UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB/A-1
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2002
[_] 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)
Delaware 90-0023731
(State or other jurisdiction
of incorporation) (I.R.S. Employer Identification Number)
7030 Empire Central Drive, Houston TX 77040
Address of Principal Executive Offices) (Zip Code)
Registrant's 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 [_]
The number of shares of the Registrant's common stock outstanding on August 14,
2002 was 4,910,812.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [x]
EXPLANATORY NOTE
FLOTEK INDUSTRIES, INC.
The purpose of this amendment No. 1 to the Flotek Industries, Inc.
Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2002 is
solely to reflect a cumulative effect of an accounting change, as a result of
the adoption of the Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", effective January 1, 2002. This new
accounting pronouncement allows companies until December 31, 2002 to quantify
the impairment charge, if any, but requires companies to record this charge
effective January 1, 2002, resulting in this amended Form 10-QSB.
2
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
1. General
2. Acquisitions
3. Stock Settlement
4. Accounts Receivable
5. Inventories and Work in Progress
6. Property and Equipment
7. Goodwill and Other Intangible Assets
8. Capital Lease Obligation
9. Notes Payable
10. Long-Term Debt
11. Net Loss Per Common Share
12. Segment Information
13. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
3
PART 1
Item 1 - Financial Information
FLOTEK INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
----------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 9,575 $ 240,438
Accounts receivable, less reserve of $6,029 and $208,333,
as of June 30, 2002 and December 31, 2001,
respectively...................................................... 3,589,565 2,189,566
Inventories and work in progress.................................. 2,712,591 3,704,153
Other current assets.............................................. 194,785 24,735
------------ ------------
Total current assets......................................... 6,506,516 6,158,892
------------ ------------
Property and equipment, net........................................... 4,566,666 3,671,939
Goodwill, net......................................................... 12,866,345 13,111,840
Patents and other intangibles, net.................................... 279,444 191,333
Other assets.......................................................... 43,064 87,253
------------ ------------
Total assets................................................. $ 24,262,035 $ 23,221,257
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 2,767,210 $ 2,225,219
Accrued liabilities............................................... 222,812 722,910
Amounts due to related parties.................................... 120,839 132,855
Notes payable..................................................... 2,973,670 1,282,966
Current portion of long-term debt................................. 1,172,521 876,737
Capital lease obligations, current portion........................ 32,290 633,894
------------ ------------
Total current liabilities.................................... 7,289,342 5,874,581
------------ ------------
Long-term debt....................................................... 3,325,982 3,339,970
Capital lease obligations, long-term................................. 1,350,661 -
Stockholders' equity:
Preferred stock, $.0001 par value, 100,000 shares authorized, no
shares issued................................................ - -
Common stock, $.0001 par value, 20,000,000 shares authorized,
4,910,812 and 4,850,696 shares issued
and outstanding as of June 30, 2002 and
December 31, 2001, respectively.............................. 491 485
Additional paid-in capital....................................... 15,762,346 15,572,886
Accumulated deficit.............................................. (3,466,787) (1,566,665)
------------ ------------
Total stockholders' equity................................... 12,296,050 14,006,706
------------ ------------
Total liabilities and stockholders' equity................... $ 24,262,035 $ 23,221,257
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ -------------------------------------
2002 2001 2002 2001
---------------- ----------------- ------------------ -----------------
Revenues.................................. $ 3,380,294 $ 2,516,757 $ 7,039,877 $ 5,206,438
Cost of revenues.......................... 2,371,961 1,701,313 4,470,774 3,258,498
------------- ------------- ------------ ------------
Gross margin.............................. 1,008,333 815,444 2,569,103 1,947,940
------------- -------------- ------------ ------------
Expenses:
Selling, general and administrative.... 1,752,941 965,514 3,336,671 2,219,254
Depreciation and amortization.......... 170,309 158,897 318,854 294,326
Research and development............... 81,108 4,308 85,650 5,364
------------- ------------- ------------ ------------
Total expenses....................... 2,004,358 1,128,719 3,741,175 2,518,944
------------- ------------- ------------ ------------
Loss from operations...................... (996,025) (313,275) (1,172,072) (571,004)
Other income (expense):
Interest expense....................... (183,987) (131,181) (276,415) (224,240)
Interest income........................ - 12,892 - 37,751
Other, net............................. (611) - 1,110 44,100
------------- ------------- ------------ ------------
Total other income (expense)........ (184,598) (118,289) (275,305) (142,389)
------------- ------------- ------------ ------------
Loss before cumulative effect of change in
accounting principle................... (1,180,623) (431,564) (1,447,377) (713,393)
Cumulative effect of change in
accounting principle................... - - (452,745) -
------------- ------------- ------------ ------------
Net loss.................................. $ (1,180,623) $ (431,564) $ (1,900,122) $ (713,393)
============= ============= ============ ============
Basic and diluted loss per common share
before cumulative effect of change in
accounting principle................... $ (.240) $ (.147) $ (.295) $ (.262)
Cumulative effect of change in
accounting principle................. - - (.093) -
------------- ------------- ------------ -----------
Basic and diluted net loss per
common share............................. $ (.240) $ (.147) $ (.388) $ (.262)
============= ============= ============ ============
Weighted average number of
shares outstanding....................... 4,910,812 2,942,247 4,901,608 2,723,010
============= ============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Common Stock Additional
------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance at December 31, 2001................. 4,850,696 $ 485 $ 15,572,886 $ (1,566,665) $ 14,006,706
Common stock issued in acquisitions.......... 60,116 6 189,460 - 189,466
Net loss..................................... - - - (1,900,122) (1,900,122)
--------- ------- ------------ ------------- ------------
Balance at June 30, 2002..................... 4,910,812 $ 491 $ 15,762,346 $ (3,466,787) $ 12,296,050
========= ======= ============ ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------------------------------
2002 2001
----------------- ----------------
Cash flows from operating activities:
Net loss..................................................... $ (1,900,122) $ (713,393)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 318,854 297,897
Change in accounting principle.......................... 452,745 -
Imputed interest expense................................ - 10,998
Gain on sale of assets.................................. - (38,963)
(Increase) decrease in:
Accounts receivable................................... (1,399,999) (525,279)
Inventories and work in progress...................... 991,562 1,238,492
Other current assets.................................. (170,050) (109,183)
Accounts payable and accrued liabilities.............. 41,893 650,947
