-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A9zixktQxOHwPrFIbTNwGxC/Q/a0zejJQ5fxwsc7uh7rJY1IbnFyfuJQhelc8hCB vj29rUMcTGlcnGEMojxXfg== 0000899243-99-001295.txt : 19990615 0000899243-99-001295.hdr.sgml : 19990615 ACCESSION NUMBER: 0000899243-99-001295 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOTEK INDUSTRIES INC/CN/ CENTRAL INDEX KEY: 0000928054 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 120370187 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-13270 FILM NUMBER: 99646214 BUSINESS ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7138499911 MAIL ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 10KSB 1 FORM 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (x) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 28, 1999 ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no fee required) Commission file number 1-13270 FLOTEK INDUSTRIES INC. (Name of small business issuer in its charter) Alberta 77-0709256 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7030 Empire Central Drive, Houston, Texas 77040 (Address of principal executive offices) (zip code) Issuer's telephone number, including area code: (713) 849-9911 Securities registered pursuant to Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered Common Stock, no par Vancouver Stock Exchange OTC Bulletin Board Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (x) No ( ) Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ( ) Revenues for the Company's 1999 fiscal year were $1,793,709 The aggregate market value of Common Stock held by nonaffiliates as of June 9, 1999, determined using the share closing price on the OTC of $.06 (United States Dollar) on that date was $2,740,848. There were 45,680,795 shares of the Registrant's Common Stock outstanding on February 28, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement issued in connection with the Registrant's 1999 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. Transitional Small Business Disclosure Format (check one): Yes ( ) No (x) PART I General This Form 10-KSB 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," "forecasts," "could" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this Form 10-KSB 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, no assurance can be given that actual results may not differ materially from those in the forward-looking statements herein for reasons including the effect of competition, the level of petroleum industry exploration and production expenditures, world economic conditions, prices of, and the demand for crude oil and natural gas, drilling activity, weather, the legislative environment in the United States and other countries, the condition of the capital and equity markets, and other risk factors identified herein. ITEM 1. - DESCRIPTION OF BUSINESS. Business Flotek Industries Inc. (hereafter the "Company" or "Flotek") was originally incorporated under the laws of the Province of British Columbia on May 17, 1985. Effective September 7, 1995, the Company transferred its corporate status by continuing under the laws of the Province of Alberta. Flotek is headquartered in Houston, Texas and its common shares have been listed on the Vancouver Stock Exchange and the OTC Bulletin Board market. On April 7, 1999, the Company received notice from the Vancouver Stock Exchange regarding the acceptance of the Company's request to voluntarily delist and that the last day of trading of the common shares of the Company on the Vancouver Stock Exchange was April 21, 1999. The Company's common stock continues to be traded in the United States on the OTC Bulletin Board market. The Company's product lines are divided into two separate segments in the industry: drilling products and production equipment. The production equipment division develops, manufactures and markets the Petrovalve + Plus(R) Pump Valve and the Petrovalve Gas Breaker Valve, which are valves for downhole sucker-rod pumps used in oil wells. The drilling products division manufactures and distributes centralizers, which are spiraled vane cementing sleeves and stand off tools that improve mud and cementation displacement in drilled oil wells. Production Equipment The Company has focused on the development of its proprietary and patented technologies: the Petrovalve + Plus(R) Pump Valve and the Petrovalve Gas Breaker Valve. Both patented products are valves used in down-hole sucker- rod pumps. The Petrovalve Gas Breaker Valve provides a solution to gas lock problems. Both valves offer producers operating advantages by performing more efficiently and lasting longer than the traditional ball and seat valves. Flotek's original technology was developed in concert with several university research departments, including the University of Alberta and is the subject of various patents and patent applications. The Company's primary production equipment customers are the 400 North American oil producers, including 30 major oil companies. The Company's competition in the production equipment market is comprised of ball-and-seat manufacturers as well as rod-pump manufacturers. There is substantial competition in the oilfield industry, which the Company assumes will remain at current levels for the foreseeable future; however, there is no other significant proprietary artificial lift technology in the downhole sucker-rod pump market. The pump manufacturers manufacture the same type of equipment and can only set themselves apart by better service, delivery and pricing. Presently, ball-and-seat manufacturers produce the majority of ball-and-seat valves for manufacturers of rod-pumps, yet, the rod-pump manufacturer is not considered to be in competition with the ball-and-seat manufacturer. While the Petrovalve Plus valve product line is manufactured by leading ball-and-seat manufacturers, it is the rod-pump manufacturer that assumes the competitive posture. This competition is a direct result of who controls the distribution of ball-and-seat valves, i.e. the rod-pump manufacturer. The Company's largest competitors with respect to its production equipment product line engage primarily in the manufacturing and direct sale of new equipment. These large manufacturers include Harbison Fischer, Halliburton, Continental EMSCO, and Weatherford International, Inc. within the United States. These companies tend to concentrate on the sale of new equipment, (down-hole sucker rod pumps and associated equipment), with sales to the customers through their regional and local pump repair facilities. The Company utilizes outside manufactures under license arrangements to manufacture its patented products. The Company currently uses: A-1 Carbide in California, Reinhold Industries in Edmonton, Alberta and Aves Industries in North Texas to manufacture the Petrovalve components. The Company's valve products are sold directly to the end user, the oil company, and distributed through pump repair facilities and regional oilfield supply stores. The Company uses agents and distributors in the international arena to market its products. Drilling Products Flotek's drilling products division distributes and services several products that enhance oil and gas well cementing programs and the safety and effectiveness of the drilling process. Its primary product is the Cementing Turbulator, which the Company began distributing in March of 1994, when it acquired Turbeco Inc., an oilfield service company. The Turbulator is a steel sleeve, which is placed over pipe before the cementation process of pipe or casing. This pipe or casing is commonly cemented in the open hole section of a recently drilled oil well. The main purpose of this tool is to provide maximum standoff and improve mud displacement to obtain the best cement 3 bond. The Company was one of the first companies to distribute spiral vaned cementing turbulators. The Turbulator has gained widespread acceptance through its proven ability to improve oil and gas well cementing programs and is effective in deep, directional and horizontal well applications. The Company's Drilling Products customers are made up of the 400 North American oil producers, including 30 major oil companies that are involved in exploration and the drilling and cementation of oil wells. The Company's active customer base is well distributed between major oil companies and smaller independent operators. The Company's marketing area includes the Gulf of Mexico. As a result of the addition of the patented D-Mudder technology, the Company has negotiated the distribution and representation of its drilling products on a global basis with several major oil-field service providers that have existing world-wide distribution. Currently the Company's primary competitors with respect to its drilling products are: Weatherford International, Inc., Franks Casing Crews, Ray Oil Tools and Milam Tool Company. Product Demand Currently, the worldwide price of oil has declined, with prices having recently dropped as much as 40% to under $13 per barrel for spot deliveries. The North American and international rig counts are at historical or near historical lows. Our operations were materially affected by the decline in the rig count during 1998 and 1999 to date. A continuation of the rig count at its current level for a prolonged period of time will adversely affect our results as demand for oil related products and services would continue to fall because of the uncertainty relating to the future. In addition, any further declines in the current worldwide rig count or drilling activity will further reduce the demand for our drilling products and services and will have a material adverse effect on the Company's financial condition and results of operations. Even with the current uncertainty related to drilling activity, we believe the principal factor behind a recovery will be a reduction in the supply of oil and natural gas as production rates decline due to the current reduction in drilling activity. Recent proposed production cuts by the oil producing countries may also result in improved market conditions to the extent those cuts are actually implemented. However, the extreme volatility of our markets makes predictions regarding results for 1999-2000 difficult to make. Patents The Company has followed a policy of seeking patent protection both inside and outside the United States for products and methods that appear to have commercial