Unassociated Document
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 JUNE 30, 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 August 8, 2005.
TABLE
OF CONTENTS
|
|
PART
I - FINANCIAL INFORMATION
|
Page
|
|
|
|
|
Item
1. Financial
Statements
|
1
|
|
|
|
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
|
|
|
Item
3. Controls
and Procedures
|
22
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
Item
1. Legal
Proceedings
|
23
|
|
|
|
|
Item
4. Submission
of Matters to a Vote of Security Holders. |
23
|
|
|
|
|
Item
6. Exhibits
|
|
|
|
|
|
Signatures
|
24
|
|
|
|
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 of America and other countries, adverse changes in the
capital and equity markets, and other risk factors including those identified
herein.
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements -
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
June
30,
2005
|
|
December
31,
2004
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
445,972
|
|
$
|
284,801
|
|
Restricted
cash
|
|
|
37,038
|
|
|
37,038
|
|
Accounts
receivable, net
|
|
|
7,174,991
|
|
|
3,372,236
|
|
Inventories,
net
|
|
|
10,246,677
|
|
|
2,447,390
|
|
Other
current assets
|
|
|
46,207
|
|
|
39,721
|
|
Total
current assets
|
|
|
17,950,885
|
|
|
6,181,186
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
4,002,960
|
|
|
2,116,796
|
|
Goodwill
|
|
|
7,619,555
|
|
|
7,465,725
|
|
Intangible
and other assets, net
|
|
|
445,140
|
|
|
193,380
|
|
|
|
$
|
30,018,540
|
|
$
|
15,957,087
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,115,869
|
|
$
|
2,641,577
|
|
Accrued
liabilities
|
|
|
2,527,336
|
|
|
1,617,762
|
|
Current
portion of long-term debt
|
|
|
2,219,224
|
|
|
1,136,467
|
|
Amounts
due to related parties
|
|
|
128,722
|
|
|
466,401
|
|
Deferred
tax liability
|
|
|
1,602,765
|
|
|
¾
|
|
Total
current liabilities
|
|
|
9,593,916
|
|
|
5,862,207
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
11,415,170
|
|
|
5,271,987
|
|
Total
liabilities
|
|
|
21,009,086
|
|
|
11,134,194
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value; 20,000,000 shares authorized; shares issued
and
outstanding: June 30, 2005 - 6,803,846 and December 31, 2004 -
6,670,004
|
|
|
680
|
|
|
667 |
|
Additional
paid-in capital
|
|
|
17,812,128
|
|
|
17,082,141
|
|
Accumulated
deficit
|
|
|
(8,803,354
|
)
|
|
(12,259,915
|
)
|
Total
stockholders’ equity
|
|
|
9,009,454
|
|
|
4,822,893
|
|
|
|
$
|
30,018,540
|
|
$
|
15,957,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED INCOME STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,460,604
|
|
$
|
4,810,976
|
|
$
|
23,501,768
|
|
$
|
9,607,367
|
|
Cost
of revenues
|
|
|
7,197,008
|
|
|
2,660,573
|
|
|
14,169,906
|
|
|
5,488,395
|
|
Gross
margin
|
|
|
5,263,596
|
|
|
2,150,403
|
|
|
9,331,862
|
|
|
4,118,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and
administrative
|
|
|
2,186,362
|
|
|
1,322,164
|
|
|
4,046,468
|
|
|
2,601,926
|
|
Depreciation
and
amortization
|
|
|
307,633
|
|
|
182,848
|
|
|
577,995
|
|
|
364,274
|
|
Research
and development
|
|
|
147,189
|
|
|
71,401
|
|
|
277,858
|
|
|
136,290
|
|
Total
expenses
|
|
|
2,641,184
|
|
|
1,576,413
|
|
|
4,902,321
|
|
|
3,102,490
|
|
Income
from operations
|
|
|
2,622,412
|
|
|
573,990
|
|
|
4,429,541
|
|
|
1,016,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(239,274
|
)
|
|
(166,348
|
)
|
|
(438,048
|
)
|
|
(344,063
|
)
|
Other,
net
|
|
|
28,624
|
|
|
34,241
|
|
|
40,672
|
|
|
3,454
|
|
Total
other income
(expense)
|
|
|
(210,650
|
)
|
|
(132,107
|
)
|
|
(397,376
|
)
|
|
(340,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,411,762
|
|
|
441,883
|
|
|
4,032,165
|
|
|
675,873
|
|
Provision
for income taxes
|
|
|
(422,923
|
)
|
|
¾
|
|
|
(575,604
|
)
|
|
¾
|
|
Net
income
|
|
$
|
1,988,839
|
|
$
|
441,883
|
|
$
|
3,456,561
|
|
$
|
675,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.29
|
|
$
|
0.07
|
|
$
|
0.51
|
|
$
|
0.10
|
|
Diluted
earnings per common share
|
|
$
|
0.26
|
|
$
|
0.06
|
|
$
|
0.46
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares used in computing basic earnings per common
share
|
|
|
6,803,846
|
|
|
6,662,939
|
|
|
6,770,904
|
|
|
6,644,363
|
|
Incremental
common shares from stock options and warrants
|
|
|
814,852
|
|
|
255,138
|
|
|
781,468
|
|
|
237,583
|
|
Weighted
average common shares used in computing diluted earnings per common
share
|
|
|
7,618,698
|
|
|
6,918,077
|
|
|
7,552,372
|
|
|
6,881,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
3,456,561
|
|
$
|
675,873
|
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
577,995
|
|
|
364,274
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,306,878
|
)
|
|
(515,759
|
)
|
Inventories
|
|
|
(925,437
|
)
|
|
(329,704
|
)
|
Deposits
and other
|
|
|
25,842
|
|
|
50,899
|
|
Accounts
payable
|
|
|
(453,144
|
)
|
|
141,686
|
|
Accrued
liabilities
|
|
|
640,534
|
|
|
194,748
|
|
Deferred
tax liability
|
|
|
(186,501
|
)
|
|
¾
|
|
Net
cash provided by operating activities
|
|
|
1,828,972
|
|
|
582,017
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
earn-out payment
|
|
|
(153,830
|
)
|
|
(145,371
|
)
|
Acquisition,
net of cash acquired
|
|
|
133,674
|
|
|
¾
|
|
Other
assets
|
|
|
(237,707
|
)
|
|
¾
|
|
Capital
expenditures
|
|
|
(953,198
|
)
|
|
(69,186
|
)
|
Net
cash used in investing activities
|
|
|
(1,211,061
|
)
|
|
(214,557
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Issuance
of stock for cash
|
|
|
30,000
