-----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, FOHD1uxhD9/uJn4N/izsJlNN4l0Fx3e6C3NmisB6rqziLJmdS3Od4avQEbnDSp5b 7UT8jAHkb/tjwYpZ0OizFQ== 0000899243-01-500780.txt : 20010614 0000899243-01-500780.hdr.sgml : 20010614 ACCESSION NUMBER: 0000899243-01-500780 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010613 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 001-13270 FILM NUMBER: 1660016 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 10KSB40 1 d10ksb40.txt FORM 10-KSB40 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - KSB (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2001 ( ) 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. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) ALBERTA 77-0709256 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 7030 EMPIRE CENTRAL DRIVE, HOUSTON, TEXAS 77040 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 849-9911 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, NO PAR OTC BULLETIN BOARD Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (x) No ( ) Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. (x) Revenues for the Company's 2001 fiscal year were $2,981,408. The aggregate market value of Common Stock held by non-affiliates as of April 30, 2001, determined using the share closing price on the OTC of $0.07 (United States Dollar) on that date was $4,193,635. There were 67,735,932 shares of the Registrant's Common Stock outstanding on April 30, 2001. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement issued in connection with the Registrant's 2001 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. Transitional Small Business Disclosure Format (check one): Yes ( ) No (x) 2 PART I General This Form 10-KSB 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-KSB 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. ITEM 1. - DESCRIPTION OF BUSINESS. 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 under the symbol FOTDF. 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 Pump Valves that include the PetroValve Gas Breaker, the Standing Valve for use with electric downhole pumps, the Petrovalve Injector 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. Flotek is a provider of the patented Petrovalve line of production equipment and a complete portfolio of casing centralizer products. The Company operates primarily in the U.S. Gulf Coast market and in Latin America. . Flotek sells Turbeco casing centralizers for all applications and provides technical advice to customers. Service personnel are available to install the product at the well site. . Flotek sells the complete line of Petrovalve products and provides engineering data and support to each customer as requested or required. On site installation is also provided as requested. Production Equipment The Company has focused on the development of its proprietary and patented technologies: the Petrovalve + Plus Pump Valve and the Petrovalve Gas Breaker Valve. Both patented products are valves used in downhole 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 3 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 down-hole 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 Turbolock Centralizer. Recently we introduced our Pressure-Actuated Casing ("PAC") centralizer. This pressure-actuated tool is designed to accommodate "slim-hole" deviated well completion programs. The PAC centralizer is an integral part of the casing and does not activate until it is its final position in the drilled well, thus reducing drag during insertion of the casing in the well bore. Once in place, the vanes are activated providing a positive stand off of the casing to maximize the integrity of the cementing process. Patent applications are pending and marketing efforts are active. 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. 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. 4 Product Demand The demand for our drilling product services is related to the level, type, depth and complexity of oil and gas drilling. The most widely accepted measure of activity is the Baker Hughes Rig Count. During the fourth quarter of 1997, the rig count reached its highest level since 1990; however a decline began that continued through the second quarter of 1999, when it fell to the lowest level recorded in the previous 50 years. Since then the rig count in our principal market began to increase and has continued to increase into the early part of 2001. Technical advances such as 3-D seismic data and computer-enhanced interpretation of that data has reduced the risk of drilling deeper wells with a resultant increase in deep-water offshore exploration. Deeper and higher- pressure wells, particularly in environmentally sensitive areas, demand the highest level of cement bond integrity. Turbulator products are designed to meet that demand. The demand for integrity will also enhance the introduction of new designs such as the PAC centralizer. Our Production Equipment Division should benefit from demand to increase the natural gas supply in North America. The Petrovalve Gas Breaker traveling valve is being used on an extended trial basis to pump water from abandoned low pressure gas wells, thereby increasing production of gas or making possible production where the pressure is too low to flow naturally. Results have been favorable and we expect this type of application to increase so long as natural gas prices remain near current levels. Oil prices at current levels not only increase drilling activity but stimulates re-completion of older producing wells and increases opportunities to pump marginal reservoirs, including heavy oil. The Petrovalve products have advantages in these pumped well and the demand for those products should continue to increase. Employees As of February 28, 2001, the Company employed approximately 28 employees. The Company considers its relationship to its employees to be generally satisfactory. The Company encourages employee loyalty through an incentive stock option plan and a participatory 401-k plan. 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. 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. 5 ITEM 2. DESCRIPTION OF PROPERTY. The Company leases 9,000 square feet of space at 7030 Empire Central Drive, in Houston, Texas, where the Company's headquarters are located, including sales offices and operating warehouse. In addition, the Company leases a 5,000 square foot sales office and warehouse in Lafayette, Louisiana, and 500 square feet of office and warehouse in Edmonton, Alberta, Canada. The Company owns 10,000 square feet of space at 1402 Fort McKavitt Street, Mason, Texas used for the Company's manufacturing operation and storage. The Company believes that its distribution and sales facilities are adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS. There are presently no outstanding lawsuits against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the Company's 2001 fiscal year. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the OTC Bulletin Board markets in the United States, under the symbol "FOTDF." The high and low closing sale prices as quoted in US dollars were as follows for the quarterly periods indicated:
