-----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, BEwZIXzJDThUIO3U3oXa3abFYo9PV1cHAua8Ki1yf1A3wnkXn1/K9kJ3l2r3nmIl B2OaABJ91s9ojmdEcJwuOA== 0000899243-99-000071.txt : 19990118 0000899243-99-000071.hdr.sgml : 19990118 ACCESSION NUMBER: 0000899243-99-000071 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOTEK INDUSTRIES INC/CN/ CENTRAL INDEX KEY: 0000928054 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 120370187 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13270 FILM NUMBER: 99506918 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 FORM 10-QSB FOR QUARTER ENDED NOVEMBER 30, 1998 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, 1998 ( ) 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 (X) No ( ) As of November 30, 1998 the number of shares of common stock outstanding was 45,680,795 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 28, ASSETS 1998 1998 -------------------- -------------------- CURRENT ASSETS Cash $ - $ 634,511 Accounts receivable, less allowance for doubtful accounts of $39,988 and $25,569 238,337 427,466 Inventory 861,074 1,181,104 ------------ ------------ Total current assets 1,099,411 2,243,081 FURNITURE AND EQUIPMENT 111,972 186,611 OTHER ASSETS 139,195 144,370 ------------ ------------ $ 1,350,578 $ 2,574,062 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Note payable $ 45,000 $ 40,000 Current portion of long-term debt 774,323 771,719 Accounts payable and accrued liabilities 510,517 739,656 Accrued repurchase option - 264,085 ------------ ------------ Total current liabilities 1,329,840 1,815,460 LONG-TERM DEBT 10,061 19,338 COMMITMENTS - - SHAREHOLDERS' EQUITY Common stock no par value; 100,000,000 shares authorized; 45,680,795 issued and outstanding 18,134,295 17,870,210 Additional paid in capital 150,313 149,113 Equity adjustment from foreign currency translation (288,965) (285,636) Accumulated deficit (17,984,966) (16,994,423) ------------ ------------ 10,677 739,264 ------------ ------------ $ 1,350,578 $ 2,574,062 ============ ============
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
Three Months Nine Months Ended November 30, Ended November 30, 1998 1997 1998 1997 --------------- --------------- --------------- -------------- Sales 357,089 822,397 $ 1,573,672 $ 2,541,014 Costs and expenses: Cost of goods sold 220,469 453,613 969,267 1,396,524 Selling 226,458 339,226 847,271 1,109,890 General and administrative 149,920 276,967 654,401 741,984 Depreciation and amortization 13,323 14,925 43,176 65,776 Research and development - - - 3,066 ----------- ----------- ----------- ----------- 609,170 1,084,731 2,514,115 3,317,240 Loss from operations 252,081 262,334 940,443 776,226 Other income (expense), net Interest (27,431) (27,759) (112,168) (61,871) Other 7,393 10,825 62,068 9,624 ----------- ----------- ----------- ----------- (20,038) (16,934) (50,100) (52,247) Net loss $ 272,119 $ 279,268 $ 990,543 $ 828,473 Basic and diluted loss per share $0.01 $0.01 $0.02 $0.03 Weighted average number of shares outstanding 45,680,795 25,744,797 44,014,128 25,744,797
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, 1998 1997 ---------------- --------------- Cash flows from operating activities Net loss for the period $(990,543) $ (828,473) Adjustments to reconcile net losses to net cash used in operating activities Depreciation and amortization 43,176 65,776 Accretion of discount 55,326 - Compensatory stock options 1,200 - Write-off of Inventory 98,170 - Severance provision 80,635 - Loss on disposal of capital assets 24,638 - Change in assets and liabilities Decrease in accounts receivable 189,129 215,164 Decrease (Increase) in inventory 221,860 (213,283) (Decrease) Increase in accounts payable and accrued liabilities (309,774) 30,924 --------- ---------- Net cash (used) provided in operating activities (586,183) (729,893) Cash flows from investing activities Proceeds from sale of capital assets 12,000 - Purchase of capital assets - (6,500) Purchase of other assets - (7,383) --------- ---------- Net cash provided (used) by investing activities 12,000 (13,883) Cash flows from financing activities Proceeds from issuance of share capital, net of costs - 1,250,000 Proceeds from long-term debt and notes payable 15,000 815,000 Repayment of long-term debt and notes payable (75,328) (330,036) --------- ---------- Net cash (used) provided by financing activities (60,328) 1,734,964 Net (decrease) increase in cash (634,511) 991,188 Cash at beginning of year 634,511 91,641 --------- ---------- Cash at end of period $ - $1,082,829 Supplementary information Interest paid $ 64,355 $ 66,553 Income taxes paid - -
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 28, 1998. The results of operations for the three-month period ended November 30, 1998 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, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Comprehensive income: Net Loss $272,119 $279,268 $990,543 $828,473 Cumulative translation adjustment 4,343 - 3,329 - -------- -------- -------- -------- Total comprehensive income $276,462 $279,268 $993,872 $828,473 ======== ======== ======== ========
