UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10 - QSB
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR
THE QUARTER ENDED MARCH 31, 2005
[_]
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)
|
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
Securities
registered pursuant to Section 12(b) of the Exchange Act:
(none)
Securities
registered pursuant to Section 12(g) of the Exchange Act:
Common
Stock, $0.0001 par value
(Title of
Class)
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 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 ¨
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12 b-2 of the Exchange Act.) YES ¨ NO x
Transitional
small business disclosure format: YES ¨ NO x
There
were 6,803,846 shares of the registrant’s common stock, $.0001 par value,
outstanding as of May 13, 2005.
TABLE
OF CONTENTS
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PART
I |
Page |
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Item
1. Financial
Statements |
1-14 |
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Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
15-21 |
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Item
4. Controls
and Procedures |
21 |
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PART
II |
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Item
1. Legal Proceedings |
22 |
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Item
6. Exhibits |
22 |
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SIGNATURES |
23 |
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Rule
13a-15(e) and 15d-15(e) Certification of Chief Executive Officer.
Exhibit
31.1 |
24 |
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Rule
13a-15(e) and 15d-15(e) Certification of Chief Financial Officer.
Exhibit
31.2 |
25 |
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Certification
of Periodic Report by Chief Executive Officer. Exhibit
32.1 |
26 |
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Certification
of Periodic Report by Chief Financial Officer. Exhibit
32.2 |
27 |
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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 and political 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 including those identified
herein.
PART
I
Item
1. Financial Statements -
|
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED BALANCE SHEETS |
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| |
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|
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|
March
31,
2005 |
|
December
31, 2004 |
|
| |
|
(unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
869,632 |
|
$ |
284,801 |
|
|
Restricted
cash |
|
|
37,038 |
|
|
37,038 |
|
|
Accounts
receivable, net |
|
|
6,206,336 |
|
|
3,372,236 |
|
|
Inventories,
net |
|
|
9,741,469 |
|
|
2,447,390 |
|
|
Other
current assets |
|
|
188,975 |
|
|
39,721
|
|
|
Total
current assets |
|
|
17,043,450 |
|
|
6,181,186 |
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net |
|
|
3,498,355 |
|
|
2,116,796 |
|
|
Goodwill |
|
|
7,599,397 |
|
|
7,465,725 |
|
|
Intangible assets,
net |
|
|
382,707 |
|
|
193,380 |
|
|
Total
assets |
|
$ |
28,523,909 |
|
$ |
15,957,087 |
|
| |
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|
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|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
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Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
2,996,814 |
|
$ |
2,641,577 |
|
|
Accrued
liabilities |
|
|
2,382,309 |
|
|
1,617,762 |
|
|
Current
portion of long-term debt |
|
|
1,878,391 |
|
|
1,136,467 |
|
|
Amounts
due to related parties |
|
|
378,401 |
|
|
466,401 |
|
|
Deferred
tax liability |
|
|
1,699,803 |
|
|
-- |
|
|
Total
current liabilities |
|
|
9,335,718 |
|
|
5,862,207 |
|
| |
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion |
|
|
12,167,576 |
|
|
5,271,987 |
|
| |
|
|
|
|
|
|
|
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Stockholders’
equity: |
|
|
|
|
|
|
|
|
Preferred
stock, $.0001 par value, 100,000 shares authorized, no shares
issued |
|
|
-- |
|
|
-- |
|
|
Common
stock, $.0001 par value, 20,000,000 shares authorized, 6,803,846 and
6,670,004 shares issued and outstanding as of March 31, 2005 and December
31, 2004, respectively |
|
|
680 |
|
|
667 |
|
|
Additional
paid-in capital |
|
|
17,812,128
|
|
|
17,082,141 |
|
|
Accumulated
deficit |
|
|
(10,792,193 |
) |
|
(12,259,915 |
) |
|
Total
stockholders’ equity |
|
|
7,020,615 |
|
|
4,822,893 |
|
|
Total
liabilities and stockholders’ equity |
|
$ |
28,523,909 |
|
$ |
15,957,087 |
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
|
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED CONDENSED
INCOME STATEMENTS
(UNAUDITED) |
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| |
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| |
|
Three
Months Ended March 31, |
|
|
|
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
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Revenues |
|
$ |
11,041,164 |
|
$ |
4,796,397 |
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues |
|
|
6,972,898 |
|
|
2,827,828 |
|
|
Gross
margin |
|
|
4,068,266 |
|
|
1,968,569 |
|
|
|
|
|
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Expenses: |
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Selling,
general and administrative |
|
|
1,860,106 |
|
|
1,281,860 |
|
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Depreciation
and amortization |
|
|
270,361 |
|
|
179,328 |
|
|
Research
and development |
|
|
130,669 |
|
|
64,889 |
|
|
Total
expenses |
|
|
2,261,136 |
|
|
1,526,077 |
|
|
Income
from operations |
|
|
1,807,130
|
|
|
442,492 |
|
|
|
|
|
|
|
|
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|
Other
income (expense): |
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(197,388 |
) |
|
(177,718 |
) |
|
Other
income (expense), net |
|
|
10,662 |
|
|
(30,784 |
) |
|
Total
other income (expense) |
|
|
(186,726 |
) |
|
(208,502 |
) |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes |
|
|
1,620,404 |
|
|
233,990 |
|
|
Provision
for income taxes |
|
|
(152,682 |
) |
|
-- |
|
|
Net
income |
|
$ |
1,467,722 |
|
$ |
233,990 |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per common share: |
|
|
|
|
|
|
|
|
Basic
earnings per common share |
|
$ |
0.22 |
|
$ |
0.04 |
|
|
Diluted
earnings per common share |
|
$ |
0.20 |
|
$ |
0.03 |
|
|
Weighted
average common shares used in computing basis earnings per common
share |
|
|
6,737,962 |
|
|
6,625,700 |
|
| Incremental
common shares from stock options and warrants |
|
|
731,591 |
|
|
217,618 |
|
|
Weighted
average common shares used in computing diluted earnings per common
share |
|
|
7,469,553 |
|
|
6,843,318 |
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
|
Three
Months Ended
March
31, |
|
|
|
|
2005 |
|
2004 |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
Net
income |
|
$ |
1,467,722 |
|
$ |
233,990 |
|
|
Adjustments
to reconcile net income to cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
270,361 |
|
|
179,328 |
|
|
Change
in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(204,548 |
) |
|
(718,516 |
) |
|
Inventories |
|
|
(420,229 |
) |
|
(191,167 |
) |
|
Other
current assets |
|
|
(149,251 |
) |
|
50,251 |
|
|
Accounts
payable and accrued liabilities |
|
|
(166,155 |
) |
|
602,420 |
|
|
Net
cash provided by operating activities |
|
|
797,900 |
|
|
156,306 |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition
earn-out payment |
|
|
(133,672 |
) |
|
-- |
|
|
Other
long-term assets |
|
|
(194,194 |
) |
|
-- |
|
|
Capital
expenditures |
|
|
(89,715 |
) |
|
(36,331 |
) |
|
Net
cash (used) investing activities |
|
|
(417,581 |
) |
|
(36,331 |
) |
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
Issuance
of stock for cash |
|
|
30,000 |
|
|
100,000 |
|
|
Proceeds
from borrowings |
|
|
5,720,628 |
|
|
-- |
|
|
Repayments
of indebtedness |
|
|
(5,458,116 |
) |
|
(187,315 |
) |
|
Payments
to related parties |
|
|
(88,000 |
) |
|
(32,660 |
) |
|
Net
cash provided by (used in) financing activities |
|
|
204,512 |
|
|
(119,975 |
) |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents |
|
|
584,831 |
|
|
-- |
|
|
Cash
and cash equivalents at beginning of period |
|
|
284,801 |
|
|
-- |
|
|
Cash
and cash equivalents at end of period |
|
$ |
869,632 |
|
$ |
-- |
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
1 - Business and Basis of Presentation
Flotek
Industries, Inc. and subsidiaries were originally incorporated under the laws of
Alberta, Canada on May 17, 1985. On October 23, 2001, we changed our corporate
domicile to Delaware. We are a provider of oilfield service products including
specialty chemicals, bulk material logistics, downhole drilling products and
downhole production products.