------------- -------------
Net cash provided by (used in) operating
activities......................................... (1,665,117) 811,516
------------- -------------
Cash flows from investing activities:
Acquisition of subsidiaries, net............................ (122,250) (7,075,124)
Capital expenditures........................................ (1,197,228) (668,036)
Proceeds from sales of assets............................... - 243,536
Deposits and other.......................................... 44,189 (63,277)
------------- -------------
Net cash used in investing activities................ (1,275,289) (7,562,901)
------------- -------------
Cash flows from financing activities:
Issuance of stock for cash.................................. - 4,262,000
Proceeds from borrowings.................................... 2,580,117 2,314,277
Proceeds from sale/leaseback transaction.................... 761,000 -
Repayments of indebtedness.................................. (607,615) (353,271)
Proceeds from (payments to) related parties................. (12,016) (300,765)
Principal payments on capital leases........................ (11,943) (12,000)
------------- -------------
Net cash provided by financing activities............ 2,709,543 5,910,241
------------- -------------
Net increase (decrease) in cash and cash equivalents............. (230,863) (841,144)
Cash and cash equivalents - beginning of period.................. 240,438 1,293,142
-------------- -------------
Cash and cash equivalents - end of period........................ $ 9,575 $ 451,998
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
7
FLOTEK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Six Months Ended
June 30,
----------------------------------------
2002 2001
------------------ ------------------
Supplemental schedule of noncash investing and financing activities:
Land and building acquired under capital lease................ $ - $ 630,794
=========== ===========
Supplemental disclosures of cash flow information:
Acquisition of subsidiaries:
Assets (liabilities) acquired:
Cash....................................................... $ - $ 224,584
Accounts receivable........................................ - 1,104,156
Inventories and work in progress........................... - 1,278,812
Other current assets....................................... - 9,080
Property and equipment..................................... - 1,418,879
Marketable securities...................................... - 204,573
Patents and other intangibles.............................. 104,466 -
Goodwill................................................... 207,250 7,596,345
Other assets............................................... - 133,878
Debt....................................................... - (495,829)
Accounts payable and accrued liabilities................... - (974,770)
----------- -----------
311,716 10,499,708
Common stock issued.......................................... (189,466) (1,800,000)
Promissory notes issued...................................... - (1,400,000)
----------- -----------
Net cash paid to sellers and transaction costs............. $ 122,250 $ 7,299,708
=========== ===========
Cash paid for interest......................................... $ 254,721 $ 224,240
=========== ===========
8
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - General
The consolidated condensed financial statements included herein are unaudited
and have been prepared by Flotek Industries, Inc. (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission. 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 reflect all
adjustments which the Company considers necessary for the fair presentation of
such financial statements for the interim periods presented and the Company
believes that the disclosures included herein are adequate to make the interim
information presented not misleading. 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 December 31, 2001. The results of operations for interim periods are not
necessarily indicative of the results expected for the full year.
Note 2 - Acquisitions
In January 2002, the Company issued 26,116 shares of common stock valued at
$82,309 to the former shareholders of Material Translogistics, Inc. ("MTI").
Under the original acquisition agreement, which had an effective date of June
29, 2001, the shareholders of MTI could receive up to 52,232 additional shares
of common stock, contingent upon the execution of two future contracts. One of
these contracts became effective in January 2002 and the shares issued above
relate to that contract. The other contract had not been executed as of June 30,
2002.
On February 19, 2002, the Company acquired 100% of the common stock of IBS 2000,
Inc. ("IBS"), a Denver-based company engaged in the development and
manufacturing of environmentally neutral chemicals for the oil industry. IBS is
in the development stage and has had limited operating history. The Company paid
$100,000 in cash and issued 34,000 shares of common stock valued at $107,157 to
acquire IBS. Including legal and other transaction costs, the acquisition
resulted in the recording of approximately $197,000 of goodwill and other
intangibles.
Note 3 - Stock Settlement
In early 2002, the Company became aware of an accounting issue regarding the
application of the percentage of completion accounting method in one of the
subsidiaries of CESI prior to the Merger, during the time CESI was a private
company. Further review resulted in adjustments to the financial statements to
reflect a proper application of the percentage of completion accounting method.
These adjusted financial statements differed materially from the ones provided
to the Company by CESI prior to the Merger. After discussions with
representatives of CESI, certain former shareholders of CESI agreed to surrender
180,000 of the common shares which were received by them pursuant to the Merger.
On July 19, 2002, these shares were redistributed for the benefit of the
shareholders of Flotek Industries, Inc. other than former CESI shareholders.
This was accomplished by declaring a stock dividend to all shareholders and
securing the agreement of all former CESI shareholders to waive their beneficial
interest in the stock dividend. The stock dividend was also waived by all other
shareholders who received shares subsequent to the Merger. The net effect of
these transactions was to distribute 180,000 shares to the shareholders of
Flotek Industries, Inc. Accordingly, with the cancellation of the 180,000 shares
surrendered by certain CESI shareholders, there was no net change in the
outstanding shares of the Company as a result of this settlement.
9
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Accounts Receivable
At June 30, 2002, the Company had approximately $2,032,000 of accounts
receivable from a customer in Venezuela, of which $1,403,000 arose from goods
shipped in the first half of 2002 and $629,000 was recorded prior to December
31, 2001. As a result of political instability and work disruptions in the
country, these amounts have not been paid within the customary payment terms for
this customer and no payments had been received through March 2002. The ultimate
customer for these goods is PDVSA, the national oil company of Venezuela. Our
customer holds a contract to deliver over $5 million of our proprietary products
to PDVSA during the next three years. However, PDVSA has delayed acceptance of
the majority of the goods shipped until its field operations return to higher
activity levels. Our customer is unable to pay for the goods until payment has
been received from PDVSA. In the second quarter of 2002 we were informed by
PDVSA that field operations would return to higher levels of activity and that
acceptance of goods shipped would begin. We received a $200,000 payment in the
second quarter, $150,000 in July and product receipts by PDVSA are continuing
into the third quarter. We expect to collect the entire June 30, 2002
outstanding balance and have not provided a reserve for doubtful accounts
associated with this balance.
