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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission
File Number 1-13270
FLOTEK
INDUSTRIES, INC.
(Exact
name of small business issuer 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)
|
(713)
849-9911
(Issuer’s
telephone number)
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 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 a shell company (as defined in Rule
12b-2 of the Exchange Act.) YES ¨ NO x
There
were 8,241,035 shares of the issuer’s common stock, $.0001 par value,
outstanding as of November 4,
2005.
Transitional
small business disclosure format: YES ¨ NO x
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
|
16
|
|
|
|
|
Item
3. Controls
and Procedures
|
25
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
Item
2. Unregistered
Sales of Equity Securities and Use of
Proceeds
|
26
|
|
|
|
|
Item
6. Exhibits
|
26
|
|
|
|
|
Signatures
|
27
|
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,
but
not limited to, 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
|
|
September
30,
2005
|
|
December
31,
2004
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
8,832,769
|
|
$
|
284,801
|
|
Restricted
cash
|
|
|
¾
|
|
|
37,038
|
|
Accounts
receivable, net
|
|
|
7,565,413
|
|
|
3,372,236
|
|
Inventories,
net
|
|
|
10,775,042
|
|
|
2,447,390
|
|
Other
current assets
|
|
|
99,254
|
|
|
39,721
|
|
Total
current assets
|
|
|
27,272,478
|
|
|
6,181,186
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
7,761,752
|
|
|
2,116,796
|
|
Goodwill
|
|
|
11,748,889
|
|
|
7,465,725
|
|
Intangible
and other assets, net
|
|
|
1,701,154
|
|
|
193,380
|
|
|
|
$
|
48,484,273
|
|
$
|
15,957,087
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,158,188
|
|
$
|
2,641,577
|
|
Accrued
liabilities
|
|
|
2,040,177
|
|
|
1,617,762
|
|
Current
portion of long-term debt
|
|
|
2,182,109
|
|
|
1,136,467
|
|
Amounts
due to related parties
|
|
|
¾
|
|
|
466,401
|
|
Deferred
tax liability
|
|
|
1,602,765
|
|
|
¾
|
|
Total
current liabilities
|
|
|
7,983,239
|
|
|
5,862,207
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
7,788,784
|
|
|
5,271,987
|
|
Total
liabilities
|
|
|
15,772,023
|
|
|
11,134,194
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value; 20,000,000 shares authorized; shares
issued
and
outstanding: September 30, 2005 - 8,241,035 and December 31, 2004
-
6,670,004
|
|
|
824 |
|
|
667 |
|
Additional
paid-in capital
|
|
|
39,745,013
|
|
|
17,082,141
|
|
Accumulated
deficit
|
|
|
(7,033,587
|
)
|
|
(12,259,915
|
)
|
Total
stockholders’ equity
|
|
|
32,712,250
|
|
|
4,822,893
|
|
|
|
$
|
48,484,273
|
|
$
|
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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Revenues
|
|
|
$
|
13,303,670
|
|
$
|
5,671,044
|
|
$
|
36,805,438
|
|
$
|
15,278,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
7,576,120
|
|
|
3,174,442
|
|
|
21,746,026
|
|
|
8,662,846
|
|
Gross
profit
|
|
|
|
5,727,550
|
|
|
2,496,602
|
|
|
15,059,412
|
|
|
6,615,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and
administrative
|
|
|
|
2,415,259
|
|
|
1,314,024
|
|
|
6,461,727
|
|
|
3,915,949
|
|
Depreciation
and
amortization
|
|
|
|
421,810
|
|
|
173,686
|
|
|
999,805
|
|
|
537,960
|
|
Research
and development
|
|
|
|
163,005
|
|
|
75,111
|
|
|
440,863
|
|
|
211,401
|
|
Total
expenses
|
|
|
|
3,000,074
|
|
|
1,562,821
|
|
|
7,902,395
|
|
|
4,665,310
|
|
Income
from operations
|
|
|
|
2,727,476
|
|
|
933,781
|
|
|
7,157,017
|
|
|
1,950,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
(214,956
|
)
|
|
(178,900
|
)
|
|
(653,004
|
)
|
|
(522,961
|
)
|
Other,
net
|
|
|
|
(1,133
|
)
|
|
48,223
|
|
|
39,539
|
|
|
51,678
|
|
Total
other income
(expense)
|
|
|
|
(216,089
|
)
|
|
(130,677
|
)
|
|
(613,465
|
)
|
|
(471,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
2,511,387
|
|
|
803,104
|
|
|
6,543,552
|
|
|
1,478,981
|
|
Provision
for income taxes
|
|
|
|
(741,620
|
)
|
|
(100,000
|
)
|
|
(1,317,224
|
)
|
|
(100,000
|
)
|
Net
income
|
|
|
$
|
1,769,767
|
|
$
|
703,104
|
|
$
|
5,226,328
|
|
$
|
1,378,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per
common
share
|
|
|
$
|
0.24
|
|
$
|
0.11
|
|
$
|
0.75
|
|
$
|
0.21
|
|
Diluted
earnings per
common
share
|
|
|
$
|
0.21
|
|
$
|
0.10
|
|
$
|
0.67
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares used in
computing
basic earnings per common share
|
|
|
|
7,387,467
|
|
|
6,666,330
|
|
|
6,976,915
|
|
|
6,656,496
|
|
Incremental
common shares from stock options
and
warrants
|
|
|
|
955,062
|
|
|
643,039
|
|
|
865,177
|
|
|
646,645
|
|
Weighted
average common shares used in
computing
diluted earnings per common share
|
|
|
|
8,342,529
|
|
|
7,309,369
|
|
|
7,842,092
|
|
|
7,303,141
|
|
The
accompanying notes are an integral part of
these consolidated condensed financial statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2005
|
|
2004
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
|
$
|
5,226,328
|
|
$
|
1,378,981
|
|
Adjustments
to reconcile net income to
net
cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
999,805
|
|
|
537,960
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
|
37,038
|
|
|
¾
|
|
Accounts
receivable
|
|
|
|
(1,316,939
|
)
|
|
(983,577
|
)
|
Inventories
|
|
|
|
(885,852
|
)
|
|
(488,757
|
)
|
Deposits
and other
|
|
|
|
(101,205
|
)
|
|
48,318
|
|
Accounts
payable
|
|
|
|
(1,967,762
|
)
|
|
(436,035
|
)
|
Accrued
liabilities
|
|
|
|
406,595
|
|
|
633,022
|
|
Deferred
tax liability
|
|
|
|
(186,501
|
)
|
|
¾
|
|
Net
cash provided by operating activities
|
|
|
|
2,211,507
|
|
|
689,912
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
earn-out payment
|
|
|
|
(153,830
|
)
|
|
(229,633
|
)
|
Acquisitions,
net of cash acquired
|
|
|
|
(7,452,084
|
)
|
|
¾
|
|
Other
assets
|
|
|
|
(267,890
|
)
|
|
¾
|
|
Capital
expenditures
|
|
|
|
(1,425,370
|
)
|
|
(107,393
|
)
|
Net
cash used in investing activities
|
|
|
|
(9,299,174
|
)
|
|
(337,026
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Issuance
of stock
|
|
|
|
19,914,598
|
|
|
107,800
|
|
Proceeds
from borrowings
|
|
|
|
9,602,862
|
|
|
302,019
|
|
Repayments
of indebtedness
|
|
|
|
(13,415,424
|
)
|
|
(700,045
|
)
|
Payments
to related parties
|
|
|
|
(466,401
|
)
|
|
(62,660
|
)
|
Net
cash used in financing activities
|
|
|
|
15,635,635
|
|
|
(352,886
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
|
8,547,968
|
|
|
¾
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
284,801
|
|
|
¾
|
|
Cash
and cash equivalents at end of period
|
|
|
$
|
8,832,769
|
|
$
|
¾
|
|
|
|
|
|
|
|
|
|
|
Supplementary
schedule of non-cash investing and
financing
activities (See Note 3):
|
|
|
|
|
|
|
|
|
Fair
value of net assets acquired
|
|
|
$
|
17,410,757
|
|
$
|
¾
|
|
Less
cash acquired
|
|
|
|
(133,674
|
)
|
|
¾
|
|
Less
debt issued
|
|
|
|
(7,375,000
|
)
|
|
¾
|
|
Less
equity issued
|
|
|
|
(2,449,999
|
)
|
|
¾
|
|
Acquisition,
net of cash acquired
|
|
|
$
|
7,452,084
|
|
$
|
¾
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
$
|
689,373
|
|
$
|
531,000
|
|
Income
taxes paid
|
|
|
$
|
1,413,524
|
|
$
|
¾
|
|
The
accompanying notes are an integral part of
these consolidated condensed financial statements.
