FELLOW FLOTEK SHAREHOLDERS:
Lead. Support. Accelerate.
Those three simple yet powerful words define the “new” Flotek.
While an annual report is intended to be reflective, your company has little time to reflect as our plate is full of
opportunities to continue to transform Flotek into a global leader in specialty oilfield technologies. From our
environmentally friendly specialty chemicals
to our best-in-class Teledrift “measurement-while-drilling”
technologies and from West Texas to the countryside of Turkey, Flotek is accelerating the transformation of your
company as it leads the innovation of products and services to find and produce new sources of oil and natural gas
around the globe.
While we are excited about the future, a quick review of the journey will put your company’s 2010 achievements in
perspective:
• Flotek finished 2010 with over $19 million of cash
in the bank. That compares to just $600,000 in
September of 2009.
• Flotek revenues for 2010 were $147 million, a 31%
increase compared to 2009. Revenues increased in
each calendar quarter and the trend continued in the
first quarter of 2011.
• Your company, with the assistance of our financial
advisors from Enerecap Partners, restructured its
senior credit
flexibility
facility, providing
necessary to focus on the reenergizing our business,
improving operations and stabilizing our balance
sheet.
the
• Flotek enhanced its financial management team with
the addition of
Johnna Kokenge as Chief
Accounting Officer. Under Johnna’s guidance, your
company improved the timeliness and transparency
of both internal and external financial analysis,
including on-time and accurate financial reports
with the Securities and Exchange Commission. In
for
transferred
addition, Flotek
independent auditing services to Hein & Associates,
a boutique Certified Public Accounting Firm with
responsibility
deep experience in the energy sector. Our new association
with Hein re-created a culture of trust and mutual respect
with our professional auditors and resulted in a much
more efficient and cost-effective audit process.
• Your company refocused its marketing efforts to assure
we were reaching the right people and the right customers
creating a more robust sales effort. In addition, Flotek
empowered its front line team members with more
information, more responsibility along with a new set of
clear performance standards. The result was a significant
increase in total revenue as well as revenue per person, a
key metric of corporate efficiency.
• Flotek began to rebuild relationships with a number of
current and former stakeholders as well as many new
shareholders. Our mission has been to regain the trust of
each and every Flotek stakeholder. Shareholders, note
holders and other stakeholders deserve an unambiguous,
consistent and transparent message about the current
status of Flotek.
• Flotek – a direct result of the dedication, effort and
enthusiasm of each member of our team – was the sixth
best performing equity listed on the New York Stock
Exchange.
Each member of the Flotek team had plenty to be proud in 2010. However, our journey has just begun and the
finish line is still in the distance. Flotek was not profitable in 2010, and that is simply not acceptable. We will
redouble our efforts, work diligently on creating more efficient processes and be acutely focused on profitable
growth. We will strive in 2011 to create profits for our shareholders and continue to position Flotek for both long-
term and lasting growth.
Operationally, Flotek can be proud of a number of milestones accomplished in 2010:
• Flotek’s chemical technologies continue to lead the
industry in “environmental friendliness” as our top-
notch research chemists are constantly striving to not
only improve the efficacy of our chemical compounds
but also find new applications and create products with
environmental sensitivities in mind. Environmental
stewardship is nothing new to Flotek as your company
filed its first patent for the microemulsion technologies
in 2003, long before the oilfield chemical debate
surfaced.
• Your company’s chemical technologies traveled long
distances in 2010 as Flotek chemistries were used on
the initial unconventional gas completions in Poland,
Turkey and in France’s Paris Basin. We are excited
about the growing international dimensions of our
business. In addition to new markets abroad, we
continued to gain traction in key markets like the
Marcellus Shale, potentially the most prolific natural
gas basin ever delineated in North America. In
addition, our Complex Nanofluid chemistries are
gaining traction in liquids plays such as the Niobrara
and Eagle Ford.
• Flotek’s drilling products technologies continue to gain
market share. In 2010, Flotek touched nearly 25% of
all drilling rigs in the United States with at least one
product or service. Our goal in 2011 is to not only
increase that reach but also increase the technology
density of Flotek’s work on our customers’ rigs.
• Teledrift, Flotek’s best-in-class measurement-while-
drilling technology, continues to gain share across the
U.S. with new sales records set in the Permian Basin.
In addition, we completed our initial work for Saudi
Aramco and, like our chemical technologies, look
forward to new international opportunities in the
coming year. Our recently announced venture with
Dubai-based Basin Supply Corp., a leading oilfield
supply chain management firm, should open additional
international doors for both our Teledrift and chemical
technologies in 2011 and beyond.
lift
• Your company’s artificial
technologies also
provided solid growth opportunities. Through superior
customer service and our ability to be responsive to
customer needs, Flotek inked one of the largest
artificial lift agreements in the history of the company.
One of the largest coal bed methane players in the
Powder River Basin agreed to move its lift business to
Flotek under a two-year agreement. As a result,
revenues from that customer grew from just $42,000 in
the second quarter of 2010 to over $1 million in the
third quarter.
While the Flotek team is pleased with these accomplishments, our success only increases the desire for more. We
cannot afford to be satisfied with where we have been but, rather, Flotek must create a compelling vision for a
successful future.
As leaders, we understand success will also lead to higher expectations and more challenging benchmarks by which
Flotek will be measured. As a result, we must work smarter, provide compelling leadership that challenges and
energizes the Flotek team to reach higher, and continue to find ways to create a more dynamic and efficient
company.
While we can’t promise perfection, we can strive for it. We also pledge to you, our shareholders, that everything we
do at Flotek will be based on our belief that it is in the best interest of our stakeholders. First and foremost, we will
work tirelessly to add value and continue to earn your trust. In short, we will lead, support and accelerate.
Thank you for your continued interest in and support
of Flotek.
With Appreciation,
pp
John W Chisholm
John W. Chisholm
Chairman of the Board and President
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission fi le number 1-13270
FLOTEK INDUSTRIES, INC.
(Exact name of registrant as specifi ed in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
2930 W. Sam Houston Parkway N. #300
Houston, TX
(Address of principal executive offi ces)
900023731
(I.R.S. Employer Identifi cation No.)
77043
(Zip Code)
(713) 849-9911
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12B OF THE ACT:
Title of each class
Common Stock, $0.0001 par value
5.25% Convertible Senior Notes
Due 2028 and guarantees
Name of each exchange on which registered
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12G OF THE ACT:
NONE
NO
YES
Indicate by check mark if
• the registrant is a well-known seasoned issuer, as defi ned in Rule 405 of the Securities Act.
• if the registrant is not required to fi le reports pursuant to Section 13 or Section 15(d) of the Act.
• whether the registrant (1) has fi led all reports required to be fi led by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to fi le such reports), and (2) has been subject to such fi ling requirements for the past 90 days.
• whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such fi les).
• if disclosure of delinquent fi lers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in defi nitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
• whether the registrant is a large accelerated fi ler, an accelerated fi ler, a non-accelerated fi ler, or a smaller reporting company. See the defi nitions
of “large accelerated fi ler,” “accelerated fi ler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated fi ler
Accelerated fi ler
Non-accelerated fi ler
(Do not check if a smaller
reporting company)
Smaller reporting company
• whether the registrant is a shell company (as defi ned in Rule 12b-2 of the Exchange Act).
Th e aggregate market value of voting common stock held by non-affi liates of the registrant as of June 30, 2010 (based on the closing
market price on the New York Stock Exchange Composite Tape on June 30, 2010) was $35,619,237.
At March 7, 2011, there were 43,034,446 outstanding shares of the registrant’s common stock, $0.0001 par value.
Th e information required in Part III of the Annual Report on Form 10-K is incorporated by reference to the registrant’s defi nitive proxy
statement to be fi led pursuant to Regulation 14A for the registrant’s 2011 Annual Meeting of Stockholders.
DOCUMENTS INCORPORATED BY REFERENCE
Table of contents
PART I
1
ITEM 1
Business ......................................................................................................................................................................................................................................................................................................................................1
ITEM 1A Risk Factors ........................................................................................................................................................................................................................................................................................................................5
ITEM 1B Unresolved Staff Comments ........................................................................................................................................................................................................................................................14
Properties ...........................................................................................................................................................................................................................................................................................................................14
ITEM 2
Legal Proceedings ..............................................................................................................................................................................................................................................................................................15
ITEM 3
(Removed and Reserved) ....................................................................................................................................................................................................................................................................15
ITEM 4
PART II
16
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities .................................................................................................................................................................................................................................................................................16
ITEM 6
Selected Financial Data .........................................................................................................................................................................................................................................................................18
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................19
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ...............................................................................................................................32
Financial Statements and Supplementary Data ....................................................................................................................................................................................32
ITEM 8
ITEM 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................58
ITEM 9A Controls and Procedures .....................................................................................................................................................................................................................................................................58
ITEM 9B Other Information ..........................................................................................................................................................................................................................................................................................59
PART III
61
ITEM 10 Directors, Executive Offi cers and Corporate Governance ...............................................................................................................................................61
ITEM 11 Executive Compensation ....................................................................................................................................................................................................................................................................61
ITEM 12
Security Ownership of Certain Benefi cial Owners and Management and Related Stockholder
Matters .............................................................................................................................................................................................................................................................................................................................61
ITEM 13 Certain Relationships and Related Transactions, and Director Independence .......................................................................61
ITEM 14 Principal Accounting Fees and Services ................................................................................................................................................................................................................61
PART IV
62
ITEM 15 Exhibits and Financial Statement Schedules ...............................................................................................................................................................................................62
SIGNATURES ........................................................................................................................................................................................................................................................................................................................................................65
Forward-Looking Statements
Th is Annual Report on Form 10-K (the “Annual Report”), and in particular, Item 7- “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C.
§ 78u-5, of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Forward-looking statements are not historical facts
but instead represent the Company’s current assumptions and beliefs regarding future events, many of which, by their nature, are inherently
uncertain and outside of the Company’s control. Th e forward-looking statements contained in this Annual Report are based upon information
available as of the date of this Annual Report. Th e forward-looking statements relate to future industry trends and economic conditions,
forecast performance or results of current and future initiatives and the outcome of contingencies and other uncertainties that may have a
signifi cant impact on the Company’s business, future operating results and liquidity. Th ese forward-looking statements generally are identifi ed
by words such as “anticipate,” “believe,” “estimate,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, or
future-tense or conditional constructions such as “will,” “may,” “should,” “could,” etc. Th e Company cautions that these statements are merely
predictions and not to be considered as guarantees of future performance. Forward-looking statements are based upon current expectations
and assumptions that are subject to risks and uncertainties that can cause actual results to diff er materially from those projected, anticipated
or implied. A detailed discussion of potential risks and uncertainties that could cause actual results and events to diff er materially from
forward-looking statements is included in Part I, Item 1A- “Risk Factors” in this Annual Report and periodically in future reports fi led with
the Securities and Exchange Commission (the “SEC”).
Th e Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or
future events, except as required by law.
PART I
ITEM 1 Business
PART I
ITEM 1 Business
General
Flotek Industries, Inc. (“Flotek” or the “Company”) is a diversifi ed
global supplier of drilling and production related products and
services. Th e Company’s strategic focus, and that of all wholly owned
subsidiaries (collectively referred to as the “Company”), includes
oilfi eld specialty chemicals and logistics, down-hole drilling tools and
down-hole production tools used in the energy and mining industries.
In December 2007, the Company’s common stock began trading on
the New York Stock Exchange (the “NYSE”) under the stock ticker
symbol “FTK.” Annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those
reports fi led or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, (“the Exchange Act”) are posted to
the Company’s website, www.fl otekind.com as soon as practicable
subsequent to electronically fi ling or furnishing to the SEC. Information
contained on the Company’s website is not to be considered as part of
any regulatory fi ling. As used herein, “Flotek,” the “Company,” “we,”
“our” and “us” refers to Flotek Industries, Inc. and/or the Company’s
wholly owned subsidiaries. Th e use of these terms is not intended to
connote any particular corporate status or relationship.
Historical Developments
Th e Company incorporated in the Province of British Columbia
on May 17, 1985. On October 23, 2001, the Company moved the
corporate domicile to the state of Delaware and culminated a reverse
stock split of 120 to 1. Eff ective October 31, 2001, the Company
completed a reverse merger with CESI Chemical, Inc. (“CESI”). Since
that date, the Company has grown through a series of acquisitions
and organic growth.
Description of Operations
Th e Company has three strategic business segments: Chemicals and
Logistics (“Chemicals”), Drilling Products (“Drilling”) and Artifi cial
Lift. Each segment off ers competitive products and services derived
from patented technological advances that are reactive to industry
demands in both domestic and international markets.
Financial information regarding operational segments and geographic
concentration is provided within this Annual Report. See Part II,
Item 8-“Financial Statements and Supplementary Data.” and Note 17-
Segment Information in the Notes to Consolidated Financial Statements
for additional information.
Chemicals and Logistics
Th e Chemicals business provides oil and natural gas fi eld specialty
chemicals for use in drilling, cementing, stimulation and production
activities designed to maximize recovery within both new and mature
fi elds. Th e Company’s specialty chemicals possess enhanced performance
characteristics and are manufactured to withstand a broad range of
down-hole pressures, temperatures and other well-specifi c conditions
and compliant with customer specifi cations. Th e Company has two
operational laboratories: 1) a technical services laboratory and 2) a research
and development laboratory. Each focuses on design improvements,
development and viability testing of new chemical formulations; as well
as continued enhancement of existing products. CESI branded micro-
emulsions are patented both domestically and internationally and are
proven strategically cost eff ective alternatives within both oil and natural
gas markets. Th e Company’s micro-emulsions are environmentally
friendly stable mixtures of oil, water and surface active agents that form
complex nano-fl uids which organize molecules into nanostructures.
Th e combined advantage of solvents, surface active agent(s) and drilling
structures result in increased well treatment results as compared to
the independent use of solvents and surface active agent(s). CESI’s
micro-emulsions are composed of renewable, plant derived, cleaning
ingredients and oils that are certifi ed as biodegradable. Certain micro-
emulsions have been approved for use in the North Sea which has some
of the most stringent oil fi eld environmental standards in the world.
Th e Company’s micro-emulsions have benefi ted both operational and
fi nancial results in low permeability sand and shale reservoirs.
FLOTEK INDUSTRIES, INC. Form 10K 1
PART I
ITEM 1 Business
Th e logistics business designs, operates and manages automated bulk
material handling and loading facilities. Th e bulk facilities handle
oilfi eld products, including sand and other materials for well-fracturing
operations, dry cement and additives for oil and natural gas well
cementing, and supply materials used in oilfi eld operations.
Drilling Products
Th e Company is a leading provider of down-hole drilling tools for
use in oilfi eld, mining, water-well and industrial drilling activities.
Further, the Company manufactures, sells, rents and inspects specialized
equipment used in drilling, completion, production and workover
activities. Th rough internal growth initiatives, operational best practices
and acquisitions, the Company has realized increased rental tool activity
and broadened its geographic scope of operations. Established tool
rental operations are strategically located throughout the United States
(the “US”) and in an increasing number of international markets.
Rental tools include stabilizers, drill collars, reamers, wipers, jars,
shock subs, wireless survey, measurement while drilling (“MWD”)
tools and mud-motors. Equipment sold primarily includes mining
equipment, centralizers and drill bits. Th e Company remains focused
on product marketing in the Southeast, Northeast, Mid-Continent
and Rocky Mountain regions of the US, as well as on international
sales expansion using third party agents and employees.
Seasonality
Artifi cial Lift
Th e Company provides pumping system components, electric submersible
pumps (“ESP’s”), gas separators, production valves and complementary
services. Artifi cial Lift products satisfy the requirements of coal bed
methane and traditional oil and natural gas production and assist
natural gas, oil and other fl uids movement from the producing horizon
to the surface. Artifi cial Lift products employ proprietary technologies
instrumental to improved well performance. Patented Petrovalve products
optimize pumping effi ciency in horizontal completions as well as heavy
oil wells and wells with high liquid to gas ratios. Petrovalve products
placed horizontally increase fl ow per stroke, and eliminate gas locking
of traditional ball and seat valves that require more maintenance. Th e
patented gas separation technology is particularly eff ective in coal bed
methane production, effi ciently separating gas and water down-hole
as well as ensuring solution gas is not lost in water production. Gas
separated down-hole, contributes to a reduction in the environmental
impact of escaped gas at the surface. Th e majority of Artifi cial Lift
products are manufactured in China, assembled domestically and
distributed globally.
Overall, operations are not aff ected by seasonality. While certain
working capital components build and recede throughout the year in
conjunction with established selling cycles that can impact operations
and fi nancial position, the Company does not consider operations to
be highly seasonal. Th e performance, of certain services within each
of the Company’s segments however, is susceptible to both weather
and naturally occurring phenomena, including:
• severity and duration of winter temperatures in North America that
impact natural gas storage levels and drilling activity;
• timing and duration of Canadian spring thaw and resulting road
restrictions that impacts activity levels; and
• timing and impact of hurricanes upon both coastal and off shore
operations.
Artifi cial Lift results of operations are historically weakest in the second
quarter of the calendar year due to Federal land drilling restrictions
during identifi ed breeding seasons of protected bird species.
Product Demand and Marketing
Demand for the Company’s products and services is reactive to the
level of natural gas storage and production, oil and natural gas well
drilling, and corresponding work-over activity, both domestically and
internationally. Products are marketed directly to customers through
contractual agency agreements and employees. Established customer
relationships provide repeat sales opportunities within all segments.
Marketing is currently concentrated within the US. Internationally
the Company primarily operates using third party agents in Canada,
Mexico, Central America, South America, the Middle East, and Asia.
Customers
Th e Company’s customer base includes major integrated oil and
natural gas companies, independent oil and natural gas companies,
pressure pumping service companies and state-owned oil companies.
One customer and its affiliates accounted for 12%, 17% and
20% of the Company’s consolidated revenue for the years ended
December 31, 2010, 2009 and 2008, respectively. Th e Company’s
top three customers together accounted for 18%, 22% and 26% of
consolidated revenue for the years ended December 31, 2010, 2009
and 2008, respectively.
2
FLOTEK INDUSTRIES, INC. Form 10K
PART I
ITEM 1 Business
Research and Development
Th e Company is engaged in research and development activities
focused on the improvement of existing products and services,
the design of specialized “customer need” products and the
development of new products, processes and services. For the years
ended December 31, 2010, 2009 and 2008 the Company incurred
$1.4 million, $2.1 million and $1.9 million in research and development
expenses, respectively. In 2010, research and development expenditures
approximated 1% of consolidated revenue. Th e Company intends to
maintain research and development investment at levels consistent
with 2010 expenditures.
Backlog
Due to the nature of the Company’s contractual customer relationships and operational management, the Company has historically not had
signifi cant backlog order activity.