The
consolidated condensed financial statements consist of Flotek Industries, Inc.
and its subsidiaries, all of which are wholly-owned. All significant
intercompany transactions and balances have been eliminated in
consolidation.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and certain assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. While management believes current estimates are
reasonable and appropriate, actual results could differ from these
estimates.
In the
opinion of management, the unaudited consolidated condensed financial statements
of Flotek Industries, Inc. include all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of its financial
position and statement of stockholders’ equity as of March 31, 2005, and its
results of operations and cash flows for the three month periods ended March 31,
2005 and 2004. The consolidated condensed statement of financial position at
December 31, 2004 is derived from the December 31, 2004 audited consolidated
financial statements. Although management believes the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The results of operations and cash flows for the three month periods
ended March 31, 2005 are not necessarily indicative of the results to be
expected for the full year.
Certain
amounts for fiscal 2004 have been reclassified in the accompanying consolidated
condensed financial statements to conform to the current year
presentation.
Note
2 - Summary of Significant Accounting Policies
Cash
and Cash Equivalents
We
consider all short-term investments with an original maturity of three months or
less to be cash equivalents.
Restricted
Cash
Restricted
cash serves as collateral for a standby letter of credit that provides financial
assurance that we will fulfill our obligations related to an international
contract to design and project manage the construction of a bulk handling
facility in Mexico.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Inventories
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 weighted average cost method. The Company
maintains a reserve for slow-moving and obsolete inventories, which is reviewed
for adequacy on a periodic basis.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. The cost of ordinary maintenance and
repairs is charged to operations, while replacements and major improvements are
capitalized. Depreciation is provided at rates considered sufficient to
depreciate the cost of the assets using the straight-line method over estimated
useful lives.
We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
exceeds either the fair value or the estimated discounted cash flows of the
assets, whichever is more readily measurable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
Goodwill
and Intangible Assets
Goodwill
represents the excess of the aggregate price paid by us in acquisitions over the
fair market value of the tangible and identifiable intangible net assets
acquired. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, “Goodwill and Other Intangible Assets”, separable intangible
assets that are not deemed to have indefinite lives will be amortized over their
useful lives.
Financial
Instruments
We
consider the fair value of all financial instruments (primarily accounts
receivable and long-term debt) not to be materially different from their
carrying values at the end of each fiscal year based on management's estimate of
the collectibility of net accounts receivable and due to our ability to borrow
funds under terms and conditions similar to those of our existing debt and
because the majority of our debt carries a floating rate.
We have
no off-balance sheet debt or other off-balance sheet financing arrangements. We
have not entered into derivatives or other financial instruments.
Revenue
Recognition
Revenue
for product sales is recognized when all of the following criteria have been
met: (i) evidence of an agreement exists, (ii) products are shipped or services
rendered to the customer and all significant risks and rewards of ownership have
passed to the customer, (iii) the price to the customer is fixed and
determinable and (iv) collectibility is reasonably assured. Accounts receivable
are recorded at that time, net of any discounts. Earnings are charged with a
provision for doubtful accounts based on a current review of collectibility of
the accounts receivable. Accounts receivable deemed ultimately uncollectible are
applied against the allowance for doubtful accounts. Deposits and other funds
received in advance of delivery are deferred until the transfer of ownership is
complete.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Our
Materials Translogistics business unit ("MTI") recognizes revenues of its design
and construction oversight contracts under the percentage-of-completion method
of accounting, measured by the percentage of costs incurred to date to the total
estimated costs of completion. This percentage is applied to the total estimated
revenue at completion to calculate revenues earned to date. Contract costs
include all direct labor and material costs and those indirect costs related to
manufacturing and construction operations. General and administrative costs are
charged to expense as incurred. Changes in job performance and estimated
profitability, including those arising from contract bonus or penalty provisions
and final contract settlements, may result in revisions to costs and income and
are recognized in the period in which such revisions appear probable. All known
or anticipated losses on contracts are recognized in full when such amounts
become apparent. MTI bulk material transload revenue is recognized as services
are performed for the customer.
Foreign
Currency
We have
sales that are denominated in currencies other than the United States dollar.
Any foreign currency transaction gains or losses are included in our results of
operations. We have not entered into any forward foreign exchange contract to
hedge the potential impact of currency fluctuations on our foreign currency
denominated sales.
Research
and Development Costs
Expenditures
for research activities relating to product development and improvement are
charged to expense as incurred.