Note
1 - Business and Basis of Presentation
Flotek
Industries, Inc. and subsidiaries was 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 engaged
in the manufacturing and marketing of innovative specialty chemicals and
downhole drilling and production equipment, and in the management of automated
bulk material handling, loading and blending facilities. Flotek serves major
and
independent companies in the domestic and international oilfield service
industry.
Company
headquarters are located in Houston, Texas, and we have operations in Texas,
Oklahoma, Louisiana, Utah and Wyoming. We market our products domestically
and
internationally in over 20 countries.
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 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
September 30, 2005 and its results of operations and cash flows for the three
and nine month periods ended September 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
flow for the three and nine month periods ended September 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, work-in-process, finished goods and parts and
materials used in manufacturing and construction operations. Finished goods
inventories include raw materials, direct labor and production overhead.
Valuation of acquired work-in-process inventory is determined based on the
guidance in FAS 141 “Business Combinations” (“FAS 141”). The Company determines
the value of acquired work-in-process inventories by estimating the selling
prices of finished goods less the sum of (a) cost to complete, (b) costs of
disposal, and (c) a reasonable profit allowance for the completing and selling
effort of the Company based on profit for similar finished goods. 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. Valuation of acquired property, plant
and equipment is determined based on the guidance in FAS 141. The Company
determines value of acquired property, plant and equipment on the lower of
(a)
replacement cost or (b) appraised value. 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 patents, non-compete
agreements 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 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 on 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 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. 123(R) “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 123(R) 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", 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
adopt
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 does not expect
SFAS No. 151 to have a material impact.
Note
3 - Acquisitions
On
February 14, 2005, 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 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
Investment
|
|
|
Application
of
FAS 14
|
|
|
Recorded
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
|
|
|
¾
|
|
|
8,075,000
|
|
Excess
of investment over purchase price
|
|
$
|
17,790,746
|
|
$
|
(17,790,746
|
)
|
$
|
¾
|
|
In
August
19, 2005, the Company purchased the assets of privately held Harmon’s Machine
Works, Inc. (“Harmon”) a down-hole
oilfield and mining tool company located in Midland, Texas,
for
approximately $4.9 million. The assets acquired included approximately $2.2
million of property, plant and equipment, $0.4 million in accounts receivable,
$0.4 million in inventory and approximately $1.9 million in goodwill and other
intangible assets. Consideration paid consisted of approximately $3.9 million
in
cash, $0.6 million in the Company’s common stock and the assumption of $0.4
million of net liabilities. The Company financed the acquisition utilizing
an
equipment term loan of $1.3 million, an acquisition loan of $1.0 million, a
real
estate term loan of $0.2 million and $1.3 million of a revolving credit facility
(See Note 7). The assets purchased have become part of the Company’s Drilling
Products segment.
Additionally,
on September 1, 2005, the Company purchased the assets of privately held
Precision-LOR, Ltd. (“LOR”), a drilling tool rental and inspection service
provider located in South Texas, for approximately $4.9 million. The assets
acquired included approximately $1.4 million of equipment and approximately
$3.5
million in goodwill and other intangible assets. Consideration paid consisted
of
approximately $3.7 million in cash and $1.2 million in the Company’s common
stock. Cash proceeds from the Company’s equity issuance (See Note 8) were
utilized for the purchase. The assets purchased have become part of the
Company’s Drilling Products segment.
Note
4 - Inventories
The
components of inventories for the period ended September 30, 2005 and December
31, 2004 were as follows:
|
|
|
For
the Period Ended
|
|
|
|
|
September
30,
2005
|
|
|
December
31,
2004
|
|
Raw
materials
|
|
$
|
1,751,100
|
|
$
|
797,430
|
|
Finished
goods
|
|
|
9,525,941
|
|
|
2,107,217
|
|
Gross
inventories
|
|
|
11,277,041
|
|
|
2,904,647
|
|
Less:
Slow-moving and obsolescence reserve
|
|
|
(501,999
|
)
|
|
(457,257
|
)
|
Inventories,
net
|
|
$
|
10,775,042
|
|
$
|
2,447,390
|
|
Additional
inventory of approximately $6.9 million associated with the Spidle acquisition
was recorded January 1, 2005 (see Note 3). Additional inventory of approximately
$0.4 million associated with the Harmon acquisition was recorded August 19,
2005.
Note
5 - Property, Plant and Equipment
For
the
period ended September 30, 2005 and December 31, 2004, property, plant and
equipment was comprised of the following:
|
|
|
For
the Period Ended
|
|
|
|
|
September
30,
2005
|
|
|
December
31,
2004
|
|
Land
|
|
$
|
268,594
|
|
$
|
68,000
|
|
Buildings
and leasehold improvements
|
|
|
3,092,477
|
|
|
1,990,436
|
|
Machinery
and equipment
|
|
|
6,497,681
|
|
|
953,224
|
|
Equipment
in progress
|
|
|
207,523
|
|
|
¾
|
|
Furniture
and fixtures
|
|
|
278,585
|
|
|
108,481
|
|
Transportation
equipment
|
|
|
1,484,776
|
|
|
514,652
|
|
Computer
equipment
|
|
|
427,090
|
|
|
424,837
|
|
Gross
property, plant and equipment
|
|
|
12,256,726
|
|
|
4,059,630
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(4,494,974
|
)
|
|
(1,942,834
|
)
|
Net
property and equipment
|
|
$
|
7,761,752
|
|
$
|
2,116,796
|
|
Property,
plant and equipment of approximately $1.5 million associated with the Spidle
acquisition was recorded January 1, 2005 (see Note 3). Property, plant and
equipment of approximately $2.2 million associated with the Harmon acquisition
was recorded August 19, 2005. Additional property, plant and equipment of
approximately $1.8 million associated with the LOR acquisition was recorded
September 1, 2005.