Intellectual Property
Th e Company’s policy is to ensure patent protection, both within
and outside of the US, for all products and methods deemed to have
commercial signifi cance and qualify for patent protection. Th e decision
to pursue patent protection is dependent upon whether patent protection
can be obtained, cost-eff ectiveness and alignment with commercial
interests. Th e Company believes patents and trademarks, combined
with trade secrets, proprietary designs, manufacturing and operational
expertise, are appropriate to protect intellectual property and ensure
continued strategic business operations. Th e Company currently has
patents pending on production valve design, casing centralizer design,
ProSeries tool design and trade secrets. Existing patents expire at various
dates during 2022 and 2023.
Competition
Th e ability to compete in the oilfi eld services industry is dependent
upon the Company’s ability to diff erentiate products and services,
provide superior quality and service, and maintain a competitive
cost structure. Activity levels in all segments are impacted by current
and expected commodity prices, vertical and horizontal drilling rig
count, other oil and natural gas drilling activity, production levels
and customer drilling and production designated capital spending.
Domestic and international regions in which Flotek operates are highly
competitive. Th e competitive environment has recently intensifi ed
due to mergers among oil and gas companies and the reduction in the
number of available customers. Th e 2009 global economic downturn
and corresponding commodity price fl uctuations caused the market
for the Company’s services, and that of competitors to decline. Certain
competing oil and natural gas service companies are larger than Flotek
and have access to more resources. Th ese competitors could be better
situated to withstand industry downturns, compete on the basis of
price and acquire and develop new equipment and technologies; all of
which, could aff ect the Company’s revenue and profi tability. Oil and
natural gas service companies also compete for customers and strategic
business opportunities. Th us, competition could have a detrimental
impact upon the Company’s business. Th e Company expects that
competition for contracts and margins will continue to be intense in
the foreseeable future.
Raw Materials
Materials and components used in the Company’s servicing and
manufacturing operations, as well as those purchased for sale are generally
available on the open market from multiple sources. Collection and
transportation of raw materials to Company facilities however could be
adversely aff ected by extreme weather conditions. Additionally, certain
raw materials used by the Chemicals segments are available from limited
sources. Disruptions to suppliers could materially impact sales. Th e
prices paid for raw materials are contingent on energy, steel and other
commodity price fl uctuations; tariff s, duties on imported materials,
foreign currency exchange rates, business cycle position and global
demand. During 2010, the price of many raw materials increased and
additional increases are anticipated in 2011. Higher prices combined
with lower availability of chemicals, steel and other raw materials could
adversely impact future sales and contract fulfi llments.
Th e Drilling and Artifi cial Lift segments purchase raw materials and
steel on the open market from numerous suppliers. When able, the
Company uses multiple suppliers, both domestically and internationally,
for all raw materials purchases.
Th e Drilling segment maintains a three to six month supply of mud-
motor inventory parts sourced from China as well as an equivalent
amount of parts necessary to meet forecast demand within Artifi cial Lift
operations. Th e Company’s inventory position approximates the lead
time required to secure parts to avoid disruption of service to customers.
FLOTEK INDUSTRIES, INC. Form 10K 3
PART I
ITEM 1 Business
Government Regulations
Th e Company is subject to federal, state and local environmental,
occupational safety and health laws and regulations within the US and
other countries in which the Company does business. Th e Company
strives to ensure full compliance with all regulatory requirements and
is unaware of any material instances of noncompliance. In the US,
compliance laws and regulations include, among others:
• the Comprehensive Environmental Response, Compensation and
Liability Act;
• the Resource Conservation and Recovery Act;
• the Clean Air Act;
• the Federal Water Pollution Control Act; and
• the Toxic Substances Control Act.
Employees
In addition to US federal laws and regulations, the Company does
business in other countries with extensive environmental, legal, and
regulatory requirements by which the Company must abide. Th e
Company evaluates the environmental impact of all Company actions
and attempts to quantify the price of contaminated property in order
to identify and avoid liability, as well as maintain compliance with
regulatory requirements. Several of Chemicals products are considered
hazardous or fl ammable. In the event of a leak or spill in association
with Company operations, the Company is exposed to risk of material
cost, net of insurance proceeds, to remediate any contamination. Th e
Company is occasionally involved in environmental litigation and claims,
including remediation of properties owned or operated. Th e Company
does not expect costs related to known remediation requirements to
have a material adverse eff ect on the Company’s consolidated fi nancial
position or results of operations.
At December 31, 2010, the Company had approximately 312 employees,
exclusive of existing worldwide agency relationships. No company
employee is covered by collective bargaining agreement and labor
relations are generally positive. Certain international location changes in
staffi ng or work arrangements are contingent upon local work councils
or other regulatory approval.
Available Information
Th e Company’s website is accessible at https://www.fl otekind.com.
Annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to reports fi led or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act are available
(see “Investor Relations” section on the Company’s website), as soon
as reasonably practicable subsequent to the Company electronically
fi ling or otherwise providing reports to the SEC. Corporate governance
materials, guidelines, charter and code of conduct are also available
on the website. A copy of corporate governance materials is available
upon written request to the Company.
All material fi led with the SEC’s “Public Reference Room” at 100 F
Street NE, Washington, DC 20549 is available to be read or copied.
Information regarding the “Public Reference Room” can be obtained by
contacting the SEC at 1-800-SEC-0330. Further, the SEC maintains
the www.sec.gov website, which contains reports and other registrant
information fi led electronically with the SEC.
Th e 2010 Annual Chief Executive Offi cer Certifi cation required by
the NYSE was submitted on September 8, 2010. Th e certifi cation
was not qualifi ed in any respect. Additionally, the Company has fi led
with this Annual Report principal executive offi cer and fi nancial
offi cer certifi cations as required under Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002.
Information with respect to the Company’s executive offi cers and
directors is incorporated herein by reference to information to be
included in the proxy statement for Flotek’s 2011 Annual Meeting
of Stockholders.
Th e Company has disclosed and will continue to disclose any changes
or amendments to Flotek’s code of ethics as well as waivers to the code
of ethics applicable to executive management by posting such changes
or waivers on the Company’s website.
4
FLOTEK INDUSTRIES, INC. Form 10K
PART I
ITEM 1A Risk Factors
ITEM 1A Risk Factors
Th e Company’s business, fi nancial condition, results of operations
and cash fl ows are subject to various risks and uncertainties, including
those described below. Th ese risks and uncertainties could cause actual
results to vary materially from current or forecast results. Th e risks
below are not all-inclusive of risks that could impact the Company.
Additional risks, not currently known to the Company, or that the
Company presently considers immaterial could impact the Company’s
business operations.
Th is Annual Report contains “forward-looking statements,” as defi ned
in the Private Securities Litigation Reform Act of 1995, that involve
risks and uncertainties. Forward-looking statements discuss Company
prospects, expected revenue, expenses and profi ts, strategic initiatives
for operations and other activity. Forward-looking statements also
contain suppositions regarding future conditions in the oil and natural
gas industry within both domestic and international economies. Th e
Company’s results could diff er materially from those anticipated in the
forward-looking statements as a result of a variety of factors, including
risks described below and elsewhere. See “Forward-Looking Statements”
at the beginning of this Annual Report.
Risks Related to the Company’s Business
Th e Company did not have profi table operations during
2010 and may not be profi table in 2011.
Th e Company experienced net losses during the last three calendar
years, including net losses in each of the four quarters of 2010. Th e
Company can provide no assurance that the 2011 operational plan (the
“2011 Plan”), will be executed successfully and that even if successful
in execution the Company will be profi table in 2011.
Demand for a majority of Company products and services
is substantially dependent on the levels of expenditures
within the oil and natural gas industry. If current global
economic conditions and the availability of credit worsen
or oil and natural gas prices materially weaken for an
extended period of time, possible reductions in customers’
levels of expenditures could have a signifi cant adverse
eff ect on revenue, margins and overall operating results.
Th e current global credit and economic environment has tempered
worldwide demand for energy. Crude oil and natural gas prices have
continued to be volatile. A substantial or extended decline in oil
or natural gas prices could aff ect customers’ spending for products
and services. Demand for the majority of the Company’s services is
dependent upon the level of expenditures within the oil and gas industry
for exploration, development and production of crude oil and natural
gas reserves. Expenditures are sensitive to oil and natural gas prices,
as well as the industry’s outlook regarding future oil and natural gas
prices. Reduced demand for Company products and services exerted
downward pressure on prices charged in 2009. Limited recovery occurred
in 2010. If economic conditions do not continue to improve or weaken
from current levels, additional reductions in customer exploration
and production expenditures could result, causing reduced demand
for Company products and services and a signifi cant adverse eff ect on
the Company’s operating results. It is diffi cult to predict the pace of
the current recovery, whether the economy will worsen, and to what
extent this could aff ect the Company.
Reduced cash fl ow of some of the Company’s customers as a result
of depressed commodity prices, reduced the availability of credit
and increased the cost of borrowing due to tight credit markets.
Reduced cash fl ow and capital availability could adversely impact the
fi nancial condition of the Company’s customers, which could result
in customer project modifi cations, delays or cancellations, general
business disruptions, and delay in, or nonpayment of, amounts that
are owed to the Company, that could result in a negative impact on
the Company’s results of operations and cash fl ows.
If certain of the Company’s suppliers were to experience signifi cant cash
fl ow constraints or become insolvent as a result of such conditions, a
reduction or interruption in supplies or a signifi cant increase in the
price of supplies could occur, and adversely impact the Company’s
results of operations and cash fl ows.
Th e price for oil and natural gas is subject to a variety of factors,
including:
• demand for energy reactive to worldwide population growth, economic
development and general economic and business conditions;
• ability of the Organization of Petroleum Exporting Countries (“OPEC”)
to set and maintain production levels;
• production of oil and natural gas by non-OPEC countries;
• availability and quantity of natural gas storage;
• import volume and pricing of Liquefi ed Natural Gas;
• pipeline capacity to critical markets;
• political and economic uncertainty and socio-political unrest;
• cost of exploration, production and transport of oil and natural gas;
• technological advances impacting energy consumption; and
• weather conditions.
Th e Company’s business is dependent upon domestic
spending within the oil and natural gas industry.
Spending could be adversely aff ected by industry
conditions or by new or increased governmental
regulations beyond the Company’s control.
Th e Company is dependent upon customers’ willingness to make
operating and capital expenditures for exploration, development
and production of oil and natural gas in both the US and abroad.
Customers’ expectations of future oil and natural gas market prices
could curtail spending thereby reducing demand for the Company’s
products and services. Industry conditions in the US are infl uenced by
numerous factors over which the Company has no control, including
the supply of and demand for oil and natural gas, domestic and
FLOTEK INDUSTRIES, INC. Form 10K 5
PART I
ITEM 1A Risk Factors
international economic conditions, political instability in oil and
natural gas producing countries and merger and divestiture activity
among oil and natural gas producers. Th e volatility of oil and natural
gas prices and the consequential eff ect on exploration and production
activity could adversely impact the level of activity engaged in by
the Company’s customers. One indicator of drilling and production
activity spending is rig count which the company actively monitors
to gauge market conditions. A reduction in drilling activity could
cause a decline in the demand for, or negatively aff ect the price of,
the Company’s products and services. Domestic demand for oil and
natural gas could also be uniquely aff ected by public attitude regarding
drilling in environmentally sensitive areas, vehicle emissions and other
environmental standards, alternative fuels, taxation of oil and gas,
perception of “excess profi ts” of oil and gas companies, and anticipated
change in governmental regulations and policy.
Th e senior credit facility contains certain covenants
that could limit the Company’s fl exibility and prevent
the Company from taking certain actions, which could
adversely aff ect the ability to initiate certain business
strategies.
Th e senior credit facility, as amended, includes a number of restrictive
covenants. Th ese covenants could adversely aff ect the Company’s
ability to plan for or react to market conditions, meet capital needs
and execute business strategies. Th e senior credit facility covenants,
among other things, limit the Company’s ability, without the consent
of the lender, to:
• incur certain types and amounts of additional debt;
• consolidate, merge, sell assets or materially change the nature of the
Company’s business;
• pay dividends on capital stock or make restricted payments;
• make voluntary prepayments, or materially amend the terms of
subordinated debt;
• enter into disallowed types of transactions with affi liates;
• make disallowed investments;
• exceed quantifi ed level of capital expenditures; and
• incur certain liens.
Th ese covenants may restrict the Company’s operating and fi nancial
fl exibility as well as limit the Company’s ability to react in a timely
manner to changes in business or competitive circumstances. Covenant
noncompliance could result in default of the senior credit facility. Upon
such default, the Company’s senior credit facility lenders could declare
all amounts borrowed and due to them, inclusive of all accrued and
unpaid interest, due and payable. As a result, the Company or one or
more of its subsidiaries could be forced into liquidation or bankruptcy.
Any of the foregoing circumstances could restrict the Company’s ability
to execute strategic business initiatives. Any default or acceleration of
the Company’s senior credit facility could result in a default of the
Company’s convertible senior notes.
6
FLOTEK INDUSTRIES, INC. Form 10K
Th e Company’s future success and profi tability may be
adversely aff ected if the Company or the Company’s
suppliers fail to develop and/or introduce new and
innovative products and services.
Th e oil and natural gas drilling industry is characterized by technological
advancements that have historically resulted in, and will likely continue
to result in, substantial improvements in the scope and quality of
oilfi eld chemicals, drilling and artifi cial lift products and services
function and performance. Consequently, the Company’s future
success is dependent, in part, upon the Company’s and the Company’s
suppliers’ continued ability to timely develop innovative products and
services. Increasingly sophisticated customer needs and the ability to
timely anticipate and respond to technological and industrial advances
in the oil and natural gas drilling industry is critical. If the Company
or the Company’s suppliers fail to successfully develop and introduce
innovative products and services that appeal to customers, or if new
market entrants or competitors develop superior products and services,
the Company’s revenue and profi tability could suff er.
Th e Company intends to pursue strategic acquisitions,
which could have an adverse impact on the Company’s
business.
Th e Company remains committed to growth through strategic
acquisitions and alliances with complementary businesses. Th e
Company’s historical and potential acquisitions involve risks that
could adversely aff ect the Company’s business climate and results of
operations. Negotiations of potential acquisitions or integration of newly
acquired businesses could divert management’s attention from other
business concerns as well as be cost prohibitive and time consuming.
Acquisitions could also expose the Company to unforeseen liabilities or
risks associated with new markets or businesses. Unforeseen operational
diffi culties related to acquisitions could result in diminished fi nancial
performance or require a disproportionate amount of the Company’s
management’s attention and resources. Additional acquisitions could
result in the commitment of capital resources without the realization
of anticipated returns. Th e Company’s current credit agreement limits
the Company’s ability to access additional borrowings under the senior
credit facility and from other sources.
If the Company does not manage the potential
diffi culties associated with expansion successfully, the
Company’s operating results could be adversely aff ected.
Th e Company has grown over the last several years through internal
growth, strategic business/asset acquisitions and strategic alliances.
Th e Company believes future success will depend, in part, on the
Company’s ability to adapt to market opportunities and changes and to
successfully integrate operations of businesses the Company acquires.
Th e following factors could generate business diffi culties going forward:
• lack of experienced management personnel;
• increased administrative burdens;
• customer retention;
• technological obsolescence; and
• infrastructure, technological, communication and logistical issues
associated with large, expansive operations.
If the Company fails to manage potential diffi culties successfully,
including increased costs associated with growth, the Company’s
operating results could be adversely aff ected.
Th e Company’s ability to grow and compete could be
adversely aff ected if adequate capital is not available.
Th e ability of the Company to grow and compete is reliant on the
availability of adequate capital. Access to capital is dependent, in large
part, on the Company’s cash fl ows from operations and the availability
of equity and debt fi nancing. Th e Company cannot guarantee cash
fl ows from operations will be suffi cient, or that the Company will
continue to be able to obtain equity or debt fi nancing on acceptable
terms, or at all, in order to realize growth strategies. Th e Company’s
senior credit facility restricts the Company’s ability to incur additional
indebtedness, including borrowings to fund future acquisitions, a key
component of growth strategies. As a result, the Company cannot assure
adequate capital will be available to fi nance strategic growth plans, to
take advantage of business opportunities or to respond to competitive
pressures, any of which could harm the Company’s business.
Th e Company’s current insurance policies may not
adequately protect the Company’s business from all
potential risks.
Th e Company’s operations are subject to risks inherent in the oil and
natural gas industry, such as, but not limited to, accidents, blowouts,
explosions, fi res, severe weather, oil and chemical spills and other hazards.
Th ese conditions can result in personal injury or loss of life, damage
to property, equipment and environment, as well as suspension of
customer’s oil and gas operations. Litigation arising from any catastrophic
occurrence where the Company’s equipment, products or services are
being used could result in the Company being named as a defendant
in lawsuits asserting large claims. Th e Company maintains insurance
coverage that it believes is customary to the industry to mitigate liabilities
associated with these hazards. Th e Company does not, however, have
insurance against all foreseeable risks, either because insurance is not
available or is cost prohibitive. Further, the Company may not have
the fi nancial wherewithal to maintain adequate insurance coverage in
the future. Consequently, losses and liabilities arising from uninsured
or underinsured events could have a material adverse eff ect on the
Company’s business, fi nancial condition and results of operations.
Th e Company is subject to complex foreign, federal,
state and local environmental, health and safety
laws and regulations, which expose the Company to
liabilities that could have a material adverse eff ect on
the Company’s business, fi nancial condition and results
of operations.
Th e Company’s operations are subject to foreign, federal, state and local
laws and regulations relating to, among other things, the protection
of natural resources, injury, health and safety considerations, waste
management and transportation of waste and other hazardous materials.
Th e Company’s Chemicals segment exposes the company to risks of
environmental liability that could result in fi nes, penalties, remediation,
property damage and personal injury liability. In order to remain
compliant with laws and regulations, the Company maintains permits,
authorizations and certifi cates as required from regulatory authorities.
Sanctions for noncompliance with such laws and regulations could
PART I
ITEM 1A Risk Factors
include assessment of administrative, civil and criminal penalties,
revocation of permits and issuance of corrective action orders.
Th e Company could incur substantial costs to ensure compliance
with existing laws and regulations. Laws protecting the environment
have generally become more stringent and are expected to continue to
do so, which could result in material expenses associated with future
environmental compliance and remediation. Th e Company’s costs
of compliance could also increase if existing laws and regulations are
amended or reinterpreted. Such amendments or reinterpretations of
existing laws or regulations or the adoption of new laws or regulations
could curtail exploratory or developmental drilling for and production
of oil and natural gas which, in turn, could limit demand for the
Company’s products and services. Some environmental laws and
regulations may also impose joint and strict liability, meaning that in
certain situations the Company could be exposed to liability as a result
of Company conduct that was lawful at the time it occurred or conduct
of, or conditions caused by, prior operators or other third parties.
Remediation expense and other damages arising as a result of such
laws and regulations could be substantial and have a material adverse
eff ect on the Company’s fi nancial condition and results of operations.