Note 5 - Inventories and Work in Progress
Inventories consist of raw materials, finished goods and parts and materials
used in manufacturing and construction operations. Finished goods inventories
include raw materials, direct labor and production overhead. Inventories are
carried at the lower of cost or market using the average cost method. The
Company maintains a reserve for impaired or obsolete inventory, which is
reviewed for adequacy on a periodic basis. Work in progress consists of
percentage of completion revenues recognized in excess of customer billings plus
any provision for estimated losses on contracts. The components of inventories
and work in progress at June 30, 2002 and December 31, 2001 were as follows:
June 30, December 31,
2002 2001
------------------ ------------------
Raw materials...................................... $ 347,931 $ 496,332
Finished goods..................................... 1,725,207 1,856,011
Manufacturing parts and materials.................. 506,160 708,036
Work in progress................................... 421,783 1,000,799
Inventory valuation reserve........................ (288,490) (357,025)
----------- -----------
Inventories and work in progress, net......... $ 2,712,591 $ 3,704,153
=========== ===========
10
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Property and Equipment
At June 30, 2002 and December 31, 2001, property and equipment were comprised of
the following:
June 30, December 31, 2001
2002
------------------ ------------------
Land............................................... $ 138,700 $ 145,000
Buildings and leasehold improvements............... 2,224,430 2,115,078
Machinery and equipment............................ 1,150,411 1,195,632
Construction in progress........................... 928,626 -
Furniture and fixtures............................. 67,935 67,936
Transportation..................................... 620,407 456,690
Computer equipment................................. 90,451 76,497
----------- -----------
Total property and equipment................... 5,220,961 4,056,833
Less accumulated depreciation..................... 654,295 384,894
----------- -----------
Net property and equipment.................... $ 4,566,666 $ 3,671,939
=========== ===========
Note 7 - Goodwill and Other Intangible Assets
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") effective January 1,
2002. This statement addresses accounting and reporting for acquired goodwill
and intangible assets. In the third quarter, we completed our initial assessment
of goodwill impairment as required under SFAS No. 142. In accordance with the
transitional provisions of SFAS No. 142, the Company determined, with the
assistance of an independent appraiser, that the carrying value of goodwill and
related assets of the Equipment Specialties reporting unit exceeded its fair
value. There was approximately $1.3 million of goodwill attributable to the
Equipment Manufacturing segment, which consists of two reporting units,
Equipment Specialties and MTI. As a result, the Company recognized a charge to
income of $452,745 ($.093 loss per share) for the Equipment Specialties
reporting unit, which represents all of this unit's goodwill. Our test concluded
there was no impairment for MTI. The goodwill impairment is reflected as the
cumulative effect of change in accounting principle during the first quarter of
2002. As of the end of each period presented, all of the Company's other
intangible assets had definitive lives and were being amortized accordingly.
Following is a reconciliation of goodwill:
Beginning balance, December 31, 2001........... $13,111,840
Acquisitions................................... 207,250
Goodwill impairment, January 1, 2002
associated with the Equipment Specialties
reporting unit............................... (452,745)
----------
Ending balance, June 30, 2002.................. $12,866,345
===========
11
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Goodwill and Other Intangible Assets (Continued)
Following is a reconciliation of the reported net income (loss) to the
adjusted net income (loss) reflecting the impact of the adoption of SFAS No. 142
on all periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
2002 2001 2002 2001
---------------- ----------------- ---------------- -----------------
Reported net Income (Loss):
Reported net income (loss)............. $ (1,180,623) $ (431,564) $ (1,900,122) $ (713,393)
Add back: Cumulative effect of
accounting change for
impairment of goodwill....... - - 452,745 -
Goodwill amortization........ - 87,000 - 170,181
------------ ----------- ------------ ------------
Adjusted net income (loss)............. $ (1,180,623) $ (344,564) $ (1,447,377) $ (543,212)
============ ============ ============ ============
Basic and Diluted earnings per share:
Reported net income (loss)............. $ (.240) $ (.147) $ (.388) $ (.262)
Add back: Cumulative effect of
accounting change for
impairment of goodwill....... - - .093 -
Goodwill amortization........ - .030 - .062
------------ ----------- ------------ ------------
Adjusted net income (loss)............. $ (.240) $ (.117) $ (.295) $ (.200)
============ =========== ============ ============
Since the impairment review was not performed until the third quarter of
2002, SFAS No. 142 requires that the result be recorded in the Company's first
reporting period which is the quarter ended March 31, 2002. Thus, the first
quarter's results were restated to reflect the impact of the impairment charge.
The following table reports the effects of recording the goodwill impairment on
previously reported net income (loss) for the three months ended March 31, 2002.
12
Note 7 - Goodwill and Other Intangible Assets (Continued)
Restated operating results for effect of cumulative change in accounting
principle:
Three Months Ended
March 31, 2002
---------------------
Reported loss before cumulative effect
of change in accounting principle.................... $ (266,754)
Goodwill impairment.................................... (452,745)
----------
Net loss............................................... $ (719,499)
==========
Reported basic and diluted loss per common share
before cumulative effect of change in accounting
principle............................................. $ (.055)
Cumulative effect of change in accounting principle.... (.092)
----------
Restated basic and diluted net loss per common share... $ (.147)
==========
The Company evaluates the recoverability of its intangible assets subject
to amortization in accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"). SFAS No. 144 requires long-lived assets to be reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. An impairment is recognized in the event that the net
book value of an asset exceeds the sum of the future undiscounted cash flows
attributable to such asset or the business to which such asset relates and the
net book value exceeds fair value. The impairment amount is measured as the
amount by which the carrying amount of a long-lived asset (asset group) exceeds
its fair value. As of June 30, 2002, the Company did not recognize any
impairment associated with its long-lived assets.
13
Note 7 - Goodwill and Other Intangible Assets (Continued)
Other intangible assets are comprised of the following:
June 30, 2002 December 31, 2001
------------------------------------ -------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------------- ----------------- ---------------- ------------------
Patents................................... $266,148 $80,722 $266,148 $74,815
Other Intangibles......................... 104,464 10,446 - -
-------- ------- -------- -------
Total................................... $370,612 $91,168 $266,148 $74,815
======== ======= ======== =======
Aggregate Expense for the Three Aggregate Expense for the Six
Months Ended Months Ended
------------------------------------ -------------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
---------------- ----------------- ----------------- -----------------
Patents................................... $ 5,767 $ - $ 5,908 $ 118
Other Intangibles......................... 10,446 - 10,446 -
-------- ------- -------- -------
Total................................... $ 16,213 $ - $ 16,354 $ 118
======== ======= ======== =======
Estimated Amortization Expense:
For the year ended December 31, 2003 $ 68,400
For the year ended December 31, 2004 $ 57,954
For the year ended December 31, 2005 $ 26,616
For the year ended December 31, 2006 $ 26,616
For the year ended December 31, 2007 $ 26,616
Note 8 - Capital Lease Obligation
On February 28, 2002, the Company sold its rights and obligation to purchase the
land and buildings covered by a capital lease obligation, together with capital
improvements to the property totaling approximately $750,000, to Oklahoma
Facilities, LLC ("Facilities"). An officer of the Company has a minority
investment interest in and is an officer of Facilities. The total consideration
at closing was $1,400,000, with net cash proceeds to the Company of $761,000.