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
25% 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
July 31, 2005, $175,411 had been paid. On August 2, 2005, the remaining balance
of $298,431 was settled in 34,080 shares of common stock (See Note
8).
Note
7 - Long-Term Debt
Long-term
debt for the period ended September 30, 2005 and December 31, 2004 consisted
of
the following:
|
|
|
For
the Period Ended
|
|
|
|
|
September
30,
2005
|
|
|
December
31,
2004
|
|
Senior
Credit Facility
|
|
|
|
|
|
|
|
Equipment
term loan (A)
|
|
$
|
5,950,000
|
|
$
|
¾
|
|
Real
estate term loan (A)
|
|
|
812,665
|
|
|
¾
|
|
Amendments
to Senior Credit Facility
|
|
|
|
|
|
|
|
Equipment
term loan (B)
|
|
|
1,309,667
|
|
|
¾
|
|
Real
estate term loan (B)
|
|
|
223,908
|
|
|
¾
|
|
Promissory
notes to stockholders of acquired businesses, maturing
December
2007 and 2008
|
|
|
350,000
|
|
|
750,000
|
|
Promissory
notes to stockholders of acquired businesses, maturing
February
2008
|
|
|
1,104,861
|
|
|
¾
|
|
Note
payable to Facilities
|
|
|
¾
|
|
|
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
|
|
|
219,792
|
|
|
125,018
|
|
Total
|
|
|
9,970,893
|
|
|
6,408,454
|
|
Less
current maturities
|
|
|
(2,182,109
|
)
|
|
(1,136,467
|
)
|
Long-term
debt
|
|
$
|
7,788,784
|
|
$
|
5,271,987
|
|
Senior
Credit Facility
On
February 14, 2005, the Company entered into a new senior credit facility (as
amended, the “Senior Credit Facility”) with Wells Fargo. The Senior Credit
Facility was originally made up of a revolving line of credit, an equipment
term
loan and a real estate term loan.
Equipment
term loan (A).
The
equipment term loan provides for borrowings of $7,000,000 bearing interest
at
prime rate plus 50 basis points payable over 60 months. This loan was utilized
in the purchase of Spidle in February 2005 (See Note 3).
Real
estate term loan (A). 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. This
loan was utilized in the purchase of Spidle in February 2005 (See Note
3).
On
August
19, 2005, the Company amended its Senior Credit Facility. The revolving credit
line was amended and three additional loans were added (descriptions below).
Equipment
term loan (B).
The
additional equipment term loan provides for borrowings of $1,320,000 bearing
interest at prime rate plus 50 basis points payable over 60 months. This loan
was specifically utilized for the purchase of Harmon in August 2005 (See Note
3).
Real
estate term loan (B).
The
additional real estate term loan provides for borrowings of $225,000 bearing
interest at prime rate. The loan is payable over 60 months, and amortized over
180 months. This loan was specifically utilized for the purchase of Harmon
in
August 2005 (See Note 3).
Revolving
line of credit.
The
amended revolving line of credit provides for borrowing through February 14,
2007, bearing interest at prime rate plus 50 basis points. The prime rate was
6.75% on September 30, 2005. The maximum amount that may be outstanding under
the amended line of credit is the lesser of (a) $6,000,000 (a $1,000,000
increase from the original revolving line of credit), or (b) the sum of 80%
of
eligible domestic trade receivables and 50% of eligible inventory, as defined.
The terms are interest-only, maturing February 2007. The Company utilized the
additional borrowing capacity in the purchase of Harmon in August 2005 (See
Note
3). Proceeds from the Company stock offering were used to pay down this loan
within the same month (See Note 8).
Acquisition
loan.
The
acquisition loan provides for borrowings of $1,000,000 bearing interest at
prime
rate plus 1% payable over 17 months. This loan was specifically utilized for
the
purchase of Harmon in August 2005 (See Note 3). Proceeds from the Company stock
offering were used to retire this loan in September 2005 (See Note
8).
Promissory
notes to stockholders of acquired businesses, maturing February
2008
In
conjunction with the acquisition of Spidle in February 2005, the Company issued
$1,275,000 of notes payable to the seller. The notes are payable over 36 months
and bear interest at 6%.
Promissory
note, maturing April 2008
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 of SCL were directors
as
well as principal stockholders of the Company. Dr. Penny was and is an employee
and director of the Company, and Mr. Beall is a former 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. Proceeds from the Company stock offering
were used to pay down this loan in August 2005 (See Note 8).
Additionally,
in August 2005, proceeds from the Company stock offering in August 2005 were
utilized to pay down the notes payable to Oklahoma Facilities, LLC
(“Facilities”), and a portion of the promissory notes to stockholders of CESI
maturing December 2007 and 2008.
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 September 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 September 30, 2005, as the majority of the long-term debt carries
a
floating interest rate based on the prime rate.
Note
8 -
Common Stock
On
August
29, 2005, we
completed a private offering of 1,300,000 shares
of
common stock at a price of $16.30 per share to 18 accredited investors. Gross
proceeds from the private offering were $21,190,000; estimated costs associated
with the offering were $1,381,400. Proceeds
from the sale were used for general corporate purposes, strategic acquisitions,
and repayment of existing indebtedness. In connection with the sale, we
covenanted with the private placement investors to
file a
registration statement with the SEC within 60 days of the completion of the
private offering, covering resale of the shares by those investors. We submitted
our Form SB-2 registration statement with the SEC on October 28, 2005, within
60
days of the completion of the private offering (See Note 13).