Material levels of the Company’s revenue are derived from customers
engaged in hydraulic fracturing services, a process that creates fractures
extending from the well bore through the rock formation to enable
natural gas or oil to fl ow more easily through the rock pores to a
production well. Bills pending in the US House and Senate have asserted
that chemicals used in the fracturing process adversely aff ect drinking
water supplies. Th e proposed legislation could require the reporting
and public disclosure of currently proprietary chemical formulas used
in the fracturing process. Legislation, if adopted, could establish an
additional level of regulation at the federal level that could result in
operational delays and increased operating costs. Th e adoption of
any future federal or state laws or the implementation of regulations
imposing reporting obligations on, or otherwise limiting, the hydraulic
fracturing process could increase the diffi culty of natural gas and oil
well production and could have an adverse impact on the Company’s
future results of operations, liquidity and fi nancial condition.
Regulation of greenhouse gases and climate change
could have a negative impact on the Company’s
business.
Certain scientifi c studies have suggested that emissions of certain gases,
commonly referred to as “greenhouse gases”, including carbon dioxide
and methane, may be contributory to the warming of the Earth’s
atmosphere and other climatic changes. In response to such studies, the
issue of climate change and the eff ect of greenhouse gas emissions, in
particular emissions from fossil fuels, is attracting increasing worldwide
attention. Legislative and regulatory measures to address greenhouse
gas emissions are in various phases of discussions or implementation
at international, national, regional and state levels.
In 2005, the Kyoto Protocol (the “Protocol”) to the 1992 United
Nations Framework Convention on Climate Change, which established
emission targets for greenhouse gases, became binding on those countries
that had ratifi ed the Protocol. In the US, federal legislation imposing
restrictions on greenhouse gases is currently under consideration.
Proposed legislation has been introduced that would establish an
economy-wide cap on emissions of greenhouse gases and would require
most sources of greenhouse gas emissions to obtain greenhouse gas
emission “allowances” corresponding to annual emissions. In addition,
FLOTEK INDUSTRIES, INC. Form 10K 7
PART I
ITEM 1A Risk Factors
the Environmental Protection Agency (the “EPA”) is taking steps that
would result in the regulation of greenhouse gases as pollutants under the
Clean Air Act. To date, the EPA has issued (i) a “Mandatory Reporting
of Greenhouse Gases” fi nal rule, eff ective December 29, 2009, which
requires operators of stationary sources in the US emitting more than
established annual thresholds of carbon dioxide-equivalent greenhouse
gases to inventory and report greenhouse gas emissions annually; and
(ii) an “Endangerment Finding” fi nal rule, eff ective January 14, 2010,
which states that current and projected concentrations of six identifi ed
greenhouse gases in the atmosphere, as well as emissions from new
motor vehicles and new motor vehicle engines threaten public health
and welfare. Final greenhouse gas standards could reduce the demand
for motor fuels refi ned from crude oil. According to the EPA, the fi nal
greenhouse gas standards will trigger construction and operating permit
requirements for large stationary sources. Existing or future laws,
regulations, treaties or international agreements related to greenhouse
gases and climate change, including energy conservation or alternative
energy incentives, could have a negative impact on the Company’s
operations if, as a result, there is a reduction in worldwide demand for
oil and natural gas or global economic activity. Other results could be
increased compliance costs and additional operating restrictions, each
of which would have a negative impact on the Company’s operations.
Lastly, the Company’s operations could be negatively impacted by
related physical changes or changes in weather patterns.
If the Company is unable to adequately protect its
intellectual property rights or is found to infringe upon
the intellectual property rights of others the Company’s
business is likely to be adversely aff ected.
Th e Company relies on a combination of patents, trademarks, non-
disclosure agreements and other security measures to establish and
protect the Company’s intellectual property rights. Although the
Company believes that existing measures are reasonably adequate
to protect intellectual property rights there is no assurance that the
measures taken will prevent misappropriation of proprietary information,
provide the Company with a competitive advantage, or dissuade
others from independent development of similar products or services.
Moreover, there is no assurance that the Company will be able to prevent
competitors from copying, reverse engineering or otherwise obtaining
and using the Company’s technology, proprietary rights or products.
Th e Company has not sought foreign protection corresponding to
all US intellectual property rights. Consequently, the Company may
not be able to enforce intellectual property rights outside of the US.
Furthermore, the laws of certain countries in which the Company’s
products are manufactured or marketed may not protect the Company’s
proprietary rights to the same extent as the laws of the US. Finally,
parties may challenge, invalidate or circumvent the Company’s patents,
trademarks, copyrights and trade secrets. In each case, the Company’s
ability to compete could be signifi cantly impaired.
A portion of the Company’s products are without patent protection.
Th e issuance of a patent does not guarantee validity or enforceability,
accordingly, Company patents may not be valid or enforceable against
third parties. Th e issuance of a patent does not guarantee that the
Company has the right to use the patented invention. Th ird parties
may have blocking patents that could be used to prevent the Company
from marketing the Company’s own patented products and utilizing
the patented technology.
Th e Company is exposed to allegations of patent and other intellectual
8
FLOTEK INDUSTRIES, INC. Form 10K
property infringement. Furthermore, the Company could become
involved in costly litigation or proceedings regarding patents or other
intellectual property rights. If any such claims are asserted against the
Company, the Company could seek to obtain a license under the third
party’s intellectual property rights in order to mitigate exposure. In
the event the Company cannot obtain a license, aff ected parties could
fi le lawsuits against the Company seeking damages (including treble
damages), or an injunction against the sale of the Company’s products
allegedly incorporating infringed intellectual property or the operation
of the Company’s business as certain conducted which would result in
the Company having to cease the sale of some products, increase the cost
of selling products, or result in damage to the Company’s reputation.
Th e award of damages, including material royalty payments, or the
entry of an injunction order against the manufacture and sale of any
of the Company’s products, could have a material adverse eff ect on the
Company’s results of operations and ability to compete.
Th e Company and the Company’s customers are subject
to risks associated with doing business outside of the US
including political risk, foreign exchange risk and other
uncertainties.
Revenue from the sale of products to customers outside the US exceeded
13% of the Company’s total 2010 annual revenue. Th e Company and
its customers are subject to risks inherent in doing business outside
of the US, including:
• governmental instability;
• war and other international confl icts;
• civil and labor disturbances;
• requirements of local ownership;
• partial or total expropriation or nationalization;
• currency devaluation; and
• foreign laws and policies, each of which may limit the movement
of assets or funds or result in the deprivation of contract rights or
appropriation of property without fair compensation.
Collections and recovery of rental tools from international customers
and agents may also prove diffi cult due to inherent uncertainties of
foreign law and judicial procedure. Th e Company could experience
signifi cant diffi culty with collections or recovery due to the political or
judicial climate in foreign countries in which it operates or in which
the Company’s products are used.
Th e Company’s international operations must be compliant with the
Foreign Corrupt Practices Act (the “FCPA”) and other applicable
US laws, and the Company could become liable under these laws for
actions taken by employees or agents. Compliance with international
laws and regulations could become more complex and expensive
thereby creating increased risk as the Company’s international business
portfolio grows. Further, the US periodically enacts laws and imposes
regulations prohibiting or restricting trade with certain nations. Th e US
government could also change these laws or enact new laws that could
restrict or prohibit the Company from doing business in identifi ed
foreign countries.
Although most of the Company’s international revenue is derived from
transactions denominated in US dollars, the Company has conducted,
and likely will continue to conduct, some business in currencies other
than the US dollar. Th e Company currently does not hedge against
foreign currency fl uctuations. Accordingly, the Company’s profi tability
could be aff ected by fl uctuations in foreign exchange rates. Th e Company
has no control over and can provide no assurances that future laws
and regulations will not materially impact the Company’s ability to
conduct international business.
Th e loss of key customers could have a material adverse
eff ect on the Company’s results of operations and could
result in a decline in the Company’s revenue.
Th e Company is dependent on a few key customers. During each of
the years ended December 31, 2010, 2009 and 2008, over 18%, 22%
and 26%, respectively, of the Company’s consolidated revenue was
derived from three customers. Th e Company’s customer relationships are
historically governed by purchase orders or other short-term contracts
rather than long-term contracts. Th e loss of one or more of these key
customers could have a material adverse eff ect on the Company’s results
of operations and could result in a decline in the Company’s revenue.
Th e loss of key suppliers, the Company’s inability to
secure raw materials on a timely basis, or the Company’s
inability to pass commodity price increases on to
customers could have a material adverse eff ect on the
Company’s ability to service customer’s needs and could
result in a loss of customers.
Materials used in servicing and manufacturing operations as well as
those purchased for sale are generally available on the open market
and from multiple sources. Acquisition and transportation of these
raw materials to the Company’s facilities however, can be impacted
by extreme weather conditions. Certain raw materials used by the
Chemicals segment are only available from limited sources and any
disruptions to these suppliers could materially impact the Company’s
sales. Th e prices the Company pays for raw materials could be aff ected
by, among other things, energy, steel and other commodity prices;
tariff s and duties on imported materials; foreign currency exchange
rates; phases of the general business cycle and global demand.
Th e Drilling and Artifi cial Lift segments purchase critical raw materials
on the open market and, where able, from multiple suppliers, both
domestically and internationally.
Th e Company maintains a three to six month supply of critical mud-
motor inventory parts that the Company sources from China. Th is
inventory stock position approximates the lead time required to secure
these parts in order to avoid disruption of service to the Company’s
customers. Th e Company’s inability to secure reasonably priced critical
inventory parts in a timely manner could adversely aff ect the Company’s
ability to service customers. Th e Company sources the vast majority of
motor parts from a single supplier. As part of the 2011 business plan,
the Company is actively working to identify and develop relationships
with back-up parts suppliers. If unsuccessful in identifying and engaging
back-up suppliers, the Company could be exposed to a disruption of
key suppliers that could result in a loss of revenue or key customers.
Additionally, if the customers were to seek or develop alternatives for
the products or services the Company off ers, the Company could suff er
a decline in revenue and loss of key customers.
Th e Company currently does not hedge commodity prices. Th e Company
may be unable to pass along price increases to its customers, which
could result in a decline in revenue or operating profi ts.
PART I
ITEM 1A Risk Factors
Th e Company’s inability to develop new products or
diff erentiate existing products could have a material
adverse eff ect on the ability to be responsive to
customer’s needs and could result in a loss of customers.
Th e Company’s ability to compete within the oilfi eld services business
is dependent upon the ability to diff erentiate products and services,
provide superior quality and service, and maintain a competitive cost
structure. Activity levels in the Company’s operations are driven by
current and forecast commodity prices, drilling rig count, oil and natural
gas production levels, and customer capital spending for drilling and
production. Th e regions in which the Company operates are highly
competitive. Th e Company is also smaller than many other oil and
natural gas service companies and has fewer resources as compared
to these competitors. Th e larger competitors are better positioned
to withstand industry downturns, compete on the basis of price and
acquire new equipment and technologies, all of which could aff ect the
Company’s revenue and profi tability. Th e Company competes for both
customers and acquisition opportunities. Competition could adversely
aff ect on the Company’s operating profi t. Th e Company believes that
competition for products and services will continue to be intense in
the foreseeable future.
If the Company loses the services of key members of
management, the Company may not be able to manage
operations and implement growth strategies.
Th e Company depends on the continued service of the President,
the Executive Vice President of Finance and Strategic Planning,
the Executive Vice President of Operations, Business Development
and Special Projects and the Chief Accounting Offi cer, who possess
signifi cant expertise and knowledge of the Company’s business and
industry. Further, the President serves as Chairman of the Board of
Directors. Th e Company does not carry key man life insurance on
any of these executives at December 31, 2010. Th e Company has
entered into employment agreements with the President, the Executive
Vice President of Finance and Strategic Planning, the Executive Vice
President of Operations, Business Development and Special Projects and
the Chief Accounting Offi cer. Any loss or interruption of the services
of key members of the Company’s management could signifi cantly
reduce the Company’s ability to manage operations eff ectively and
implement strategic business initiatives. Th e Company can provide
no assurance that appropriate replacements for key positions could be
found should the need arise.
Failure to maintain eff ective disclosure controls
and procedures and internal controls over fi nancial
reporting could have an adverse eff ect on the Company’s
operations and the trading price of the Company’s
common stock.
Eff ective internal controls are necessary for the Company to provide
reliable fi nancial reports, eff ectively prevent fraud and operate successfully
as a public company. If the Company cannot provide reliable fi nancial
reports or eff ectively prevent fraud, the Company’s reputation and
operating results could be harmed. If the Company is unable to maintain
eff ective disclosure controls and procedures and internal controls over
fi nancial reporting, the Company may not be able to provide reliable
fi nancial reports or prevent fraud, which, in turn could aff ect the
operating results or cause the Company to fail to meet Company’s
FLOTEK INDUSTRIES, INC. Form 10K 9
PART I
ITEM 1A Risk Factors
reporting obligations. Ineff ective internal controls could also cause
investors to lose confi dence in reported fi nancial information, which
could negatively eff ect the trading price of the Company’s common
stock, limit the ability to access capital markets in the future and
require the incurrence of additional costs to improve internal control
systems and procedures.
Th e Company did not maintain an eff ective control environment during
2009 and consequently identifi ed control defi ciencies that constituted
material defi ciencies in connection with preparation of the Company’s
2009 fi nancial statements. Th e Company has concluded that while
certain previously identifi ed material defi ciencies related to internal
controls have been remediated as of December 31, 2010 the material
defi ciencies still exist within the Company’s control environment,
disclosure controls and procedures remain ineff ective.
Th e Company has implemented on-going remediation and internal
control improvement initiatives order to identify material weaknesses and
to enhance the overall fi nancial control environment. Th e Company’s
management continues to be actively committed to and engaged in
the implementation and execution of remediation eff orts to identify
and resolve any material weaknesses. Th e executive management
team is committed to achieving and maintaining a strong control
environment, high ethical standards, and fi nancial reporting integrity.
Th ere can, however, be no assurance that the Company’s remediation
eff orts will be successful.
Failure to timely fi le accurate reports with the SEC
could have an adverse eff ect on the trading price of the
Company’s common stock and the ability to raise capital
in the capital markets.
Th e Company did not fi le the March 31, 2010 Quarterly Report
on Form 10-Q in a timely manner. Th e Company fi led a request
for an extension of time to fi le and subsequently fi led the referenced
Form 10-Q within the extension period. A failure to timely fi le SEC
reports could result in the Company’s inability to fi le registration
statements using any registration form other than Form S-1, which is
more time consuming and costly to prepare. Filing limitations could
also hamper the Company’s ability to raise capital in fi nancial markets.
Additionally, the late fi ling of reports with the SEC could result in
a technical default of the Company’s various debt obligations. Th e
Company restated the Financial Statements in the Annual Report
on Form 10-K for the calendar year ended December 31, 2009 to
reclassify warrants from stockholders’ equity to warrant liability and
to recognize changes in the fair value of the a warrant liability in the
statement of operations.
Risks Related to the Company’s Industry
Uncertainty regarding the pace of recovery from
the recent recession could have an adverse eff ect on
exploration and production activity and result in lower
demand for the Company’s products and services.
Recent worldwide fi nancial and credit crisis uncertainty has reduced the
availability of liquidity and credit markets to fund the continuation and
expansion of industrial business operations worldwide. Th e shortage
of liquidity and credit combined with pressure on worldwide equity
markets could continue to impact the worldwide economic climate.
Unrest in the Middle East may also impact demand for the Company’s
products and services both domestically and internationally.
Demand for the Company’s products and services is dependent on
oil and natural gas industry activity and expenditure levels that are
directly aff ected by trends in oil and natural gas prices. Demand for
the Company’s products and services is particularly sensitive to levels
of exploration, development, and production activity of, and the
corresponding capital spending by, oil and natural gas companies,
including national oil companies. One indication of drilling and
production activity and spending is rig count, which the Company
monitors to gauge market conditions. Any prolonged reduction in oil
and natural gas prices or drop in rig count could depress current levels
of exploration, development, and production activity. Perceptions of
longer-term lower oil and natural gas prices by oil and natural gas
companies could similarly reduce or defer major expenditures given
the long-term nature of many large-scale development projects. Lower
levels of activity could result in a corresponding decline in the demand
for the Company’s oil and natural gas well products and services,
which could have a material adverse eff ect on the Company’s revenue
and profi tability.
10
FLOTEK INDUSTRIES, INC. Form 10K
Continuation of the global credit crisis could have an
adverse impact on the Company’s customers and on the
Company’s dealings with lenders, insurers and fi nancial
institutions.
Events in global credit markets over the past several years have signifi cantly
impacted the availability of credit and associated fi nancing costs for many
of the Company’s customers. A signifi cant portion of the Company’s
customers fi nance drilling and production programs through third-
party lenders. Lack of available credit or increased costs of borrowing
could cause customers to reduce spending on drilling programs,
thereby reducing demand and potentially resulting in lower prices for
the Company’s products and services. Also, the credit and economic
environment could signifi cantly impact the fi nancial condition of some
customers over a prolonged period, leading to business disruptions and
restricted ability to pay for the Company’s products and services. Th e
Company’s forward-looking statements assume that the Company’s
lenders, insurers and other fi nancial institutions will be able to fulfi ll
their obligations under various credit agreements, insurance policies
and contracts. If any of the Company’s signifi cant lenders, insurers
and others are unable to perform under such agreements, and if the
Company was unable to fi nd suitable replacements at a reasonable
cost, the Company’s results of operations, liquidity and cash fl ows
could be adversely impacted.
PART I
ITEM 1A Risk Factors
A prolonged period of depressed oil and natural
gas prices could result in reduced demand for the
Company’s products and services and adversely aff ect
the Company’s business, fi nancial condition and results
of operations.
Th e markets for oil and natural gas have historically been extremely
volatile. Such volatility in oil and natural gas prices, or the perception
by the Company’s customers of unpredictability in oil and natural gas
prices, could adversely aff ect spending within targeted industries. Th e
Company anticipates that current markets will continue to be volatile
in the future. Th e demand for the Company’s products and services
is, in large part, driven by current and anticipated oil and natural gas
prices and the related general levels of production spending and drilling
activity. In particular, depressed oil and natural gas prices could cause
a decline in exploration and drilling activities. Th is, in turn, could
result in lower demand for the Company’s products and services and
could result in lower prices for the Company’s products and services.
A prolonged decline in oil or natural gas prices could adversely aff ect
the Company’s business, fi nancial condition and results of operations.
New and existing competitors within the Company’s
industry could have an adverse eff ect on results of
operations.
Th e oil and natural gas industry is highly competitive and fragmented.
Th e Company’s principal competitors include numerous small companies
capable of competing eff ectively in the Company’s markets on a local
basis, as well as a number of large companies that possess substantially
greater fi nancial and other resources than does the Company. Larger
competitors may be able to devote greater resources to developing,
promoting and selling products and services. Th e Company may
also face increased competition due to the entry of new competitors
including current suppliers that decide to sell their products and services
directly to the Company’s customers. As a result of this competition,
the Company could experience lower sales or greater operating costs,
which could have an adverse eff ect on the Company’s margins and
results of operations.
Th e Company’s industry has a high rate of employee
turnover. Diffi culty attracting or retaining personnel or
agents could adversely aff ect the Company’s business.
