-----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, MG7Ew6KllJDvppSaNZAMV8q1pKg343eBkJkSZMRdhATfwfg8LuACgAQsH6yjYG5R /U5GRS7WWNpX9eAaTkpfsg== 0000950129-98-004301.txt : 19981016 0000950129-98-004301.hdr.sgml : 19981016 ACCESSION NUMBER: 0000950129-98-004301 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981015 SROS: NONE 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: 98725988 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 FLOTEK INDUSTRIES, INC. - DATED 08/31/98 1 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 August 31, 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 (I.R.S. Employer of incorporation 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 August 31, 1998 the number of shares of common stock outstanding was 43,180,795 (Exhibit Index located on page 12) Transitional Small Business Disclosure Format (check one): Yes ( ) No (x) 2 Part I - Financial Information FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
August 31, February 28, ASSETS 1998 1998 ------------ ------------ CURRENT ASSETS Cash $ 69,210 $ 634,511 Accounts receivable, less allowance for doubtful accounts of $25,569 and $25,569 469,450 427,466 Inventory 829,390 1,181,104 ------------ ------------ Total current assets 1,368,050 2,243,081 FURNITURE AND EQUIPMENT 149,992 186,611 OTHER ASSETS 141,205 144,370 ------------ ------------ $ 1,659,247 $ 2,574,062 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Note payable $ 30,000 $ 40,000 Current portion of long-term debt 766,535 771,719 Accounts payable and accrued liabilities 562,771 739,656 Accrued repurchase option 264,085 264,085 ------------ ------------ Total current liabilities 1,623,391 1,815,460 LONG-TERM DEBT 12,802 19,338 COMMITMENTS -- -- SHAREHOLDERS' EQUITY Common stock - no par value; 100,000,000 shares authorized; 43,180,795 issued and outstanding 17,870,210 17,870,210 Additional paid in capital 150,313 149,113 Equity adjustment from foreign currency translation (284,622) (285,636) Accumulated deficit (17,712,847) (16,994,423) ------------ ------------ 23,054 739,264 ------------ ------------ $ 1,659,247 $ 2,574,062 ============ ============
The accompanying notes are an integral part of these statements and should be read in conjunction herewith. 2 3 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Six Months Ended August 31, Ended August 31, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Sales 486,897 792,296 $ 1,216,583 $ 1,718,617 Costs and expenses: Cost of goods sold 400,979 413,135 748,798 942,911 Selling 301,264 358,639 620,813 770,664 General and administrative 283,385 187,064 504,481 463,562 Depreciation and amortization 15,670 46,330 30,853 50,851 Research and development -- 4,521 -- 4,521 ------------ ------------ ------------ ------------ 1,001,298 1,009,689 1,904,945 2,232,509 Loss from operations 514,401 217,393 688,362 513,892 Other income (expense), net Interest (42,301) (16,453) (84,737) (34,112) Other 12,468 973 54,675 (1,201) ------------ ------------ ------------ ------------ (29,833) (15,480) (30,062) (35,313) Net loss $ 544,234 $ 232,873 $ 718,424 $ 549,205 Basic and diluted loss per share $ 0.013 $ 0.009 $ 0.017 $ 0.021 Weighted average number of shares outstanding 43,180,795 25,744,797 43,180,795 25,744,797
The accompanying notes are an integral part of these financial statements and should be read in conjunction herewith. 3 4 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended August 31, 1998 1997 --------- --------- Cash flows from operating activities Net loss for the period $(718,424) $(549,205) Adjustments to reconcile net losses to net cash used in operating activities Depreciation and amortization 30,853 50,851 Accretion of discount 44,261 -- Compensatory stock options 1,200 -- Write-off of Inventory 98,170 -- Severance provision 80,635 -- Loss on disposal of capital assets 8,931 -- Change in assets and liabilities (Increase) Decrease in accounts receivable (41,984) 177,813 Decrease (Increase) in inventory 253,544 (130,511) (Decrease) Increase in accounts payable and accrued liabilities (257,520) 268,491 Increase in due to related parties -- 52,685 --------- --------- Net cash (used) provided in operating activities (500,334) (129,876) Cash flows from investing activities Purchase of furniture and equipment -- (17,239) Purchase of other assets -- (6,599) --------- --------- Net cash used by investing activities -- (23,838) Cash flows from financing activities Proceeds from long-term debt and notes payable -- 136,024 Repayment of long-term debt and notes payable (65,981) (52,899) --------- --------- Net cash (used) provided by financing activities (65,981) 83,125 Effect of exchange rates on cash 1,014 -- --------- --------- Net (decrease) increase in cash (565,301) (70,589) Cash at beginning of year 634,511 91,641 --------- --------- Cash at end of period $ 69,210 $ 21,052 ========= ========= Supplementary information Interest paid $ 40,693 $ 3,754 Income taxes paid -- --
The accompanying notes are an integral part of these financial statements and should be read in conjunction herewith. 4 5 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 August 31, 1998 are not necessarily indicative of the results expected for the full year. Note 2 - Comprehensive Income Comprehensive income as defined by Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, is net income plus direct adjustments to stockholders' equity. The cumulative translation adjustment of certain foreign entities is the only such direct adjustment recorded by the Company.
