<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 AUGUST 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 August 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>
August 31, February 29,
ASSETS 2000 2000
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 42,169 $ 128,184
Accounts receivable, less allowance for doubtful
accounts of $24,000 564,267 296,172
Inventory 906,929 860,872
------------ ------------
Total current assets 1,513,365 1,285,228
FURNITURE AND EQUIPMENT 250,570 253,153
OTHER ASSETS 550,923 392,545
------------ ------------
$ 2,314,858 $ 1,930,926
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ - $ 36,000
Current portion of long-term debt 58,635 1,765,367
Accounts payable and accrued liabilities 691,728 1,146,439
Due to related party 190,829 210,829
------------ ------------
Total current liabilities 941,192 3,158,635
Accrued dividends 59,144 -
LONG-TERM DEBT 181,459 190,366
SHAREHOLDERS' EQUITY
Common stock - no par value; 100,000,000 shares
authorized; 50,243,295 and 48,493,295 issued
and outstanding at August and February 29, 2000, respectively 18,574,920 18,399,920
Convertible preferred stock - no par value;
2,365.77 shares issued and outstanding at August 31,2000
(none at February 29, 2000); liquidation value of $2,424,914
at August 31, 2000. 2,365,770 -
Additional paid in capital 160,879 163,813
Equity adjustment from foreign currency translation (258,120) (287,784)
Accumulated deficit $(19,710,386) (19,694,024)
------------ ------------
Total shareholders' equity 1,133,063 (1,418,075)
------------ ------------
$ 2,314,858 $ 1,930,926
============ ============
</TABLE>
The accompanying notes are an integral part of these statements and should be
read in conjunction herewith.
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FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended August 31, Ended August 31,
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales $ 826,654 $ 451,119 $ 1,483,088 $ 755,772
Costs and expenses:
Cost of goods sold 395,563 194,918 692,200 380,800
Selling 175,542 222,749 352,296 461,134
General and administrative 168,358 77,381 323,412 188,371
Depreciation and amortization 18,349 13,127 38,150 24,303
Research and development 9,514 -- 17,254 --
----------- ----------- ---------- ------------
767,326 508,175 1,423,312 1,054,608
----------- ----------- ---------- ------------
Income (loss) from operations 59,328 (57,056) 59,776 (298,836)
Other income (expense), net
Interest (4,996) (39,494) (63,558) (72,898)
Other (2,740) 68 46,564 87,424
----------- ----------- ----------- ------------
(7,736) (39,426) (16,994) 14,526
----------- ----------- ----------- ------------
Net income (loss) $ 51,592 $ (96,482) $ 42,782 $ (284,310)
----------- ----------- ----------- ------------
Basic and diluted
net income (loss) per common
share (See note 4) $.000 $(0.002) $.000 $ (.006)
Weighted average number
of shares outstanding 50,243,295 45,680,795 50,243,295 48,493,295
</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>
Six Months
Ended August 31,
2000 1999
---------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 42,782 $(284,310)
Adjustments to reconcile net loss to cash used in operations
used in operating activities
Depreciation and amortization 38,150 24,303
Accretion of discount - 4,639
Change in operating assets and liabilities:
Accounts receivable (268,095) (315,252)
Inventory (46,057) (73,171)
Due to related parties - (21,000)
Notes payable - -
Accounts payable and accrued liabilities (288,940) 111,596
---------- ---------
Net cash used in operating activities (522,160) (553,195)
Cash flows from investing activities
Capital expenditures (18,945) -
Cash flows from financing activities
Proceeds from long-term debt and notes payable 495,000 497,068
Repayment of long-term debt and notes payable (66,640) -
Other (2,934) -
---------- ---------
Net cash provided by financing activities 425,426 497,068
Effect of exchange rates on cash 29,664 (848)
---------- ---------
Net decrease in cash (86,015) (56,975)
Cash and cash equivalents - beginning of period 128,184 50,492
---------- ---------
Cash and cash equivalents - end of period $ 42,169 $ (6,483)
========== =========
Supplementary information:
Non-cash investing and financing activities
Patent acquired for common stock $ 175,000 -
Preferred Stock exchanged for indebtedness $2,365,770 -
Accrued dividends 59,144 -
Assets purchased for stock and notes - 471,616
</TABLE>
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
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<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 interim periods 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.
Six Months Ended
August 31,
2000 1999
------- ---------
Comprehensive income (loss):
Net income (loss) $42,782 $(284,310)
Cumulative translation adjustment 29,664 (46,233)
------- ---------
Total comprehensive income (loss) $72,446 $(330,543)
======= =========
Note 3 - Convertible Preferred Stock
The Company issued (i) 2,365.77 shares of Series A Convertible Preferred Stock
(no par) in exchange for the cancellation of principal indebtedness of
$2,200,000 and accrued interest (as of April 30, 2000) of $165,770 which
indebtedness was previously evidenced by certain secured promissory notes, and
(ii) warrants to purchase an aggregate of 78,859,012 shares of the Common Stock
of the Company in exchange for the cancellation of certain warrants and
conversion rights previously issued by the Company to purchase 73,333,332 shares
of the Common Stock of the Company.
The rights and preferences of the Series A Convertible Preferred Stock is
described in the Articles of Incorporation of the Company, pursuant to which,
among other things, the Series A Convertible Preferred Stock (i) is convertible
into shares of Common Stock of the Company at a conversion price of US$.03, (ii)
is entitled to a preferential distribution in the event of the liquidation of
the Company equal to $1,000 per share, (iii) accrues preferred cumulative
dividends at the annual rate of 10% of such liquidation preference amount and
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(iv) has voting rights based on the number of shares of the Common Stock into
which the Series A Convertible Preferred Stock are then convertible, (v) may be
redeemed at the election of the Company at a redemption price equal to 300% of
the liquidation preference. In addition, before the Company may engage in
certain significant corporate transactions, it must obtain the consent of the
holders of at least 50% of the shares of the Series A Convertible Preferred
Stock.
