Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10 - QSB
x
QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2006
o
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission
File Number 1-13270
FLOTEK
INDUSTRIES, INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
|
90-0023731
|
(State
or other jurisdiction of incorporation)
|
(I.R.S.
Employer Identification Number)
|
|
|
7030
Empire Central Drive, Houston TX 77040
|
(Address
of Principal Executive Offices)
|
(713)
849-9911
(Issuer’s
telephone number)
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90
days. YES x NO o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) YES o NO x
There
were 8,522,116
shares of the issuer’s common stock, $.0001 par value, outstanding as of May 9,
2006.
Transitional
small business disclosure format: YES o NO x
TABLE
OF CONTENTS
|
|
PART
I - FINANCIAL INFORMATION
|
Page
|
|
|
|
|
Item
1. Financial
Statements
|
1
|
|
|
|
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
11
|
|
|
|
|
Item
3. Controls
and Procedures
|
16
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
Item
2. Unregistered
Sales of Equity Securities and Use of
Proceeds
|
18
|
|
|
|
|
Item
6. Exhibits
|
18
|
|
|
|
|
Signatures
|
19
|
Forward-Looking
Statements
Except
for the historical information contained herein, the discussion in this Form
10-QSB includes "forward-looking statements" within the meaning of Section
27A
of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The words "anticipate", "believe", "expect",
"plan", "intend”, "project", "forecast", "could" and similar expressions are
intended to identify forward-looking statements. All statements other than
statements of historical facts included in this Form 10-QSB regarding the
Company's financial position, business strategy, budgets and plans, and
objectives of management for future operations are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially
from those in the forward-looking statements for various reasons, including,
but
not limited to, the effect of competition, the level of petroleum industry
exploration and production expenditures, world economic and political
conditions, prices of and the demand for crude oil and natural gas, weather,
the
legislative environment in the United States of America and other countries,
adverse changes in the capital and equity markets, and other risk factors
including those identified herein.
PART
I - FINANCIAL INFORMATION
Item
1. Financial
Statements
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED BALANCE SHEETS
|
|
March
31,
2006
|
|
December
31,
2005
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
594,112
|
|
$
|
7,376,858
|
|
Accounts
receivable, net
|
|
|
10,654,361
|
|
|
10,407,086
|
|
Inventories,
net
|
|
|
10,191,951
|
|
|
10,657,560
|
|
Other
current assets
|
|
|
298,456
|
|
|
233,879
|
|
Total
current assets
|
|
|
21,738,880
|
|
|
28,675,383
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
13,412,702
|
|
|
9,961,353
|
|
Goodwill
|
|
|
17,265,416
|
|
|
12,388,318
|
|
Intangible
and other assets, net
|
|
|
1,261,133
|
|
|
1,132,470
|
|
|
|
$
|
53,678,131
|
|
$
|
52,157,524
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,807,742
|
|
$
|
3,804,899
|
|
Accrued
liabilities
|
|
|
4,567,424
|
|
|
3,296,282
|
|
Current
portion of long-term debt
|
|
|
2,250,683
|
|
|
2,016,410
|
|
Current
portion of deferred tax liability
|
|
|
318,947
|
|
|
318,947
|
|
Total
current liabilities
|
|
|
8,944,796
|
|
|
9,436,538
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
6,474,533
|
|
|
7,276,570
|
|
Deferred
tax liability, less current portion
|
|
|
254,238
|
|
|
239,553
|
|
Total
liabilities
|
|
|
15,673,567
|
|
|
16,952,661
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $.0001 par value; 20,000,000 shares authorized; shares issued
and
outstanding: March 31, 2006 - 8,430,839 and December 31, 2005 -
8,317,265
|
|
|
843
|
|
|
832
|
|
Additional
paid-in capital
|
|
|
40,787,317
|
|
|
39,743,794
|
|
Accumulated
deficit
|
|
|
(2,783,596
|
)
|
|
(4,539,763
|
)
|
Total
stockholders’ equity
|
|
|
38,004,564
|
|
|
35,204,863
|
|
|
|
$
|
53,678,131
|
|
$
|
52,157,524
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED INCOME STATEMENTS
(UNAUDITED)
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Revenues
|
|
$
|
16,060,879
|
|
$
|
11,041,164
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
9,278,734
|
|
|
6,972,898
|
|
Gross
profit
|
|
|
6,782,145
|
|
|
4,068,266
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
3,186,450
|
|
|
1,860,106
|
|
Depreciation
and amortization
|
|
|
598,234
|
|
|
270,361
|
|
Research
and development
|
|
|
155,030
|
|
|
130,669
|
|
Total
expenses
|
|
|
3,939,714
|
|
|
2,261,136
|
|
Income
from operations
|
|
|
2,842,431
|
|
|
1,807,130
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(171,813
|
)
|
|
(197,388
|
)
|
Other,
net
|
|
|
12,174
|
|
|
10,662
|
|
Total
other income (expense)
|
|
|
(159,639
|
)
|
|
(186,726
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,682,792
|
|
|
1,620,404
|
|
Provision
for income taxes
|
|
|
(926,625
|
)
|
|
(152,682
|
)
|
Net
income
|
|
$
|
1,756,167
|
|
$
|
1,467,722
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per common share:
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.21
|
|
$
|
0.22
|
|
Diluted
earnings per common share
|
|
$
|
0.19
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares used in computing basic earnings per common
share
|
|
|
8,387,566
|
|
|
6,737,962
|
|
Incremental
common shares from stock options and warrants
|
|
|
911,966
|
|
|
731,591
|
|
Weighted
average common shares used in computing diluted earnings per common
share
|
|
|
9,299,532
|
|
|
7,469,553
|
|
The
accompanying notes are an integral part of
these consolidated condensed financial statements.