Income
Taxes
Income
taxes are computed under the liability method. We provide deferred income tax
assets and liabilities for the expected future tax consequences attributable to
differences between the financial statement carrying amounts and the respective
tax basis of assets and liabilities. These deferred assets and liabilities are
based on enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce deferred income tax assets to amounts which are more likely than not to
be realized.
Earnings
Per Share
Earnings
per common share is calculated by dividing net income or loss attributable to
common stockholders by the weighted average number of common shares outstanding.
Dilutive income or loss per share is calculated by dividing net income or loss
attributable to common stockholders by the weighted average number of common
shares outstanding and dilutive effect of stock options and warrants.
Stock-Based
Compensation
We
recognize compensation expense associated with stock-based awards under the
recognition and measurement principles of Accounting Principles Board Opinion
("APB") No. 25, “Accounting for Stock Issued to Employees”, and related
interpretations. The difference between the quoted market price as of the date
of the grant and the contractual purchase price of shares is charged to
operations over the vesting period. No compensation expense has been recognized
for stock options with fixed exercise prices equal to the market price of the
stock on the dates of grant. We provide supplemental disclosure of the effect or
net income (loss) and earnings (loss) per share as if the provisions of
SFAS No. 123, “Accounting for Stock-Based Compensation, as amended by SFAS No.
148, “Accounting for Stock-Based Compensation - Transition and Disclosure” had
been applied in measuring compensation expense.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R “Share-Based Payment”. This is a revision of SFAS No. 123,
“Accounting
for Stock-Based Compensation”, and supersedes APB No. 25. As noted
in our stock-based compensation accounting policy described above, we do not
record compensation expense for stock-based compensation. Under SFAS 123R, we
will be required to measure the cost of employee services received in exchange
for stock based on the grant date at fair value (with limited exceptions). That
cost will be recognized over the period during which an employee is required to
provide services in exchange for the award (usually the vesting period). The
fair value will be estimated using an option-pricing model. Excess tax benefits,
as defined in SFAS 123R, will be recognized as an addition to additional paid-in
capital. The standard is effective as of the beginning of the first interim or
annual reporting period that begins after December 15, 2005. We are currently in
the process of evaluating the impact of SFAS 123R on our financial statements,
including different option-pricing models.
In
December 2004, the FASB published the following two final FASB Staff Positions,
effective immediately. SFAS No. 109-1, "Application of FASB Statement No.109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004," giving guidance
on applying FASB Statement No. 109, "Accounting for Income Taxes”. SFAS No.
109-2, "Accounting and Disclosure Guidance for that Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004" provides
guidance on the Act's repatriation provision. We are in the process of reviewing
the SFAS No. 109-1 and SFAS No. 109-2; however, at this time, we do not believe
that the adoption of these standards will have a material impact on our
consolidated financial position, results of operations or cash
flows.
In
November 2004, the FASB Emerging Issues Task Force, or EITF, reached a consensus
in applying the conditions in Paragraph 42 of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report
Discontinued Operations". Evaluation of whether operations and cash flows have
been eliminated depends on whether (i) continuing operations and cash flows are
expected to be generated, and (ii) the cash flows, based on their nature and
significance, are considered direct or indirect. This consensus should be
applied to a component that is either disposed of or classified as held-for-sale
in fiscal periods beginning after December 15, 2004. We do not believe that the
adoption of EITF03-13 will have a material impact on our consolidated financial
position, results of operations or cash flows.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An Amendment of
ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and re-handling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective
for fiscal years beginning after June 15, 2005 and is required to be adopted by
us in the first quarter of fiscal 2006, beginning on January 1, 2006. We are
currently evaluating the effect that the adoption of SFAS No. 151 will have on
our consolidated financial position, results of operations and cash flows, but
do not expect SFAS No. 151 to have a material impact.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
3 - Acquisitions
On
February 14, 2005 (the “Closing Date”), Flotek completed the purchase of Spidle
Sales and Services, Inc. (“Spidle”). The consolidated income statements include
the results of operations of Spidle commencing January 1, 2005. A written
agreement transferred effective control of Spidle to Flotek as of January 1,
2005 without restrictions except those required to protect the shareholders of
Spidle. Flotek acquired 100% of the outstanding Spidle common stock.
The $8.1
million purchase price of the Spidle acquisition has been allocated to the
assets acquired and liabilities assumed based on estimated fair values,
following the completion of an independent appraisal and other evaluations. In
accordance with SFAS No. 141, “Accounting for Business Combinations,” the excess
of the net fair value of the assets acquired over the purchase price was
allocated to reduce proportionately the values assigned to non-current assets in
determining their fair values. In applying Statement No. 141 to the transaction,
the net value of property, plant and equipment was reduced by $16 million and
the net value of the deferred tax assets were reduced by $74,000 to eliminate
the excess of investment over purchase price. A deferred tax liability of $1.8
million was recorded as a result of the fair value of the assets for book
purposes being higher than the tax basis which is carried at original cost. The
total purchase price consisted of $6.1 million in cash, a $1.275 million seller
note payable over three years, and 129,271 shares of Flotek common stock valued
at $5.42 per share.