YEAR ENDED FEBRUARY 28, 2001 Fiscal Quarter Ended May 31, 2000 0.26 0.10 Fiscal Quarter Ended August 31, 2000 0.125 0.045 Fiscal Quarter Ended November 30, 2000 0.09 0.03 Fiscal Quarter Ended February 28, 2001 0.05 0.025 YEAR ENDED FEBRUARY 29, 2000 HIGH LOW ----- ----- Fiscal Quarter Ended May 31, 1999 0.15 0.05 Fiscal Quarter Ended August 31, 1999 0.18 0.04 Fiscal Quarter Ended November 30, 1999 0.125 0.05 Fiscal Quarter Ended February 29, 2000 0.20 0.03
Holders of Record At February 28, 2001, the Company had approximately 132 holders of record of the Company's common stock. This includes shareholders in street name accounts with approximately 62% of the outstanding shares. 6 Dividends The Company has not declared a cash dividend during the last two fiscal years. Convertible preferred stock accrues dividends at 10%. Recent Sales of Unregistered Securities Warrants to purchase 3,312,360 shares of common stock were exercised on February 28, 2001. Warrants to purchase a total of 5,080,277 shares of common stock were exercised in March and April 2001. All warrants were at an exercise price of $.03 per share and resulted in net proceeds of $251,788 to the Company. In March 2001, three holders elected to convert 251.27 shares of the Company's Convertible Preferred Stock plus related accrued dividends into approximately 9,100,000 shares of the Company's common stock. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Business Environment Flotek consists of two divisions, which provide products and services used in the drilling and production of oil and gas wells. The business environment for oilfield operations and its corresponding operating results are affected significantly by petroleum industry exploration and production expenditures. Higher oil prices have resulted in a substantial increase in funds being allocated by our customers to explore for and produce oil and gas. There is always the possibility of reduction in exploration and production activity which would impact our businesses through lower revenues, pricing pressures and reduced margins. Reduced exploration activity would reduce the demand for the products and services provided by us serving the drilling markets. Our drilling products would be the most significantly affected. RESULTS OF OPERATIONS REVENUE BY OPERATING SEGMENT:
YEAR ENDED ------------------------------------- FEBRUARY 28, 2001 FEBRUARY 29, 2000 ----------------- ----------------- REVENUES Drilling Products Segment $1,771,026 $1,113,168 Production Equipment Segment 1,210,382 448,625 ---------- ---------- Consolidated Revenues $2,981,408 $1,561,793
Consolidated revenues were up for the year ended February 28, 2001 as compared to the same period in 2000. Revenues from the drilling products segment increased by 59% as to the same period in 2001, reflecting the increased North American rig counts caused by the 2001 increase in oil prices. Revenues from the production equipment segment increased by 170% for the year as compared to the 7 same period in 2000, reflecting increased acceptance of our production valve products, including increased international sales. Costs and Expenses Consolidated gross margins increased from 2000 to 2001. In fiscal 2000, the Company incurred a charge of $251,000, primarily related to the drilling products segment, to provide a reserve for slow moving inventories. Excluding the write-down of inventory, the Company's consolidated gross margins increased from 41.5% to 52.8%, reflecting the favorable product mix change to the more profitable production equipment segment and increased profitability in the drilling products segment resulting from a full year utilization of the Trinity Tools, Inc. manufacturing location and the effect of higher production on overhead absorption rates. Selling expenses which consist primarily of the salaries, wages, and benefits of the Company's salesmen, rent, insurance and other direct selling costs were reduced from 52.6% of sales in 2000 to 23.7% in fiscal 2001. This decrease was attributable to reduction of the work force and improvement in the effectiveness of the sales force. The Company also increased in-house sales, which have lower selling costs. General and administrative expense increased by approximately $15,000, primarily related to increased sales volumes, but decreased as a percentage of sales from 45.7% to 24.4%. Depreciation & amortization decreased by $32,000 from the 2001 amount. Research and development for new products for 2001 was $21,079. Interest expense for fiscal 2001 was $83,986 compared to $173,783, a decrease of 52%. The decrease in interest expense primarily reflects the exchange of $2,200,000 of interest bearing indebtedness into preferred stock in the second quarter of fiscal 2001. Other Income Included in other income in 2001 were amounts totaling approximately $50,000 representing negotiated reductions for cash payments to settle accounts payable and accrued liabilities. Non-recurring charges In the fourth quarter of fiscal 2000, the Company incurred a non-recurring charge of $251,000 related to the provision of reserves for slow moving inventory. The Company has instituted procedures to insure inventory movement is closely monitored to reduce the potential of future overstock situations. In the fourth quarter of fiscal 2000, the Company incurred a charge of $125,000 related to the settlement of a lawsuit. REVENUE BY OPERATING SEGMENT:
YEAR ENDED ------------------------------------- FEBRUARY 29, 2000 FEBRUARY 28, 1999 ----------------- ----------------- REVENUES Drilling Products Segment $1,113,168 $1,451,519 Production Equipment Segment 448,625 342,190 ---------- ---------- Consolidated Revenues $1,561,793 $1,793,709