FLOTEK
INDUSTRIES, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
1,756,167
|
|
$
|
1,467,722
|
|
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
598,234
|
|
|
270,361
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
269,342
|
|
|
(338,222
|
)
|
Inventories
|
|
|
551,266
|
|
|
(420,229
|
)
|
Deposits
and other
|
|
|
(63,898
|
)
|
|
(149,251
|
)
|
Accounts
payable
|
|
|
(2,398,007
|
)
|
|
(572,199
|
)
|
Accrued
liabilities
|
|
|
1,264,832
|
|
|
495,507
|
|
Deferred
tax liability
|
|
|
14,686
|
|
|
(89,463
|
)
|
Net
cash provided by operating activities
|
|
|
1,992,622
|
|
|
664,226
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
earn-out payment
|
|
|
¾
|
|
|
(133,672
|
)
|
Acquisitions,
net of cash acquired
|
|
|
(6,711,835
|
)
|
|
133,674
|
|
Other
assets
|
|
|
¾
|
|
|
(194,194
|
)
|
Capital
expenditures
|
|
|
(2,014,303
|
)
|
|
(89,715
|
)
|
Net
cash used in investing activities
|
|
|
(8,726,138
|
)
|
|
(283,907
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Issuance
of stock
|
|
|
518,534
|
|
|
30,000
|
|
Proceeds
from borrowings
|
|
|
63,848
|
|
|
5,720,628
|
|
Repayments
of indebtedness
|
|
|
(631,612
|
)
|
|
(5,458,116
|
)
|
Payments
to related parties
|
|
|
¾
|
|
|
(88,000
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(49,230
|
)
|
|
204,512
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(6,782,746
|
)
|
|
584,831
|
|
Cash
and cash equivalents at beginning of period
|
|
|
7,376,858
|
|
|
284,801
|
|
Cash
and cash equivalents at end of period
|
|
$
|
594,112
|
|
$
|
869,632
|
|
|
|
|
|
|
|
|
|
Supplementary
schedule of non-cash investing and financing activities (See Note
3):
|
|
|
|
|
|
|
|
Fair
value of net assets acquired
|
|
$
|
7,274,792
|
|
$
|
8,075,000
|
|
Less
cash acquired
|
|
|
(37,957
|
)
|
|
(133,674
|
)
|
Less
debt issued
|
|
|
¾
|
|
|
(7,375,000
|
)
|
Less
equity issued
|
|
|
(525,000
|
)
|
|
(700,000
|
)
|
Acquisition,
net of cash acquired
|
|
$
|
6,711,835
|
|
$
|
(133,674
|
)
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
208,798
|
|
$
|
178,630
|
|
Income
taxes paid
|
|
$
|
930,000
|
|
$
|
165,200
|
|
The
accompanying notes are an integral part of
these consolidated condensed financial statements.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
1 - General
The
information contained in the following notes is condensed from that which would
appear in the annual consolidated financial statements; accordingly, the
consolidated condensed financial statements included herein should be reviewed
in conjunction with the consolidated financial statements for the year ended
December 31, 2005 and related notes thereto, included in the Annual Report
on
Form 10-KSB filed by Flotek Industries, Inc. (“Flotek”) with the Securities and
Exchange Commission. All references to the “Company” include Flotek and its
wholly-owned subsidiaries unless otherwise indicated or the context indicates
otherwise.
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
March 31, 2006 and its results of operations and cash flows for the three month
periods ended March 31, 2006 and 2005. The consolidated condensed statement
of
financial position as of December 31, 2005 is derived from the December 31,
2005
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
month
period ended March 31, 2006 are not necessarily indicative of the results to
be
expected for the full year.
Certain
prior period amounts have been reclassified in the accompanying consolidated
condensed financial statements to conform to the current period
presentation.
Note
2 - 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 has adopted SFAS No. 154 as of December
31, 2005.
In
December 2004, the FASB issued Statement No. 123R, “Share
Based Payment” (“SFAS 123R”). This statement revises Statement 123 and
supersedes APB 25 and amends FASB Statement No. 95, “Statement
of Cash Flows”. SFAS 123R requires companies to expense the fair value of
employee services received in exchange for an award of equity instruments,
including stock options. SFAS 123R also provides guidance on valuing and
expensing these awards, as well as disclosure requirements with respect to
these
equity arrangements.
We
adopted SFAS 123R effective as of January 1, 2006. We are following the
“modified prospective” method of adoption of SFAS 123R whereby earnings for
prior periods will not be restated as though stock based compensation had been
expensed, rather than the “modified retrospective” method which would entail
restatement of previously published earnings. SFAS 123R also requires the
benefits of tax deductions in excess of recognized compensation cost be reported
as a financing cash flow, rather than as an operating cash flow, but this is
not
anticipated to have a significant impact on our cash flow reporting. The impact
of adoption of SFAS 123R will depend on levels of share-based compensation,
particularly stock options, granted in the future and the fair value assigned
thereto. We do not expect that the adoption of SFAS 123R will have a material
financial impact on our consolidated financial position, results of operations
or cash flows, unless a significant number of new options are
granted.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On
December 22, 2005, the Compensation Committee, on behalf of the Board of
Directors (“Board”) approved the acceleration of the vesting of all previously
unvested stock options granted under our 2003 and 2005 Long Term Incentive
Plans
(the "Plans"). The vesting acceleration represents options exercisable for
a
total of 313,140 shares of our common stock, including a total of 175,875 shares
of common stock underlying options held by our executive officers. The options
have exercise prices ranging from $4.25 to $9.40 per share. The closing price
of
our common stock on December 22, 2005 was $18.80. The acceleration of the
vesting schedule of the options was effected pursuant to Section 4(c)(x) of
the
Plans, which authorizes the Board, in its sole discretion, to substitute an
accelerated vesting schedule for options granted under the Plans. In most
instances, stock options granted under the Plans vested over a four-year
period.