| |
|
Appraised |
|
Application |
|
Recorded |
|
| |
|
Investment |
|
of
FAS 141 |
|
Investment |
|
|
Cash |
|
$ |
133,673 |
|
|
|
|
$ |
133,673 |
|
|
Receivables |
|
|
2,495,877
|
|
|
|
|
|
2,495,877
|
|
|
Inventories |
|
|
6,873,854
|
|
|
|
|
|
6,873,854
|
|
|
Deferred
tax asset |
|
|
74,000
|
|
|
(74,000 |
) |
|
--
|
|
|
Property,
plant and equipment |
|
|
17,484,818
|
|
|
(15,927,480 |
) |
|
1,557,338
|
|
|
Accounts
payable |
|
|
(927,436 |
) |
|
|
|
|
(927,436 |
) |
|
Accrued
liabilities |
|
|
(112,828 |
) |
|
|
|
|
(112,828 |
) |
|
Federal
income taxes payable |
|
|
(156,212 |
) |
|
|
|
|
(156,212 |
) |
|
Deferred
tax liability |
|
|
-- |
|
|
(1,789,266 |
) |
|
(1,789,266 |
) |
|
Less:
Total purchase price |
|
|
8,075,000
|
|
|
|
|
|
8,075,000
|
|
|
Excess
of investment over purchase price |
|
$ |
17,790,746 |
|
$ |
(17,790,746 |
) |
$ |
-- |
|
Note
4 - Inventories
The
components of inventories as of March 31, 2005 and December 31, 2004 were as
follows:
|
|
|
March
31,
2005 |
|
December
31, 2004 |
|
|
|
|
|
|
|
|
|
Raw
materials |
|
$ |
931,008 |
|
$ |
797,430 |
|
|
Finished
goods |
|
|
9,305,230 |
|
|
2,107,217 |
|
|
Gross
inventories |
|
|
10,236,238 |
|
|
2,904,647 |
|
|
Less
slow-moving and obsolescence reserve |
|
|
494,769 |
|
|
457,257
|
|
|
Inventories,
net |
|
$ |
9,741,469 |
|
$ |
2,447,390 |
|
Finished
goods inventory of $6,873,854 associated with the acquisition of Spidle was
recorded in the first quarter 2005. The fair market value of the finished
goods inventory acquired was calculated based on actual third party sales to
customers reduced by 9.4% for estimated selling expenses, in accordance with
SFAS No. 141.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
5 - Property, Plant and Equipment
As of
March 31, 2005 and December 31, 2004, property, plant and equipment was
comprised of the following:
|
|
|
March
31,
2005 |
|
December
31,
2004 |
|
|
|
|
|
|
|
|
|
Land |
|
$ |
68,000 |
|
$ |
68,000 |
|
|
Buildings
and leasehold improvements |
|
|
2,017,361 |
|
|
1,990,436 |
|
|
Machinery
and equipment |
|
|
2,524,990 |
|
|
953,224 |
|
|
Furniture
and fixtures |
|
|
108,481 |
|
|
108,481 |
|
|
Transportation
equipment |
|
|
558,014 |
|
|
514,652 |
|
|
Computer
equipment |
|
|
424,837 |
|
|
424,837 |
|
|
Gross
property, plant and equipment |
|
|
5,701,683 |
|
|
4,059,630 |
|
|
Less
accumulated depreciation and amortization |
|
|
2,203,328 |
|
|
1,942,834 |
|
|
Net
property, plant and equipment |
|
$ |
3,498,355 |
|
$ |
2,116,796 |
|
Property,
plant and equipment of $1,557,338 associated with the acquisition of Spidle was
recorded in the first quarter.
Note
6 - Goodwill and Intangible Assets
In
February 2002, we acquired IBS 2000, Inc., a Denver-based company engaged in the
development and manufacture of environmentally neutral chemicals for the oil
industry. The terms of the acquisition called for an "Earn-Out Payment" based on
twenty-five percent of the division’s earnings before interest and taxes for the
three one-year periods ending on March 31, 2003, 2004 and 2005. During 2004, the
Company recorded additional goodwill of $320,012 associated with earn-out for
the period March 31, 2003 through December 31, 2004 and $133,769 during the
first quarter of 2005, to reflect additional acquisition consideration related
to this agreement. As of March 31, 2005, $100,804 had been paid. The remaining
$352,977 will be paid during 2005 and is reflected as accrued liabilities in the
accompanying financial statements.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
7 - Long-Term Debt
Long-term
debt as of March 31, 2005 and December 31, 2004 consisted of the
following:
| |
|
March
31,
2005 |
|
December
31,
2004 |
|
|
Equipment
term loan |
|
$ |
6,883,333 |
|
$ |
-- |
|
|
Real
estate term loan |
|
|
850,685 |
|
|
-- |
|
|
Revolving
line of credit |
|
|
3,834,352 |
|
|
-- |
|
|
Promissory
notes to stockholders of acquired businesses, maturing December 2007 and
2008 |
|
|
650,000 |
|
|
750,000 |
|
|
Promissory
notes to stockholders of acquired businesses, maturing February
2008 |
|
|
1,275,000 |
|
|
-- |
|
|
Note
payable to Facilities |
|
|
432,751 |
|
|
465,495 |
|
|
Note
payable to bank maturing March 2008 |
|
|
-- |
|
|
1,365,766 |
|
|
Note
payable to bank maturing October 2008 |
|
|
-- |
|
|
629,539 |
|
|
Term
loan payable to bank maturing December 2007 |
|
|
-- |
|
|
536,281 |
|
|
Revolving
line of credit, maturing September 2005 |
|
|
-- |
|
|
2,439,483 |
|
|
Mortgage
note payable maturing December 2012 |
|
|
-- |
|
|
96,872 |
|
|
Other |
|
|
119,846 |
|
|
125,018 |
|
|
Total |
|
|
14,045,967 |
|
|
6,408,454 |
|
|
Less
current maturities |
|
|
1,878,391
|
|
|
1,136,467 |
|
|
Long-term
debt |
|
$ |
12,167,576 |
|
$ |
5,271,987 |
|
On
February 14, 2005, we entered into new senior credit facility with Wells Fargo.
The credit facility is made up of an equipment term loan, a real estate term
loan and a Revolving Line of Credit. The Revolving Line of Credit provides for
borrowings through February 14, 2007, bearing interest at prime rate plus 50
basis points. The prime rate was 5.75% on March 31, 2005. The maximum amount
that may be outstanding under the line of credit is the lesser of (a) $5,000,000
or (b) the sum of 80% of eligible domestic trade accounts receivable and 50% of
eligible inventory, as defined. The terms are interest-only, maturing in
February 2007. The Equipment Term Loan provides for borrowings of $7,000,000
bearing interest at prime rate plus 50 basis points payable over 60 months. The
Real Estate Term Loan provides for borrowings of $855,437 bearing interest at
prime rate. The loan is payable over 60 months, and amortized over 180 months.
In
conjunction with the acquisition of Spidle Sales and Services, Inc, we issued
$1,275,000 of notes payable to the seller. The notes are payable over 36 months
and bear interest at 6%.
All bank
borrowings are collateralized by substantially all of our assets. Bank
borrowings are subject to certain financial covenants and a material adverse
change subjective acceleration clause. As of March 31, 2005, we were in
compliance with all covenants.
We
believe the fair value of our long-term debt approximates the recorded value at
March 31, 2005, as the majority of the long-term debt carries a floating
interest rate based on the prime rate.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
8 - Earnings Per Share
Net
income per share is calculated by dividing net income attributable to common
stockholders by the weighted average number of common shares outstanding.
Diluted income per share is calculated by dividing net income attributable to
common stockholders by the weighted average number of common shares outstanding
and potential dilutive common shares. For the three months ended March 31, 2005,
56,029 stock warrants were excluded from the computation of diluted earnings per
share because the warrant exercise price of $13.13 per share was greater than
the average market price of the Company’s common stock.
