Unassociated Document
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Filed
Pursuant to Rule 424(b)(3)
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Registration
No. 333-129308 |
PROSPECTUS
2,618,468 Shares
FLOTEK
INDUSTRIES, INC.
Common
Stock
This
prospectus relates to an aggregate of 2,618,468 shares of our common
stock
that may be sold by the selling shareholders named in this prospectus under
the
heading “Selling Shareholders”. Of that number, 2,542,439 shares were acquired
from us in two private placements and 76,029 shares will be issued by us to
the
selling shareholders upon the exercise of outstanding warrants held by them.
This
prospectus covers the resale by the selling shareholders of all of those
shares.
The
selling shareholders may offer and sell the shares of our common stock in their
discretion from time to time at prevailing market prices, at negotiated prices
or at fixed prices. We will not receive any of the proceeds from the sale of
those shares, but we will receive gross proceeds of $842,660 if all of the
warrants are exercised for cash by the selling shareholders.
We
have
agreed with the selling shareholders to bear all of the expenses incurred in
connection with the registration of these shares, and the selling shareholders
will pay any brokerage commissions or similar charges incurred for the sale
of
their shares of our common stock. The shares of common stock may be sold through
broker-dealers or in privately negotiated transactions in which commissions
and
other fees may be charged.
Our
common stock is traded on the American Stock Exchange under the symbol “FTK.” On
December 23, 2005, the last sale price for the common stock, as reported on
the
American Stock Exchange, was $18.90 per share.
See
“Risk Factors” beginning on page 4 for factors you should consider before
buying shares of our common stock.
Neither
the Securities and Exchange Commission (the “SEC”) nor any state securities
commission has approved or disapproved of these securities or determined if
this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The
date
of this prospectus is December 30, 2005
TABLE
OF CONTENTS
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Page
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Summary
Information
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3
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Risk
Factors
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4
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Private
Securities Litigation Reform Act Safe Harbor Statement
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7
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Use
of Proceeds
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7
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Selling
Shareholders
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8
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Plan
of Distribution
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9
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Circumstances
under which Selling Shareholders Acquired Securities
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10
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Business
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11
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Management
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14
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Management’s
Discussion and Analysis
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15
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Market
for Common Stock and Related Stockholders Matters
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25
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Security
Ownership of Certain Beneficial Owners and Management
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26
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Certain
Relationships and Related Transactions
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27
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Executive
Compensation
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27
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Properties
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29
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Description
of Securities
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29
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Indemnification
for Securities Act Liabilities
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30
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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30
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Legal
Matters
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30
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Experts
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30
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Available
Information
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31
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Index
to Consolidated Financial Statements
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32
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SUMMARY
INFORMATION
The
following summary highlights key aspects of the information contained elsewhere
in this prospectus. We urge you to read this entire prospectus, including the
more detailed consolidated financial statements and notes to the consolidated
financial statements prior to making an investment decision. Investing in our
common stock involves risks. Therefore, please carefully consider the
information provided under the heading "Risk Factors" beginning on page
4.
Our
Business
Flotek
is
a Delaware corporation 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 used in this prospectus, the terms
"company", “Flotek”, "we", "our", "ours", and "us" may, depending upon the
context, refer to Flotek Industries, Inc. together with its consolidated
subsidiaries taken as a whole.
Our
principal executive offices are located at 7030 Empire Central Drive, Houston,
Texas, 77040, and our telephone number at that address is (713) 849-9911. Our
website is located at www.flotekind.com.
The
information on our website is not part of this prospectus.
The
Offering
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Common
Stock outstanding prior to this offering
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8,288,618
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Common
Stock offered by selling shareholders, assuming full exercise of
common
stock purchase warrants
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2,618,468
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Common
Stock to be outstanding after the offering
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8,364,647
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Use
of Proceeds
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We
will not receive any proceeds from the sale of the common stock
by the
selling shareholders, although we could receive proceeds of up
to $842,660
if all of the warrants are exercised.
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AMEX
Trading Symbol
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FTK
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Summary
Financial Data
The
summary consolidated financial data presented below is derived from and should
be read in conjunction with our audited consolidated financial statements for
the years ended December 31, 2004 and 2003, including the notes to those
financial statements, and the unaudited interim condensed consolidated financial
statements for the nine months ended September 30, 2005, including
the
notes to those financial statements, which are included elsewhere in this
prospectus along with the section entitled “Management’s Discussion and
Analysis” beginning on page 15
of this
prospectus.
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Statement
of Operations Information
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For
the nine months ended September 30,
2005
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For
the year ended December 31, 2004
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For
the year ended December 31, 2003
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Revenues
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$
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36,805,438
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$
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21,881,289
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$
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14,844,431
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Gross
Profit
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$
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15,059,412
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$
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9,351,658
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$
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5,580,340
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Net
income (loss) for the period
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$
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5,226,328
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$
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2,153,689
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$
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(7,384,107
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)
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Basic
earnings (loss) per common share
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$
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0.75
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$
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0.32
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$
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(1.23
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)
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Balance
Sheet Information
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As
at September
30,
2005
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As
at December 31, 2004
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As
at December 31, 2003
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Total
Assets
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$
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48,484,273
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$
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15,957,087
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$
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13,970,338
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Total
Liabilities
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$
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15,722,023
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$
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11,134,194
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$
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11,410,234
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Working
Capital (Negative
Working Capital)
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$
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19,289,239
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$
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318,979
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$
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(5,248,186
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)
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Total
Stockholders’ Equity
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$
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32,712,250
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$
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4,822,983
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$
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2,560,104
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Common
Stock Outstanding
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8,241,035
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6,670,004
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6,521,670
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Our
business is subject to a number of risks, some of which are discussed below.
Before deciding to invest in our company or to maintain or increase your
investment, you should carefully consider the risk factors described below.
The
risks and uncertainties described below are not the only ones that we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business and results of
operations. If any of these risks actually occurs, our business, financial
condition or results of operations could be seriously harmed. In that event,
the
market price for our common stock could decline and you may lose all or part
of
your investment.
Risks
Related to Our Business
We
have had a history of losses.
We
incurred net losses in four of our last five years, including losses of
approximately $7.4 million in 2003, $5.5 million in 2002, $1.4 million in 2001
and $159,000 in 2000. We had income of approximately $2.2 million in 2004.
Our
ability to operate profitably depends on increasing our sales, expanding our
markets and achieving sufficient gross profit margins. We cannot assure you
that
we will achieve or maintain profitable operations in the future.
We
have experienced fluctuations in our revenues, which may continue in the
future.
Fluctuations in revenues are principally the result of the highly cyclical
nature of the oil and natural gas exploration and drilling business and, to
a
lesser extent, geographic expansion of our sales and marketing. A decrease
in
oil and gas prices generally causes a decline in exploration and drilling
activity resulting in decreased demand for our products that serve the drilling
industry. Therefore, a decline in oil and natural gas prices will negatively
impact our revenues and income. As a result of the cyclicality of our industry,
our results of operations have been volatile, and we expect this volatility
to
continue.
Our
historical results are not an indicator of our future
operations.
We
have
made numerous acquisitions during the past year. As a result of these
transactions, our past performance is not indicative of future performance,
and
investors in the common stock should not base their expectations as to our
future performance on our historical results.
We
may have difficulty integrating acquired businesses.
The
integration of new businesses will be complex and time consuming, will be a
drain on management’s resources, and may disrupt our businesses. We may be
adversely impacted by unknown liabilities of acquired businesses. We may
encounter substantial difficulties, costs and delays involved in integrating
common accounting information and communication systems, operating procedures,
internal controls and human resources practices, including incompatibility
of
business cultures and the loss of key employees and customers. These
difficulties may increase operating expenses and hinder our ability to achieve
the synergies we expect from the combination of businesses, including reduced
overhead through shared facilities, cross-marketing to customers and accessing
a
larger pool of customers through the provision of a larger range of
services.
Our
international operations are subject to special risks that can materially affect
our sales and profits.
Our
international operations have increased business and credit risks inherent
in
doing business in countries with legal and political policies different from
those in the United States. Those risks can include unsettled political
conditions, war, civil unrest, boycotts, inflation and fluctuations in foreign
currency exchange rates. Governmental reaction to the general legislative and
regulatory environment, exchange controls, changes in global trade policies
such
as trade restrictions and embargos by the United States and other countries,
and
changes in international business, political and economic condition can
negatively impact our international operations. In addition, future trends
for
pricing, margins, revenue and profitability remain difficult to predict in
the
industries we serve and under current economic and political conditions. Most
of
these risks are beyond our control.
The
loss of key personnel would adversely affect our operations and future potential
acquisitions.
We are
dependent upon the efforts and skills of our executives to manage our business,
identify and consummate potential future acquisitions and obtain and retain
our
customers. In addition, our recent development and expansion will require
additional experienced management and operations personnel. No assurance can
be
given that we will be able to identify and retain these employees. The loss
of
one or more of the services of our key personnel could increase our exposure
to
the other risks described in this section. We do not maintain key man insurance
on any of our personnel.
Risks
Associated With Our Industry
We
are subject to government regulations which can increase operating costs and
affect our operations.
We
are
subject to various federal, state and local laws and regulations relating to
the
energy industry in general and the environment in particular. Environmental
laws
have become more stringent in recent years and have generally sought to impose
greater liability on a larger number of potentially responsible parties.
Although we are not aware of any proposed material changes in any federal,
state
and local statutes, rules or regulations, any changes could materially affect
our financial condition and results of operations.
Severe
weather could have a material adverse impact on our
business.
Our
business could be materially and adversely affected by severe weather.
Hurricanes, tropical storms and other weather hazards may cause the curtailment
of services, damages to our equipment and facilities, interruptions in the
transportation of our products and materials in accordance with contract
schedules and loss of productivity. Our business could be materially
and
adversely affected indirectly if our customers are unable to operate as a result
of weather hazards, and curtail the purchase of our products and
services.
Risks
of economic downturn could reduce demand for our
products.
In
the
event of an economic downturn in the United States and/or globally there may
be
decreased demand and lower prices for oil and natural gas and therefore for
our
products and services. Our customers are generally involved in the energy
industry, and if these customers experience a business decline, we could be
subject to increased exposure to credit risk. If an economic downturn occurs,
our results of operations may be adversely affected.
We
are at risk for certain operating hazards.
Our operations
are subject to hazards present in the oil and natural gas industry which can
cause personal injury and damage to property or the environment. Litigation
arising from an accident at a location where our products or services are used
or provided may cause us to be named as a defendant in lawsuits asserting
potentially large claims. We have insurance coverage against operating hazards,
which we believe is customary in the industry. This insurance has deductibles
and contains certain coverage exclusions. Our insurance premiums can be
increased or decreased based on the claims we make on our insurance policies.
Results of operations could be adversely affected by unexpected claims not
covered by insurance.
We
are subject to substantial competition and the risk of technical
obsolescence.
The
oilfield service industry is highly competitive, and we must compete with many
companies possessing greater financial resources and better established market
positions. These competitors may be better positioned to withstand industry
downturns, compete on the basis of price and acquire new equipment and
technologies, all of which could affect our revenues and profitability. The
introduction of new products and technologies by competitors may adversely
affect the demand for our products and services.
The
failure to adequately protect our proprietary rights could adversely affect
our
ability to compete.
We
rely
on a combination of patents, trademarks, non-disclosure agreements and other
security measures in order to establish and protect our proprietary rights.
Although we believe that those measures, together with our trade secrets and
proprietary design, manufacturing and operational expertise, are reasonably
adequate to protect our intellectual property and provide for the continued
operation of our business, we are unable to provide assurance that the measures
we have taken or may take in the future will prevent misappropriation of our
proprietary information or that others will not independently develop similar
products, design around our proprietary or patented technology or duplicate
our
products.
Risks
Related to the Common Stock
Substantial
sales of our common stock by the selling shareholders could cause our stock
price to decline.
The 2,618,468
shares
covered by this prospectus represent approximately 33.4% of our weighted average
outstanding shares of common stock, on a fully diluted basis. We are unable
to
predict the amount or timing of sales by the selling shareholders of our common
stock, but sales of substantial amounts in the public market could lower the
market price of our stock.
An
active market may not develop for our common stock.
Our
common stock is quoted on the American Stock Exchange. While there is currently
one specialist in our common stock, this specialist is not obligated to continue
to make a market in our common stock. In the event it does not continue to
make
a market in our common stock, the liquidity of our common stock could be
adversely impacted and a stockholder could have difficulty obtaining accurate
stock quotes. Trading volume for our common stock has historically been low.
Despite the increase in the number of shares of common stock to be publicly
held
as a result of the private placement to the selling shareholders and the
exercise of warrants, we cannot assure you that an active trading market for
our
common stock will develop or be sustained.
The
price of our common stock has been volatile. The
market price of our common stock could be subject to significant fluctuations
after this offering. During the past twelve months, the trading price of our
common stock has ranged from $3.25 to $22.50 per share. You may not be able
to
resell your shares at or above the price paid to acquire our common stock.
The
stock markets in general have experienced extreme volatility that has at times
been unrelated to the operating performance of particular companies. These
broad
market fluctuations may adversely affect the trading price of our common stock.
Among the factors that could affect our stock price but may be unrelated to
our
operating and financial performance are speculation in the press or investment
community, sales of our common stock by the selling shareholders, fluctuations
in oil and gas prices, general market conditions and domestic and international
economic, legal and regulatory factors unrelated to our
performance.
Future
issuance of additional shares of our common stock could cause dilution of
ownership interests and adversely affect our stock
price.
The
company may in the future issue its previously authorized and unissued
securities, resulting in the dilution of the ownership interests of its current
stockholders and purchasers of common stock offered hereby. We are currently
authorized to issue 20,000,000 shares of common stock with such rights as
determined by our board of directors. The potential issuance of such additional
shares of common stock may create downward pressure on the trading price of
our
common stock. We may also issue additional shares of our common stock or other
securities that are convertible into or exercisable for capital raising or
other
business purposes. Future sales of substantial amounts of common stock, or
the
perception that sales could occur, could have a material adverse effect on
the
price of our common stock.
We
may issue shares of preferred stock with greater rights than our common
stock.
Subject
to the rules of the American Stock Exchange, our articles of incorporation
authorize our board of directors to issue one or more series of preferred stock
and set the terms of the preferred stock without seeking any further approval
from holders of our common stock. Currently, there are 100,000 preferred shares
authorized but none issued. Any preferred stock that is issued may rank ahead
of
our common stock in terms of dividends, priority and liquidation premiums and
may have greater voting rights than holders of our common stock.
We
have not paid dividends on our common stock and do not expect to do so in the
foreseeable future.
We
have
no present intention to pay cash dividends on our common stock in the
foreseeable future, and some of our credit agreements contain provisions that
limit the payment of dividends. Therefore an investor in our common stock should
not expect to obtain any economic benefit from owning our common stock prior
to
a sale of those shares, if then.
Our
governing documents limit director liability thereby making it difficult to
bring any action against them for breach of fiduciary duty.
As
permitted by Delaware law, the company’s Certificate of Incorporation and Bylaws
limit the liability of directors to the company or its stockholders for monetary
damages for breach of a director’s fiduciary duty except for liability in
certain instances. As a result of those provisions and Delaware law,
stockholders’ rights to recover against directors for breach of fiduciary duty
will be limited.
PRIVATE
SECURITIES LITIGATION
REFORM
ACT SAFE HARBOR STATEMENT
This
prospectus contains forward-looking statements within the meaning of Section
27A
of the Securities Act and Section 21E of the Securities Exchange Act of 1934,
as
amended (the “Exchange Act”), based on our current expectations, assumptions,
estimates and projections about our business and our industry. 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 regarding
the company’s financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the company believes that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially
from those in the forward-looking statements for various reasons, including
the
effects of competition, the level of petroleum industry exploration and
production expenditures, world economic and political conditions, prices of
and
the demand for crude oil and natural gas, weather, the legislative environment
in the United States and other countries, adverse changes in the capital and
equity markets, and other risk factors identified herein.
New
risk
factors emerge from time to time, and it is not possible for us to predict
all
risk factors, nor can we assess the impact of all factors on our business or
the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
We
undertake no obligation to update publicly or revise any forward-looking
statements. You should not rely upon forward-looking statements as predictions
of future events or performance. We cannot assure you that the events and
circumstances reflected in the forward-looking statements will be achieved
or
occur.
USE
OF PROCEEDS
The
shares of common stock offered by this prospectus will be sold by the selling
shareholders, who will receive all of the proceeds from the sales of such
shares. The company will not receive any proceeds from the sale or distribution
of the common stock by the selling shareholders, but we will incur all costs
associated with this registration statement and prospectus. We will receive
gross proceeds of $842,660 if all of the warrants are exercised for cash by
the
selling shareholders. We intend to use cash proceeds from exercises of warrants
for working capital and other general corporate purposes.
SELLING
SHAREHOLDERS
The
following table sets forth certain information regarding the selling
shareholders’ ownership of our common stock as of September 30, 2005, and as
adjusted to reflect the assumed sale by the selling shareholders of all of
the
common stock owned, or to be owned upon the exercise of outstanding warrants,
by
them in this offering. The term “selling shareholder” includes the shareholders
listed below and their transferees, assignees, pledges, donees or other
successors.
Each
of
the selling shareholders has represented to us that it is not a broker-dealer.
One
of the selling shareholders, Oberweis Micro-Cap Fund, has represented to
us that
it is an
affiliate of a broker-dealer, that it purchased the shares in the
ordinary course of business and that at the time of purchase of the
shares it had no agreements or understandings, directly or indirectly,
with
any person to distribute the shares.
We
are
unable to determine the exact number of shares that will actually be sold,
because the selling shareholders may sell all or some of the shares and reserve
the right to accept or reject, in whole or in part, any proposed sale of shares.
The selling shareholders may offer and sell less than the number of shares
indicated, and are not making any representations that any shares covered by
this prospectus will or will not be offered for sale. We are not aware of any
agreements, arrangements or understandings with respect to the sale of any
of
the shares. The following table assumes that the selling shareholders will
sell
all of the shares being offered for their account by this
prospectus.