Th e Company operates in an industry that has historically been highly
competitive in securing qualifi ed personnel with the required technical
skills and experience. Th e Company’s services require skilled personnel
able to perform physically demanding work. Due to industry volatility
and the demanding nature of the work, workers could choose to
pursue employment opportunities that off er a more desirable work
environment at wages competitive with the Company’s. As a result,
the Company may not be able to fi nd qualifi ed labor, which could
limit the Company’s growth ability. In addition, the cost of attracting
and retaining qualifi ed personnel has increased over the past several
years due to competitive pressures. Th e Company expects labor costs
will continue to increase in the foreseeable future. In order to attract
and retain qualifi ed personnel the Company may be required to off er
increased wages and benefi ts. If the Company is unable to increase
the prices of products and services to compensate for increases in
compensation, or is unable to attract and retain qualifi ed personnel,
operating results could be adversely aff ected.
Severe weather could have a material adverse impact on
the Company’s business.
Th e Company’s business could be materially and adversely aff ected
by severe weather conditions. Hurricanes, tropical storms, blizzards,
cold weather and other severe weather conditions could result in
curtailment of services, damage to equipment and facilities, interruption
in transportation of products and materials and loss of productivity.
If the Company’s customers are unable to operate or are required to
reduce operations due to severe weather conditions, and as a result
curtail purchases of the Company’s products and services, the Company’s
business could be materially adversely aff ected.
A terrorist attack or armed confl ict could harm the
Company’s business.
Terrorist activities, anti-terrorist eff orts and other armed confl icts
involving the US could adversely aff ect the US and global economies
and could prevent the Company from meeting fi nancial and other
obligations. Th e Company could experience loss of business, delays or
defaults in payments from payors, or disruptions of fuel supplies and
markets if pipelines, production facilities, processing plants or refi neries
are direct targets or indirect casualties of an act of terror or war. Such
activities could reduce the overall demand for oil and natural gas which,
in turn, could also reduce the demand for the Company’s products
and services. Th e Company has implemented certain security measures
in response to the threat of terrorist activities. Terrorist activities and
the threat of potential terrorist activities and any resulting economic
downturn could adversely aff ect the Company’s results of operations,
impair the ability to raise capital or otherwise adversely impact the
Company’s ability to realize certain business strategies.
FLOTEK INDUSTRIES, INC. Form 10K 11
PART I
ITEM 1A Risk Factors
Risks Related to the Company’s Securities
Th e market price of the Company’s common stock has
been and may continue to be volatile.
Th e market price of the Company’s common stock has historically
been subject to signifi cant fl uctuations. Th e following factors, among
others, could cause the price of the Company’s common stock to
fl uctuate signifi cantly:
• variations in the Company’s quarterly results of operations;
• changes in market valuations of companies in the Company’s industry;
• fl uctuations in stock market prices and volume;
• fl uctuations in oil and natural gas prices;
• issuances of common stock or other securities in the future;
• additions or departures of key personnel; and
• announcements by the Company or the Company’s competitors of
new business, acquisitions or joint ventures.
Th e stock market has experienced unusual price and volume fl uctuations
in recent years that have signifi cantly aff ected the price of common stock
of many companies within the oil and natural gas industry. Further
changes can occur without regard to specifi c operating performance.
Th e price of the Company’s common stock could continue to fl uctuate
based upon factors that have little to do with the Company’s operational
performance, and these fl uctuations could materially reduce the
Company’s stock price. Class action lawsuits have historically been
brought against companies following periods of common stock market
price volatility. Th e Company could be named in a legal case of this
type, which could be expensive and divert management’s attention
and company resources, as well as have a material adverse eff ect on
the Company’s business, fi nancial condition and results of operations.
An active market for the Company’s common stock may
not continue to exist or may not continue to exist at
current trading levels.
Trading volume for the Company’s common stock has historically been
low when compared to companies with larger market capitalizations.
Th e Company cannot presume that an active trading market for the
Company’s common stock will continue or be sustained. Sales of
signifi cant amounts of shares of the Company’s common stock in the
public market could lower the market price of the Company’s stock.
If the Company does not meet the New York Stock
Exchange continued listing requirements, the Company’s
common stock may be delisted, which could have an
adverse impact on the liquidity and market price of the
Company’s common stock.
Th e Company’s common stock is currently listed on the NYSE. In
accordance with the NYSE’s continued listing standards, a company is
considered to be below compliance standards if, among other things,
(i) both a Company’s average global market capitalization is less than
$50 million over a 30 trading-day period and a company’s stockholders’
equity is less than $50 million; (ii) a company’s average global market
capitalization is less than $15 million over a 30 trading-day period,
which would result in immediate initiation of suspension procedures;
12
FLOTEK INDUSTRIES, INC. Form 10K
or (iii) a company’s average closing price of a listed security is less
than $1.00 over a consecutive 30 trading-day period. Th e Company
previously received notifi cation from the NYSE that it was not in
compliance with the NYSE’s continued listing requirements because
both the 30 trading-day average global market capitalization and the
Company’s stockholders’ equity were below the respective $50 million
requirements.
When a listed company’s stock falls below the market capitalization
and stockholders’ equity standard, a company is considered “below
criteria,” however, the company is permitted to submit a business plan
demonstrating ability to return to compliance with continued listing
standards within 18 months of receipt of the NYSE notifi cation. Th e
Company submitted a plan of action to the NYSE in March 2010,
which the Company believes will provide the ability to, once again,
achieve compliance by no later than June 28, 2011 with the minimum
listing requirements. During the plan implementation process, the
Company’s common stock continues to be listed on the NYSE, subject
to the Company’s compliance with other NYSE continued listing
requirements. On March 29, 2010, the NYSE agreed to accept the
Company’s plan of action.
If the Company’s shares of common stock are delisted from the NYSE
and the Company is unable to list common stock on another US
national or regional securities exchange or have shares of common
stock quoted on an established over-the-counter trading market in the
US within 30 days of being delisted, the Company could be required
to off er to repurchase all of the Company’s outstanding convertible
notes at a price equal to 100% of the principal amount thereof plus
any accrued and unpaid interest. Were this to occur the Company
could lack the fi nancial wherewithal to fund the repurchase of any
convertible notes tendered.
Delisting of the Company’s common stock could also negatively impact
the Company by: (i) reducing the liquidity and market price of the
Company’s common stock; (ii) reducing the number of investors willing
to hold or acquire the Company’s common stock, and correspondingly
impact the Company’s ability to raise equity fi nancing; and (iii) decreasing
the amount of news and analyst coverage for the Company. In addition,
the Company could experience other adverse eff ects, including, without
limitation, the loss of confi dence in the Company by current and
prospective suppliers, customers, employees and others with whom
the Company has or may seek to initiate business relationships, and
the Company’s ability to attract and retain personnel by means of
equity compensation.
Th e Company has no plans to pay dividends on the
Company’s common stock, and, therefore, investors
will have to look to stock appreciation for return on
investments.
Th e Company does not anticipate paying any cash dividends on the
Company’s common stock in the foreseeable future. Th e Company
currently intends to retain all future earnings to fund the development
and growth of the Company’s business and to meet current debt
obligations. Any payment of future dividends will be at the discretion
of the Company’s board of directors and will depend on, among other
things, the Company’s earnings, fi nancial condition, capital requirements,
level of indebtedness, statutory and contractual restrictions applying
to the payment of dividends and other considerations deemed relevant
by the board of directors. Certain covenants of the Company’s senior
credit facility restrict the payment of dividends without the prior
written consent of the lenders. Investors must rely on sales of common
stock held after price appreciation, which may never occur, in order
to realize a return on their investment.
Certain anti-takeover provisions of the Company’s
charter documents and applicable Delaware law
could discourage or prevent others from acquiring the
Company, which may adversely aff ect the market price
of the Company’s common stock.
Th e Company’s certifi cate of incorporation and bylaws contain provisions
that:
• permit the Company to issue, without stockholder approval, up to
100,000 shares of preferred stock, in one or more series and, with
respect to each series, to fi x the designation, powers, preferences and
rights of the shares of the series;
• prohibit stockholders from calling special meetings;
• limit the ability of shareholders to act by written consent;
• prohibit cumulative voting; and
• require advance notice for stockholder proposals and nominations
for election to the board of directors to be acted upon at meetings
of stockholders.
In addition, Section 203 of the Delaware General Corporation Law limits
business combinations with owners of more than 15% of the Company’s
stock without the approval of the board of directors. Aforementioned
provisions and other similar provisions make it more diffi cult for a
third party to acquire the Company exclusive of negotiation. Th e
Company’s board of directors could choose not to negotiate with an
acquirer deemed not benefi cial to or synergistic with the Company’s
strategic outlook. If an acquirer were discouraged from off ering to
acquire the Company or prevented from successfully completing a
hostile acquisition by referenced anti-takeover measures, shareholders
could lose the opportunity to sell owned shares at a favorable price.
Future issuance of additional shares of common
stock could cause dilution of ownership interests and
adversely aff ect the Company’s stock price.
Th e Company may, in the future, issue previously authorized and
unissued shares of common stock, which would result in the dilution
of current stockholders ownership interests. Th e Company is currently
authorized to issue 80,000,000 shares of common stock, of which
44,417,382 were issued as of March 7, 2011. Additional shares are
subject to future issuance through the exercise of options granted
under various equity compensation plans or through the exercise of
options still available for future equity grants. Th e potential issuance
of additional shares of common stock, whether directly or pursuant
to any conversion right associated with the convertible senior notes
or convertible preferred stock or other convertible securities of the
Company, or through exercise of outstanding warrants may create
downward pressure on the trading price of the Company’s common
stock. Th e Company may also issue additional shares of common
PART I
ITEM 1A Risk Factors
stock or other securities that are convertible into or exercisable for
common stock in order to raise capital or eff ectuate other business
purposes. Future sales of substantial amounts of common stock, or
the perception that sales could occur, could have a material adverse
eff ect on the price of the Company’s common stock.
Th e Company may issue additional shares of preferred
stock or debt securities with greater rights than the
Company’s common stock.
Subject to the rules of the NYSE, the Company’s certifi cate of
incorporation authorizes the board of directors to issue one or more
additional series of preferred stock and to set the terms of the issuance
without seeking approval from holders of common stock. Currently,
there are 100,000 preferred shares authorized, of which 16,000 shares
were originally issued, of which no shares remain outstanding at
March 7, 2011. Any preferred stock that is issued may rank senior to
common stock in terms of dividends, priority and liquidation premiums,
and may have greater voting rights than holders of common stock.
All outstanding warrants are exercisable as of December 31, 2010.
Th e Company’s ability to use net operating loss
carryforwards and tax attribute carryforwards to off set
future taxable income may be limited as a result of
transactions involving the Company’s common stock.
Under section 382 of the Internal Revenue Code of 1986, as amended,
a corporation that undergoes an “ownership change” is subject to
limitations on the Company’s ability to utilize pre-change net operating
losses (“NOLs”), and certain other tax attributes to off set future taxable
income. In general, an ownership change occurs if the aggregate stock
ownership of certain stockholders increases by more than 50 percentage
points over such stockholders’ lowest percentage ownership during the
testing period (generally three years). An ownership change could limit
the Company’s ability to utilize NOLs and tax attribute carryforwards
for taxable years including or following an identifi ed “ownership
change.” Transactions involving the Company’s common stock, even
those outside the Company’s control, such as purchases or sales by
investors, within the testing period, could result in an “ownership
change”. Limitations imposed on the ability to use NOLs and tax
credits to off set future taxable income could require the Company to
pay US federal income taxes in excess of that which would otherwise be
required if such limitations were not in eff ect. NOLs and tax attributes
could expire unused, in each instance reducing or eliminating the
benefi t of the NOLs and tax attributes. Similar rules and limitations
may apply for state income tax purposes.
Disclaimer of Obligation to Update
Except as required by applicable law or regulation, the Company
assumes no obligation (and specifi cally disclaims any such obligation)
to update these Risk Factors or any other forward-looking statement
contained in this Annual Report to refl ect actual results, changes in
assumptions or other factors aff ecting such forward-looking statements.
FLOTEK INDUSTRIES, INC. Form 10K 13
PART I
ITEM 1B Unresolved Staff Comments
ITEM 1B Unresolved Staff Comments
None.
ITEM 2 Properties
As of February 28, 2011, the Company operates 34 manufacturing and warehouse facilities in seven states. Th e Company owns 12 of these
facilities. Th e remaining facilities are leased with lease terms expiring at various dates through 2032. Th e Company’s corporate offi ce is a leased
facility located in Houston, Texas. Th e following table sets forth facility locations :
Segment
Chemicals
Drilling
Artifi cial Lift
General Corporate
Owned/Leased
Leased
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Location
Raceland, Louisiana
Norman, Oklahoma
Marlow, Oklahoma
Carthage, Texas
Wheeler, Texas
Raceland, Louisiana
Pocola, Oklahoma
Wilburton, Oklahoma
Th e Woodlands, Texas
Chickasha, Oklahoma
Oklahoma City, Oklahoma
Houston, Texas
Midland, Texas
Robstown, Texas
Vernal, Utah
Evanston, Wyoming
Bossier City, Louisiana
Lafayette, Louisiana
Shreveport, Louisiana
Farmington, New Mexico
Corpus Christi, Texas
Granbury, Texas
Grand Prairie, Texas
Houston, Texas
Midland, Texas (3 locations)
Odessa, Texas
Pittsburgh, Pennsylvania
Towanda, Pennsylvania
Casper, Wyoming
Gillette, Wyoming
Farmington, New Mexico
Houston, Texas
Th e Company considers all facilities in good condition and suitable to the safe conduct of business.
14
FLOTEK INDUSTRIES, INC. Form 10K
PART I
ITEM 2 (Removed and Reserved)
ITEM 3 Legal Proceedings
Litigation
Th e Company is subject to routine litigation and other claims that
arise in the normal course of business. Management is not aware
of any pending or threatened lawsuits or proceedings which would
have a material eff ect on the Company’s fi nancial position, results of
operations or liquidity.
ITEM 4
(Removed and Reserved)
FLOTEK INDUSTRIES, INC. Form 10K 15
PART II
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
ITEM 5
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases
of Equity Securities
Th e Company’s common stock began trading on the NYSE on
December 27, 2007 under the stock ticker symbol “FTK.” As of the
close of business on March 7, 2011, there were 43,034,446 shares of
common stock outstanding held by approximately 6,000 holders of
record. Th e last reported sales price of the common stock on the NYSE
on March 7, 2011 was $6.30.
Th e following table sets forth, on a per share basis for the periods
indicated, the high and low closing sales prices of common stock as
reported by the NYSE. Th ese prices do not include retail mark-ups,
mark-downs or commissions.
Common Stock Closing Sales Price, per share
Fiscal 2010
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
$
$
$
$
High
5.75 $
1.73 $
2.24 $
1.90 $
Low
1.40
1.01
1.16
1.20
Fiscal 2009
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
$
$
$
$
High
2.41
2.59
3.30
5.00
$
$
$
$
Low
0.96
1.38
1.23
1.21
Th e Company has never declared or paid cash dividends on common
stock. While the Company regularly assesses the dividend policy,
the Company has no current plans to declare dividends on common
stock, and intends to continue to use earnings and other cash in the
maintenance and expansion of the business. Further, the Company’s
senior credit facility contains provisions that limit the Company’s
ability to pay cash dividends on common stock.
16
FLOTEK INDUSTRIES, INC. Form 10K
PART II
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Performance Graph
Th e performance graph below illustrates a fi ve year comparison of
cumulative total returns based on an initial investment of $100 in
the Company’s common stock, as compared with the Russell 2000
Index and the Philadelphia Oil Service Index for the annual 2006
through 2010 periods. Th e performance graph assumes $100 invested
on December 31, 2005 in each of the Company’s common stock, the
Russell 2000 Index and the Philadelphia Oil Service Index, and that
any and all dividends were reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
$400
$350
$300
$250
$200
$150
$100
$ 50
$ 0
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Flotek Industries, Inc.
Russell 2000 Index
Philadelphia Oil Service Index (OSX)
Flotek Industries, Inc.
Russell 2000 Index
Philadelphia Oil Service Index
(OSX)
$
$
$
2005
100
$
100
$
2006
150
$
118
$
2007
387
$
117
$
100
$
110
$
167
$
2008
27
$
77
$
68
$
2009
14
$
98
$
110
$
2010
58
124
139
Th e foregoing graph should not be deemed to be fi led as part of this
Annual Report, does not constitute soliciting material and should
not be deemed fi led or incorporated by reference into any other fi ling
of the Company under the Securities Act of 1933, as amended, or
the Exchange Act, as amended, except to the extent the Company
specifi cally incorporates the graph by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
Th e following table summarizes information regarding the Company’s equity securities that are authorized for issuance under the Company’s
individual stock option compensation agreements:
EQUITY COMPENSATION PLAN INFORMATION
Plan category
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted-Average Exercise
Price of Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities Refl ected
in the Column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
TOTAL
1,605,135
$
-
1,605,135
$
3.90
-
3.90
2,880,024
-
2,880,024
FLOTEK INDUSTRIES, INC. Form 10K 17
PART II
ITEM 6 Selected Financial Data
Recent Sales of Unregistered Securities
During the three months ended December 31, 2010 the Company had no sales of unregistered securities that have not been previously reported.
ITEM 6
Selected Financial Data
Th e following table sets forth certain selected historical fi nancial data and
should be read in conjunction with Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and Item 8
“Financial Statements and Supplementary Data,” included elsewhere
herein. Th e selected operating and fi nancial position data presented
for each of the fi ve years has been derived from the Company’s audited
consolidated fi nancial statements, some of which appear elsewhere in
this Annual Report. During the annual periods 2006 through 2008,
the Company completed a number of business combinations and
other transactions that materially aff ected the comparability of the
information provided below.
Th e Company incurred signifi cant non-recurring charges during the
years 2007 through 2010. During 2010, the Company recorded a fi xed
asset and other intangible impairment charge of $9.3 million. During
2009 and 2008, the Company recorded goodwill impairment and
other intangible assets of $18.5 million and $67.7 million, respectively
(see Note 9 to the Notes of the Consolidated Financial Statements).
On July 11, 2007, the Company eff ected a two-for-one stock split in
the form of a 100% stock dividend to the stockholders of record on
July 3, 2007. All share and per share information has been retroactively
adjusted to refl ect the 2007 stock split.
(in thousands, except per share data)
2010
2009
2008
2007
2006
As of and for the Year ended December 31,
Operating Data
Revenue
Income (loss) from operations
Net income (loss)
Earnings (loss) per share – Basic
Earnings (loss) per share – Diluted
Financial Position Data
$
146,982
$
112,550
$
226,063
$
158,008
$
100,642
(6,267)
(43,465)
(1.94)
(1.94)
(33,103)
(50,333)
(2.68)
(2.68)
(30,751)
(34,242)
(1.79)
(1.79)
29,686
16,727
0.91
0.88
Total assets
Convertible senior notes, long term debt and capital
lease obligations, less discount and current portion
Stockholders’ equity (defi cit)
184,807
178,901
234,959
160,793
126,682
(3,453)
119,190
27,196
120,281
66,105
52,377
77,461
2009 and 2008 amounts were restated in accordance with Accounting Standards Update (“ASU”) No. 2009-15, “Accounting for Own-Share
Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.”