5 Note 3 - Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), Disclosures About Segments of an Enterprise and Related Information, in the first quarter of 1998. SFAS No. 131 requires segment information to be reported on a basis consistent with that used internally for evaluating segment performance and deciding how to allocate resources to the segment. Quarterly disclosures are not required in the first year of adoption. Note 4 - Reclassifications and Restatements Certain reclassifications of prior year balances have been made to conform such amounts to corresponding 1998 classifications. These reclassifications had no impact on net income or shareholders' equity. ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-QSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipate," "believe," "expect," "plan," "intend," "project," "forecasts," "could" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this Form 10-QSB regarding the Company's financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although the Company believes that the expectations reflected in such forward- looking statements are reasonable, no assurance can be given that actual results may not differ materially from those in the forward-looking statements herein for reasons including the effect of competition, the level of petroleum industry exploration and production expenditures, world economic conditions, prices of, and the demand for crude oil and natural gas, drilling activity, weather, the legislative environment in the United States and other countries, and the condition of the capital and equity markets. 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 Environment Flotek Industries Inc. (the "Company") is a supplier of engineered oilfield tools and equipment. The Company's products are used both for the drilling and production phases of oil and natural gas wells. The Company's product lines are divided into two separate segments in the industry: drilling products and production equipment. The production equipment segment develops, manufactures and markets the Petrovalve + Plus(R) Pump Valve and the Petrovalve Gas Breaker Valve, which are valves for downhole sucker-rod pumps used in oil wells. The drilling products 6 segment manufactures and distributes centralizers, which are spiraled vane cementing sleeves and stand off tools that improve mud and cementation displacement in drilled oil wells. The business environment for oilfield operations and its corresponding operating results are affected significantly by petroleum industry exploration and production expenditures. These expenditures are influenced strongly by oil company expectations as to energy prices and the supply and demand for crude oil and natural gas. Petroleum supply and demand, and pricing, in turn, are influenced by numerous factors including, but not limited to, 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, and the condition of the capital and equity markets. The worldwide price of oil has declined significantly since late 1997, with prices having dropped as much as 40% to under $13 per barrel for spot deliveries. This decline has attributed to, among other things, an excess supply of oil in the world markets, reduced domestic demand associated with an unseasonably warm winter, and high inventory levels of oil and gas. The depressed economic conditions in Southeast Asia also have had a negative effect on the economies in other regions around the world and the associated demand for oil in those regions. These conditions have resulted in substantially lower rig utilization rates in the United States and Canadian land markets as well as less dramatic declines in the United States offshore markets as the Company's customers have begun to reevaluate their exploration and development plans for 1998 in light of current lower oil prices. The above factors have particularly affected the demand for many of the Company's centralizer products. A prolonged decline in future oil and natural gas prices would likely result in reduced exploration and development of oil and gas and a decline in the demand for the Company's drilling products and could have an adverse financial effect on the Company. Within the United States and Canada, the Company's artificial lift segment has experienced declines in revenue as demand and pricing has fallen with the lower rig count and oil production activity. The artificial lift segment has been particularly affected by large declines in demand for its equipment used for the production of heavy oil and other wells that are highly dependent on oil prices. If crude oil prices remain at or below current levels for a prolonged period of time, management believes demand for products and services could continue to be adversely impacted in the U.S. and certain other markets. The Company currently anticipates that under current market conditions the demand for its current products and services will decline during the remainder of fiscal year 1999. The declines will be most significant in the Company's drilling products segment. In response to the current industry conditions, the Company has implemented various actions directed at reducing costs to be in line with the reduced operating activities. These actions include reductions in employment, the reduction of certain operating expenses, and disposal of certain lower margin product lines. 7 RESULTS OF OPERATIONS Revenue by Operating Segment:
