<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, 1999
( ) 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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, 1999 the number of shares of common stock outstanding was
48,493,295
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>
November 30, November 30,
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 115 $ -
Accounts receivable, less allowance for doubtful
accounts of $17,905.58 and $6,017.78 504,590 238,337
Inventory 894,634 861,074
------------ ------------
Total current assets 1,399,339 1,099,411
FURNITURE AND EQUIPMENT 363,104 111,972
OTHER ASSETS 379,624 139,195
------------ ------------
$ 2,142,067 $ 1,350,578
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 249,515 $ 45,000
Current portion of long-term debt 1,352,218 774,323
Accounts payable and accrued liabilities 730,931 510,517
Accrued repurchase option -
------------ ------------
Total current liabilities 2,332,664 1,329,840
LONG-TERM DEBT 136,841 10,061
COMMITMENTS - -
SHAREHOLDERS' EQUITY
Common stock - no par value; 100,000,000 shares
authorized; 48,493,295 issued
and outstanding 18,384,296 18,134,295
Additional paid in capital 163,813 150,313
Equity adjustment from foreign currency translation (232,319) (288,965)
Accumulated deficit (18,643,226) (17,984,966)
------------ ------------
Shareholder equity (327,438) (10,677)
------------ ------------
Total $ 2,142,067 $ 1,350,578
============ ============
</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,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales 399,513 357,089 $ 1,155,285 $ 1,573,672
Costs and expenses:
Cost of goods sold 139,639 220,469 520,802 969,267
Selling 228,400 226,458 694,138 847,271
General and administrative 132,800 149,920 321,602 654,401
Depreciation and amortization 14,458 13,323 38,648 43,176
Research and development - - - -
----------- ----------- ----------- -----------
515,296 610,170 1,576,190 2,514,115
Loss from operations (115,782) (253,081) (420,905) (940,443)
Other income (expense), net
Interest (35,249) (27,431) (115,532) (112,168)
Other 15,414 7,393 102,847 62,068
----------- ----------- ----------- -----------
(19,835) (20,038) (12,685) (50,100)
Net loss $ 135,617 $ 273,119 $ 433,590 $ 990,543
Basic and diluted loss per share $ 0.01 $ 0.01 $ 0.01 $ 0.02
Weighted average number of shares outstanding 48,493,295 45,680,795 48,493,295 44,014,128
</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,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net loss for the period $(433,590) $(990,543)
Adjustments to reconcile net losses to net cash
used in operating activities
Depreciation and amortization 38,698 43,176
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
(Increase) Decrease in accounts receivable (366,233) 189,129
Decrease (Increase) in inventory (108,995) 221,860
(Decrease) Increase in accounts payable and accrued
liabilities 298,658 (309,774)
--------- ---------
Net cash (used) provided in operating activities (573,317) (586,183)
Cash flows from investing activities -
Proceeds from sale of capital assets 12,000
Purchase of capital assets (282,124) -
Purchase of other assets (242,438) -
---------
Net cash provided (used) by investing activities (1,095,879) 12,000
Cash flows from financing activities
Proceeds from issuance of share capital, net of costs 250,000
Proceeds from long-term debt and notes payable 795,697 15,000
Repayment of long-term debt and notes payable (0) (75,328)
---------
Net cash (used) provided by financing activities 1,045,697 (60,328)
Net (decrease) increase in cash (50,377) (634,511)
Cash at beginning of year $ 50,492 $ 634,511
---------
Cash at end of period $ 115 $ -
Supplementary information
Interest paid 103,539 $ 64,355
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, 1999. The results of operations
for the three-month period ended November 30, 1999 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,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Comprehensive income:
Net Loss $ 135,617 $ 273,119 $ 433,591 $ 990,543
Cumulative translation adjustment 4,343 3,329
---------- ----------
Total comprehensive income $ 135,617 $ 277,462 $ 433,591 $ 993,872
========== ========== ========== ==========
</TABLE>
5
<PAGE>
RESULTS OF OPERATIONS
Revenue by Operating Segment:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Drilling Products $ 321,684 $ 284,787 $ 1,259,307 $ 729,968
Production Equipment 35,405 114,727 314,365 376,904
------- ------- --------- ---------
$ 357,089 $ 399,514 $ 1,573,672 $ 1,106,872
======== ======== ========== ==========
</TABLE>
Consolidated revenues were down $418,473, or 27% for the quarter ended
November 30, 1999, as compared to the same period in 1998, resulting from
certain customers' decision to limit investments in exploration, drilling and
production activities.