18
FLOTEK INDUSTRIES, INC. Form 10K
18,853
11,350
0.66
0.61
82,890
8,185
53,509
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Th e table above refl ects the results of equity and asset acquisitions from
the respective date of acquisition for the following years:
• 2008 –Teledrift, Inc.;
• 2007 – Triumph Drilling Tools, Inc., CAVO Drilling Motors Ltd
Co., and Sooner Energy Service, Inc.; and
• 2006 – Can-Ok Oil Field Services, Inc., Total Well Solutions, LLC,
and LifTech, LLC.
ITEM 7
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Th e following discussion and analysis should be read in conjunction
with the Company’s consolidated fi nancial statements and the related
notes included elsewhere in this Annual Report on Form 10-K. Th e
following information contains forward-looking statements, which are
subject to risks and uncertainties. Should one or more of these risks or
uncertainties materialize, actual results could diff er from those expressed
or implied by the forward-looking statements. See “Forward-Looking
Statements” at the beginning of this Annual Report on Form 10-K
for further clarifi cation.
Executive Summary
Th e Company is a diversifi ed global technology-driven growth company
to the oil, gas, and mining industries by providing oilfi eld products,
services and equipment. Th e Company operates in select domestic and
international markets, including the Gulf Coast, the Southwest, the
Rocky Mountains, the Northeastern and Mid-Continental US, Canada,
Mexico, Central America, South America, Europe, Africa and Asia and
markets products domestically and internationally in over 20 countries.
Th e Company’s customers include major integrated oil and natural
gas companies, independent oil and natural gas companies, pressure
pumping service companies, state-owned oil companies and international
service supply chain management companies. Th e Company’s ability to
compete in the oilfi eld services market is dependent on the Company’s
ability to diff erentiate products and services, provide superior quality
and service, and maintain a competitive cost structure. Company
operations are impacted by natural gas and oil well drilling activity, the
depth and drilling conditions of wells, the number of well completions
and the level of work-over activity in North America. Drilling activity,
is largely dependent on the volatility of natural gas and crude oil prices
and expectations of future prices. Th e Company’s results of operations
depend heavily upon sustainable prices charged customers, which are
impacted by drilling activity levels, availability of equipment and other
resources, and competitive pressures. Th ese combined market factors
can lead to volatility in both revenue and profi tability.
Historical market conditions are refl ected in the table below:
2010
2009
2008
Average Active Drilling Rigs
United States
Canada
Total North America
Vertical Rigs (U.S.)
Horizontal Rigs (U.S.)
Directional Rigs (U.S.)
Total Drilling Type (U.S.)
Oil vs. Natural Gas Drilling Rigs
Oil
Natural Gas
Total North America
Average Commodity Prices
1,549
349
1,898
502
825
222
1,549
795
1,103
1,898
1,089
221
1,310
433
455
201
1,089
382
928
1,310
West Texas Intermediate Crude Prices
(per barrel)
Natural Gas Prices ($/mmbtu)
$
$
79.40
4.25
$
$
61.65
3.71
$
$
1,879
381
2,260
954
553
372
1,879
543
1,717
2,260
99.57
8.07
2010
vs
2009
42.2 %
57.9 %
44.9 %
16.0 %
81.3 %
10.4 %
2009
vs
2008
(42.0) %
(42.0) %
(42.0) %
(54.6) %
(17.7) %
(46.0) %
108.1 %
18.9 %
(29.7) %
(46.0) %
28.8 %
14.6 %
(38.1) %
(54.0) %
Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); West Texas Intermediate Crude and Natural Gas Prices: Department of Energy,
Energy Information Administration (www.eia.doe.gov).
FLOTEK INDUSTRIES, INC. Form 10K 19
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Global economic growth and increased demand for oil and natural gas
are the primary drivers of customer expenditures to develop and produce
oil and natural gas. Th e recovery within the global economy began in
2010 and is anticipated to continue in 2011. Increased economic activity,
particularly in emerging Asia and Middle East economies, and market
predictions for continued economic growth supports expectations of
increasing demand for oil and natural gas. Spending by oil and natural
gas exploration and production companies, which is dependent upon
forecasts of the expected future supply and future demand for oil and
natural gas products and associated estimates of costs to fi nd, develop,
and produce reserves, increased in 2010 as compared to 2009. Changes
in oil and natural gas exploration and production spending resulted in
increased demand for the Company’s products and services.
In North America, customer expenditures increased for both oil and
natural gas projects resulting in a 45% increase in the North American
rig count in 2010 as compared to 2009. Th e increase in oil-directed
drilling is a direct refl ection of the global price of oil, which is currently
trading at a premium, on a Btu basis, relative to natural gas in North
America. Th e increase in gas-directed drilling was driven by activity in
unconventional shale gas plays due to the favorable prices of wet gas,
despite relatively low prices for natural gas. Spending on gas-directed
projects in 2010 was supported by (1) hedges on production made in
prior periods when futures prices were higher, (2) the need to drill and
produce natural gas to hold leases acquired in earlier periods, (3) the
infl ux of equity from companies interested in developing a position
in the shale resource plays and (4) associated production of natural
gas liquids in certain basins.
As a result of streamlining operational costs in 2009 and proactive
management of operational costs during 2010, the Company was
favorably positioned to respond to increased activity and product
demand in 2010. Further, innovative sales initiatives and strategic
international eff orts enabled the Company to increase revenues by
30.6% in 2010 as compared to 2009.
Forecasting the Company’s position in the current recovery cycle is
challenging, as it diff ers from past cycles due to the overlay of continued
worldwide uncertainties, including signifi cant political unrest and radical
regime and governmental changes in signifi cant oil producing countries.
Changes in product demand to liquid rich natural gas and oil products
from natural gas products aff ected the type of industry drilling activity
and increased petroleum pricing. Despite recent favorable activity the
Company expects continued uncertainty in drilling activity in 2011
due to a number of factors including commodity prices, global demand
for oil and natural gas, supply and depletion rates of oil and natural
gas reserves, as well as broader variables including government fi scal
policies and current and potential political unrest in key petroleum
producing countries.
Th e oil fi eld services sector experienced a cyclical low in the third
quarter of 2009. Stabilization of the business and cost containment
measures taken by the Company beginning in 2009 were still being
realized throughout 2010. Th e Company expects improved economic
conditions will continue throughout 2011 despite drilling activity
uncertainty. As exploration and production companies’ outlooks
improve with higher expectations of forecast liquid-rich natural gas
and oil prices, the Company remains optimistic capital budgets for
drilling and completion activities will strengthen. Th e Company
expects rig count in the oil basins, which have contributed to Drilling
revenue with increased Teledrift business in the Permian Basin, to lead
to margin relief on pricing.
Th e Company expects that North American gas market activity will
continue to remain stable in unconventional plays such as Barnett,
Haynesville, Marcellus and other basins which utilize the Company’s
drilling tools. In addition, the Company expects chemical additives will
continue realizes to enhanced performance, when added to fracturing
fl uids utilized in this type drilling further supporting the stability of
product demand of the Company’s Chemicals segment which is closely
aligned to rig count activity. Th e Company plans to pursue identifi ed
international opportunities in 2011.
Th e Company expects 2011 drilling and completion activity to remain
relatively stable compared to 2010 levels. Market conditions are forecast
to improve slightly and pricing is expected to remain competitive
throughout 2011. Th e Company intends to continue the strategic
initiative to add drilling jars and shock subs to the company’s fl eet
and to reduce the Company’s sub-rental usage. Th e Company also
intends to continue to pursue international market opportunities with
the Teledrift line of MWD products during 2011.
With research eff orts focused on the Chemicals segment, the Company
has been able to timely respond to the increased demand for growth in
unconventional liquid rich and oil sand formation plays. As a result of
the Company’s success in unconventional areas, such as the Marcellus
Shale, and within tight sand gas play areas, such as the Niobrara, the
Company expects to continue to experience growth within identifi ed
basins by leveraging the proven success of the Company’s products,
in particular, complex nanofl uids.Th e Drilling segment has eff ectively
redesigned the Company’s motors to operate more successfully in areas
such as Haynesville, Barnett and Bakken. Th e increase in operational
performance of the Company’s Artifi cial Lift segment enabled the
Company to signifi cantly increase the customer base in 2010.
Capital expenditures in the Drilling segment were $4.7 million in
2010 compared to $6.2 million in 2009. Capital expenditures were
signifi cantly curtailed in 2010 in response to decreased demand.
Management has forecast Drilling capital expenditures of $7.9 million
in 2011; however, this amount may fl uctuate dependent upon market
demand and realized results of operations. Th e Company intends to
sharpen the focus of capital expenditures within the Drilling segment
to further increase the Company’s international presence.
Th e Company’s business is comprised of three reportable segments:
Chemicals, Drilling and Artifi cial Lift. Th e Company’s focus is on
serving the drilling-related needs of oil and gas companies primarily
through the Chemicals and Drilling segments, and the production
related needs of oil and gas companies through the Artifi cial Lift and
Chemicals segments. Th e Company believes product off erings and
geographical presence throughout all three business segments provides the
Company with diverse sources of cash fl ow. Although each segment has
unique technical expertise, all segments share a commitment to provide
customers with quality, competitively priced equipment and services.
• Th e Chemicals segment is comprised of two business divisions:
Specialty Chemicals and Logistics. Specialty Chemicals designs,
develops, manufactures, packages and markets specialty chemicals
used in oil and gas well cementing, stimulation, acidizing, drilling and
production. Logistics manages automated material handling, loading
facilities, and blending capabilities for oilfi eld services companies.
• Th e Drilling segment rents, inspects, manufactures and markets
down-hole drilling equipment for the energy, mining, water well
and industrial drilling sectors.
• Th e Artifi cial Lift segment assembles and markets artifi cial lift
20
FLOTEK INDUSTRIES, INC. Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
equipment, including the Petrovalve line of rod pump components,
electric submersible pumps, gas separators, valves and services that
support coal bed methane production.
oilfi eld service cyclical risk by balancing drilling versus production;
rental versus service; domestic versus international; and natural gas
versus crude oil operations.
Over the past several years, the Company has grown through strategic
acquisitions, organic growth and investments in complementary or
competing businesses in an eff ort to expand product off erings and
geographic presence within targeted markets. Th e Company mitigates
Acquisitions completed by the Company in the preceding three years
include:
• Teledrift, Inc. (“Teledrift”), designs and manufactures wireless survey
and MWD equipment, in February 2008.
Results of Operations (in thousands):
Revenue
Cost of revenue
Gross margin
Selling, general and administrative cost
Depreciation and amortization
Research and development costs
Impairment of long-lived assets
Loss on disposal of long-lived assets
Impairment of goodwill and other intangible assets
Loss from operations
Change in fair value of warrant liability
Interest and other expense, net
Loss before income taxes
(Provision) benefi t for income taxes
NET LOSS
Results for 2010 compared to 2009—
Consolidated
Revenue for the year ended December 31, 2010 was $147.0 million, an
increase of $34.4 million, or 30.6%, compared to $112.6 million for
the same period in 2009. Revenue increased across all of the company’s
segments due to improved pricing, increased drilling activity, and slight
recovery of industry demand for products.
Consolidated gross margin increased by $23.6 million, or 80.3%, to
$53.0 million in 2010 from $29.4 million in 2009. Gross margin
as a percentage of sales increased to 36.0% for 2010 from 26.1%
for 2009. Th is favorable variance resulted from increased product
sales ($21.5 million or 29.7%) and rental revenue ($13.5 million or
47.3%) combined with direct operational expense savings off set by a
13.0% increase in cost of revenue. Increased cost of revenue was due
to increased costs of materials, rentals and freight proportionate to
increased activity. Gross margin is calculated as revenue less associated
cost of revenue, inclusive of personnel, occupancy, depreciation and
other expenses directly associated with the generation of revenue.
Year Ended December 31,
2010
2009
2008
$
146,982
$
112,550
$
226,063
94,012
52,970
41,861
4,543
1,441
8,898
2,104
390
(6,267)
(21,464)
(21,279)
(49,010)
5,545
83,166
29,384
36,943
4,926
2,118
-
-
18,500
(33,103)
135,307
90,756
46,311
5,570
1,931
-
-
67,695
(30,751)
465
-
(15,679)
(48,317)
(2,016)
(13,990)
(44,741)
10,499
$
43,465
$
50,333
$
34,242
Selling, general and administrative costs, (“SG&A”) are not directly
attributable to products sold or services rendered. SG&A costs for the
year ended December 31, 2010 were $41.9 million, an increase of
13.3%, compared to $36.9 million in 2009. Th e comparative period over
period increase resulted from increased incentive stock compensation
expense of $4.0 million and professional fees of $2.1 million. Non-cash
incentive stock compensation expense increased due to recognition
of $3.0 million of non-cash compensation expense during the second
quarter of 2010 related to prior equity grants to the Company’s former
President and CEO, which vested at the time of his retirement from the
Company on June 30, 2010 and vesting of other outstanding existing
equity grants. Th e increase in professional fees related to the Company’s
March 31, 2010 fi nancing, defense of class action lawsuits and use
of third party technical consultants (e.g., information technology;
investment; and valuation advisors).
Depreciation and amortization costs were $4.5 million for the year
ended December 31, 2010, a decrease of approximately 8.1% compared
to the same period in 2009.
FLOTEK INDUSTRIES, INC. Form 10K 21
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Research and development (“R&D”) expenses were $1.4 million for
the year ended December 31, 2010, a decrease of 33.3%, compared
to $2.1 million during the same period in 2009. Th e reduction in
R&D expense is attributable to more realigned spending objectives
on key initiatives driven by the economic recession and management
cost containment objectives. Th e Company anticipates 2011 R&D
spending levels to remain consistent with 2010. R&D is charged to
expense as incurred.
Costs associated with impairments totaled $8.9 million and $0.4 million,
related to long-lived asset and other intangibles, for the year ended
December 31, 2010, a decrease of $9.2 million or 49.8% compared to
$18.5 million in 2009. Th e impairment valuation recognized during
2010 primarily related to long-lived assets within the Drilling segment.
During the fourth quarter of 2010 revenue generation trends of certain
identifi ed rental assets were not performing as anticipated by management
in the Company’s 2010 forecast. Upon review, management determined
the recoverability of the carrying value of certain assets to be less than
the expected revenue generation capacity of the assets. Th e $18.5 million
recognized in 2009 was attributable to the Teledrift division.
Revenue within the Drilling segment increased $15.0 million, or
29.6% in 2010 due to increased demand for products resulting from
a shift in the type of drilling activity as well as fl uctuations in oil and
natural gas commodity prices. Management believes the current cost
structure is appropriate for 2011 forecast levels of activity and does
not foresee signifi cant future adjustments. Changes in market demand
or forecast assumptions could cause management to pursue additional
cost containment eff orts.
During the year ended December 31, 2010, the warrant liability
increased by $21.5 million to $26.2 million. Th e increase has been
recognized in the statement of operations as a noncash expense. Th is
liability will not be settled in cash. Future fl uctuations in the warrant
liability will be recognized as noncash income or expense.
Interest expense was $19.4 million for the year ended December 31, 2010,
an increase of $3.9 million or 25.0% compared with $15.5 million
in 2009. Th e increase was the result of an increase in the interest rate
associated with the refi nancing of the Company’s senior credit facility
from 8.5% to 12.5% combined with the amortization of related
issuance costs of $2.0 million incurred during the year (See “Capital
Resources and Liquidity”), commitment fee payments of $7.3 million.
An income tax benefi t of $5.5 million was recorded for the year ended
December 31, 2010, refl ecting an eff ective tax rate of (11.3)%, compared
to a tax provision of $2.0 million for the year ended December 31, 2009,
refl ecting an eff ective tax rate of (4.2%). Th e change in the Company’s
eff ective tax rate is primarily due to a $4.2 million increase in the
valuation allowance recorded in 2010 against the deferred tax asset
of one of our fi ling jurisdictions and a $7.5 million increase to tax
expense recorded in 2010 for the nondeductible expense related to
the warrant liability.
Results for 2009 compared to 2008—
Consolidated
Revenue for the year ended December 31, 2009 was $112.6 million, a
decrease of $113.5 million, or 50.2%, compared to $226.1 million for
the same period in 2008. Revenue decreased across all of the Company’s
segments as depressed petroleum and natural gas prices drove down
rig count and related drilling activity, negatively impacting activity
volume in 2009. Pricing pressures were also a factor in the decline of
revenue as customers switched to less expensive products where possible.
Consolidated gross margin decreased $61.4 million and as a percentage
of sales decreased to 26.1% in 2009 from 40.1% in 2008 due to margin
compression in the Drilling segment. Although direct expense reductions
of $5.9 million were realized in 2009 versus 2008, the decrease in direct
expenses did not occur as swiftly as the decline in revenue.
SG&A costs were $36.9 million for the year ended December 31, 2009,
a decrease of 20.2%, compared to $46.3 million in 2008. Th e decrease
was primarily due to a $9.3 million reduction in indirect personnel
and personnel related costs and professional fees due to headcount
reduction and cost containment eff orts.
Depreciation and amortization costs were $4.9 million for 2009, a
decrease of approximately 11.6% compared to $5.6 million in 2008.
A reduction of amortizable intangible assets and depreciable fi xed
assets due to the impairment recorded in 2008 was the primary cause
of the decrease.
R&D costs in 2009 were $2.1 million, an increase of 9.7%, compared
to $1.9 million in 2008. R&D costs in the Chemicals segment were
65% and 89% of total R&D expense in 2009 and 2008, respectively.
In the second quarter of 2009, the Company recognized goodwill
impairment of approximately $18.5 million related to the Teledrift
reporting unit. No impairment was recorded as part of management’s
2009 annual assessment of goodwill.
Interest expense was $15.5 million for the year ended December 31, 2009
versus $13.9 million for the comparative 2008 period. Th e increase
primarily related to accretion of debt discount recognized eff ective
January 1, 2009 associated with adoption of a new accounting principle.
An income tax provision of $2.0 million was recorded for the year ended
December 31, 2009, resulting in an eff ective tax rate of (4.2)%, compared
to a tax benefi t of $10.5 million for the year ended December 31, 2008,
with an eff ective tax rate of 23.5%. Th e change in the Company’s
eff ective tax rate, resulted from an $18.8 million valuation allowance
recorded in 2009 against deferred tax assets of one of the Company’s
fi ling jurisdictions and due to a $19.3 million impairment charged
assessed in 2008 which impacted the 2008 tax provision.