8 Consolidated revenues were down for the year ended February 29, 2000 as compared to the same period in 1999. Revenues from the drilling products segment decreased as to the same period in 1999, reflecting the record low North American rig counts caused by the 1999 decline in oil prices. Subsequent increases in oil prices did not substantially increase drilling activity. Our operations were materially affected by the decline in the drilling rig count, reducing the demand for the Company's drilling products and services. 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 decreased from 1999 to 2000. In fiscal 2000, the Company incurred a charge of $251,000, primarily related to the drilling products segment, to provide a reserve for slow moving inventories. Excluding the write-down of inventory, the Company's consolidated gross margins increased from 36% to 41.5%, reflecting the favorable product mix change to the more profitable production equipment segment and increased profitability in the drilling products segment resulting from an eight month reduction in cost of sales after 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 full year impact of the prior year reduction of the work force in response to the reduction in exploration and development activity. 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 decreased by approximately $25,000. Benefits from the Company's cost reduction program were offset by increased litigation costs related to settlements and attorney's fees. The $60,000 increase in depreciation & amortization resulted primarily from the acquisition of Trinity and reflects depreciation of its assets and amortization of goodwill during the eight months it was included in fiscal 2000 operations. Interest expense for fiscal 2000 was $173,783 compared to $134,819, an increase of 29%. The increase in interest expense reflects the increase in the Company's overall indebtedness in 2000. Non-recurring charges In the fourth quarter of fiscal 2000, the Company incurred a non-recurring charge of $251,000 related to the provision of reserves for slow moving inventory. The Company has instituted procedures to insure inventory movement is closely monitored to reduce the potential of future overstock situations. In the fourth quarter of fiscal 2000, the Company incurred a charge of $125,000 related to the settlement of a lawsuit. 9 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 $51,442 at February 28, 2001 from $128,184 at February 29,2000. Overall cash flows used in operating activities decreased to $733,228 from $794,081 in 2000. Accounts receivable increased from $296,172 at February 29, 2000 to $563,010 at February 28, 2001, reflecting the higher level of sales in 2001. Inventory levels increased to $1,079,655 at February 28, 2001 from $860,872 in 2000 reflecting a build up of new product lines and increases to meet higher sales levels. The Company expects to fund liquidity needs from a combination of available cash balances, internally generated funds and future financing activities. Investing Activities Capital expenditures in fiscal 2001 related to computer software and equipment and production equipment. Major capital expenditures in fiscal 2000 related primarily to the acquisition of Trinity Tool, Inc. and automobiles. The Company does not intend to make any material capital expenditures during the upcoming fiscal year. Any capital expenditures that are required will be funded through available cash, cash flow from operations, or future financing activities. Financing Activities Cash flows provided by financing activities decreased from $1,002,006 in Fiscal 2000 to $698,777 in Fiscal 2001. Cash was raised through the issuance of notes payable, issuance of long-term debt and amounts received from related parties. At February 28, 2001 the Company has working capital of $606,885 and cash and cash equivalents of $51,442 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 conversion of $2,200,000 of indebtedness and accrued interest payable of $165,770 into convertible preferred stock, offset by increases in accounts receivable and inventory and decreases in accounts payable and accrued liabilities. Prior to 2001, the Company sustained substantial operating losses and has used substantial amounts of working capital in its operations. In view of these matters, realization of a major portion of the assets in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions taken over the last two years 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: 10 . During the second fiscal quarter of 2001, 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 at $.03 per share in exchange for the cancellation of certain warrants and conversion rights previously issued by the Company. The preferred stock accrues dividends at 10% per annum compounding quarterly. No cash dividend payments have been declared. . Flotek has an agreement with a bank to factor domestic accounts receivable. The advancement of funds requires an assignment of first security interests in factored receivables. Advances of $175,966 were outstanding at February 28, 2001. . 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 actively seek potential acquisition or merger candidates to either decrease our costs of providing products, similar to the Trinity Tool Acquisition discussed below, or add new products and customer base to diversify the Company's market. Risk Factors The following risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected: . 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 decline in the rig count from its current level for a prolonged period of time would adversely affect the Company's drilling products division's results of operations as demand for oil related products and services would fall because of the uncertainty relating to the future. In addition, declines in the current worldwide rig count or drilling activity would 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. . 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. 11 ITEM 7. FINANCIAL STATEMENTS. TABLE OF CONTENTS PAGE NUMBER ----------- Independent Auditors' Report F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations and Comprehensive Income (Loss) F-3 Consolidated Statements of Shareholders' Equity (Deficit) F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-7 12 INDEPENDENT AUDITORS' REPORT The Board of Directors Flotek Industries Inc. and Subsidiaries Houston, Texas We have audited the accompanying Consolidated Balance Sheets of Flotek Industries Inc. and Subsidiaries as of February 28, 2001 and February 29, 2000, and the related Consolidated Statements of Operations and Comprehensive Income (Loss), Shareholders' Equity (Deficit), and Cash Flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Flotek Industries Inc. and Subsidiaries as of February 28, 2001 and February 29, 2000, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that Flotek Industries Inc. and Subsidiaries will continue as a going concern. As more fully described in Note 2, the Company has incurred accumulated operating losses and cash deficits from operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. WEINSTEIN SPIRA & COMPANY, P.C. Houston, Texas June 8, 2001 F-1 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, FEBRUARY 29, 2001 2000 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 51,442 $ 128,184 Accounts receivable, net of allowance for doubtful accounts of $15,000 and $24,000 for 2001 and 