The transaction did not generate any gain or loss. The Company simultaneously
entered into a lease agreement with Facilities under which it is obligated to
pay average rent of $18,000 per month for a fixed term of ten years. The Company
has the right to buy the property at any time during the first two years of the
lease for a fixed price of $1,400,000. The Company also has the option to
purchase the building for a fixed price of $420,000 at the end of the ten-year
lease term.
14
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Notes Payable
Notes payable at June 30, 2002 and December 31, 2001 consisted of the following:
June 30, December 31,
2002 2001
---- ----
Revolving line of credit, secured by accounts receivable and inventory,
bearing interest at the prime rate plus 1.25%, due in May 2003, with
maximum borrowings of $1,414,035 (1)................................... $ 1,414,035 $ 1,252,966
Revolving line of credit, secured by accounts receivable and inventory,
bearing interest at the prime rate plus 1.25%, due in January 2003,
with maximum borrowings of $1,608,100 (2).............................. 1,529,635 -
Other notes payable...................................................... 30,000 30,000
----------- -----------
Total notes payable.................................................... $ 2,973,670 $ 1,282,966
=========== ===========
(1) Limited to a borrowing base amount calculated as 60% of eligible accounts receivable and inventory.
(2) Limited to a borrowing base amount calculated as 50% of eligible accounts receivable and inventory.
Note 10 - Long-Term Debt
Long-term debt at June 30, 2002 and December 31, 2001, consisted of the
following:
June 30, December 31,
2002 2001
---- ----
Notes payable to shareholders of acquired businesses, unsecured, bearing
interest at 9% payable quarterly, due in five annual installments of
$200,000 each beginning January 2002.................................. $ 800,000 $ 1,000,000
Note payable to bank, bearing interest at the prime rate plus 1%, payable
in monthly installments of $39,812 including interest, due in January
2008 2,271,933 2,439,532
Note payable to bank, bearing interest at the prime rate plus 1%, payable
in monthly installments of $14,823 including interest, due in
September 2004........................................................ 387,680 464,538
Construction loan payable to bank, bearing interest at the prime rate plus
1%, payable in monthly installments of $25,923 including interest, due
in January 2005....................................................... 709,325 -
Mortgage note on property, bearing interest at 10%, payable in monthly
installments of $1,451 including interest, with final payment of
$111,228 due in December 2002......................................... 112,908 115,877
Notes payable to Duncan Area Economic Development Foundation, unsecured,
interest at 6%, payable in monthly installments of $1,934 including
interest, due in May 2006............................................. 79,102 87,620
Secured vehicle and other equipment loans.................................. 137,555 109,140
----------- -----------
Total................................................................. 4,498,503 4,216,707
Less current maturities............................................... 1,172,521 876,737
----------- -----------
Long-term debt.................................................... $ 3,325,982 $ 3,339,970
=========== ===========
15
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Long-Term Debt (Continued)
The revolving lines of credit and bank notes payable are owed to the Company's
primary lending bank and are secured by substantially all of the assets of the
Company. They have also been personally guaranteed by an officer of the Company.
Note 11 - Net Loss Per Common Share
Net loss per common share is calculated by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding.
Dilutive loss per share is calculated by dividing net loss attributable to
common stockholders by the weighted average number of common shares and dilutive
potential common shares outstanding. There were no potentially dilutive common
shares as of June 30, 2002 or December 31, 2001.
Note 12 - Segment Information
The Company has three reportable segments, as follows:
o The Specialty Chemicals segment develops, manufactures, packages and
sells chemicals used by other oilfield service companies in oil and gas
well stimulation, cementing and production.
o The Equipment Manufacturing segment designs, manufactures and rebuilds
specialized cementing and stimulation equipment, including heavy
vehicles used for pressure pumping, blending and bulk material
transport. This segment also designs, constructs and manages automated
bulk material handling and loading facilities for other oilfield
service companies.
o The Downhole Equipment segment manufactures and markets the Petrovalve
line of downhole pump components and the Turbeco line of casing
centralizers.
The Company's reportable segments are strategic business units that offer
different products and services. Each business segment requires different
technology and marketing strategies and is managed independently. The accounting
policies used in each of the segments are the same as those described in the
significant accounting policies. The Company evaluates the performance of its
operating segments based on operating income excluding goodwill amortization and
unusual charges. Intersegment sales and transfers are not material.
16
FLOTEK INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Segment Information (Continued)
The following table presents the revenues and operating income by business
segment and on a comparable basis:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- ---------------- ---------------- ----------------
Revenues:
Specialty Chemicals.................. $ 1,597,409 $ 1,828,400 $ 2,900,339 $ 3,818,510
Equipment Manufacturing.............. 1,096,315 688,357 2,206,483 1,387,928
Downhole Equipment................... 686,570 - 1,933,055 -
----------- ----------- ----------- -----------
Consolidated....................... $ 3,380,294 $ 2,516,757 $ 7,039,877 $ 5,206,438
=========== =========== =========== ===========
Income (loss) from operations:
Specialty Chemicals.................. $ 142,228 $ 274,897 $ 260,732 $ 711,722
Equipment Manufacturing.............. (673,863) (390,558) (870,846) (940,804)
Downhole Equipment................... (57,836) - 396,669 -
Corporate and Other.................. (406,554) (197,614) (958,627) (341,922)
----------- ----------- ----------- -----------
Consolidated....................... $ (996,025) $ (313,275) $ 1,172,072 $ (571,004)
=========== =========== =========== ===========
Note 13 - Subsequent Events (Unaudited)
On July 25, 2002, the Company borrowed $500,000 under a promissory note from
Oklahoma Facilities LLC ("Facilities"). An officer of the Company has a minority
investment interest in and is an officer of Facilities. The note is secured by
an account receivable from the Company's major customer in Venezuela. The note
bears interest at 4.25% over prime with payments of interest only for the first
three months and fixed payments of $8,045 per month thereafter. The note is due
upon the collection of the account receivable, but in any event must be paid in
full by August 1, 2003. Proceeds from the loan will be used to meet general
corporate purposes.
