1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (I.R.S. Employer Identification No.) incorporation or organization) 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, 1997 the number of shares of common stock outstanding was 43,180,795 (Exhibit Index located on page 13) 2 Part I - Financial Information FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Expressed in Canadian Dollars (unaudited) November 30, February 28, 1997 1997 ------------ ------------ ASSETS CURRENT ASSETS Cash $ 1,511,827 $ 124,978 Accounts receivable 809,943 1,106,869 Inventory 2,108,622 1,814,291 ------------ ------------ 4,430,392 3,046,138 CAPITAL ASSETS 334,627 416,088 OTHER ASSETS 209,520 205,518 ------------ ------------ $ 4,974,539 $ 3,667,744 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Note payable 1,151,463 335,000 Current portion of long-term debt 124,512 196,250 Accounts payable and accrued liabilities 561,633 949,916 Due to related party -- 274,000 ------------ ------------ 1,837,608 1,755,166 LONG-TERM DEBT 34,805 83,517 SHAREHOLDERS' EQUITY (DEFICIT) Share capital 23,912,352 21,474,894 Accumulated deficit (20,810,226) (19,645,833) ------------ ------------ 3,102,126 1,829,061 ------------ ------------ $ 4,974,539 $ 3,667,744 ============ ============ The accompanying notes are an integral part of these financial statements and should be read in conjunction herewith. 2 3 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICITS Expressed in Canadian Dollars (unaudited) Three Months Nine Months Ended November 30, Ended November 30, ------------------ ------------------ 1997 1996 1997 1996 ------------ ------------ ------------ ------------ REVENUE $ 1,185,728 $ 1,209,079 $ 3,557,419 $ 3,247,339 COSTS AND EXPENSES Cost of Sales 653,916 698,847 1,955,133 1,792,197 Selling 490,329 592,410 1,553,846 2,082,381 General and Administrative 399,061 353,542 1,038,777 1,519,563 Research and development -- 37,158 4,293 69,186 Depreciation and Amortization 30,975 44,532 96,618 146,450 ------------ ------------ ------------ ------------ 1,574,281 1,726,489 4,648,667 5,609,777 OPERATING LOSS (388,553) (517,410) (1,091,248) (2,362,438) OTHER INCOME (EXPENSE) Interest Expense (39,544) (137,835) (86,619) (386,998) Other, Net 13,046 12,802 13,474 63,716 ------------ ------------ ------------ ------------ (26,498) (125,033) (73,145) (323,282) LOSS BEFORE UNUSUAL ITEMS (415,051) (642,443) (1,164,393) (2,685,720) ------------ ------------ ------------ ------------ UNUSUAL ITEMS -- -- -- (424,932) ------------ ------------ ------------ ------------ NET LOSS (415,051) (642,443) (1,164,393) (3,110,652) ============ ============ ============ ============ ACCUMULATED DEFICIT, BEGINNING OF PERIOD (20,395,175) (18,085,077) (19,645,833) (15,616,868) ACCUMULATED DEFICIT, END OF PERIOD (20,810,226) (18,727,520) (20,810,226) (18,727,520) ============ ============ ============ ============ NET LOSS PER COMMON SHARE (0.01) (0.04) (0.04) (0.19) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 31,565,130 17,298,441 27,684,908 16,476,108 ============ ============ ============ ============ 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 Expressed in Canadian Dollars (unaudited) Nine Months Ended November 30, ------------------ 1997 1996 ----------- ----------- Cash flow from operating activities: Net Loss $(1,164,393) $(3,110,652) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 96,618 146,450 Unusual items -- 424,932 Change in accounts receivable 296,926 104,455 Change in inventory (294,331) (311,640) Change in accounts payable 42,675 314,478 ----------- ----------- Net cash used in operating activities (1,022,505) (2,431,977) Cash flows from investing activities: Purchase of capital assets, net (8,970) (37,603) Purchase of other assets (10,189) (10,826) ----------- ----------- Net cash (used in) provided by investing activities (19,159) (48,429) Cash flows from financing activities: Issue of share capital, net of costs 1,732,500 1,765,230 Proceeds from notes payable 1,151,463 263,030 Payment of notes payable (335,000) -- Repayment of long-term debt (120,450) (98,415) ----------- ----------- Net cash provided by financing activities 2,428,513 1,929,845 ----------- Increase (decrease) in cash 1,386,849 (550,561) Cash and cash equivalents, beginning of year 124,978 751,710 ----------- ----------- Cash and cash equivalents, end of period $ 1,511,827 $ 201,149 =========== =========== Supplementary