Beneficial
ownership is determined in accordance with Rule 13d-3 under the Securities
Act
and generally includes voting or investment power with respect to securities.
Except as indicated in the footnotes to the table, we believe that each
shareholder possesses sole voting and investment power with respect to all
of
the shares of common stock owned by that holder, subject to community property
laws where applicable. In computing the number of shares beneficially owned
by a
holder and the percentage ownership of that holder, shares of common stock
underlying warrants that are currently exercisable within 60 days are deemed
outstanding. Percentages are based on 8,288,618 shares of common stock issued
and outstanding as of November 28, 2005 and, solely in the case of selling
shareholders who hold warrants to purchase common stock, the number of shares
of
common stock issuable upon the exercise of the warrant held by that selling
shareholder.
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Shares
Beneficially Owned after the
Offering
|
|
Selling
Shareholders
|
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|
Shares
Beneficially Owned before the
Offering
|
|
|
Shares
Offered in this
Offering
|
|
|
No.
of Shares
|
|
|
%
of
Outstanding
|
|
Bonanza
Master Fund Ltd. (1)
|
|
|
195,000
|
|
|
195,000
|
|
|
—
|
|
|
—
|
|
Calm
Waters Partnership (2)
|
|
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310,000
|
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150,000
|
|
|
160,000
|
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|
1.9
|
% |
Cordillera
Fund, LP (3)
|
|
|
20,000
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
Deephaven
Distressed Opportunities Trading Ltd. (4)
|
|
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88,000
|
|
|
88,000
|
|
|
—
|
|
|
—
|
|
Deephaven
Event Trading Ltd. (5)
|
|
|
103,600
|
|
|
103,600
|
|
|
—
|
|
|
—
|
|
Green
Bay Packing Master Trust Fund (6)
|
|
|
4,000
|
|
|
4,000
|
|
|
—
|
|
|
—
|
|
Harbour
Holdings Ltd. (7)
|
|
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27,500
|
|
|
27,500
|
|
|
—
|
|
|
—
|
|
HedgEnergy
Master Fund (8)
|
|
|
150,000
|
|
|
150,000
|
|
|
—
|
|
|
—
|
|
Ironman
Energy Capital, LP (9)
|
|
|
200,000
|
|
|
200,000
|
|
|
—
|
|
|
—
|
|
Los
Angeles City Employees’ Retirement System (10)
|
|
|
48,500
|
|
|
48,500
|
|
|
—
|
|
|
—
|
|
MA
Deep Event Ltd. (11)
|
|
|
8,400
|
|
|
8,400
|
|
|
—
|
|
|
—
|
|
Nite
Capital LP (12)
|
|
|
10,000
|
|
|
10,000
|
|
|
—
|
|
|
—
|
|
UMB
Trust & Co. FBO Oberweis Micro-Cap Fund (13)
|
|
|
33,700
|
|
|
25,000
|
|
|
8,700
|
|
|
*
|
|
Ritchie
Energy Trading, Ltd. (14)
|
|
|
200,000
|
|
|
200,000
|
|
|
—
|
|
|
—
|
|
SIT
Small Cap Growth Fund, Series D (15)
|
|
|
47,500
|
|
|
47,500
|
|
|
—
|
|
|
—
|
|
Skylands
Quest LLC (16)
|
|
|
17,700
|
|
|
4,500
|
|
|
13,200
|
|
|
*
|
|
Skylands
Special Investment LLC (17)
|
|
|
50,100
|
|
|
17,500
|
|
|
32,600
|
|
|
*
|
|
Skylands
Special Investment II LLC (18)
|
|
|
1,225
|
|
|
500
|
|
|
725
|
|
|
*
|
|
Wells
Fargo National Association (19)
|
|
|
20,000
|
|
|
20,000
|
|
|
—
|
|
|
—
|
|
John
Chisholm (20) (21)
|
|
|
176,453
|
|
|
152,725
|
|
|
23,728
|
|
|
|
|
Arvind
Sanger (21)
|
|
|
30,024
|
|
|
7,657
|
|
|
22,367
|
|
|
*
|
|
Tom
Bandy (21)
|
|
|
18,832
|
|
|
18,832
|
|
|
—
|
|
|
—
|
|
Glenn
Penny (22)
|
|
|
777,915
|
|
|
6,991
|
|
|
770,924
|
|
|
9.3
|
%
|
William
Ziegler (23)
|
|
|
298,463
|
|
|
290,418
|
|
|
|
|
|
*
|
|
Saxton
River Corporation (24)
|
|
|
69,498
|
|
|
69,498
|
|
|
—
|
|
|
—
|
|
TOSI,
LLP (25)
|
|
|
752,347
|
|
|
752,347
|
|
|
|
|
|
|
|
TOTAL
|
|
|
3,658,757
|
|
|
2,618,468
|
|
|
1,040,289
|
|
|
12.6
|
%
|
*
|
Represents
less than 1%.
|
(1)
|
Bernay
Box, President of the General Partner of Bonanza Master Fund
Ltd.,
exercises voting and investment power over the shares held by
Bonanza
Master Fund Ltd.
|
(2)
|
Richard
S. Strong, Managing Partner of Calm Waters Partnership, exercises
voting
and investment power over the shares held by Calm Waters
Partnership.
|
(3)
|
John
Relton, Chief Financial Officer of Andrew Carter Capital,
exercises voting
and investment power over the shares held by Cordillera Fund,
LP.
|
(4)
|
Jeff
Golbus, Assistant Portfolio Manager of Deephaven Distressed
Opportunities
Trading Ltd., exercises voting and investment power over
the shares held
by Deephaven Distressed Opportunities Trading Ltd.
|
(5)
|
Jeff
Golbus, Assistant Portfolio Manager of Deephaven Event Trading
Ltd.,
exercises voting and investment power over the shares held
by Deephaven
Event Trading Ltd.
|
(6)
|
Eugene
Sit, Chairman, CEO & CIO of SIT Investment Associates, Inc., exercises
voting and investment power over the shares held by Green
Bay Packing
Master Trust Fund.
|
(7)
|
Charles
A. Paquelet, President of Skylands Capital, LLC.,
exercises voting
and investment power over the shares held by Harbour Holdings
Ltd.
|
(8)
|
B.J.
Willingham, Chief Investment Officer of HedgEnergy Master
Fund, exercises
voting and investment power over the shares held by HedgEnergy
Master
Fund.
|
(9)
|
G.
Bryan Dutt, Managing Director of Ironman Energy Capital,
LP, exercises
voting and investment power over the shares held by Ironman
Energy
Capital, LP.
|
(10)
|
Eugene
Sit, Chairman, CEO & CIO of SIT Investment Associates, Inc.,
exercises voting and investment power over the shares held
by Los Angeles
City Employees’ Retirement System.
|
(11)
|
Jeff
Golbus, Assistant Portfolio Manager of MA Deep Event Ltd.,
exercises
voting and investment power over the shares held by MA Deep
Event
Ltd.
|
(12)
|
Keith
Goodman, Manager of the General Partner of Nite Capital LP,
exercises
voting and investment power over the shares held by Nite
Capital
LP.
|
(13)
|
James
W. Oberweis, President of the Oberweis Micro-Cap Funds, exercises
voting
and investment power over the shares held by UMB Trust & Co. FBO
Oberweis Micro-Cap Fund.
|
(14)
|
Jeff
Wallace, Senior Managing Director of Ritchie Capital and
Investment
Advisor to Ritchie Energy Trading, Ltd., exercises voting
and investment
power over the shares held by Ritchie Energy Trading, Ltd
|
(15)
|
Eugene
Sit, Chairman, CEO & CIO of SIT Investment Associates, Inc.,
exercises voting and investment power over the shares held
by SIT Small
Cap Growth Fund, Series D.
|
(16)
|
Charles
A. Paquelet, President of Skylands Capital, LLC, exercises
voting and
investment power over the shares held by Skylands Quest
LLC.
|
(17)
|
Charles
A. Paquelet, President of Skylands Capital, LLC, exercises
voting and
investment power over the shares held by Skylands Special
Investment
LLC.
|
(18)
|
Charles
A. Paquelet, President of Skylands Capital, LLC, exercises
voting and
investment power over the shares held by Skylands Special
Investment II
LLC.
|
(19)
|
Common
stock issuable upon the exercise of warrants at $5.35 per
share issued
in
connection
with a credit agreement between the Company and Wells Fargo
Bank dated
February 14, 2005.
|
(20)
|
Member
of our Board of Directors since 1999. 123,185 shares
and 29,540
warrants held by Chisholm Energy Partners.
|
(21)
|
Includes
23,728 shares of common stock held by Mr. Chisholm issuable
upon the
exercise of warrants at $13.13 per share issued pursuant
to a Securities
Purchase and Exchange Agreement between the Company and the
holder listed,
dated April 30, 2000 as amended August 15, 2001.
|
(22)
|
Member
of our Board of Directors and Chief Technical Officer since
2001.
Currently an employee of the Company.
|
(23)
|
Member
of our Board of Directors since 1997.
|
(24)
|
Saxton
River Corporation is controlled by Jerry D. Dumas, Sr., Chairman
and CEO
of Flotek Industries, Inc.
|
(25)
|
J.W.
Beavers, President of Pitman Property Corp, general partner
of TOSI, L.P.,
exercises voting and investment power over the shares held
by TOSI,
L.P.
|
PLAN
OF DISTRIBUTION
As
of the
date of this prospectus, we have not been advised by the selling shareholders
as
to any plan of distribution. Distributions of the shares by the selling
shareholders, or by their partners, pledgees, donees (including charitable
organizations), transferees or other successors in interest, may from time
to
time be offered for sale either directly by such individual, or through
underwriters, dealers or agents or on any exchange on which the shares may
from
time to time be traded, in the over-the-counter market, or in independently
negotiated transactions or otherwise. In
the
event of the transfer by any of the selling stockholders of its shares to any
pledgee, donee, transferee or other successor, we will file a prospectus
supplement to this prospectus and the registration statement of which it is
a
part, identifying such successors as selling shareholders. The methods by
which the shares may be sold include:
· |
a
block trade (which may involve crosses) in which the broker or dealer
so
engaged will attempt to sell the securities as agent but may position
and
resell a portion of the block as principal to facilitate the transaction;
|
· |
purchases
by a broker or dealer as principal and resale by such broker or dealer
for
its own account pursuant to this
prospectus;
|
· |
exchange
distributions and/or secondary
distributions;
|
· |
sales
in the over-the-counter market;
|
· |
underwritten
transactions;
|
· |
ordinary
brokerage transactions and transactions in which the broker solicits
purchasers; and
|
· |
privately
negotiated transactions.
|
Such
transactions may be effected by the selling shareholders at market prices
prevailing at the time of sale or at negotiated prices. The selling shareholders
may effect such transactions by selling the common stock to underwriters or
to
or through broker-dealers, and such underwriters or broker-dealers may receive
compensations in the form of discounts or commissions from the selling
shareholders and may receive commissions from the purchasers of the common
stock
for whom they may act as agent. The selling shareholders may agree to indemnify
any underwriter, broker-dealer or agent that participates in transactions
involving sales of the shares against certain liabilities, including liabilities
arising under the Securities Act. We have agreed to register the shares for
sale
under the Securities Act and to indemnify the selling shareholders and each
person who participates as an underwriter in the offering of the shares against
certain civil liabilities, including certain liabilities under the Securities
Act.
In
connection with sales of the common stock under this prospectus, the selling
shareholders may enter into hedging transactions with broker-dealers, who may
in
turn engage in short sales of the common stock in the course of hedging the
positions they assume. The selling shareholders also may sell shares of common
stock short and deliver them to close out the short positions, or loan or pledge
the shares of common stock to broker-dealers that in turn may sell
them.
The
selling shareholders and any broker-dealers or agents that participate with
the
selling shareholders in the sale of the shares may be deemed to be
“underwriters” within the meaning of the Securities Act in connection with these
sales. In that event, any commissions received by the broker-dealers or agents
and any profit on the resale of the shares of common stock purchased by them
may
be deemed to be underwriting commissions or discounts under the Securities
Act.
CIRCUMSTANCES
UNDER WHICH
SELLING
SHAREHOLDERS ACQUIRED SECURITIES
Set
forth
below is a summary of the circumstances that led to the issuance to the selling
shareholders of shares of our common stock and the warrants which are
exercisable for shares of our 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. This
prospectus covers the sale of those 1,300,000 shares.
On
February 14, 2005, in connection with a credit agreement with Well Fargo Bank
National Association, we issued common stock purchase warrants to Wells Fargo
to
purchase 20,000 shares of common stock at $5.35 per share at any time before
February 14, 2007. We also covenanted with Wells Fargo to file a registration
statement covering the resale of the shares to be issued upon the exercise
of
the warrant. This prospectus covers the sale of 20,000 shares issuable upon
the
exercise of that warrant.
On
April
30, 2000, pursuant to a Securities Purchase and Exchange Agreement with certain
purchasers, we issued to such purchasers (i) 2,365.77 shares of our Series
A
Convertible Preferred Stock of the Company and (ii) warrants to purchase an
aggregate of 78,859,012 shares of common stock at an exercise price of $0.03
per
share expiring April 2010. The consideration provided by these purchasers to
the
Company in exchange for the issuance of these securities was the cancellation
of
certain promissory notes issued by the Company to evidence loans previously
made
by the purchasers to the Company and certain warrants granted by the Company
in
connection with these loans. On August 15, 2001, pursuant to an Agreement and
Plan of Reorganization with Chemical & Equipment Specialties,
Inc. ("CESI"), the conversion price for the Series A Convertible
Preferred Stock and associated warrants was adjusted to $0.027 per share. The
conversion price of those warrants whose holders did not participate in the
reorganization was adjusted to $0.12 per share, and their expiration date was
extended five years from the date of the agreement. In connection with
the
Securities Purchase and Exchange Agreement, we entered into a Registration
Rights Agreement with those purchasers in which we agreed to include in any
registration statement filed by us with the SEC prior to April 30, 2006 any
shares of common stock into which the warrants were subsequently exercised
or
the Series A Convertible Preferred Stock of the Company subsequently converted,
and any other shares of our common stock owned by them at the time of the
execution of the Registration Rights Agreement. Of the total number of shares
we
have the obligation to register under that Registration Rights
Agreement, 1,242,439 shares of common stock now held by such purchasers
as
a result of the exercise of warrants or the conversion of the Series A
Convertible Preferred Stock, and 56,029 shares of common stock issuable upon
the
exercise of warrants which remain issued and outstanding, are covered by this
prospectus.
BUSINESS
Historical
Development
Flotek
was originally incorporated under the laws of the Province of British Columbia
on May 17, 1985. On October 23, 2001, we approved a change in our
corporate domicile to Delaware and a reverse stock split of 120 to 1. On October
31, 2001, we completed a reverse merger with CESI. Since that date, we have
entered into the following acquisitions that were outside the ordinary course
of
our business:
· |
acquired
IBS 2000, Inc. (“IBS 2000”), a Denver-based company engaged in the
development and manufacture of environmentally neutral chemicals
for the
oil industry, on February 19,
2002,
|
· |
acquired
manufacturing assets, inventory and intellectual property rights
to
produce oilfield shale shaker screens from Phoenix E&P Technology, LLC
(“Phoenix”) on January 28, 2005,
|
· |
acquired
Spidle Sales and Services, Inc. (“Spidle”), a downhole tool company with
rental, sales and manufacturing operations throughout the Rocky Mountains,
on February 14, 2005,
|
· |
acquired
the assets of Harmon’s Machine Works, Inc. (“Harmon”), a downhole oilfield
and mining tool company with manufacturing and sales operations located
in
Midland, Texas, on August 19, 2005,
and
|
· |
acquired
the assets of Precision-LOR, Ltd. (“LOR”), a drilling tool rental and
inspection service provider in south Texas, on August 31,
2005.
|
Description
of Business
We
are a
supplier of drilling and production products and services to the energy industry
on a worldwide basis. Our core focus is oilfield specialty chemicals and
logistics, downhole drilling tools and downhole production tools. We are
headquartered in Houston, Texas. As of July 27, 2005 our common stock began
trading on the American Stock Exchange under the stock ticker symbol “FTK”.
Prior to this date our common stock was traded on the OTC Bulletin Board market
under the stock ticker symbol, “FLTK” or “FLTK.OB”. Our website is located at
http://www.flotekind.com.
Information contained in our website or links contained on our website are
not
part of this prospectus.
Our
reportable segments are strategic business units that offer different products
and services. Each business segment requires different technology and marketing
strategies, and is managed independently.
|
|
·
|
The
Chemicals and Logistics segment is made up of two business units.
The CESI
Chemical business unit develops, manufactures, and markets chemicals
used
by oilfield service
companies in oil and gas well drilling, cementing, stimulation
and
production. The Materials Translogistics business unit manages
automated
bulk material handling, loading facilities, and blending capabilities
for
oilfield service companies.
|
|
|
·
|
The
Drilling Products segment 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.
|
|
|
Chemicals
and Logistics
The
CESI
Chemical business offers a full spectrum of oilfield specialty chemicals used
for drilling, cementing, stimulation, and production. We have laboratory
facilities in Oklahoma and Colorado which design, develop and test new chemical
formulations and enhance existing products, often in cooperation with our
customers. The laboratory provides quality assurance to our manufacturing
operations and expert technical support to our customers on existing product
lines. The development of specialty chemicals with enhanced performance
characteristics to withstand a wide range of downhole pressures,
temperatures and other well-specific conditions is key to the success of this
business unit.
The
customer base for the CESI Chemicals business is primarily oil and gas pumping
service companies, including both major and independent oilfield service
companies. The segment manufactures, packages and warehouses its products in
Oklahoma. We distinguish ourselves through the strength of our innovative and
proprietary products, dedication to product quality and superior customer
service. The division’s products provide measurable productivity increases and
solutions to environmental problems.
