, and Weatherford
International, 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, Aves in Arlington, Texas, among others. The Company's valve
products are sold directly to the end user, the oil and gas producer, and
distributed domestically through pump repair facilities and regional oilfield
supply stores; and internationally through area agents and distributors, as well
as direct Petrovalve Plus sales.
Drilling Products
Flotek's drilling products division manufactures, distributes and
services several products that enhance oil and gas well cementing programs and
the safety and effectiveness of the drilling process. Its primary products
include 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 cementing
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 standoff and improve 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. New products
that have been successfully introduced are the Integral Pup Centralizer, the
Eccentric Turbulator (jointly patented with Marathon Oil), and the most recent
Rotolok Centralizer.
The Company's Drilling Products customers are made up of the North
American oil producers, including major oil companies that are involved in
exploration and the drilling and cementing of oil wells. The Company's active
customer base is well distributed between major oil companies and smaller
independent operators. The Company's marketing area includes the Gulf of
Mexico. As a result of the addition of US patented technology, the Company has
negotiated the distribution and representation of its drilling products on a
global basis with several major oil-field service providers that have existing
world-wide distribution. Currently the Company's primary competitors with
respect to its drilling products are: Weatherford International, Inc., Franks
Industries, Ray Oil Tools and Milam Tool Company.
Product Demand
Currently, the worldwide price of oil has risen as a result of production
controls by OPEC, and drilling activity has increased. Our operations are
materially affected by the rig count. Any declines
<PAGE>
in the current worldwide rig count or drilling activity could reduce the demand
for our drilling products and services and would have a material adverse effect
on the Company's financial condition and results of operations.
Patents
The Company has followed a policy of seeking patent protection both
inside and outside the United States for products and methods that appear to
have commercial significance. The Company believes its patents and trademarks
to be adequate for the conduct of its business. During the first quarter of
fiscal 2001, the Company issued 1,750,000 shares of its common stock, valued at
$175,000, to purchase patents to improve its production equipment line.
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. Even though the majority of the Company's operations are located in
the United States, there can be no assurance that an occurrence of any one of
these events in our international operations would not have a material adverse
effect on its operations.
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.
Capital Resources and Liquidity
The Company has financed its operations to date from stock offerings,
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 decreased to $47,800 at May 31,
2000 from $128,184 at February 29, 2000. Overall cash flows used in operating
activities increased from $199,397 for the three months ending May 31,1999 to
$471,349 for the three months ending May 31, 2000. Accounts receivable increased
from $296,172 at February 29, 2000 to $397,668 at May 31, 2000, reflecting the
higher level of sales in 2000.
<PAGE>
The Company expects to fund liquidity needs from a combination of available
cash balances, internally generated funds and future financing activities.
Financing Activities
Repayments of long-term debt during the three months ending May 31, 2000 were
$44,008.
At May 31, 2000 the Company had a working capital deficit of $1,847,443 and cash
and cash equivalents of $47,800 compared to a working capital deficit of
$1,873,407 and cash and cash equivalents of $128,184 at February 29, 2000. The
overall increase in working capital is attributable primarily to the improved
operating results. The Company has sustained substantial operating losses in
recent years resulting in an accumulated deficit of $19,702,834 at May 31, 2000.
In addition, the Company has used substantial amounts of working capital
in its operations. Further, the Company has current maturities of debt totaling
$2,388,188.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheets 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 has taken the following steps to revise its
operating and financial requirements, which it believes are sufficient to
provide the Company with adequate working capital:
. Management is in the process of restructuring existing indebtedness totaling
$2,200,000 at May 31, 2000. Under the proposed restructuring the
indebtedness, and related accrued interest would be converted to preferred
stock, decreasing current liabilities by $2,380,857.
. Management has signed an agreement with a bank to factor accounts receivable.
Since the advancement of funds requires an assignment of first security
interests in accounts receivable, no advances can be drawn until after the
completion of the restructuring and release of liens by the debt holders.
. Management has reduced ongoing selling, general and administrative expense by
eliminating high cost positions and tightening expenditure controls.
. Management continues to add complementary product lines to help diversify the
Company's product mix. Such new product lines will be sold through the
Company's existing sales structure.
. Management continues to seek potential acquisition candidates to either
decrease our costs of providing products or add new products and customer base
to our existing product lines to diversify the Company's market.
<PAGE>
The Company is in the process of restructuring $2.2 million of existing
indebtedness and related accrued unpaid interest. Under the proposed terms of
the restructuring, the principal and interest would be converted into a newly
created preferred stock which would be convertible into common stock at the
option of the holder at a price of $.03 per share. Detachable warrants to
purchase the number of shares determined by dividing the principal and accrued
interest by $.03 would also be issued in conjunction with the restructuring.
If it had occurred at May 31, 2000, the proposed restructuring would have had
the proforma effect of decreasing current liabilities by approximately
$2,380,857, including $180,857 of accrued, unpaid interest and increasing
preferred stock and related stockholders' equity by $2,380,857, resulting in
positive stockholders' equity of $1,143,945.
If the proposed preferred shares were converted, it would result in
approximately 78,000,000 additional common shares being issued. If all of the
warrants were exercised, an additional 78,000,000 common shares would be issued
for proceeds of $2,200,000.
Risk Factors
The following risk factors, among others, may cause the Company's
operating results and/or financial position to be adversely affected:
. 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 continuation of the rig count at a low level for a prolonged period of time
will adversely affect the Company's results of operations as demand for oil
related products and services would continue to fall because of the
uncertainty relating to the future. In addition, any declines in the current
worldwide rig count or drilling activity will reduce the demand for our
drilling products and services and will have a material adverse effect on the
Company's financial condition and results of operations.
. In managing inventory requirements, the Company must forecast customer demand
for our 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 its inventory to maintain low inventory levels immediately
prior to major price declines, the Company could be unable to take immediate
advantage of such declines to lower product costs, which could adversely
affect its sales and gross margins.
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)
<PAGE>
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 May 31, 2000, the Company filed no reports on
Form 8-K.
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)
By: /s/ JERRY DUMAS
Date: July 24, 2000 ----------------
Jerry Dumas
President and Chief Executive Officer
(Principal Executive Officer)
12