22
FLOTEK INDUSTRIES, INC. Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results by Segment
Chemicals and Logistics (dollars in thousands)
2010
2009
2008
For the Year Ended December 31,
Revenue
Gross margin
Gross margin %
Income from operations
Income from operations %
$
$
$
66,121
29,249
44.2 %
19,833
30.0 %
$
$
$
49,296
21,667
44.0 %
12,964
26.3 %
$
$
$
109,356
49,119
44.9 %
37,433
34.2 %
Results for 2010 compared to 2009—Chemicals
and Logistics
Results for 2009 compared to 2008—Chemicals
and Logistics
Chemicals’ revenue for 2010 was $66.1 million, an increase of
$16.8 million, or 34.1%, as compared to $49.3 million in 2009. Recovery
of previously granted product and service price reductions, increased
international sales and increased demand for microemulsion products
from new and existing customers drove the increase. Additionally, new
products generated from the Company’s ongoing R&D activities continue
to be favorably received by customers. Th e favorable variance also
correlates with an 18.9% increase in average natural gas rig activity (2010:
1,103 rigs vs. 2009: 928 rigs) within the industry and corresponding
product sales increases of $17.5 million. Th e favorable variances was
off set by a decrease in customer service revenue ($0.7 million) in the
fi rst half of 2010 as compared to the fi rst half of 2009 in response to
industry uncertainty regarding ramifi cations of the British Petroleum
Deepwater Horizon oil disaster. Correspondingly, the drilling moratorium
in the Gulf of Mexico signifi cantly impacted the Company’s Logistics
division contract in the Gulf of Mexico.
Th e gross margin increased $7.6 million, or 35% in 2010 as compared
to 2009; however, the gross margin as a percentage of revenue remained
relatively fl at at 44.2% for the year ended December 31, 2010, compared
to 44.0% for the year ended December 31, 2009. Favorable variances
were due to increased product sales volumes and favorable product
mix margins.
Income from operations was $19.8 million for 2010, an increase of
approximately 53.0% compared to $13.0 million in 2009. Income from
operations as a percentage of revenue increased to 30.0% for 2010 from
26.3% for the same period in 2009. Favorable variance is attributable
to increased product sales and favorable product mix margins.
Drilling Products (dollars in thousands)
Revenue
Gross margin
Gross margin %
Loss from operations
Income from operations %
Chemicals revenue for the year ended December 31, 2009 was
$49.3 million, a decrease of $60.1 million, or 54.9%, compared to
$109.4 million for the year ended December 31, 2008. Th e decrease
in revenue was primarily due to a 46% reduction in volume driven
by lower crude and natural gas prices and associated steep drop in rig
and well fracturing activity. Further, pricing pressures drove customers
to lower priced products resulting in a 24% decrease in average sales
dollars per unit sold in 2009 versus 2008. Sales of the Company’s
patented micro-emulsion chemicals declined 59% to $31.6 million in
2009 compared to 77.3 million in 2008. Demand for micro-emulsion
chemicals is contingent upon various market variables including the fact
that micro-emulsion chemicals historically have a higher per-unit cost.
Gross margin decreased $27.5 million in 2009 due to reductions in
revenue. Slight reductions in gross margin as a percentage of revenue
from 44.9% to 44.0% were realized in 2009 versus 2008, respectively.
Product margins as a percentage of product revenue remained fl at.
Field direct expenses as a percentage of segment revenue increased to
8.1% in 2009 from 5.5% in 2008 as revenue decreased at a higher rate
than cost containment reductions. Chemical product costs fl uctuated
signifi cantly with the price of petroleum. Th e Company has historically
not led the market in pricing, accordingly, product margins are directly
impacted by market and cost fl uctuations.
Income from operations was $13.0 million for the year ended
December 31, 2009, a decrease of approximately 65.4% compared
to the same period in 2008. Income from operations as a percentage
of revenue decreased to 26.3% for 2009 versus 34.2% in 2008. Field
indirect costs decreased by $3.2 million or 26.8% due primarily to
on-going cost containment eff orts initiated in 2008. Th e rate of cost
reductions, however, did not keep pace with the decline in revenue;
accordingly fi eld indirect costs increased as a percentage of revenue to
17.7% in 2009 from 10.9% in 2008.
For the Year Ended December 31,
2010
2009
65,782
$
18,991
$
28.9 %
50,774
$
4,781
$
9.4 %
2008
98,262
36,897
37.5 %
(9,738)
$
(32,084)
$
(43,840)
(14.8) %
(63.2) %
(44.6) %
$
$
$
FLOTEK INDUSTRIES, INC. Form 10K 23
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results for 2010 compared to 2009—Drilling
Products
Results for 2009 compared to 2008—Drilling
Products
Drilling revenue for the year ended December 31, 2010 was
$65.8 million, an increase of $15.0 million, or 29.6% compared to
$50.8 million for the year ended December 31, 2009. Th e favorable
variance was attributable to increased rental activity of $13.6 million
that was partially driven by a 16.0% increase in vertical rig count
during 2010 as compared to 2009 (2010: 502 versus 2009: 433). Th e
$13.6 million increase, by reporting unit, consisted of increased rental
activity of $6.4 million for Teledrift products and $7.1 million for
Spidle/Turbeco. Teledrift realized 104% revenue growth in West Texas
due to improved market conditions, marketing and sales eff orts and
above average lost-in-hole revenue. Spidle/Turbeco revenue benefi ted
from increased motor rentals in both the Barnett and Bakken shales.
Improved motor designs for historically diffi cult basins resulted in
improved pricing and run rates. An additional $1.3 million period over
period increase was realized from increased domestic and international
product sales both domestically and internationally to the copper
mining industry. Increased copper mining activity is attributable to
an escalation in the market price of copper.
Gross margin increased to $19.0 million in 2010, an increase of
$14.2 million, or 297.2%, compared to $4.8 million in 2009. Gross
margin as a percentage of revenue increased 19.5% to 28.9% in 2010
from 9.4% in 2009. Favorable period over period variance was primarily
due to increased rental volumes and favorable product mix margins.
Loss from operations was $9.8 million in 2010, an improvement of
$22.3 million or 69.6% as compared to $32.1 million loss in 2009.
Th e improved performance is primarily due to the $9.6 million
positive variance between the 2010 realized $9.3 million impairment
of long-lived and other intangible assets and the 2009 $18.5 million
impairment of goodwill, combined with the $13.6 million increase
in rental revenue.
Drilling revenue for the year ended December 31, 2009 was
$50.8 million, a decrease of $47.5 million, or 48.3%, compared
to $98.3 million for the year ended December 31, 2008. Th e 2009
decline as compared to 2008 was primarily due to decreased demand
for products and services commensurate with the reduction in total
rig count in North America. Reductions in volume were experienced
in all product lines and nearly all products. Further, an oversupply
of tools available for rent or sale by the Company and in the market
due to the economic recession created pricing pressures that reduced
revenue on a per rental basis.
Gross margin decreased $32.1 million in 2009 compared to 2008 due
to reduced revenue. Product and rental gross margins as a percentage
of associated revenue declined to 55.6% in 2009 from 66.0% in 2008,
accounting for a $4.6 million relative decrease in gross margin, due to
market pricing pressures. Field direct costs decreased $3.6 million or
16% in 2009 due to cost containment eff orts; however, due to reduced
revenue, costs increased as a percentage of revenue to 37% from 23%.
Inventory adjustments related to increased inventory reserves, increased
$1.9 million in 2009 as compared to 2008 contributing to the decrease.
Loss from operations was $32.1 million in 2009, an improvement of
$11.8 million or 26.8% as compared to the 2008 loss of $43.8 million.
Th e positive variance was due to a year-over-year reduction in goodwill
impairment charges ($18.5 million in 2009 versus $59.1 million in
2008,) off set by decreased gross margins. Field indirect costs decreased
by $3.2 million or 15.0% in 2009 as compared to 2008 due to cost
containment eff orts; however, due to reduced revenue, indirect costs
increased as a percentage of revenue to 36.2% in 2009 from 22.0%
in 2008.
Artifi cial Lift (dollars in thousands)
Revenue
Gross margin
Gross margin %
Income (loss) from operations
Income (loss) from operations %
$
$
$
For the Year Ended December 31,
2010
15,079
4,730
$
$
31.4 %
3,070
$
20.4 %
2009
12,480
2,936
$
$
23.5 %
1,161
$
9.3 %
2008
18,445
4,740
25.7 %
(6,709)
(36.4) %
Results for 2010 compared to 2009—Artifi cial
Lift
Artifi cial Lift revenue for the year ended December 31, 2010 was
$15.1 million, an increase of $2.6 million, or 20.8%, compared to
$12.5 million for the year ended December 31, 2009. Th e majority
of Artifi cial Lift revenue is derived from coal bed methane (“CBM”)
drilling. CBM drilling activity is highly correlated to the price of
natural gas. Th e price of natural gas has increased 14.4% to $4.25/
mmbtu at the end of December 2010 from $3.71/mmbtu for the
same period in 2009. Th roughout 2010 natural gas drilling activity
also steadily increased to levels in excess of 1,000 natural gas drilling
rigs. Th e average North American natural gas rig count increased
18.9% to 1,103 rigs at the end of December 2010 from 928 rigs for
the comparable period in 2009. Th e impact of the increase in natural
gas prices and corresponding increase in drilling activity resulted in
an increase in the volume of units sold.
Gross margin increased $1.8 million, or 61.1% to $4.7 million in
2010 from $2.9 million in 2009 due to increased product revenue of
$2.3 million or 19.9% combined with cost effi ciencies realization. Raw
materials costs and direct expenses decreased as a percentage of revenue
to 69% in 2010 from 76% in 2009 due to the fi xed cost structure of
the business and managements continued cost containment eff orts.
Income from operations improved $1.9 million or 164.4% to
$3.1 million in 2010 from $1.2 million in 2009 due to increased
demand driven by the period over period increase in the average price
of natural gas and the corresponding increase in drilling activity.
24
FLOTEK INDUSTRIES, INC. Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results for 2009 compared to 2008—Artifi cial
Lift
Artifi cial Lift revenue for the year ended December 31, 2009 was
$12.5 million, a decrease of $6.0 million, or 32.3%, compared to
$18.4 million for the year ended December 31, 2008. As the price of
natural gas declined throughout the majority of 2009, drilling activity
slowed considerably, resulting in a reduction in the volume of units sold.
Gross margin decreased $1.8 million, or 38.1%, to $2.9 million in
2009 from $4.7 million in 2008 due to decreased product revenue.
Product margins increased slightly to 69% in 2009 from 68% in 2008
accounting for a $0.1 million relative increase in gross margin. Field
direct costs decreased by $0.3 million, or 24%, period over period due
to cost containment eff orts.
Income from operations increased $7.9 million to $1.2 million in 2009
from a loss from operations of $6.7 million in 2008. Th e majority of
the variance is due to no goodwill impairment being recognized in
2009 compared to $8.6 million of impairment recognized in 2008.
Further, fi eld indirect costs decreased $1.1 million due to management’s
cost containment eff orts.
Capital Resources and Liquidity
Overview
Plan of Operations for 2011
Ongoing capital requirements are driven by the Company’s need to
service debt, acquire and maintain equipment, and fund working capital
requirements. During 2010, the Company funded capital requirements
primarily with operating cash fl ows, debt borrowings, and conversions
of exercisable and contingent warrants.
Th e impact of the global recession continued to aff ect the Company’s
fi nancial performance and liquidity in 2010; however, as oil and natural
gas prices, the number of well completions and rig count trended
favorably throughout 2010, the Company experienced, and continues
to experience, increasing levels of demand for products and services
across all business segments.
At December 31, 2010, the Company was in compliance with debt
covenants. Th e signifi cant terms of the Company’s term loan are
discussed under Item 8 “Financial Statements and Supplementary
Data” and in Note 10 “Convertible Notes and Long-Term Debt” in
of the Notes to Consolidated Financial Statements.
At December 31, 2010, the Company was not in compliance with
the continued listing standards of the NYSE. Noncompliance arose as
both global market capitalization and stockholders’ equity fell below
$50 million in 2009. In March 2010, the Company submitted a
plan of action to the NYSE outlining management’s plan to achieve
compliance during the 18-month cure period allowed by the NYSE,
which ends June 2011. During implementation and execution of the
plan, the Company’s common stock has continued to be listed on
the NYSE, subject to compliance with other NYSE continued listing
requirements. On March 29, 2010, the NYSE accepted the Company’s
plan of action.
The Company has cash and cash equivalents of approximately
$19.9 million at December 31, 2010 primarily attributable to cash fl ows
from operations. In March 2010, the Company received net proceeds
of $6.1 million from the execution of a term loan and refi nancing of a
portion of the Company’s convertible notes. Th e Company’s favorable
operating cash results, anticipated increases in forecast activity and
level of demand for the Company’s products and services, as well as,
current cash position and future outlook infl uenced the $2.7 million
increase of planned 2011 capital expenditures to $8.8 million from
capital expenditures of $6.1 million in 2010.
Th e Company believes suffi cient cash reserves are available to meet
anticipated operating and capital expenditure requirements during
2011; however, the Company is exploring options to secure more
favorable debt and equity fi nancing terms.
During 2010 oil and liquid-rich natural gas prices improved directly
impacting demand for the Company’s products and services. Forecasting
the depth and length of the recovery cycle of the current economy is
challenging due to the overlay of worldwide fi nancial uncertainty. As
the 2010 average annual drilling rig count increased to 1,549 rigs,
or 42.2%, as compared to the average annual drilling rig count of
1,089 in 2009, the Company has experienced encouraging revenue
growth of 30.6% and an increase in gross margin percentage of 9.9%
compared to 2009.
Th e Company’s 2011 Plan of Operations anticipates sustained
improvement in industry economic conditions. Th e 2011 Plan includes
the following:
• Establish a traditional commercial banking relationship to provide
the Company with increased capacity and fl exibility to respond to
increased demand forecast for 2011.
• Invoke the automatic conversion of preferred stock.
• Explore funding opportunities with fi nancial advisors. Th e likelihood
of obtaining additional equity funding should increase if the economy
continues to improve and if the oil and gas industry growth continues.
• Closely manage capital expenditures despite improved cash fl ows. Th e
Company’s capital expenditure budget for 2011, is approximately
$8.8 million, an increase of $2.7 million from the $6.1 million
spent in 2010.
• Continue expansion into foreign markets to realize strategic benefi ts
for the Company’s existing business segments. Th e Company is actively
working with potential business partners that off er a broader geographic
reach or new and unique ways to use existing products and services.
• Continue strategic identifi cation and sale of non-core assets and
underperforming product lines. Continue identifi cation of assets
no longer aligned with strategic objectives. In addition to providing
liquidity, the sale of non-strategic assets should allow the Company
to continue to concentrate eff orts and resources on improving and
expanding the reach of profi table products.
• Continue emphasis of certain product lines, which could result in
further improvement of the Company’s margins. Th e Company
continues to assess both outsourcing and in-house opportunities to
realize operational improvements. As economic conditions improve,
the Company will hire additional personnel as needed.
FLOTEK INDUSTRIES, INC. Form 10K 25
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
• Manage operating cash fl ows through receivables, payables and
inventory management. Th e Company is poised to realize increased
cash fl ows from inventory management as demand for products
increases. Overall management of working capital is being highlighted.
Th e Company will continue to revisit pricing strategies and adjust
prices in order to attain the most favorable market positions that
conditions and environments will allow.
• Manage asset utilization to enhance and increase the synergy of
operations and sales across all business and product lines in order to
be prepared and responsive with available resources to meet increasing
market demand of products and services.
• Continue to emphasize technology advancements and diff erentiation
across all business segments. Technological innovations are important
to the Company’s future success. Th e Company intends to maintain
current R&D activities in support of Chemicals’ additives solutions
and Drilling’s product design diff erentiation to meet the specifi c
demands of the customers and areas where the Company operates.
• Implement a new ERP system to more actively manage internal
controls, reduce current accounting constraints, and increase operational
responsiveness.
• Continue to simplify existing tax structure, while taking advantage
of existing NOLs.
Cash Flows
Cash fl ow metrics from our consolidated statements of cash fl ows are as follows (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by fi nancing activities
Eff ect of exchange rate fl uctuations
Net increase (decrease) in cash and cash equivalents
2010
12,099
$
(600)
1,900
(21)
13,378
$
2009
2,186
$
2008
24,874
(3,699)
(117,178)
7,812
(7)
6,292
$
91,215
-
(1,089)
$
$
Operating Activities
During 2010, 2009 and 2008, the Company generated cash
from operating activities totaling $12.1 million, $2.2 million and
$24.9 million, respectively. Th e consolidated net loss for 2010 was
$43.5 million compared to a consolidated net loss of $50.3 million for
2009 and a consolidated net loss of $34.2 million for 2008. Noncash
items in 2010 totaled $55.9 million, consisting of a change in warrant
liability fair value ($21.5 million), asset depreciation and amortization
($13.8 million), impairment of long-lived assets and other intangibles
($9.3 million), amortization of deferred fi nancing costs and accretion of
debt discount ($8.9 million), stock compensation expense ($4.7 million),
reduction in the tax benefi t of share-based awards ($1.7 million) and
a loss on the extinguishment of debt ($1.0 million) off set by a net
gain on the sale of assets of $1.3 million and a deferred income tax
benefi t ($3.6 million). Noncash items in 2009 were $49.4 million,
consisting of impairment charge of goodwill ($18.5 million), asset
depreciation and amortization ($14.2 million), deferred income tax
provision ($10.5 million), amortization of deferred fi nancing costs and
accretion of debt discount ($6.4 million), and stock compensation
expense ($1.7 million), off set by a net gain on the sale of long-lived
assets ($1.4 million). Noncash items in 2008 were $62.5 million,
consisting goodwill and intangible impairment charges ($67.7 million),
depreciation and amortization ($12.8 million), amortization of deferred
fi nancing cost and accretion of debt discount ($4.7 million) off set by
a deferred tax benefi t ($20.9 million), a net gain on the sale of and
stock compensation expense ($2.5 million) assets ($2.9 million) and
excess tax benefi ts of share based awards ($2.0 million).
During 2010 changes in working capital used $0.4 million in cash. Th e
decrease in working capital is primarily due to working capital utilization
to meet increased demands of the improved economic environment
off set by the Company’s eff orts to match customer collection activity
with the payment of vendors. Th e Company’s use of working capital is
evidenced by an increase in accounts receivable and inventory balances
($12.7 million and $0.6 million, respectively) off set by reductions in
working capital obligations in accounts payable ($5.5 million), accrued
liabilities ($4.6 million) and recognized income tax receivable ($3.6
million). During 2009 changes in working capital provided $3.1 million
in cash. Th e increase in working capital is a result of decisive eff orts
taken during 2009 as the business declined to collect accounts receivable
($22.6 million) and utilize inventory on-hand ($10.8 million) off set
by payments of accounts payable ($14.6 million), accrued liabilities
($9.8 million) and an increase in income taxes receivables ($6.6 million).
During 2008 the changes in working capital used $3.4 million. Th e
decrease in working capital is principally due to the Company’s need
to fi nance increased sales through an increase in accounts payable
($12.4 million), accrued liabilities ($5.1 million) and interest payable
($2.4 million) while simultaneously increasing the balance of accounts
receivable ($8.5 million) and inventory purchases ($14.5 million).