Our
Material Translogistics business designs, project manages and operates automated
bulk material handling and loading facilities for oilfield service companies,
and serves as consulting engineers. The domestic customer base for this segment
consists of one major independent oilfield service company which specializes
in
pressure pumping, cementing and stimulation services. We also contract with
international customers to design and project manage the construction of bulk
handling facilities. Our client’s bulk facilities handle oilfield products
including sand and other materials for well fracturing operations, as well
as
dry cement and additives for oil and gas well cementing, and supplies and
materials used in oilfield operations which we blend to specification.
Drilling
Products
The
Drilling Products segment manufactures and sells centralizers, rents and sells
a
variety of downhole drilling tools, and provides drilling tool inspection
services.
Our
Turbeco line of fixed rigid and integral joint centralizers is used in oil
and
gas well cementing programs to increase the effectiveness of such operations.
The tool’s main purpose is assuring the pipe is properly centered in the well
bore thereby obtaining an effective bond with the formation. We manufacture
and
market the Turbo-Flo high efficiency oilfield shale shaker screens purchased
from Phoenix through our existing sales network.
We
rent
and sell a variety of downhole drilling tools used in the oilfield, mining,
water well and industrial drilling sectors domestically and in Central and
South
America. Products include drill bits, reamers, stabilizers, tubulars and
drilling mud motors. In addition we provide drill pipe inspection services
domestically.
Our
customers in the Drilling Products segment are primarily oil and gas exploration
and production companies, including major oil companies, which own producing
oil
and gas wells and are involved in the drilling and cementing of oil wells.
Our
active customer base is distributed among major oil companies and smaller
independent operators. Marketing for our products is primarily focused in the
Gulf of Mexico, Mid-Continent and Rocky Mountain regions of the United States.
Production
Products
The
Production Products segment manufactures and markets the patented Petrovalve
line of downhole pump components. The Petrovalve line of downhole pump valves
was originally designed in the mid-1980’s and has undergone significant
improvements in recent years. The Petrovalve product line provides longer and
more reliable downhole pump performance than the traditional ball and seat
valves which are the predominant product in the industry. Additionally, the
Petrovalve has demonstrated more efficient flow characteristics and increased
production volumes in many circumstances. Our “Gas Breaker” technology allows us
to provide a solution to gas lock problems often encountered on wells with
lower
flow rates or high gas ratios. We outsource manufacturing of most of the
machined valve components, but assemble and perform final quality assurance
on
all valves in Houston.
The
Petrovalve product line is comprised of rod pump manufacturers and pump
maintenance and service shops using the industry standard API ball and seat
product, as well as other proprietary valve products. Our customers in the
Downhole Production Products segment are primarily major oil and gas exploration
and production companies. The majority of the sales in this segment are
international sales.
Product
Demand and Marketing
The
demand for our products and services is generally correlated to the level of
oil
and gas drilling activity, both in the United States and internationally.
Drilling activity, in turn, is generally dependent on the price levels of oil
and gas. Certain products, particularly the Petrovalve line and some of our
specialty chemicals, are more closely related to the production of oil and
gas,
and demand is less dependent on drilling activity.
We
market
our products primarily through direct sales to our customers by company managers
and sales employees. We have established customer relationships which provide
for repeat sales. The majority of our marketing is currently conducted within
the United States. However, we have been expanding our international sales
efforts and we expect international sales to continue to increase.
Internationally, we operate primarily through agents in Canada, Mexico, Central
and South America, the Middle East, Asia and Russia.
Customers
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. Although we are not dependent on one or a few major
customers, five customers accounted for 47% of consolidated revenues for the
year ended December 31, 2004 and 26% of consolidated revenues for the nine
months ended September
30, 2005. The majority of these sales was in the Chemicals and Logistics
segment and collectively accounted for 57% of revenues in this segment for
the
year ended December 31, 2004 and 45% of revenues in this segment for the nine
months ended September 30, 2005.
Research
and Development
We
are
actively involved in developing proprietary products to expand our existing
product lines and in developing new technologies. We incurred $300,074 and
$46,654 in research and development expenses for the years ended December 31,
2004 and 2003, respectively. We have incurred $440,863 for the nine
months
ended September 30, 2005.
Intellectual
Property
We
have
followed a policy of seeking patent protection both within and outside the
United States for products and methods that appear to have commercial
significance and qualify for patent protection. The decision to seek patent
protection considers whether such protection can be obtained on a cost-effective
basis and is likely to be effective in protecting our commercial interests.
We
believe our patents and trademarks, together with our trade secrets and
proprietary design, manufacturing and operational expertise, are reasonably
adequate to protect our intellectual property and provide for the continued
operation of our business. We maintain patents on our production valve design
and casing centralizer design, and trade secrets on certain specialty chemicals.
Competition
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. The
regions in which we operate are highly competitive. The competitive environment
has intensified as recent mergers among oil and gas companies have reduced
the
number of available customers. Many other oil and gas service companies are
larger than we are and have greater resources than we have. These competitors
are better able to withstand industry downturns, compete on the basis of price
and acquire new equipment and technologies, all of which could affect our
revenues and profitability. These competitors compete with us both for customers
and for acquisitions of other businesses. This competition may cause our
business to suffer. We believe that competition for contracts will continue
to
be intense in the foreseeable future.
Raw
Materials
The
Chemical and Logistic segment’s operations purchase their principal raw
material, chemical feed stocks, on the open market. Collection and
transportation of these raw materials to the Company’s plants can be adversely
affected by extreme weather conditions. Prices for the chemical feed stocks
also
vary in relation to the general business cycle and global demand. The
Drilling and Production segments purchase their principal raw material, steel,
on the open market. Except for a few chemical additives, the raw materials
are available in most cases from several suppliers at market prices.
We use multiple suppliers, both domestically and internationally, for
our
key raw materials.
Government
Regulations
We
are
subject to federal, state and local environmental and occupational safety and
health laws and regulations in the United States and other countries in which
we
do business. We strive to comply fully with these requirements and are not
aware
of any material instances of noncompliance. Many of the products within our
specialty chemicals segment are considered hazardous or flammable. If a leak
or
spill occurs in connection with our operations, we could incur material costs,
net of insurance, to remediate any resulting contamination.
Employees
As
of
November 28, 2005, we employed 170 full-time employees. None of our
employees are covered by collective bargaining agreements.
MANAGEMENT
The
following table provides certain information with respect to the Board of
Directors and the Executive Officers of the Company.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Positions
|
|
Position
Held
Since
|
|
|
|
|
|
|
|
Jerry
D. Dumas, Sr.
|
|
70
|
|
Chief
Executive Officer, Chairman
and Director
|
|
1998
|
Glenn
S. Penny
|
|
55
|
|
President,
Chief Technical Officer
and Director
|
|
2001
|
Lisa
Bromiley Meier
|
|
32
|
|
Chief
Financial Officer and
Vice President
|
|
2004
|
Gary
M. Pittman
|
|
42
|
|
Director
|
|
1997
|
William
R. Ziegler
|
|
63
|
|
Director
|
|
1997
|
John
W. Chisholm
|
|
51
|
|
Director
|
|
1999
|
Barry
E. Stewart
|
|
50
|
|
Director
|
|
2001
|
Richard
O. Wilson
|
|
75
|
|
Director
|
|
2003
|
|
|
|
|
|
|
|
The
following is a brief description of the background and principal occupation
of
each director and executive officer:
Jerry
D. Dumas, Sr.
- Mr.
Dumas became Chairman of the Board of Directors of the Company in 1998. He
has
served as Chief Executive Officer of the Company since September 1998. Prior
to
that he was Vice President of Corporate and Executive Services with Merrill
Lynch Private Client Group for ten years. Mr. Dumas served as Group Division
President with Hughes Tool Company, a predecessor to Baker Hughes, Inc., from
1980 to 1984. Mr. Dumas holds a B.S. degree from Louisiana State
University.
Glenn
S. Penny
- Dr.
Penny became President, Chief Technical Officer and a Director of the Company
with the merger of Flotek Industries, Inc. and CESI in 2001. Dr. Penny founded
CESI in April 2000 and served as its President and Chief Executive Officer.
Prior to founding CESI, Dr. Penny served as President of Stim-Lab, Inc., a
company specializing in independent testing of completion fluids and methods,
from its founding in 1985 to April 2000. Stim-Lab, Inc. was acquired by Core
Laboratories N.V., an NYSE-listed oilfield service company, in 1997. Dr. Penny
holds a B.S. degree in Chemistry from Trinity University and a Ph.D. degree
in
Chemistry from the University of Houston.
Lisa
Bromiley Meier
- Mrs.
Meier was appointed Chief Financial Officer of the Company in April 2004 and
Vice President in January 2005. Prior to joining Flotek, Mrs. Meier worked
in
the energy audit practice of PricewaterhouseCoopers, LLP and worked for three
Fortune 500 companies. Mrs. Meier served in various accounting, finance, SEC
reporting and risk management positions. Mrs. Meier is a Certified Public
Accountant and a Chartered Financial Analyst candidate. Mrs. Meier holds B.B.A.
and Masters of Accountancy degrees from the University of Texas.
Gary
M. Pittman
- Mr.
Pittman founded his own company in 1995 to provide investment and merchant
banking services to private and public companies. From 1987 to 1995,
Mr.
Pittman was Vice President of The Energy Recovery Fund, a $180 million private
equity fund focused on the energy industry. Mr. Pittman has served
as
Director and Audit Committee member of Czar Resources, Ltd., a public Canadian
exploration and production company; Triton Imaging International, a developer
of
sea floor imaging software; Secretary, VP and Director of Sub Sea International,
an offshore robotics and diving company; BioSafe Technologies, a developer
of
non-toxic insecticides; and owned and operated an oil and gas production and
gas
gathering company in Montana. Mr. Pittman holds a B.A. degree in
Economics/Business from Wheaton College and an M.B.A. degree in Finance and
Marketing from Georgetown University. Mr. Pittman serves as Chairman
of
the Compensation Committee and is a member of the Audit Committee.
William
R. Ziegler
- Mr.
Ziegler has been of counsel to the law firm of Satterlee Stephens Burke
& Burke LLP since January 2001. Prior to that time he was a partner in that
law firm and predecessor firms for over five years. Mr. Ziegler is a director
and Vice Chairman of Grey Wolf, Inc., a provider of contract land drilling
services to the oil and gas industry. He is Chairman of the Board
(non-executive) of Vesta Corp., Firebird Holdings Limited, and Geokinetics,
Inc.
He serves as Vice Chairman of the Board (non-executive) of Union Drilling,
Inc.
Mr. Ziegler is a graduate of Amherst College and received a law degree from
the
University of Virginia and an M.B.A. degree from Columbia University. He has
practiced corporate, banking and securities law since 1968. Mr. Zeigler is
a
member of the Compensation Committee.
John
W. Chisholm
- Mr.
Chisholm is a founder of Wellogix, Inc., which develops software for the oil
and
gas industry to streamline workflow, improve collaboration, expedite the
inter-company exchange of enterprise data and communicate complex engineered
services. Mr. Chisholm co-founded ProTechnics Company and served as President
of
that company from 1985 through 1998, after it was acquired by Core Laboratories
N.V. in 1996. After leaving Core Laboratories in 1998 as Senior Vice President
of Global Sales and Marketing he started Chisholm Energy Partners, an investment
fund specializing in mid-size energy service companies. Mr. Chisholm holds
a
B.A. degree from Ft. Lewis College. Mr. Chisholm is a member of the Compensation
Committee.
Barry
E. Stewart
- Mr.
Stewart became
Chief Financial Officer of Rotech Healthcare Inc. in July 2004. Mr. Stewart
served as Chief Financial Officer of Evolved Digital Systems, Inc. from 2001
to
2004, and Vice President of Finance for Community Health Systems, Inc. from
1996
to 2001. Prior to 1996, Mr. Stewart served in various managing director
positions with national commercial banks. He is a Certified Public
Accountant licensed in Texas and Tennessee and has a M.B.A. degree from
the
University of Houston. Mr. Stewart serves as Chairman of the Audit
Committee.
Richard
O. Wilson
- Mr.
Wilson is an Offshore Construction consultant with 48 years experience in the
North Sea, Gulf of Mexico, Gulf of Paria, Lake Maracaibo, South Atlantic
Offshore Brazil and Angola. Mr. Wilson is a Director of Callon Petroleum Inc.
Mr. Wilson received a B.S. degree in Civil Engineering from Rice University.
Mr.
Wilson serves on the Audit Committee.
There
are
no family relationships between any director or executive officer.
We
have a
code of ethics that applies to our principal executive officer, principal
financial officer and chief accounting officer/controller.
Board
Committees
The
standing committees of the Board include the Compensation Committee consisting
of Gary Pittman, John Chisholm, and William Ziegler, and the Audit Committee,
comprised of Barry Stewart, Gary Pittman and Richard Wilson. Mr. Stewart is
considered a “financial expert” based on his current and past employment, his
education and his professional certification.
The
Compensation Committee sets compensation policy for all of our Executive
Officers, makes recommendations to the full Board of Directors regarding
executive compensation and employee stock option awards, and administers our
2003 and 2005 Long-Term Incentive Plans.
The
primary function of the Audit Committee is to provide advice with respect to
our
financial matters and to assist the Board of Directors in fulfilling its
oversight responsibilities regarding audit, finance, accounting and tax
compliance. In particular, the Audit Committee is responsible for overseeing
the
engagement, independence and services of our independent auditors. The Audit
Committee also serves to: (i) act as an independent and objective party to
monitor our financial reporting process and internal control system; (ii) review
and appraise the audit efforts of the independent auditors; (iii) evaluate
our
quarterly financial performance as well as the compliance with laws and
regulations; (iv) oversee management’s establishment and enforcement of
financial policies and business practices; and (v) provide an open avenue of
communication among the independent auditors, financial and senior management,
counsel, and the Board of Directors. The Board has adopted a written charter
for
the Audit Committee.
Our
Board
of Directors does not have a standing executive or nominating committee or
committees performing similar functions.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Critical
Accounting Policies and Estimates
Our
financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and
require us to make estimates and assumptions during their preparation which
require judgment. Our critical accounting policies and procedures include but
are not limited to the following:
Cash
and Cash Equivalents
We
consider all short-term investments with an original maturity of three months
or
less to be cash equivalents.
Restricted
Cash
As
of
December 31, 2004, we had $37,038 of restricted cash which serves as collateral
for a standby letter of credit that provides financial assurance that we will
fulfill our obligations related to an international contract to design and
project manage the construction of a bulk handling facility in
Mexico.
Inventories
Inventories
consist of raw materials, finished goods, and parts and materials used in
manufacturing and construction operations. Finished goods inventories include
raw materials, direct labor and production overhead. Inventories are carried
at
the lower of cost or market using the weighted average cost method. The Company
maintains a reserve for slow-moving and obsolete inventories, which is reviewed
for adequacy on a periodic basis.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. The cost of ordinary maintenance and
repairs is charged to operations, while replacements and major improvements
are
capitalized. Depreciation or amortization is provided at rates considered
sufficient to amortize the cost of the assets using the straight-line method
over the following estimated useful lives:
|
|
Buildings
and leasehold improvements
|
3-24
years
|
Machinery
and equipment
|
2-3
years
|
Furniture
and fixtures
|
3-7
years
|
Transportation
equipment
|
3
years
|
Computer
equipment
|
3-5
years
|
|
|
We
review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the
carrying amount of an asset to future net cash flows expected to be generated
by
the asset. If such assets are considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
exceeds either the fair value or the estimated discounted cash flows of the
assets, whichever is more readily measurable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
Goodwill
and Intangible Assets
Goodwill
represents the excess of the aggregate price paid by us in acquisitions over
the
fair market value of the tangible and identifiable intangible net assets
acquired. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, “Goodwill and Other Intangible Assets” separable intangible
assets that are not deemed to have indefinite lives will be amortized over
their
useful lives.
Financial
Instruments
We
consider the fair value of all financial instruments (primarily 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 our ability to borrow funds under
terms and conditions similar to those of our existing debt and because the
majority of our debt carries a floating rate.
We
have
no off-balance sheet debt or other off-balance sheet financing arrangements.
We
have not entered into derivative 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. Our Material Translogistics business unit ("MTI") recognizes revenues
of its design and construction oversight contracts under the
percentage-of-completion method of accounting, measured by the percentage of
costs incurred to date to the total estimated costs of completion. This
percentage is applied to the total estimated revenue at completion to calculate
revenues earned to date. Contract costs include all direct labor and material
costs and those indirect costs related to manufacturing and construction
operations. General and administrative costs are charged to expense as incurred.
Changes in job performance and estimated profitability, including those arising
from contract bonus or penalty provisions and final contract settlements, may
result in revisions to costs and income and are recognized in the period in
which such revisions appear probable. All known or anticipated losses on
contracts are recognized in full when such amounts become apparent. MTI bulk
material transload revenue is recognized as services are performed for the
customer.
Foreign
Currency
We
have
sales that are denominated in currencies other than the United States dollar.
Any foreign currency transaction gains or losses are included in our results
of
operations. We have not entered into any forward foreign exchange 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. We provide deferred income tax
assets and liabilities for the expected future tax consequences attributable
to
differences between the financial statement carrying amounts and the respective
tax basis of assets and liabilities. These deferred assets and liabilities
are
based on enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary
to
reduce deferred income tax assets to amounts which are more likely than not
to
be realized.
Earnings
Per Share
Earnings
per common share is calculated by dividing net income or loss attributable
to
common stockholders by the weighted average number of common shares outstanding.
Dilutive income or loss per share is calculated by dividing net income or loss
attributable to common stockholders by the weighted average number of common
shares outstanding and dilutive effect of stock options.
Stock-Based
Compensation
We
recognize compensation expense associated with stock-based awards under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, “Accounting for Stock Issued to Employees”, and related
interpretations. The difference between the quoted market price as of the date
of the grant and the contractual purchase price of shares is charged to
operations over the vesting period. No compensation expense has been recognized
for stock options with fixed exercise prices equal to the market price of the
stock on the dates of grant. We provide supplemental disclosure of the effect
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. Under SFAS 123R,
we will be required to measure the cost of employee services received in
exchange for stock based on the grant date at fair value (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide services in exchange for the award (usually
the
vesting period). The fair value will be estimated using an option-pricing model.