A
reconciliation of the number of shares used for the basic and diluted earnings
per share calculation is as follows:
|
|
|
For
the Quarter Ended
March
31, |
|
|
|
|
2005 |
|
2004 |
|
|
Net
income |
|
$ |
1,467,722 |
|
$ |
233,990 |
|
|
Weighted-average
common shares outstanding |
|
|
6,737,962 |
|
|
6,625,700 |
|
|
Basic
earnings per common share |
|
$ |
0.22 |
|
$ |
0.04 |
|
|
Diluted
earnings per common share |
|
$ |
0.20 |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding |
|
|
6,737,962
|
|
|
6,625,700
|
|
|
Effect
of dilutive securities |
|
|
731,591 |
|
|
217,618 |
|
|
Weighted-average
common equivalent shares outstanding |
|
|
7,469,553 |
|
|
6,843,318 |
|
A
reconciliation of the number of shares used for the basic earnings per share
calculation on a proforma basis for 2004 had the acquisition of Spidle occurred
January 1, 2004 is as follows:
|
|
|
For
the Quarter Ended
March
31, |
|
|
|
|
2005 |
|
2004 |
|
| Proforma
revenues |
|
$ |
11,041,164 |
|
$ |
8,569,053 |
|
| Proforma
income from operations |
|
|
1,807,130 |
|
|
743,818 |
|
|
Proforma
net income from continuing operations |
|
|
1,467,722 |
|
|
722,631 |
|
|
Proforma
weighted-average common shares outstanding |
|
|
6,800,466 |
|
|
6,754,971 |
|
|
Basic
earnings per common share |
|
$ |
0.22 |
|
$ |
0.11 |
|
| |
|
|
|
|
|
|
|
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
9 - Stock Based Compensation Expense
We have
elected to follow APB Opinion No. 25 in accounting for our employee stock
options. Accordingly, no compensation expense is recognized in our financial
statements because the exercise price of our employee stock options equals the
market price of our common stock on the date of grant. If under SFAS No.
123 we determined compensation costs based on the fair value at the grant
date for its stock options, net income and earnings per share would have
been reduced to the following pro forma amounts:
|
|
|
For
the Quarter Ended
March
31, |
|
|
|
|
2005 |
|
2004 |
|
|
Net
income |
|
|
|
|
|
|
As
reported |
|
$ |
1,467,722 |
|
$ |
233,990 |
|
|
Deduct:
Total stock-based employee compensation expense determine under fair value
based method for all awards, net of related tax effects |
|
|
(329 |
) |
|
(16,486 |
) |
|
Pro
forma |
|
$ |
1,467,393 |
|
$ |
217,504 |
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share: |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.22 |
|
$ |
0.04 |
|
|
Pro
forma |
|
$ |
0.22 |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share: |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
0.20 |
|
$ |
0.03 |
|
|
Pro
forma |
|
$ |
0.20 |
|
$ |
0.03 |
|
Note
10 - Related Party Transactions
On
February 14, 2005 in conjunction with the acquisition of Spidle, we issued
$1,275,000 notes payable to the shareholders. The notes are payable over 36
months and bear an interest rate of 6%.
On
February 11, 2003, Mr. Jerry D. Dumas, Sr., our Chairman and CEO, made us a
short-term loan for $135,000 to cover operating cash flow requirements. This
note has been paid in full as of March 31, 2005. Additional demand notes from
Mr. Dumas total $31,068, bearing interest at 10% per annum.
On July
25, 2002, we borrowed $500,000 under a promissory note from Oklahoma Facilities,
LLC ("Facilities"). One of our officers, who is also a director and
principal stockholder, has a minority investment interest in and is an officer
of Facilities. The majority of the note is secured by specific Petrovalve
inventory. The note was amended on October 1, 2004, bearing interest at the
prime rate plus 7.25%, payable in 36 monthly installments beginning January 1,
2005. On February 14, 2005, Facilities was required to fully subordinate their
outstanding debt position in connection with the new senior credit
facility.
We
purchased from Phoenix E&P Technology, LLC ("Phoenix"), the manufacturing
assets, inventory and intellectual property rights to produce oilfield shale
shaker screens on January 28, 2005. The assets were purchased for $46,640 with a
three-year royalty interest on all shale shaker screens produced. Phoenix is 75%
owned by Chisholm Energy Partners (“CEP”). Jerry D. Dumas, Sr., our Chief
Executive Officer and Chairman and Dr. Glenn Penny each have a two and one-half
percent indirect ownership interest in CEP and John Chisholm, one of our
directors, has a thirty percent ownership interest in CEP. No royalties
were earned during the first quarter 2005.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
11 - Segment Information
Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance. We have four principal operating segments, which are the design,
manufacturing, operating, service and marketing of (i) specialty chemicals, (ii)
downhole drilling tools, (iii) downhole production tools, and (iv) automated
bulk handling systems. These operating segments were determined based on the
nature of the products and services offered.
We have
determined that there are three reportable segments:
|
·
|
The
Chemicals and Logistics segment is made up of two business units. The CESI
Chemical business unit designs, develops, manufactures, packages and sells
chemicals used by oilfield service companies in oil and gas well drilling,
cementing, stimulation and production. The Materials Translogistics
business unit manages automated bulk material handling, loading
facilities, and blending capabilities for oilfield service companies.
|
|
·
|
The
Drilling Products segment is made up of two business units. The Turbeco
division manufactures and markets the Turbeco line of casing centralizers,
Turbo-Flo mud shaker screens and external casing packers for coal bed
methane drilling. The Spidle division rents, markets, and manufactures
downhole equipment for the energy, mining, waterwell and industrial
drilling sectors. |
|
·
|
The
Production Products segment manufactures and markets the Petrovalve line
of downhole pump components. |
We
evaluate performance based on several factors, of which the primary financial
measure is business segment income before taxes. The accounting policies of the
business segments are the same as those described in “Note 2: Summary of
Significant Accounting Policies.” Intersegment sales are
accounted for at fair value as if sales were to third parties and are eliminated
in the consolidated financial statements.