Three Months Ended Nine Months Ended November 30, November 30, 1998 1997 1998 1997 ----------------- ----------------- ------------------- ------------------ Drilling Products $321,684 $725,521 $1,259,307 $2,156,621 Production Equipment 35,405 96,876 314,365 384,393 -------- -------- ---------- ---------- $357,089 $822,397 $1,573,672 $2,541,014 ======== ======== ========== ==========
Consolidated revenues were down $465,308, or 57% for the quarter ended November 30, 1998, as compared to the same period in 1997, primarily due to the effect of lower oil prices resulting in certain customers' decision to limit investments in exploration, drilling and production activities. Revenues from the drilling products segment decreased 56% in the quarter as compared to the same period in 1997. Lower oil prices have resulted in a reduction in the rig count and related drilling activity in the United States and reductions in the exploration and development budgets of producers. This reduction in oil prices has particularly affected the demand for many of the Company's centralizer products, which are used in the drilling process. Revenues from the production equipment segment decreased 63% in the quarter as compared to the same period in 1997. The overall decrease was attributed to a decline in demand for the Company's artificial lift products due to lower oil prices, an associated drop in heavy oil drilling activity primarily in Canada and other marginal oil production activity. There were only 190 rigs drilling for U.S. oil in November 1998, the lowest number on record and a 50 percent decline since November 1997, according to the latest Baker-Hughes Inc. rig count. Costs and Expenses The Company's consolidated gross margins decreased from 45% in the quarter ended November 30, 1997 to 38% in the quarter ended November 30, 1998. The Company's drilling products segments gross margins declined from 43% in the quarter ended November 30, 1997 to 36% in the quarter ended November 30, 1998. The decline in gross margins is attributed to pricing pressures in the Company's centralizer line of products. The worldwide price of oil has declined significantly since late 1997. These price declines have resulted in substantially lower rig utilization rates in the United States offshore markets as the Company's customers have begun to reevaluate their exploration and development plans for 1998 in light of current lower oil prices. This has particularly affected the demand for many of the Company's centralizer products. As a result, the Company has been forced to reduce the selling price of such products. The Company's production equipment segments gross margins increased from 57% in the quarter ended November 30, 1997 to 63% in the quarter ended November 30, 1998 due to the Company's sale of certain inventory components from inventory quantities that were previously written-off in fiscal year 1998. 8 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 $112,768, or 33% in the third quarter as compared to the same period in 1997. In response to the current industry conditions, the Company has implemented various actions directed at reducing costs to be in line with the reduced operating activities. These actions include reductions in the Company's sales-force. General corporate expenses decreased in the third quarter by $127,047, or 46% as compared to the same period in 1997. In response to the current industry conditions, the Company has implemented various actions directed at reducing costs to be in line with the reduced operating activities. These actions include reductions in the Company's corporate overhead. Interest Expenses Overall interest expense for the quarter ended November 30, 1998 remained relatively consistent with interest expense for the quarter ended November 30, 1997, as overall debt level remained relatively constant. CAPITAL RESOURCES AND LIQUIDITY The Company has financed its growth to date from stock offerings, subordinated borrowings, and internally generated funds. The principal uses of its cash have been to fund the working capital needs of the Company. The Company had no cash on hand at November 30, 1998, as compared to cash and cash