|
|
|
106,000
|
|
Proceeds
from borrowings
|
|
|
5,153,288
|
|
|
¾
|
|
Repayments
of indebtedness
|
|
|
(5,302,349
|
)
|
|
(425,800
|
)
|
Payments
to related parties
|
|
|
(337,679
|
)
|
|
(47,660
|
)
|
Net
cash used in financing activities
|
|
|
(456,740
|
)
|
|
(367,460
|
)
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
161,171
|
|
|
¾
|
|
Cash
and cash equivalents at beginning of period
|
|
|
284,801
|
|
|
¾
|
|
Cash
and cash equivalents at end of period
|
|
$
|
445,972
|
|
|
¾
|
|
|
|
|
|
|
|
|
|
Supplementary
schedule of non-cash investing and financing activities (See
Note
3):
|
|
|
|
|
|
|
|
Fair
value of net assets acquired
|
|
$
|
8,075,000
|
|
|
¾
|
|
Less
cash acquired
|
|
|
(133,674
|
)
|
|
¾
|
|
Less
debt issued
|
|
|
(7,375,000
|
)
|
|
¾
|
|
Less
equity issued
|
|
|
(700,000
|
)
|
|
¾
|
|
Acquisition,
net of cash acquired
|
|
$
|
(133,674
|
)
|
|
¾
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
402,549
|
|
$
|
454,010
|
|
Income
taxes paid
|
|
$
|
325,000
|
|
|
¾
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 was originally incorporated under the laws
of
the Province of British Columbia 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 wholly-owned subsidiaries, collectively referred to herein as the
“Company” or “Flotek”. 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 the Company include all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of its financial position as
of
June 30, 2005 and its results of operations and cash flows for the three and
six
month periods ended June 30, 2005 and 2004. The consolidated condensed statement
of financial position as of 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
and
six month periods ended June 30, 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
Cash
equivalents consist of highly liquid investments with an original maturity
of
three months or less.
Restricted
Cash
Restricted
cash serves as collateral for a standby letter of credit that provides financial
assurance that the Company will fulfill its obligations related to an
international contract to design and project manage the construction of a bulk
handling facility in Mexico.
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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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.
The
Company reviews 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. The Company’s other intangibles consists of patent
and deferred financing costs.
Financial
Instruments
The
Company considers 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.
The
Company has no off-balance sheet debt or other off-balance sheet financing
arrangements. The Company has 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.
The
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
The
Company has sales that are denominated in currencies other than the United
States dollar. In accordance with SFAS No. 52, “Foreign Currency Translation”,
any foreign currency transaction gains or losses are included in the
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Company’s
results of operations. The Company has not
entered into any forward foreign exchange contracts 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. The Company provides 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
The
Company recognizes 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. The Company provides 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.
Recent
Accounting Pronouncements
In
May 2005, the Financial Accounting Standards Board (“FASB”), issued SFAS
No. 154, “Accounting Changes and Error Corrections”. The Company’s
effective date for the pronouncement begins December 15, 2005. SFAS
No. 154 requires that all voluntary changes in accounting principles,
including corrections of errors, are retrospectively applied to prior financial
statements as if that principle had always been used, unless it is impracticable
to do so. When it is impracticable to calculate the effects on all prior
periods, SFAS No. 154 requires that the new principle be applied to
the
earliest period practicable. The Company will adopt SFAS No. 154 as of December
15, 2005.
In
March
of 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (“SAB 107”) to
assist preparers by simplifying some of the implementation challenges of SFAS
123(R) while enhancing the information that investors receive. SAB 107 creates
a
framework that is premised on two overarching themes: (a) considerable judgment
will be required by preparers to successfully implement SFAS 123(R),
specifically when valuing employee stock options; and (b) reasonable
individuals, acting in good faith, may conclude differently on the fair value
of
employee stock options. Key topics covered by SAB 107 include: (a) valuation
models—SAB 107 reinforces the flexibility allowed by SFAS 123(R) to choose an
option-pricing model that meets the standard’s fair value measurement objective;
(b) expected volatility—SAB 107 provides guidance on when it would be
appropriate to rely exclusively on either historical or implied volatility
in
estimating expected volatility; and (c) expected term—the new
guidance
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
includes
examples and some simplified approaches to
determining the expected term under certain circumstances. The Company will
apply the principles of SAB 107 in conjunction with its adoption of SFAS
123(R).