Summarized
financial information concerning our segments as of March 31, 2005 and 2004 is
shown in the following tables (in thousands):
|
|
|
Chemicals
and
Logistics |
|
Drilling
Products |
|
Production
Products |
|
Corporate
and
Other |
|
Total |
|
| Three
months ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers |
|
$ |
6,128 |
|
$ |
4,574 |
|
$ |
339 |
|
$ |
-- |
|
$ |
11,041 |
|
|
Income
(loss) from operations |
|
$ |
1,505 |
|
$ |
844 |
|
$ |
56 |
|
$ |
(598 |
) |
$ |
1,807 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers |
|
$ |
3,409 |
|
$ |
1,263 |
|
$ |
125 |
|
$ |
-- |
|
$ |
4,796 |
|
|
Income
(loss) from operations |
|
$ |
648 |
|
$ |
319 |
|
$ |
(68 |
) |
$ |
(456 |
) |
$ |
442 |
|
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Total
assets by reportable segment were as follows:
|
|
|
For
the Period Ended |
|
|
|
|
March
31,
2005 |
|
December
31,
2004 |
|
|
|
|
|
|
|
|
|
Chemicals
and Logistics |
|
$ |
13,783 |
|
$ |
12,837 |
|
|
Drilling
Products |
|
|
12,284 |
|
|
868 |
|
|
Production
Products |
|
|
1,655 |
|
|
1,467 |
|
|
Corporate
and Other |
|
|
802 |
|
|
785 |
|
|
Total
Assets |
|
$ |
28,524 |
|
$ |
15,957 |
|
Note
12 - Subsequent Events
On
January 30, 2003, we entered into an agreement with Stimulation Chemicals, LLC
(“SCL”) to procure raw materials as ordered by CESI granting CESI 120 day
payment terms for a 15% percent markup. Dr. Penny owns 37.06% and Mr. Beall owns
62.94% of SCL. Both owners are directors as well as principal stockholders. Dr.
Penny is also one of our employees. On August 27, 2003, a new
agreement was executed for repayment of the outstanding balance of $359,993
beginning September 15, 2003 with monthly principal and interest payments in the
amount of $38,600, plus interest of 1% per month on the unpaid balance until
paid in full. As of December 31, 2004, the outstanding balance owed to SCL was
$347,333. On February 14, 2005, SCL was required to fully subordinate their debt
position and defer principal payments for six months in connection with the new
senior credit facility. To compensate for the subordination the interest rate on
the note was raised to 21%. On April 1, 2005, 62.94% of the outstanding
principal and interest was paid to Mr. Beall to retire his portion of the loan.
The remaining principal was converted into a new loan with Dr. Penny, bearing a
fixed interest rate of 12.5%, payable over 36 months.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Management’s
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with “Item 1. Financial Statements” contained herein.
Business
Overview
Flotek
Industries, Inc. and subsidiaries (the “Company” or “Flotek”) was originally
incorporated under the laws of Alberta, Canada on May 17, 1985. On October 23,
2001, we approved a change in our corporate domicile to Delaware and a
reverse stock split of 120 to 1. On October 31, 2001, we completed a reverse
merger with Chemical & Equipment Specialties, Inc. (“CESI”).
We are a
supplier of drilling and production products and services to the oil and natural
gas industry on a worldwide basis. Our core focus is oilfield specialty
chemicals and logistics, downhole drilling tools and downhole production tools.
We are headquartered in Houston, Texas and our common stock is traded on the OTC
Bulletin Board market under the stock ticker symbol, “FLTK” or “FLTK.OB”. Our
website is located at http://www.flotekind.com.
Information contained in our website or links contained on our website are not
part of this Form 10-QSB.
Our
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
Chemicals and Logistics segment is made up of two business units. The CESI
Chemical business unit designs, develops, manufactures, packages and sells
chemicals used by oilfield service companies in oil and gas well drilling,
cementing, stimulation and production. The Materials Translogistics
business unit manages automated bulk material handling, loading
facilities, and blending capabilities for oilfield service companies.
|
|
·
|
The
Drilling Products segment is made up of two business units. The Turbeco
division manufactures and markets the Turbeco line of casing centralizers,
Turbo-Flo mud shaker screens and external casing packers for coal bed
methane drilling. The Spidle division rents, markets, and manufactures
downhole equipment for the energy, mining, waterwell and industrial
drilling sectors. |
|
·
|
The
Production Products segment manufactures and markets the Petrovalve line
of downhole pump components. |
The
customers for our products and services include the major integrated oil and
natural gas companies, independent oil and natural gas companies and state-owned
national oil companies. Our ability to compete in the oilfield services market
is dependent on our ability to differentiate our products and services, provide
superior quality and service, and maintain a competitive cost structure.
Activity levels in our three segments are driven primarily by current and
expected commodity prices, drilling rig count, oil and gas production levels,
and customer capital spending allocated for drilling and production.
We
continue to actively seek profitable acquisition or merger candidates in our
core business to either decrease costs of providing products or add new products
and customer base to diversify our market.
Results
of Operations
| |
|
Three
Months Ended
March
31, |
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
11,041,164 |
|
$ |
4,796,397 |
|
|
Cost
of revenues |
|
|
6,972,898 |
|
|
2,827,828 |
|
|
Gross
margin |
|
|
4,068,266 |
|
|
1,968,569 |
|
|
Gross
margin % |
|
|
36.8 |
% |
|
41.0 |
% |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
1,860,106 |
|
|
1,281,860 |
|
|
Depreciation and amortization |
|
|
270,361 |
|
|
179,328 |
|
|
Research and development |
|
|
130,669 |
|
|
64,889 |
|
|
Total expenses |
|
|
2,261,136
|
|
|
1,526,077 |
|
|
Income from operations |
|
|
1,807,130 |
|
|
442,492 |
|
|
Income from operations % |
|
|
16.4 |
% |
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(197,388 |
) |
|
(177,718 |
) |
|
Other, net |
|
|
10,662 |
|
|
(30,784 |
) |
|
Total other income (expense) |
|
|
(186,726 |
) |
|
(208,502 |
) |
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations |
|
|
1,620,404 |
|
|
233,990 |
|
|
Provision
for income taxes |
|
|
(152,682 |
) |
|
-- |
|
|
Net
income |
|
$ |
1,467,722 |
|
$ |
233,990 |
|
Total
revenues increased by $6,244,767 or 130% in the first quarter 2005 versus 2004.
As discussed in the segment analysis that follows, this increase in revenues was
due to the addition of Spidle’s operating results for the entire quarter and
strong performance by our Chemicals and Logistics segment, particularly with our
line of proprietary chemicals.