The
Board
imposed selling restrictions on shares received through the exercise of
accelerated options. These restrictions prohibit the sale of shares purchased
under accelerated options until the date on which the options would otherwise
have vested under the original option grants or six months after the date on
which the options would otherwise have vested under the original option grants
if the employee is no longer employed by the Company.
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 adopted SFAS No.
151
as of January 1, 2006. The adoption of SFAS No. 151 has had no material impact
on our consolidated financial position, results of operations and cash flows
as
of March 31, 2006.
Note
3 - Acquisitions
On
January 2, 2006, the Company purchased the assets of Can-Ok Oil Field Services,
Inc. and Stabilizer Technology, Inc. (collectively “Can-Ok”) a downhole
oilfield tool company located in Chickasha, Oklahoma.
The
assets acquired, liabilities assumed and consideration paid were as follows:
Assets
acquired:
|
|
|
|
Cash
|
|
$
|
37,957
|
|
Accounts
receivable
|
|
|
516,617
|
|
Inventory
|
|
|
85,657
|
|
Other
prepaid assets
|
|
|
678
|
|
Plant,
property and equipment (net)
|
|
|
1,959,345
|
|
Goodwill
|
|
|
4,877,098
|
|
Intangible
and other assets
|
|
|
204,600
|
|
Total
assets acquired
|
|
$
|
7,681,952
|
|
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
|
Accounts
payable
|
|
|
400,850
|
|
Other
accrued liabilities
|
|
|
6,310
|
|
Total
liabilities assumed
|
|
$
|
407,160
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
7,274,792
|
|
|
|
|
|
|
Consideration
paid:
|
|
|
|
|
Cash
|
|
$
|
6,749,792
|
|
Common
stock (25,020 shares)
|
|
|
525,000
|
|
Total
consideration paid
|
|
$
|
7,274,792
|
|
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note
4 - Inventories
The
components of inventories for the period ended March 31, 2006 and December
31,
2005 were as follows:
|
|
|
For
the Period Ended
|
|
|
|
|
March
31,
2006
|
|
|
December
31,
2005
|
|
Raw
materials
|
|
$
|
2,582,197
|
|
$
|
2,409,597
|
|
Work-in-process
|
|
|
50,721
|
|
|
50,721
|
|
Finished
goods
|
|
|
7,974,897
|
|
|
8,602,777
|
|
Gross
inventories
|
|
|
10,607,815
|
|
|
11,063,095
|
|
Less:
Slow-moving and obsolescence reserve
|
|
|
(415,864
|
)
|
|
(405,535
|
)
|
Inventories,
net
|
|
$
|
10,191,951
|
|
$
|
10,657,560
|
|
Additional
inventory of approximately $0.1 million associated with the Can-Ok acquisition
was recorded January 2, 2006 (see Note 3).
Note
5 - Property, Plant and Equipment
For
the
period ended March 31, 2006 and December 31, 2005, property, plant and equipment
was comprised of the following:
|
|
|
For
the Period Ended
|
|
|
|
|
March
31,
2006
|
|
|
December
31,
2005
|
|
Land
|
|
$
|
460,820
|
|
$
|
409,311
|
|
Buildings
and leasehold improvements
|
|
|
3,173,016
|
|
|
3,025,974
|
|
Machinery,
equipment and rental tools
|
|
|
10,115,603
|
|
|
7,882,396
|
|
Equipment
in progress
|
|
|
1,640,949
|
|
|
464,051
|
|
Furniture
and fixtures
|
|
|
129,060
|
|
|
123,266
|
|
Transportation
equipment
|
|
|
1,388,919
|
|
|
1,067,457
|
|
Computer
equipment and other
|
|
|
459,646
|
|
|
432,908
|
|
Gross
property, plant and equipment
|
|
|
17,368,013
|
|
|
13,405,363
|
|
Less:
Accumulated depreciation
|
|
|
(3,955,311
|
)
|
|
(3,444,010
|
)
|
Net
property, plant and equipment
|
|
$
|
13,412,702
|
|
$
|
9,961,353
|
|
Net
property, plant and equipment of approximately $2.0 million associated with
the
Can-Ok acquisition was recorded January 2, 2006 (see Note 3).
Note
6 - Goodwill
The
Company evaluates 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 discounted cash flows approach. 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 2005 resulted in no
impairment losses.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Additional
goodwill of approximately $4.9 million associated with the acquisition of Can-Ok
was recorded January 2, 2006 (see Note 3).
Note
7 - Long-Term Debt
Long-term
debt for the period ended March 31, 2006 and December 31, 2005 consisted of
the
following:
|
|
For
the Period Ended
|
|
|
|
March
31,
2006
|
|
December
31,
2005
|
|
Senior
Credit Facility
|
|
|
|
|
|
Equipment
term loan
|
|
$
|
5,250,000
|
|
$
|
5,716,667
|
|
Real
estate term loan
|
|
|
784,150
|
|
|
803,160
|
|
Amendments
to Senior Credit Facility
|
|
|
|
|
|
|
|
Equipment
term loan
|
|
|
1,247,667
|
|
|
1,289,000
|
|
Real
estate term loan
|
|
|
217,359
|
|
|
221,725
|
|
Promissory
notes to stockholders of acquired businesses, maturing February
2008
|
|
|
959,028
|
|
|
1,004,418
|
|
Other
|
|
|
267,012
|
|
|
258,010
|
|
Total
|
|
|
8,725,216
|
|
|
9,292,980
|
|
Less
current maturities
|
|
|
(2,250,683
|
)
|
|
(2,016,410
|
)
|
Long-term
debt, less current portion
|
|
$
|
6,474,533
|
|
$
|
7,276,570
|
|
All
bank
borrowings are collateralized by substantially all of our assets. Bank
borrowings are subject to certain financial covenants and a material adverse
change subjective acceleration clause. As of March 31, 2006, 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 March 31, 2006, as the majority of the long-term debt carries a
floating interest rate based on the prime rate.