The
amount of common shares issued and outstanding is summarized as
follows:
Issued
and outstanding as of December 31, 2004
|
|
|
6,670,004
|
|
Shares
issued for Spidle acquisition (See Note 3)
|
|
|
129,271
|
|
Shares
issued for IBS 2000 “earn-out payment” (See Note 6)
|
|
|
34,080
|
|
Shares
issued for Harmon acquisition (See Note 3)
|
|
|
35,108
|
|
Shares
issued in private offering (See above)
|
|
|
1,300,000
|
|
Shares
issued for LOR acquisition (See Note 3)
|
|
|
68,001
|
|
Stock
options exercised through September 30, 2005
|
|
|
4,571
|
|
Issued
and outstanding as of September 30, 2005
|
|
|
8,241,035
|
|
Note
9 - 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 nine months ended September
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
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Net
income
|
|
$
|
1,769,767
|
|
$
|
703,104
|
|
$
|
5,226,328
|
|
$
|
1,378,981
|
|
Weighted-average
common shares
outstanding
|
|
|
7,387,467
|
|
|
6,666,330
|
|
|
6,976,915
|
|
|
6,656,496
|
|
Basic
earnings per common share
|
|
$
|
0.24
|
|
$
|
0.11
|
|
$
|
0.75
|
|
$
|
0.21
|
|
Diluted
earnings per common share
|
|
$
|
0.21
|
|
$
|
0.10
|
|
$
|
0.67
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
outstanding
|
|
|
7,387,467
|
|
|
6,666,330
|
|
|
6,976,915
|
|
|
6,656,496
|
|
Effect
of dilutive securities
|
|
|
955,062
|
|
|
643,039
|
|
|
865,177
|
|
|
646,645
|
|
Weighted-average
common
equivalent
shares outstanding
|
|
|
8,342,529
|
|
|
7,309,369
|
|
|
7,842,092
|
|
|
7,303,141
|
|
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
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Pro
forma revenues
|
|
$
|
32,303,670
|
|
$
|
10,858,641
|
|
$
|
36,805,438
|
|
$
|
27,321,366
|
|
Pro
forma income from operations
|
|
|
2,752,312
|
|
|
1,637,886
|
|
|
7,181,853
|
|
|
2,990,607
|
|
Pro
forma net income
|
|
|
1,794,603
|
|
|
1,563,016
|
|
|
5,251,164
|
|
|
2,961,214
|
|
Pro
forma weighted-average common shares outstanding
|
|
|
7,387,467
|
|
|
6,795,601
|
|
|
6,976,915
|
|
|
6,785,767
|
|
Basic
earnings per common share
|
|
$
|
0.24
|
|
$
|
0.23
|
|
$
|
0.75
|
|
$
|
0.44
|
|
Note
10 - 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
September
30,
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
income:
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
1,769,767
|
|
$
|
703,104
|
|
$
|
5,226,328
|
|
$
|
1,378,981
|
|
Deduct:
Total stock-based
employee
compensation expense
determined
under fair value based
method
for all awards, net of related tax
effects
|
|
|
¾
|
|
|
(12,808
|
)
|
|
(43,922
|
)
|
|
(47,075
|
)
|
Pro
forma
|
|
$
|
1,769,767
|
|
$
|
690,296
|
|
$
|
5,182,406
|
|
$
|
1,331,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.24
|
|
$
|
0.11
|
|
$
|
0.75
|
|
$
|
0.21
|
|
Pro
forma
|
|
$
|
0.24
|
|
$
|
0.10
|
|
$
|
0.74
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.21
|
|
$
|
0.10
|
|
$
|
0.67
|
|
$
|
0.19
|
|
Pro
forma
|
|
$
|
0.21
|
|
$
|
0.09
|
|
$
|
0.66
|
|
$
|
0.18
|
|
For
the
three months ended September 30, 2005, the Company had two stock option grants
totaling 18,140, no stock option exercises and 250 stock option forfeitures.
For
the nine months ended September 30, 2005, the Company had four stock option
grants totaling 73,140, stock option exercises totaling 4,571 and stock option
forfeitures of 23,530.
Note
11 - Income Taxes
Our
effective income tax rate in 2005 and 2004 differs from the federal statutory
rate primarily due to state income taxes and changes in the valuation allowances
due to the utilization of net operating loss carryforwards.
A
valuation allowance was provided in full against our net deferred tax assets
due
to our uncertainty surrounding the realization of our deferred tax assets in
future years. Certain Internal Revenue Code provisions may limit the use of
our
net operating loss carryforwards. We are currently assessing limitations on
our
net operating loss carryforwards, if any, on future periods. As of December
31,
2004, we had estimated net operating loss carryforwards of approximately $8.8
million, expiring in various amounts in 2017 through 2023.
Our
current corporate organization structure requires us to file two separate
consolidated U.S. Federal income tax returns. As a result, taxable income
of one
group cannot be offset by tax attributes, including net operating losses,
of the
other group. Accordingly, the effective tax rate in future periods may differ
significantly from the expected statutory rates depending on the level of
taxable income or loss for each group.
Note
12 - 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 of SCL were directors
as
well as principal stockholders of the Company. Dr. Penny was and is an employee
of the Company, and Mr. Beall is a former 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.
In
September 2005 the loan with Dr. Penny was paid down with proceeds from the
Company’s private offering (See Note 8).
On
July
25, 2002, we borrowed $500,000 under a promissory note from 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 beginning January 1, 2005. On February 14, 2005, Facilities
was required to fully subordinate its outstanding debt position in connection
with the new senior credit facility.
In
September 2005 the promissory note with Facilities was paid down with proceeds
from the Company’s private offering (See Note 8).
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 2-1/2%
indirect ownership interest in CEP, and John Chisholm, a director of Flotek,
has
a 30% ownership interest in CEP. No royalties were earned during the first
nine
months of 2005.
Note
13 - 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 rents, inspects, manufactures and markets
downhole drilling equipment for the energy, mining, water well 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.” Inter-segment 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 the segments for the three and nine months
ending September 30, 2005 and 2004 is show in the following tables (in
thousands):
|
|
Chemicals
and
Logistics
|
|
Drilling
Products
|
|
Production
Products
|
|
Corporate
and
Other
|
|
Total
|
|
Three
months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
7,727
|
|
$
|
5,372
|
|
$
|
205
|
|
$
|
¾
|
|
$
|
13,304
|
|
Income
(loss) from operations
|
|
$
|
2,243
|
|
$
|
1,253
|
|
$
|
(33
|
)
|
$
|
(736
|
)
|
$
|
2,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
4,889
|
|
$
|
650
|
|
$
|
132
|
|
$
|
¾
|
|
$
|
5,671
|
|
Income
(loss) from operations
|
|
$
|
1,285
|
|
$
|
94
|
|
$
|
(92
|
)
|
$
|
(353
|
)
|
$
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
20,920
|
|
$
|
14,978
|
|
$
|
907
|
|
$
|
¾
|
|
$
|
36,805
|
|
Income
(loss) from operations
|
|
$
|
5,598
|
|
$
|
3,355
|
|
$
|
33
|
|
$
|
(1,829
|
)
|
$
|
7,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
12,377
|
|
$
|
2,607
|
|
$
|
294
|
|
$
|
¾
|
|
$
|
15,278
|
|
Income
(loss) from operations
|
|
$
|
3,224
|
|
$
|
382
|
|
$
|
(330
|
)
|
$
|
(1,326
|
)
|
$
|
1,950
|
|
Total
assets by reportable segment were as follows (in thousands):
|
|
|
For
the Period Ended
|
|
|
|
|
September
30,
2005
|
|
|
December
31,
2004
|
|
Chemicals
and Logistics
|
|
$
|
14,538
|
|
$
|
12,837
|
|
Drilling
Products
|
|
|
24,315
|
|
|
868
|
|
Production
Products
|
|
|
1,255
|
|
|
1,467
|
|
Corporate
and Other
|
|
|
8,376
|
|
|
785
|
|
Total
Assets
|
|
$
|
48,484
|
|
$
|
15,957
|
|
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 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
engaged in the manufacturing and marketing of innovative specialty chemicals
and
downhole drilling and production equipment, and in the management of automated
bulk material handling, loading and blending facilities. Flotek serves major
and
independent companies in the domestic and international oilfield service
industry.
