-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ObKbLS+PVor7bae6tJ9+rDs0QIKbWev1NsJjn660QMIZV58JbrUN3V9fkRWdAtxV vWdbtcbvQdYzBX2S2TlJ0g== 0000899243-01-000082.txt : 20010123 0000899243-01-000082.hdr.sgml : 20010123 ACCESSION NUMBER: 0000899243-01-000082 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOTEK INDUSTRIES INC/CN/ CENTRAL INDEX KEY: 0000928054 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 770709256 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13270 FILM NUMBER: 1509102 BUSINESS ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7138499911 MAIL ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 10QSB 1 0001.txt FORM 10-QSB FOR QUARTER ENDED NOVEMBER 30, 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 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] Part I - Financial Information FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
November 30, February 29, 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 ============ ============
The accompanying notes are an integral part of these statements and should be read in conjunction herewith. 2 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Nine Months Ended November 30, Ended November 30, 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
The accompanying notes are an integral part of these financial statements and should be read in conjunction herewith. 3 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 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 $165,770 which indebtedness was previously evidenced by certain secured promissory notes, and (ii) warrants to purchase an aggregate of 78,859,012 shares of the Common Stock of the Company in exchange for the cancellation of certain warrants and conversion rights previously issued by the Company to purchase 73,333,332 shares of the Common Stock of the Company. 5 The rights and preferences of the Series A Convertible Preferred Stock is described in the Articles of Incorporation of the Company, pursuant to which, among other things, the Series A Convertible Preferred Stock (i) is convertible into shares of Common Stock of the Company at a conversion price of US$.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:
Three Months Nine Months Ended November 30, Ended November 30, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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)
The conversion of preferred stock or exercise of options and warrants to common is antidilutive in regard to loss per common share. 6 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 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 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 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 $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 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 . 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) 13 -----END PRIVACY-ENHANCED MESSAGE-----