Investing Activities
During 2010, 2009 and 2008, capital expenditures were $6.1 million,
$6.6 million and $23.7 million, respectively. Capital expenditures
remained relatively consistent during 2010 and 2009 given the economic
uncertainty during both years in addition to the Company closely
monitoring and maintaining available cash. Capital expenditures in
2010 were for motors, shocks, jars, subs and instruments as well as
fl eet service vehicles to meet and support increased customer demand.
Capital expenditures in 2009 were made to expand the Company’s
rental tool fl eet (primarily mud motors, MWD tools, shock subs and
drilling jars), construct a larger facility for Teledrift operations and
purchase additional plant and machinery, primarily machines to repair
motors and for use in R&D activities. During 2008, the Company
expended $98.0 million for the Teledrift acquisition and incurred
capital expenditures of $23.7 million. Cash fl ows used in investing
activities during 2010, 2009 and 2008 were primarily off set with
proceeds from the sale of assets of $5.5 million, $2.9 million, and
$4.6 million respectively.
26
FLOTEK INDUSTRIES, INC. Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financing Activities
During 2010, 2009 and 2008, fi nancing activities provided net cash
of $1.9 million, $7.8 million and $91.2 million, respectively.
During 2010, the Company entered into a new term loan ($40.0 million)
and received cash as a result of the exercise of contingent and exercisable
stock warrants ($4.5 million). Repayments of indebtedness included
settlement of the Company’s existing senior credit facility with Wells
Fargo ($32.0 million) and required principal payments under the
Whitebox fi nancing term loan of ($6.4 million). Th e Company
used proceeds received as payment for associated debt issuance costs
($2.0 million). Th e Company also recognized a reduction in excess tax
benefi ts related to share-based awards ($1.7 million).
During 2009, the Company received net advances ($21.8 million) from
existing credit facilities and proceeds from the issuance of preferred stock
($16.0 million). Repayments include payments made on indebtedness
($27.8 million), expenses related to debt issuance costs ($0.9 million), and
costs related to issuance of preferred stock and warrants ($1.2 million).
During 2008, the Company issued 5.25% Convertible Notes (“2008
Notes”) due 2028 ($115.0 million), received net advances from existing
credit facilities ($6.7 million) and incurred an increase in excess tax
benefi t related to share-based awards ($2.0 million). Payments include
repayments made on indebtedness ($27.6 million), expenses related
to the issuance of the 2008 Notes ($5.5 million) and repurchases of
treasury stock ($0.3 million).
Non-Cash Impairment
Th e Company tests goodwill for impairment at the reporting unit
level each year in the fourth quarter and on an interim basis if events
occur or circumstances change that could result in a reduction in the
reporting units fair value below the reporting unit’s carrying value. Th e
Company tests other long-lived and intangible assets for impairment
when events or circumstances exist which could result in a decline in
the carrying value of the assets. Goodwill impairment is recognized
when the carrying amount of goodwill exceeds the fair value. Other
long-lived and intangible assets impairment is recognized when the
Off -Balance Sheet Arrangements
Th ere have been no transactions that generated relationships with
unconsolidated entities or fi nancial partnerships, such as entities
often referred to as “structured fi nance” or “special purpose entities”
(“SPEs”), established for the purpose of facilitating off -balance sheet
arrangements for other contractually narrow or limited purposes.
As of December 31, 2010, the Company was not involved in any
unconsolidated SPEs.
carrying value of the assets exceeds the sum of the assets forecast
undiscounted cash fl ows.
Th e test for goodwill, other long-lived assets, and intangible assets
requires an analysis of the current business environment, future economic
market indicators, expectations of future performance, anticipated
cost of working capital requirements, projected revenue and operating
margins, and market and industry risk rates. Recognition of changes in
any of these variables may indicate existence of potential impairment.
During the fourth quarter of 2010, the Company reviewed generation
trends of certain long-lived asset groups in response to recovering
economic expectations. Th e Company performed an assessment of
the recoverability of identifi ed asset groups based upon the expected
revenue generation capability of the asset groups over the remaining
useful lives of the asset groups compared to the carrying value of the
asset groups. Th e result of the assessment was discovery of certain asset
groups’ inability to recover associated carrying value. Accordingly, the
Company recorded a pre-tax impairment charge of $8.9 million related
to long-lived assets, primarily rental tools within the Drilling segment.
Further, during the fourth quarter of 2010 management tested certain
defi nite-lived intangible assets due to changes in exclusive vendor
relationships previously held and as a result recognized $0.4 million
of impairment charges.
Th e Company anticipates a steady but constant economic recovery
into the latter half of 2011. Th e Company also expects to continue
to realize benefi ts from re-leveraging of sales through early 2011.
Notwithstanding the aforementioned, uncertainties surrounding oil
and natural gas prices and the global economy have contributed to
conservative cash fl ows and higher risk-adjusted discount rates which
were used in the annual 2010 assessment as compared to those used
in the interim 2010 and annual 2009 assessments.
Th e Company believes cost containment actions taken in late 2009
and actively managed throughout 2010 were successful. Th ese actions
included closing operating locations, curtailing capital expenditures,
reducing personnel levels, discontinuing the Company’s 401(k) matching,
and focusing on cost margin management. Th e Company continues to
emphasize collection of customer receivables and inventory management.
Th e Company has not made any guarantees to customers or vendors
nor does the Company have any off -balance sheet arrangements or
commitments, that have, or are reasonably likely to have, a current or
future eff ect on the Company’s fi nancial condition, change in fi nancial
condition, revenue, expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
FLOTEK INDUSTRIES, INC. Form 10K 27
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Contractual Obligations
Cash fl ows from operations are dependent on a number of factors,
including fl uctuations in operating results, accounts receivable collections,
inventory management, and the timing of payments for goods and
services. Correspondingly, the impact of contractual obligations on the
Company’s liquidity and capital resources in future periods should be
analyzed in conjunction with such factors.
Material contractual obligations consist of repayment of amounts
borrowed through the 2008 and 2010 Notes, Senior Credit Facility
debt, and capital and operating lease obligations. Contractual obligations
at December 31, 2010 are as follows (in thousands):
Secured convertible senior notes
$
Unsecured senior convertible notes
Interest expense on convertible notes(1)
Long-term debt obligations
Interest expense on long-term debt(2)
Capital lease obligations
Operating lease obligations
Payments Due by Period
Total
Less than 1 year
2 - 3 years
4 -5 years
More than 5 years
36,004
$
75,000
12,384
33,621
6,319
960
4,407
$
-
-
5,828
6,047
3,784
407
1,508
36,004
$
75,000
6,556
27,574
2,535
553
1,396
$
-
-
-
-
-
-
-
-
-
-
-
-
147
1,356
TOTAL
(1) Interest at 5.25% with principal repayment on February 15, 2013, the date of the holders’ first put option.
(2) Interest at 12.5% until the principal balance is reduced below $30 million, and then interest at 11.5%. Scheduled principal reductions are considered, with final maturity of the
168,695 $
149,618 $
17,574 $
147 $
1,356
$
debt on November 1, 2013.
Critical Accounting Policies and Estimates
Th e Company’s consolidated fi nancial statements have been prepared
in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”). Preparation of these statements
requires management to make judgments, estimates and assumptions
that aff ect the amounts of assets and liabilities in the fi nancial statements
and revenue and expenses during the reported periods. Signifi cant
accounting policies are described in Note 2 - “Summary of Signifi cant
Accounting Policies” in the Notes to Consolidated Financial Statements.
Th e Company believes the following accounting policies are critical
due to the signifi cant, subjective and complex judgments and estimates
required based upon management’s understanding of the Company’s
business and to the Company’s preparation of the consolidated fi nancial
statements. Th e Company regularly reviews the judgments, assumptions
and estimates related to the critical accounting policies noted below.
Inventory Reserves
Inventories consist of raw materials, work-in-process and fi nished
goods and are carried at the lower of cost or market using the weighted
average cost method. Finished goods inventories include raw materials,
direct labor and production overhead. Th e Company’s inventory reserve
represents the excess of inventory carrying value over the amount expected
to be realized from the ultimate sale or other disposal of the inventory.
Th e Company regularly reviews inventory quantities on hand and records
provisions for excess or obsolete inventory based on the Company’s
forecast of product demand, historical usage of inventory on hand,
market conditions, production and procurement requirements and
technological developments. Signifi cant or unanticipated changes in
market conditions or forecast expectations could aff ect the amount
and timing of provisions for excess or obsolete inventory.
28
FLOTEK INDUSTRIES, INC. Form 10K
Th e Company has not made any material change in the accounting
methodology used to establish slow-moving and obsolete reserves
during the past three fi scal years. Specifi c assumptions are updated at
the date of each test to consider current industry and Company specifi c
risk factors. Th e current business climate is subject to evolving market
conditions and requires signifi cant judgment to predict the potential
impact to the Company assumptions. To the extent that changes in the
current business environment result in adjustments to management
assumptions, impairment losses could be realized in future periods. Th e
potential change in the inventory reserve resulting from a hypothetical
10% adverse impact in the Company’s forecast annual demand for
products would have increased the recommended inventory reserve
by $0.2 million at December 31, 2010.
Revenue Recognition
Revenue for product sales and services is recognized when all of the
following criteria have been met: (i) persuasive evidence of an arrangement
exists, (ii) products are shipped or services rendered to the customer
and all signifi cant risks and rewards of ownership have passed to the
customer, (iii) the price to the customer is fi xed and determinable, and
(iv) collectability is reasonably assured. Th e Company’s products and
services are sold with fi xed or determinable prices and do not typically
include the right of return or any signifi cant post delivery obligations.
Revenue and associated accounts receivable in the Chemicals and Drilling
segments are typically recorded net of discount when aforementioned
conditions are met and a signed proof of obligation is obtained from
the customer. Deposits and other funds received in advance of delivery
are deferred until the transfer of ownership is complete.
Th e Logistics division recognizes revenue related to design and
construction oversight contracts under the percentage-of-completion
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
method of accounting, measured by the percentage of cost incurred
to date proportionate to the total estimated costs of completion. Th is
calculated percentage is applied to the total estimated revenue upon
completion to calculate revenue earned to date. Contract costs include
all direct labor and material costs, as well as, indirect costs related to
manufacturing and construction operations. General and administrative
costs are charged to expense as incurred. Changes in job performance
metrics or estimated profi tability, including those arising from contract
bonus and penalty provisions and fi nal contract settlements, may
periodically result in revisions to income and expense estimates and
are recognized in the period in which such revisions appear probable.
All known or anticipated losses on contracts are recognized when such
amounts become probable and estimable.
Within the Drilling segment, payments from customers for the
contractually negotiated replacement and loss of use value of rental
equipment damaged or lost-in-hole (“LIH”) are refl ected as revenue
and the carrying value of the equipment charged to cost of sales. LIH
revenue totaled $3.1 million, $2.9 million and $4.4 million for the
years ended December 31, 2010, 2009, and 2008, respectively.
Goodwill
Th e Company annually evaluates the carrying value of goodwill in the
fourth quarter of each year, as well as, on an interim basis if events occur
or circumstances change that are indicative of a potential impairment.
Such circumstances could include, but are not limited to signifi cant
adverse changes in the business climate, unanticipated competition, or
changes in the projected operating results. Impairment testing consists
of a two-step process. Th e fi rst step is to compare the estimated fair value
of each reporting unit’s carrying value. If the fair value of a reporting
unit is less than the carrying value, the second step of the impairment
test is performed to determine the amount of impairment, if any.
Th e Company determines fair value using widely accepted valuation
techniques, including discounted cash fl ows and market multiple
analyses, and through use of independent fi xed asset valuation fi rms, as
appropriate. Th ese types of analyses contain uncertainties as they require
management to make assumptions and apply judgments regarding
estimates of industry economic factors and the profi tability of future
business strategies. Th e Company’s policy is to conduct impairment
testing based on current business strategies, taking into consideration
current industry and economic conditions, as well as, the Company’s
future expectations. Key assumptions used in the discounted cash fl ow
valuation model include, among others, discount rates, growth rates,
cash fl ow projections and terminal value rates. Discount rates and
cash fl ow projections are the most sensitive and susceptible to change
as they require signifi cant management judgment. Discount rates are
determined by using a weighted average cost of capital (“WACC”). Th e
WACC considers market and industry data, as well as, Company-specifi c
risk factors for each reporting unit in determining the appropriate
discount rate to be used. Th e discount rate utilized for each reporting
unit is indicative of the return an investor would expect to receive for
investing in a similar business. Operational management, industry
considerations and Company specifi c historical and projected results
are used to develop cash fl ow projections for each reporting unit.
Additionally, as part of the market multiple approach, the Company
utilizes market data from publicly traded entities whose businesses
operate in industries comparable to the Company’s reporting units,
adjusted for certain factors that increase comparability.
During the Company’s 2010 annual impairment assessment the estimated
fair value of the Chemicals reporting unit exceeded total carrying value
by more than $81.3 million. Th e estimated fair value of the Teledrift
reporting unit exceeded total carrying book value by approximately
$21.3 million. As a result, Step 2 evaluation was not required. To
evaluate the sensitivity of the fair value calculations of the reporting
units, the Company applied a hypothetical 10% unfavorable change
in the weighted average cost of capital, which would have reduced the
estimated fair value of the Chemicals and Teledrift reporting units by
approximately $2.8 million and $2.2 million, respectively. In addition,
the Company applied a hypothetical 10% reduction to the Company’s
market multiples, key fi nancial measures and estimated future cash
fl ows utilized in the Company’s impairment analyses. Th e results of
which would have reduced the estimated fair value of the Chemicals
and Teledrift reporting units by approximately $20.0 million and
$11.0 million, respectively. Neither of these sensitivity analyses were
indicative of impairment.
Th e Company cannot predict the occurrence of events or circumstances
that could adversely aff ect the fair value of goodwill. Such events
may include, but are not limited to deterioration of the economic
environment, in particular the oil and gas industry, increases in the
Company’s weighted average cost of capital, material negative changes
in relationships with signifi cant customers, reductions in valuations of
other public companies within the Company’s industry, or strategic
decisions made in response to economic and competitive conditions. If
actual results are not consistent with the Company’s current estimates
and assumptions, an impairment of goodwill could be required.
Based upon annual and interim evaluations no goodwill impairment
was assessed in 2010. Due to continuing macro-economic conditions
aff ecting the oil and gas industry and fi nancial performance of the
Company’s reporting units, management tested for evidence of goodwill
impairment during the second and third quarters of 2009, in addition
to assessment of any annual impairment. A goodwill impairment charge
of $18.5 million related to the Teledrift reporting unit was recognized
in the second quarter of 2009. An annual impairment assessment
during 2008 recognized $61.5 million of required impairment charges.
Long-Lived Assets Other than Goodwill
Long-lived assets other than goodwill consist of property, equipment
and defi nite-lived intangible assets. Th e Company makes judgments
and estimates regarding the carrying value of these assets, including
amounts to be capitalized, depreciation and amortization method,
useful lives and valuation of acquired defi nite-lived intangibles.
Long-lived assets other than goodwill are tested for impairment whenever
events or changes in circumstances indicate that the carrying value of
the asset may not be recoverable. An impairment loss is recognized
when the carrying value of a long-lived asset is not recoverable and
is in excess of fair value. Th e carrying value of a long-lived asset is
deemed not recoverable if the carrying value is in excess of the sum
of the undiscounted cash fl ows expected to result from the use and
eventual disposition of the asset. Th e assessment is based on the carrying
value of the asset at the date tested for recoverability. Th e Company’s
impairment evaluation considers internal valuation analyses and
other publicly available market information, as well as, the use of an
independent valuation fi rm, as appropriate.
Th e development of future net undiscounted cash fl ow projections
requires management projections of future cash fl ows related to sales and
FLOTEK INDUSTRIES, INC. Form 10K 29
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
profi tability trends and the estimation of remaining useful lives of the
assets. Th ese projections are consistent with projections the Company
uses to internally manage operations. When potential impairment is
indicated, a discounted cash fl ow valuation model similar to that used to
value goodwill at the reporting unit level, incorporating discount rates
commensurate with risks associated with each asset, is used to determine
the fair value of the asset in order to measure potential impairment.
Discount rates are determined by using a WACC. Estimated revenue
and WACC are the assumptions most sensitive and susceptible to change
in the long-lived asset analysis as they require signifi cant management
judgment. Th e Company believes the assumptions used are refl ective
of what a market participant would have used in calculating fair value.
Valuation methodologies utilized to evaluate long-lived assets other
than goodwill for impairment were consistent with prior periods.
Specifi c assumptions discussed above are updated at each testing date
to consider current industry and Company-specifi c risk factors from
the perspective of a market participant. Th e current business climate
is subject to evolving market conditions and requires signifi cant
management judgment to interpret the potential impact upon the
Company’s assumptions. To the extent that changes in the current
business climate result in adjustments to management projections,
impairment losses may be recognized in future periods.
During the fourth quarter of 2010, management tested for impairment
of certain defi nite-lived intangible assets due to the loss of the exclusivity
of contractual vendor relationships previously recognized. Th e Company
also tested long-lived rental tool assets due to unfavorable shifts in
assumptions regarding historical industry demand of rental assets.
Impairment of long-lived rental tool fi xed assets of $8.9 million and
defi nite long-lived intangible assets of $0.4 million was realized as a
result of the 2010 impairment assessment.
Due to continuing macro-economic factors aff ecting the oil and natural
gas industry and the fi nancial performance of the Company’s reporting
units, management tested for evidence of long-lived asset impairment
during the second and the third quarters of 2009. Assessments for
impairment focused on the Teledrift and Chemicals reporting units.
No long-lived asset impairment was recorded related to any reporting
units for 2009. Due to the changing business conditions identifi ed late
in the fourth quarter of 2008, the Company determined that a test for
potential impairment of long-lived assets was appropriate. An analysis
was performed during the fourth quarter 2008 which resulted in the
Company recognizing a $6.2 million impairment of defi nite-lived
intangible assets, primarily customer lists and patents.
Allowance for Doubtful Accounts
Th e Company performs ongoing credit evaluations of customers and
grants credit based upon past payment history, fi nancial condition and
industry expectations. Th e determination of the collectability of amounts
due from customers requires the Company to use estimates and make
judgments regarding future events and trends, including monitoring
customers’ payment history and current credit worthiness in order to
determine that collectability is reasonably assured, as well as, considering
the overall business climate in which the customers operate. Th ese
uncertainties require the Company to make frequent judgments and
estimates regarding a customers’ ability to pay amounts due in order to
assess an appropriate allowance for doubtful accounts. Th e primary factors
used to quantify the allowance are customer bankruptcy, delinquency,
and the Company’s estimate of the ability to collect outstanding
receivables based on the number of days outstanding. Substantially
all of the Company’s customers are involved in the energy industry.
Th e cyclical nature of the industry may aff ect customers’ operating
performance and cash fl ows, which could impact the Company’s ability
to collect on obligations. Additionally, some customers are located
in certain international areas that are inherently subject to risks of
economic, political and civil instability.
While credit losses have historically been within expectations and
provisions established, should actual write-off s diff er from estimates,
revisions to the allowance would be recognized. Th e Company; however,
cannot assume historical credit loss rates will continue.
