UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended May 31, 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.
(Exact name of registrant as specified in its charter)
ALBERTA 77-0709256
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7030 EMPIRE CENTRAL DRIVE, HOUSTON, TEXAS 77040
(Address of principal executive offices) (zip code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE
(713) 849-9911
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes ( ) No (x)
As of May 31, 2000 the number of shares of common stock outstanding was
67,724,137.
Transitional Small Business Disclosure Format (check one):
Yes ( ) No (x)
Part I - Financial Information
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31, February 28,
ASSETS 2001 2001
------------ ------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 124,693 $ 51,442
Accounts receivable, less allowance for doubtful
accounts of $15,000 752,767 563,010
Inventory 1,035,628 1,079,665
------------ ------------
Total current assets 1,913,088 1,694,117
PROPERTY AND EQUIPMENT, NET 232,141 233,881
OTHER ASSETS 528,154 535,642
------------ ------------
$ 2,673,383 $ 2,463,640
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to Bank $ 151,867 $ 175,966
Other notes payable 180,000 31,000
Current portion of long-term debt 55,339 57,270
Accounts payable and accrued liabilities 535,555 632,157
Due to related party 190,839 190,839
------------ ------------
Total current liabilities 1,113,600 1,087,232
Accrued Dividends 237,133 203,136
LONG-TERM DEBT 141,489 149,828
SHAREHOLDERS' EQUITY
Common stock - no par value; 100,000,000 shares
authorized; 67,724,137 and 53,555,655 issued
and outstanding at May 31, 2001 and February 28, 2001,
respectively 19,096,928 18,674,290
Convertible preferred stock - no par value; 2,114.496
Shares issued and outstanding at May 31, 2001
(2,365.77 shares at February 28, 2001); liquidation
of $2,351,629 at May 15, 2001 2,114,496 2,365,770
Additional paid in capital 160,879 160,879
Accumulated deficit (19,900,439) (19,886,792)
Accumulated other comprehensive loss (290,703) (290,703)
------------ ------------
1,181,161 1,023,444
------------ ------------
$ 2,673,383 $ 2,463,640
============ ============
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
Ended May 31,
2001 2000
---- ----
(unaudited)
Sales $ 893,945 $ 656,434
Costs and expenses:
Cost of goods sold 401,747 296,637
Selling 211,630 176,754
General and administrative 174,982 155,054
Depreciation and amortization 21,345 19,801
Research and development 24,324 7,740
----------- -----------
834,028 655,986
----------- -----------
Income from operations 59,917 448
Other income (expense), net
Interest (18,203) (58,652)
Other - 49,304
----------- -----------
(18,203) (9,258)
----------- -----------
Net income (loss) $ 41,714 $ (8,810)
Basic and diluted net loss per common share
(See Note 3) $ (0.0002) $ (0.0002)
Weighted average number of shares outstanding 66,588,995 50,243,295
The accompanying notes are an integral part of these financial statements and
should be read in conjunction herewith.
3
FLOTEK INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended May 31,
2001 2000
--------- ---------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss) $ 41,714 $ (8,810)
Adjustments to reconcile net income (loss) to cash
used in operating activities
Depreciation and amortization 21,345 19,810
Change in operating assets and liabilities:
Accounts receivable (189,757) (101,496)
Inventory 44,037 15,281
Accounts payable and accrued liabilities (96,602) (396,125)
--------- ---------
Net cash used in operating activities (179,263) (471,349)
Cash flows from investing activities
Purchase of property and equipment (12,117)
Cash flows from financing activities
Exercise of common stock warrants 150,000 -
Proceeds from long-term debt, notes payable and due to related parties 150,000 420,000
Repayment of long-term debt and notes payable (35,369) (44,008)
--------- ---------
Net cash provided by financing activities 264,631 375,992
Effect of exchange rates on cash - 14,973
--------- ---------
Net increase (decrease) in cash 73,251 (80,384)
Cash and cash equivalents - beginning of period 51,442 128,184
--------- ---------
Cash and cash equivalents - end of period $ 124,693 $ 47,800
========= =========
Supplementary information
Interest paid $ 12,323 $ 8,228
Income taxes paid - -
Non-cash investing and financing activities
Patent acquired for common stock $ 175,000
Preferred stock and accrued interest converted to common stock $ 272,638
Accrued preferred dividends $ 55,361
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, 2001. The results of operations
for the three-month period ended May 31, 2001 are not necessarily indicative of
the results expected for the full year.
Note 2 - Comprehensive Income
In September 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources and includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners.
Three Months Ended
May 31,
2001 2000
---- ----
Comprehensive income:
Net income (loss) $ 41,714 $ (8,810)
Cumulative translation adjustment - 14,973
--------- --------
Total comprehensive income $ 41,714 $ 6,163
========= ========
3. Net loss per common share
Net loss per common share has been computed as follows:
Three Months
Ended May 31,
---------------------
2001 2000
---- ----
Net income (loss) $ 41,714 $ (8,810)
Accrued preferred stock dividends (55,361) -
------------ -----------
Loss for common shareholders $ (13,647) $ (8,810)
Weighted average shares outstanding 66,588,995 50,243,295
Basic and diluted net loss per
Common share $ (.0002) $ (.0002)
The conversion of preferred stock or exercise of options or warrants to purchase
common stock are antidilutive in regard to loss per common share.