significance. The Company believes its patents and trademarks to be adequate for the conduct of its business. International Operations The Company's operations are subject to the risks inherent in doing business in multiple countries with various legal and political policies. These risks include war, 4 boycotts, political changes, and changes in currency exchange rates. Although it is impossible to predict the likelihood of such occurrences or their effect on the Company, management believes these risks to be acceptable. Even though the majority of the Company's operations are located in the United States, there can be no assurance that an occurrence of any one of these events in our international operations would not have a material adverse effect on its operations. Employees As of February 28, 1999, the Company employed approximately 12 employees. The Company considers its relations with its employees to be generally satisfactory. The reduction in the number of employees from the prior year was attributable to the down turn in the industry and our attempts to control costs. Operating Risks and Insurance The Company's products are used for the exploration and production of oil and natural gas. Such operations are subject to hazards inherent in the oil and gas industry, such as fires, explosions, blowouts and oil spills, that can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and marine life, and suspension of operations. Litigation arising from an occurrence at a location where the Company's products or services are used or provided may in the future result in the Company being named as a defendant in lawsuits asserting potentially large claims. The Company maintains insurance coverage that it believes to be customary in the industry against these hazards. Year 2000 Issue The Year 2000 issue is the risk that information systems, computers, equipment and products using date-sensitive software or containing computer chips with two-digit date fields will be unable to correctly process the Year 2000 date change. If not identified and corrected prior to the Year 2000, failures could occur in the software, hardware, equipment and products of the Company and its suppliers, vendors and customers that could result in interruptions of the Company's business. Any of such failures could have a material impact on the Company. The Company is currently assessing the cost and uncertainties related to the Year 2000 issue using internal and external resources. Based on preliminary information, the Company currently believes that it has substantially addressed the Year 2000 issues with respect to its software, hardware and products without significant impact on its operations. The estimated costs associated with achieving Year 2000 compliance are not expected to have a material impact on the Company's financial condition or results of operations. There is inherent uncertainty in the Year 2000 problem due to the possibility of unanticipated failures by third party customers and suppliers. Accordingly, the Company is unable, at this time, to assess the extent and resulting materiality of the impact of possible Year 2000 failures on its operations, liquidity or financial position. The Company has designated personnel responsible to identify and respond to these 5 issues and once all identifications and reviews are completed, a contingency plan will be developed to mitigate the risk of business interruption. ITEM 2. DESCRIPTION OF PROPERTY. The Company leases 12,964 square feet of space at 7030 Empire Central Drive, in Houston, Texas, where the Company's headquarters are located. In addition, the Company leases a 2,000 square foot sales office and warehouse in Lafayette, Louisiana. The Company believes that its distribution and sales facilities are adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS. In the ordinary course of business, the Company became the subject of various claims and litigation. The following suits against the Company are pending: Milam Tools, Inc. and its owner, Jack Milam, have filed a federal court suit against Flotek Industries Inc. and its wholly-owned subsidiary Turbeco, Inc., alleging infringement of the complainant's patent. The complaint filed is not specific about the claimed infringements, and general counsel for the respondents has stated that more details of the claim will be elicited though discovery procedures. General counsel believes the claim to be without merit and will proceed with the defense for the Companies. William Jayroe, former President and Chief Executive Officer, has filed a request for arbitration of his dispute with the company relating to his employment agreement. General counsel is handling the arbitration. General counsel believes any outcome from any arbitration will not have a material effect on the financial condition and operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the Company's 1999 fiscal year. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock has been traded on the Vancouver Stock Exchange in Vancouver, British Columbia, under the symbol "FTK", and the OTC Bulletin Board markets in the United States, under the symbol "FOTDF." On April 7, 1999, the Company received notice from the Vancouver Stock Exchange regarding the acceptance of the Company's request to voluntarily delist and that the last day of trading of the common shares of the Company on the Vancouver Stock Exchange was April 21, 1999. The Company's common stock will continue to be traded in the United States on the OTC Bulletin Board market. The Company's common shares commenced trading on the Vancouver Stock Exchange in June 1986. The high and low closing sale prices as 6 quoted in Canadian dollars as reported by the Vancouver Stock Exchange, were as follows for the quarterly periods indicated:
Year Ended February 28, 1999 High Low ----------- ------------ Fiscal Quarter Ended May 31, 1998 0.28 0.11 Fiscal Quarter Ended August 31, 1998 0.15 0.05 Fiscal Quarter Ended November 30, 1998 0.18 0.04 Fiscal Quarter Ended February 28, 1999 0.14 0.03 Year Ended February 28, 1998 Fiscal Quarter Ended May 31, 1997 0.40 0.24 Fiscal Quarter Ended August 31, 1997 0.34 0.13 Fiscal Quarter Ended November 30, 1997 0.50 0.14 Fiscal Quarter Ended February 28, 1998 0.23 0.11 0.05
Holders of Record At February 28, 1999, the Company had approximately 125 holders of record of the Company's common stock. Dividends The Company has not declared a cash dividend during the last two fiscal years. In addition, there is a convertible loan agreement dated October 16, 1997 from TOSI LLP which prohibits the Company from declaring or paying any dividends. Recent Sales of Unregistered Securities None ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Business Environment Flotek consists of two divisions, which provide products and services used in the drilling and production of oil and gas wells. The business environment for oilfield operations and its corresponding operating results are affected significantly by petroleum industry exploration and production expenditures. Low oil prices have reduced the funds available to our clients to explore for and produce oil and gas and have made the exploration and production of oil reserves in various locations uneconomical. The capital budgets of our customers have been reduced and delayed because of industry consolidations and market uncertainties as to future oil prices. The reduction in exploration and production activity during 1998 and 1999 to date has impacted our businesses through lower revenues, pricing pressures and reduced margins. Reduced exploration activity has reduced the demand for the products and services provided by us 7 serving the drilling markets. Our drilling products have been the most significantly affected. In addition, our production equipment was severely affected by the recent declines in oil prices. These declines were particularly felt in our North American and South American operations where historically our customers are located. We expect that oil production and demand for our products in North and South America will not likely return to prior levels as a result of the recent declines in oil prices and associated reduction in drilling for and production of oil. RESULTS OF OPERATIONS Revenue by Operating Segment:
Year Ended February 28, ------------------------------- 1999 1998 -------------- -------------- REVENUES Drilling products segment $1,451,519 $2,700,245 Production equipment segment 342,190 481,423 ---------- ---------- Consolidated Revenues $1,793,709 $3,181,668 ========== ==========
Consolidated revenues were down 44% for the year ended February 28, 1999, as compared to the same period in 1998. Revenues from the drilling products segment decreased 46% as compared to the same period in 1998. The North American rig counts are at historical or near historical lows due to recent declines in oil prices. Our operations were materially affected by the decline in the rig count during 1998 and 1999. This reduction in exploration activity has reduced the demand for the Company's drilling products and services. Revenues from the production equipment segment were down 29% for the year as compared to the same period in 1998. The Company's production equipment revenue was severely affected by the recent declines in oil prices. These declines were particularly felt in our North American and South American operations where historically our customers are located. In addition, the Company's lack of sufficient working capital for inventory requirements and marketing hindered the sales effort. The Company's ability to benefit from the increased acceptance of its technologies will depend on its ability to maintain adequate working capital. Costs and Expenses Consolidated gross margins increased from 23% in 1998 to 36% in 1999. However, in the fourth quarter of 1998, the Company wrote-down the cost of a portion of its Petrovalve inventory due to the redesign and improvement of its Petrovalve technology. The Company incurred a charge of $604,765, which was included in the Company's consolidated cost of goods sold in 1998. Excluding the write-down of Petrovalve inventory during 1998, the Company's consolidated gross margins decreased from 42% in 1998 to 36% in 1999. The overall decline in gross margin percentages is attributed to pricing pressures, primarily in the Company's drilling products and