disclosure of cash flow information: Interest paid $ 91,843 $ 28,780 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 Expressed in Canadian Dollars (unaudited) 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 are, in the opinion of management, 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-Q pursuant to such rules and regulations. The results of operations for the nine months ended November 30, 1997 are not necessarily indicative of the results to be expected for the full year. Note 2 - Reclassifications Certain of the 1996 amounts have been reclassified to conform to the 1997 presentation. Note 3 - Other Assets Included in Other Assets are patents which 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. 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. Note 4 - Notes Payable On November 4, 1997, the Company closed a private placement of a $1,039,500 convertible loan with 7,000,000 detachable warrants. The loan matures on October 16, 1998 and can be converted into common shares of the Company at $0.15 per share at any time prior to maturity, at the option of the payee. The loan accrues interest at the rate of 10% per annum, and is secured by a senior lien, on certain assets of Flotek and its subsidiaries. Each detachable warrant entitles the holder to purchase one common share at $0.15. 5 6 Item 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MD&A 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-Q 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. All references to amounts are expressed in Canadian dollars unless otherwise indicated. Business Environment Flotek Industries Inc. consists of two divisions that 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. These expenditures are influenced strongly by oil company expectations about 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. While the Company anticipates continued growth in the worldwide demand for hydrocarbons will result in increased spending by oil and gas companies for the development of the hydrocarbon supply; crude oil and natural gas prices have continued to fluctuate over the last several years. This price volatility creates some market uncertainties despite the overall improvement in oil and gas fundamentals. 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 6 7 worldwide exploration and production expenditures. The Company, however, has seen this historical operating environment change slightly over the past few years. While these indicators are still very important, the Company believes a number of new trends are emerging which could positively affect the market for the Company's products. One of those trends is the expanded use of technology aimed at reducing the finding costs of oil and gas and the use of technology to extract that oil and gas from the well. Because of these and other industry trends, even with a limited decrease in both rig count and the price of oil and gas, the Company anticipates an increase in the acceptance of and use of its technologies. The Company's ability to benefit from the increased acceptance of its technologies will depend upon the industry risk factors stated above as well as its ability to maintain adequate working capital. RESULTS OF OPERATIONS Revenue by Operating Division: Three Months Nine Months Ended November 30, Ended November 30, ------------------ ------------------ 1997 1996 1997 1996 ------------ ------------ ------------ ------------ REVENUES Centralizer $ 1,015,730 $ 898,332 $ 3,019,270 $ 2,513,144 Artificial Lift 169,998 310,747 538,149 734,195 ------------ ------------ ------------ ------------ Consolidated Revenues 1,185,728 1,209,079 3,557,419 3,247,339 ============ ============ ============ ============ Consolidated revenues were down 2% and up 10% for the three months and nine months ended November 1997, respectively, as compared to the same periods in 1996. Revenues from the Centralizer division were up 13% for the quarter and 20% for the nine months as compared to the same periods in 1996. The deployment of new technology aimed at reducing the cost to drill and complete a well, coupled with increased drilling activity around the world contributed to this revenue gain. Revenues from the Artificial Lift division were down 45% for the quarter and 27% for the nine months as compared to the same periods in 1996. The Company's lack of sufficient working capital for inventory requirements and a reduction in the salesforce in this division contributed to this decrease. Operating Loss The Company's consolidated operating loss was down 25% and 54% for the three months and nine months ended November 1997, respectively, as compared to the same periods in 1996. The reduction in overall selling, general and administrative expenses contributed to this reduction. Costs and Expenses Gross margins were 45% for the quarter and the nine months ended November 30, 1997. 