At June 30, 2002 the Company was not in compliance on its borrowing base
requirements for its revolving lines of credit as detailed in Footnote 9 to the
Consolidated Financial Statements due primarily to the over 90 day accounts
receivable that are excluded from the eligible asset base in the borrowing base
calculation. The majority, approximately $1,594,000 of the over 90 day accounts
receivable relates to amounts due from a customer in Venezuela as further
explained in Footnote 4 to the Consolidated Financial Statements. On August 8,
2002, the Lender for the revolving lines of credit, granted the Company a 90 day
waiver from excluding the over 90 day accounts receivable in the borrowing base
calculation. The wavier expires on October 1, 2002. With the wavier, the Company
is in compliance with its revolving line credit agreements.
17
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Overview
Flotek was established in 1985 and is currently traded on the OTC Bulletin Board
market. On October 31, 2001, the Company completed a Merger with Chemical &
Equipment Specialties, Inc. ("CESI"). The Merger has been accounted for as a
reverse acquisition using the purchase method of accounting. In the Merger, the
shareholders of the acquired company, CESI, received the majority of the voting
interests in the surviving consolidated company. Accordingly, CESI was deemed to
be the acquiring company for financial reporting purposes and the historical
financial statements of the Company are the historical financial statements of
CESI. All of the assets and liabilities of Flotek were recorded at fair value on
October 31, 2001, the date of the Merger, and the operations of Flotek have been
reflected in the operations of the combined company only for periods subsequent
to the date of the Merger.
CESI was incorporated on June 27, 2000 to acquire businesses in the specialty
chemical and equipment manufacturing segments of the oilfield service industry.
It had no revenues or operations prior to the acquisitions of Esses, Inc.,
Plainsman Technology, Inc., Neal's Technology, Inc., and Padko International,
Inc. in January 2001. It subsequently acquired Material Translogistics, Inc. in
June 2001. These five companies are referred to collectively as the "CESI
Acquired Businesses".
The Company's product lines are divided into three segments within the oilfield
service industry:
o The Specialty Chemicals segment develops, manufactures, packages and
sells chemicals used by other oilfield service companies in oil and gas
well stimulation, cementing and production.
o The Equipment Manufacturing segment designs, manufactures and rebuilds
specialized cementing and stimulation equipment, including heavy
vehicles used for pressure pumping, blending and bulk material
transport. This segment also designs, constructs and manages automated
bulk material handling and loading facilities for other oilfield
service companies.
o The Downhole Equipment segment manufactures and markets the Petrovalve
line of downhole pump components and the Turbeco line of casing
centralizers.
All of the Company's businesses serve the oil and gas industry and are affected
by changes in the worldwide demand for and price of oil and natural gas. The
majority of our products are dependent on the level of exploration and
development activity and the completion phase of oil and gas well drilling.
Other products and services, such as our Petrovalve downhole pump products and
certain of our specialty chemicals are more closely tied to the production of
oil and gas and are less dependent on drilling activity.
The oil and gas industry has been subject to significant volatility in recent
years due to changes in the demand, supply and pricing of oil and natural gas.
The U.S. rig count, as measured by Baker Hughes Incorporated, began 2001 at
around 1,100 active rigs and reached a peak of almost 1,300 in July 2001. During
the third quarter of 2001, the demand for oil and natural gas began to weaken in
response to slowing growth in worldwide economies. This resulted in a slowdown
in North American drilling rig activity, with a steady decline in the rig count
during the second half of 2001 until it had reached a level of just under 900
active rigs at December 31, 2001. During the quarter ended June 30, 2002, the
U.S. rig count decline stopped and has steadily increased from a low of 738 to
840 active rigs working at the end of the quarter. In addition, natural gas
prices
18
and crude oil prices have maintained their stability in the second
quarter compared to the first yielding approximately $3.40 per MCF and $27.00
per barrel, respectively at the end of the quarter. We anticipate that our
business will benefit from these stable oil and gas commodity prices.
Risk Factors
The Company faces various business risks specific to its industry, product
lines, financial resources and competitive position, as well as general economic
and financial risks. The following risk factors, among others, may cause the
Company's operating results and/or financial position to be adversely affected:
o The Company is dependent on the oil and gas industry, and activity
levels in the industry are volatile.
o Oil and gas prices are volatile and have a direct impact on the
spending levels of our customers.
o The oilfield service industry is highly competitive and we must compete
with many companies possessing greater financial resources and better
established market positions.
o The introduction of new products and technologies by competitors may
adversely affect the demand for our products and services.
o The Company's debt service obligations may limit our ability to fund
operations and capital spending or provide for future growth.
o The Company may not be able to successfully manage its growth.
o Changes in political conditions, governmental regulations, economic and
financial market conditions, unexpected litigation and other
uncertainties may have an adverse effect on our operations.
Results of Operations
Six months ended June 30, 2002 2001
----------------- ----------------
Revenues........................................... $ 7,039,877 $5,206,438
Cost of revenues................................... 4,470,774 3,258,498
---------- ----------
Gross margin.................................... 2,569,103 1,947,940
---------- ----------
Gross margin %.................................. 36.5% 37.4%
Selling, general and administrative................ 3,336,671 2,219,254
Depreciation and amortization...................... 318,854 294,326
Research and development........................... 85,650 5,364
---------- ----------
Total expenses.................................. 3,741,175 2,518,944
---------- ----------
Operating income (loss)......................... (1,172,072) (571,004)
---------- ----------
Operating income (loss) %....................... (16.6%) (11.0%)
Interest expense................................... (276,415) (224,240)
Interest income.................................... - 37,751
Other, net......................................... 1,110 44,100
---------- ----------
Other income (expense), net.................... (275,305) (142,389)
---------- ----------
Pre-tax income (loss).......................... $(1,447,377) $ (713,393)
========== ==========
19
Total revenues increased by $1,833,439 or 35.2%, in the first six months of 2002
compared to the comparable period in 2001. As discussed in the segment analysis
below, the Specialty Chemicals segment experienced a significant drop in
revenues in 2002 compared to 2001, while the Equipment Specialties and Downhole
Equipment segments had higher revenues in the first six months of 2002, although
these increases resulted primarily from business combinations whose operations
were not reflected in the first quarter of 2001.