Note
8 -
Common Stock
The
amount of common shares issued and outstanding is summarized as
follows:
Issued
and outstanding as of December 31, 2005
|
|
|
8,317,265
|
|
Shares
issued for Can-Ok acquisition (See Note 3)
|
|
|
25,020
|
|
Warrants
exercised through March 31, 2006
|
|
|
26,490
|
|
Stock
options exercised through March 31, 2006
|
|
|
62,064
|
|
Issued
and outstanding as of March 31, 2006
|
|
|
8,430,839
|
|
Note
9 - Earnings Per Share (“EPS”)
Basic
EPS
excludes dilution and is computed by dividing net income by the weighted average
number of common shares outstanding for the period. Diluted EPS is based on
the
weighted average number of shares outstanding during each period and the assumed
exercise of dilutive instruments (stock options and warrants) less the number
of
treasury shares assumed to be purchased with the exercise proceeds using the
average market price of the Company’s common stock for each of the periods
presented.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The
following table presents information necessary to calculate earnings per share
for the periods presented.
|
|
|
For
the Three Months Ended
March
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Net
income
|
|
$
|
1,756,167
|
|
$
|
1,467,722
|
|
Weighted-average
common shares outstanding
|
|
|
8,387,566
|
|
|
6,737,962
|
|
Basic
earnings per common share
|
|
$
|
0.21
|
|
$
|
0.22
|
|
Diluted
earnings per common share
|
|
$
|
0.19
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
8,387,566
|
|
|
6,737,962
|
|
Effect
of dilutive securities
|
|
|
911,966
|
|
|
731,591
|
|
Weighted-average
common equivalent shares outstanding
|
|
|
9,299,532
|
|
|
7,469,553
|
|
Note
10 - Stock-Based Compensation
The
Company adopted SFAS 123R effective as of January 1, 2006. SFAS 123R
requires all stock-based payments, including grants of stock options, to be
recognized in the income statement as an operating expense, based on their
fair
values. The Company follows the “modified prospective” method of adoption of
SFAS 123R whereby earnings for prior periods will not be restated as though
stock-based compensation had been expensed.
Prior
to
the adoption of SFAS 123R, the Company accounted for stock based employee
compensation under Accounting Principles Board Opinion No. 25 “Accounting
for Stock Issued to Employees” (“APB 25”). 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.
By
accelerating the vesting of all outstanding options as of December 22, 2005
(see
Note 2), the Company accounted for the stock options under the rules in effect
when the stock options were granted, APB 25, versus SFAS 123R adopted on January
1, 2006.
Under
SFAS 123R, the Company’s compensation costs based on the fair value at the
grant date for its stock options, net income and EPS would have been
reduced to the following pro forma amounts for the prior comparable
quarter:
|
|
Three
Months
Ended
March
31, 2005
|
|
Net
income:
|
|
|
|
As
reported
|
|
$
|
1,467,722
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
|
(329
|
)
|
Pro
forma
|
|
$
|
1,467,393
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
As
reported
|
|
$
|
0.22
|
|
Pro
forma
|
|
$
|
0.22
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
As
reported
|
|
$
|
0.20
|
|
Pro
forma
|
|
$
|
0.20
|
|
For
the
three months ended March 31, 2006, the Company did not grant any stock options.
As a result, no stock based compensation expense was recorded for the three
months ended March 31, 2006.
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED 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 Three Months Ended
March
31,
|
|
2006
|
|
2005
|
Income
tax (benefit) at statutory rate
|
34.0
|
%
|
|
34.0
|
%
|
State
taxes, net of federal benefit
|
2.6
|
|
|
2.0
|
|
Deductible
items
|
(0.3)
|
|
|
¾
|
|
Change
in valuation allowance
|
¾
|
|
|
(26.6)
|
|
Other
|
(1.8)
|
|
|
¾
|
|
Provision
for income taxes
|
34.5
|
%
|
|
9.4
|
%
|
Our
effective income tax rate in 2006 and 2005 differs from the federal statutory
rate primarily due to state income taxes and changes in the valuation allowances
due to the change in management's estimate of the utilization of net operating
loss carryforwards. A
valuation allowance was provided against our net deferred tax assets relating
to
our net operating losses in the amount that management believes is more likely
than not to expire unrealized based on existing carryforward abilities. Certain
Internal Revenue Code provisions may limit the use of our net operating loss
carryforwards. We continue to assess the limitations on our net operating loss
carryforwards, if any, on future periods. We are currently evaluating our
historical Canadian performance and associated filings to verify the existence
and usage of our Canadian net operating losses. As of March 31, 2006, we had
estimated net operating loss carryforwards of approximately $6.3 million,
expiring in various amounts in 2017 through 2025.
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 can not 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
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 three
months ended March 31, 2006.
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-makers in deciding how to allocate resources and in assessing
performance.