Excess tax benefits, as defined in SFAS 123R, will be recognized as an addition
to additional paid-in capital. The Standard is effective as of the beginning
of
the first interim or annual reporting period that begins after June 15, 2005.
We
are currently in the process of evaluating the impact of SFAS 123R on our
financial statements.
Recent
Accounting Pronouncements
In
January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation
of Variable Interest Entities”. FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, Consolidated
Financial Statements,
to
certain entities in which equity investors do not have the characteristics
of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN 46R which
revised certain provisions in the original interpretation and permitted multiple
effective dates based upon the nature and formation date of the variable
interest entity. Adoption of the provisions of FIN 46R did not have any impact
on our financial position, results of operations or cash flows as all of our
subsidiaries are wholly-owned.
In
December 2004, the FASB published the following two final FASB Staff Positions,
effective immediately. FAS 109-1, "Application of FASB Statement No.109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004," giving guidance
on applying FASB Statement No. 109, Accounting for Income Taxes, to the tax
deduction on qualified production activities provided by the American Jobs
Creation Act of 2004. FAS 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 FAS 109-1 and FAS 109-2; however, at this time,
we
do not believe that the adoption of FAS 109-1 or FAS 109-2 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" (EITF 03-13). Evaluation of whether operations and
cash
flows have been eliminated depends on whether (1) continuing operations and
cash
flows are expected to be generated, and (2) 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 EITF 03-13 will have a material impact on our
consolidated financial position, results of operations or cash
flows.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An Amendment of
ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in
ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and re-handling
costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective
for fiscal years beginning after June 15, 2005 and is required to be adopted
by
us in the first quarter of fiscal 2006, beginning on January 1, 2006. We are
currently evaluating the effect that the adoption of SFAS No. 151 will have
on
our consolidated financial position, results of operations and cash flows,
but
do not expect SFAS No. 151 to have a material impact.
Results
of Operations for the Nine Months Ending September 30, 2005 and
2004
|
|
Nine
Months Ended September 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
36,805,438
|
|
$
|
15,278,420
|
|
Cost
of revenues
|
|
|
21,746,026
|
|
|
8,662,846
|
|
Gross
profit
|
|
|
15,059,412
|
|
|
6,615,574
|
|
Gross
profit %
|
|
|
40.9
|
%
|
|
43.3
|
%
|
Expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
6,461,727
|
|
|
3,915,949
|
|
Depreciation and amortization
|
|
|
999,805
|
|
|
537,960
|
|
Research and development
|
|
|
440,863
|
|
|
211,401
|
|
Total expenses
|
|
|
7,902,395
|
|
|
4,665,310
|
|
Income
from operations
|
|
|
7,157,017
|
|
|
1,950,264
|
|
Income
from operations %
|
|
|
19.4
|
%
|
|
12.8
|
%
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(653,004
|
)
|
|
(522,961
|
)
|
Other, net
|
|
|
39,539
|
|
|
51,678
|
|
Total other income (expense)
|
|
|
(613,465
|
)
|
|
(471,283
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6,543,552
|
|
|
1,478,981
|
|
Provision
for income taxes
|
|
|
(1,317,224
|
)
|
|
(100,000
|
)
|
Net
income
|
|
$
|
5,226,328
|
|
$
|
1,378,981
|
|
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 for the Nine Months Ending September 30, 2005 and
2004
Chemicals
and Logistics
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
20,919,830
|
|
$
|
12,377,009
|
|
Gross
profit
|
|
$
|
8,286,832
|
|
$
|
5,149,683
|
|
Gross profit
%
|
|
|
39.6
|
%
|
|
41.6
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
5,598,728
|
|
$
|
3,223,981
|
|
Operating
margin %
|
|
|
26.8
|
%
|
|
26.1
|
%
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
14,977,962
|
|
$
|
2,607,263
|
|
Gross
profit
|
|
$
|
6,289,706
|
|
$
|
1,320,724
|
|
Gross profit
%
|
|
|
42.0
|
%
|
|
50.7
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
3,354,993
|
|
$
|
382,031
|
|
Operating
margin %
|
|
|
22.4
|
%
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
Nine Months
Ended September
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
907,647
|
|
$
|
294,149
|
|
Gross
profit
|
|
$
|
482,874
|
|
$
|
145,167
|
|
Gross profit
%
|
|
|
53.2
|
%
|
|
49.4
|
%
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
32,768
|
|
$
|
(330,139
|
)
|
Operating
margin %
|
|
|
3.6
|
%
|
|
(112.2
|
)%
|
|
|
|
|
|
|
|
|
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.
Results
of Operations for the Years Ended December 31, 2004 and
2003
|
|
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
21,881,289
|
|
$
|
14,844,431
|
|
Cost
of revenues
|
|
|
12,529,631
|
|
|
9,264,091
|
|
Gross
margin
|
|
|
9,351,658
|
|
|
5,580,340
|
|
Gross
margin %
|
|
|
42.7
|
%
|
|
37.6
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
5,349,594
|
|
|
4,788,749
|
|
Goodwill impairment
|
|
|
—
|
|
|
5,120,633
|
|
Depreciation and amortization
|
|
|
689,901
|
|
|
713,531
|
|
Research and development
|
|
|
300,074
|
|
|
46,654
|
|
Total expenses
|
|
|
6,339,569
|
|
|
10,669,567
|
|
Income (loss) from operations
|
|
|
3,012,089
|
|
|
(5,089,227
|
)
|
Income (loss) from operations %
|
|
|
13.8
|
%
|
|
(34.3
|
)%
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(691,568
|
)
|
|
(618,438
|
)
|
Other, net
|
|
|
46,264
|
|
|
26,985
|
|
Total income (expense)
|
|
|
(645,304
|
)
|
|
(591,453
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
2,366,785
|
|
|
(5,680,680
|
)
|
Provision
for income taxes
|
|
|
(213,096
|
)
|
|
|
|
Income
(loss) from continuing operations
|
|
|
2,153,689
|
|
|
(5,680,680
|
)
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
|
|
|
(545,592
|
)
|
Loss
on disposal of discontinued operations, net of tax
|
|
|
|
|
|
(1,157,835
|
)
|
Net
income (loss)
|
|
$
|
2,153,689
|
|
$
|
(7,384,107
|
)
|
Net
income (loss) %
|
|
|
9.8
|
%
|
|
(49.7
|
)%
|
Total
revenues increased by $7,036,858 or 47.4% in 2004 from 2003. As discussed in
the
segment analysis that follows, this significant increase in revenues was due
to
strong performance by our Chemicals and Logistics segment, particularly with
our
line of proprietary chemicals. Currently, international sales make up
approximately 15% of total revenues. We have expanded our international
geographic footprint and customer base as evidenced by penetration into new
markets this year in Russia, Mexico and the Middle East. We will continue to
focus on growing international revenues.
Gross
margin increased 67.6%, from $5,580,340 in 2003 to $9,351,658 in 2004. More
importantly, gross margin as a percentage of revenues increased from 37.6%
in
2003 to 42.7% in 2004. Improved margins in the Chemical and Logistics segment
were primarily responsible for the improvement in margins. The gross margin
is
best analyzed on a segment by segment basis, discussed below, as gross margin
varies significantly between operating segments and can vary significantly
from
year to year in certain operating segments.
Selling,
general and administrative are costs not directly attributable to products
sold
or services rendered. Selling, general and administrative costs increased to
$5,349,594 in 2004 from $4,788,749 in 2003, however decreased as a percentage
of
revenue. Measured as a percentage of revenue, selling, general and
administrative dropped from 32.3% in 2003 to 24.4% in 2004. Significant emphasis
continues to be placed on growing sales while containing selling, general and
administrative costs across the organization.
Interest
expense increased slightly from $618,438 in 2003 to $691,568 in 2004. The
increase was caused by higher interest rates, which were offset by lower overall
debt levels. The majority of our indebtedness carries a variable interest rate
tied to the prime rate, adjusted on a quarterly basis.
Research
and development costs increased due to expansion of our applied research
facilities, including increased personnel costs. The higher personnel costs
are
due to increased staffing in our applied research laboratories, reflecting
our
strategy to continue to develop proprietary specialty chemicals. Over the years,
we have made a number of technological advances, including the development
of an
environmentally benign line of specialty chemicals. Substantially all of the
new
technologies have resulted from requests and guidance from our clients,
particularly major oil companies. Research and development expenditures are
charged to expense as incurred. We intend to continue committing financial
resources and effort to the development and acquisition of new products and
services.
Based
on
our improved profitability, a $213,096 provision for income taxes was recorded
in 2004. The provision was made for estimated state income tax and alternative
minimum tax, which cannot be offset by our net operating loss carryforwards.
The
result of these taxes reduced earnings per share by $0.03. 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, 2003, we had various
net deferred tax assets made up primarily of the expected future tax benefit
of
net operating loss carryforwards. A valuation allowance was provided in full
against these net deferred tax assets based upon the Company’s historical
losses. During 2004, we reduced the valuation allowance related to the remaining
net tax assets by $1,160,000. The reduction reflects our ability to utilize
this
amount of net deferred tax assets based on 2004 operating results. The benefit
from this reduction was recorded as a decrease in current income tax provision.
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 for the Years Ended December 31, 2004 and 2003
Chemicals
and Logistics
|
|
|
For
the Years Ended December
31,
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
17,982,880
|
|
$
|
11,919,350
|
|
Gross
margin
|
|
$
|
7,466,881
|
|
$
|
4,131,606
|
|
Gross
margin %
|
|
|
41.5
|
%
|
|
34.7
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
4,731,486
|
|
$
|
1,822,525
|
|
Operating
margin %
|
|
|
26.3
|
%
|
|
15.3
|
%
|
Chemicals
and Logistics revenues increased $6,063,530 or 50.9%, in 2004 compared to 2003.
The increase in sales is attributable to continued increase in drilling activity
and expanded market penetration in the U.S., Canada, Mexico and Russia. The
most
significant revenue growth relates to our environmental friendly “green”
chemicals in the U.S., which have more than tripled from $1,103,680 in 2003
to
$3,952,841 in 2004. CESI Chemical's focus on applied research has resulted
in
the penetration of new markets, continual expansion of our customer base,
product portfolio and increased margins. Recently our applied research resulted
in the development and subsequent sale of products to the drilling fluids
industry, a new sales segment for us. CESI Chemical differentiates itself
through the strength of its innovative and proprietary products, the depth
of
the laboratory staff, dedication to product quality, and superior customer
service.
The
gross
margin increased from $4,131,606 in 2003 to $7,466,881 in 2004. Not only did
gross margin increase, but gross margin as a percentage of revenues increased
from 34.7% in 2003 to 41.5% in 2004. The increase in margin is attributable
to
increased sales of our novel and proprietary chemicals that command higher
margins. Increased volume at our logistics facility in Raceland, Louisiana
also
contributed to our improved margins in 2004.
Operating
income increased $2,908,961, or 160%, in 2004 compared to 2003, primarily as
a
result of increased sales in the Chemical division and improved gross margins
in
the Chemical and Logistics business unit. Expansion of our proprietary product
line and customer base has driven the increase in sales and margin during 2004.
Drilling
Products
|
|
|
|
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,315,520
|
|
$
|
2,700,374
|
|
Gross
margin
|
|
$
|
1,592,923
|
|
$
|
1,419,520
|
|
Gross
margin %
|
|
|
48.0
|
%
|
|
52.6
|
%
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
358,649
|
|
$
|
394,347
|
|
Operating
margin %
|
|
|
10.8
|
%
|
|
14.6
|
%
|
|
|
|
|
|
|
|
|
Drilling
Products revenues increased $615,146 or 22.8% in 2004 compared to 2003. The
increase in sales was driven by product line and geographic expansion. Gross
margin also increased from $1,419,520 to $1,592,923 but decreased year over
year
as a percentage of revenue. The decrease in gross margin percentage from 52.6%
in 2003 to 48.0% in 2004 was primarily due to a shift in product sales mix.
The
decision to expand this segment during 2004, both in products and geographic
footprint, resulted in several one-time start-up costs. Prior to 2004, the
geographic coverage primarily included the Gulf Coast of Texas and
Louisiana. We actively expanded our sales efforts into West Texas,
North Texas and internationally, and incurred increased sales and marketing
costs as a result. Historically the segment had variations of a single product.
The drilling products group introduced an integral bow spring and other bow
spring tools. These tools are outsourced for manufacturing, resulting in reduced
margins. Introductory pricing was lower for these new products, but has improved
based on product performance.
Production
Products
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
582,889
|
|
$
|
224,707
|
|
Gross
margin
|
|
$
|
291,035
|
|
$
|
29,214
|
|
Gross
margin %
|
|
|
49.9
|
%
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
Operating
(loss)
|
|
$
|
(355,656
|
)
|
$
|
(5,547,601
|
)
|
Operating
loss %
|
|
|
(61.0
|
)%
|
|
(2,468.8
|
)%
|
Production
Products revenues increased $358,182 in 2004 compared to 2003 as a result of
the
new management team expanding its customer base. Additionally, sales to
Venezuela resumed marginally in 2004. Gross margin percentage also increased
significantly from 13.0% in 2003 to 49.9% in 2004. We are focused
on
increasing total revenues in 2005 by expanding the customer and geographic
base.
Petrovalve is actively marketed in the U.S., Canada, Mexico, Central America,
South America, the Middle East, Russia and Asia. Currently Petrovalve has
representation in 18 countries.
Data
provided by Petrovalve customers subsequent to valve installation indicate
an
increase in productions as much as 40% over prior performance of conventional
valves. This improvement stems from the patented and unique design of the
Petrovalve that allows greater volumes of hydrocarbons to be lifted per pump
stroke.
This
enables the operator the option of slowing the pump stroke rate while
maintaining consistent production levels, which reduces wear on all parts of
the
lifting mechanism, extending the life of the entire system. The “Gas Breaker”
version of the Petrovalve has been proven to be successful in eliminating “gas
locking” which prior to the Gas Breaker installation completely stopped
production and required workover of the well. The Petrovalve can
effectively lift highly viscous oil in heavy oil or tar sand production
zones.
In
2003,
we fully impaired $5,120,633 of goodwill for Petrovalve based on lower than
expected sales in 2003 and political instability in Venezuela.
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.
|
We
continue to actively seek 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. Currently, the
Company
plans to stay focused on further integrating completed acquisitions and
expanding within our three core segments both domestically and internationally
and on integrating our recent acquisitions into our operations. In addition,
we
have plans to expand our existing manufacturing, warehouse and office
facilities
in Marlow, Oklahoma and Raceland, Louisiana.
MARKET
FOR COMMON STOCK AND RELATED STOCKHOLDERS MATTERS
Market
Prices
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”. The following table sets forth, on a per share basis for the periods
indicated, our high and low closing sales prices reported by the American Stock
Exchange, as provided by Yahoo Finance and the high and low bid information
on
the OTC Bulletin Board. The OTC Bulletin Board quotations were provided by
Yahoo
Finance and reflect inter-dealer prices, without retail mark-up, mark-down
or
commission and may not represent actual transactions.
2005
|
|
High
|
|
Low
|
|
Third
quarter ended September 30, 2005
|
|
$
|
20.45
|
|
$
|
9.40
|
|
Second
quarter ended June 30, 2005
|
|
$
|
7.45
|
|
$
|
9.60
|
|
First
quarter ended March 31, 2005
|
|
$
|
4.00
|
|
$
|
9.25
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
Fourth
quarter ended December 31, 2004
|
|
$
|
5.00
|
|
$
|
2.20
|
|
Third
quarter ended September 30, 2004
|
|
$
|
2.00
|
|
$
|
1.01
|
|
Second
quarter ended June 30, 2004
|
|
$
|
1.50
|
|
$
|
0.85
|
|
First
quarter ended March 31, 2004
|
|
$
|
1.75
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
Fourth
quarter ended December 31, 2003
|
|
$
|
1.30
|
|
$
|
0.55
|
|
Third
quarter ended September 30, 2003
|
|
$
|
1.30
|
|
$
|
0.60
|
|
Second
quarter ended June 30, 2003
|
|
$
|
1.30
|
|
$
|
0.55
|
|
First
quarter ended March 31, 2003
|
|
$
|
1.25
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
As
of December 23, 2005, our closing stock price, as quoted on the American
Stock Exchange, was $18.90. As of November 28, 2005, there were 8,288,618 common
shares outstanding held by approximately 134 holders of record.