freight 8 charges that were written-off in the Company's drilling products segment as a result of the termination of its exclusive distribution agreement with Downhole Products Plc., the Company's supplier of its Spir-O-Lizer line of products. As stated in the distribution agreement, Downhole Products Plc. was required to repurchase the Company's entire Spir-O-Lizer inventory at the original invoice price, excluding all transportation costs incurred by the Company for transporting the inventory from Scotland to its Houston facility. As a result of the termination of the distribution agreement, $98,170 in freight costs were charged against cost of sales during the quarter. In addition, reduced exploration activity due to the recent declines in oil prices has reduced the demand for the products and services provided by us serving the drilling markets. Accordingly, the Company has had to reduce the selling prices on its drilling products. Despite this pricing pressure, the Company expects that the combination of changes in product mix, continued improvements in asset management, reductions in the cost of certain inventory items, and higher margins on new products will allow Flotek to maintain relatively stable gross margin levels in fiscal year 2000. Selling expenses, which consist primarily of the salaries, wages, and benefits of the Company's salesmen, rent, insurance, and other direct selling costs, were down 34%, as compared to the same period in 1998. This decrease was primarily attributed to an overall reduction in the Company's workforce in response to the reduction in exploration activity as a result of the recent decline in oil prices. This reduction in exploration activity has reduced the demand for the Company's drilling products and services. General and administrative expenses were down 47% as compared to the same period in 1998. This decrease was primarily attributed to an overall reduction in the Company's workforce in response to the reduction in exploration activity as a result of the recent decline in oil prices. The Company anticipates that in fiscal year 2000, general and administrative expense will decrease in absolute dollars due to an expected full years benefit of the Company's current cost reduction programs. Non-recurring Charges 1999 In the second quarter of fiscal year 1999, the Company incurred a non- recurring charge related to freight that was written-off in the Company's drilling products segment as a result of the termination of its exclusive distribution agreement with Downhole Products Plc., the Company's supplier of it's Spir-O-Lizer line of products. As stated in the distribution agreement, Downhole Products Plc. was required to repurchase the Company's entire Spir-O- Lizer inventory at the original invoice price, excluding all transportation costs incurred by the Company for transporting the inventory from Scotland to its Houston facility. As a result of the termination of the distribution agreement, $98,170 in freight costs were charged against cost of sales during the quarter. In the second quarter of fiscal year 1999, the Company made a severance provision of $80,635 for the departure of William G. Jayroe, the Company's former President and Chief Executive Officer. During the fourth quarter of fiscal year 1999, 9 William G. Jayroe filed a request for arbitration of his dispute with the company relating to his employment agreement. General counsel is handling the arbitration. General counsel believes any outcome from arbitration will not have a material effect on the financial condition and operations of the Company, and that the provision that the Company has accrued will adequately cover any outcome from the arbitration proceeding. 1998 In the fourth quarter of fiscal year 1998, the Company decided to write- down the cost of a portion of its Petrovalve inventory due to the redesign and improvement of its Petrovalve technology. The majority of the Petrovalve inventory consisted of components to be utilized in the old design of the Petrovalve. The inventory components that could not be utilized in the newly redesigned valve were written down in the fourth quarter of fiscal year 1998. In connection with this decision, the Company incurred a charge of $604,765, which was included in the Company's consolidated cost of goods sold. Effective March 8, 1994, the Company acquired 100% of the outstanding common shares of Turbeco. The Turbeco purchase agreement contained a repurchase option, which could be triggered upon the occurrence of certain events. During fiscal year 1998, the Company reached an agreement to purchase the repurchase option for 2,500,000 shares of the Company's common stock and has accrued $264,085 at February 28, 1998, which was included in general and administrative expense. In the fourth quarter of fiscal year 1998, the Company adopted a plan to close its Edmonton facility. The Company incurred a charge of approximately $73,000 with this closure. Interest Expense Interest expense for 1999 was $134,819 compared to $123,562 for 1998, an increase of 9%. The increase in interest expense in 1999, as compared to 1998, is a result of an overall increase in the Company's indebtedness in 1999. NEW ACCOUNTING PRONOUNCEMENTS In 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings per Share, which replaces primary earnings per share with basic earnings per share and requires dual presentation of basic and diluted earnings per share. The Company adopted SFAS No. 128 in the fourth quarter of fiscal year 1998. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting of comprehensive income and its components in a full set of general-purpose financial statements and are effective for years beginning after December 15, 1997. The Company adopted SFAS No. 130 in the fourth quarter of fiscal year 1999. 10 In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131, effective for years beginning after December 15, 1997, requires segment information to be reported on a basis consistent with that used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company adopted SFAS No. 131 in fiscal year 1998. CAPITAL RESOURCES AND LIQUIDITY The Company has financed its operations to date from stock offerings, subordinated borrowings and internally generated funds. The principal use of its cash has been to fund the working capital needs of the Company. Operating Activities Substantially all of the Company's customers are engaged in the energy industry. This concentration of customers may impact the Company's overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. The Company performs ongoing credit evaluations of its customers and does not generally require collateral in support of its trade receivables. The Company maintains reserves for potential credit losses, and actual losses have historically been within the Company's expectations. The Company's cash and cash equivalents decreased to $50,492 at February 28, 1999, from $634,511 at February 28, 1998, primarily due to working capital needs. Overall, cash flows used in operating activities decreased from $1,098,712 to $690,804. Accounts receivable decreased to $138,357 at February 28, 1999, from $427,466 at February 28, 1998, primarily as a result of improved asset management and an overall reduction in sales. Inventory levels decreased to $785,639 at February 28, 1999, from $1,181,104 at February 28, 1998, primarily as a result of the Company's decision to terminate the exclusive distribution agreement with Downhole Products Plc. As stated in the distribution agreement, Downhole Products Plc. was required to repurchase the Company's entire Spir-O-Lizer inventory at the original invoice price, excluding all transportation costs incurred by the Company for transporting the inventory from Scotland to it's Houston facility. As a result of the termination of this distribution agreement, approximately $327,000 of Spir-O-Lizer inventory was returned. The Company expects to fund liquidity needs from a combination of available cash balances, internally generated funds and future financing arrangements. Investing Activities The Company does not intend to make any material capital expenditures during the upcoming fiscal year. However, any capital expenditures that are made will be funded with available cash, cash flow from operations, or future financing arrangements. 11 Financing Activities Cash flows from financing activities decreased from $1,671,204 in fiscal year 1998 to $118,190 in fiscal year 1999. This decrease is primarily attributed to the private placement of $1,250,000 and the $750,000 convertible loan that were closed in fiscal year 1998. At February 28, 1999, the Company had a working capital deficit of $438,797 and cash of $50,492, as compared to positive working capital of $427,621 and cash of $634,511 at February 28, 1998. The overall decrease in the Company's working capital during the current fiscal year is attributed to an overall decrease in cash, accounts receivable and inventory and an increase in short-term debt. The Company has sustained substantial operating losses in recent years. In addition, the Company has used substantial amounts of working capital in its operations. Further, the company has a debt payment of $750,000 due in July 1999. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. Management is taking the following steps to provide the Company with adequate working capital: . Management continues to reduce selling, general and administrative expenses. . Management is adding complementary product lines to help diversify the Company's product mix, without increasing supporting expenditures. . Management intends to secure new long-term equity financing for working capital purposes. . Management intends to convert the existing $900,000 debt obligation to equity. . Management plans to seek potential acquisition candidates that will be accretive to earnings and diversify the Company's market. Risk Factors The following risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected: . The Company's ability to raise additional working capital could be limited due to future operating losses and the existing level of short-term debt. Without the ability to raise operating capital, there would be substantial doubt about the Company's ability to continue as a going concern. . Competitive factors including, but not limited to, the Company's limitations with respect to financial resources and its ability to compete against companies with substantially greater resources. 