Company
headquarters are located in Houston, Texas, and we have operations in Texas,
Oklahoma, Louisiana, Utah and Wyoming. We market our products domestically
and
internationally in over 20 countries. 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 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 rents, inspects, manufactures and markets
downhole drilling equipment for the energy, mining, water well
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, and
domestic and international mining activity.
We
continue to actively seek profitable acquisition or merger candidates in our
core business to either decrease costs of providing products, add new products,
expand our customer base and/or expand our geographic footprint.
Results
of Operations
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,303,670
|
|
$
|
5,671,044
|
|
$
|
36,805,438
|
|
$
|
15,278,420
|
|
Cost
of revenues
|
|
|
7,576,120
|
|
|
3,174,442
|
|
|
21,746,026
|
|
|
8,662,846
|
|
Gross
profit
|
|
|
5,727,550
|
|
|
2,496,602
|
|
|
15,059,412
|
|
|
6,615,574
|
|
Gross
profit %
|
|
|
43.1
|
%
|
|
44.0
|
%
|
|
40.9
|
%
|
|
43.3
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,415,259
|
|
|
1,314,024
|
|
|
6,461,727
|
|
|
3,915,949
|
|
Depreciation and amortization
|
|
|
421,810
|
|
|
173,686
|
|
|
999,805
|
|
|
537,960
|
|
Research and development
|
|
|
163,005
|
|
|
75,111
|
|
|
440,863
|
|
|
211,401
|
|
Total expenses
|
|
|
3,000,074
|
|
|
1,562,821
|
|
|
7,902,395
|
|
|
4,665,310
|
|
Income
from operations
|
|
|
2,727,476
|
|
|
933,781
|
|
|
7,157,017
|
|
|
1,950,264
|
|
Income
from operations %
|
|
|
20.5
|
%
|
|
16.5
|
%
|
|
19.4
|
%
|
|
12.8
|
%
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(214,956
|
)
|
|
(178,900
|
)
|
|
(653,004
|
)
|
|
(522,961
|
)
|
Other, net
|
|
|
(1,133
|
)
|
|
48,223
|
|
|
39,539
|
|
|
51,678
|
|
Total other income (expense)
|
|
|
(216,089
|
)
|
|
(130,677
|
)
|
|
(613,465
|
)
|
|
(471,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,511,387
|
|
|
803,104
|
|
|
6,543,552
|
|
|
1,478,981
|
|
Provision
for income taxes
|
|
|
(741,620
|
)
|
|
(100,000
|
)
|
|
(1,317,224
|
)
|
|
(100,000
|
)
|
Net
income
|
|
$
|
1,769,767
|
|
$
|
703,104
|
|
$
|
5,226,328
|
|
$
|
1,378,981
|
|
Consolidated
- Comparison of Three Months Ended September 30, 2005 and 2004
Total
revenues increased by $7.6 million or 134.6% in the third 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 specialty chemicals continue to grow, bolstered by strong margins
across all three segments. Revenues for the third quarter 2005 approximately
$1.0 million lower than management projections due to the severe hurricane
season on the Gulf Coast.
Gross
profit increased 129.4%, from $2.5 million in the third quarter of 2004 to
$5.7
million in 2005. Gross profit as a percentage of revenues decreased from 44.0%
in the third quarter of 2004 to 43.1% in 2005. The gross profit is best analyzed
on a segment by segment basis, discussed below, as gross profit varies 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 $2.4
million for the third quarter of 2005 compared to $1.3 million in the third
quarter of 2004. Measured as a percentage of revenue, selling, general and
administrative costs dropped from 23.1% in the third quarter of 2004 to 18.2%
in
2005. The costs associated with moving onto the American Stock Exchange were
expensed during the third quarter 2005. Significant emphasis continues to be
placed on growing sales while containing selling, general and administrative
costs across the organization.
Depreciation
and amortization increased $0.2 million or 142.9% in the third quarter of 2005
compared to the same quarter in 2004 due to increased property, plant and
equipment. The increase in property, plant and equipment was primarily due
to
the addition of assets associated with Spidle, Harmon and LOR.
Interest
expense increased from $178,900 for the third quarter of 2004 to $214,956 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 $0.8 million provision for income taxes was
recorded for the third quarter of 2005. The provision was made for estimated
federal income tax and state income tax. Our net operating losses can be used
to
offset a portion of our 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 Nine Months Ended September 30, 2005 and 2004
Total
revenues increased by $21.5 million or 140.9% in the first nine months of 2005
versus 2004. As discussed in the segment analysis that follows, this increase
in
revenues was due to the addition of Spidle to our operating results for the
entire nine months of 2005, the continued strong performance by our Chemicals
and Logistics segment and the acquisition of Harmon and LOR in August 2005.
Gross
profit increased 127.6%, from $6.6 million in the first nine months of 2004
to
$15.1 million in 2005. Gross profit as a percentage of revenues decreased from
43.3% in the first nine months of 2004 to 40.9% in 2005. The gross profit is
best analyzed on a segment by segment basis, discussed below, as gross profit
varies between operating segments and can vary significantly from year to year
in certain operating segments.
Selling,
general and administrative costs increased to $6.5 million in the first nine
months of 2005 from $3.9 million in the first nine months of 2004, however,
decreased as a percentage of revenue. Measured as a percentage of revenue,
selling, general and administrative costs dropped from 25.6% in the first nine
months 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 $0.5 million or 85.9% in the first nine months of
2005 compared to the same period in 2004 due to increased property, plant and
equipment. The increase in property, plant and equipment was primarily due
to
the addition of assets associated with Spidle, Harmon and LOR.
Interest
expense increased from $0.5 million for the first nine months of 2004 to $0.7
million 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 $1.3 million provision for income taxes was
recorded for the first nine months of 2005. The provision was made for estimated
federal income tax and state income tax. Our net operating losses can be used
to
partially 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
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,726,746
|
|
$
|
4,889,426
|
|
$
|
20,919,830
|
|
$
|
12,377,009
|
|
Gross
profit
|
|
$
|
3,181,472
|
|
$
|
2,001,007
|
|
$
|
8,286,832
|
|
$
|
5,149,683
|
|
Gross
profit %
|
|
|
41.2
|
%
|
|
40.9
|
%
|
|
39.6
|
%
|
|
41.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
2,243,410
|
|
$
|
1,285,142
|
|
$
|
5,598,728
|
|
$
|
3,223,981
|
|
Operating
margin %
|
|
|
29.0
|
%
|
|
26.3
|
%
|
|
26.8
|
%
|
|
26.1
|
%
|
Chemicals
and Logistics - Comparison of Three Months Ended September 30, 2005 and
2004
Chemicals
and Logistics revenues increased $2.8 million or 58.0%, in the third quarter
of
2005 compared to 2004. Increased sales of our specialty chemicals were the
main
driver in the segment. Increased revenue was a result of higher volume sold,
increased prices, and expansion of our market base. Strong commodity prices
and
solid demand have steadily increased oilfield activity. Our third quarter 2005
gross sales were approximately $0.8 million below our projected levels due
to
the effects of Hurricane Katrina and Hurricane Rita, which slowed sales to
the
major oilfield service companies and decreased throughput at our Louisiana
based
bulk handling facility by approximately 40%.