Six Months Ended August 31, 1998 1997 --------- --------- Comprehensive income: Net Loss $(718,424) $(549,205) Cumulative translation adjustment 1,014 -- --------- --------- Total comprehensive income $(717,410) $(549,205) ========= =========
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. 5 6 Note 4 - Reclassifications and Restatements Certain reclassifications of prior year balances have been made to conform such amounts to corresponding 1998 classifications. 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 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 6 7 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. While the Company anticipates continued long-term growth in the worldwide demand for hydrocarbons will result in increased spending by oil and gas companies for the development of the hydrocarbon supply, in recent years, oil and natural gas prices have reacted to actual and perceived changes in the supply of and demand for oil and natural gas, which has resulted in volatile levels of oil and gas exploration and drilling activity. This price volatility has created some market uncertainties. Historically, crude oil prices, natural gas prices and the number of rotary rigs in operation have been a significant factor in determining the amount of worldwide exploration and production expenditures. 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. As prices for oil have continued to decline and remain depressed, the Company and others in the industry continue to experience a softening in demand for their products and services, in particular products associated with exploration activity and oil production. This reduction in oil prices has particularly affected the demand for many of the Company's centralizer products. A significant or 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 production equipment and could have an adverse financial effect on the Company. In addition, the Company's ability to benefit from the increased acceptance of its technologies will depend on its ability to maintain adequate working capital. RESULTS OF OPERATIONS Revenue by Operating Segment:
Three months ended August 31, ----------------------------- 1998 1997 -------- -------- REVENUES Drilling products segment $419,942 $654,993 Production equipment segment 66,955 137,303 -------- -------- Consolidated Revenues $486,897 $792,296 ======== ========
Consolidated revenues were down $305,399, or 39% for the quarter ended August 31, 1998, as compared to the same period in 1997. Revenues from the drilling products segment decreased 36% 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 51% for the second 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 and an associated drop in heavy oil drilling activity primarily in Canada and other marginal oil production activity. Comparing the Company's second quarter in 1998 to the same period in 7 8 1997, the North American active rotary rig count as reported by Baker Hughes decreased 20%. The average international rig count declined slightly in the second quarter of 1998, as compared to the second quarter of 1997. Costs and Expenses The Company's consolidated gross margins decreased from 48% in the quarter ended August 31, 1997 to 18% in the quarter ended August 31, 1998. The Company's drilling products segment gross margins declined from 44% in the quarter ended August 31, 1997 to 17% in the quarter ended August 31, 1998. The overall decline was attributed to freight charges that were written-off in the Company's drilling products segment as a result of the termination of it's exclusive distribution agreement with Downhole Products Plc., the Company's supplier of it's Spir-O-Lizer line of products. As stated in the distribution agreement, Downhole Products Plc. was required to repurchase the Company's entire Spir-O-Lizer inventory at the original invoice price, excluding all transportation costs incurred by the Company for transporting the inventory from Scotland to it's Houston facility. As a result of the termination of the distribution agreement, $98,170 in freight costs were charged against cost of sales during the quarter. 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 16% in the second quarter as compared to the same period in 1997. This decrease was primarily attributed to the Company's on-going efforts to reduce marketing expenditures to acceptable levels. In connection with these efforts, the Company downsized its international salesforce, primarily in Canada during fiscal year 1998. General corporate expenses increased in the second quarter by $96,321, or 51% as compared to the same period in 1997. The increase was attributed to a severance provision of $80,635 for the departure of William G. Jayroe, the Company's President and Chief Executive Officer. In addition, the Company incurred additional legal expenses associated with the Company's change in reporting requirements in the United States. When the Company ceased to be a foreign private issuer, it was no longer eligible to utilize Form 20-F and 6-K or other forms utilized under the integrated disclosure system for foreign private issuers. The Company must now comply with the reporting requirements required by the Securities and Exchange Act of 1934. Interest Expenses The increase in interest expense in the quarter ended August 31, 1998, as compared to the quarter ended August 31, 1997, reflects the issuance by the Company of a convertible loan in the principal amount of $750,000 on October 16, 1997. 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. 8 9 The Company had cash and cash equivalents of $69,210 at August 31, 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, decreased inventory levels as a result of Downhole Products Plc.'s requirement to repurchase the Company's entire Spir-O-Lizer inventory, and the increase in short term debt. Cash flow used in operating activities was $500,334 primarily as a result of it's net loss for the period. 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 October 16, 1998. 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: o Management continues to reduce selling, general and administrative expenses. o Management is adding complementary products lines to help diversify the Company's product mix, without increasing supporting expenditures. o Management intends to secure new long-term equity financing for working capital purposes. o 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: o 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. o 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. o The Company's ability to control the amount of operating expenses. 9 10 o A significant portion of the Company's consolidated revenues are generated by the Company's drilling products segment. A further reduction in drilling activity could adversely affect future operating results. PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 3.2 By-laws (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 3.3 Amendment to Registrant's Bylaws (incorporated by reference to the Company's Form 10-KSB for the fiscal year ended February 28, 1998) 4.1 Shareholders Protection Rights Plan (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) *27.1 Financial Data Schedule * filed herewith (b) Reports on Form 8-K During the fiscal quarter ended August 31, 1998, the Registrant filed no reports on Form 8-K. 10 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: October 15, 1998 By: /s/ Jerry Dumas President and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer) 11 12 Exhibit Index
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS FEB-28-1999 MAR-01-1998 FEB-28-1999 69,210 0 469,450 25,569 469,450 1,368,050 149,992 0 1,659,247 1,623,391 0 0 0 17,870,210 (16,210,963) 1,659,247 1,216,583 1,216,583 748,798 1,904,945 30,062 0 84,737 (718,424) 0 (718,424) 0 0 0 (718,424) (.017) (.017)
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