12 . The Company's ability to control the amount of operating expenses. . A continuation of the rig count at its current level for a prolonged period of time will adversely affect the Company's results of operations as demand for oil related products and services would continue to fall because of the uncertainty relating to the future. In addition, any further declines in the current worldwide rig count or drilling activity will further reduce the demand for our drilling products and services and will have a material adverse effect on the Company's financial condition and results of operations. . In managing inventory requirements, the Company must forecast customer demand for our products. Should the Company underestimate the supplies needed to meet demand, it could be unable to meet customer demand. Should the Company overestimate the supplies needed to meet customer demand, its working capital could be adversely affected. If the Company is unable to manage purchases and utilization of its inventory to maintain low inventory levels immediately prior to major price declines, the Company could be unable to take immediate advantage of such declines to lower product costs, which could adversely affect its sales and gross margins. . The Year 2000 issue (i.e., the ability of computer systems to accurately identify and process dates beginning with year 2000 and beyond) affects virtually all companies and organizations. Recognizing the need to limit problems associated with year 2000 software failures; the Company has developed a plan to address this potential exposure. Key financial information and operational systems are being assessed and detailed plans have been developed. The Company is also communicating with its suppliers to determine their plans to limit problems associated with the year 2000 issue. Despite these efforts, the year 2000 issue is complex and may present unforeseen problems in the Company's systems and from third parties with which the Company deals, such as third party payers. 13 ITEM 7. FINANCIAL STATEMENTS. The following documents are filed as a part of this report: Page ---- Report of Independent Public Accountants 15 Consolidated Financial Statements: Consolidated Balance Sheets 17 Consolidated Statements of Operations and Comprehensive Loss 18 Consolidated Statement of Stockholder's (Deficit) Equity 19 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 21 14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Flotek Industries Inc. and Subsidiaries We have audited the consolidated balance sheets of Flotek Industries Inc. and Subsidiaries as of February 28, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Flotek Industries Inc. and Subsidiaries as of February 28, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has experienced recurring operating losses. This factor and others discussed in Note B, raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Grant Thornton LLP Houston, Texas April 24, 1998 15 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FLOTEK INDUSTRIES INC. AND SUBSIDIARIES FEBRUARY 28, 1999 AND 1998 16 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- Board of Directors and Stockholders Flotek Industries Inc. and Subsidiaries We have audited the consolidated balance sheets of Flotek Industries Inc. and Subsidiaries as of February 28, 1999 and 1998, and the related consolidated statements of operations and comprehensive loss, stockholders' (deficit) equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Flotek Industries Inc. and Subsidiaries as of February 28, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with generally accepted accounting principles. 15 The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has experienced recurring operating losses resulting in a stockholders' deficit at February 28, 1999. These factors, and others discussed in Note B, raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Houston, Texas April 30, 1999 18 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS February 28,
ASSETS 1999 1998 ------------ ------------ CURRENT ASSETS Cash $ 50,492 $ 634,511 Accounts receivable, less allowance for doubtful accounts of $54,431 and $25,569 138,357 427,466 Inventory 785,639 1,181,104 ------------ ------------ Total current assets 974,488 2,243,081 FURNITURE AND EQUIPMENT 117,863 186,611 OTHER ASSETS 137,186 144,370 ------------ ------------ $ 1,229,537 $ 2,574,062 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 30,000 $ 40,000 Current portion of long-term debt 930,012 771,719 Accounts payable and accrued liabilities 432,273 739,656 Accrued repurchase option - 264,085 Due to related party 21,000 - ------------ ------------ Total current liabilities 1,413,285 1,815,460 LONG-TERM DEBT 10,061 19,338 COMMITMENTS - - SHAREHOLDERS' (DEFICIT) EQUITY Common stock no par value; 100,000,000 shares authorized; 45,680,795 and 43,180,795 issued and outstanding in 1999 and 1998 18,134,295 17,870,210 Additional paid in capital 163,813 149,113 Accumulated other comprehensive income (284,086) (285,636) Accumulated deficit (18,207,831) (16,994,423) ------------ ------------ (193,809) 739,264 ------------ ------------ $ 1,229,537 $ 2,574,062 ============ ============
The accompanying notes are an integral part of these statements. 19 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Years ended February 28,
1999 1998 ----------- ----------- Sales $ 1,793,709 $ 3,181,668 Costs and expenses: Cost of goods sold 1,149,343 2,438,720 Selling 1,015,172 1,530,574 General and administrative 735,065 1,393,903 Depreciation and amortization 62,246 93,103 Research and development - 4,158 ----------- ----------- 2,961,826 5,460,458 ----------- ----------- Loss from operations 1,168,117 2,278,790 Other expense (income), net Interest 134,819 123,562 Other (89,528) 30,452 ----------- ----------- 45,291 154,014 ----------- ----------- Net loss 1,213,408 2,432,804 Other comprehensive income, net of tax Foreign currency translation 1,550 (8,661) ----------- ----------- Comprehensive loss $ 1,211,858 $ 2,441,465 =========== =========== Basic and diluted net loss per share $ .03 $ .08 =========== =========== Weighted average number of shares outstanding 44,420,521 31,150,755 =========== ===========
The accompanying notes are an integral part of these statements. 20 Flotek Industries Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY Years ended February 28,
Accumulated Total Common stock Additional other stockholders' -------------------------- paid-in Accumulated comprehensive (deficit) Shares Amount capital deficit income equity ---------- ----------- ----------- ------------ --------- ----------- Balance at March 1, 1997 25,744,797 $16,171,467 $ - $(14,561,619) $(276,975) $ 1,332,873 Issuance of common stock on private placement 12,708,333 1,182,608 - - - 1,182,608 Settlement of liabilities through issuance of common stock 4,727,665 516,135 - - - 516,135 Issuance of stock options to non-employees - - 60,592 - - 60,592 Issuance of detachable stock warrants - - 88,521 - - 88,521 Equity adjustment from foreign currency translation - - - - (8,661) (8,661) Net loss - - - (2,432,804) - (2,432,804) ---------- ----------- ----------- ----------- --------- ----------- Balance at February 28, 1998 43,180,795 17,870,210 149,113 (16,994,423) (285,636) 739,264 Issuance of common stock for Turbeco, Inc. repurchase option 2,500,000 264,085 - - - 264,085 Issuance of stock options to non-employees - - 1,200 - - 1,200 Issuance of detachable stock warrants - - 13,500 - - 13,500 Equity adjustment from foreign currency translation - - - - 1,550 1,550 Net loss - - - (1,213,408) - (1,213,408) ---------- ----------- ----------- ------------ --------- ----------- Balance at February 28, 1999 45,680,795 $18,134,295 $ 163,813 $(18,207,831) $(284,086) $ (193,809) ========== =========== =========== ============ ========= ===========
The accompanying notes are an integral part of this statement. 21 Flotek Industries Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended February 28,
1999 1998 ----------- ----------- Cash flows from operating activities Net loss for the year $(1,213,408) $(2,432,804) Adjustments to reconcile net losses to net cash used in operating activities Depreciation and amortization 62,246 93,103 Bad debt expense 31,292 102,683 Accretion of discount 55,326 17,034 Accrued repurchase option - 264,085 Compensatory stock options 1,200 60,592 Write-off and reserve of inventory and other 50,000 604,765 Loss on disposal of furniture and equipment 26,641 50,604 Change in assets and liabilities Decrease in accounts receivable 257,817 277,785 Decrease (increase) in inventory 345,465 (461,569) (Decrease) increase in accounts payable and accrued liabilities (307,383) 325,010 ----------- ----------- Net cash used in operating activities (690,804) (1,098,712) Cash flows from investing activities Purchase of furniture and equipment (24,955) (18,960) Purchase of other assets - (2,001) Proceeds from sale of furniture and equipment 12,000 - ----------- ----------- Net cash used by investing activities (12,955) (20,961) Cash flows from financing activities Issuance of common stock, net of costs - 1,182,608 Proceeds from long-term debt, notes payable and due to related parties 205,901 1,144,473 Repayment of long-term debt, notes payable and due to related parties (87,711) (655,877) ----------- ----------- Net cash provided by financing activities 118,190 1,671,204 Effect of exchange rates on cash 1,550 (8,661) ----------- ----------- Net (decrease) increase in cash (584,019) 542,870 Cash at beginning of year 634,511 91,641 ----------- ----------- Cash at end of year $ 50,492 $ 634,511 =========== =========== Supplementary information Interest paid $ 94,304 $ 91,265 Income taxes paid - - Non cash activities Issuance of detachable stock warrants 13,500 88,521 Issuance of stock for Turbeco, Inc. repurchase option 264,085 -