Dividend
Policy
We
have
not historically paid cash dividends on our common stock. We intend to retain
future earnings to meet our working capital requirements and to finance the
future operations of our business. Therefore, we do not plan to declare or
pay
cash dividends to holders of our common stock in the foreseeable future. In
addition, some of our credit agreements contain provisions that limit our
ability to pay cash dividends on our common stock.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table summarizes information regarding our equity securities that
are
authorized for issuance under our long term incentive plans approved
by
the shareholders and under individual non-qualified and incentive stock
option compensation agreements granted
to key employees and directors and not submitted to the shareholders for their
approval:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options and
warrants
|
|
Weighted-average
exercise price of outstanding options and warrants
|
|
Number
of securities remaining available for future issuance
|
|
Equity
plans approved by security holders
|
|
|
954,914
|
|
$
|
1.84
|
|
|
587,586
|
|
Equity
plans not approved by security holders (1)
|
|
|
142,872
|
|
$
|
9.41
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,097,786
|
|
$
|
2.83
|
|
|
587,586
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Individual
nonqualified and incentive stock options have been granted to five
employees and directors at exercise prices equal to the fair market
of our
stock on the date of grant. Options are fully vested and exercisable
and
terminate five years after
grant.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information concerning the beneficial ownership
of
common stock of (i) the directors, (ii) the executive officers,
(iii) any person known to us to own more than 5% of our common stock
and
(iv) all of our current directors and executive officers as a group as of
September 30, 2005. Beneficial ownership is determined in accordance with Rule
13d-3 under the Securities Act and generally includes voting or investment
power
with respect to securities. Except as indicated in the footnotes to the table,
we believe that each shareholder possesses sole voting and investment power
with
respect to all of the shares of common stock owned by that holder, subject
to
community property laws where applicable. In computing the number of shares
beneficially owned by a holder and the percentage ownership of that holder,
shares of common stock underlying options or warrants that are currently
exercisable within 60 days are deemed outstanding. Percentages are based on
8,288,618 shares of common stock issued and outstanding as of November 28,
2005.
|
|
|
|
|
|
|
|
|
|
Name
of Beneficial Owner
|
|
Shares Owned
|
|
Right
to Acquire
|
|
Total Shares
|
|
Percent
of Class
|
|
|
|
|
|
|
|
|
|
|
|
Glenn
S. Penny
|
|
|
777,915
|
|
|
36,500
|
|
|
814,415
|
|
|
9.8
|
%
|
Jerry
D. Dumas, Sr. (1)
|
|
|
114,238
|
|
|
170,492
|
|
|
284,730
|
|
|
3.4
|
%
|
William
R. Ziegler
|
|
|
298,463
|
|
|
63,451
|
|
|
361,914
|
|
|
4.3
|
%
|
John
W. Chisholm (2)
|
|
|
146,913
|
|
|
92,991
|
|
|
239,904
|
|
|
2.9
|
%
|
Gary
M. Pittman
|
|
|
10,000
|
|
|
72,593
|
|
|
82,593
|
|
|
1.0
|
%
|
Barry
E. Stewart
|
|
|
9,999
|
|
|
47,833
|
|
|
57,832
|
|
|
*
|
|
Richard
O. Wilson
|
|
|
2,000
|
|
|
39,040
|
|
|
41,040
|
|
|
*
|
|
Lisa
Bromiley Meier
|
|
|
7,624
|
|
|
20,000
|
|
|
27,624
|
|
|
*
|
|
TOSI,
L.P. (3)
|
|
|
752,347
|
|
|
—
|
|
|
752,347
|
|
|
9.1
|
%
|
1601
Elm Street, Suite 3900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dallas,
Texas 75201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group
|
|
|
1,367,152 |
|
|
542,900
|
|
|
1,910,052
|
|
|
21.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Represents less than 1%.
(1) |
Includes
69,498 common shares owned by Saxton River Corporation which is
controlled
by Mr. Dumas.
|
(2) |
Includes
123,185 common shares and
warrants to purchase 29,540 shares of common stock held by Chisholm
Energy Partners LLC, of which Mr. Chisholm is a manager and member.
|
(3) |
The
sole general partner of TOSI, L.P., Pitman Property Corp., and its
President and controlling person, J.W. Beavers, may also be deemed
to be
the beneficial owners of those shares. Pitman Property Corp. has
no
affiliation with Mr. Gary Pittman, a director of Flotek.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Except
as
disclosed below, in the past three years there have been no transactions, or
proposed transactions, which have materially affected or will materially affect
us in which any director, executive officer or beneficial holder of more than
10% of our outstanding common stock, or any of their respective relatives,
spouses, associates or affiliates, has had or will have any direct or material
indirect interest.
The
Company purchased from Phoenix the manufacturing assets, inventory and
intellectual property rights to produce oilfield shale shaker screens on January
28, 2005. The assets were purchased for $46,640 with a three year royalty
interest on all shale shaker screens produced. Phoenix is 75% owned by Chisholm
Energy Partners (“CEP”). Jerry D. Dumas, Sr., Chief Executive Officer, director
and Chairman of the Company, and Dr. Glenn Penny, President and director of
the
Company, each have a 2-1/2% indirect ownership interest in CEP, and John
Chisholm, who is also a director, has a 30% ownership interest in CEP.
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, a director of the Company until May 24, 2005, owned 62.94%, of SCL.
We
renegotiated 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 agreed to subordinate its debt position and defer
principal payments for six months in connection with our new senior credit
facility, and we agreed to increase the interest rate on the note to 21% per
annum. On April 1, 2005 we retired Mr. Beall’s portion of the loan, and
the remaining principal was converted into a new note to Dr. Penny, bearing
a
fixed interest rate of 12.5%, payable over 36 months. On September 20, 2005
we
paid in full the outstanding principal balance of $128,722 and accrued interest
on the promissory note to Dr. Penny.
On
February 11, 2003, Mr. Dumas made a short-term loan to the Company for $135,000
to cover operating cash flow requirements. This note bore interest at 6%
annually. On September 9, 2003, we refinanced the outstanding principal of
$95,000 with a note bearing 10% interest per annum and providing for payments
of
$10,000 on October 31, 2003 and monthly payments of $5,000 thereafter until
the
note was paid in full. On April 5, 2005, this note was paid in full.
On
July
25, 2002, we borrowed $500,000 from Oklahoma Facilities, LLC (“Facilities”), in
which Dr. Glenn Penny has a minority investment interest and is an officer.
On
October 1, 2004, we amended the note to provide for an interest rate of prime
rate plus 7.25%, and 36 monthly installments beginning January 1, 2005. On
February 14, 2005, Facilities agreed to fully subordinate its outstanding debt
position in connection with our new senior credit facility.
On
September 21, 2005 we paid in full the outstanding principal balance of $356,966
and accrued interest.
Pursuant
to an arrangement which existed at the time of the merger of CESI with the
Company, Dr. Penny was a personal guarantor on substantially all of the bank
debt of the Company. Dr. Penny does not receive any compensation for his
guaranty of Company indebtedness. Dr. Penny was removed as guarantor of the
Company indebtedness pursuant to the closing of the Wells Fargo credit facility
obtained by the Company in February 2005.
EXECUTIVE
COMPENSATION
The
following table sets forth cash and certain other compensation paid to or
earned
by the Chief Executive Officer and other executive officers of the Company
who
earned at least $100,000 in cash compensation for the years indicated (the
“Named Executive Officers”):
Summary
Compensation Table
|
|
Annual
Compensation
|
|
Long
Term Compensation Awards
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Restricted
Stock (1)
|
|
Securities
Underlying Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerry
D. Dumas, Sr.
|
|
|
2004
|
|
$
|
180,800
|
|
$
|
56,600
|
|
|
|
|
|
187,500
|
|
Chairman
and
|
|
|
2003
|
|
$
|
162,700
|
|
$
|
—
|
|
$
|
75,000
|
|
|
209,546
|
|
Chief
Executive Officer
|
|
|
2002
|
|
$
|
137,600
|
|
$
|
—
|
|
|
|
|
|
84,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Glenn Penny
|
|
|
2004
|
|
$
|
113,800
|
|
$
|
20,400
|
|
|
|
|
|
22,000
|
|
President
and
|
|
|
2003
|
|
$
|
89,400
|
|
$
|
—
|
|
|
|
|
|
—
|
|
Chief
Technical Officer
|
|
|
2002
|
|
$
|
93,700
|
|
$
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents
a stock grant of 125,000 shares at the fair market value on the date
of
grant of $0.60 per share. As of December 31, 2004, the 125,000 restricted
shares owed by Mr. Dumas had a fair market value of
$537,500.
|
No
bonuses were issued during 2003 and 2002. Amounts exclude certain personal
benefits, the aggregate value of which does not exceed 10% of the annual
compensation shown for each person
Stock
Options Granted During 2004
Name
and Date of Option
Grant
|
|
Options
Granted
|
|
%
of Total Options Granted
to Employees
|
|
Exercise
Price
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
Jerry
D. Dumas, Sr.
|
|
|
|
|
|
|
|
|
|
09/21/2004
|
|
|
125,000
|
|
|
36.7
|
%
|
$
|
1.70
|
|
|
09/21/2014
|
|
12/10/2004
|
|
|
62,500
|
|
|
18.3
|
%
|
$
|
4.25
|
|
|
12/10/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn
S. Penny
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/10/2004
|
|
|
22,000
|
|
|
6.5
|
%
|
$
|
4.68
|
|
|
12/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregated
Option Exercises in 2004 and December 31, 2004 Option
Values
|
|
Number
of Securities Underlying Unexercised Options at Fiscal Year
End
|
|
Value
of Unexercised In-the-Money Options at Fiscal Year End
(1)
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
Jerry
D. Dumas, Sr.
|
|
|
157,525
|
|
|
221,250
|
|
$
|
360,661
|
|
$
|
453,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn
S. Penny
|
|
|
36,500
|
|
|
35,500
|
|
$
|
132,860
|
|
$
|
49,140
|
|
(1)
Based
on the difference between the exercise price of the option and the closing
price
on December 31, 2004 of $4.30 per share.
There
were no stock options exercised by the Named Executive Officers in 2004.
Dr.
Penny
was covered by an employment contract which provided for minimum compensation
of
$100,000 per year, which expired pursuant to its terms on January 21, 2004.
Dr.
Penny remains an employee of the Company.
PROPERTIES
The
following table sets forth certain information with respect to our principal
properties:
Location
|
Square
Feet
|
Own/Lease
|
Use
of Property
|
|
|
|
|
Midland,
Texas
|
16,750
|
Owned
|
Manufacturing,
Warehouse and Administrative Offices Downhole
Equipment
|
|
|
|
|
Marlow,
Oklahoma
|
15,500
|
Owned
|
Manufacturing
Specialty Chemicals
|
|
|
|
|
Mason,
Texas
|
12,000
|
Owned
|
Manufacturing
Downhole Equipment
|
|
|
|
|
Vernal,
Utah
|
12,000
|
Owned
|
Warehouse
and Administrative Offices
|
|
|
|
|
Evanston,
Wyoming
|
11,500
|
Owned
|
Manufacturing,
Warehouse and Administrative Offices
|
|
|
|
|
Houston,
Texas
|
9,000
|
Leased
|
Corporate
Office and Warehouse
|
|
|
|
|
Lafayette,
Louisiana
|
5,000
|
Leased
|
Warehouse
for Downhole Equipment
|
|
|
|
|
Houston,
Texas
|
5,000
|
Leased
|
Warehouse
for Downhole Equipment
|
|
|
|
|
Raceland,
Louisiana
|
4,000
|
Owned
|
Transload
for Oilfield Services Material
|
|
|
|
|
Alice,
Texas
|
3,200
|
Lease
|
Warehouse
for Downhole Equipment
|
|
|
|
|
Denver,
Colorado
|
1,200
|
Leased
|
Specialty
Chemicals Sales Office
|
|
|
|
|
Raceland,
Louisiana
|
700
|
Leased
|
Administrative
Offices
|
|
|
|
|
We
consider our facilities to be in good condition and suitable for the conduct
of
our business.
DESCRIPTION
OF SECURITIES
We
are
authorized to issue 20,000,000 shares of Common Stock, par value $0.0001 per
share, and 100,000 shares of preferred stock, par value $0.0001 per share.
As at
November 28, 2005, we had 8,288,618 shares of common stock and no shares of
preferred stock outstanding.
Common
Stock
The
holders of outstanding shares of our common stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as our board of directors may from time to time determine. Holders
of
common stock will share equally on a per share basis in all dividends declared
by our board of directors. Upon liquidation, dissolution or winding up of the
corporation, the holders of common stock are entitled to share ratably in all
net assets available for distribution to stockholders after payment to
creditors. The common stock is not convertible or redeemable and has no
preemptive, subscription or conversion rights. Each outstanding share of common
stock is entitled to one vote on all matters submitted to a vote of
stockholders. There are no cumulative voting rights.
Preferred
Stock
The
board
of directors is authorized, subject to any limitations imposed by law, without
stockholder approval, from time to time to issue up to a total of 100,000 shares
of preferred stock, in one or more series, each series to have rights and
preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as the board of directors
may
determine. In 2001, our board of directors designated and issued 2,089.075
shares
of preferred stock as Series A Convertible Stock. No shares of Series A
Convertible Stock remain outstanding, and those shares may not be reissued
as
Series A Convertible Stock. As of the date of this prospectus, no shares of
preferred stock are issued, outstanding or currently contemplated to be
issued.
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
Certificate of Incorporation and Bylaws provide that no director shall be
personally liable to us or our stockholders for monetary damages for breach
of
fiduciary duty as a director, but shall be indemnified by us against all
expenses and liabilities reasonably incurred in connection with services for
us
or on our behalf, to the fullest extent authorized by Delaware law. Those
documents also authorize the board of directors to indemnify our officers,
directors and agents against expenses incurred in connection with any proceeding
arising by reason of the fact that such person is or was an agent of the
company.
Insofar
as indemnification for liabilities arising under the Securities Act might be
permitted to directors, officers or persons controlling our company under the
provisions described above we have been informed that in the opinion of the
SEC
such indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Our
Audit
Committee of our Board of Directors dismissed Weinstein Spira & Company as
its independent and principal accountants effective February 23, 2005, and
on
the same day engaged the firm UHY Mann Frankfort Stein & Lipp CPAs, LLP as
our new independent principal auditors.
During
the two most recent fiscal years audited and the subsequent interim periods
preceding its determination to change independent principal accountants, there
were no disagreements with Weinstein Spira & Company on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of Weinstein
Spira & Company would have caused it to make reference to the subject matter
of the disagreement in connection with its reports on the financial statements
for such years. Neither of Weinstein Spira & Company’s reports for the past
two years contained an adverse opinion or disclaimer of opinion. The
reports of Weinstein Spira & Company on the financial statements for the
past two fiscal years contained an explanatory paragraph regarding the ability
of our company to continue as a going concern. In addition, there
were no disagreements between ourselves and our successor auditors through
the
date of this report.
LEGAL
MATTERS
Certain
legal matters in connection with the common stock to be sold by the selling
shareholders have been passed on for us by Doherty & Doherty LLP, Houston,
Texas.
EXPERTS
The
financial statements as of December 31, 2004 and for the year then ended
in
this prospectus have been audited by UHY Mann Frankfort Stein & Lipp CPAs
LLP, and the financial statements as of December 31, 2003 and for the
year
then ended in this prospectus have been audited by Weinstein Spira &
Company, P.C. independent auditors, as indicated in their respective reports
with respect thereto in reliance upon the authority of said firms as experts
in
giving said reports.
AVAILABLE
INFORMATION
We
are
subject to the information requirements of the Exchange Act. Accordingly, we
file reports, proxy statements and other information with the SEC. You may
read
and copy materials we file with the SEC at the SEC's Public Reference Room
at
100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC
at
1-800-732-0330. The SEC also maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC at http://www.sec.gov.
We
have
filed with the SEC a registration statement on Form SB-2 under the
Securities Act. This prospectus does not contain all of the information,
exhibits and undertakings set forth in the registration statement, certain
parts
of which are omitted as permitted by the rules and regulations of the SEC.
For
further information, please refer to the registration statement which may be
read and copied in the manner and at the sources described above. You may obtain
information about our company from our website at www.flotekind.com.
Information on our website is not incorporated by reference into this
prospectus. You may also request a copy of our filings, which we will provide
at
no cost, by writing to Flotek Industries, Inc. Attention: Glenn Neslony,
Director of Financial Reporting, 7030 Empire Central Drive, Houston,
Texas 77040, or by telephone at (713) 849-9911.
You
should rely only on information contained in this document or to which we have
referred you. Neither we nor the selling shareholders have authorized anyone
to
provide you with different or additional information. This document may only
be
used where it is legal to sell these securities. The information in this
document may only be accurate on the date of this document. You should not
assume that the information in the prospectus, or incorporated herein by
reference, or in any prospectus supplement is accurate as of any date other
than
the date on the front of those documents.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Report
of Independent Registered Public Accounting Firm |
33 |
|
|
Independent
Auditors’ Report |
34 |
|
|
For the Nine Months Ended September
30, 2005
and 2004 (Unaudited)
|
|
Consolidated
Condensed Balance Sheets
|
35 |
|
|
Consolidated
Condensed Statements of Operations
|
36 |
|
|
Consolidated
Condensed Statements of Cash Flows
|
37 |
|
|
Notes
to Consolidated Financial Statements
|
38 |
For
the Years Ended December 31, 2004 and 2003
Consolidated
Balance Sheets
|
48 |
|
|
Consolidated
Statements of Operations
|
49 |
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
50 |
|
|
Consolidated
Statements of Cash Flows
|
51 |
|
|
Notes
to Consolidated Financial Statements
|
53 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Flotek
Industries, Inc. and Subsidiaries
We
have
audited the accompanying Consolidated Balance Sheet of Flotek Industries,
Inc.
and Subsidiaries as of December 31, 2004, and the related Consolidated
Statement
of Operations, Changes in Stockholders’ Equity and Cash Flows for the year then
ended. These Consolidated financial statements are the responsibility of
the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards
require
that we plan and perform the audit to obtain reasonable assurance about
whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Flotek
Industries, Inc. and Subsidiaries as of December 31, 2004, and the consolidated
results of their operations and their cash flows for the year then ended,
in
conformity with accounting principles generally accepted in the United
States of
America.
UHY
MANN
FRANKFORT STEIN & LIPP CPAs, LLP
Houston,
Texas
March
30,
2005
INDEPENDENT
AUDITORS' REPORT
The
Board
of Directors
Flotek
Industries, Inc. and Subsidiaries
Houston,
Texas
We
have
audited the accompanying Consolidated Balance Sheet of Flotek Industries
Inc.
and Subsidiaries as of December 31, 2003, and the related Consolidated
Statement
of Operations, Changes in Stockholders’ Equity and Cash Flows for the year then
ended. These consolidated financial statements are the responsibility of
the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audit in accordance with auditing standards generally accepted
in
the United States of America. Those standards require that we plan and
perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis,
evidence supporting the amounts and disclosures in the financial statements.
An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Flotek
Industries Inc. and Subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended,
in
conformity with accounting principles generally accepted in the United
States of
America.