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 17% and 25% for the three months and nine months ended November 1997, respectively, as compared to the same periods in 1996. The consolidation of the Company's operating units contributed to this reduction. 7 8 General corporate expenses were up 13% and down 31% for the three months and nine months ended November 1997, respectively, as compared to the same periods in 1996. The increase in the quarter was the result of a one time charge of approximately $66,000 to write-down a note receivable that management deemed as uncollectable. The decrease for the nine-months was attributed to the Company ongoing reduction of corporate overhead expenses. The administrative expense reduction efforts have been on-going and are designed to reduce redundant costs and to improve the Company's ability to deliver higher levels of operational efficiency. Interest Expenses Interest expenses for the three and nine months ended November 30, 1997 decreased compared to the same periods in 1996 due to the conversion of a $4,574,000 loan to equity and an overall reduction in the Company's debt levels. 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. Operating Activities Net cash outflows from operating activities for the first nine months of 1997 were $1,022,505 compared to cash outflows of $2,431,977 in the first nine months of 1996. The decrease of $1,409,472 in 1997 was due to a decrease in net loss adjusted for noncash items. Investing Activities Net cash outflows from investing activities were $19,159 in the first nine months of 1997 compared to cash outflows of $48,429 in the first nine months of 1996. Financing Activities Net cash inflows from financing activities were $2,428,513 in the first nine months of 1997 compared to cash inflows of $1,929,845 in the first nine months of 1996. The overall increase was due to the Company closing the following transactions during the quarter: On November 4, 1997, the Company closed a private placement of a $1,039,500 convertible loan with 7,000,000 detachable share purchase warrants. In addition, the Company closed a private placement of 11,666,667 units (one common share with a warrant attached) at $0.15 per unit. Each warrant will entitle the holder to purchase one common share at $0.15 for the first year and at $0.17 during the second year. Total proceeds from the private placement were $1,732,500. At November 30, 1997, the Company had working capital of $2,592,784 and cash of $1,511,827. 8 9 Part II - Other Information Item 2 - Changes in Securities On September 16, 1997 the Company issued common shares in connection with a short-term loan. The following number of common shares were issued: Number of Shares Name Dated Issued Issued ---- ------------ ------ Stanberry September 16, 1997 10,000 James Mott-Smith September 16, 1997 2,500 On November 4, 1997, the Company closed a private placement of 11,666,667 units (one common share with a warrant attached) at $0.15 per unit. Each warrant entitles the holder to purchase one common share at $0.15 for the first year and at $0.17 during the second year. Of the 11,666,667 units privately placed, Charles Dickinson was issued 2,333,333 units (one common share with a warrant attached) for consideration of $350,000. An investment group, Marlin Investors LLC, was issued the additional 9,333,334 units. (one common share with a warrant attached) for consideration of $1,400,000. In connection with this private placement, three individuals were issued shares as a finders fee for consummating the transaction. The individuals and the number of shares issued to each of them are as follows: Number of Shares Name Dated Issued Issued ---- ------------ ------ Tom Panos November 4, 1997 345,833 Adam Weiss November 4, 1997 233,333 James Mott-Smith November 4, 1997 112,500 On November 4, 1997, the Company closed a second private placement of a $1,039,500 convertible loan with 7,000,000 detachable warrants. The loan