2000, respectively 563,010 296,172 Inventory 1,079,665 860,872 ------------ ------------ Total Current Assets 1,694,117 1,285,228 PROPERTY AND EQUIPMENT, NET 233,881 253,153 OTHER ASSETS 535,642 392,545 ------------ ------------ $ 2,463,640 $ 1,930,926 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Notes payable to bank 175,966 - Other notes payable 31,000 36,000 Current portion of long-term debt 57,270 1,765,367 Accounts payable and accrued liabilities 632,157 1,146,439 Due to related party 190,839 210,829 ------------ ------------ Total Current Liabilities 1,087,232 3,158,635 Accrued Dividends 203,136 - LONG-TERM DEBT 149,828 190,366 COMMITMENTS SHAREHOLDERS' EQUITY (DEFICIT) Common stock - no par value; 53,555,655 and 48,493,295 issued and outstanding in 2001 and 2000, respectively 18,674,290 18,399,920 Convertible preferred stock - no par value; 2,365.77 shares issued and outstanding at February 28, 2001 (none at February 29, 2000); liquidation value of $2,568,906 at February 28,2001 2,365,770 - Additional paid-in capital 160,879 163,813 Accumulated deficit (19,886,792) (19,694,024) Accumulated other comprehensive loss (290,703) (287,784) ------------ ------------ 1,023,444 (1,418,075) ------------ ------------ $ 2,463,640 $ 1,930,926 ============ ============
See notes to consolidated financial statements. F-2 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FEBRUARY 28, FEBRUARY 29, 2001 2000 ----------- ------------ Revenues, net $ 2,981,408 $ 1,561,793 Costs and expenses: Cost of goods sold 1,394,284 1,164,927 Selling 705,463 877,776 General and administrative 728,189 712,981 Depreciation and amortization 90,547 122,812 Research and development 21,079 ----------- ----------- 2,939,562 2,878,496 ----------- ----------- Income(Loss) from operations 41,846 (1,316,703) Interest expense (83,968) (173,783) Other income-net 52,490 4,293 ----------- ----------- (31,478) (169,490) ----------- ----------- Net income (loss) 10,368 (1,486,193) Other comprehensive expense, net of tax Foreign currency translation (2,919) (3,698) ----------- ----------- Comprehensive income (loss) $ 7,449 $(1,489,891) =========== =========== Basic and diluted net loss per common share $(.004) $(.03) =========== =========== Weighted average number of shares outstanding 50,243,295 47,428,716 =========== ===========
See notes to consolidated financial statements. F-3 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000
ACCUMULATED TOTAL COMMON STOCK PREFERRED STOCK ADDITIONAL OTHER SHAREHOLDERS' -------------------------- ------------------------- PAID-IN ACCUMULATED COMPREHENSIVE EQUITY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS (DEFICIT) ----------- ------------ --------- ------------- ---------- ------------- ------------- ----------- Balance at February 28, 1999 45,680,795 $18,134,295 - $ - $ 163,813 $(18,207,831) $(284,086) $ (193,809) Issuance of common stock for purchase of Trinity 2,500,000 250,000 250,000 Issuance of stock to non-employees 312,500 15,625 15,625 Equity adjustment from foreign currency translation (3,698) (3,698) Net loss (1,486,193) (1,486,193) ---------- ----------- --------- ------------ --------- ---------- Balance at February 29, 2000 48,493,295 18,399,920 163,813 (19,694,024) (287,784) (1,418,075) Issuance of common stock for patent 1,750,000 175,000 175,000 Issuance of preferred stock 2,365.77 2,365,770 (2,934) 2,362,836 Exercise of warrants for common stock 3,312,360 99,370 99,370 Preferred stock accrued dividends (203,136) (203,136) Equity adjustment from foreign currency translation (2,919) (2,919) Net income 10,368 10,368 ---------- ----------- -------- ------------ --------- ------------ --------- ---------- Balance at February 28, 2001 53,555,655 $18,674,290 2,365.77 $ 2,365,770 $ 160,879 $(19,886,792) $(290,703) $1,023,444 ========== =========== ======== ============ ========= ============ ========= ==========
See notes to consolidated financial statements. F-4 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FEBRUARY 28, FEBRUARY 29, 2001 2000 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 10,368 $(1,486,193) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation and amortization 90,547 122,812 Bad debt expense - 30,442 Accretion of discount - 13,500 Stock issued for services - 15,625 Write-off and change in reserve of inventory and other (81,685) 256,984 Loss on disposal of furniture and equipment - 24,717 Changes in operating assets and liabilities: Accounts receivable (266,838) (164,513) Inventory (137,108) (254,592) Accounts payable and accrued liabilities (348,512) 647,137 --------- ----------- Net Cash Used in Operating Activities (733,228) (794,081) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (41,089) (88,722) Acquisition of Trinity - (42,373) Other 1,717 4,500 --------- ----------- Net Cash Used in Investing Activities (39,372) (126,595) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Exercise of common stock warrants 99,370 - Proceeds from long-term debt, notes payable and due to related parties 674,568 1,094,504 Repayment of long-term debt, notes payable and due to related parties (72,227) (92,438) Other (2,934) - --------- ----------- Net Cash Provided by Financing Activities 698,777 1,002,066 Effect of exchange rates on cash (2,919) (3,698) --------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (76,742) 77,692 Cash and Cash Equivalents - Beginning of Period 128,184 50,492 --------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 51,442 $ 128,184 ========= =========== SUPPLEMENTARY INFORMATION Interest paid $ 41,256 $ 31,740 ========= ===========
See notes to consolidated financial statements. F-5 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NON-CASH INVESTING AND FINANCING ACTIVITIES 2001 Patent acquired for common stock $ 175,000 Preferred stock exchanged for indebtedness and accrued interest 2,365,770 Accrued Dividends 203,136 2000 The Company acquired the following assets and liabilities of Trinity Tool, Inc., a company with manufacturing operations in Mason, Texas: Accounts receivable $ 23,744 Inventory 71,641 Property and equipment 180,022 Goodwill 279,918 Accounts payable (67,029) Note payable (6,000) Long-term debt (189,923) Common stock issued (250,000) --------- Net cash paid $ 42,373 ========= See notes to consolidated financial statements. F-6 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Flotek Industries Inc. and Subsidiaries (the "Company") 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 under the law of continuance to the laws of the Province of Alberta. The Company consists of two divisions which provide proprietary and patented products and services used in the drilling and production of oil and gas wells. One of the Company's divisions carries on the business of developing, manufacturing and