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.
|
FLOTEK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
·
|
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 the
consolidated financial statements for the year ended December 31, 2005 and
the
related notes thereto, included in the Annual Report on Form 10-KSB filed by
the
Company with the Securities and Exchange Commission. 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 months ending March
31, 2006 and 2005 is shown in the following tables (in thousands):
Three
months ended March 31, 2006
|
|
Chemicals
and
Logistics
|
|
Drilling
Products
|
|
Production
Products
|
|
Corporate
and
Other
|
|
Total
|
|
Net
revenues to external customers
|
|
$
|
7,876
|
|
$
|
8,092
|
|
$
|
93
|
|
$
|
¾
|
|
$
|
16,061
|
|
Income
(loss) from operations
|
|
$
|
1,911
|
|
$
|
1,781
|
|
$
|
(100
|
)
|
$
|
(750
|
)
|
$
|
2,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues to external customers
|
|
$
|
6,128
|
|
$
|
4,574
|
|
$
|
339
|
|
$
|
¾
|
|
$
|
11,041
|
|
Income
(loss) from operations
|
|
$
|
1,505
|
|
$
|
844
|
|
$
|
56
|
|
$
|
(598
|
)
|
$
|
1,807
|
|
Total
assets by reportable segment were as follows (in thousands):
|
|
|
For
the Period Ended
|
|
|
|
|
March
31,
2006
|
|
|
|
|
Chemicals
and Logistics
|
|
$
|
17,415
|
|
$
|
16,417
|
|
Drilling
Products
|
|
|
34,280
|
|
|
26,787
|
|
Production
Products
|
|
|
1,324
|
|
|
1,233
|
|
Corporate
and Other
|
|
|
659
|
|
|
7,721
|
|
Total
assets
|
|
$
|
53,678
|
|
$
|
52,158
|
|
Note
14 - Subsequent Events
On
April
5, 2006 the Company closed the acquisition of certain assets of Total Well
Solutions, LLC for approximately $4.8 million in cash. The Company purchased
the
tangible assets, which included the product inventory, and licensed the rights
to exercise the exclusive worldwide rights to a patented gas separator used
in
coal bed methane production.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Management’s
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with “Item 1. Financial Statements” contained herein.
Business
Overview
We
provide a broad range of products and services worldwide, for use in the
exploration and production of crude oil and natural gas. We compete in the
specialty chemicals, bulk handling and logistics, downhole drilling tool and
downhole production tool oilfield products and services.
We
were
incorporated in 1985. As of July 27, 2005 our common stock began trading on
the
American Stock Exchange under the stock ticker symbol “FTK”. Our headquarters
are in Houston, Texas, and we have manufacturing operations in Texas, Oklahoma,
Louisiana, Utah and Wyoming. We market our products domestically and
internationally in over 20 countries.
Our
product lines are divided into three segments within the oilfield service
industry:
|
·
|
The
Chemicals and Logistics segment is made up of two business
units:
|
|
§
|
The
CESI chemical business unit develops, manufactures, and markets specialty
chemicals used by oilfield service companies in oil and gas well
cementing, stimulation, drilling and production. Our applied research
laboratories support the specific drilling and production needs of
our
customers.
|
|
§
|
The
Materials Translogistics business unit designs and 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 patented
Petrovalve line of downhole pump components. Effective April 1, 2006
we
acquired the assets of Total Well Solutions (“TWS”) (see Note 14)
expanding this segment into the manufacturing and marketing of electric
submersible pumps and a patented gas separator used primarily in
coal bed
methane applications.
|
The
customers for our products and services include the major integrated oil and
natural gas companies, independent oil and natural gas companies and state-owned
national oil companies. Our ability to compete in the oilfield services market
is dependent on our ability to differentiate our products and services, provide
superior quality and service, and maintain a competitive cost structure.
Activity levels in our three segments are driven primarily by current and
expected commodity prices, drilling rig count, oil and gas production levels,
and customer capital spending allocated for drilling and production.
Over
the
last year we have grown our sales internally and through acquisitions. During
2005 and 2006, we have entered into the following acquisitions that were outside
the ordinary course of our business:
|
·
|
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;
|
|
·
|
acquired
the assets of Precision-LOR, Ltd. (“LOR”), a drilling tool rental and
inspection service provider in south Texas, on August 31,
2005;
|
|
·
|
acquired
the assets of Can-Ok Oil Field Services, Inc. and Stabilizer Technology,
Inc. (“Can-Ok”), a drilling tool sales and rental provider in Oklahoma,
Louisiana and Arkansas, on January 2, 2006;
and
|
|
·
|
acquired
the assets of TWS, which manufactures, markets and services electric
submersible pumps and downhole gas/water separators primarily to
coal bed
methane gas producers on April 5, 2006.
|
We
continue to actively seek profitable acquisition or merger candidates in our
core businesses to either decrease costs of providing products or add new
products and customer base to diversify our market.
Results
of Operations
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,060,879
|
|
$
|
11,041,164
|
|
Cost
of revenues
|
|
|
9,278,734
|
|
|
6,972,898
|
|
Gross
profit
|
|
|
6,782,145
|
|
|
4,068,266
|
|
Gross
profit %
|
|
|
42.2%
|
|
|
36.8%
|
|
Expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,186,450
|
|
|
1,860,106
|
|
Depreciation and amortization
|
|
|
598,234
|
|
|
270,361
|
|
Research and development
|
|
|
155,030
|
|
|
130,669
|
|
Total expenses
|
|
|
3,939,714
|
|
|
2,261,136
|
|
Income
from operations
|
|
|
2,842,431
|
|
|
1,807,130
|
|
Income
from operations %
|
|
|
17.7%
|
|
|
16.4%
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(171,813
|
)
|
|
(197,388
|
)
|
Other, net
|
|
|
12,174
|
|
|
10,662
|
|
Total other income (expense)
|
|
|
(159,639
|
)
|
|
(186,726
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,682,792
|
|
|
1,620,404
|
|
Provision
for income taxes
|
|
|
(926,625
|
)
|
|
(152,682
|
)
|
Net
income
|
|
$
|
1,756,167
|
|
$
|
1,467,722
|
|
Consolidated
- Comparison of Three Months Ended March 31, 2006 and 2005
Total
revenues increased by $5.0 million or 45.5% in the first quarter of 2006 versus
the first quarter of 2005. The acquisition of Harmon, LOR and Can-Ok accounted
for $2.2 million of the increase in revenues quarter over quarter, with the
remaining $2.8 million coming from internal revenue growth within the Chemical
and Logistics segment and the established Drilling Products segment.