The
accompanying consolidated financial statements as of December 31, 2003
have been
prepared assuming that Flotek Industries Inc. and Subsidiaries will continue
as
a going concern. The Company had incurred accumulated operating losses
and had a
working capital deficit from operations as of December 31, 2003. These
conditions raised substantial doubt about the Company’s ability to continue as a
going concern as of December 31, 2003. The financial statements do not
include
any adjustments to reflect the possible future effects on the recoverability
and
classification of assets or the amounts and classification of liabilities
that
may result from the outcome of this uncertainty.
WEINSTEIN
SPIRA & COMPANY, P.C.
Houston,
Texas
March
18,
2004
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)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
Revenues
|
|
$
|
36,805,438
|
|
$
|
15,278,420
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
21,746,026
|
|
|
8,662,846
|
|
Gross
profit
|
|
|
15,059,412
|
|
|
6,615,574
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
6,461,727
|
|
|
3,915,949
|
|
Depreciation
and amortization
|
|
|
999,805
|
|
|
537,960
|
|
Research
and development
|
|
|
440,863
|
|
|
211,401
|
|
Total
expenses
|
|
|
7,902,395
|
|
|
4,665,310
|
|
Income
from operations
|
|
|
7,157,017
|
|
|
1,950,264
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(653,004
|
)
|
|
(522,961
|
)
|
Other,
net
|
|
|
39,539
|
|
|
51,678
|
|
Total
other income (expense)
|
|
|
(613,465
|
)
|
|
(471,283
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6,543,552
|
|
|
1,478,981
|
|
Provision
for income taxes
|
|
|
(1,317,224
|
)
|
|
(100,000
|
)
|
Net
income
|
|
$
|
5,226,328
|
|
$
|
1,378,981
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per common share:
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.75
|
|
$
|
0.21
|
|
Diluted
earnings per common share
|
|
$
|
0.67
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares used in computing basic earnings per common
share
|
|
|
6,976,915
|
|
|
6,656,496
|
|
Incremental
common shares from stock options and warrants
|
|
|
865,177
|
|
|
646,645
|
|
Weighted
average common shares used in computing diluted earnings per
common
share
|
|
|
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 provided by (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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 141
|
|
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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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
|
|
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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
|
|
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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).
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A
reconciliation of the number of shares used for the basic and diluted earnings
per share calculation is as follows:
|
|
For
the Nine Months Ended September
30,
|
|
|
|
2005
|
|
2004
|
|
Net
income
|
|
$
|
5,226,328
|
|
$
|
1,378,981
|
|
Weighted-average
common shares outstanding
|
|
|
6,976,915
|
|
|
6,656,496
|
|
Basic
earnings per common share
|
|
$
|
0.75
|
|
$
|
0.21
|
|
Diluted
earnings per common share
|
|
$
|
0.67
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
6,976,915
|
|
|
6,656,496
|
|
Effect
of dilutive securities
|
|
|
865,177
|
|
|
646,645
|
|
Weighted-average
common equivalent
shares outstanding
|
|
|
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 Nine Months Ended September
30,
|
|
|
|
2005
|
|
2004
|
|
Pro
forma revenues
|
|
$
|
36,805,438
|
|
$
|
27,321,366
|
|
Pro
forma income from operations
|
|
$
|
7,181,853
|
|
$
|
2,990,607
|
|
Pro
forma net income
|
|
$
|
5,251,164
|
|
$
|
2,961,214
|
|
Pro
forma weighted-average common shares outstanding
|
|
|
6,976,915
|
|
|
6,785,767
|
|
Basic
earnings per common share
|
|
$
|
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:
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
For
the Nine Months Ended September
30,
|
|
Net
income:
|
|
|
|
|
|
As
reported
|
|
$
|
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
|
|
|
(43,922
|
)
|
|
(47,075
|
)
|
Pro
forma
|
|
$
|
5,182,406
|
|
$
|
1,331,906
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.75
|
|
$
|
0.21
|
|
Pro
forma
|
|
$
|
0.74
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.67
|
|
$
|
0.19
|
|
Pro
forma
|
|
$
|
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).
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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
|
|
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
|
|
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
284,801
|
|
$
|
—
|
|
Restricted
cash
|
|
|
37,038
|
|
|
|
|
Accounts
receivable, net
|
|
|
3,372,236
|
|
|
1,977,926
|
|
Inventories,
net
|
|
|
2,447,390
|
|
|
1,905,070
|
|
Other
current assets
|
|
|
39,721
|
|
|
113,326
|
|
Total
current assets
|
|
|
6,181,186
|
|
|
3,996,322
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
2,116,796
|
|
|
2,644,860
|
|
Goodwill
|
|
|
7,465,725
|
|
|
7,145,713
|
|
Intangible
assets, net
|
|
|
193,380
|
|
|
183,443
|
|
Total
assets
|
|
$
|
15,957,087
|
|
$
|
13,970,338
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,641,577
|
|
$
|
2,961,805
|
|
Accrued
liabilities
|
|
|
1,617,762
|
|
|
623,006
|
|
Notes
payable
|
|
|
|
|
|
3,482,325
|
|
Current
portion of long-term debt
|
|
|
1,136,467
|
|
|
1,596,221
|
|
Amounts
due to related parties
|
|
|
466,401
|
|
|
581,151
|
|
Total
current liabilities
|
|
|
5,862,207
|
|
|
9,244,508
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
5,271,987
|
|
|
2,165,726
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.0001 par value, 100,000 shares authorized, no shares
issued
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value, 20,000,000 shares authorized, 6,670,004
and
6,521,670
shares issued and outstanding as of December 31, 2004 and 2003,
respectively
|
|
|
667
|
|
|
652
|
|
Additional
paid-in capital
|
|
|
17,082,141
|
|
|
16,973,056
|
|
Accumulated
deficit
|
|
|
(12,259,915
|
)
|
|
(14,413,604
|
)
|
Total
stockholders’ equity
|
|
|
4,822,893
|
|
|
2,560,104
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
15,957,087
|
|
$
|
13,970,338
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
|
2004
|
|
|
2003
|
|
Revenues
|
|
$
|
21,881,289
|
|
$
|
14,844,431
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
12,529,631
|
|
|
9,264,091
|
|
Gross
margin
|
|
|
9,351,658
|
|
|
5,580,340
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
5,349,594
|
|
|
4,788,749
|
|
Goodwill
impairment
|
|
|
—
|
|
|
5,120,633
|
|
Depreciation
and amortization
|
|
|
689,901
|
|
|
713,531
|
|
Research
and development
|
|
|
300,074
|
|
|
46,654
|
|
Total
expenses
|
|
|
6,339,569
|
|
|
10,669,567
|
|
Income
(loss) from operations
|
|
|
3,012,089
|
|
|
(5,089,227
|
)
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(691,568
|
)
|
|
(618,438
|
)
|
Other
income (expense), net
|
|
|
46,264
|
|
|
26,985
|
|
Total
income (expense)
|
|
|
(645,304
|
)
|
|
(591,453
|
)
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
2,366,785
|
|
|
(5,680,680
|
)
|
Provision
for income taxes
|
|
|
(213,096
|
)
|
|
|
|
Income
(loss) from continuing operations
|
|
|
2,153,689
|
|
|
(5,680,680
|
)
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
|
|
|
(545,592
|
)
|
Loss
on disposal of discontinued operations, net of tax
|
|
|
|
|
|
(1,157,835
|
)
|
Net
income (loss)
|
|
$
|
2,153,689
|
|
$
|
(7,384,107
|
)
|
Net
income (loss) %
|
|
|
9.8
|
%
|
|
(49.7
|
)%
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per common share from:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.32
|
|
$
|
(0.95
|
)
|
Discontinued
operations
|
|
|
|
|
|
(0.09
|
)
|
Disposal
of discontinued operations
|
|
|
|
|
|
(0.19
|
)
|
Basic
earnings (loss) per common share
|
|
$
|
0.32
|
|
$
|
(1.23
|
)
|
Diluted
earnings (loss) per common share
|
|
$
|
0.31
|
|
$
|
(1.23
|
)
|
Weighted
average common shares used in computing basis earnings (loss) per
common
share
|
|
|
6,659,395
|
|
|
5,976,237
|
|
Incremental
common shares from stock options
|
|
|
353,742
|
|
|
—
|
|
Weighted
average common shares used in computing diluted earnings (loss)
per common
share
|
|
|
7,013,137
|
|
|
5,976,237 |
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
|
5,521,670
|
|
$
|
552
|
|
$
|
16,373,156
|
|
$
|
(7,029,497
|
)
|
$
|
9,344,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for compensation ($0.60 per share)
|
|
|
125,000
|
|
|
12
|
|
|
74,988
|
|
|
—
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash ($0.60 per share)
|
|
|
875,000
|
|
|
88
|
|
|
524,912
|
|
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(7,384,107
|
)
|
|
(7,384,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
6,521,670
|
|
|
652
|
|
|
16,973,056
|
|
|
(14,413,604
|
)
|
|
2,560,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash ($0.75 per share)
|
|
|
133,334
|
|
|
13
|
|
|
99,987
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options exercised
|
|
|
15,000
|
|
|
2
|
|
|
9,098
|
|
|
|
|
|
9,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
2,153,689
|
|
|
2,153,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
6,670,004
|
|
$
|
667
|
|
$
|
17,082,141
|
|
$
|
(12,259,915
|
)
|
$
|
4,822,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$
|
2,153,689
|
|
$
|
(5,680,680
|
)
|
Adjustments
to reconcile net income (loss) to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
689,901
|
|
|
713,531
|
|
Goodwill
impairment
|
|
|
—
|
|
|
5,120,633
|
|
Stock
compensation expense
|
|
|
|
|
|
75,000
|
|
Bad
debt expense
|
|
|
|
|
|
12,943
|
|
Loss
on sale of fixed assets
|
|
|
|
|
|
2,756
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,394,310
|
)
|
|
43,512
|
|
Inventories
|
|
|
(542,320
|
)
|
|
(351,840
|
)
|
Other
current assets
|
|
|
73,605
|
|
|
84,729
|
|
Accounts
payable and accrued liabilities
|
|
|
418,282
|
|
|
1,028,340
|
|
Net
cash provided by (used in) continuing operations
|
|
|
1,398,847
|
|
|
1,048,924
|
|
Net
cash provided by (used in) discontinued operations
|
|
|
|
|
|
(1,086,181
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
1,398,847
|
|
|
(37,257
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
earn-out payment
|
|
|
(100,804
|
)
|
|
|
|
Proceeds
from sale of assets
|
|
|
|
|
|
8,924
|
|
Other
long-term assets
|
|
|
(58,666
|
)
|
|
|
|
Capital
expenditures
|
|
|
(113,108
|
)
|
|
(575,260
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(272,578
|
)
|
|
(566,336
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Issuance
of stock for cash
|
|
|
109,100
|
|
|
525,000
|
|
Proceeds
from borrowings
|
|
|
302,019
|
|
|
359,001
|
|
Repayments
of indebtedness
|
|
|
(1,137,837
|
)
|
|
(664,997
|
)
|
Payments
to related parties
|
|
|
(114,750
|
)
|
|
(80,940
|
)
|
Proceeds
from related parties
|
|
|
|
|
|
561,199
|
|
Net
cash provided by (used in) financing activities from continuing
operations
|
|
|
(841,468
|
)
|
|
699,263
|
|
Net
cash provided by (used in) financing activities from discontinued
operations
|
|
|
|
|
|
(95,670
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(841,468
|
)
|
|
603,593
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
284,801
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
284,801
|
|
$
|
|
|
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Supplemental
schedule of noncash investing activities:
|
|
|
|
|
|
Earn-out
payment, net
|
|
$
|
219,208
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
687,405
|
|
$
|
564,165
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
74,956
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
FLOTEK
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Business and Basis of Presentation
Flotek
Industries, Inc. was originally incorporated under the laws of the Province
of
British Columbia on May 17, 1985. On October 23, 2001, we changed our corporate
domicile to Delaware. We are a provider of oilfield service products including
specialty chemicals, bulk material logistics, downhole drilling products and
downhole production products.
The
consolidated financial statements consist of Flotek Industries, Inc. and its
subsidiaries, all of which are wholly-owned. All significant intercompany
transactions and balances have been eliminated in consolidation.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and certain assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. While management believes current estimates are
reasonable and appropriate, actual results could differ from these
estimates.
Certain
amounts for 2003 have been reclassified in the accompanying consolidated
financial statements to conform to the current year presentation.
Note
2 - Summary of Significant Accounting Policies
Cash
and Cash Equivalents
We
consider all short-term investments with an original maturity of three months
or
less to be cash equivalents. As of December 31, 2003, cash overdraft of $518,547
was included in accounts payable in the consolidated balance sheet.
Restricted
Cash
As
of
December 31, 2004, we had $37,038 of restricted cash which serves as collateral
for a standby letter of credit that provides financial assurance that we will
fulfill our obligations related to an international contract to design and
project manage the construction of a bulk handling facility in
Mexico.
Inventories
Inventories
consist of raw materials, finished goods, and parts and materials used in
manufacturing and construction operations. Finished goods inventories include
raw materials, direct labor and production overhead. Inventories are carried
at
the lower of cost or market using the weighted average cost method. The Company
maintains a reserve for slow-moving and obsolete inventories, which is reviewed
for adequacy on a periodic basis.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost. The cost of ordinary maintenance and
repairs is charged to operations, while replacements and major improvements
are
capitalized. Depreciation or amortization is provided at rates considered
sufficient to amortize the cost of the assets using the straight-line method
over the following estimated useful lives:
|
|
|
|
|
Buildings
and leasehold improvements
|
|
|
3-24
years
|
|
Machinery
and equipment
|
|
|
2-3
years
|
|
Furniture
and fixtures
|
|
|
3-7
years
|
|
Transportation
equipment
|
|
|
3
years
|
|
Computer
equipment
|
|
|
3-5
years
|
|
We
review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the
carrying amount of an asset to future net cash flows expected to be generated
by
the asset. If such assets are considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
exceeds either the fair value or the estimated discounted cash flows of the
assets, whichever is more readily measurable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
Goodwill
and Intangible Assets
Goodwill
represents the excess of the aggregate price paid by us in acquisitions over
the
fair market value of the tangible and identifiable intangible net assets
acquired. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, “Goodwill and Other Intangible Assets” separable intangible
assets that are not deemed to have indefinite lives will be amortized over
their
useful lives.
Financial
Instruments
We
consider the fair value of all financial instruments (primarily 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 our ability to borrow funds under
terms and conditions similar to those of our existing debt and because the
majority of our debt carries a floating rate.
We
have
no off-balance sheet debt or other off-balance sheet financing arrangements.
We
have not entered into derivatives or other financial instruments.
Revenue
Recognition
Revenue
for product sales is recognized when all of the following criteria have been
met: (i) evidence of an agreement exists, (ii) products are shipped or services
rendered to the customer and all significant risks and rewards of ownership
have
passed to the customer, (iii) the price to the customer is fixed and
determinable and (iv) collectibility is reasonably assured. Accounts receivable
are recorded at that time, net of any discounts. Earnings are charged with
a
provision for doubtful accounts based on a current review of collectibility
of
the accounts receivable. Accounts receivable deemed ultimately uncollectible
are
applied against the allowance for doubtful accounts. Deposits and other funds
received in advance of delivery are deferred until the transfer of ownership
is
complete. Our Materials Translogistics business unit ("MTI") recognizes revenues
of its design and construction oversight contracts under the
percentage-of-completion method of accounting, measured by the percentage of
costs incurred to date to the total estimated costs of completion. This
percentage is applied to the total estimated revenue at completion to calculate
revenues earned to date. Contract costs include all direct labor and material
costs and those indirect costs related to manufacturing and construction
operations. General and administrative costs are charged to expense as incurred.
Changes in job performance and estimated profitability, including those arising
from contract bonus or penalty provisions and final contract settlements, may
result in revisions to costs and income and are recognized in the period in
which such revisions appear probable. All known or anticipated losses on
contracts are recognized in full when such amounts become apparent. MTI bulk
material transload revenue is recognized as services are performed for the
customer.
Foreign
Currency
We
have
sales that are denominated in currencies other than the United States dollar.
Any foreign currency transaction gains or losses are included in our results
of
operations. We have not entered into any forward foreign exchange contract
to
hedge the potential impact of currency fluctuations on our foreign currency
denominated sales.
Research
and Development Costs
Expenditures
for research activities relating to product development and improvement are
charged to expense as incurred.
Income
Taxes
Income
taxes are computed under the liability method. We provide deferred income tax
assets and liabilities for the expected future tax consequences attributable
to
differences between the financial statement carrying amounts and the respective
tax basis of assets and liabilities. These deferred assets and liabilities
are
based on enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary
to
reduce deferred income tax assets to amounts which are more likely than not
to
be realized.
Earnings
Per Share
Earnings
per common share is calculated by dividing net income or loss attributable
to
common stockholders by the weighted average number of common shares outstanding.
Dilutive income or loss per share is calculated by dividing net income or loss
attributable to common stockholders by the weighted average number of common
shares outstanding and dilutive effect of stock options. Outstanding options
and
warrants of 713,873 for the year ended December 31, 2003 were not included
in
the computation of diluted earnings per share, since to do so would have been
antidilutive.
Stock-Based
Compensation
We
recognize compensation expense associated with stock-based awards under the
recognition and measurement principles of Accounting Principles Board Opinion
("APB") No. 25, “Accounting for Stock Issued to Employees”, and related
interpretations. The difference between the quoted market price as of the date
of the grant and the contractual purchase price of shares is charged to
operations over the vesting period. No compensation expense has been recognized
for stock options with fixed exercise prices equal to the market price of the
stock on the dates of grant. We provide supplemental disclosure of the effect
or
net income (loss) and earnings (loss) per share as if the provisions
of
SFAS No. 123, “Accounting for Stock-Based Compensation, as amended by SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure” had
been applied in measuring compensation expense.
We
have
elected to follow APB Opinion No. 25 in accounting for our employee
stock
options. Accordingly, no compensation expense is recognized in our financial
statements because the exercise price of our employee stock options equals
the
market price of our common stock on the date of grant. If under SFAS No.