In
the
third quarter of 2005 compared to 2004, a significant portion of our sales
growth was due to increased sales in Mexico, Canada and Russia. Domestically,
sales growth in the Rocky Mountains improved dramatically, followed by an
increase in Mid-Continent sales. We continue to focus on expanding our
international sales and expanding the footprint of our domestic sales to
increase overall sales and diversify sales concentration risk. Growth of
international sales has outpaced domestic sales growth, and made up 25% of
total
sales in the third quarter of 2005 as compared to 11% of total sales in the
third quarter of 2004.
Sales
of
our proprietary specialty chemicals continued to grow at a strong pace. Sales
of
our top three proprietary products made up almost $1.0 million of the increase
in total sales this quarter of 2005 versus 2004. The sales of our environmental
friendly “green” chemicals increased 24.3%, from $1.3 million in the third
quarter of 2004 to $1.6 million for the third quarter of 2005. CESI Chemical's
focus on applied research has resulted in the penetration of new markets,
continued expansion of our customer base and product portfolio, and increased
margins by shifting our product sales mix to more proprietary products. 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
profit increased 59.0% from $2.0 million in the third of quarter 2004 to $3.2
million for the same period of 2005. Gross profit as a percentage of revenues
increased from 40.9% in the third quarter of 2004 to 41.2% in 2005. The increase
in gross profit is due to price increases that were implemented in 2005 and
slightly reduced cost of goods as a percentage of total revenues. Managing
chemical feedstock and transportation prices and passing the increase in the
costs to our customers are critical to maintain our gross profits.
Operating
income increased $1.0 million, or 74.6%, during the third quarter of 2005
compared to the same period in 2004. Operating margin increased from 26.3%
in
2004 to 29.0% in 2005. Operating income increased at a faster rate than revenue
growth and gross profit growth, by increasing sales while controlling indirect
costs. Revenue per employee increased by more than 20% during the third quarter
of this year as compared to the same period last year. The growth in sales
of
our proprietary products while controlling input costs and operating costs
has
driven the increase in operating income this quarter.
Chemicals
and Logistics - Comparison of Nine Months Ended September 30, 2005 and
2004
Chemicals
and Logistics revenues increased $8.5 million or 69.0%, in the first nine months
of 2005 compared to 2004. The increase is due to an increase in the volume
of
specialty chemical sales coupled with price increases that were put into effect
in 2005. MTI partially offset an approximate 40% decrease in throughput at
our
Louisiana based bulk handling facility during 2005 as compared to 2004, by
increasing revenue associated with the design and construction oversight of
bulk
handling facilities in Mexico and Texas during the first nine 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
the
first nine months of 2005 compared to 2004, international sales grew by 115.6%,
outpacing domestic growth. Sales into Mexico, Canada and Russia have been the
main drivers for growth in international sales. Domestic sales have continued
to
grow in our established core markets, the Mid-Continent and Permian Basin,
but
have increased dramatically in the Rocky Mountains and East Texas. We continue
to focus on expanding our international sales and expanding the footprint of
our
domestic sales coverage to increase overall sales and diversify sales
concentration risk. Growth of international sales has outpaced our domestic
growth, and made up 16% of total sales for the first nine months of 2005 as
compared to 13% of total sales for the same period in 2004.
Sales
of
our proprietary specialty chemicals continued to grow at a strong pace. Sales
of
our top three proprietary products made up $3.1 million of the increase in
total
sales for the first nine months of 2005 versus 2004. The sales of our
environmental friendly “green” chemicals increased $2.3 million, or 92.4%, from
$2.5 million in the first nine months of 2004 to $4.8 million for the first
nine
months of 2005. CESI Chemical's focus on applied research has resulted in the
penetration of new markets, continued expansion of our customer base and product
portfolio and increased margins by shifting our product sales mix to more and
more proprietary products. 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
profit increased 60.9% from $5.1 million in the first nine months of 2004 to
$8.3 million for the same period in 2005. Gross profit as a percentage of
revenues decreased from 41.6% in the first nine months of 2004 to 39.6% in
2005.
The decrease in margin is attributable to an increase in cost of goods sold
in
our specialty chemical division without corresponding price increases to pass
these costs onto the customer instituted later in the year. Price increases
were
implemented in June 2005 and will continue to be evaluated by management. In
addition, cost of goods sold were approximately $0.4 million higher in the
first
nine months of 2005 as compared to 2004 due to materials procured for the two
bulk handling projects managed by MTI.
Operating
income increased $2.4 million, or 73.7%, during the first nine months of 2005
compared to 2004, primarily as a result of increased sales in the Chemical
division, improved gross margins in the Chemical and Logistics business unit
and
reduction of operating costs as a percentage of revenue. 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
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,372,108
|
|
$
|
650,164
|
|
$
|
14,977,962
|
|
$
|
2,607,263
|
|
Gross
profit
|
|
$
|
2,443,894
|
|
$
|
416,357
|
|
$
|
6,289,706
|
|
$
|
1,320,724
|
|
Gross
profit %
|
|
|
45.5
|
%
|
|
64.0
|
%
|
|
42.0
|
%
|
|
50.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
1,252,521
|
|
$
|
93,510
|
|
$
|
3,354,993
|
|
$
|
382,031
|
|
Operating
margin %
|
|
|
23.3
|
%
|
|
14.4
|
%
|
|
22.4
|
%
|
|
14.7
|
%
|
Drilling
Products - Comparison of Three Months Ended September 30, 2005 and
2004
On
February 14, 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.
On
August
19, 2005, the Company purchased the assets of privately held Harmon, a
down-hole
oilfield and mining tool company located in Midland, Texas,
for
approximately $4.9 million. Harmon serves both the oilfield and mining
industries, and offers significant strategic manufacturing and sourcing
capabilities to our drilling products division. The assets acquired included
approximately $2.2 million of property, plant and equipment, $0.4 million in
accounts receivable, $0.4 million in inventory and approximately $1.9 million
in
goodwill. Consideration paid consisted of approximately $3.9 million in cash,
$0.6 million in the Company’s common stock and the assumption of $0.4 million of
net liabilities. The Company financed the acquisition utilizing an equipment
term loan of $1.3 million, an acquisition loan of $1.0 million, a real estate
term loan of $0.2 million and $1.3 million of a revolving credit
facility.