Gross
profit increased by $2.7 million or 66.7% in the first quarter of 2006 versus
2005. The acquisitions noted above accounted for $0.9 million of the increase.
Gross margin as a percentage of sales increased significantly from 36.8% in
the
first quarter of 2005 to 42.2% in the first quarter of 2006. 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 are not directly attributable to products
sold
or services rendered. Selling, general and administrative costs were $3.2
million in the first quarter of 2006 versus $1.9 million in the first quarter
of
2005. The acquisitions noted above accounted for $0.6 million of the increase.
The
balance of the increase is primarily due to increased sales and field support
costs in the Chemical and Logistics segment. As we acquire organizations,
significant emphasis is placed on growing sales while controlling selling,
general and administrative costs across the organization.
Depreciation
and amortization increased from $0.3 million in the first quarter of 2005 to
$0.6 million in the first quarter of 2006 due to the increased levels of
property, plant and equipment. The increase in property, plant and equipment
was
primarily due to the addition of assets associated with the drilling tool
acquisitions noted above.
A
provision for income taxes of $0.9 million was recorded in the first quarter
of
2006. An effective tax rate of 34.5% was applied in the first quarter of 2006
versus 9.4% in the first quarter of 2005, resulting in a $0.8 million increase
in the tax provision quarter over quarter. On a comparative basis, had pretax
income been taxed at the first quarter 2005 effective tax rate of 9.4%, net
income would have been $0.7 million higher which would have resulted in a $0.08
increase in basic earnings per share for the quarter. The significant increase
in taxes is a result of the decreased use of our accumulated net operating
losses (“NOL”), an increase in our projected federal statutory rate based on
estimated income levels, and an increase in our estimated state income tax
liability. The Company’s remaining NOL’s are subject to limitations and are not
expected to significantly reduce our effective tax rate going forward. The
provision was made for estimated federal income tax, state income tax and
alternative minimum tax, which cannot be offset by our NOL carryforwards.
Results
by Segment
Chemicals
and Logistics
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
7,876,012
|
|
$
|
6,128,273
|
|
Gross
profit
|
|
$
|
2,984,297
|
|
$
|
2,263,569
|
|
Gross
profit %
|
|
|
37.9%
|
|
|
36.9%
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
1,911,933
|
|
$
|
1,505,439
|
|
Operating
margin %
|
|
|
24.3%
|
|
|
24.6%
|
|
Chemicals
and Logistics - Comparison of Three Months Ended March 31, 2006 and
2005
Chemical
and Logistics revenues increased $1.7 million or 28.5% in the first quarter
of
2006 compared to 2005. The increase in revenue is a result of an increase in
volume coupled with higher prices, particularly of our proprietary specialty
chemicals. The most significant sales growth occurred in the Rocky Mountains
and
Mid-Continent regions for first quarter 2006 as compared to first quarter 2005.
The
majority of revenue growth is attributed to increased sales of our line of
biodegradable environmentally benign ‘green’ chemicals which grew from $1.7
million in the first quarter of 2005 to $3.0 million in the first quarter of
2006. International sales grew slightly, but decreased as a percentage of sales
from 16.8% in the first quarter of 2005 to 14.1% in the first quarter of 2006.
The mix of international activity shifted from Russia in the first quarter
of
2005 to Central and South America in the first quarter of 2006. We continue
to
focus on expanding our international sales, and at the end of the first quarter
of 2006 we opened an office in the Netherlands to market our proprietary
biodegradable capillary foamers which have received North Sea
certification.
Gross
profit as a percentage of revenues increased from 36.9% in the first quarter
of
2005 to 37.9% in the first quarter of 2006. The increase in gross profit is
due
to price increases and a reduction in cost of goods as a percentage of total
revenues. Managing chemical feedstock and transportation prices and passing
the
increase in the costs on to our customers are critical to maintain our gross
profits. We are completing a 30,000 square foot expansion to our production
facilities which will triple our production capabilities and allow us to manage
larger volumes of inputs to take further advantage of volume pricing
discounts.
Operating
income increased from $1.5 million in the first quarter of 2005 to $1.9 million
in the first quarter of 2006. The operating profit as a percentage of revenue
dropped slightly as a result of increased indirect sales costs and start-up
costs associated with the Netherlands office.
Drilling
Products
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,091,788
|
|
$
|
4,574,250
|
|
Gross
profit
|
|
$
|
3,778,654
|
|
$
|
1,598,493
|
|
Gross
profit %
|
|
|
46.7%
|
|
|
34.9%
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
1,780,604
|
|
$
|
844,213
|
|
Operating
margin %
|
|
|
22.0%
|
|
|
18.5%
|
|
Drilling
Products - Comparison of Three Months Ended March 31, 2006 and
2005
During
2005 and 2006 an emphasis was placed on expanding our drilling products sales
through acquisition, allowing us to expand geographically as well as expand
the
amount of products and services provided. In August 2005 we acquired the assets
of Harmon, a downhole oilfield and mining tool company with manufacturing and
sales operations located in Midland, Texas, and the assets of LOR, a drilling
tool rental and inspection service provider in South Texas. In January 2006
we
acquired the assets of Can-Ok, a drilling tool sales and rental provider in
Oklahoma, Louisiana and Arkansas.