123 we determined compensation costs based on the fair value at the
grant
date for its stock options, net income (loss) and earnings (loss) per
share
would have been reduced to the following pro forma amounts:
|
|
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
Net
income (loss) from continuing operations:
|
|
|
|
|
|
As
reported
|
|
$
|
2,153,689
|
|
$
|
(5,680,680
|
)
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
|
(376,257
|
)
|
|
(65,946
|
)
|
Pro
forma
|
|
$
|
1,777,432
|
|
$
|
(5,746,626
|
)
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.32
|
|
$
|
(0.95
|
)
|
Pro
forma
|
|
$
|
0.27
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.31
|
|
$
|
(0.95
|
)
|
Pro
forma
|
|
$
|
0.25
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
The
weighted-average estimated fair value of stock options granted during 2004
and
2003 was $2.22 and $0.39 per share, respectively. These amounts were determined
using the Black-Scholes option-pricing model, which values options based on
the
stock price at the grant date, the expected life of the option, the estimated
volatility of the stock, the expected dividend payments, and the risk-free
interest rate over the expected life of the option. The assumptions used in
the
Black-Scholes model were as follows for stock options granted in 2004 and
2003:
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
Risk-free
interest rate
|
|
|
3.82%
- 4.38
|
%
|
|
4.2
|
%
|
Expected
volatility of common stock
|
|
|
50
|
%
|
|
50
|
%
|
Expected
life of options
|
|
|
10
years
|
|
|
10
years
|
|
Vesting
period
|
|
|
0
-
4 years
|
|
|
3
years
|
|
|
|
|
|
|
|
|
|
The
Black-Scholes option valuation model was developed for estimating the fair
value
of traded options that have no vesting restrictions and are fully-transferable.
Because option valuation models require the use of subjective assumptions,
changes in these assumptions can materially affect the fair value of the
options, and our options do not have the characteristics of traded options,
the
option valuation models do not necessarily provide a reliable measure of the
fair value of its options.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R “Share-Based Payment”. This is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes APB No. 25. As
noted
in our stock-based compensation accounting policy described above, we do not
record compensation expense for stock-based compensation. Under SFAS 123R,
we
will be required to measure the cost of employee services received in exchange
for stock based on the grant date at fair value (with limited exceptions).
That
cost will be recognized over the period during which an employee is required
to
provide services in exchange for the award (usually the vesting period). The
fair value will be estimated using an option-pricing model. Excess tax benefits,
as defined in SFAS 123R, will be recognized as an addition to additional paid-in
capital. The standard is effective as of the beginning of the first interim
or
annual reporting period that begins after June 15, 2005. We are currently in
the
process of evaluating the impact of SFAS 123R on our financial
statements.
In
January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”),“Consolidation
of Variable Interest Entities”. FIN 46 clarifies the application of Accounting
Research Bulletin ("ARB") No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not
have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. In December 2003,
the FASB issued FIN 46R which revised certain provisions in the original
interpretation and permitted multiple effective dates based upon the nature
and
formation date of the variable interest entity. Adoption of the provisions
of
FIN 46R did not have any impact on our financial position, results of operations
or cash flows as all of our subsidiaries are wholly-owned.
In
December 2004, the FASB published the following two final FASB Staff Positions,
effective immediately. SFAS No. 109-1, "Application of FASB Statement No.109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004," giving guidance
on applying FASB Statement No. 109, "Accounting for Income Taxes to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004". 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 EITF 03-13 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 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 rehandling costs be recognized
as current-period charges regardless of whether they meet the criterion of
"so
abnormal" as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005 and is required to be adopted by us in the first
quarter of fiscal 2006, beginning on January 1, 2006. We are currently
evaluating the effect that the adoption of SFAS No. 151 will have on our
consolidated financial position, results of operations and cash flows but do
not
expect SFAS No. 151 to have a material impact.
Note
3 - Discontinued Operations
During
the third quarter of 2003, our Equipment Specialties (“ESI”) reporting unit,
which designed, manufactured and rebuilt specialized cementing and stimulation
equipment, was discontinued and the assets were sold to Special Equipment
Manufacturing, Inc. (“SEM”), an unrelated party for $60,000 in cash. In
connection therewith, we assigned ESI’s facility lease with Oklahoma Facilities,
LLC (“Facilities”) to SEM, thus eliminating our future liability lease
obligation. To effect this assignment, we agreed to pay Facilities an additional
$91,000 of rent for the 17 month rental period beginning March 1, 2002 and
ending July 31, 2003 in six equal installments beginning November 15, 2003.
The
Equipment Specialties Division is accounted for as a discontinued operation
and
therefore, the results of its operations and its cash flows have been removed
from our results of continuing operations for all periods presented. In
connection with the discontinuance of ESI, we recognized a net loss from
discontinued operations of $545,592 and net loss from disposal of discontinued
operations of $1,157,835.
Note
4 - Accounts Receivable
Prior
to
December 31, 2003, we had approximately $1,227,000 of accounts receivable from
a
customer in Venezuela, all of which arose from goods shipped in the first half
of 2002. The ultimate customer for these goods was Petróleos de Venezuela S.A.
(“PDVSA”), the national oil company of Venezuela. PDVSA delayed acceptance of
the majority of the goods shipped due to the political unrest and oil and gas
industry work curtailment in Venezuela and had not taken delivery of the
products from our customer as of December 31, 2003. We reversed the $1,227,000
of accounts receivable and the associated reserve for doubtful accounts for
$878,000 as of December 31, 2003 that had been recorded during 2002. Ownership
of the inventory was transferred back to us and recorded at its original cost
basis of $350,000 in finished goods.
Note
5 - Inventories
The
components of inventories as of December 31, 2004 and 2003 were as
follows:
|
|
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
797,430
|
|
$
|
363,409
|
|
Finished
goods
|
|
|
2,107,217
|
|
|
2,033,015
|
|
Gross
inventories
|
|
|
2,904,647
|
|
|
2,396,424
|
|
Less
slow-moving and obsolescence reserve
|
|
|
457,257
|
|
|
491,354
|
|
Inventories,
net
|
|
$
|
2,447,390
|
|
$
|
1,905,070
|
|
|
|
|
|
|
|
|
|
Raw
materials and finished goods inventories increased due to increased sales within
our Chemicals business. The higher sales volumes have resulted in volume
purchases of raw materials to take advantage of pricing discounts. Included
in
finished goods inventories as of December 31, 2004 and 2003 is approximately
$320,000 and $350,000, respectfully, in carrying value of Petrovalve downhole
pump valves which were previously sold to PDVSA in the first quarter of 2002.
See Note 3 of the Notes to Consolidated Financial Statements.
Note
6 - Property, Plant and Equipment
As
of
December 31, 2004 and 2003, property, plant and equipment was comprised of
the
following:
|
|
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Land
|
|
$
|
68,000
|
|
$
|
68,000
|
|
Buildings
and leasehold improvements
|
|
|
1,990,436
|
|
|
1,954,254
|
|
Machinery
and equipment
|
|
|
953,224
|
|
|
942,129
|
|
Furniture
and fixtures
|
|
|
108,481
|
|
|
89,981
|
|
Transportation
equipment
|
|
|
514,652
|
|
|
470,416
|
|
Computer
equipment
|
|
|
424,837
|
|
|
415,833
|
|
Gross
property, plant and equipment
|
|
|
4,059,630
|
|
|
3,940,613
|
|
Less
accumulated depreciation and amortization
|
|
|
1,942,834
|
|
|
1,295,753
|
|
Net
property and equipment
|
|
$
|
2,116,796
|
|
$
|
2,644,860
|
|
|
|
|
|
|
|
|
|
Note
7 - Goodwill and Intangible Assets
In
February 2002, we acquired IBS 2000, Inc., a Denver-based company engaged in
the
development and manufacture of environmentally neutral chemicals for the oil
industry. The terms of the acquisition called for an "Earn-Out Payment" based
on
twenty-five percent of the division’s earnings before interest and taxes for the
three one-year periods ending on March 31, 2003, 2004 and 2005. During 2004,
the
Company recorded additional goodwill of $320,012 associated with earn-out for
the period March 31, 2003 through December 31, 2004, to reflect additional
acquisition consideration related to this agreement. As of December 31, 2004,
$100,804 had been paid. The remainder will be paid and is reflected as accrued
liabilities in the accompanying financial statements.
We
evaluate the carrying value of goodwill during the fourth quarter of each year
and on an interim basis, if events occur or circumstances change that would
more
likely than not reduce the fair value of the reporting unit below its carrying
amount. Such circumstances could include, but are not limited to: (i) a
significant adverse change in legal factors or in business climate, (ii)
unanticipated competition, or (iii) an adverse action or assessment by a
regulator. When evaluating whether goodwill is impaired, the Company compares
the fair value of the reporting unit to which the goodwill is assigned to the
reporting unit’s carrying amount, including goodwill. The fair value of the
reporting unit is estimated using a combination of the income, or discounted
cash flows approach and the market approach, which utilizes comparable
companies’ data. If the carrying amount of a reporting unit exceeds its fair
value, then the amount of the impairment loss must be measured. The impairment
loss would be calculated by comparing the implied fair value of reporting unit
goodwill to its carrying amount. In calculating the implied fair value of
reporting unit’s goodwill, the fair value of the reporting unit is allocated to
all of the other assets and liabilities of that unit based on their fair values.
The excess of the fair value of a reporting unit over the amount assigned to
its
other assets and liabilities is the implied fair value of goodwill. An
impairment loss would be recognized when the carrying amount of goodwill exceeds
its implied fair value. The Company’s evaluation of goodwill completed during
2004 resulted in no impairment losses.
We
conducted a goodwill impairment assessment during the fourth quarter of 2003
for
the Petrovalve reporting unit within the Downhole Production Products segment.
There was approximately $5.1 million of goodwill attributable to this segment,
all relating to the Petrovalve reporting unit. Our evaluation concluded the
entire $5.1 million of goodwill was impaired. Consequently, we recognized a
goodwill impairment of $5,120,633 in 2003.
The
following is a reconciliation of goodwill by segment:
|
|
|
|
|
|
|
|
|
|
Chemical
& Logistics
|
|
Downhole
Production Products
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2002
|
|
$
|
7,145,713
|
|
$
|
5,120,633
|
|
$
|
12,266,346
|
|
Goodwill
impairment
|
|
|
—
|
|
|
(5,120,633
|
)
|
|
(5,120,633
|
)
|
Balance
as of December 31, 2003
|
|
$
|
7,145,713
|
|
$
|
|
|
$
|
7,145,713
|
|
Earn-out
payment
|
|
|
320,012
|
|
|
|
|
|
320,012
|
|
Balance
as of December 31, 2004
|
|
$
|
7,465,725
|
|
$
|
|
|
$
|
7,465,725
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets are comprised of the following:
|
|
|
|
|
|
For
the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
308,826
|
|
$
|
148,622
|
|
$
|
281,434
|
|
$
|
129,331
|
|
Other
Intangibles
|
|
|
137,640
|
|
|
104,464
|
|
|
104,464
|
|
|
73,124
|
|
Total
|
|
$
|
446,466
|
|
$
|
253,086
|
|
$
|
385,898
|
|
$
|
202,455
|
|
|
|
Aggregate
Amortization
Expense
for the Years Ended
December
31,
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Patents
|
|
$
|
17,389
|
|
$
|
27,232
|
|
Other
Intangibles
|
|
|
31,340
|
|
|
42,032
|
|
Total
|
|
$
|
48,729
|
|
$
|
69,264
|
|
|
|
|
|
|
|
|
|
The
following is a schedule of estimated amortization expense:
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
2005
|
|
$
|
19,500
|
|
2006
|
|
$
|
19,500
|
|
2007
|
|
$
|
19,500
|
|
2008
|
|
$
|
19,500
|
|
2008
|
|
$
|
19,522
|
|
2009
and beyond
|
|
$
|
62,683
|
|
|
|
|
|
|
Note
8 - Notes Payable
Notes
payable as of December 31, 2004 and 2003 consisted of the
following:
|
|
|
|
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
2004
|
|
|
2003
|
|
Revolving
line of credit payable to bank, secured by accounts receivable and
inventory, bearing interest at the prime rate (5.25% at December
31, 2004)
plus 4.25%, due September 2005, with maximum borrowings of $2,553,983
(1)
|
|
$
|
—
|
|
$
|
2,250,948
|
|
Note
payable to Facilities, secured by accounts receivable, bearing interest
at
the prime rate plus 7.25%, due July 2005 (2)
|
|
|
|
|
|
495,780
|
|
Note
payable to bank, bearing interest at prime rate plus 3.75%, payable
in
monthly installments of $16,005 including interest, due in October
2008
(3)
|
|
|
|
|
|
735,597
|
|
|
|
|
|
|
|
|
|
Total
notes payable
|
|
$
|
|
|
$
|
3,482,325
|
|
(1)
|
We
had a revolving line of credit with a bank for the lesser of (a)
$2,553,968, or (b) the sum of 60% of eligible domestic trade accounts
receivable and 60% of eligible inventory, as defined. The line of
credit
expires in September 2005, unless extended. Borrowings under the
line of
credit bear interest (9.50% at December 31, 2004) at the prime rate
plus
4.25%. All borrowings are collateralized by substantially all our
assets.
The outstanding balance on the line of credit was $2,439,483 and
$2,250,948 at December 31, 2004 and 2003, respectively. Borrowings
under
the line are subject to certain financial covenants and a material
adverse
change subjective acceleration clause. As of December 31, 2004, we
were in
compliance with all covenants. On February 14, 2005, we entered into
a
Revolving Loan Agreement (the Loan Agreement) with Wells Fargo Bank,
N.A.
which replaced the above mentioned line of credit. The Loan Agreement
provides for borrowings through February 14, 2007. Borrowings will
bear
interest at prime rate plus 50 basis points. The Loan Agreement pays
interest only and matures in February 2007. Based on the new maturity
date, amounts were reclassed to long-term debt. See Note 9 - Long-Term
Debt.
|
(2)
|
On
July 25, 2002, we borrowed $500,000 under a promissory note from
Facilities. An officer of ours, who is also a director and principal
shareholder, has a minority investment interest in and is an officer
of
Facilities. 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. Based on the new maturity date, amounts were reclassed
to
long-term debt. See Note 9 - Long-Term Debt.
|
(3)
|
The
note that matured on September 30, 2004 was renewed by the bank on
October
1, 2004 bearing interest at the prime rate plus 3.75%, a reduction
from
the original interest rate of prime plus 4.25%, with a maturity in
October
2008. This amount was reclassed to long-term debt.
See Note 9 -
Long-Term Debt.
|
Note
9 - Long-Term Debt
Long-term
debt as of December 31, 2004 and 2003, consisted of the
following:
|
|
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Revolving
line of credit payable to bank, secured by accounts receivable and
inventory, bearing interest at the prime rate (5.25% at December
31, 2004)
plus 4.25%, due in September 2005, with maximum borrowings of $2,553,983
(1)
|
|
$
|
2,439,483
|
|
$
|
—
|
|
Note
payable to Facilities, secured by accounts receivable, bearing interest
at
the prime rate plus 7.25%, due in monthly installments through December
2007 (2)
|
|
|
465,495
|
|
|
|
|
Promissory
note to stockholder and employee of acquired businesses, unsecured,
bearing interest at 9% payable quarterly, due in annual installments
through December 2008 (3)
|
|
|
350,000
|
|
|
400,000
|
|
Promissory
notes to stockholder and employee of acquired businesses, unsecured,
bearing interest at 9% payable quarterly, due in annual installments
through December 2007 (4)
|
|
|
400,000
|
|
|
400,000
|
|
Note
payable to bank, bearing interest at the prime rate (5.25% at December
31,
2004) plus 1%, due in monthly installments through March 2008
|
|
|
1,365,766
|
|
|
1,726,320
|
|
Note
payable to bank, bearing interest at prime rate plus 3.75%, due in
monthly
installments through October 2008 (5)
|
|
|
629,539
|
|
|
|
|
Term
loan payable to bank, bearing interest at the prime rate plus 4.25%,
payable in monthly installments due December 2007
|
|
|
536,281
|
|
|
681,852
|
|
Note
payable to bank, bearing interest at the prime rate plus 1%, due
in
monthly installments through November 2004
|
|
|
|
|
|
176,030
|
|
Mortgage
note secured by a first lien on property, payable to Marvin E. Eckert,
Jr.
and Wanda Eckert, bearing interest at 10%, due in monthly installments
through December 2012
|
|
|
96,872
|
|
|
104,410
|
|
Note
payable to Bauer & Skloss, LLP, bearing interest at 10% annually, due
in monthly installments through March 2005
|
|
|
25,941
|
|
|
100,000
|
|
Note
payable to Duncan Area Economic Development Foundation, unsecured,
interest at 6%, due in monthly installments through May 2006
|
|
|
27,913
|
|
|
48,219
|
|
Secured
vehicle and other equipment loans
|
|
|
71,164
|
|
|
125,116
|
|
Total
|
|
|
6,408,454
|
|
|
3,761,947
|
|
Less
current maturities
|
|
|
1,136,467
|
|
|
1,596,221
|
|
Long-term
debt
|
|
$
|
5,271,987
|
|
$
|
2,165,726
|
|
(1)
|
We
had a revolving line of credit with a bank for the lesser of (a)
$2,553,968, or (b) the sum of 60% of eligible domestic trade accounts
receivable and 60% of eligible inventory, as defined. The line of
credit
expires in September 2005, unless extended. Borrowings under the
line of
credit bear interest (9.50% at December 31, 2004) at the prime rate
plus
4.25%. All borrowings are collateralized by substantially all our
assets.
The outstanding balance on the line of credit was $2,439,483 and
$2,250,948 at December 31, 2004, and December 31, 2003, respectively.
Borrowings under the line are subject to certain financial covenants
and a
material adverse change subjective acceleration clause. As of December
31,
2004, we were in compliance with all covenants. On February 14, 2005,
we
entered into a Revolving Loan Agreement (the Loan Agreement) with
Wells
Fargo Bank, N.A. which replaced the above mentioned line of credit.