marketing the Petrovalve + Plus Pump Valve and the Petrovalve Gas Breaker Valve, which are valves for downhole sucker-rod pumps used in oil wells. The other division manufactures and distributes centralizers, which are a vaned cementing sleeve and integral joint stand off tool that improves mud and cementation displacement in drilled oil wells. The Company sells its products primarily to companies in the oil and gas industry in North America. PRINCIPLES OF CONSOLIDATION These consolidated financial statements include the accounts of Flotek Industries Inc. and its directly and indirectly, wholly-owned subsidiaries, Petrovalve International Inc. ("Petrovalve"), USA Petrovalve, Inc. ("USAPI"), Turbeco, Inc. ("TI"), Petrovalve International (Barbados) Inc. ("PIBI"), Petrovalve Canada Limited ("PCL") and Trinity Tool, Inc. ("Trinity"). All material intercompany transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with a maturity at the date of purchase of three months or less to be cash equivalents. REVENUE RECOGNITION The Company recognizes revenue when products have been delivered and all significant risks and rewards of ownership have passed to customers, and accounts receivable are recorded at that time. Earnings are charged with a provision for doubtful accounts based on collection experience and a current review of the collectibility of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. Funds received on deposit in advance of delivery are deferred until the ultimate transfer of ownership. INVENTORY Inventory, which primarily consists of finished goods, is stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. Inventory is stated net of a reserve of $219,000 and $301,000 for slow-moving inventory at February 28, 2001 and February 29, 2000, respectively. F-7 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated using the straight- line method over the following useful lives: Building and improvements 15 years Automotive equipment 3 years Computer equipment 3 years Furniture and equipment 5 years Moulds 7 years INCOME TAXES The Company's policy is to include in income tax expense all United States, foreign and state income taxes, including federal income taxes that would become due if all undistributed earnings of foreign subsidiaries were repatriated. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. FOREIGN CURRENCY TRANSLATION The assets and liabilities denominated in foreign currency are translated into U.S. dollars at the current rate of exchange existing at period end, and revenues and expenses are translated at average monthly exchange rates. Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations. LOSS PER SHARE Loss per common share is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding. Dilutive loss per share is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares and dilutive potential common shares outstanding. STOCK-BASED COMPENSATION The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic method, as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock, and is recognized over the related vesting period. The Company provides supplemental disclosure of the effect on net income and earnings per share as if the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, had been applied in measuring compensation expense. F-8 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 LONG-LIVED ASSETS The Company reviews the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying value amount. The Company has not identified any such impairment losses. SEGMENT INFORMATION The FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" which established standards for the way public enterprises are to report information about operating segments in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic area, and major customers. COMPREHENSIVE INCOME Effective March 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which requires an entity to report and display comprehensive income and its components. Comprehensive income includes net earnings plus other comprehensive income. The Company's other comprehensive income consists of foreign currency translation adjustments. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 2 - GOING CONCERN The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. However, the Company has sustained accumulated operating losses since inception. In addition, the Company has used substantial amounts of working capital in its operations. In view of these matters, realization of a major portion of the assets in the accompanying consolidated 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 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: . The Company expects increased revenue and net income in fiscal 2002. . During the second fiscal quarter of 2001, 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 at $.03 per share in exchange for the cancellation of certain warrants and conversion rights previously issued by the Company. The preferred stock accrues dividends at 10%. No cash dividend payments have been declared. . Flotek has an agreement with a bank to factor domestic accounts receivable. The advancement of funds requires an assignment of first security interests in factored receivables. Advances of $175,966 were outstanding at February 28, 2001. . 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 actively seek potential acquisition or merger candidates to either decrease our costs of providing products, similar to the Trinity Tool Acquisition discussed below, or add new products and customer base to diversify the Company's market. NOTE 3 - NET LOSS PER COMMON SHARE Net loss per common share has been computed as follows: Year ended ------------------------------------- February 28, 2001 February 29, 2000 ----------------- ---------------- Net income (loss) $ 10,368 $(1,486,193) Accrued preferred stock dividends (203,136) -- ----------- ----------- Loss for common shareholders $ (192,768) $(1,486,193) =========== =========== Weighted average shares outstanding 50,243,295 47,428,716 Basic and diluted net loss per common share $ (.004) $ (.03) The conversion of preferred stock or exercise of options to purchase common stock are antidilutive in regard to loss per common share. NOTE 4 - ACQUISITION Effective July 1, 1999 the Company entered into an agreement to purchase all of the common stock, assets and liabilities of Trinity Tool, Inc. for $10,000 in cash, a promissory note for $40,000 payable in two payments of $20,000 in August and September 1999, and 2,500,000 shares of common stock of the Company with a market value of $250,000. Pursuant to the sale and purchase agreement, the acquisition was accounted for as a purchase and the results of Trinity from July 1, 1999 forward have been included in the Company's consolidated results of operations. The Company allocated the $279,918 excess of purchase price over net assets acquired to goodwill which will be amortized over 20 years. F-10 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 5 - PROPERTY AND EQUIPMENT At February 28, 2001, and February 29, 2000, property and equipment were comprised of the following:
2001 2000 -------- --------- Land $ 25,000 $ 25,000 Building and improvements 128,708 128,708 Automotive equipment 142,296 142,296 Computer equipment 43,938 26,385 Furniture and equipment 153,145 130,577 Moulds 65,297 64,329 -------- -------- 558,384 517,295 Less: Accumulated depreciation and amortization 324,503 264,142 -------- -------- $233,881 $253,153 ======== ========
NOTE 6 - OTHER ASSETS Other assets consist of the following: 2001 2000 ---- ---- Patents $265,654 $ 90,654 Goodwill 365,464 365,464 Other 5,410 7,127 -------- -------- 636,528 463,245 Accumulated amortization 100,886 70,700 -------- -------- $535,642 $392,545 ======== ======== Patents are amortized over the life of the patent. Petrovalve received a United States patent on the design of its Petrovalve Plus valve on June 2, 1992, and on the Petrovalve Gas Breaker valve on October 5, 1993. 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. In addition, filings were made in the United States to protect improvements to the core technology. Original filings were also made in Canada, Venezuela and Mexico. Goodwill, which represents the excess of the cost of purchased companies over the fair value of the companies' net assets at the date of acquisition, is being amortized on the straight-line method over 20 years. NOTE 7 - NOTES PAYABLE BANK Flotek has an agreement with a bank to factor domestic accounts receivable. The interest rate is 10.5% per annum. The advancement of funds requires an assignment of first security interests in factored receivables. Advances of $175,966 were outstanding at February 28, 2001. F-11 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 8 - LONG-TERM DEBT
2001 2000 -------- ---------- Convertible debt with interest at 10%; exchanged for preferred stock effective April 30, 2000 $ $540,000 Convertible debt with interest at 10%; exchanged for preferred stock effective April 30, 2000 750,000 Convertible loan with interest at 10%; exchanged for preferred stock effective April 30, 2000 400,000 Real estate lien note, secured by land and building, bearing interest at 10%, principal and interest of $1,451 due monthly until March 8, 2002, when the remaining unpaid principal and interest are due 120,504 125,587 10.25% Note payable to a bank, secured by accounts receivable, inventory and equipment, matured October 27, 1999 35,902 Notes payable, secured by vehicles, payments in aggregate monthly installments of $3,493, including interest ranging from 4.9% to 13.3%, maturing at various dates through July, 2003. 66,707 88,768 Other 19,887 15,476 ---------- ---------- 207,098 1,955,733 Less current portion 57,270 1,765,367 ---------- ---------- $ 149,828 $ 190,366 ========== ==========
Long-term debt is due as follows: 2002 $ 57,270 2003 142,840 2004 6,988 --------- $ 207,098 ========= Effective April 30, 2000, convertible preferred stock (no par) was issued in exchange for the cancellation of principal indebtedness of $2,200,000 and accrued interest of $165,770 and issuance of warrants. NOTE 9 - DUE TO RELATED PARTY At February 28, 2001 the Company had notes payable of $190,839 to two directors. The notes bear interest at 10%. Related interest expense for 2001 was $9,621. Effective April 30, 2000, notes payable totaling $1,480,000 and accrued interest of $154,914 to directors or companies in which directors had significant interest were exchanged for preferred stock. Related interest expense for these notes for 2001 was $12,780 ($125,063 in 2000). Due to related party at February 29, 2000 consists of four unsecured notes payable due to companies controlled by a director of the Company. The notes bear interest at 10% and are due upon demand. Interest expense for these notes was $15,688 in 2000. F-12 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 10 - WARRANTS At February 28, 2001, the following share purchase warrants were outstanding: CONVERSION NUMBER PRICES PER SHARE EXPIRATION DATES ---------- ---------------- ---------------- 75,546,652 US $.03 May 1, 2010 There were 18 warrant holders at February 28,2001. At February 29, 2000, the following share purchase warrants were outstanding:
CONVERSION NUMBER PRICES PER SHARE EXPIRATION DATES ----------- ---------------- ----------------- 12,500,000 US $0.06 February 1, 2009 9,000,000 US $0.06 December 31, 2004 ---------- 21,500,000 ==========
In August 2000, the Company issued 78,859,012 warrants to purchase common stock at $.03 per share in connection with the Securities Purchase and Exchange Agreement for the issuance of 2,365.77 shares of Series A Convertible Preferred Stock and cancellation of warrants previously issued by the Company. The cancelled warrants included all of the warrants outstanding at the end of fiscal 2000, plus warrants to issue 7,000,000 shares at $.06 per share issued in conjunction with indebtedness incurred in 2001. In February 2001, warrants for 3,312,360 shares were exercised. In March 1997, the Company issued 12,500 warrants in connection with two notes payable at $0.60 (Canadian) that expired March 1999. In September 1997, the Company issued 11,666,667 warrants in connection with private placements at $0.15 (Canadian) for the first year and $0.17 (Canadian) thereafter, which expired September 1999. In October 1997, the Company issued in connection with the $750,000 convertible debt 7,000,000 warrants at $0.15 (Canadian) that originally expired in October 1998 but were extended to February 2004 by the Company. In December 1999, the $750,000 convertible debt was amended to increase the number of warrants to 12,500,000, decrease the exercise price to $0.06 and extend the expiration date to February 1, 2009. In February 1999, the Company issued, in connection with the $150,000 convertible debt, 2,500,000 warrants at $0.06 that were scheduled to expire in February 2004. In December 1999 this convertible debt was amended to increase the number of warrants to 9,000,000 and extend the expiration date to December 31, 2004. F-13 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 11 - STOCK OPTIONS The shareholders of the Company have authorized the Company to grant stock options. The exercise price of each option is equal to the market price of the Company's stock on the date of grant. The shares are restricted, as they have not been registered with the United States Securities and Exchange Commission. There were no grants in fiscal 2001 and no grants to non-employees in fiscal 2000. Had compensation cost been determined on the basis of fair value pursuant to FASB Statement No. 123, stock-based compensation costs for options granted to employees and directors would have increased the loss for fiscal year 2000 by approximately $207,000. Basic and diluted loss per share would have been $.04 per share in 2000. The fair value of options at the date of grant was estimated using the Black- Scholes Model with the following assumptions:
2001 2000 --------- -------- Expected life n/a 2 years Interest rate n/a 6.5% Volatility n/a 228% Dividend yield n/a 0%
The status of the stock option plan follows:
2001 ------------------------------------------ WEIGHTED EXERCISE AVERAGE PRICE RANGE EXERCISE OPTIONS PER SHARE PRICE --------- ------------------ --------- Outstanding at beginning of year (in U.S.dollars) 2,950,000 US $0.03 - $ .06 US $0.04 Outstanding at beginning of year (in Canadian dollars) 2,840,000 C $0.15 - $0.17 C $0.16 Granted - Expired (100,000) US $0.06 US $0.06 --------- Outstanding at end of year (in Canadian dollars) 2,840,000 C $0.15 - $0.17 C $0.16 ========= Outstanding at end of year (in U.S. dollars) 2,850,000 US $0.03 - $0.06 US $0.04 ========= Exercisable (in Canadian dollars) 2,840,000 C $0.15 - $0.17 C $0.16 Exercisable (in U.S. dollars) 2,850,000 US $0.03 - $0.06 US $0.04 --------- 5,690,000 ========= C$ = Canadian dollars US$ = United States dollars
F-14 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 11 - STOCK OPTIONS (CONTINUED)
2000 ------------------------------------------- WEIGHTED EXERCISE AVERAGE PRICE RANGE EXERCISE OPTIONS PER SHARE PRICE ----------- --------------- ---------- Outstanding at beginning of year (in U.S. dollars) 350,000 US $0.06 US $0.06 Outstanding at beginning of year (in Canadian dollars) 3,035,000 C $0.15 - $0.17 C $0.16 Granted (in Canadian dollars) 1,300,000 C $0.15 C $0.15 Granted (in U.S. dollars) 2,600,000 US $0.03 - $0.06 US $0.04 Expired (1,495,000) C $0.17 C $0.17 ----------- Outstanding at end of year (in Canadian dollars) 2,840,000 C $0.15 - $0.17 C $0.16 =========== Outstanding at end of year (in U.S. dollars) 2,950,000 US $0.03 - $0.06 US $0.04 =========== Exercisable (in Canadian dollars) 2,509,444 C $0.15 - $0.17 C $0.16 Exercisable (in U.S. dollars) 2,950,000 US $0.03 - $0.06 US $0.04 ----------- 5,459,444 =========== C$ = Canadian dollars US$ = United States dollars
Following is a summary of the options outstanding at February 28, 2001:
OUTSTANDING ---------------------------------------------------------------- WEIGHTED AVERAGE EXERCISE REMAINING EXERCISABLE PRICE NUMBER CONTRACTUAL LIFE NUMBER ----------- --------- ---------------- --------- US $0.03 2,000,000 4.0 years 2,000,000 US $0.06 850,000 3.6 years 850,000 C $0.15 2,100,000 2.5 years 2,100,000 C $0.17 740,000 0.9 years 740,000 --------- --------- 5,690,000 5,690,000 ========= =========
NOTE 12 - RELATED PARTY TRANSACTIONS The Company had an agreement with a corporation whose president was a director of the Company. The agreement called for the promotion of Turbeco sales in exchange for a commission of 25% of all sales made by the corporation. The agreement was terminated December 31, 1999. The Company incurred charges of $54,519 during the year ended February 29, 2000. The Company leased machinery from an officer and director for approximately $35,000 during the years ended February 28, 2001, and February 29, 2000. See Note 9 for related party indebtedness. F-15 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 13 - INCOME TAXES The temporary differences giving rise to the deferred tax asset consist primarily of depreciation differences and the tax operating loss carryforwards. Valuation allowances are required to reduce deferred tax assets when realization is not more likely than not. As a result of the Company's previous operating losses, a valuation allowance of $2,400,000 and $2,408,000 as of February 28, 2001 and February 29, 2000, respectively, was recorded for deferred tax assets that were not offset by scheduled future reversals of deferred tax liabilities. For U.S. Federal tax purposes, the Company has net operating loss carryforwards of approximately $6,250,000 as of February 28, 2001, that expire between the years 2009 and 2020. The Company believes a change in control may have occurred in April 2000 in connection with the exchange of convertible preferred stock for certain indebtedness. If such a change in control has occurred, the net operating loss carryforward could be limited in total and as to the amount available in each year. The Company's effective income tax rate differed from the Federal statutory rate primarily due to meals and entertainment, foreign and state income taxes and the valuation allowance against deferred tax assets. NOTE 14 - COMMITMENTS AND CONTINGENCIES Petrovalve was engaged in ongoing research in conjunction with the Alberta Research Council ("ARC"). On April 1, 1991, Petrovalve entered into a two year joint venture agreement with the ARC which provided for a total budget of $847,000 (Canadian) for research and development of the Petrovalve Plus. The joint venture agreement was extended until December 31, 1994, with an additional budget of $400,000 (Canadian) to be jointly provided as per the terms of the original agreement. The extension was subject to a payback clause, whereby if Petrovalve moved its sales and distribution offices outside Alberta or if Petrovalve is sold, two times the total investment of the ARC in the project, equal to $1,247,000 (Canadian), must be paid back to the ARC, by way of monthly payments equal to 2% of all proceeds received by Petrovalve in the immediately preceding month on sales of the Petrovalve Plus until the amount is fully paid. No amount has been accrued in the accompanying consolidated financial statements, as the Company believes no liability triggering event has occurred since inception of this research agreement. The Company has entered into operating lease arrangements that expire at various dates through 2005. Lease expense for the years ended February 28, 2001 and February 29, 2000 was $135,424 and $134,819, respectively. Minimum lease payments for the next five years are as follows:
2002 $ 123,499 2003 100,774 2004 88,842 2005 61,550 2006 2,787 --------- $ 377,452 =========