Drilling
Products revenues increased $3.5 million in the first quarter of 2006 compared
to the first quarter of 2005. The acquisitions noted above accounted for $2.2
million of this increase. The remaining increase in sales was due to increased
downhole centralizers sales both domestically and internationally.
Gross
profit increased $2.2 million in the first quarter of 2006 compared to 2005.
The
acquisitions noted above accounted for $0.9 million of this increase, with
the
majority achieved through price increases, an increase in rentals which
typically are higher margin than sales, and direct cost management. Gross profit
as a percentage of sales increased significantly from 34.9% in the first quarter
of 2005 to 46.7% in the first quarter of 2006. The improvement in gross margin
was due to increased asset utilization and cost reductions resulting from the
acquisitions.
Operating
profit increased by $0.9 million for the first quarter of 2006 compared to
2005.
The acquisitions noted above accounted for $0.3 million of the increase.
Indirect expenses were higher than expected in the first quarter 2006 as a
result of facility repairs and maintenance and building adequate material and
supply levels in recently acquired locations.
Production
Products
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
93,079
|
|
$
|
338,640
|
|
Gross
profit
|
|
$
|
19,193
|
|
$
|
206,205
|
|
Gross
profit %
|
|
|
20.6%
|
|
|
60.9%
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
(99,702
|
)
|
$
|
56,054
|
|
Operating
margin %
|
|
|
(107.1%
|
)
|
|
16.6%
|
|
Production
Products - Comparison of Three Months Ended March 31, 2006 and
2005
Production
revenues were $0.1 million in the first quarter of 2006 versus $0.3 million
in
the first quarter of 2005. In the first quarter of 2006 there were no
significant international sales as compared to the first quarter of 2005 which
included a large sale to a customer in Russia. The gross margin percentage
decreased significantly from 60.9% in the first quarter of 2005 to 20.6% in
the
first quarter of 2006, as a result of lower margins on domestic sales versus
international sales, and higher fixed costs as a percentage of
revenue.
Management
continues to focus on effectively marketing the Petrovalve line of pump
components. Our patented guided valves are the only product which can be placed
horizontally allowing a pump to be placed at the production zone in horizontally
completed wells reducing the effort needed to pump the product to the surface.
The Petrovalve can effectively lift highly viscous oil in heavy oil or tar
sand production zones. Because of this we signed an exclusive distribution
agreement with C.E. Franklin in Canada and have aligned ourselves with a major
domestic pump manufacturer to build pumps with our valve.
In
April
2006 we acquired the assets of TWS which will be reported within the Production
Products segment. TWS markets and services electric submersible pumps and
patented downhole gas/water separators primarily to coal bed methane gas
producers in the Powder River Basin. It is our expectation that the TWS patented
gas separator combined with the Petrovalve products will enable coal bed methane
producers to realize substantially higher gas production rates and lower
operating costs by capturing in-solution gas otherwise lost with water
production and by increasing pump performance and life.
Capital
Resources and Liquidity
Capital
resources and liquidity continued to improve during the first three months
of
2006 compared to the same period in 2005. During the quarter ending March 31,
2006 we generated net income of $1.7 million based on a 34.5% effective tax
rate, versus a 9.4% effective tax rate for the first quarter of 2005. Cash
flows
from operations were $2.0 million in the first quarter of 2006 versus $0.7
million in the first quarter of 2005. The improvement in cash flow from
operations is a direct result of improved operating results offset by an
expected increased tax burden. The decrease in cash and cash equivalents of
$6.8
million for the quarter was primarily due to the acquisition of Can-Ok.
Net
working capital increased $0.4 million in the first quarter of 2006 versus
a net
increase of $1.1 million in the first quarter of 2005. The increase in cash
used
during the quarter was driven by a net $1.1 million reduction in accounts
payable and accrued liabilities offset by $0.3 million decrease
in receivables and a $0.6 million decrease in inventory.
Capital
expenditures for the quarter ended March 31, 2006 totaled approximately $2.0
million. During the three months ended March 31, 2006, we purchased
approximately $0.9 million in rental equipment for our Drilling Products segment
and invested $1.0 million to expand our manufacturing plant and research and
laboratory facilities within our Chemicals and Logistics segment.
Our
amended Senior Credit Facility consists of a revolving line of credit, two
equipment term loans and two real estate term loans. Our bank borrowings are
collateralized by substantially all of our assets. As
of
March 31, 2006, we had no amounts outstanding under the revolving line of
credit of the amended Senior Credit Facility. 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, and use of treasury management
services. 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 March 31, 2006, we were in
compliance with all covenants.
We
have
funded our capital requirements with operating cash flows, debt borrowings,
and
by issuing shares of our common stock, which are described below:
|
·
|
In
the acquisition of Can-Ok in January 2006, we issued 25,020 shares
of
common stock.
|
|
·
|
In
the first quarter of 2006, warrants to purchase 26,490 shares were
exercised with proceeds of approximately $348,000 paid to the
Company.
|
|
·
|
In
the first quarter of 2006, stock options to purchase 62,064 shares
were
exercised by officers, directors and employees with proceeds of
approximately $171,000 paid to the
Company.
|
Impact
of Recently Issued Accounting Standards
In
May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 154, “Accounting Changes and Error Corrections”. The Company’s
effective date for the pronouncement began 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 has adopted SFAS No. 154 as of December
31, 2005.