matures on October 16, 1998, and can be converted into common shares of the Company at $0.15 per share at any time prior to maturity, at the option of the payee. The loan accrues interest at the rate of 10% per annum, and is secured by a senior lien on certain assets of Flotek and its subsidiaries. Each detachable warrant entitles the holder to purchase one common share at $0.15. In connection with the above transaction, 350,000 common shares were issued to David Hunt on November 4, 1997 as a finders fee. Each of the above issuances of securities was exempt from registration under the Securities Act of 1933, pursuant to section 4 (2) thereof, as a transaction by the issuer not involving any public offering. 9 10 On November 21, 1997, the Company converted a portion of its trade and short-term debt into common shares of the Company. The Company issued 4,715,165 common shares to retire $722,589 in trade and short-term debt. Included in the common shares issued was 1,531,419 shares issued to a director, Wallace Robertson, to retire trade debt of $245,027, and 2,405,832 common shares to Camuri Holdings LTD, a security holder known to own more than five percent of the Company's outstanding common shares, to retire short-term debt and accrued interest of $360,875. Item 5 - Other Information The Company filed a registration statement on Form 20-F under Section 12 of the Securities and Exchange Act of 1934, as amended ("Exchange Act") on June 19, 1996. In doing so, the Company registered its common shares without par value as of September 15, 1995 and associated common share purchase rights. At the time of this original registration, the Company qualified as a "foreign private issuer." Under the general instructions to Form 20-F, foreign private issuers may use Form 20-F as an annual report filed under Section 13(a) or 15(d) of the Exchange Act. In addition, as a foreign private issuer, the Company was required to file current reports on Form 6-K pursuant to Rule 13a-16 of the Exchange Act. As a foreign private issuer, there was no requirement to file quarterly Form 10-Q's. On November 4, 1997, the Company closed a private placement, as described above. With the consummation of the above transaction, the Company ceased to qualify as a foreign private issuer, as more than 50% of its outstanding shares were held of record by residents of 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 Exchange Act. 10 11 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation 3.2 By-laws 4.1 Shareholders Protection Rights Plan 10.1 Distributorship Agreement--Downhole Products (UK), LTD 10.2 Wallace Robertson Inc. Consulting Agreement 10.3 Bill Jayroe Employment Agreement 10.4 Convertible Loan Agreement between the Company and TOSI, L.P. dated October 16,1997 10.5 Form of Warrant Agreement dated October 16, 1997--Marlin Investors, L.L.C. 10.6 Form of Warrant Agreement dated October 16, 1997--Charles A. Dickinson 10.7 License Agreement--Harlan King 10.8 Form of Subscription Agreement by and between the Company and certain shareholders, dated September 16, 1997--Marlin Investors, L.L.C. 10.9 Form of Subscription Agreement by and between the Company and Certain shareholders, dated September 16, 1997--Charles A. Dickinson 21.1 List of Operating Subsidiaries 27 Financial Data Schedule (b) Reports on Form 8-K - None 11 12 Signatures Pursuant to the requirement 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 14, 1997 By: /s/ William Jayroe President and Chief Executive Officer Date: January 14, 1997 By: /s/ Scott Cook Chief Financial Officer 12 13 Exhibit Index 3.1 Articles of Incorporation 3.2 By-laws 4.1 Shareholders Protection Rights Plan 10.1 Distributorship Agreement--Downhole Products (UK), LTD 10.2 Wallace Robertson Inc. Consulting Agreement 10.3 Bill Jayroe Employment Agreement 10.4 Convertible Loan Agreement between the Company and TOSI, L.P. dated October 16,1997 10.5 Form of Warrant Agreement dated October 16, 1997--Marlin Investors, L.L.C. 10.6 Form of Warrant Agreement dated October 16, 1997--Charles A. Dickinson 10.7 License Agreement--Harlan King 10.8 Form of Subscription Agreement by and between the Company and certain shareholders, dated September 16, 1997--Marlin Investors, L.L.C. 10.9 Form of Subscription Agreement by and between the Company and Certain shareholders, dated September 16, 1997--Charles A. Dickinson 21.1 List of Operating Subsidiaries 27 Financial Data Schedule