F-16 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 NOTE 15 - SEGMENT INFORMATION The Company has two reportable segments: drilling products and production equipment. The drilling products segment manufactures and distributes centralizers, which are a vaned cementing sleeve and integral joint stand off tool that improves mud and cementation displacement in drilled oil wells. The production equipment segment carries on the business of developing, manufacturing and marketing valves for downhole sucker-rod pumps used in oil wells. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations, not including nonrecurring gains and losses and foreign exchange gains and losses. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately, because each business requires different technology and marketing strategies. The Company operates primarily in the United States and Canada. As of February 28, 2001 and February 29, 2000, and for each of the years then ended, the Company has operated in two industry segments, drilling products and production equipment, for which revenues, depreciation and amortization expense, operating income (loss), interest expense, and total assets are as follows:
FOR FISCAL YEAR ENDED FEBRUARY 28, 2001 ---------------------------------------------- DRILLING PRODUCTION PRODUCTS EQUIPMENT OTHER TOTAL ---------- --------- -------- ---------- Revenues $1,771,026 $1,210,382 $2,981,408 Depreciation and amortization expense 68,961 17,410 $ 4,176 90,547 Operating income (loss) 92,220 338,127 (388,501) 41,846 Interest expense 27,437 15,410 41,121 83,968 Assets 1,437,300 889,363 136,977 2,463,640 FOR FISCAL YEAR ENDED FEBRUARY 29, 2000 ---------------------------------------------- DRILLING PRODUCTION PRODUCTS EQUIPMENT OTHER TOTAL ---------- --------- -------- ---------- Revenues $1,113,168 $448,625 $1,561,793 Depreciation and amortization expense 76,948 42,933 $ 2,931 122,812 Operating loss (729,103) (231,314) (356,286) (1,316,703) Interest expense 16,117 12,376 145,290 173,783 Assets 1,335,694 391,448 203,784 1,930,926
F-17 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 Information on the Company's geographic segments, based on the locations of the Company's operations, are as follows:
FOR FISCAL YEAR ENDED FEBRUARY 28, 2001 ------------------------------------------ CANADA U.S. TOTAL ---------- ------------- ------------- Revenues $ 34,659 $2,946,749 $2,981,408 Operating income (loss) (28,378) 70,224 41,846 Assets 127,971 2,335,489 2,463,460 FOR FISCAL YEAR ENDED FEBRUARY 29, 2000 ------------------------------------------ CANADA U.S. TOTAL --------- ------------ ------------ Revenues $ 84,470 $ 1,477,323 $ 1,561,793 Operating loss (15,923) (1,300,780) (1,316,703) Assets 133,975 1,796,951 1,930,926
Included in the U.S. geographic segment is one South American customer which accounts for $765,330 of revenues. NOTE 16 - SIGNIFICANT CUSTOMER AND MAJOR SUPPLIERS Sales to a significant international customer in the production equipment segment represented 26% of total sales for the year ended February 28, 2001. Purchases from Trinity, prior to its acquisition, for materials during the year ended February 29, 2000 was 39%. F-18 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Grant Thornton, the former Auditor, resigned on or about January 26, 2000. The Auditor's Report on the financial statements for the past two fiscal years of the company contain no adverse opinions, disclaimer of opinion, modification as to uncertainty, audit scope, or accounting principles, except for its "going concern" doubts. The resignation of Grant Thornton was accepted by the Board of Directors at a Special Meeting held at the offices of the company on February 8, 2000. Subsequent to the resignation of Grant Thornton, the auditing firm of Weinstein Spira & Company, P.C., 5 Greenway Plaza, Suite 2200, Houston, Texas 77046, Telephone (713) 622-7000, Facsimile (713) 622-9535 was retained by the company, but no accounting or auditing issues transpired or were discussed. Weinstein Spira has reported on both years presented in the financial statements. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The Proxy Statement to be issued in connection with the Annual Meeting of Stockholders to be held in August 2001, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption, "Directors and Executive Officers of the Registrant" information required by Item 9 of Form 10-KSB as to directors and certain executive officers of the Company and is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION. The Proxy Statement to be issued in connection with the Annual Meeting of Stockholders to be held in August 2001, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption, "Executive Compensation" information required by Item 10 of Form 10-KSB as to directors and certain executive officers of the Company and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The Proxy Statement to be issued in connection with the Annual Meeting of Stockholders to be held in August 2001, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption, "Security Ownership of Certain Beneficial Owners, Directors, and Management" information required by Item 11 of Form 10-KSB as to directors and certain executive officers of the Company and is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Proxy Statement to be issued in connection with the Annual Meeting of Stockholders to be held in August 2001, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption, "Certain Relationships and Related Transactions" information required by Item 12 of Form 10-KSB as to directors and certain executive officers of the Company and is incorporated herein by reference. F-19 ITEM 13. 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 year ended February 28, 1998) 4.1 Shareholders Protection Rights Plan (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 4.2 Securities Purchase and Exchange Agreement effective as of April 30, 2000, signed in August 2000 (incorporated by reference to the Company's Form 10-Q 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-Q for the quarter ended August 31, 2000) 10.1 Distribution Agreement - Downhole Products (UK), LTD (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.2 Wallace Robertson Inc. Consulting Agreement (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.7 License Agreement - Harlan King (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 21.1 List of Operating Subsidiaries (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) (b) Reports on Form 8-K During the fiscal year ended February 28, 2001 the Company filed no reports on Form 8-K. F-20 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. June 13, 2001 FLOTEK INDUSTRIES INC. (Registrant) By: /s/ JERRY DUMAS -------------------------------------- President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ JERRY DUMAS President, Chief Executive June 13, 2001 - ------------------------ Officer, Director Jerry Dumas (Principal Executive Officer, Principal Accounting Officer) /s/ GARY M. PITTMAN Director June 13, 2001 - ---------------------------- Gary M. Pittman /s/ WILLIAM ZIEGLER Director June 13, 2001 - ---------------------------- William Ziegler /s/ JOHN W. CHISHOLM Director June 13, 2001 - ---------------------------- John W. Chisholm
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