In
December 2004, the 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, the Company
does not record compensation expense for stock-based compensation. Under SFAS
123R, the Company 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. The Company is currently in the process of evaluating the
impact of SFAS 123R on its 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", which gives
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. The Company is in the process
of
reviewing the SFAS No. 109-1 and SFAS No. 109-2; however, at this time, the
Company does not believe that the adoption of these standards will have a
material impact on its 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. The Company does not
believe that the adoption of EITF03-13 will have a material impact on its
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. The Company is required to
be
adopted SFAS No. 151 beginning on January 1, 2006. The Company is currently
evaluating the effect that the adoption of SFAS No. 151 will have on its
consolidated financial position, results of operations and cash flows, but
do
not expect SFAS No. 151 to have a material impact.
Note
3 - Acquisitions
On
February 14, 2005 (the “Closing Date”), the Company completed the purchase of
Spidle Sales and Services, Inc. (“Spidle”). The consolidated condensed income
statements include the results of operations of Spidle commencing January 1,
2005. A written agreement transferred effective control of Spidle to the Company
as of January 1, 2005 without restrictions except those required to protect
the
shareholders of Spidle. Spidle is accounted for as a wholly-owned subsidiary
of
the Company.
The
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
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
over
the purchase price was allocated proportionately
to reduce 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 $16.0 million. 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
$1.3 million seller note payable over three years, and 129,271 shares of
the
Company’s common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appraised
|
|
|
Application
|
|
|
Recorded
|
|
|
|
|
Investment
|
|
|
of
FAS 141
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
133,673
|
|
|
¾
|
|
$
|
$133,673
|
|
Receivables
|
|
|
2,495,877
|
|
|
¾
|
|
|
2,495,877
|
|
Inventories
|
|
|
6,873,854
|
|
|
¾
|
|
|
6,873,854
|
|
Deferred
tax asset
|
|
|
74,000
|
|
|
¾
|
|
|
74,000
|
|
Property,
plant and equipment
|
|
|
17,484,818
|
|
|
(16,001,480
|
)
|
|
1,483,338
|
|
Accounts
payable
|
|
|
(927,436
|
)
|
|
¾ |
|
|
(927,436
|
)
|
Accrued
liabilities
|
|
|
(112,828
|
)
|
|
¾
|
|
|
(112,828
|
)
|
Federal
income taxes payable
|
|
|
(156,212
|
)
|
|
¾ |
|
|
(156,212
|
)
|
Deferred
tax liability
|
|
|
¾
|
|
|
(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
|
)
|
$
|
¾
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
4 - Inventories
The
components of inventories for the period ended June 30, 2005 and December 31,
2004 were as follows:
|
|
|
For
the Period Ended
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,316,705
|
|
$
|
797,430
|
|
Finished
goods
|
|
|
9,420,519
|
|
|
2,107,217
|
|
Gross
inventories
|
|
|
10,737,224
|
|
|
2,904,647
|
|
Less:
Slow-moving and obsolescence reserve
|
|
|
(490,547
|
)
|
|
(457,257
|
)
|
Inventories,
net
|
|
$
|
10,246,677
|
|
$
|
2,447,390
|
|
Additional
inventory of $6,873,854 associated with the Spidle acquisition was recorded
January 1, 2005 (see Note 3).
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
5 - Property, Plant and Equipment
For
the
period ended June 30, 2005 and December 31, 2004, property, plant and equipment
was comprised of the following:
|
|
|
|
|
|
|
|
For
the Period Ended
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
221,155
|
|
$
|
68,000
|
|
Buildings
and leasehold improvements
|
|
|
2,796,675
|
|
|
1,990,436
|
|
Machinery
and equipment
|
|
|
2,923,583
|
|
|
953,224
|
|
Equipment
in transit |
|
|
222,500 |
|
|
— |
|
Furniture
and fixtures
|
|
|
266,939
|
|
|
108,481
|
|
Transportation
equipment
|
|
|
1,261,367
|
|
|
514,652
|
|
Computer
equipment
|
|
|
427,090
|
|
|
424,837
|
|
Gross
property, plant and equipment
|
|
|
8,119,309
|
|
|
4,059,630
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(4,116,349
|
)
|
|
(1,942,834
|
)
|
Net
property and equipment
|
|
$
|
4,002,960
|
|
$
|
2,116,796
|
|
|
|
|
|
|
|
|
|
Additional
property, plant and equipment of $1,483,338 associated with the Spidle
acquisition was recorded January 1, 2005 (see Note 3).
