<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, 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 November 30, 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>
November 30, February 29,
<S> <C> <C>
ASSETS 2000 2000
------------ ------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 15,124 $ 128,184
Accounts receivable, less allowance for doubtful
accounts of $24,000: secures notes payable
at November 30, 2000 382,666 296,172
Inventory 993,903 860,872
------------ ------------
Total current assets 1,391,693 1,285,228
FURNITURE AND EQUIPMENT 256,111 253,153
OTHER ASSETS 542,613 392,545
------------ ------------
$ 2,190,417 $ 1,930,926
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 129,345 $ 36,000
Current portion of long-term debt 64,295 1,765,367
Accounts payable and accrued liabilities 621,709 1,146,439
Due to related party 176,650 210,829
------------ ------------
Total current liabilities 991,999 3,158,635
Accrued dividends 118,288 -
LONG-TERM DEBT 164,226 190,366
SHAREHOLDERS' EQUITY
Common stock - no par value; 100,000,000 shares
authorized; 50,243,295 and 48,493,295 issued and outstanding
at November 30 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 November 30,2000
(none at February 29, 2000); liquidation value of $2,484,058
at November 30, 2000. 2,365,770 -
Additional paid in capital 160,879 163,813
Equity adjustment from foreign currency translation (262,906) (287,784)
Accumulated deficit $(19,922,759) (19,694,024)
------------ ------------
Total shareholders' equity (deficit) 915,904 (1,418,075)
------------ ------------
$ 2,190,417 $ 1,930,926
============ ============
</TABLE>
The accompanying notes are an integral part of these statements and should be
read in conjunction herewith.
2
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FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended November 30, Ended November 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
----------- ----------- ----------- -----------
Sales $ 570,043 $ 399,513 $ 2,053,131 $ 1,155,285
Costs and expenses:
Cost of goods sold 303,012 139,639 995,212 520,802
Selling 178,219 228,400 530,515 695,138
General and administrative 197,841 132,800 521,253 321,602
Depreciation and amortization 23,516 14,458 61,666 38,648
Research and development 666 -- 17,920 --
----------- ----------- ----------- -----------
703,254 515,297 2,126,566 1,576,190
----------- ----------- ----------- -----------
Loss from operations (133,211) (115,784) (73,435) (420,905)
Other income (expense), net
Interest (19,002) (35,249) (82,560) (115,532)
Other (1,016) 15,414 45,548 102,847
----------- ----------- ----------- -----------
(20,018) (19,835) (37,012) (12,685)
----------- ----------- ----------- -----------
Net loss $ (153,229) $ (135,619) $ (110,447) $ (433,590)
----------- ----------- ----------- -----------
Basic and diluted
net loss per common
share (See note 4) $(0.01) $(0.01) $(.01) $(.01)
Weighted average number
of shares outstanding 50,243,295 48,493,295 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
Nine Months
Ended November 30,
2000 1999
---------- ----------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (110,447) $ (433,590)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 61,666 38,698
Change in operating assets and liabilities:
Accounts receivable (86,494) (366,233)
Inventory (133,031) (108,995)
Due to related parties (14,179) -
Accounts payable and accrued liabilities (358,959) 298,658
---------- ----------
Net cash used in operating activities (641,444) (571,462)
Cash flows from investing activities
Capital expenditures (40,231) (524,612)
Cash flows from financing activities
Proceeds from notes payable 129,345 -
Proceeds from long-term debt and notes payable 495,000 795,697
Repayment of long-term debt and notes payable (78,213) -
Proceeds from issuance of common shares, net - 250,000
Other (2,603) -
---------- ----------
Net cash provided by financing activities 543,529 1,045,697
Effect of exchange rates on cash 25,086 -
---------- ----------
Net decrease in cash (113,060) (50,377)
Cash and cash equivalents - beginning of period 128,184 50,492
---------- ----------
Cash and cash equivalents - end of period $ 15,124 $ 115
========== ==========
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 118,288 -
Assets purchased for stock and notes - 471,616
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 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.