The accompanying notes are an integral part of these statements. 22 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS February 28, 1999 and 1998 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Flotek Industries, Inc. was originally incorporated under the laws of the Province of British Columbia on May 17, 1985. Effective September 7, 1995, the Company transferred its corporate status under the law of continuance to the laws of the Province of Alberta. Flotek Industries, Inc. and its subsidiaries, collectively referred to as the Company, consist of two divisions which provide proprietary and patented products and services used in the drilling and production of oil and gas wells. One of the Company's divisions carries on the business of developing, manufacturing and marketing the Petrovalve + Plus(R) Pump Valve and the Petrovalve Gas Breaker Valve, which are valves for downhole sucker-rod pumps used in oil wells. The other division manufacturers and distributes centralizers, which are a spiraled vane cementing sleeve and stand off tool that improves mud and cementation displacement in drilled oil wells. The Company sells its products primarily to companies in the oil and gas industry in North America. 1. PRINCIPLES OF CONSOLIDATION --------------------------- These consolidated financial statements include the accounts of Flotek Industries, Inc. and, its direct and indirect wholly-owned subsidiaries Petrovalve International Inc. ("Petrovalve"), USA Petrovalve, Inc., Turbeco, Inc., Petrovalve International (Barbados) Inc. and Petrovalve Canada Limited. All material intercompany transactions have been eliminated. 2. CASH EQUIVALENTS ---------------- The Company considers all highly liquid debt instruments with a maturity at the date of purchase of three months or less to be cash equivalents. 3. REVENUE RECOGNITION ------------------- The Company recognizes revenue when products have been delivered and all significant risks and rewards of ownership have passed to customers. Funds received on deposit in advance of delivery are deferred until the ultimate transfer of ownership. 4. INVENTORY --------- Inventory, which primarily comprises finished goods, is stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. Included in cost of goods sold for the year ended February 28, 1999, is a $50,000 reserve for slow-moving inventory. Included in cost of goods sold for the year ended February 28, 1998, is a $604,765 write-down of petrovalve components to its net realizable value. 23 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 5. FURNITURE AND EQUIPMENT ----------------------- Furniture and equipment is recorded at cost and depreciated using the following annual rates: Automotive equipment 30% declining balance Computer equipment 30% declining balance Furniture and equipment 20% declining balance Moulds straight-line over seven years 6. INCOME TAXES ------------ The Company's policy is to include in income tax expense all United States, foreign and state income taxes, including federal income taxes that would become due if all undistributed earnings of foreign subsidiaries were repatriated. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 7. FOREIGN CURRENCY TRANSLATION ---------------------------- The assets and liabilities denominated in foreign currency are translated into U.S. dollars at the current rate of exchange existing at period end and revenues and expenses are translated at average monthly exchange rates. Related translation adjustments are reported as a separate component of stockholders' equity, whereas, gains or losses resulting from foreign currency transactions are included in results of operations. 8. LOSS PER SHARE -------------- Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding. Dilutive loss per share is calculated by dividing net loss by the weighted average number of common shares and dilutive potential common shares outstanding. Diluted loss per share has not been presented as the effect of the outstanding share purchase warrants, options and convertible debt is anti-dilutive. 24 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued February 28, 1999 and 1998 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 9. STOCK-BASED COMPENSATION ------------------------ The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic method, as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock, and is recognized over the related vesting period. The Company provides supplemental disclosure of the effect on net income and earnings per share as if the provisions of SFAS No. 123, Accounting for Stock-Based Compensation had been applied in measuring compensation expense. 10. LONG-LIVED ASSETS ----------------- The Company reviews the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying value amount. The Company has not identified any such impairment losses. 11. SEGMENT INFORMATION ------------------- The FASB issued Statement of Financial Accounting Standards No. 131, Disclosure about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 establishes standards for the way public enterprises are to report information about operating segments in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic area, and major customers. 12. COMPREHENSIVE INCOME -------------------- Effective March 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which requires an entity to report and display comprehensive income and its components. Comprehensive income includes net earnings plus other comprehensive income. The Company's other comprehensive income consists of foreign currency translation adjustments. 25 Flotek Industries Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued February 28, 1999 and 1998 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 13. USE OF ESTIMATES IN FINANCIAL STATEMENTS ---------------------------------------- In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. 14. RECLASSIFICATIONS ----------------- Certain of the 1998 amounts have been reclassified to conform to the 1999 presentation. NOTE B - GOING CONCERN The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. However, the Company has sustained substantial operating losses in recent years resulting in a stockholders' deficit at February 28, 1999. In addition, the Company has used substantial amounts of working capital in its operations. Further, the Company has current maturities of debt totaling $930,012. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. Management has taken the following steps to revise its operating and financial requirements which it believes are sufficient to provide the Company with adequate working capital: . Management continues to reduce selling, general and administrative expenses to acceptable levels. . Management is adding complementary product lines to help diversify the Company's product mix, without increasing supporting expenditures. . Management intends on securing new long-term equity financing for working capital purposes. . Management intends to convert the existing $900,000 in debt obligations to equity. . Management plans to seek potential acquisition candidates that will be accretive to earnings and diversify the Company's market. 26 Flotek Industries Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE C - FURNITURE AND EQUIPMENT As at February 28, furniture and equipment comprised the following:
1999 1998 -------- -------- Automotive equipment $111,229 $224,115 Computer equipment 66,104 73,244 Furniture and equipment 106,723 112,517 Moulds 64,329 64,329 -------- -------- 348,385 474,205 Accumulated depreciation and amortization 230,522 287,594 -------- -------- $117,863 $186,611 ======== ========
NOTE D - OTHER ASSETS Included in other assets are patents which are amortized over the life of the patent. Petrovalve received a United States patent on the design of its Petrovalve Plus valve on June 2, 1992 and on the Petrovalve Gas Breaker valve on October 5, 1993. In addition, filings were made in the United States to protect improvements to the core technology. Original filings were also made in Canada, Venezuela and Mexico. Also included in other assets is goodwill of $82,181 and $84,535 net of accumulated amortization of $11,985 and $9,631 in 1999 and 1998. Goodwill, which represents the excess of the cost of the purchased company over the fair value on the company's net assets at the date of acquisition, is being amortized on the straight-line method over 40 years. NOTE E - NOTES PAYABLE During the year ended February 28, 1998, the Company entered into and paid in full two notes payable totaling $308,000. At February 28, 1998, the note payable in the original amount of $50,000 is due to an individual with interest at 10%, due in 5 monthly installments of $10,000 and accrued interest due as the sixth monthly installment. The individual also received 10,000 shares of stock and 10,000 warrants at $0.60 (Canadian), which expire in March 1999. The Company believes it has reached a verbal renegotiation of the terms of the note to address the outstanding principal balance due of $30,000. 27 Flotek Industries Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE F - LONG-TERM DEBT
1999 1998 ---------- ---------- Convertible debt with interest at 10%, principal and interest due in August 1999, net of unamortized discount of $13,500 attributable to 2,500,000 detachable stock warrants at $.06 expiring August 1999; secured by an equal senior exclusive lien on all of the assets of the Company with the holder of the $750,000 convertible debt; the debt is convertible at the discretion of the lender until maturity into 2,500,000 shares of common stock. Additionally, the holder has a right to purchase $350,000 of common stock at $.06 per share. If such right is exercised, 5,833,333 additional warrants will be issued at $.06 per share. $ 136,500 $ - Convertible debt with interest at 10%, payable quarterly with the balance due in July 1999, net of unamortized discount of $55,326 in 1998 attributable to 7,000,000 detachable stock warrants at $.15 (Canadian) expiring July 1999, secured by an equal senior exclusive lien on all of the assets of the Company with the holder of the $150,000 convertible debt; the debt is convertible at the discretion of the lender until maturity into 7,000,000 shares of common stock; the agreement prohibits the Company from declaring or paying any dividends. 750,000 694,674 Government of Canada, Department of Western Economic Diversification; interest at 6.5% payable in monthly installments of $2,535; balance due on November 15, 1998. The Company restructured the payment terms during the year ended February 28, 1999 and retired the note subsequent to year end. 12,683 27,890 Other notes payable collateralized by automobiles payable in aggregate monthly installments of approximately $1,100, including interest ranging from 4.9% to 10.5%, maturing at various dates through May 2002. 28,975 27,598 Obligations under capital leases 11,915 40,895 -------- -------- 940,073 791,057 Less current portion 930,012 771,719 -------- -------- $ 10,061 $ 19,338 ======== ========