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 an earn-out
for
the period March 31, 2003 through December 31, 2004 to reflect additional
acquisition consideration related to this agreement. In the first quarter of
2005 the Company recorded additional goodwill of $153,830 to reflect the final
amount of additional acquisition consideration related to this agreement. As
of
June 30, 2005, $100,804 had been paid. The remaining $373,038 will be paid
in
cash and common stock 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 for the period ended June 30, 2005 and December 31, 2004 consisted of
the
following:
|
|
|
|
|
|
|
|
For
the Period Ended
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Equipment
term loan
|
|
$
|
6,533,333
|
|
$
|
¾
|
|
Real
estate term loan
|
|
|
836,427
|
|
|
¾
|
|
Revolving
line of credit
|
|
|
3,870,440
|
|
|
¾
|
|
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
|
|
|
1,177,778
|
|
|
¾
|
|
Promissory
note maturing April 2008
|
|
|
128,722
|
|
|
¾
|
|
Note
payable to Facilities
|
|
|
395,757
|
|
|
465,495
|
|
Note
payable to bank maturing March 2008
|
|
|
¾
|
|
|
1,365,766
|
|
Note
payable to bank maturing October 2008
|
|
|
¾
|
|
|
629,539
|
|
Term
loan payable to bank maturing December 2007
|
|
|
¾
|
|
|
536,281
|
|
Revolving
line of credit, maturing September 2005
|
|
|
¾
|
|
|
2,439,483
|
|
Mortgage
note payable maturing December 2012
|
|
|
¾
|
|
|
96,872
|
|
Other
|
|
|
41,937
|
|
|
125,018
|
|
Total
|
|
|
13,634,394
|
|
|
6,408,454
|
|
Less
current maturities
|
|
|
(2,219,224
|
)
|
|
(1,136,467
|
)
|
Long-term
debt
|
|
$
|
11,415,170
|
|
$
|
5,271,987
|
|
|
|
|
|
|
|
|
|
On
January 30, 2003, the Company 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% markup. Dr. Penny owned 37.06% and Mr. Beall
owned 62.94% of SCL. At that time, both owners were directors as well as
principal stockholders. Dr. Penny was and is an employee of the Company and
Mr.
Beall is no longer a director of the Company. 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 its 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, maturing April
2008.
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 6.25% on June 30, 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, the Company
issued $1,275,000 of notes payable to the seller. The notes are payable over
36
months and bear interest at 6%.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 June 30, 2005, the Company
was in
compliance with all covenants.
The
Company believes the fair value of its long-term debt approximates the
recorded
value as of June 30, 2005, as the majority of the long-term debt carries
a
floating interest rate based on the prime rate.
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 potentially dilutive common shares. For the three and six months ended
June
30, 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 Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,988,839
|
|
$
|
441,883
|
|
$
|
3,456,561
|
|
$
|
675,873
|
|
Weighted-average
common shares outstanding
|
|
|
6,803,846
|
|
|
6,662,939
|
|
|
6,770,904
|
|
|
6,644,363
|
|
Basic
earnings per common share
|
|
$
|
0.29
|
|
$
|
0.07
|
|
$
|
0.51
|
|
$
|
0.10
|
|
Diluted
earnings per common share
|
|
$
|
0.26
|
|
$
|
0.06
|
|
$
|
0.46
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
6,803,846
|
|
|
6,662,939
|
|
|
6,770,904
|
|
|
6,644,363
|
|
Effect
of dilutive securities
|
|
|
814,852
|
|
|
255,138
|
|
|
781,468
|
|
|
237,583
|
|
Weighted-average
common equivalent
shares outstanding
|
|
|
7,618,698
|
|
|
6,918,077
|
|
|
7,552,372
|
|
|
6,881,946
|
|
A
reconciliation of the number of shares used for the basic earnings per share
calculation on a pro forma basis for 2004 had the acquisition of Spidle occurred
January 1, 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended
June
30,
|
|
|
For
the Six Months Ended
June
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma revenues
|
|
$
|
12,460,604
|
|
$
|
7,893,669
|
|
$
|
23,501,768
|
|
$
|
16,462,722
|
|
Pro
forma income from operations
|
|
|
2,622,412
|
|
|
946,208
|
|
|
4,429,541
|
|
|
1,690,026
|
|
Pro
forma net income
|
|
|
1,988,839
|
|
|
841,159
|
|
|
3,456,561
|
|
|
1,563,790
|
|
Pro
forma weighted-average common shares outstanding
|
|
|
6,803,846
|
|
|
6,792,210
|
|
|
6,770,904
|
|
|
6,773,634
|
|
Basic
earnings per common share
|
|
$
|
0.29
|
|
$
|
0.12
|
|
$
|
0.51
|
|
$
|
0.23
|
|
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
9 - Stock Based Compensation Expense
The
Company has elected to follow APB Opinion No. 25 in accounting for our
employee stock options. Accordingly, no compensation expense is recognized
in
the financial statements because the exercise price of the employee stock
options equals the market price of the common stock on the date of grant. If
determined under SFAS No. 123, the Company’s 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 Three Months Ended
June
30,
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
income:
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1,988,839
|
|
$
|
441,883
|
|
$
|
3,456,561
|
|
$
|
675,873
|
|
Deduct:
Total stock-based
employee
compensation expense determined under fair value based method for
all
awards, net of related tax effects
|
|
|
¾
|
|
|
(17,781
|
)
|
|
(329
|
)
|
|
(34,267
|
)
|
Pro
forma
|
|
$
|
1,988,839
|
|
$
|
424,102
|
|
$
|
3,456,232
|
|
$
|
641,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.29
|
|
$
|
0.07
|
|
$
|
0.51
|
|
$
|
0.10
|
|
Pro
forma
|
|
$
|
0.29
|
|
$
|
0.06
|
|
$
|
0.51
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.26
|
|
$
|
0.06
|
|
$
|
0.46
|
|
$
|
0.10
|
|
Pro
forma
|
|
$
|
0.26
|
|
$
|
0.06
|
|
$
|
0.46
|
|
$
|
0.09
|
|
For
the
three months ended June 30, 2005, the Company did not have any stock option
grants, exercises or forfeitures.