On an aggregate basis, the gross margin as a percentage of revenues decreased
from 37.4% in 2001 to 36.5% in 2002. The gross margin is best analyzed on a
segment by segment basis, discussed below, as the margin varies significantly
between operating segments and can vary significantly from period to period in
certain of our operating segments.
Selling, general and administrative ("SG&A") costs represent the costs of
selling, operations and overhead expenses not directly attributable to products
sold or services rendered. The revenues from services are less than 10% of
consolidated revenues and the direct costs of providing these services are
included in cost of revenues. SG&A amounted to 47.4% of revenues in 2002, an
increase of 4.8% of revenues from the level of 42.6% in 2001. The costs of
administration increased as a result of the merger and the increased size and
complexity of the Company. Also, administration costs increased in the second
quarter of 2002 due to activities associated with the stock settlement as
explained in Note 3 to the Consolidated Financial Statements.
Interest expense increased approximately $52,000 in the first half of 2002
compared to same period in 2001. The average amount of outstanding debt under
the Company's credit agreements was higher in 2002 as a result of the financing
of capital expenditures and increased working capital needs during the year. In
addition, payments associated with the long-term capital lease mentioned in
footnote 8 to the Consolidated Financial Statements started in the second
quarter of 2002. The majority of the Company's indebtedness carries a variable
interest rate tied to the prime rate and is adjusted on a quarterly basis.
As more fully discussed in Note 7 to the Consolidated Financial Statements,
the Company completed in the third quarter of 2002, its initial assessment, with
the assistance of a third-party appraiser, of goodwill impairment as required
under SFAS No. 142. There was approximately $1.3 million of goodwill
attributable to the Equipment Manufacturing segment, of which we have identified
two reporting units, Equipment Specialties and MTI. Our test concluded that all
of the goodwill attributable to Equipment Specialties, totaling $452,745, was
impaired. Consequently, we have recognized this impairment loss as of the first
interim period, which was March 31, 2002. Out test concluded that no impairment
loss existed for the MTI reporting unit.
Results by Segment
Specialty Chemicals
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------- ------------ ------------
Revenues................................ $ 1,597,409 $ 1,828,400 $ 2,900,339 $ 3,818,510
Gross margin............................ $ 671,467 $ 689,672 $ 1,185,811 $ 1,698,832
Gross margin percentage............. 42.0% 37.7% 40.9% 44.5%
Operating income........................ $ 142,228 $ 274,897 $ 260,732 $ 711,722
Operating margin percentage......... 8.9% 15.0% 9.0% 18.6%
20
Specialty Chemical revenues decreased $918,000, or 24%, in the first six months
of 2002 compared to the same period in 2001. Sales in this segment are heavily
dependent on drilling activity and the decrease in revenue is primarily
attributable to sharply lower drilling activity in the first half of 2002
compared to 2001. Average product pricing levels in this segment declined as
lower demand caused our pricing to come under pressure.
The gross margin in this segment also declined from 44.5% for the first six
months of 2001 to 40.9% in the same comparable period for 2002. In certain
cases, in trying to maintain sales levels and market share, we sold our products
at a lower gross margin. The combination of lower revenues and lower gross
margins had a significant adverse effect on our operating margin and overall
levels of operating income.
Operating income fell $451,000, or 63%, in the first six months of 2002 compared
to the same period in 2001, primarily as a result of lower revenues and gross
margins. We took actions to reduce selling, general and administrative expenses
in this segment to keep these costs in line with the reduced revenue levels.
However, these costs could not be reduced at the same rate as revenue resulting
in a significant decrease in operating income margin percentage in this segment
from 18.6% in 2001 to 9.0% in 2002.
Operating results for the second quarter of 2002 compared to the same period in
2001 were lower for much of the same reasons as mentioned above regarding the
first six months of 2002. Gross margins improved between periods by 4.3% from
37.7% in 2001 to 42.0% in 2002 primarily due to changes in product mix.
Equipment Manufacturing
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- -----------------
Revenues................................ $ 1,096,315 $ 688,357 $ 2,206,483 $ 1,387,928
Gross margin............................ $ 11,749 $ 125,772 $ 294,743 $ 249,108
Gross margin percentage............. 1.1% 18.3% 13.4% 17.9%
Operating income........................ $ (673,863) $ (390,558) $ (870,846) $ (940,804)
Operating margin percentage......... (61.5%) (56.7%) (39.5%) (67.8%)
Equipment Manufacturing revenues increased $819,000, or 59.0%, in the first six
months of 2002 over 2001 levels. This increase primarily resulted from the
addition of Material Translogistics, Inc. ("MTI"), a company that was acquired
on June 29, 2001. Under purchase accounting, MTI's results of operations are
included only for periods subsequent to the acquisition; therefore it is not
reflected in the results for the 2001 period. During the first six months of
2002, MTI had revenues of $1,076,000 and positive operating income of $48,000.
We continued to experience poor results in our Equipment Specialties operations
(formerly Neal's Technology, Inc.), although we initiated substantial cost
reduction measures during the first quarter of 2002.
The gross margin percentage for the first six months decreased from 17.9% in
2001 to 13.4% in 2002, primarily as a result of poor results in the second
quarter of 2002. Our loss increased
21
significantly in the second quarter of 2002 as we experienced cost overruns
completing two large jobs and also incurred additional costs to repair units
which had been completed in 2001.
Subsequent to the Merger, the Company replaced the management of this segment
and focused significant efforts and financial resources on improving the
performance of this segment, including the implementation of improved operating
procedures, better accounting controls and proper documentation of work
processes. The Company also initiated cost reduction measures in response to
lower revenue levels and reduced sales expectations. While significant
improvements have been made, this segment continued to operate at a loss.
We faced a difficult market outlook for the equipment manufacturing operations
in this segment during the first half of the year. Requests for bids and orders
for new manufactured equipment slowed significantly. We have recently seen an
increase in bidding activity and have secured some new orders for the second
half of the year. Management is continuing to solicit new orders. While the
outlook for increased revenues has improved in recent months, the Company cannot
give assurance that it will not continue to experience losses in its equipment
manufacturing operations.
The outlook for MTI's operations within this segment, consisting of the design,
construction and management of bulk material handling and loading facilities, is
much more positive. Based on the current work in progress and outstanding bids
in response to requests for quotations, management believes that the revenues
and operating margin attributable to these operations will continue to increase
over the remainder of 2002. However, there can be no assurance that the
Equipment Manufacturing segment as a whole will be profitable. As more fully
discussed in Note 7 of the Notes to Consolidated Financial Statements, there is
approximately $1.3 million of net goodwill attributable to this segment, all or
some portion of which may be subject to an impairment charge based on new
accounting requirements which must be implemented by the end of 2002.