28 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE F - LONG-TERM DEBT - CONTINUED Long-term debt is due as follows: 2000 $930,012 2001 8,901 2002 1,160 NOTE G - DUE TO RELATED PARTY Due to related party at February 28, 1999 represents two notes payable due to a company controlled by a director of the Company. The notes bear interest at 9% and are due upon demand. NOTE H - WARRANTS At February 28, 1999, the following share purchase warrants were outstanding:
Conversion prices Number per share Expiration dates ------ ------------------- -------------------- 12,500 C $0.60 March 18, 1999 11,666,667 C $0.15/$0.17 September 14, 1999 7,000,000 C $0.15 February 1, 2004 2,500,000 US $0.06 February 1, 2004 ---------- 21,179,167 ==========
C$ = Canadian dollars US$ = United States dollars In February 1999, the Company issued in connection with the $150,000 convertible debt 2,500,000 warrants at $0.06 that expire in February 2004. 29 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE H - WARRANTS - CONTINUED At February 28, 1998, the following share purchase warrants, issued in connection with private placements, were outstanding:
Conversion prices per share (in Number Canadian dollars) Expiration dates - ---------- ---------------------- ------------------------ 12,500 $ 0.60 March 18, 1999 11,666,667 $0.15/$0.17 September 14, 1999 1,199,000 $ 0.83 April 18, 1998 2,062,500 $ 0.60 October 16, 1998 7,000,000 $ 0.15 October 16, 1998 - ----------- 21,940,667 ===========
In March 1997, the Company issued 12,500 warrants in connection with two notes payable at $0.60 (Canadian) that expire March 1999. In September 1997, the Company issued 11,666,667 warrants in connection with private placements at $0.15 (Canadian) for the first year and $0.17 (Canadian) thereafter expiring September 1999. In October 1997, the Company issued in connection with the $750,000 convertible debt 7,000,000 warrants at $0.15 (Canadian) that originally expired in October 1998 but was extended to February 2004 by the Company. Warrants are issued at prices based on the market value of the shares at the date of issuance of the warrants. NOTE I - STOCK OPTIONS During the year ended February 28, 1998, all outstanding options were cancelled and replaced by an incentive stock option plan. Under the plan, the Company may grant options for up to 3,945,000 shares of common stock. The exercise price of each option is equal to the market price of the Company's stock on the date of grant. The term of the options is five years, and they are 100% vested on the grant date. The shares are restricted, as they have not been registered with the United States Securities and Exchange Commission. 30 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE I - STOCK OPTIONS - CONTINUED Compensation cost charged to operations for options granted to non-employees was $1,200 and $60,592 for the years ended February 28, 1999 and 1998. Had compensation cost been determined on the basis of fair value pursuant to FASB Statement No. 123, stock-based compensation costs for options granted to employees would have increased loss for the year by approximately $15,000 and $93,000 in 1999 and 1998. Basic and diluted loss per share would have been $.03 and $.08 per share in 1999 and 1998. The pro forma disclosures only include the effects of options granted since March 1, 1995. Director and employee share purchase options are granted at prices based upon Board approval, but not less than the market value of the share at the date of grant. During the year ended February 28, 1997, all outstanding options were repriced to $0.50 (Canadian) per share and the expiration dates were extended to January 7, 2002. At February 28, 1998, 3,945,000 director and employee share purchase options were outstanding. In August 1998, 700,000 options were granted to a director. The options expire in August 2003 and vest over 3 years. In February 1999, the Company issued in connection with the $150,000 convertible debt 350,000 options at $0.06 that expire February 2004. The fair value of options at the date of grant was estimated using the Black- Scholes option pricing model with the following weighted-average assumptions: 1999 1998 -------- ---------- Expected life 2 years 1.6 years Interest rate 5.1% 5.8% Volatility 130% 80% Dividend yield 0% 0% 31 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE I - STOCK OPTIONS - CONTINUED A summary of the status of the stock option plan follows:
1999 ---- Exercise Price Range Weighted Average Options Per Share Exercise Price ------------------- ------------------------------ -------------------------- Outstanding at beginning of year 3,945,000 C $0.17 C $0.17 Granted (in Canadian dollars) 800,000 C $0.15 C $0.15 Granted (in U.S. dollars) 350,000 US $0.06 US $0.06 Exercised - - - Expired 1,710,000 C $0.17 C $0.17 --------- Outstanding at end of year (in Canadian dollars) 3,035,000 C $0.15 - C $0.17 C $0.16 ========= Outstanding at end of year (in U.S. dollars) 350,000 US $0.06 US $0.06 ========= Exercisable (in Canadian dollars) 2,451,667 C $0.15 - C $0.17 C $0.17 Exercisable (in U.S. dollars) 350,000 US $0.06 US $0.06 --------- 3,801,667 ========= C$ = Canadian dollars US$ = United States dollars 1998 ---- Exercise Price Range Per Weighted Average Share Exercise Price Options (in Canadian dollars) (in Canadian dollars) -------------------- --------------------------- -------------------------- Outstanding at beginning of year 2,480,000 $0.50 $0.50 Cancelled (2,480,000) $0.50 $0.50 Granted 3,945,000 $0.17 $0.17 Exercised - - - Expired - - - ---------- Outstanding at end of year 3,945,000 $0.17 $0.17 ========== Exercisable 3,945,000 $0.17 $0.17
32 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE I - STOCK OPTIONS - CONTINUED Following is a summary of the options outstanding at February 28, 1999:
Outstanding ------------------------------------------------------------------------------ Weighted Average Exercisable Exercise Price Number Remaining Contractual Life Number - ------------------------- ------------------ --------------------------------- --------------------- US $0.06 350,000 0.5 years 350,000 C $0.15 800,000 4.5 years 216,667 C $0.17 2,235,000 2.8 years 2,235,000 --------- --------- 3,385,000 3,801,667 ========= =========
NOTE J - RELATED PARTY TRANSACTIONS In November 1997, $257,768 due to a company controlled by a director of the Company including accrued interest of $15,356 and $20,000 of costs paid on behalf of the Company by a director were converted into 2,405,832 shares of common stock. The Company had an agreement with a corporation whose president is a director of the Company. The agreement calls for the promotion of Turbeco sales in exchange for $12,500 a month through December 1998. During the year ended February 28, 1999 the agreement was amended to a commission of 25% of all sales made by the corporation. The Company incurred charges of $81,247 during the year ended February 28, 1999. The Company incurred charges of $196,472 of which $101,500 was settled in exchange for 1,531,419 shares of common stock during the year ended February 28, 1998. In September 1997, the Company entered into a three year employment agreement with the president of the Company. The agreement called for a base salary of $150,000 per year and bonuses up to $150,000 based upon the net income of the Company. The agreement also provided for the issuance of up to 600,000 options based upon the net income of the Company or at the compensation committee's discretion. The options, if granted, vested at a rate of 4.17% per month and had a maximum term of the earlier of five years or his last day of employment. During the year ended February 1999, the president left the Company and no options were granted under the agreement. The Company has accrued its estimate of potential liability and are in negotiations to terminate the agreement through arbitration. 33 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE K - INCOME TAXES The temporary differences giving rise to the deferred tax asset consist primarily of depreciation differences and the tax operating loss carryforwards. Valuation allowances are required to reduce deferred tax assets when realization is not more likely than not. As a result of the Company's previous operating losses, a valuation allowance of $1,863,000 and $1,467,000 as of February 28, 1999 and 1998 was recorded for deferred tax assets that were not offset by scheduled future reversals of deferred tax liabilities. For U.S. Federal tax purposes, the Company has net operating loss carryforwards of approximately $4,818,000 and $3,822,000 as of February 28, 1999 and 1998 that expire between the years 2009 and 2019. The Company's effective income tax rate differed from the Federal statutory rate primarily due to meals and entertainment, foreign and state income taxes and the valuation allowance against deferred tax assets. NOTE L - COMMITMENTS Effective March 8, 1994, Petrovalve acquired 100% of the outstanding common shares of Turbeco. The purchase agreement contains a repurchase option which could be triggered upon the occurrence of certain events. Management reached an agreement to purchase the aforementioned repurchase option for 2,500,000 shares of common stock at $0.15 (Canadian), and accrued $264,085 at February 28, 1998, which was included in general and administrative expense in the accompanying consolidated statements of operations. In September 1998, the 2,500,000 shares of common stock were issued. Petrovalve was engaged in ongoing research in conjunction with the Alberta Research Council ("ARC"). On April 1, 1991, Petrovalve, entered into a two year joint venture agreement with the ARC which provided for a total budget of $847,000 (Canadian) for research and development of the Petrovalve Plus. The joint venture agreement was extended until December 31, 1994, with an additional budget of $400,000 (Canadian), to be jointly provided as per the terms of the original agreement. The extension was subject to a payback clause, whereby if Petrovalve moved its sales and distribution offices outside Alberta or if Petrovalve is sold, two times the total investment of the ARC in the project, equal to $1,247,000 (Canadian), must be paid back to the ARC, by way of monthly payments equal to 2% of all proceeds received by Petrovalve in the immediately proceeding month on sales of the Petrovalve Plus until the amount is fully paid. No amount has been accrued in the accompanying consolidated financial statements as the Company believes no liability triggering event has occurred since inception of this research agreement. 34 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued February 28, 1999 and 1998 NOTE L - COMMITMENT - CONTINUED The Company has entered into operating lease arrangements that expire at various dates through 2002. Rent expense for the years ended February 28, 1999 and 1998 was $96,049 and $116,200. Minimum lease payments for the next five years are approximately as follows: 2000 $103,000 2001 28,000 2002 7,000