Note
10 - Related Party Transactions
On
January 30, 2003, the Company 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% markup. Dr. Penny owned 37.06% and Mr. Beall
owned 62.94% of SCL. At that time, both owners were directors as well as
principal stockholders. Dr. Penny was and is an employee of the Company and
Mr.
Beall is no longer a director of the Company. 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 its 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, maturing April
2008
On
July
25, 2002, we borrowed $500,000 under a promissory note from Oklahoma Facilities,
LLC (“Facilities”). One of the Company’s 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
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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.
The
Company purchased from Phoenix E&P Technology, LLC ("Phoenix"), its
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, a
director of Flotek, has a thirty percent ownership interest in CEP. No royalties
were earned during the first six months of 2005.
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. The Company has 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.
The
Company has 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.
|
The
Company evaluates 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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Summarized
financial information concerning the segments for the three and six months
ending June 30, 2005 and 2004 is show in the following tables (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
and
|
|
Drilling
|
|
Production
|
|
and
|
|
|
|
|
|
Logistics
|
|
Products
|
|
Products
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
7,065
|
|
$
|
5,032
|
|
$
|
364
|
|
$
|
¾
|
|
$
|
12,461
|
|
Income
(loss) from operations
|
|
$
|
1,850
|
|
$
|
1,258
|
|
$
|
10
|
|
$
|
(496
|
)
|
$
|
2,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
4,079
|
|
$
|
694
|
|
$
|
38
|
|
$
|
¾
|
|
$
|
4,811
|
|
Income
(loss) from operations
|
|
$
|
1,291
|
|
$
|
(30
|
)
|
$
|
(170
|
)
|
$
|
(517
|
)
|
$
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
13,193
|
|
$
|
9,606
|
|
$
|
703
|
|
$
|
¾
|
|
$
|
23,502
|
|
Income
(loss) from operations
|
|
$
|
3,355
|
|
$
|
2,103
|
|
$
|
66
|
|
$
|
(1,094
|
)
|
$
|
4,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
7,487
|
|
$
|
1,957
|
|
$
|
163
|
|
$
|
¾
|
|
$
|
9,607
|
|
Income
(loss) from operations
|
|
$
|
1,939
|
|
$
|
288
|
|
$
|
(238
|
)
|
$
|
(973
|
)
|
$
|
1,016
|
|
Total
assets by reportable segment were as follows (in thousands):
|
|
|
|
|
|
|
|
For
the Period Ended
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
and Logistics
|
|
$
|
14,571
|
|
$
|
12,837
|
|
Drilling
Products
|
|
|
13,849
|
|
|
868
|
|
Production
Products
|
|
|
1,431
|
|
|
1,467
|
|
Corporate
and Other
|
|
|
168
|
|
|
785
|
|
Total
Assets
|
|
$
|
30,019
|
|
$
|
15,957
|
|
Note
12 - Subsequent Event
On
August
4, 2005 the Company signed a definitive agreement to purchase the assets of
privately held Harmon’s Machine Works Inc. Consideration to be paid is
approximately $3.4 million cash, $0.6 million in common stock and $0.5 million
in assumed net liabilities. The acquisition is anticipated to close by the
end
of August 2005.
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 the Province of British Columbia 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 energy 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. As of July 27, 2005 our common stock began
trading on the American Stock Exchange under the stock ticker symbol “FTK”.
Prior to this date our common stock was 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 develops, manufactures, and markets 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 June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,460,604
|
|
$
|
4,810,976
|
|
$
|
23,501,768
|
|
$
|
9,607,367
|
|
Cost
of revenues
|
|
|
7,197,008
|
|
|
2,660,573
|
|
|
14,169,906
|
|
|
5,488,395
|
|
Gross
margin
|
|
|
5,263,596
|
|
|
2,150,403
|
|
|
9,331,862
|
|
|
4,118,972
|
|
Gross
margin %
|
|
|
42.2
|
%
|
|
44.7
|
%
|
|
39.7
|
%
|
|
42.9
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,186,362
|
|
|
1,322,164
|
|
|
4,046,468
|
|
|
2,601,926
|
|
Depreciation and amortization
|
|
|
307,633
|
|
|
182,848
|
|
|
577,995
|
|
|
364,274
|
|
Research and development
|
|
|
147,189
|
|
|
71,401
|
|
|
277,858
|
|
|
136,290
|
|
Total expenses
|
|
|
2,641,184
|
|
|
1,576,413
|
|
|
4,902,321
|
|
|
3,102,490
|
|
Income
from operations
|
|
|
2,622,412
|
|
|
573,990
|
|
|
4,429,541
|
|
|
1,016,482
|
|
Income
from operations %
|
|
|
21.1
|
%
|
|
11.9
|
%
|
|
18.9
|
%
|
|
10.6
|
%
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(239,274
|
)
|
|
(166,348
|
)
|
|
(438,048
|
)
|
|
(344,063
|
)
|
Other, net
|
|
|
28,624
|
|
|
34,241
|
|
|
40,672
|
|
|
3,454
|
|
Total other income (expense)
|
|
|
(210,650
|
)
|
|
(132,107
|
)
|
|
(397,376
|
)
|
|
(340,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,411,762
|
|
|
441,883
|
|
|
4,032,165
|
|
|
675,873
|
|
Provision
for income taxes
|
|
|
(422,923
|
)
|
|
¾
|
|
|
(575,604
|
)
|
|
¾
|
|
Net
income
|
|
$
|
1,988,839
|
|
$
|
441,883
|
|
$
|
3,456,561
|
|
$
|
675,873
|
|
Consolidated
- Comparison of Three Months Ended June 30, 2005 and 2004
Total
revenues increased by $7,649,628 or 159% in the second quarter of 2005 versus
2004. As discussed in the segment analysis that follows, organic growth within
our Chemicals and Logistics segment combined with the expansion of our Drilling
Products segment produced the increase in sales and profit. Sales of our
proprietary chemical line continue to grow bolstered by strong margins in our
downhole drilling tool operations.