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 $601,598, or 33% in the third quarter as compared to the
same period in 1998
General corporate expenses decreased in the third quarter by $337,327, or 48%
as compared to the same period in 1998
Interest Expenses
Overall interest expense for the quarter ended November 30, 1999 is up 30%
due to the additional capital investments of William Ziegler, Jerry D. Dumas,
Sr. and Chisholm Energy Partners, L.L.P., in addition to the TOSI Ltd.
Investment.
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 1999. 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 1999 classifications. These reclassifications had no
impact on net income or shareholders' equity.
6
<PAGE>
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
Flotek Industries Inc. (hereafter the "Company" or "Flotek")
was originally incorporated under the laws of the Province of British
Columbia on May 17, 1985. Flotek is headquartered in Houston, Texas and its
common shares are listed 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 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 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 + 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. We have now expanded the use of the valve
as a standing valve for other types of artificial lift applications in the
oil industry, such as the Hydraulic Pump, Electro Submersible Pump (ESP) Gas
Lift and Plunger Lift.
7
<PAGE>
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
standoff 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. The Company also markets the
patented D-Mudder, a tool that effectively removes external casing mud and
improves primary cement results. The Company also has patents pending on new
technology that should have a positive effect on the Company's business and
income.
Business Environment
The business environment for oilfield operations and its
corresponding operating results have shown marked improvement during the
quarter, but are affected significantly by petroleum industry exploration and
production expenditures. The market for oilfield products and services has
resulted in a small increase in domestic rig count that still remains at
historical low levels. Despite recent increases in oil and natural gas prices,
drilling and production activity has remained relatively low. The increase in
oil prices has followed an agreement of the Organization of Petroleum Exporting
Countries to limit oil production. The increase in oil prices has not yet
resulted in any material increase in rig or drilling activity. The reduction in
exploration and production activity during 1999 continues to impact the
Company's businesses through relatively low revenues, pricing pressures, and
reduced margins. Low exploration activity reduces the demand for the products
and services provided by us serving the drilling markets. Our drilling products
were the most significantly affected.
The patent suit brought by Milam Tool Company has now been
settled on the basis of Turbeco, Inc. modifying and reconfiguring some of its
centralizer products, and the settlement payment to the Complainants of
$125,000, $75,000 of which has been paid, and the remainder to be paid in
eight quarterly payments.
On the claim made by William Jayroe under his employment
agreement with the Company, an arbitration hearing was held on November 30,
1999; briefs were filed by legal counsel for both sides; and a decision will
be handed down by the Arbitrator by the end of January, 2000.
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.
8
<PAGE>
The Company has sustained substantial operating losses in
recent years. In addition, the Company has used substantial amounts of
working capital in its operations. 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 complimentary product 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 plans to seek potential acquisition candidates that will accrete
to earnings and diversify the Company's market.
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.
- - Any declines in the current worldwide rig count or drilling activity will
further 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.
9
<PAGE>
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 November 30, 1999 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)
Date: January 15, 2000 By: /s/ Jerry Dumas
-----------------------------------
Jerry Dumas
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER, PRINCIPAL
FINANCIAL OFFICER, PRINCIPAL ACCOUNTING
OFFICER)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 115
<SECURITIES> 0
<RECEIVABLES> 504,590
<ALLOWANCES> 17,906
<INVENTORY> 894,634
<CURRENT-ASSETS> 1,399,339
<PP&E> 363,104
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,142,067
<CURRENT-LIABILITIES> 2,332,684
<BONDS> 0
0
0
<COMMON> 18,384,296
<OTHER-SE> (18,643,226)
<TOTAL-LIABILITY-AND-EQUITY> 2,142,087
<SALES> 399,513
<TOTAL-REVENUES> 399,513
<CGS> 189,639
<TOTAL-COSTS> 515,296
<OTHER-EXPENSES> 19,885
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,249
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (135,617)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (135,617)
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