The
Loan Agreement provides for borrowings through February 14, 2007
(the
Maturity Date). Borrowings will bear interest at prime rate plus
50 basis
points. The maximum amount that may be outstanding under the Loan
Agreement is the lesser of (a) $5,000,000 or (b) the sum of 80% of
eligible domestic trade accounts receivable and 50% of eligible inventory,
as defined. The terms are interest-only, maturing in February 2007.
Based
on the new maturity date, amounts were reclassed from Notes Payable.
See
Note 8 - Notes Payable.
|
(2)
|
On
July 25, 2002, we borrowed $500,000 under a promissory note from
Facilities. An officer of ours, who is also a director and principal
stockholder, has a minority investment interest in and is an officer
of
Facilities. 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. Based on the new maturity date, amounts
were reclassed from Notes Payable. See Note 8 - Notes Payable.
|
(3)
|
Effective
December 31, 2004 a forbearance agreement was signed to defer $150,000
of
the $200,000 payment due on December 31, 2004, with no interest penalty.
The remaining payments set forth in the original promissory note
were
extended to be paid in annual installments of $100,000 in 2005, 2006,
2007
with a final payment of $50,000 due on or before December 31,
2008.
|
(4)
|
Effective
December 31, 2004 a forbearance agreement was signed to the $200,000
payment due on December 31, 2004, with no interest penalty. The remaining
payments set forth in the original promissory note were extended
to be
paid in installments of $100,000 due on or before February 10, 2005,
December 31, 2005, December 31, 2006 and December 31,
2007.
|
(5)
|
The
note matured September 30, 2004 was renewed by the bank on October
1, 2004
bearing interest at the prime rate plus 3.75%, a reduction
from the
original interest rate of prime plus 4.25%, with a maturity in October
2008. This amount was reclassed from Notes Payable.
|
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 December 31, 2004, we were in
compliance with all covenants. During the year ended December 31, 2004, we
had
not received any notices of default or acceleration from any of our
lenders.
We
believe the fair value of our long-term debt approximates the recorded value
at
December 31, 2004, as the majority of the long-term debt carries a floating
interest rate based on prime.
On
February 14, 2005, we entered into an Equipment Term Loan Agreement (the
Equipment Term Loan) and a Real Estate Term Loan Agreement (the Real Estate
Term
Loan) with Wells Fargo Bank, N.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. The Real Estate Term Loan provides for borrowings up
to
$3,000,000 bearing interest at prime rate. The loan is payable over 60 months,
and amortized over 180 months.
The
following is a schedule of future maturities of long-term debt:
|
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
2005
|
|
$
|
1,136,468
|
|
2006
|
|
|
3,608,320
|
|
2007
|
|
|
1,177,576
|
|
2008
|
|
|
428,138
|
|
2009
|
|
|
12,401
|
|
Thereafter
|
|
|
45,552
|
|
|
|
|
|
|
Note
10 - Common Stock, Stock Options and Warrants
We
have a
Long-Term Incentive Plan (the “Plan”) under which our officers, key employees,
and non-employee directors may be granted options to purchase shares of our
authorized but unissued common stock. As of December 31, 2004, there were no
shares available for future grants under the Plan. Under the Plan, the option
exercise price is equal to the fair market value of our common stock at the
date
of grant. Options currently expire no later than 10 years from the grant date
and generally vest within four years or less. Proceeds received by us from
exercises of stock options are credited to common stock and additional paid-in
capital.
Prior
to
the merger with CESI in 2001, we had outstanding warrants to purchase 56,030
shares of common stock at an exercise price of $15.79, expiring in September
2006. These warrants were assumed by Flotek after the merger. The warrants
were
issued to one of our directors and three investors.
In
January, 2004, we issued 133,334 shares of our common stock in a private
offering to “accredited investors” in exchange for $100,000 of subscription
proceeds, which was paid by tender to us. During 2004, a total of 15,000 stock
options were exercised by directors, officers and employees.
During
2003, we issued 578,500 stock options with a market value of $347,100 at the
date of grant. On April 3, 2003, a stock grant of 125,000 shares was awarded
to
Mr. Jerry D. Dumas, Sr., our Chairman and CEO, which resulted in $75,000 of
compensation expense. Also, during 2003, we issued 875,000 shares of our common
stock in a private offering to “accredited investors” in exchange for $525,000
of subscription proceeds, which was paid by tender to us. We received $150,000
of the total $525,000 from two of our directors, one of which is a principal
stockholder.
Additional
information with respect to the Plan’s stock option activity is as
follows:
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding
as of December 31, 2002
|
|
|
176,747
|
|
$
|
4.70
|
|
Granted
|
|
|
578,500
|
|
$
|
0.60
|
|
Exercised
|
|
|
—
|
|
|
|
|
Cancelled
|
|
|
(97,404
|
)
|
$
|
4.56
|
|
Outstanding
as of December 31, 2003
|
|
|
657,843
|
|
$
|
1.54
|
|
Granted
|
|
|
441,414
|
|
$
|
0.61
|
|
Exercised
|
|
|
(15,000
|
)
|
$
|
3.27
|
|
Cancelled
|
|
|
(42,500
|
)
|
$
|
0.60
|
|
Outstanding
as of December 31, 2004
|
|
|
1,041,757
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
Options
exercisable as of December 31, 2003
|
|
|
342,878
|
|
$
|
1.75
|
|
Options
exercisable as of December 31, 2004
|
|
|
560,908
|
|
$
|
2.05
|
|
The
weighted average contractual life remaining on outstanding stock options was
approximately nine years as of December 31, 2004 versus six years as of December
31, 2003.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123 “Share-Based
Payment”.
This is
a revision of SFAS No. 123,
Accounting for Stock-Based Compensation,
and
supersedes APB No. 25. As
noted
in our stock-based compensation accounting policy, we do not record compensation
expense for stock-based compensation. Under SFAS 123R, we will be required
to
measure the cost of employee services received in exchange for stock based
on
the grant date at fair value (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award (usually the vesting period). The fair value
will be estimated using an option-pricing model. Excess tax benefits, as defined
in SFAS 123R, will be recognized as an addition to additional paid-in capital.
The Standard is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. We are currently in the
process of evaluating the impact of SFAS 123R on our financial
statements.
Note
11 - Income Taxes
A
reconciliation of the effective income tax rate to the statutory income tax
rate
is as follows:
|
|
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Income
tax (benefit) at statutory rate (34%)
|
|
$
|
804,707
|
|
$
|
(1,931,431
|
)
|
State
taxes, net of federal benefit
|
|
|
138,096
|
|
|
|
|
Nondeductible
items
|
|
|
—
|
|
|
1,748,731
|
|
Other
|
|
|
430,293
|
|
|
(781,300
|
)
|
Change
in valuation allowance
|
|
|
(1,160,000
|
)
|
|
964,000
|
|
Provision
for income taxes
|
|
$
|
213,096
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Our
effective income tax rate in 2004 differs from the federal statutory rate
primarily due to state income taxes and changes in valuation allowances due
to
the utilization of net operating loss carryforwards.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts reported for income tax purposes at the enacted tax rates in effect
when the differences reverse. The components of our deferred tax asset and
liabilities are as follows:
|
|
For
the Years Ended December
31,
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
7,000
|
|
$
|
6,000
|
|
Inventory
reserves
|
|
|
155,000
|
|
|
176,000
|
|
Net
operating loss carryforwards
|
|
|
2,992,000
|
|
|
4,383,000
|
|
Property,
plant and equipment
|
|
|
99,000
|
|
|
(77,000
|
)
|
Alternative
minimum tax credit carryforwards
|
|
|
75,000
|
|
|
—
|
|
|
|
|
3,328,000
|
|
|
4,488,000
|
|
Valuation
allowance
|
|
|
(3,328,000
|
)
|
|
(4,488,000
|
)
|
|
|
$
|
— |
|
$
|
|
|
|
|
|
|
|
|
|
|
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 organizational 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 groups. Accordingly, the effective tax rate in future periods may differ
significantly from the expected statutory rates depending on the level of
taxable income of loss for each group.
Note
12 - Related Party Transactions
On
January 30, 2003, we entered into an agreement with Stimulation Chemicals,
LLC
(“SCL”) to procure raw materials as ordered by CESI, granting CESI 120 day
payment terms for a 15% percent markup. SCL is owned jointly by Dr. Penny and
Mr. Beall, whom are both directors as well as principal stockholders. Dr. Penny
is also one of our employees. On August 27, 2003, a new agreement
was
executed for repayment of the outstanding balance of $359,993 beginning
September 15, 2003 with monthly principal and interest payments in the amount
of
$38,600, plus interest of 1% per month on the unpaid balance until paid in
full.
As of December 31, 2004, the outstanding balance owed to SCL was $347,333.
On
February 14, 2005, SCL was required to fully subordinate their debt position
and
defer principal payments for six months in connection with the new senior credit
facility. To compensate for the subordination, the interest rate on the note
was
raised to 21%. We plan to pay off the note during the second quarter
of
2005.
On
February 11, 2003, Mr. Jerry D. Dumas, Sr., our Chairman and CEO, made us a
short-term loan for $135,000 to cover operating cash flow requirements. This
note bears interest at 10% annually. As of December 31, 2004, this note had
an
unpaid balance of $15,000. Additional demand notes from Mr. Dumas total
$104,068, bearing interest at 10% per annum.
On
July
25, 2002, we borrowed $500,000 under a promissory note from Facilities. One
of
our officers, who is also a director and principal stockholder, has a minority
investment interest in and is an officer of Facilities. The majority of the
note
is secured by specific Petrovalve inventory. The note was amended on October
1,
2004, bearing interest at the prime rate plus 7.25%, payable in 36 monthly
installments beginning January 1, 2005. On February 14, 2005, Facilities was
required to fully subordinate their outstanding debt position of $454,689 in
connection with the new senior credit facility.
We
purchased from Phoenix E&P Technology, LLC ("Phoenix"), the manufacturing
assets, inventory and intellectual property rights to produce oilfield shale
shaker screens on January 28, 2005. The assets were purchased for $46,640 with
a
three-year royalty interest on all shale shaker screens produced. Phoenix is
75%
owned by Chisholm Energy Partners (“CEP”). Jerry D. Dumas, Sr., our Chief
Executive Officer and Chairman, and Dr. Glen Penny each have a two and one-half
percent indirect ownership interest in CEP, and John Chisholm, one of our
directors, has a thirty percent ownership interest in CEP.
Note
13 - Commitments and Contingencies
We
are
involved, on occasion, in routine litigation incidental to our business. As
of
December 31, 2004 we were not named or involved in any litigation.
We
have
entered into operating leases for office space, vehicles and equipment. Future
minimum lease payments under these leases are as follows:
For
the Years Ended December 31,
|
|
|
|
2005
|
|
$
|
189,773
|
|
2006
|
|
$
|
135,608
|
|
2007
|
|
$
|
108,562
|
|
2008
|
|
$
|
101,804
|
|
2009
|
|
$
|
95,556
|
|
|
|
|
|
|
Total
rent expense under these operating leases totaled $205,008 and $159,172 during
the years ended December 31, 2004 and 2003, respectively.
401(k)
Retirement Plan
We
maintain a 401(k) retirement plan for the benefit of eligible employees in
the
United States. All employees are eligible for the plan upon six months of
employment. Currently, we do not match employee contributions.
Note
14 - Segment Information
We
have
four principal operating segments, which are the design, manufacturing,
operating service and marketing of (i) specialty chemicals, (ii) downhole
drilling tools, (iii) downhole production tools, and (iv) automated bulk
handling systems. These operating segments were determined based on the nature
of the products and services offered. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker
in
deciding how to allocate resources and in assessing performance.
We
have
determined that there are three reportable segments:
·
|
The
Chemicals and Logistics segment which 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 manufactures and markets the Turbeco line
of
casing centralizers, Turbo-Flo mud shaker screens and external casing
packers for coal bed methane
drilling.
|
·
|
The
Production Products segment manufactures and markets the Petrovalve
line
of downhole pump components.
|
We
evaluate performance based on several factors, of which the primary financial
measure is business segment income before taxes. The accounting policies of
the
business segments are the same as those described in “Note 2: Summary of
Significant Accounting Policies.” Intersegment sales are accounted for at fair
value as if sales were to third parties and are eliminated in the consolidated
financial statements.
Summarized
financial information concerning our segments as of December 31, 2004 and 2003
is show in the following tables (in thousands):
2004
|
|
Chemicals
and
Logistics
|
|
Drilling
Products
|
|
Production
Products
|
|
Corporate
and
Other
|
|
Total
|
|
Net
revenues to external customers
|
|
$
|
17,983
|
|
$
|
3,315
|
|
$
|
583
|
|
$
|
|
|
$
|
21,881
|
|
Income
(loss) from operations
|
|
$
|
4,731
|
|
$
|
359
|
|
$
|
(356
|
)
|
$
|
(1,722
|
)
|
$
|
3,012
|
|
Depreciation
and amortization
|
|
$
|
430
|
|
$
|
87
|
|
$
|
31
|
|
$
|
142
|
|
$
|
690
|
|
Total
assets
|
|
$
|
12,837
|
|
$
|
868
|
|
$
|
1,467
|
|
$
|
785
|
|
$
|
15,957
|
|
Goodwill
|
|
$
|
7,466
|
|
$
|
—
|
|
$
|
|
|
$
|
|
|
$
|
7,466
|
|
Capital
expenditures
|
|
$
|
67
|
|
$
|
27
|
|
$
|
|
|
$
|
19
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
117
|
|
$
|
13
|
|
$
|
|
|
$
|
562
|
|
$
|
692
|
|
2003
|
|
Chemicals
and
Logistics
|
|
Drilling
Products
|
|
Production
Products
|
|
Corporate
and
Other
|
|
Total
|
|
Net
sales to external customers
|
|
$
|
11,919
|
|
$
|
2,700
|
|
$
|
225
|
|
$
|
|
|
$
|
14,844
|
|
Income
(loss) from operations
|
|
$
|
1,822
|
|
$
|
394
|
|
$
|
(5,548
|
)
|
$
|
(1,758
|
)
|
$
|
(5,090
|
)
|
Depreciation
and amortization
|
|
$
|
534
|
|
$
|
90
|
|
$
|
34
|
|
$
|
55
|
|
$
|
713
|
|
Total
assets
|
|
$
|
10,870
|
|
$
|
697
|
|
$
|
1,682
|
|
$
|
721
|
|
$
|
13,970
|
|
Goodwill,
net
|
|
$
|
7,146
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
7,146
|
|
Capital
expenditures
|
|
$
|
173
|
|
$
|
45
|
|
$
|
|
|
$
|
357
|
|
$
|
575
|
|
Interest
Expense
|
|
$
|
84
|
|
$
|
17
|
|
$
|
5
|
|
$
|
512
|
|
$
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Essentially
all of our revenues are derived from the oil and gas industry. This
concentration of customers in one industry increases our credit and business
risk, particularly given the volatility of activity levels in the industry.
The
majority of our sales are to major or large independent oilfield service
companies with established credit histories and actual credit losses have been
insignificant.
Five customers accounted for 47% of consolidated revenues for the year ended
December 31, 2004. These same five customers were also in the Chemicals and
Logistics segment of our business and they collectively accounted for 57% of
the
revenues in this segment.
The
Chemicals and Logistics segment generated the majority of our revenues in 2003.
Five customers accounted for 54% of consolidated revenues for the year ended
December 31, 2003. These same five customers were also in the Chemicals and
Logistics segment of our business and they collectively accounted for 67% of
the
revenues in this segment.
Note
15 - Subsequent Events
We
purchased from Phoenix E&P Technology, LLC ("Phoenix"), the manufacturing
assets, inventory and intellectual property rights to produce oilfield shale
shaker screens on January 28, 2005. The assets were purchased for $46,640 with
a
three-year royalty interest on all shale shaker screens produced. Phoenix is
75%
owned by Chisholm Energy Partners (“CEP”). Jerry D. Dumas, Sr., our Chief
Executive Officer and Chairman, and Dr. Glenn Penny each have a two and one-half
percent indirect ownership interest in CEP, and John Chisholm, one of our
directors, has a thirty percent ownership interest in CEP.
On
February 14, 2005, we entered into a $13 million credit agreement with Wells
Fargo Bank. The following table presents the senior secured credit facilities
provided by the credit agreement:
|
|
Principal
|
|
Interest
Rate
|
|
Maturity
|
|
Amortization
|
|
Revolving
Line of Credit
|
|
$
|
5,000,000
|
|
|
Prime
|
|
|
February
2007
|
|
|
Interest
Only
|
|
Equipment
Term Loan
|
|
$
|
7,000,000
|
|
|
Prime
+0.5
|
%
|
|
February
2010
|
|
|
60
months
|
|
Real
Estate Term Loan
|
|
$
|
855,437
|
|
|
Prime
|
|
|
February
2020
|
|
|
60
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
proceeds of the senior credit facilities were used to fund a portion of the
acquisition of Spidle Sales and Services, Inc., as discussed below, refinance
some of our existing indebtedness, pay for fees and expenses incurred in
connection with the senior credit facilities and provide future working capital
for our operations. See Note 8 - Notes Payable and Note 9
-
Long-Term Debt.
In
February 2005, we completed the purchase of Spidle Sales and Services, Inc.
(“Spidle”), a privately-held downhole tool company with rental, sales 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 not included in the consolidated financial
statements for all periods presented. Spidle will be merged with Turbeco into
Flotek’s Drilling Products segment. 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. As a result of the
acquisition, we are expected to (i) expand its product, customer and geographic
base in the downhole drilling tools market and (ii) provide operational
synergies with Flotek’s other business units.
The
aggregate purchase price of $8.1 million consisted of $6.1 million in cash,
sellers notes totaling $1.3 million and common stock valued at $700,000. The
value of the common shares issued was determined based on the average market
price of our common shares over the 10 business days prior to the close of
the
acquisition. The purchase price for the acquisition exceeded the fair value
of
the net assets acquired, so there was no goodwill associated with the business
combination.