4. Common stock options
On April 11, 2000 the Board granted 1,000,000 fully vested options to Gary
Pittman, a director and 250,000 fully vested options to each of the remaining
four directors. In addition, options to purchase 5,000,000 shares of common
stock were granted to Jerry D. Dumas (3,000,000 options to vest immediately and
the balance to be vested in three equal parts over the following eighteen
months). All options were issued at the market price on the grant date. The
options have a five-year life.
5
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-QSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipate," "believe,"
"expect," "plan," "intend," "project," "forecasts," "could" and similar
expressions are intended to identify forward-looking statements. All statements
other than statements of historical facts included in this Form 10-QSB regarding
the Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, no assurance can be given that actual results
may not differ materially from those in the forward-looking statements herein
for reasons including the effect of competition, the level of petroleum industry
exploration and production expenditures, world economic conditions, prices of,
and the demand for crude oil and natural gas, drilling activity, weather, the
legislative environment in the United States and other countries, the condition
of the capital and equity markets, and other risk factors identified herein.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes thereto.
Business
Flotek Industries Inc. (hereafter the "Company" or "Flotek") was originally
incorporated under the laws of the Province of British Columbia on May 17, 1985.
Effective September 7, 1995, the Company transferred its corporate status by
continuing under the laws of the Province of Alberta. Flotek is headquartered in
Houston, Texas and its common shares have been listed on the OTC Bulletin Board
market. The Company's common stock is traded in the United States on the OTC
Bulletin Board market 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 turbulator 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.
6
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 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, HRC Tool and Dye Manufacturing LTD. and
Karnin Machine in Edmonton, Alberta, Canada 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.
7
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.
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
hose products should continue to increase.
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
8
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.
RESULTS OF OPERATIONS
Revenue by Operating Segment:
Three Months Ended
May 31,
2001 2000
---- ----
Drilling Products $534,913 $417,076
Production Equipment 359,032 239,358
-------- --------
$893,945 $656,434
======== ========
Consolidated revenues were up 36% for the three months ended May 31, 2001 as
compared to the same period in fiscal 2001. Revenues from the drilling products
segment increased by 28% compared to 2001, reflecting the increased North
American rig counts caused by the fiscal 2001 increase in oil prices. Revenues
from the production equipment segment increased by 50% for the quarter as
compared to the same period in 2001, reflecting increased acceptance of our
production valve products, including increased international sales.
Costs and Expenses
Consolidated gross margins at 55% were approximately the same for both periods.
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 27% of sales in fiscal 2001 to 24% of sales in 2002. This decrease
was primarily attributable to more effective utilization of the work force and
increased sales. The Company also increased in-house sales, which have lower
selling costs.
General and administrative expense increased by approximately $20,000,
reflecting the increased sales volumes, but decreased as a percentage of sales
from 24% to 20%.
Research and development costs increased by $16,584 in fiscal 2002, compared to
the same period in 2001, reflecting the continued development efforts for our
Pressure-Actuated Casing centralizer.
Interest expense for the first quarter of fiscal 2002 was $18,203 compared to
$58,652 in 2001. 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 (expense)
Included in other income for the three months ending May 31, 2000 were amounts
totaling approximately $49,000 representing negotiated reductions for cash
payments to settle accounts payable and accrued liabilities.
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 increased to $124,693 at May 31,
2001 from $51,442 at February 28, 2001. Overall cash flows used in operating
activities decreased from $471,349 for the three months ending May 31, 2000 to
$179,263 for the three months ending May 31, 2001. Accounts receivable increased
from $563,010 at February 28, 2001 to $752,767 at May 31, 2001, reflecting the
higher level of sales in 2001.
The Company expects to fund liquidity needs from a combination of available
cash balances, internally generated funds and future financing activities.
Financing Activities
Repayments of long-term debt during the three months ending May 31, 2000 were
$35,369. At May 31, 2001 the Company borrowed $150,000 from a private
corporation. The Advance bears interest at 10% and is secured by two invoices
totaling $343,802. The advance is to be repaid in the second quarter of fiscal
2002.
At May 31, 2001 the Company had working capital of $799,488 and cash and cash
equivalents of $124,643 compared to a working capital of $606,885 and cash and
cash equivalents of $51,442 at February 28, 2001. The overall increase in
working capital is attributable primarily to the improved operating results.
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.
. 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
10
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 $151,867 were outstanding at May 31,
2000.
. 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.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
11
(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)
(b) Reports on Form 8-K
During the fiscal quarter ended May 31, 2001, the Company filed no reports on
Form 8-K.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLOTEK INDUSTRIES INC.
(Registrant)
By: /s/ JERRY DUMAS
Date: July 12, 2001 ----------------
Jerry Dumas
President and Chief Executive Officer
(Principal Executive Officer)
12