NOTE M - SEGMENT INFORMATION The Company has two reportable segments: drilling products and production equipment. The drilling products segment manufactures and distributes centralizers, which are a spiraled vane cementing sleeve and stand off tool that improves mud and cementation displacement in drilled oil wells. The production equipment segment carries on the business of developing, manufacturing and marketing valves for downhole sucker-rod pumps used in oil wells. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations not including nonrecurring gains and losses and foreign exchange gains and losses. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The Company operates primarily in the United States and Canada. As of February 28, 1999 and 1998, and for each of the years then ended, the Company has operated in two industry segments, drilling products and production equipment, for which revenues, depreciation expense, operating loss, interest expense, net loss, and total assets are as follows: For fiscal year ended February 28, 1999:
Drilling Production Products Equipment Other Total ----------------- ------------------ ----------------- ---------------- Revenues $1,451,519 $342,190 $ - $1,793,709 Depreciation and amortiza- tion expense 15,640 33,733 12,873 62,246 Operating loss 331,123 298,007 538,987 1,168,117 Interest expense 2,453 4,207 128,159 134,819 Assets 705,912 432,229 91,396 1,229,537
35 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE M - SEGMENT INFORMATION - CONTINUED For fiscal year ended February 28, 1998:
Drilling Production Products Equipment Other Total ----------------- ------------------- ----------------- ---------------- Revenues $2,700,245 $ 481,423 $ - $3,181,668 Depreciation and amortiza- tion expense 22,043 58,366 12,694 93,103 Operating loss 92,614 1,145,100 1,041,076 2,278,790 Interest expense 7,171 9,309 107,082 123,562 Assets 1,357,076 528,680 688,306 2,574,062
Information on the Company's geographic segments, based on the locations of the Company's operations, are as follows: For fiscal year ended February 28, 1999:
Canada U.S. Total ------------------ ------------------ ---------------- Revenues $ 77,756 $1,715,953 $1,793,709 Operating (income) loss (27,339) 1,195,456 1,168,117 Assets 119,574 1,109,963 1,229,537
For fiscal year ended February 28, 1998:
Canada U.S. Other Total ----------------- ------------------ ----------------- ---------------- Revenues $139,610 $3,042,058 $ - $3,181,668 Operating loss 328,468 1,929,037 21,285 2,278,790 Assets 127,343 2,446,719 - 2,574,062
36 FLOTEK INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED February 28, 1999 and 1998 NOTE N - SIGNIFICANT CUSTOMER AND MAJOR SUPPLIERS Sales to a significant customer in the drilling products segment represented 13% and 23% of total sales for the years ended February 28, 1999 and 1998. At February 28, 1998, amounts due from that customer included in receivables were $57,436. Purchases from a principal supplier, which were in excess of 10% of total direct costs for materials during the years ended February 28, 1999 and 1998, were 76% and 35% of total purchases. Purchases from another principal supplier, which were in excess of 10% of total direct costs for materials during the year ended February 28, 1998, were 28% of total purchases. 37 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The report of Grant Thornton LLP dated April 30, 1999 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to audit scope or accounting principles; however, the report included an emphasis of a matter paragraph due to uncertainties resulting from going concern issues. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The Proxy Statement issued in connection with the Annual Meeting of Stockholders to be held on August 5, 1999, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption, "Directors and Executive Officers of the Registrant" information required by Item 9 of Form 10-KSB as to directors and certain executive officers of the Company and is incorporated herein by reference. The Proxy Statement issued in connection with the Annual Meeting of Stockholders to be held on August 5, 1999, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption "Beneficial Ownership Reporting Compliance" information required by Item 9 of Form 10-KSB as compliance with Section 16(a) of the Exchange Act and is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION. The Proxy Statement issued in connection with the Annual Meeting of Stockholders to be held on August 5, 1999, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption, "Executive Compensation" information required by Item 10 of Form 10-KSB as to directors and certain executive officers of the Company and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The Proxy Statement issued in connection with the Annual Meeting of Stockholders to be held on August 5, 1999, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption, "Security Ownership of Certain Beneficial Owners, Directors, and Management" information required by Item 11 of Form 10-KSB as to directors and certain executive officers of the Company and is incorporated herein by reference. 38 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Proxy Statement issued in connection with the Annual Meeting of Stockholders to be held on August 5, 1999, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), contains under the caption, "Certain Relationships and Related Transactions" information required by Item 12 of Form 10-KSB as to directors and certain executive officers of the Company and is incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 3.1 Articles of Incorporation (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 3.2 By-laws (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 3.3 Amendment to Registrant's Bylaws (incorporated by reference to the Company's Form 10-KSB for the year ended February 28, 1998) 4.1 Shareholders Protection Rights Plan (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.1 Distribution Agreement - Downhole Products (UK), LTD (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.2 Wallace Robertson Inc. Consulting Agreement (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.3 Bill Jayroe Employment Agreement (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.4 Convertible Loan Agreement between the Company and TOSI, L.P. dated October 16,1997 (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.5 Form of Warrant Agreement dated October 16, 1997 - Marlin Investors, L.L.C. (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.6 Form of Warrant Agreement dated October 16, 1997 - Charles A. Dickinson (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.7 License Agreement - Harlan King (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.8 Form of Subscription Agreement by and between the Company and certain shareholders, dated September 16, 1997 - Marlin Investors, L.L.C. (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.9 Form of Subscription Agreement by and between the Company and certain shareholders, dated September 16, 1997 - Charles A. Dickinson (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 39 *10.10 Promissory Note between Chisholm Energy Partners, LLC and the Company dated February 24, 1999. 21.1 List of Operating Subsidiaries (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) *27.1 Financial Data Schedule * Filed herewith (b) Reports on Form 8-K During the fiscal quarter ended February 28, 1999, the Registrant filed no reports on Form 8-K. 40 Exhibit Index 3.1 Articles of Incorporation (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 3.2 By-laws (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 3.3 Amendment to Registrant's Bylaws (incorporated by reference to the Company's Form 10-KSB for the year ended February 28, 1998) 4.1 Shareholders Protection Rights Plan (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.1 Distribution Agreement - Downhole Products (UK), LTD (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.2 Wallace Robertson Inc. Consulting Agreement (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.3 Bill Jayroe Employment Agreement (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.4 Convertible Loan Agreement between the Company and TOSI, L.P. dated October 16, 1997 (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.5 Form of Warrant Agreement dated October 16, 1997 - Marlin Investors, L.L.C. (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.6 Form of Warrant Agreement dated October 16, 1997 - Charles A. Dickinson (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.7 License Agreement - Harlan King (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.8 Form of Subscription Agreement by and between the Company and certain shareholders, dated September 16, 1997 - Marlin Investors, L.L.C. (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) 10.9 Form of Subscription Agreement by and between the Company and certain shareholders, dated September 16, 1997 - Charles A. Dickinson (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) *10.10 Promissory Note between Chisholm Energy Partners, LLC and the Company dated February 24, 1999. 