On
August
31, 2005, the Company purchased the assets of privately held LOR, a drilling
tool rental and inspection service provider located in South Texas, for
approximately $4.9 million. LOR expands our drilling tools segment into the
drill pipe inspection service industry and further expands the geographic
footprint of our drilling tool rental operations. The assets acquired included
approximately $1.4 million of equipment and approximately $3.5 million in
goodwill and other intangible assets. Consideration paid consisted of
approximately $3.7 million in cash and $1.2 million in the Company’s common
stock. Cash proceeds from the Company’s equity issuance were utilized for the
purchase (See Note 8).
Drilling
Products revenues increased $4.7 million for the third quarter of 2005 compared
to 2004. This increase primarily relates to the addition of the operating
results of Spidle to our drilling products segment. Spidle contributed $4.1
million, and Harmon and LOR contributed $0.6 million, in revenue during the
third quarter. Actual operating results were below management’s expectations for
our most recent acquisitions, but are projected to meet budgeted levels for
the
fourth quarter of this year.
Gross
profit increased $2.0 million in the third quarter of 2005 compared to 2004.
Gross profit as a percentage of revenues decreased from 64.0% in the third
quarter of 2004 to 45.5% in 2005. During the third quarter of 2004 margins
were
higher due to the sale of inventory that had previously been reserved. Excluding
these sales, gross profit for the third quarter of 2004 was 55%, versus 46%
for
the third quarter of 2005. In addition, inventory acquired from Spidle which
had
an original cost basis of $1.6 million was recorded at $6.9 million in
accordance with SFAS 141, which requires inventory to be recorded at fair value
less reasonable selling expenses. Fair value was determined to be full sales
price to our customers less approximately 9% for selling expenses. This increase
in recorded value for inventory acquired at the time of the acquisition
increased the weighted average cost of goods for this segment, reducing gross
profit.
Operating
income for the third quarter of 2005 was $1.3 million compared to $0.1 million
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 among the three
companies acquired in 2005 and the other business units.
Drilling
Products - Comparison of Nine Months Ended September 30, 2005 and
2004
Drilling
Products revenues increased $12.4 million in the first nine months of 2005
compared to 2004. This increase relates primarily to the addition of the
operating results of Spidle to our drilling products segment. Spidle contributed
$12.3 million in revenue during the first nine months of 2005. Harmon and LOR,
which were acquired in the third quarter of this year, contributed $0.6 million
in revenue.
Gross
profit increased $5.0 million in the first nine months of 2005 compared to
2004.
Gross profit as a percentage of revenues decreased from 50.7% in the first
nine
months of 2004 to 42.0% in 2005. The decrease is attributable to a change in
the
base of operations with the addition of Spidle, Harmon and LOR. Our Turbeco
operations have historically been focused on the manufacturing and marketing
of
drilling tools. The acquisitions made during 2005
expand
drilling tool operations into the manufacturing and marketing of a much broader
offering of drilling tools, drilling tool rentals, and pipe inspection services.
In addition, inventory acquired from Spidle which had an original cost basis
of
$1.6 million was recorded at $6.9 million in accordance with SFAS 141, which
requires inventory to be recorded at fair value less reasonable selling
expenses. Fair value was determined to be full sales price to our customers
less
approximately 9% for selling expenses. This increase in recorded value for
inventory acquired at the time of the acquisition increased the weighted average
cost of goods for this segment, reducing gross profit.
Operating
income increased $3.0 million during the first nine 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 among the three
acquisitions made this year and the other business units, as well as increased
utilization of the inventory acquired with Spidle.
Production
Products
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
204,817
|
|
$
|
131,453
|
|
$
|
907,647
|
|
$
|
294,149
|
|
Gross
profit
|
|
$
|
102,184
|
|
$
|
79,238
|
|
$
|
482,874
|
|
$
|
145,167
|
|
Gross
profit %
|
|
|
49.9
|
%
|
|
60.3
|
%
|
|
53.2
|
%
|
|
49.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(33,014
|
)
|
$
|
(92,397
|
)
|
$
|
32,768
|
|
$
|
(330,139
|
)
|
Operating
margin %
|
|
|
(16.1
|
)%
|
|
(70.3
|
)%
|
|
3.6
|
%
|
|
(112.2
|
)%
|
Production
Products - Comparison of Three Months Ended September 30, 2005 and
2004
Production
Products revenues increased approximately $0.1 million in the third quarter
of
2005 compared to 2004 primarily due to increased domestic sales. However, gross
profit percentage decreased significantly from 60.3% during the third quarter
of
2004 to 49.9% in 2005. We are focused on increasing total revenues
in
2005 by expanding the customer and geographic base. During the third quarter
of
this year, we signed an exclusive marketing agreement with a major independent
pump manufacturer to market our Petrovalve as a component within their valve
system. 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 Nine Months Ended September 30, 2005 and
2004
Production
Products revenues increased $0.6 million in the first nine months of 2005
compared to 2004 due to sales to customers in Russia and Venezuela. Gross profit
percentage also increased significantly from 49.4% during the first nine months
of 2004 to 53.2% 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
Capital
resources and liquidity continued to improve during the first nine months of
2005. During the first nine months of 2005 we produced net income of $5.2
million and had positive cash flows from operations of $2.2 million
after
a
reduction in working capital of $4.0 million. 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. Cash and cash
equivalents increased $8.5 million. The September 30, 2005 balance is made
up of
$9.5 million of short term cash investments offset by outstanding checks in
excess of bank balances of approximately $0.7 million.
Both
accounts receivable and inventories increased due to increased sales levels
during the first nine months of 2005. In addition, the acquisition of Spidle,
Harmon and LOR contributed $2.8 million in receivables and $7.3 million in
inventory as of September 30, 2005 as compared to December 31, 2004. Accounts
payable decreased $0.5 million despite an increase in sales levels due to a
continued effort to pay down long outstanding payables associated with
professional fees and with discontinued operations, as well as faster payment
to
vendors to take advantage of sales discounts and increased credit from our
suppliers.
Capital
expenditures for the nine months ended September 30, 2005 totaled $1.4 million.
Approximately $0.9 million has been spent to acquire drilling tool equipment
and
approximately $0.2 million has been spent to expand our research and laboratory
facilities for our specialty chemicals group. In February 2005, we successfully
obtained our new Senior Credit Facility with Wells Fargo. As part of the terms
negotiated, we obtained approval for a capital expenditures budget of $2.0
million for 2005 which has allowed us to expand our operations. The August
2005
amendment to the Senior Credit Facility made no changes to the original terms
of
our capital expenditures budget.
In
February 2005, we obtained the Senior Credit Facility with Wells Fargo which
includes a revolving loan agreement, an equipment term loan and a real estate
term loan. In August 2005, we amended the Senior Credit Facility to include
an
additional equipment term loan and real estate term loan. The amendment to
the
Senior Credit Facility also increased the maximum amount outstanding on the
revolving line of credit from the lesser of (a) $6.0 million (prior to
amendment: $5.0 million) or (b) the sum of 80% of eligible domestic trade
accounts receivable and 50% of eligible inventory, as defined. The revolving
loan agreement provides for borrowings that bear interest at prime rate plus
50
basis points. The terms are interest-only, maturing in February 2007. The
original equipment term loan provides for borrowings of $7.0 million bearing
interest at prime rate plus 50 basis points payable over 60 months. The
additional equipment term loan provides for borrowings of $1.3 million with
the
same interest provision as the original equipment term loan. The original real
estate term loan provides for borrowings up to $3.0 million bearing interest
at
prime rate. The loan is payable over 60 months, and amortized over 180 months.