In
December 2004, the FASB issued Statement No. 123R,“Share
Based Payment”. This statement revises Statement 123 and supersedes APB 25 and
amends FASB Statement No. 95, “Statement
of Cash Flows”. SFAS 123R requires companies to expense the fair value of
employee services received in exchange for an award of equity instruments,
including stock options. SFAS 123R also provides guidance on valuing and
expensing these awards, as well as disclosure requirements with respect to
these
equity arrangements.
We
adopted SFAS 123R effective as of January 1, 2006. We are following the
“modified prospective” method of adoption of SFAS 123R whereby earnings for
prior periods will not be restated as though stock based compensation had been
expensed, rather than the “modified retrospective” method which would entail
restatement of previously published earnings. SFAS 123R also requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow, but
this will not have a significant impact on our cash flow reporting. The impact
of adoption of SFAS 123R will depend on levels of share-based compensation,
particularly stock options, granted in the future and the fair value assigned
thereto. We do not expect that the adoption of SFAS 123R will have a material
financial impact on our consolidated financial position, results of operations
or cash flows, unless a significant number of new options is
granted.
On
December 22, 2005, the Compensation Committee, on behalf of the Board of
Directors (“Board”) approved the acceleration of the vesting of all previously
unvested stock options granted under our 2003 and 2005 Long Term Incentive
Plans
(the "Plans"). The vesting acceleration represents options exercisable for
a
total of 313,140 shares of our common stock, including a total of 175,875 shares
of common stock underlying options held by our executive officers. The options
have exercise prices ranging from $4.25 to $9.40 per share. The closing price
of
our common stock on December 22, 2005 was $18.80. The acceleration of the
vesting schedule of the options was effected pursuant to Section 4(c)(x) of
the
Plans, which authorizes the Board, in its sole discretion, to substitute an
accelerated vesting schedule for options granted under the Plans. In most
instances, stock options granted under the Plans vested over a four-year
period.
The
Board
imposed selling restrictions on shares received through the exercise of
accelerated options. These restrictions prohibit the sale of shares purchased
under accelerated options until the date on which the options would otherwise
have vested under the original option grants or six months after the date on
which the options would otherwise have vested under the original option grants
if the employee is no longer employed by the Company.
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. We adopted SFAS No. 151
on
January 1, 2006.
Item
3. Controls
and Procedures
Our
Chief
Executive Officer and our Chief Financial Officer (collectively, the “Certifying
Officers”) have evaluated the effectiveness of the Company's "disclosure
controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report , and have
concluded that, as of the date of this report, our disclosure controls and
procedures are effective in enabling us to record, process, summarize, and
report information required to be included in our SEC filings within the
required time period, and to ensure that such information is accumulated and
communicated to our management, including the Certifying Officers, to allow
timely decisions regarding required disclosure. Since the date of this report,
there have not been any significant changes in our internal controls, or in
other factors that could significantly affect these controls subsequent to
the
date of this report.
In
anticipation of our compliance with the Sarbanes-Oxley Act of 2002 (the “Act”),
we have increased our finance and accounting staff dedicated to the
documentation and testing required under this Act.
It
should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of
the
system will be met. In addition, the design of any control system is based
in
part upon certain assumptions about the likelihood of future
events.
PART
II - OTHER INFORMATION
Item
2 .
Unregistered
Sales of Equity Securities and Use of Proceeds
On
January 2, 2006, we issued 25,020 shares of common stock to a former shareholder
of Can-Ok as partial consideration for our purchase of assets of those
companies. At various times during the first quarter of 2006, the Company issued
an aggregate of 26,490 shares to holders of outstanding warrants upon the
exercise of those warrants, for aggregate proceeds to the Company from the
sale
of the warrants of $348,000 in cash.
The
foregoing securities were offered and sold in private transactions in accordance
with Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder, based on the investment representations and position
as
informed, accredited investors of the recipients thereof. The sales were made
without the use of an underwriter or selling agent, and no commissions or
underwriting discounts were paid in connection with such sales.
Item
6. Exhibits.
|
Exhibit
No. |
Description of
Exhibit |
|
10.1
|
Asset
Purchase Agreement dated January 2, 2006 among Flotek Industries,
Inc. and
Can-Ok Field Services, Inc.
|
|
10.2
|
Asset
Purchase Agreement dated January 2, 2006 among Flotek Industries,
Inc. and
Stabilizer Technology, Inc.
|
|
31.1
|
Rule
13a-15(e) and 15d-15(e) Certification of Chief Executive
Officer
|
|
31.2
|
Rule
13a-15(e) and 15d-15(e) Certification of Chief Financial
Officer
|
|
32.1
|
Certification
of Periodic Report by Chief Executive Officer and Chief Financial
Officer
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
FLOTEK
INDUSTRIES, INC.
|
|
|
|
|
|
|
|
By:
/s/
Jerry D. Dumas Sr.
|
|
|
|
Jerry
D. Dumas, Sr.
|
|
|
|
Chairman
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
By:
/s/
Lisa Meier
|
|
|
|
Lisa
Meier
|
|
|
|
Chief
Financial Officer
|
|
May
12,
2006
EXHIBIT
INDEX
|
Exhibit
No. |
Description of
Exhibit |
|
10.1
|
Asset
Purchase Agreement dated January 2, 2006 among Flotek Industries,
Inc. and
Can-Ok Field Services, Inc.
|
|
10.2
|
Asset
Purchase Agreement dated January 2, 2006 among Flotek Industries,
Inc. and
Stabilizer Technology, Inc.
|
|
31.1
|
Rule
13a-15(e) and 15d-15(e) Certification of Chief Executive
Officer
|
|
31.2
|
Rule
13a-15(e) and 15d-15(e) Certification of Chief Financial
Officer
|
|
32.1
|
Certification
of Periodic Report by Chief Executive Officer and Chief Financial
Officer
|