Gross
margin increased 145%, from $2,150,403 in the second quarter of 2004 to
$5,263,596 in 2005. Gross margin as a percentage of revenues decreased from
44.7% in the second quarter of 2004 to 42.2% in 2005. The decrease in margin
as
a percentage of revenues was a result of increased chemical feedstock and
transportation costs. 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 were $2,186,362
for the second quarter of 2005 compared to $1,322,164 in the second quarter
of
2004, however decreased as a percentage of revenue. Measured as a percentage
of
revenue, selling, general and administrative costs dropped from 27.5% in the
second quarter of 2004 to 17.6% in 2005. Significant emphasis continues to
be
placed on growing sales while containing selling, general and administrative
costs across the organization.
Depreciation
and amortization increased $124,785 or 68% in the second quarter of 2005
compared to the same quarter in 2004. The additional assets related to the
Spidle acquisition effective January 1, 2005 are the primary
reasons
for the increased depreciation and amortization.
Interest
expense increased from $166,348 for the second quarter of 2004 to $239,274
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.
Research
and development costs increased due to expansion of our applied research
capabilities. 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 $422,923 provision for income taxes was recorded
for the second quarter of 2005. The provision was made for estimated federal
income tax, state income tax and alternative minimum tax. Our net operating
losses can be used to offset federal income taxes. 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.
Consolidated
- Comparison of Six Months Ended June 30, 2005 and 2004
Total
revenues increased by $13,894,401 or 145% in the first six months of 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
six months of 2005 and strong performance by our Chemicals and Logistics
segment, particularly with our line of proprietary chemicals.
Gross
margin increased 127%, from $4,118,972 in the first six months of 2004 to
$9,331,862 in 2005. Gross margin as a percentage of revenues decreased from
42.9% in the first six months of 2004 to 39.7% in 2005. The decrease in margin
as a percentage of revenues was a result of increased chemical feedstock and
transportation costs. 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
$4,046,468 in the first six months of 2005 from $2,601,926 in the first six
months of 2004, however decreased as a percentage of revenue. Measured as a
percentage of revenue, selling, general and administrative costs dropped from
27.1% in the first six months of 2004 to 17.2% in 2005. Significant emphasis
continues to be placed on growing sales while containing selling, general and
administrative costs across the organization.
Depreciation
and amortization increased $213,721 or 59% in the first six months of 2005
compared to the same period in 2004. The additional assets related to the Spidle
acquisition effective January 1, 2005 are the primary reasons
for the
increased depreciation and amortization.
Interest
expense increased from $344,063 for the first six months of 2004 to $438,048
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.
Research
and development costs increased due to expansion of our applied research
capabilities. 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 $575,604 provision for income taxes was recorded
for the first six months of 2005. The provision was made for estimated federal
income tax, state income tax and alternative minimum tax. Our net operating
losses can be used to offset federal income taxes. 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 June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,064,810
|
|
$
|
4,078,968
|
|
$
|
13,193,084
|
|
$
|
7,487,583
|
|
Gross
margin
|
|
$
|
2,841,791
|
|
$
|
1,842,949
|
|
$
|
5,105,360
|
|
$
|
3,148,676
|
|
Gross
margin %
|
|
|
40.2
|
%
|
|
45.2
|
%
|
|
38.7
|
%
|
|
42.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
1,849,878
|
|
$
|
1,291,076
|
|
$
|
3,355,318
|
|
$
|
1,938,839
|
|
Operating
margin %
|
|
|
26.2
|
%
|
|
31.7
|
%
|
|
25.4
|
%
|
|
25.9
|
%
|
Chemicals
and Logistics - Comparison of Three Months Ended June 30, 2005 and
2004
Chemicals
and Logistics revenues increased $2,985,842 or 73.2%, in the second quarter
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
doubled from $639,845 in the second quarter of 2004 to $1,608,399 for the second
quarter of 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. 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.
Gross
margin increased from $1,842,949 in the second of quarter 2004 to $2,841,791
for
the same period 2005. Gross margin as a percentage of revenues decreased from
45.2% in the second quarter of 2004 to 40.2% 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, and price increases that
were implemented June 2005.
Operating
income increased $558,802, or 43.3%, during the second quarter of 2005 compared
to 2004, primarily as a result of increased sales in the Chemical division
and
improved gross margins in the Chemical and Logistics business unit. 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.
Chemicals
and Logistics - Comparison of Six Months Ended June 30, 2005 and
2004
Chemicals
and Logistics revenues increased $5,705,501 or 76.2%, in the first six 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. Sales of our line of environmental friendly “green”
chemicals increased from $1,220,376 in the first six months of 2004 to
$3,227,808 for the first six months of 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. 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 a bulk handling design
and
construction oversight project in Mexico during the first six months of 2005.