Gross
margin increased 107%, from $1,968,569 in the first quarter 2004 to $4,068,266
in 2005. Gross margin as a percentage of revenues decreased from 41.0% in 2004
to 36.8% in 2005. The decrease in margin as a percentage of revenues was a
result of increased chemical feedstock and transportation costs, as well as a
shift in our revenue base composition with the addition of Spidle. The gross
margin is best analyzed on a segment by segment basis, discussed below, as gross
margin varies significantly between operating segments and can vary
significantly from year to year in certain operating segments.
Selling,
general and administrative are costs not directly attributable to products sold
or services rendered. Selling, general and administrative costs increased to
$1,860,106 in the first quarter 2005 from $1,281,860 in the first quarter 2004,
however decreased as a percentage of revenue. Measured as a percentage of
revenue, selling, general and administrative dropped from 26.7% in the first
quarter 2004 to 16.8% in 2005. Significant emphasis continues to be placed on
growing sales while controlling selling, general and administrative costs across
the organization.
Interest
expense increased from $177,718 for the first three months in 2004 to $197,388
in 2005. The increase is a result of an increase in our overall debt level
associated with the acquisition of Spidle, offset by lower interest rates on the
senior credit facility obtained in February 2005. Flotek’s
senior borrowing rates were reduced approximately 300 basis points as a result
of the new financing. The
majority of our indebtedness carries a variable interest rate tied to the prime
rate, adjusted on a quarterly basis.
Research
and development costs increased due to expansion of our applied research
facilities, including increased personnel costs. The higher personnel costs are
due to increased staffing in our applied research laboratories, reflecting our
strategy to continue to develop proprietary specialty chemicals. Over the years,
we have made a number of technological advances, including the development of an
environmentally benign line of specialty chemicals. Substantially all of the new
technologies have resulted from requests and guidance from our clients,
particularly major oil companies. Research and development expenditures are
charged to expense as incurred. We intend to continue committing financial
resources and effort to the development and acquisition of new products and
services.
Based on
our improved profitability, a $152,682 provision for income taxes was recorded
for the first quarter 2005. The provision was made for estimated federal income
tax, state income tax and alternative minimum tax, which can not be offset by
our net operating loss carryforwards. The effective income tax rate differs from
the statutory rate primarily as a result of utilization of our net operating
loss carryforwards. As of December 31, 2004, we had estimated net operating loss
carryforwards which may be available to offset future taxable income of
approximately $8.8 million, expiring in 2017 through 2023.
Results
by Segment
Chemicals
and Logistics
| |
|
Three
Months Ended
December
31, |
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
6,128,273 |
|
$ |
3,408,613 |
|
|
Gross
margin |
|
$ |
2,263,569 |
|
$ |
1,305,729 |
|
|
Gross
margin % |
|
|
36.9 |
% |
|
38.3 |
% |
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
$ |
1,505,439 |
|
$ |
647,763 |
|
|
Operating
margin % |
|
|
24.6 |
% |
|
19.0 |
% |
Chemicals
and Logistic's revenues increased $2,719,660 or 79.8%, in the first three months
of 2005 compared to 2004. The increase in sales is attributable to continued
increase in drilling activity and expanded market penetration in the U.S.,
Canada, Mexico and Russia. The most significant revenue growth relates to our
environmental friendly “green” chemicals in the U.S., which have more than
tripled from $580,531 in the first quarter 2004 to $1,619,409 for the first
quarter 2005. CESI Chemical's focus on applied research has resulted in the
penetration of new markets, continued expansion of our customer base, product
portfolio and increased margins. Recently our applied research resulted in the
development and subsequent sale of additive products to the drilling fluids
industry, a new sales segment for us. CESI Chemical differentiates itself
through the strength of its innovative and proprietary products, the depth of
the laboratory staff, dedication to product quality, and superior customer
service. In addition, MTI completed the majority of a significant bulk handling
design and construction oversight project in Mexico during the first quarter of
2005.
Gross
margin increased from $1,305,729 in the first quarter 2004 to $2,263,569 for the
same period 2005. Gross margin as a percentage of revenues decreased from 38.3%
in the first quarter 2004 to 36.9% in 2005. The decrease in margin is
attributable to increased cost of goods sold. Chemical feedstock, transportation
and equipment associated with the Mexico bulk handling plant contributed to the
increase in cost of goods during 2005. Management is focused on improving
margins through improved procurement and logistics, as well as planned price
increases.
Operating
income increased $857,676, or 132%, during the first three months of 2005
compared to 2004, primarily as a result of increased sales in the Chemical
division. The completion of the Mexico bulk handling plant also increased
revenue and operating income for this segment during 2005. Expansion of our
proprietary product line and customer base has driven the increase in sales and
margin during 2005.
Drilling
Products
| |
|
Three
Months Ended
March
31, |
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,574,250 |
|
$ |
1,263,186 |
|
|
Gross
margin |
|
$ |
1,598,493 |
|
$ |
603,576 |
|
|
Gross
margin % |
|
|
34.9 |
% |
|
47.8 |
% |
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
$ |
844,213 |
|
$ |
318,910 |
|
|
Operating
margin % |
|
|
18.5 |
% |
|
25.2 |
% |
In
February 2005, we completed the purchase of Spidle, a privately held downhole
tool company with rental, marketing and manufacturing operations throughout the
Rocky Mountains, by acquiring all of the outstanding capital stock of Spidle for
a total purchase price of $8.1 million. Spidle’s results of operations are
included in the consolidated financial statements for the first quarter
effective January 1, 2005. Spidle serves both the domestic and international
downhole tool markets with a customer base extending into Canada, Mexico, South
America, Europe, Asia and Africa. Spidle operates in the energy, mining, water
well and industrial drilling sectors.
Drilling
Products revenues, increased $3,311,064 or 262% in the first quarter 2005
compared to 2004. This increase relates to the addition of the operating results
Spidle to our drilling products segment. Spidle contributed $4 million in
revenue during the first quarter. Management views the acquisition and
integration of Spidle to be positive with actual results matching management
projections through the first quarter 2005.
Gross
margin increased $994,917 or 165% in the first quarter of 2005 compared to 2004.