The additional real estate term loan provides for borrowings of $0.2 million
bearing interest at prime rate with the same payment schedule as the original
real estate term loan. Our bank borrowings are collateralized by substantially
all of our assets.
As
of
September 30, 2005, we had borrowing availability under the amended Senior
Credit Facility of approximately $5.3 million. Bank borrowings are subject
to
certain covenants and a material adverse change subjective acceleration clause.
Affirmative covenants include compliance with laws, various reporting
requirements, visitation rights, maintenance of insurance, maintenance of
properties, keeping of records and books of account, preservation of existence
of assets, notification of adverse events, ERISA compliance, joinder agreement
with new subsidiaries, borrowing base audits, use of treasury management
services, use of proceeds, and compliance with terms of existing Facilities
note. Negative covenants include limitations associated with liens,
indebtedness, change in nature of business, transactions with affiliates,
investments, distributions, subordinate debt, leverage ratio, fixed charge
coverage ratio, consolidated net income, prohibition of fundamental changes,
asset sales and capital expenditures. As of September 30, 2005, we were in
compliance with all covenants.
In
addition to funding our capital requirements from business operations and
borrowings, we have issued shares of our common stock, which are described
below:
· |
In
February 2005, we issued 129,271 shares of our common stock in conjunction
with the acquisition of Spidle.
|
· |
In
the February 2002 acquisition of IBS 2000, we agreed to make an "earn-out
payment" based on 25% of the division’s earnings before interest and taxes
for the three years ending on March 31, 2005.
|
· |
On
August 2, 2005 the remaining balance on the earnout was settled in
stock
as required by the original agreement, and 34,080 shares of common
stock
were issued.
|
· |
In
the acquisition of Harmon on August 19, 2005, we issued 35,108 shares
of
common stock and assumed approximately $1.0 million in liabilities
as
partial consideration for that
acquisition.
|
· |
The
Company completed a private offering of 1,300,000 shares of common
stock
on August 29, 2005 at a price of $16.30 per share to 18 accredited
investors. Gross proceeds from the private offering were $21.2
million;
estimated costs associated with the offering were $1.4
million.
|
· |
In
the acquisition of LOR on August 31, 2005, we issued 68,001 shares
of
common stock.
|
· |
For
the nine months ended September 30, 2005, 4,571 stock options have
been
exercised by an employee, with proceeds of $30,000 paid to the
Company.
|
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. 123(R) “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 123(R),
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 123(R), 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 123(R) 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" 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
2 .
Unregistered
Sales of Equity Securities and Use of Proceeds
In
the
third quarter of 2005 we issued shares of common stock in connection with the
acquisitions of Harmon and LOR, and in a private placement. Each of these
issuances of common stock was made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933 for
transactions not involving a public offering. No underwriters were engaged
in
connection with any of these sales of securities. The sales were made without
general solicitation or advertising. Each purchaser was an "accredited investor"
or a "sophisticated investor" with access to all relevant information necessary
to evaluate the investment, who represented to us that the shares were being
acquired for investment.
On
August
19, 2005, we issued 35,108 shares of common stock to the former shareholders
of
Harmon, and on August 31, 2005, we issued 68,001 shares of common stock to
the
former partners of LOR, as partial consideration for our purchase of assets
of
those companies. On August 29, 2005,
we
issued 1,300,000 shares
of
common stock to 18 accredited investors at a price of $16.30 per share for
gross
proceeds of $21,190,000. Gross
proceeds from the private offering were $21,190,000; estimated costs associated
with the offering were $1,381,400. Proceeds from the sale were used for general
corporate purposes, strategic acquisitions, and repayment of existing
indebtedness. In connection with the sale, we covenanted with the private
placement investors to file a registration statement with the SEC within 60
days
of the completion of the private offering, covering resale of the shares by
those investors. That registration statement on Form SB-2 was filed with the
SEC
on October 28, 2005.
Item
6. Exhibits.
Exhibit
No.
|
Description
of Exhibit |
|
|
4.1
|
Subscription
and Registration Rights Agreement dated August 29, 2005 (incorporated
by reference to Exhibit 4.6 to Registration Statement No. 333-129308
on
Form SB-2 filed with the SEC on October 28, 2005.)
|
10.1
|
Asset
Purchase Agreement dated August 4, 2005 among Flotek Industries,
Inc. and
Harmon Machine Works, Inc. (incorporated by reference to Exhibit
10.8 to
Registration Statement No. 333-129308 on Form SB-2 filed with
the SEC on
October 28, 2005.)
|
10.2
|
Asset
Purchase Agreement dated August 25, 2005 among Flotek Industries,
Inc. and
Precision LOR, Ltd.
(incorporated
by reference to Exhibit 10.9 to Registration Statement No. 333-129308
on
Form SB-2 filed with the SEC on October 28, 2005.)
|
10.3
|
First
Amendment to Credit Agreement Between Flotek Industries, Inc.
and Wells
Fargo Bank, N.A. dated August 19, 2005 (incorporated by reference
to
Exhibit 10.10 to Registration Statement No. 333-129308 on Form
SB-2 filed
with the SEC on October 28, 2005.)
|
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 and Chief Financial
Officer
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant 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
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/
Lisa Bromiley Meier
|
|
|
|
Lisa
Bromiley Meier
|
|
|
|
Chief
Financial Officer
|
November
7,
2005 |
|
|
EXHIBIT
INDEX
Exhibit
No.
|
Description
of Exhibit |
|
|
4.1
|
Subscription
and Registration Rights Agreement dated August 29, 2005 (incorporated
by reference to Exhibit 4.6 to Registration Statement No. 333-129308
on
Form SB-2 filed with the SEC on October 28, 2005.)
|
10.1
|
Asset
Purchase Agreement dated August 4, 2005 among Flotek Industries,
Inc. and
Harmon Machine Works, Inc. (incorporated by reference to Exhibit
10.8 to
Registration Statement No. 333-129308 on Form SB-2 filed with
the SEC on
October 28, 2005.)
|
10.2
|
Asset
Purchase Agreement dated August 25, 2005 among Flotek Industries,
Inc. and
Precision LOR, Ltd.
(incorporated
by reference to Exhibit 10.9 to Registration Statement No.
333-129308 on
Form SB-2 filed with the SEC on October 28, 2005.)
|
10.3
|
First
Amendment to Credit Agreement Between Flotek Industries, Inc.
and Wells
Fargo Bank, N.A. dated August 19, 2005 (incorporated by reference
to
Exhibit 10.10 to Registration Statement No. 333-129308 on Form
SB-2 filed
with the SEC on October 28, 2005.)
|
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 and Chief Financial
Officer
|