equivalents of $634,511 at February 28, 1998. The overall decrease in the Company's working capital during the current period is attributed to an overall decrease in its cash balances. YEAR 2000 ISSUE The Year 2000 issue is the risk that information systems, computers, equipment and products using date-sensitive software or containing computer chips with two-digit date fields will be unable to correctly process the Year 2000 date change. If not identified and corrected prior to the Year 2000, failures could occur in the software, hardware, equipment and products of the Company and its suppliers, vendors and customers that could result in interruptions of the Company's business. Any of such failures could have a material impact on the Company. The Company is currently assessing the cost and uncertainties related to the Year 2000 issue using internal and external resources. Based on preliminary information, the Company currently believes that it has substantially addressed the Year 2000 issues with respect to its software, hardware and products without significant impact on its operations. The estimated costs associated with achieving Year 2000 compliance are not expected to have a material impact on the Company's financial condition or results of operations. There is inherent uncertainty in the Year 2000 problem due to the possibility of unanticipated failures by third party customers and suppliers. Accordingly, the Company is unable, at this time, to assess the extent and resulting materiality of the impact of possible Year 2000 failures on its operations, liquidity or financial position. The Company has designated personnel responsible to identify and respond to these 9 issues and once all identifications and reviews are completed, a contingency plan will be developed to mitigate the risk of business interruption. The Company has sustained substantial operating losses in recent years. In addition, the Company has used substantial amounts of working capital in its operations. Further, the Company has a debt payment of $750,000 due on January 14, 1999. Management is currently negotiating with the lender for an extension of the debt obligation. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet 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 is taking the following steps to provide the Company with adequate working capital: . Management continues to reduce selling, general and administrative expenses. . Management intends to secure new long-term equity financing for working capital purposes. . Management is negotiating with the lender an extension or conversion of the existing $750,000 debt obligation to equity. Risk Factors The following risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected: . The Company's ability to raise additional working capital could be limited due to future operating losses and the existing level of short-term debt. Without the ability to raise operating capital, there would be substantial doubt about the Company's ability to continue as a going concern. . 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. . The Company's drilling products segment generates a significant portion of the Company's consolidated revenues. A further reduction in drilling activity could adversely affect future operating results. 10 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation (incorporated by 10-Q for the quarter ended November 30, 1997) reference to the Company's Form 3.2 By-laws (incorporated by reference to the quarter ended November 30, 1997) Company's Form 10-Q for the 3.3 Amendment to Registrant's Bylaws (incorporated by reference to the Company's Form 10-KSB for the fiscal year ended February 28, 1998) 4.1 Shareholders Protection Rights Plan (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) *27.1 Financial Data Schedule * filed herewith (b) Reports on Form 8-K During the fiscal quarter ended November 30, 1998, the Company filed no reports on Form 8-K. 11 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) Date: January 15, 1998 By: /s/ Jerry Dumas President and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer) 12 Exhibit Index 3.1 Articles of Incorporation (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 3.2 By-laws (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 3.3 Amendment to Registrant's Bylaws (incorporated by reference to the Company's Form 10-KSB for the fiscal year ended February 28, 1998) 4.1 Shareholders Protection Rights Plan (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) *27.1 Financial Data Schedule * filed herewith 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS FEB-28-1999 MAR-01-1998 NOV-30-1998 0 0 238,337 39,988 861,074 1,099,411 111,972 0 1,350,578 1,329,840 0 0 0 18,134,295 (18,123,618) 1,350,578 1,573,672 1,573,672 969,267 2,514,115 50,100 0 112,168 0 0 (990,543) 0 0 0 (990,543) (.02) (.02)
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