The Warrants to purchase shares of the Common Stock of the Company issued
in connection with this transaction are immediately exercisable at a price of
$.03 per share, and expire on April 30, 2010.
The Company has granted to the holders of the Series A Convertible
Preferred Stock certain registration rights with respect to the shares of Common
Stock issuable upon the conversion of the Series A Convertible Preferred Stock
or the exercise of the Warrants.
4. Net income (loss) per common share
Net income (loss) per common share has been computed as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended August 31, Ended August 31,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $ 51,592 $ (96,482) $ 42,782 $ (284,310)
Accrued preferred stock dividends (59,144) -- (59,144) --
-------- -------- -------- ---------
Loss for common shareholders (7,552) (96,482) (16,362) (284,310)
Weighted average shares outstanding 50,243,295 45,680,795 50,243,295 48,493,295
Basic and diluted loss per common
share $.000 $.002 $.000 $.006
</TABLE>
The conversion of preferred stock or exercise of options and warrants to
common is antidilutive in regard to loss per common share.
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, 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.
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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.
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 worldwide
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.
8
<PAGE>
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 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.
RESULTS OF OPERATIONS
Revenue by Operating Segment:
Six Months Ended
August 31,
2000 1999
---------- --------
Drilling Products $1,045,988 $493,509
Production Equipment 437,100 262,263
---------- --------
$1,483,088 $755,772
========== ========
9
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Consolidated revenues were up 83% and 96% for the three and six-month periods
ended August 31, 2000 as compared to the same periods 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 2000 as compared to the same periods in 1999,
reflecting increased acceptance of our production valve products and the effects
of increasing international sales.
Costs and Expenses
Consolidated gross margins increased from 50% for the six months ending August
31,1999 to 53% 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. (Prior to June 30, 2000 the Company purchased
products from Trinity). Consolidated gross margins decreased from 57% for the
three months ending August 31, 1999 to 52% for 2000, reflecting a decreased
percentage of production segment revenues and the inclusion of two months of
Trinity manufacturing operations in 1999.
Selling expenses which consist primarily of the salaries, wages, and benefits of
the Company's salesmen, rent, insurance and other direct selling costs were down
as compared to the same periods 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 $91,000 and
$135,000 for the three and six-month periods ended August 31, 2000 as compared
to the same periods in 1999 reflecting an increase in legal fees and personnel
cost and the reclassification of rent from selling to General and
Administrative.
The 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 the three months and six months ending August 31, 2000 was
approximately $35,000 and $9,000 less than comparable periods in 1999,
reflecting the effects of the exchange of $2.2 million of indebtedness into
convertible preferred stock effective May 1, 2000.
Other income (expense)
Included in other income for the six months ending August 31, 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 for the six
months ending August 31, 2000 were amounts totaling approximately $49,000
representing negotiated reductions for cash payments to settle accounts payable
and accrued liabilities.
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.
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. Effective April 30, 2000
the Company exchanged 2,365.77 shares of its newly authorized convertible
preferred stock for notes payable and long term debt of $2.2 million and accrued
interest of $165,770.
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
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<PAGE>
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 $42,169 at August 31,
2000 from $128,184 at February 29, 2000. Overall cash flows used in operating
activities decreased from $553,195 for the six months ending August 31, 1999 to
$522,160 for the six months ending August 31, 2000. Accounts receivable
increased from $296,172 at February 29, 2000 to $564,267 at August 31, 2000,
reflecting the higher level of sales in 2000.
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 six months ending August 31, 2000 were
$66,640.
At August 31, 2000 the Company had working capital of $572,173 and cash and cash
equivalents of $42,169 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 primarily attributable to the conversion of indebtedness
and accrued interest to preferred stock, and to a lesser extent, to the improved
operating results. The Company has sustained substantial operating losses in
recent years resulting in an accumulated deficit of $19,651,242 at August 31,
2000. 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 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 restructured existing indebtedness totaling $2,200,000 effective
April 30, 2000. Under the restructuring indebtedness, and related accrued
interest was converted to convertible preferred stock, decreasing current
liabilities by $2,380,857.
Management signed an agreement with a bank to factor accounts receivable. The
advancement of funds requires an assignment of first security interests in
accounts receivable. No advances had been received as of August 31, 2000.
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.
The Company has issued (i) 2,365.77 shares of Series A Convertible Preferred
Stock in exchange for the cancellation of principal indebtedness of $2,200,000
and accrued interest (as of April 30, 2000) of $165,770, which indebtedness was
previously evidenced by certain secured promissory notes, and (ii) warrants to
purchase an aggregate of 78,859,012 shares of the Common Stock of the Company in
11
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exchange for the cancellation of certain warrants and conversion rights
previously issued by the Company to purchase 73,333,332 shares of the Common
Stock of the Company. If all warrants were exercised an additional 78,859,012
shares would be outstanding with cash proceeds of $3,365,770 to the Company.
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)
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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)
*4.2 Securities Purchase and Exchange Agreement effective as of April 30,
2000, signed in August 2000
*4.3 Registration Rights Agreement effective as of April 30, 2000, signed in
August 2000
*27.1 Financial Data Schedule
* filed herewith
(b) Reports on Form 8-K
During the fiscal quarter ended August 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: October 12, 2000 -----------------------
Jerry Dumas
President and Chief
Executive Officer
(Principal Executive
Officer)
13