Gross margin as a percentage of revenues decreased from 47.8% in the first
quarter 2004 to 34.9% in 2005. The decrease in margin is attributable to change
in the base of operations with the addition of Spidle. Our Turbeco operations
have historically been focused on the manufacturing and marketing of drilling
tools while Spidle manufactures and markets drilling tools, acts as an agent for
various drill bit manufactures and mud motor companies, and rents downhole
drilling tools.
Operating
income increased $525,303, or 165%, during the first three months of 2005
compared to 2004, primarily as a result the addition of Spidle. We believe we
will see improvements in operating income as a percentage of revenue as we
capitalize on the geographic, customer and product synergies between Spidle and
the other business units as well as increased utilization of the inventory
acquired with Spidle.
Production
Products
|
|
|
Three
Months Ended
March
31, |
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
338,640 |
|
$ |
124,598 |
|
|
Gross
margin |
|
$ |
206,205 |
|
$ |
59,267 |
|
|
Gross
margin % |
|
|
60.9 |
% |
|
47.6 |
% |
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) |
|
$ |
56,054 |
|
$ |
(68,222 |
) |
|
Operating
income loss % |
|
|
16.6 |
% |
|
(54.8 |
)% |
Production
Products revenues increased $214,042 in the first quarter 2005 compared to 2004
due to a sale to a new customer in Russia. Gross margin percentage also
increased significantly from 47.6% during the first three months of 2004 to
60.9% in 2005. We are focused on increasing total revenues in 2005 by
expanding the customer and geographic base. Petrovalve is actively marketed in
the U.S., Canada, Mexico, Central America, South America, the Middle East,
Russia and Asia. Currently Petrovalve has representation in 18 countries.
Data
provided by Petrovalve customers subsequent to valve installation indicate an
increase in production by as much as 40% over prior performance of conventional
valves. This improvement stems from the patented and unique design of the
Petrovalve that allows greater volumes of hydrocarbons to be lifted per pump
stroke. This
enables the operator the option of slowing the pump stroke rate while
maintaining consistent production levels, which reduces wear on all parts of the
lifting mechanism, extending the life of the entire system. The “Gas Breaker”
version of the Petrovalve, has been proven to be successful in eliminating “gas
locking” which, prior to the Gas Breaker installation, completely stopped
production and required workover of the well. Furthermore, the
Petrovalve can effectively lift highly viscous oil in heavy oil or tar sand
production zones.
Capital
Resources and Liquidity
Our
capital resources and liquidity continued to improve during the first quarter of
2005. During the first three months of 2005 we generated net income of
$1,467,722 and had positive cash flows from operations of $797,900 after
contributing $940,183 to working capital in the quarter. The improvement in cash
flow is a direct result of significant improvements in operating results for our
reporting units due to increased sales and operational efficiencies.
We
increased cash and cash equivalents during the quarter and reported a cash
balance of $869,632 as of March 31, 2005. This significant increase compared to
prior years is a result of improved operational performance results and strict
cash flow management. Management will continue to focus on managing cash
outflows while providing the resources needed to grow our business units.
Both
accounts receivable and inventories increased due to increased sales levels
during the quarter. The change in working capital accounts for the quarter have
been adjusted for the addition of Spidle as of the beginning of the period.
Accounts payable decreased $572,199 due to a continued effort to pay down long
outstanding payables associated with professional fees and payables associated
with the discontinued operations as well as faster payment to vendors to take
advantage of sales discounts and increased credit from our suppliers. The
reduction in accounts payable was offset by an increase in accrued liabilities
of $495,507. The increase in accrued liabilities was due to increased income
taxes payable, incentive compensation payable, and amounts accrued, but not yet
paid, related to the earn-out provision of our acquisition of ISB 2000.
Our deferred tax liability associated with the purchase of Spidle was reduced by
$89,463 for first quarter sales of inventory acquired.
Not
withstanding the Spidle acquisition which was a non-cash transaction, capital
expenditures for the quarter totaled $89,715 and were used for furniture and
fixture purchases, expansion of laboratory facilities, and the purchase of
a new vehicle. Capital expenditures were below budgeted levels due to the timing
of expansion projects. In February 2005, we successfully obtained a new senior
credit facility with Wells Fargo, in which we obtained approval for a capital
expenditures budget of $2,000,000 for 2005 allowing us to expand our operations.
In
February, we issued 129,271 shares of our common stock in conjunction with the
acquisition of Spidle. In addition, 4,571 stock options were exercised with
proceeds of $30,000 paid to the Company. A total of 55,000 incentive stock
options were granted in the first quarter 2005 to key Spidle and Flotek
employees.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123 “Share-Based
Payment”. This is
a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, and
supersedes APB No. 25. As noted
in our stock-based compensation accounting policy, we do not record compensation
expense for stock-based compensation. Under SFAS 123R, we will be required to
measure the cost of employee services received in exchange for stock based on
the grant date at fair value (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award (usually the vesting period). The fair value
will be estimated using an option-pricing model. Excess tax benefits, as defined
in SFAS 123R, will be recognized as an addition to additional paid-in capital.
The Standard is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. We are currently in the
process of evaluating the impact of SFAS 123R on our financial statements,
including different option-pricing models.
Item
4. Controls
and Procedures
Our Chief
Executive Officer and Chief Financial Officer (collectively, the “Certifying
Officers”) are responsible for establishing and maintaining our disclosure
controls and procedures. 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 our disclosure controls and procedures are effective
to ensure that information required to be disclosed by us in this report is
accumulated and communicated to 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 our internal controls or other factors that could significantly affect such
controls subsequent to the date of their evaluation. Previously noted weaknesses
have been corrected.
PART
II
Item
1. Legal
Proceedings
We are
involved, on occasion, in routine litigation incidental to our business. As of
March 31, 2005 we were not named or involved in any litigation.
Item
6. Exhibits
|
Exhibit
Number |
|
Description
of Exhibit |
|
|
|
|
|
31.1 |
|
Rule
13a-15(e) and 15d-15(e) Certification of Chief Executive
Officer. |
|
|
|
|
|
31.2 |
|
Rule
13a-15(e) and 15d-15(e) Certification of Chief Financial
Officer. |
|
|
|
|
|
32.1 |
|
Certification
of Periodic Report by Chief Executive Officer. |
|
|
|
|
|
32.2 |
|
Certification
of Periodic Report by Chief Financial
Officer. |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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. |
|
|
|
|
By: |
/s/ Jerry D. Dumas,
Sr. |
| |
|
| |
Jerry D. Dumas, Sr.
Chairman and Chief Executive
Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
May
16, 2005