Gross
margin increased from $3,148,676 in the first six months of 2004 to $5,105,360
for the same period 2005. Gross margin as a percentage of revenues decreased
from 42.1% in the first six months of 2004 to 38.7% 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. Price increases were implemented in June
2005.
Operating
income increased $1,416,479, or 73.1%, during the first six months of 2005
compared to 2004, primarily as a result of increased sales in the Chemical
division and improved gross margins in the Chemical and Logistics business
unit.
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 June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,031,604
|
|
$
|
693,912
|
|
$
|
9,605,854
|
|
$
|
1,957,098
|
|
Gross
margin
|
|
$
|
2,247,319
|
|
$
|
300,792
|
|
$
|
3,845,812
|
|
$
|
904,367
|
|
Gross
margin %
|
|
|
44.7
|
%
|
|
43.4
|
%
|
|
40.0
|
%
|
|
46.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
1,258,260
|
|
$
|
(30,388
|
)
|
$
|
2,102,472
|
|
$
|
288,521
|
|
Operating
margin %
|
|
|
25.0
|
%
|
|
(4.4
|
)%
|
|
21.9
|
%
|
|
14.7
|
%
|
Drilling
Products - Comparison of Three Months Ended June 30, 2005 and
2004
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 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 $4,337,692 in the second quarter of 2005 compared
to 2004. This increase relates to the addition of the operating results Spidle
to our drilling products segment. Spidle contributed $4.2 million in revenue
during the second quarter. Management views the acquisition and integration
of
Spidle to be positive with actual results exceeding management projections
through the second quarter of 2005.
Gross
margin increased $1,946,527 in the second quarter of 2005 compared to 2004.
Gross margin as a percentage of revenues increased from 43.4% in the second
quarter of 2004 to 44.7% in 2005. The increase in margin is attributable to
a
shift in the mix of revenues, with drilling tool rentals contributing to the
increase in margins.
Operating
income for the second quarter of 2005 was $1,258,260 compared to an operating
loss of $30,388 in 2004, due to the expansion of the division and improved
sales. 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.
Drilling
Products - Comparison of Six Months Ended June 30, 2005 and
2004
Drilling
Products revenues, increased $7,648,756 in the first six months of 2005 compared
to 2004. This increase relates to the addition of the operating results Spidle
to our drilling products segment. Spidle contributed $8.2 million in revenue
during the first six months of 2005. Management views the acquisition and
integration of Spidle to be positive with actual results exceeding management
projections through the first six months of 2005.
Gross
margin increased $2,941,445 in the first six months of 2005 compared to 2004.
Gross margin as a percentage of revenues decreased from 46.2% in the first
six
months of 2004 to 40.0% in 2005. The decrease in margin is attributable to
change in the based 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 $1,813,951 during the first six months of 2005 compared to
2004, primarily due to the expansion of the division. We believe we will
continue to 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 June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
364,190
|
|
$
|
38,096
|
|
$
|
702,830
|
|
$
|
162,695
|
|
Gross
margin
|
|
$
|
174,485
|
|
$
|
6,662
|
|
$
|
380,690
|
|
$
|
65,929
|
|
Gross
margin %
|
|
|
47.9
|
%
|
|
17.5
|
%
|
|
54.2
|
%
|
|
40.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
9,729
|
|
$
|
(169,521
|
)
|
$
|
65,783
|
|
$
|
(237,742
|
)
|
Operating
margin %
|
|
|
2.7
|
%
|
|
(445.0
|
)%
|
|
9.4
|
%
|
|
(146.1
|
)%
|
Production
Products - Comparison of Three Months Ended June 30, 2005 and
2004
Production
Products revenues increased $326,094 in the second quarter of 2005 compared
to
2004 due to sales to Venezuela. Gross margin percentage also increased
significantly from 17.5% during the second quarter of 2004 to 47.9% 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 indicated
increases in productions 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 provides 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 successful in
eliminating “gas locking” which prior to the Gas Breaker installation completely
stopped production and required workover of the well. The Petrovalve can
effectively lift highly viscous oil in heavy oil or tar sand production
zones.
Production
Products - Comparison of Six Months Ended June 30, 2005 and
2004
Production
Products revenues increased $540,135 in the first six months of 2005 compared
to
2004 due to sales to customers in Russia and Venezuela. Gross margin percentage
also increased significantly from 40.5% during the first six months of 2004
to
54.2% 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.
Capital
Resources and Liquidity
Our
capital resources and liquidity continued to improve during the first six months
of 2005. During the first six months of 2005 we produced net income of
$3,456,561 and had positive cash flows from operations of $1,828,972 after
contributing $2,205,584 to working capital. 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.
Both
accounts receivable and inventories increased due to increased sales levels
during the first six months of 2005. The change in working capital accounts
for
the first six months of 2005 has been adjusted for the addition of Spidle as
of
the beginning of the period. Accounts payable decreased $453,144 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 $1,006,422. 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 IBS 2000.
Capital
expenditures for the six months ended June 30, 2005 totaled $953,198 and was
used for drilling tool equipment and expansion of laboratory facilities.
In
February 2005, we successfully obtained a new senior credit facility with Wells
Fargo. As part of the terms negotiated, we obtained approval for a capital
expenditures budget of $2,000,000 for 2005 allowing us to expand our
operations.