Three Months Ended Nine Months Ended
November 30, November 30,
2000 1999 2000 1999
---- ---- ---- ----
Comprehensive loss:
Net income (loss) $(153,229) $(135,617) $(110,447) $(433,590)
Cumulative translation
adjustment (4,786) 2,255 24,878 51,767
--------- --------- --------- ---------
Total comprehensive income
(loss) $(158,015) $(133,362) $ (85,569) $ 381,823
========= ========= ========= =========
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 $165,770 which
indebtedness was previously evidenced by certain secured promissory notes, and
(ii) warrants to purchase an aggregate of 78,859,012 shares of the Common Stock
of the Company in exchange for the cancellation of certain warrants and
conversion rights previously issued by the Company to purchase 73,333,332 shares
of the Common Stock of the Company.
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The rights and preferences of the Series A Convertible Preferred Stock is
described in the Articles of Incorporation of the Company, pursuant to which,
among other things, the Series A Convertible Preferred Stock (i) is convertible
into shares of Common Stock of the Company at a conversion price of US$.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, (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, and (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 loss per common share
Net loss per common share has been computed as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended November 30, Ended November 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $ (153,229) $ (135,617) $ (110,447) $ (433,591)
Accrued preferred stock dividends (59,144) -- (118,288) --
----------- ----------- ----------- -----------
Loss for common shareholders $ (212,373) $ (135,617) $ (228,735) $ (433,591)
Weighted average shares outstanding 50,243,295 48,493,295 50,243,295 48,493,295
Basic and diluted loss per common
share $ (.01) $ (.01) $ (.01) $ (.01)
</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.
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;
7
<PAGE>
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.
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.
8
<PAGE>
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.
9
<PAGE>
RESULTS OF OPERATIONS
Revenue by Operating Segment:
Three Months Ended Nine Months Ended
November 30, November 30,
2000 1999 2000 1999
---- ---- ---- ----
Drilling Products $344,265 $284,787 $1,390,645 $ 778,381
Production Equipment 225,778 114,727 662,486 376,904
-------- -------- ---------- ----------
$570,043 $399,514 $2,053,131 $1,155,285
Consolidated revenues were up 43% and 78% for the three and nine-month periods
ended November 30, 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 decreased from 55% for the nine months November 30,
1999 to 52% in 2000, reflecting a better mix to 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), offset by the reduced utilization of the Trinity plant in the third
quarter of fiscal 2001. Consolidated gross margins decreased from 65% for the
three months ending November 30, 1999 to 47% for 2000, reflecting a decreased
percentage of production segment revenues and decreased utilization of the
Company's Trinity Tools' production facility.
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 $50,000 and
$200,000 for the three and nine-month periods ended November 30, 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 nine months ending November 30, 2000
was approximately $16,000 and $33,000 less than comparable periods in 1999,
reflecting the effects of the exchange of
10
<PAGE>
$2.2 million of indebtedness into convertible preferred stock effective May 1,
2000, offset by interest related to accounts receivable factoring.
Other income (expense)
Included in other income for the nine months ending November 30, 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
nine months ending November 30, 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 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 $15,124 at November 30,
2000 from $128,184 at February 29, 2000. Overall cash flows used in operating
activities increased from $573,317 for the nine months ending November 30, 1999
to $641,444 for the nine months ending November 30, 2000. Accounts receivable
increased from $296,172 at February 29, 2000 to $382,666 at November 30, 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 nine months ending November 30, 2000
were $78,213.
At November 30, 2000 the Company had working capital of $399,694 and cash and
cash equivalents of $15,124 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 $19,922,759 at
November 30, 2000. In addition, the Company has used substantial amounts of
working capital in its operations.
11
<PAGE>
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.
The Company has an agreement with a bank to factor accounts receivable. The
advancement of funds requires an assignment of first security interests in
accounts receivable. Advances of $129,345 were outstanding at November 30, 2000,
representing 85% of factored receivables.
Management has reduced ongoing selling 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 or merger 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
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.
12
<PAGE>
. 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-QSB for the quarter ended November 30, 1997)
3.2 By-laws (incorporated by reference to the Company's Form 10-QSB
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-QSB for the quarter ended November 30, 1997)
4.2 Securities Purchase and Exchange Agreement effective as of April 30,
2000, signed in August 2000 (incorporated by reference to the
Company's Form 10-QSB for the quarter ended August 31, 2000)
4.3 Registration Rights Agreement effective as of April 30, 2000, signed in
August 2000 (incorporated by reference to the Company's Form 10-QSB
for the quarter ended August 31, 2000)
(b) Reports on Form 8-K
During the fiscal quarter ended November 30, 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: January 15, 2000 -----------------------------------
Jerry Dumas
President and Chief
Executive Officer
(Principal Executive Officer)
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