10QSB 1 0001.txt FORM 10-QSB FOR MAY 31, 2000 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) Part I - Financial Information FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
May 31, February 29, ASSETS 2000 2000 ------------ ------------ (unaudited) 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 ============ ============
The accompanying notes are an integral part of these statements and should be read in conjunction herewith. 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. FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended May 31, 2000 1999 --------- --------- (unaudited) (unaudited) 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 -
The accompanying notes are an integral part of these financial statements and should be read in conjunction herewith. 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) ======= ========= 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. 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. 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 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. 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. 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) 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