As more fully discussed in Note 7 to the Consolidated Financial Statements,
the Company completed in the third quarter of 2002, its initial assessment, with
the assistance of a third-party appraiser, of goodwill impairment as required
under SFAS No. 142. There was approximately $1.3 million of goodwill
attributable to the Equipment Manufacturing segment, of which we have identified
two reporting units, Equipment Specialties and MTI. Our test concluded that all
of the goodwill attributable to Equipment Specialties, totaling $452,745, was
impaired. Consequently, we have recognized this impairment loss as of the first
interim period, which was March 31, 2002. Out test concluded that no impairment
loss existed for the MTI reporting unit.
Downhole Equipment
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
2002 2001 2002 2001
-------------- --------------- ------------- --------------
Revenues................................ $ 686,570 $ - $ 1,933,055 $ -
Gross margin............................ $ 325,117 $ - $ 1,088,549 $ -
Gross margin percentage............. 47.4% - 56.3% -
Operating income........................ $ (57,836) $ - $ 396,669 $ -
Operating margin percentage......... (8.4%) - 20.5% -
The Downhole Equipment segment became part of the consolidated group after the
Merger became effective on October 31, 2001. These operations, which consist of
manufacturing and marketing the Petrovalve line of downhole pump components and
the Turbeco line of casing centralizers, were the original operations of Flotek
Industries, Inc. prior to the Merger. Since the
22
merger was recorded for accounting purposes as a reverse merger, the
results of operations of this segment were included in the consolidated results
of operations only for periods subsequent to the Merger and are not reflected in
the first half of 2001.
Our Petrovalve sales, totaling $1,429,000 in the first half of 2002, were almost
exclusively to one customer in Venezuela. As more fully discussed in Note 4 of
the Notes to Consolidated Financial Statements and the Capital Resources and
Liquidity section, below, this customer has not paid for these goods within the
customary payment terms. These sales carry a high gross margin and are
significantly profitable to this segment. Sales of the Turbeco line of casing
centralizers, which constitute the balance of the revenues in this segment, are
very dependent on the level of drilling activity and have suffered from lower
demand. We have recently seen signs of improvement in this line of business and
are positive about the outlook for the balance of the year.
Capital Resources and Liquidity
In the first six months of 2002, the Company sustained a net loss of $1,447,377
and had negative cash flow from operations of $1,665,000. These losses resulted
primarily from the poor operating results in the Equipment Manufacturing
segment, although the losses were reduced from the levels in 2001 for this
segment. As discussed above, management has taken and will continue to take
appropriate steps to improve performance and attempt to limit the losses in this
segment. The negative cash flow resulted primarily from the operating loss
mentioned above and from delays in collecting accounts receivable from sales to
a Venezuelan customer, as discussed below.
As of June 30, 2002, net working capital was negative approximately $783,000,
resulting in a current ratio of .89 to 1. Inventories have decreased
significantly, approximately $992,000, during the first six months of 2002
primarily due to completion of manufactured equipment projects.
As disclosed in Note 4 of the Notes to Consolidated Financial Statements, at
June 30, 2002, the Company had approximately $2,032,000 of accounts receivable
from a customer in Venezuela, of which $1,403,000 arose from goods shipped in
the first half of 2002 and $629,000 was recorded prior to December 31, 2001. As
a result of political instability and work disruptions in the country, these
amounts have not been paid within the customary payment terms for this customer.
The ultimate customer for these goods is PDVSA, the national oil company of
Venezuela. Our customer holds a contract to deliver over $5 million of our
proprietary products to PDVSA during the next three years. However, PDVSA has
delayed acceptance of the majority of the goods shipped until its field
operations return to higher activity levels. Our customer is unable to pay for
the goods until payment has been received from PDVSA. In the second quarter of
2002 we were informed by PDVSA that field operations would return to higher
levels of activity and that acceptance of goods shipped would begin. We received
a $200,000 payment in the second quarter, $150,000 in July and product receipts
by PDVSA are continuing into the third quarter. We fully expect to collect the
entire outstanding balance and have not provided a reserve for doubtful accounts
associated with this balance. The delay in collecting this accounts receivable
balance has had a significant adverse effect on the cash flow of the Company.
Additionally, all invoice amounts which are greater than 90 days old cannot be
included in the borrowing base under our lines of credit.
During the first quarter of 2002, the Company entered into a sale and leaseback
transaction regarding its Equipment Manufacturing facility in Duncan, Oklahoma.
This transaction resulted in net cash proceeds to the Company of $761,000. The
Company simultaneously entered into an agreement to lease back the facility over
ten years. This transaction has been recorded as a capital lease.
23
The Company has borrowed $2.58 million in the first six months of 2002 under its
line of credit arrangements, including a new $1.6 million line of credit which
was executed in January of 2002. In addition, our primary lending bank has
extended a $1.4 million line of credit until May 29, 2003. We also made total
debt service payments of approximately $608,000 during the first six months of
this year. The company has estimated minimum debt service obligations in 2002 of
$1.8 million. This amount includes the minimum principal and interest payments
on the new credit agreements mentioned above and in Note 13 of the Consolidated
Financial Statements and the capital lease obligation incurred during the first
quarter of 2002.
Capital expenditures in the first six months of 2002 were $1,197,000. The
majority of these capital expenditures relate to a bulk material transload
facility which the Company is constructing in Raceland, Louisiana and a paint
shop for Equipment Specialties in Duncan, Oklahoma. With the exception of the
capital expenditures required to complete the construction of the Raceland
transload facility, the Company does not at this time expect to have any major
requirements for capital expenditures in the remainder of 2002.
The Company believes its operations are capable of generating sufficient cash
flow to meet its debt service obligations. However, we face a challenging
near-term industry environment and there are many factors involved in executing
our business strategy which are beyond our control. In particular, it is
critical that we continue to successfully collect amounts due from our
Venezuelan customer. In the event we are unable to collect the remaining amounts
due in the near future or if we are unable to successfully limit our losses in
the Equipment Manufacturing segment, the Company may be forced to seek
additional equity or debt financing to meet working capital needs. There can be
no assurance that the Company would be able to secure such financing on terms
which would be acceptable to it. Accordingly, investors are advised that the
Company faces significant financial risks in the next year as we attempt to meet
these challenges.