21.1 List of Operating Subsidiaries (incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1997) *27.1 Financial Data Schedule * Filed herewith 41 Signatures In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. June 11, 1999 FLOTEK INDUSTRIES INC. (Registrant) By: /s/ Jerry D. Dumas, Sr. ----------------------------------- President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ JERRY D. DUMAS, SR. President, Chief Executive June 11, 1999 - ----------------------- Officer, Director Jerry D. Dumas, Sr. (Principal Executive Officer, Principal Accounting Officer) /s/ GARY M. PITTMAN Director June 11, 1999 - ----------------------- Gary M. Pittman /s/ WILLIAM ZIEGLER Director June 11, 1999 - ----------------------- William Ziegler /s/ JASON EVANS Director June 11, 1999 - ----------------------- Jason Evans /s/ LARRY R. SHABEN Director June 11, 1999 - ----------------------- Larry R. Shaben 42 EX-10.10 2 PROMISSORY NOTE EXHIBIT 10.10 PROMISSORY NOTE $150,000.00 Houston, Texas February 24, 1999 FOR VALUE RECEIVED, ON OR BEFORE ONE HUNDRED EIGHTY (180) DAYS FROM THE DATE HEREOF, the undersigned, FLOTEK INDUSTRIES INC., and Alberta corporation (herein called the "Maker"), promises to pay to the order of CHISHOLM ENERGY PARTNERS, L.L.C., a Texas limited liability company (hereinafter called the "Payee"), at 1160 Dairy Ashford, Suite 125, Houston, Texas 77079, or at such other place as the Payee may designate in writing to the Maker, in lawful money of the United States of America, the principal sum of ONE HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($150,000.00), together with interest thereon from the date hereof until maturity at the rate of ten percent (10%) per annum. The Maker covenants to apply the total amount advanced by the Payee hereunder only in the manner set forth in the Loan Agreement of even date herewith between the Maker and the Payee (the "Loan Agreement"). The Maker understands and acknowledges that the Payee would not be willing to make the loan evidenced hereby but for the Maker's covenant set forth in the immediately- preceding sentence. The outstanding principal amount of this Note shall be convertible into common shares of the Maker in the manner and to the extent set forth in the Loan Agreement. All payments hereunder, whether designated as payments of principal or interest, shall be applied: first to unpaid and accrued interest; then to the discharge of any expenses or damages for which the Payee may be entitled to receive reimbursement under the terms of this Note or under the terms of any document executed in connection herewith; and, lastly, to unpaid principal in the inverse order of maturity. All past due principal and interest on this Note, whether due as the result of acceleration of maturity or otherwise, shall bear interest from the date of the payment thereof shall have become due until the same shall have been fully discharged by payment at the maximum nonusurious rate of interest or, if applicable law does not provide for a maximum nonusurious rate of interest, at a rate per annum equal to eighteen percent (18%). If the Maker shall file a voluntary petition in bankruptcy, or shall be held insolvent, or shall file any petition or answer seeking for itself any arrangement, composition, readjustment, or similar relief under any present of future statute, law or regulation, or shall file any answer admitting the material allegations of a petition filed against the Maker in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee or receiver, on all or any part of the properties of the Maker, or if a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Maker to be bankrupt or insolvent under the federal bankruptcy laws or any applicable law of the United States of America or any state law, or appointing a receiver or trustee or assignee in bankruptcy or insolvency of the Maker or its properties, and such decree or order shall have continued undischarged or unstayed for a period of sixty (60) days, or if the Maker shall make an assignment for the benefit of creditors, or if the Maker shall fail to pay this Note or any installment when due, or if a default shall occur in the performance of any of the covenants or agreements contained herein or any related documents or security instruments, then in any such event --------- Initial Page 1 of a 3 Page $150,000.00 Note the holder of this Note shall have the option to declare this Note due and payable, whereupon the entire unpaid principal balance of this Note and all interest accrued thereon shall thereupon at once mature and become due and payable and shall bear interest from the date of such default or event (whichever occurs first) until paid at the rate for default provided above, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Maker. The time of payment of this Note is also subject to acceleration in the event the Maker defaults or otherwise fails to discharge its obligations under any of the instruments securing payment hereof. All co-signers and endorsers of this Note are to be regarded as principals as to their respective joint and several liability to any legal holder hereof and the Maker, and each of the guarantors, sureties and endorsers, hereby expressly and severally waive grace, and all notices, demands, presentments for payment, notice of nonpayment, protest and notice of protest, notice of intent to accelerate, notice of acceleration of the indebtedness due hereunder, and diligence in collecting this Note or enforcing any security rights of the Payee under any document securing this Note, and agree (i) that the Payee or other legal holder of this Note may, at any time, and from time to time, on request of or by agreement with the Maker, extend the date of maturity of all or any part hereof, without notifying or consulting with any Maker or principal hereof, who shall remain fully obligated for the payment hereof; (ii) that it will not be necessary for the Payee or any holder hereof, in order to enforce payment of this Note, to first institute or exhaust its remedies against the Maker or other party liable therefor or to enforce its rights against any security for this Note; and (iii) to any substitution, exchange or release of any security now or hereafter given for this Note or the release of any party primarily or secondarily liable hereon. In the event of default hereunder or under any of the instruments securing hereof and the placing of this Note in the hands of an attorney for collection (whether or not suit is filed), or if this Note is collected by suit or legal proceedings or through the probate court or bankruptcy proceedings, the Maker agrees to pay the holder hereof the costs and reasonable attorney's fees incurred in the collection hereof. It is the intention of the parties hereto to comply with applicable usury laws (now or hereafter enacted); accordingly, notwithstanding any provision to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents require the payment or permit the collection of interest in excess of the maximum amount permitted by such laws. If any such excess of interest is contracted for, charged, taken, reserved or received under this Note or under the terms of any of the documents securing payment hereof or otherwise relating hereto, or in the event the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or in the event that all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged, taken, reserved or received under this Note or under any of the instruments securing payment hereof or otherwise relating hereto, on the amount of principal actually outstanding from time to time under this Note shall exceed the maximum amount of interest permitted by applicable usury laws, now or hereafter enacted, then in any such event (i) the provisions of this paragraph shall govern and control, (ii) any such excess which may have been collected at final maturity of said indebtedness either shall be applied as a credit against the then unpaid principal amount hereof or refunded to the Maker at the Payee's option, and (iii) upon such final maturity, the effective rate of ---------- Initial Page 2 of a 3 Page $150,000.00 Note interest shall be automatically reduced to the maximum lawful rate allowed under applicable usury laws as now or hereafter construed by the courts having jurisdiction thereof. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, taken, reserved or received under this Note or under such other documents which are made for the purpose of determining whether such rate exceeds the maximum lawful rate, shall be made, to the extent permitted by law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged, taken, reserved or received from the Maker or otherwise by the Payee in connection with such indebtedness. Any check, draft, money order or other instrument given in payment of all or any portion hereof may be accepted by the holder hereof and handled in collection in the customary manner, but the same shall not constitute payment hereunder or diminish any rights of the holder hereof except to the extent that actual cash proceeds of such instrument are unconditionally received by the holder and applied to this indebtedness in the manner elsewhere herein, provided. If is further agreed that the Payee shall have a first lien on all deposits and other sums at any time credited by or due from the Payee to any maker, endorser, surety or guarantor hereof as collateral security for the payment of this Note, and the Payee, at its option, may at any time, without notice and without any liability, hold all or any part of any such deposits or other sums until all sums owing on this Note have been paid in full and/or apply or set off all or any part of any such deposits or other sums credited by or due from the Payee to or against any sums due on this Note in any manner and in any order of preference with the Payee, in its sole discretion, chooses. This Note is secured by a security interest granted in a Security Agreement of even date herewith from the Maker to the Payee. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. FLOTEK INDUSTRIES INC. By /s/ Jerry D. Dumas ----------------------------------- Name Jerry D. Dumas --------------------------------- Title President -------------------------------- Page 3 of a 3 Page $150,000.00 Note EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR FEB-28-1999 MAR-01-1998 FEB-28-1999 50,492 0 138,357 54,431 785,639 974,488 117,863 230,522 1,229,537 1,413,285 0 0 0 18,134,295 (18,328,104) 1,229,537 1,793,709 1,793,709 1,149,343 2,961,826 45,291 0 134,819 (1,213,408) 0 (1,213,408) 0 0 0 (1,213,408) (.03) (.03)
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