Our
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 June 30, 2005, we were in
compliance with all covenants.
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. No additional shares or stock options were issued in the second
quarter of 2005.
Impact
of Recently Issued Accounting Standards
In
May 2005, the Financial Accounting Standards Board (“FASB”), issued SFAS
No. 154, “Accounting Changes and Error Corrections”. Our effective date for
the pronouncement begins December 15, 2005. SFAS No. 154 requires
that
all voluntary changes in accounting principles, including corrections of errors,
are retrospectively applied to prior financial statements as if that principle
had always been used, unless it is impracticable to do so. When it is
impracticable to calculate the effects on all prior periods, SFAS No. 154
requires that the new principle be applied to the earliest period practicable.
We will adopt SFAS No. 154 as of December 15, 2005.
In
March
2005, the SEC staff issued Staff Accounting Bulletin No. 107 (“SAB 107”) to
assist preparers by simplifying some of the implementation challenges of SFAS
123(R) while enhancing the information that investors receive. SAB 107 creates
a
framework that is premised on two overarching themes: (a) considerable judgment
will be required by preparers to successfully implement SFAS 123(R),
specifically when valuing employee stock options; and (b) reasonable
individuals, acting in good faith, may conclude differently on the fair value
of
employee stock options. Key topics covered by SAB 107 include: (a) valuation
models—SAB 107 reinforces the flexibility allowed by SFAS 123(R) to choose an
option-pricing model that meets the standard’s fair value measurement objective;
(b) expected volatility—SAB 107 provides guidance on when it would be
appropriate to rely exclusively on either historical or implied volatility
in
estimating expected volatility; and (c) expected term—the new guidance includes
examples and some simplified approaches to determining the expected term under
certain circumstances. We will apply the principles of SAB 107 in conjunction
with its adoption of SFAS 123(R).
In
December 2004, the 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", which gives
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. We are required to adopt SFAS
No. 151 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.
Item
3. Controls
and Procedures
Our
Chief
Executive Officer and our Chief Financial Officer (collectively, the "Certifying
Officers") have evaluated the effectiveness of the Company's "disclosure
controls and procedures" (as defined in
Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report, and have concluded that, as of the date of this report, our disclosure
controls and procedures are
effective
in enabling us to record, process, summarize, and report information required
to
be included in our SEC filings within the required time period, and to ensure
that such information is accumulated and communicated to our management,
including the Certifying Officers, to allow timely decisions regarding required
disclosure. Since the date of this report, there have not been any significant
changes in
our
internal controls, or in other factors that could significantly affect these
controls subsequent to the date of this report.
In
anticipation
of our compliance with
the
Sarbanes-Oxley Act of 2002
(the
"Act"), we have increased our finance and accounting staff dedicated to the
documentation and testing required under this Act.
It
should
be noted that any system of controls, however well designed and operated,
can
provide only reasonable, and not absolute, assurance that the objectives
of the
system will be met. In addition, the design of any control system is based
in
part
upon
certain assumptions about the likelihood of future events.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings.
We
are
involved, on occasion, in routine litigation incidental to our business. As
of
June 30, 2005 we were not named or involved in any litigation.
Item
4. Submission
of Matters to a Vote of Security Holders.
The
annual meeting of the stockholders of the Company was held on May 24, 2005,
at
which meeting the shareholders voted to (1) elect Jerry D. Dumas, Sr., Glenn
S.
Penny, Gary M. Pittman, William R. Ziegler, John W. Chisholm, Barry E. Stewart
and Richard O. Wilson as directors and (2) approve the Company’s 2005 Long-term
Incentive Plan. The voting results for each proposal submitted to a vote is
as
listed below.
Election
of Directors
All
directors serve one year terms. All directors that were nominated were elected
to another term. Results of voting were as follows:
John
W.
Chisholm - 5,316,928 votes for and 47,244 votes withheld.
Jerry
D.
Dumas, Sr. - 5,038,718 votes for and 325,454 votes withheld.
Glenn
S.
Penny - 5,038,045 votes for and 311,127 votes withheld.
Gary
M.
Pittman - 5,347,871 votes for and 16,301 votes withheld.
Barry
E.
Stewart - 5,347,871 votes for and 16,301 votes withheld.
Richard
O. Wilson - 5,347,769 votes for and 16,403 votes withheld.
William
R. Ziegler - 5,347,862 votes for and 16,310 votes withheld.
Approval
of Company’s 2005 Long-term Incentive Plan
4,487,015
votes for, 2,431 votes against and 904 votes abstaining.
Item
6. Exhibits.
(a)
|
Exhibits:
|
|
|
|
|
|
10.1
|
Material
Contracts
|
|
|
|
|
11.1
|
Computation
of Net Income (Loss) Per Common Share
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31.1
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Rule
13a-15(e) and 15d-15(e) Certification of Chief Executive
Officer
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31.2
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Rule
13a-15(e) and 15d-15(e) Certification of Chief Financial
Officer
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32.1
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Certification
of Periodic Report by Chief Executive Officer
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32.2
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Certification
of Periodic Report by Chief Financial
Officer
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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.
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FLOTEK
INDUSTRIES, INC. |
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By: |
/s/ Jerry
D. Dumas Sr. |
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Jerry
D. Dumas, Sr.
Chairman and Chief Executive
Officer
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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.
August
9,
2005