Forward Looking Statements
Except for the historical information contained herein, the discussion in 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," "forecast," "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, actual results may differ materially
from those in the forward-looking statements for various 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, weather, the legislative environment in the
United States and other countries, adverse changes in the capital and equity
markets, and other risk factors identified herein.
24
Item 4 - Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer
(collectively, the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures for the Company. Such officers
have concluded (based upon their evaluation of these controls and procedures as
of a date within 90 days of the filing of this report) that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in this report is accumulated and
communicated to the Company's management, including its principal executive
officers as appropriate, to allow timely decisions regarding required
disclosure.
The Certifying Officers also have indicated that there were no significant
changes in the Company's internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
however, there are corrective actions required with respect to significant
deficiencies and material weaknesses in internal controls as follows:
Weakness Solution
-------------------------------------------------------------------------------
1. A contingency plan has not been developed Develop a backup plan by
for alternative processing of data in the March 31, 2003
event of loss or interruption of the IT
server(s)
2. Off premises storage is not maintained for Identify applications and
applications and related documentation related documentation that
need to be stored off-site
and move to off-site
storage by March 31, 2003
3. Annual property plant and equipment (PP&E) Complete annual physical
inventories have not been taken inventory of PP&E by
December 31, 2002
4. Physical controls of Equipment Specialties Move inventory to a secure
inventory need improvement site by December 31, 2002
25
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On May 1, 2002, Milam Tool Company and the Estate of Jack J. Milam filed a
complaint against Flotek Industries, Inc., Turbeco, Inc., and Jerry D. Dumas,
Sr., individually, in the United States District Court for the Southern District
of Texas, Houston Division. The complaint asserts that the sale of TURBO-LOK
turbulators, which are part of the Company's Downhole Equipment segment,
violates an agreement among the parties and infringes a United States patent
controlled by the plaintiffs. Plaintiffs seek injunctive relief and unspecified
damages. The Company has answered the complaint. At a Scheduling Conference on
July 3, the court deferred discovery on issues related to damage allegations and
entered a scheduling order governing the consideration of liability issues. The
court did not set a trial date, but did schedule a hearing on May 16, 2003 to
consider construction of the claims of the Milam patent. The Company strongly
denies the assertions in the complaint and intends to vigorously contest this
matter.
On May 14, 2002, the Company filed suit against Casetech International, Larry
Carroll, Wallace Robertson and Mark G. Verret ("Defendants") in the 270th
Judicial District Court of Harris County, Texas. The Petition asserts that the
Defendants converted the Company's trade secrets and confidential information,
usurped corporate opportunity away from the Company, defamed the Company and
breached certain fiduciary duties owed to the Company. On July 18, 2002, the
Court entered a Docket Order setting the case for trial for the two-week term of
Court beginning April 7, 2003. Very little discovery has taken place; however,
it is anticipated that depositions will begin within the next 60 days. The
Company intends to vigorously prosecute the claims and causes of action asserted
in this matter.
Item 2 - Changes in Securities and Use of Proceeds
In January 2002, the Company issued 26,116 shares of common stock to the former
shareholders of Material Translogistics, Inc., which were issued in accordance
with the terms of the original acquisition agreement. In February 2002, the
Company issued 34,000 shares of common stock in connection with the acquisition
of IBS 2000, Inc. Additional disclosure related to the issuance of these shares
is included in Note 2 of the Notes to Consolidated Financial Statements.
The foregoing issuances of common stock were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act of 1933 for
transactions not involving a public offering. No underwriters were engaged in
connection with the foregoing sales of securities. The sales were made without
general solicitation or advertising. Each purchaser was an "accredited investor"
or a sophisticated investor with access to all relevant information necessary to
evaluate the investment who represented to the Company that the sales were being
acquired for investment.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
26
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Promissory Note, Loan Agreement and Security Agreement dated January 7,
2002 by and between Legacy Bank and Flotek Industries, Inc. For document
description, see Flotek Industries, Inc. Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 2002, as filed on August 14, 2002.
10.2 Promissory Note, Loan Agreement and Security Agreement dated January 4,
2002 by and between Legacy Bank and Flotek Industries, Inc. For document
description, see Flotek Industries, Inc. Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 2002, as filed on August 14, 2002.
10.3 Promissory Note and Collateral Assignment Agreement dated July 25, 2002 by
and between Oklahoma Facilities, LLC and Flotek Industries, Inc. For
document description, see Flotek Industries, Inc. Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 2002, as filed on August 14,
2002.
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 24, 2002. This form 8-K reported the redistribution of shares, as announced
by Flotek Industries, Inc. (the "Company") on May 21, 2002, resulting from the
merger of the Company and Chemical & Equipment Specialties, Inc. ("CESI") on
October 31, 2001 (the "Merger"). As a result of accounting issues, certain
former shareholders of CESI agreed to surrender 180,000 of the common shares
which were received by them pursuant to the Merger. This redistribution of the
shares received in the Merger resulted from an adjustment to the results of
operations of Neal's Technology, Inc., a subsidiary of CESI, in the financial
statements of CESI for the six month period ended June 30, 2001, to reflect an
improper application of the percentage of completion accounting method. No
financial statements were filed in connection with this report.
SIGNATURE
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.
Date: February 3, 2003 /s/ Jerry D. Dumas, Sr.
----------------------------------------
Jerry D. Dumas, Sr.
Chairman and Chief Executive Officer
27
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Flotek Industries, Inc. on Form
10-QSB/A-1 for the quarter ended June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Jerry D. Dumas, Sr., the Chief
Executive Officer of the Company, certify, pursuant to and for purposes of 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, that:
1. I have reviewed this quarterly report on Form 10-QSB/A-1 of Flotek
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 3, 2003
/s/ Jerry D. Dumas, Sr.
------------------------------------------
Jerry D. Dumas, Sr.
Chief Executive Officer
28
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Flotek Industries, Inc. on Form
10-QSB/A-1 for the quarter ended June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof, I, Mark D. Kehnemund, the Chief
Financial Officer of the Company, certify, pursuant to and for purposes of 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, that:
1. I have reviewed this quarterly report on Form 10-QSB/A-1 of Flotek
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 3, 2003
/s/ Mark D. Kehnemund
-------------------------------------------
Mark D. Kehnemund
Sr. Vice President & Chief Financial Officer
29