Warrant Liabilities
Th e Company evaluates fi nancial instruments for freestanding and
embedded derivatives. Warrant liabilities do not have readily determinable
fair values and therefore require signifi cant management judgment and
estimation. Th e Company used the Black-Scholes option-pricing model
to estimate the fair value of warrant liabilities at the end of each applicable
reporting period. Changes in the fair value of warrant liabilities during
each reporting period are included in the statement of operations. Inputs
into the Black-Scholes option-pricing model require estimates, including
such items as estimated volatility based upon historical volatilities of
the Company’s stock and an identifi ed group of peer companies and
estimated life of the fi nancial instruments being fair valued.
Fair Value Measurements
Fair value is defi ned as the amount that would be received for selling
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining fair
value measurements for assets and liabilities the Company considers
the principal, or most advantageous market, and assumptions that
market participants would use when pricing the asset or liability. Th e
Company categorizes its fi nancial assets and liabilities into a three-tiered
fair value hierarchy, based upon the nature of the inputs used in the
determination of fair value. Inputs refer broadly to the assumptions
that market participants would use in pricing an asset or liability
and may be observable or unobservable. Signifi cant judgments and
estimates are required, particularly when inputs are based on pricing
for similar assets or liabilities, pricing in non-active markets or when
unobservable inputs are required.
Income Taxes
Th e determination of the Company’s tax provision is subject to judgments
and estimates due to the complexity and the eff ect of the tax laws
upon the Company due to operations in multiple tax jurisdictions.
Income tax expense is based on taxable income, statutory tax rates
and tax planning opportunities available in the various jurisdictions
in which the Company operates. Th e Company’s income tax expense
is expected to fl uctuate from year to year as the amount of pre-tax
income fl uctuates. Changes in tax laws, and the level of operations or
profi tability in each jurisdiction may impact the Company’s tax liability.
While the annual tax provision is based on the information available
to the Company at the time of preparation a number of years may
elapse before the ultimate tax liabilities are determined.
30
FLOTEK INDUSTRIES, INC. Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Deferred tax assets and liabilities are recognized for the anticipated future
tax eff ects of temporary diff erences between the fi nancial statement
basis and the tax basis of assets and liabilities using statutory tax rates
in eff ect at year end. A valuation allowance is recorded against tax assets
when it is more likely than not that tax assets will not be realized. At
December 31, 2010, the Company has recorded a valuation allowance
of $22.9 million for its deferred tax assets.
Th e Company periodically identifi es and evaluates uncertain tax
positions. Th is process involves consideration of the amounts and
probabilities of various outcomes that could be realized upon ultimate
settlement. Liabilities for uncertain tax positions are based on a two-
step process. Th e actual benefi ts ultimately realized may diff er from
the Company’s estimates. Changes in facts, circumstances, and new
information may require a change in recognition and measurement
estimates for prior tax positions. Any changes in estimates are recorded
in the results of operations in the period in which the change occurs.
At December 31, 2010, the Company performed an evaluation of
its various tax positions and concluded that there are no signifi cant
uncertain tax positions requiring recognition in the consolidated
fi nancial statements.
Share-Based Compensation
Th e Company has stock-based incentive plans which may issue stock
options, restricted stock and other incentive awards. Stock-based
compensation expense for options is determined based on an estimated
grant-date fair value. Th e fair value is calculated using the Black-Scholes
option-pricing model and is recognized pro-ratably as expense over the
requisite service period. Th e option-pricing model requires the input
of highly subjective assumptions, including expected volatility and
expected option life. In addition, the Company estimates an expected
forfeiture rate and only recognizes expense for those shares expected to
vest. Th e estimated forfeiture rate is based upon historical experience. To
the extent that the actual forfeiture rate is diff erent from the estimate,
stock-based compensation expense is adjusted accordingly.
Loss Contingencies
Th e Company is subject to the possibility of various loss contingencies
arising in the course of business. Management considers the likelihood
of any loss or impairment of an asset or the incurrence of a liability, as
well as, the Company’s ability to reasonably estimate the amount of
loss in determining loss contingencies. An estimated loss contingency
is accrued when it is probable that a liability has been incurred or an
asset has been impaired and the amount of loss can be reasonably
estimated. Accruals for loss contingencies have not been recorded
during the past three years. Th e Company regularly evaluates current
information available to determine whether such accruals are necessary.
Seasonality
Due to higher customer spending near year end, the results of operations
of the Chemicals segment are generally stronger in the fourth quarter
of the year than the beginning of the year. Th e results of operations of
the Artifi cial Lift segment are generally weaker in the second quarter of
the year due to restrictions on drilling on federal lands due to breeding
seasons of certain endangered bird species.
Recent Accounting Pronouncements
Recent accounting pronouncements which may impact the Company are described in Note 2 – “Summary of Signifi cant Accounting Policies”
to the Notes to the Consolidated Financial Statements.
FLOTEK INDUSTRIES, INC. Form 10K 31
PART II
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A Quantitative and Qualitative Disclosures About
Market Risk
Th e Company is exposed to market risk from changes in interest
rates, and, to a limited extent, commodity prices and foreign currency
exchange rates. Market risk is measured as the potential negative impact
on earnings, cash fl ows or fair values resulting from a hypothetical
change in interest rates or foreign currency exchange rates during
the next year. Th e Company manages the exposure to market risks
at the corporate level. Th e portfolio of interest-sensitive assets and
liabilities is monitored and adjusted to provide liquidity necessary to
satisfy anticipated short-term needs. Th e Company’s risk management
policies allow the use of specifi ed fi nancial instruments for hedging
purposes only; speculation on interest rates or foreign currency rates
is not permitted. Th e Company does not consider any of these risk
management activities to be material.
At December 31, 2010, the Company does not have signifi cant market
risk related to changes in interest rates, commodity prices or foreign
currency exchange rates.
Interest Rate Risk
Th e Company was exposed to the impact of interest rate fl uctuations on
outstanding indebtedness under the previous Wells Fargo senior credit
facility which had variable interest rates. As required by the previous
senior credit facility, the Company entered into an interest rate swap
agreement on 50% of the term loan facility to partially reduce exposure
to interest rate risk. Th e Wells Fargo senior credit facility was repaid in
March 2010; accordingly, the Company terminated the interest rate
swap and recognized a loss of $0.1 million in 2010 upon termination.
ITEM 8
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Flotek Industries, Inc.:
We have audited the accompanying consolidated balance sheet of
Flotek Industries, Inc. and Subsidiaries as of December 31, 2010
and the related consolidated statement of operations, cash fl ows and
changes in stockholders’ equity (defi cit) for the year then ended. Th ese
fi nancial statements are the responsibility of the Flotek Industries,
Inc.’s management. Our responsibility is to express an opinion on
these fi nancial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Th ose standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the fi nancial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the fi nancial statements.
An audit also includes assessing the accounting principles used and
signifi cant estimates made by management, as well as evaluating the
overall fi nancial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated fi nancial statements referred to
above present fairly, in all material respects, the fi nancial position of
Flotek Industries, Inc. and Subsidiaries as of December 31, 2010 and
the results of their operations and their cash fl ows for the year then
ended, in conformity with accounting principles generally accepted
in the United States of America.
We were not engaged to examine management’s assertion about the
eff ectiveness of Flotek Industries Inc. and Subsidiaries’ internal control
over fi nancial reporting as of December 31, 2010 and, accordingly, we
do not express an opinion thereon.
As discussed in Note 2 to the consolidated fi nancial statements,
the Company changed its method of accounting for share lending
arrangements on January 1, 2010.
/s/ Hein & Associates, LLP
Houston, Texas
March 16, 2011
32
FLOTEK INDUSTRIES, INC. Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Flotek Industries, Inc.
and Subsidiaries:
overall fi nancial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
We have audited the accompanying Consolidated Balance Sheet
of Flotek Industries, Inc. and Subsidiaries (the “Company”) as of
December 31, 2009, and the related Consolidated Statements of
Operations, Stockholders’ Equity and Cash Flows for each of the years
in the two-year period ended December 31, 2009. Th ese consolidated
fi nancial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated
fi nancial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Th ose standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated fi nancial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the fi nancial statements.
An audit also includes assessing the accounting principles used and
signifi cant estimates made by management, as well as evaluating the
In our opinion, the fi nancial statements referred to above present
fairly, in all material respects, the consolidated fi nancial position of
Flotek Industries, Inc. and Subsidiaries as of December 31, 2009, and
the consolidated results of their operations and their cash fl ows for
each of the years in the two-year period ended December 31, 2009,
in conformity with accounting principles generally accepted in the
United States of America.
/s/ UHY LLP
Houston, Texas
May 21, 2010, except for the eff ect in 2009 and 2008 of the change in
the method of accounting for a share lending arrangement, described
in Note 2, which is as of March 16, 2011
FLOTEK INDUSTRIES, INC. Form 10K 33
PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets
FLOTEK INDUSTRIES, INC.
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $262 and $948 at December 31 2010 and
2009, respectively
Inventories
Deferred tax assets, net
Income tax receivable
Other current assets
Total current assets
Property and equipment, net
Goodwill
Deferred tax assets, net
Other intangible assets, net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY DEFICIT
Current liabilities:
Accounts payable
Accrued liabilities
Interest payable
Current portion of long-term debt
Deferred tax liabilities, net
Total current liabilities
Convertible notes, net of discount
Long-term debt, less current portion
Warrant liability
Deferred tax liabilities, net
Total liabilities
Commitments and contingencies
Stockholders’ equity (defi cit):
Cumulative convertible preferred stock at accreted value, $0.0001 par value, 100,000 shares authorized;
11,205 and 16,000 shares issued and outstanding at December 31, 2010 and 2009, respectively; liquidation
preference of $1,000 per share
Common stock, $0.0001 par value, 80,000,000 shares authorized; 36,753,891 shares issued and 35,327,893
shares outstanding at December 31, 2010; 24,168,292 shares issued and 23,362,907 shares outstanding at
December 31, 2009
Additional paid-in capital
Accumulated other comprehensive income
Accumulated defi cit
Treasury stock, at cost; 565,199 and 346,270 shares at December 31, 2010 and 2009, respectively
Total stockholders’ equity (defi cit)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY DEFICIT
See accompanying Notes to Consolidated Financial Statements.
December 31,
2010
2009
$
19,863
150
27,310
27,845
575
2,973
1,041
79,757
42,524
26,943
117
35,466
184,807
$
$
13,520
11,956
2,185
6,454
117
34,232
98,555
28,127
26,193
1,153
188,260
6,485
10
14,612
27,232
762
6,607
871
56,579
60,251
26,943
-
35,128
178,901
8,021
4,941
2,672
8,949
-
24,583
95,601
23,589
4,729
3,203
151,705
7,280
6,943
4
103,408
97
(113,350)
(892)
(3,453)
184,807
$
2
84,020
118
(63,342)
(545)
27,196
178,901
$
$
$
$
34
FLOTEK INDUSTRIES, INC. Form 10K
Consolidated Statements of Operations
PART II
ITEM 8 Financial Statements and Supplementary Data
FLOTEK INDUSTRIES, INC.
(in thousands, except per share data)
Revenue
Cost of revenue
Gross margin
Expenses:
Selling, general and administrative
Depreciation and amortization
Research and development
Impairment of long-lived assets
Loss on disposal of long-lived assets
Impairment of goodwill and intangible assets
Total expenses
Loss from operations
Other income (expense):
Loss on extinguishment of debt
Interest expense
Other fi nancing costs
Change in fair value of warrant liability
Other expense, net
Total other expense
Loss before income taxes
(Provision) benefi t for income taxes
NET LOSS
Accrued dividends and accretion of discount on preferred stock
Net loss attributable to common stockholders
Basic and diluted loss per common share:
Basic and diluted loss per common share
$
$
Weighted average common shares used in computing basic and diluted loss per common share
See accompanying Notes to Consolidated Financial Statements.
$
Year ended December 31,
2010
$
146,982
94,012
52,970
2009
$
112,550
83,166
29,384
2008
226,063
135,307
90,756
46,311
5,570
1,931
-
-
67,695
121,507
(30,751)
36,943
4,926
2,118
-
-
18,500
62,487
(33,103)
-
-
(15,524)
(13,894)
-
465
(155)
(15,214)
(48,317)
(2,016)
(50,333)
(2,231)
(52,564)
$
-
-
(96)
(13,990)
(44,741)
10,499
(34,242)
-
(34,242)
(2.68)
$
19,595
(1.79)
19,157
41,861
4,543
1,441
8,898
2,104
390
59,237
(6,267)
(995)
(19,399)
(816)
(21,464)
(69)
(42,743)
(49,010)
5,545
(43,465)
(6,543)
(50,008)
(1.94)
25,731
$
$
FLOTEK INDUSTRIES, INC. Form 10K 35
PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Statements of Stockholders’ Equity (Defi cit)
FLOTEK INDUSTRIES, INC.
Common Stock
Preferred Stock
Treasury Stock
Shares
Issued Value
1
18,803 $
-
-
-
-
Shares
Shares
Cost
Value
-
-
-
72 $ (190) $
-
-
-
-
Additional
Paid-in
Capital
54,141 $
-
-
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumula-
ted Defi cit)
Total
23,464 $ 77,461
(34,242)
80
(34,162)
(34,242)
-
45 $
-
80
-
-
-
-
-
-
-
-
125
-
(7)
-
-
-
-
-
-
-
-
(10,778)
(50,333)
-
-
-
-
-
-
-
-
-
-
(1,331)
(900)
-
-
-
-
-
-
-
-
118
-
(21)
-
-
-
-
-
(63,342)
(43,465)
-
1
(307)
-
905
-
2,020
2,500
17,222
465
66,105
(50,333)
(7)
(50,340)
10,806
(1,199)
-
(900)
-
-
30
433
-
(195)
1,731
725
27,196
(43,465)
(21)
(43,486)
-
-
16 10,806
-
-
-
-
-
-
-
-
-
-
-
-
-
17
70
-
-
-
-
(307)
-
-
-
-
-
-
-
905
-
2,020
2,500
17,222
465
-
-
159
-
-
-
-
-
-
152
-
35
-
-
-
-
346
-
-
(497)
77,253
-
-
-
-
-
-
-
-
-
(48)
-
-
-
-
(545)
-
-
-
-
(1,199)
-
-
5,194
-
30
481
-
(195)
1,731
725
84,020
-
-
-
-
-
-
-
-
1,331
-
-
-
- (5,194)
-
-
-
-
-
-
-
-
-
6,943
(in thousands)
Balance December 31, 2007
Net loss
Foreign currency translation adjustment
Comprehensive loss
Common stock issued under share lending
agreement
Treasury stock purchased
Restricted stock forfeited
Stock options exercised
Restricted stock granted
Tax benefi t of share-based awards
Stock compensation expense
Convertible debt bifurcation; net of tax
Fair value of share lending agreement
Balance December 31, 2008
Net loss
Foreign currency translation adjustment
Comprehensive loss
Sale of preferred stock and detachable warrants
Issuance costs of preferred stock and detachable
warrants
Accretion of discount on preferred stock
Preferred stock dividends
Benefi cial conversion discount on preferred
Restricted stock forfeited
Stock options exercised
Restricted shares issued and treasury stock
purchased in payment of 2008 bonus
Restricted stock granted
Reduction in tax benefi t of share-based awards
Stock compensation expense
Tax benefi t related to convertible debt bifurcation
Balance December 31, 2009
Net loss
Foreign currency translation adjustment
Comprehensive loss
3,800
-
-
519
52
-
-
-
23,174
-
-
1
-
-
-
-
-
-
-
2
-
-
-
-
-
-
-
100
471
423
-
-
-
24,168
-
-
-
-
-
-
-
-
-
-
-
-
-
2
-
-
Common stock issued in payment of debt
issuance costs
Common stock issued in exchange of
convertible notes
Accretion of discount on preferred stock
Preferred stock dividends, net of forfeitures
Stock warrants exercised
Stock options exercised
Restricted stock granted
Restricted stock forfeited
Treasury stock purchased
Reduction in tax benefi t related to share-based
awards
Stock compensation expense
Conversion of preferred stock into common stock
Balance December 31, 2010
4,042
1
1,569
-
-
3,923
140
827
-
-
-
-
2,085
36,754 $
-
-
-
1
-
-
-
-
-
-
-
4
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
16
-
-
`
-
-
-
-
-
-
-
-
-
See accompanying Notes to Consolidated Financial Statements.
36
FLOTEK INDUSTRIES, INC. Form 10K
-
-
-
5,095
-
5,132
-
-
-
-
-
-
-
-
-
-
-
-
23
196
-
-
-
-
-
-
-
(347)
1,992
-
-
4,452
114
-
-
-
-
-
-
-
-
-
-
-
-
-
5,096
-
(5,132)
(1,411)
-
-
-
-
-
1,992
-
(1,411)
4,453
114
-
-
(347)
-
-
-
-
(5) (4,795)
7,280
11 $
-
-
-
-
-
-
(1,744)
4,684
4,795
$ (892) $ 103,408 $
565
-
-
-
(1,744)
4,684
-
97 $ (113,350) $ (3,453)
-
-
-
Consolidated Statements of Cash Flows
PART II
ITEM 8 Financial Statements and Supplementary Data
FLOTEK INDUSTRIES, INC.
(in thousands)
Cash fl ows from operating activities :
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred fi nancing costs
Accretion of debt discount
Change in fair value of warrant liability
Gain on sale of assets
Impairment of goodwill, intangible assets and fi xed assets
Stock compensation expense
Reduction in excess tax benefi t related to share-based awards
Deferred income tax (benefi t) provision
Unrealized (gain) loss on interest rate swap
Loss on extinguishment of debt
Change in current assets and liabilities:
Restricted cash
Accounts receivable
Inventories
Income tax receivable
Other current assets
Accounts payable
Accrued liabilities
Interest payable
NET CASH PROVIDED BY OPERATING ACTIVITIES
Cash fl ows from investing activities :
Proceeds from sale of assets
Acquisitions, net of cash acquired
Purchase of patents
Capital expenditures
NET CASH USED IN INVESTING ACTIVITIES
Cash fl ows from fi nancing activities :
Proceeds from exercise of stock options
Purchase of treasury stock
Proceeds from borrowings
Proceeds from convertible debt off ering
Debt issuance costs
Reduction in excess tax benefi t related to share-based awards
Repayments of indebtedness
Proceeds from preferred stock off ering
Issuance costs of preferred stock and detachable warrants
Proceeds from exercise of warrants
NET CASH PROVIDED BY FINANCING ACTIVITIES
Eff ect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of year
CASH AND CASH EQUIVALENTS AT THE END OF YEAR
See accompanying Notes to Consolidated Financial Statements.
Year ended December 31,
2010
2009
2008
$
(43,465)
$
(50,333)
$
(34,242)
13,768
3,914
4,946
21,464
(1,261)
9,289
4,684
1,744
(3,611)
-
995
(140)
(12,698)
(613)
3,634
(170)
5,499
4,607
(487)
12,099
5,460
-
-
(6,060)
600
3
(236)
40,000
-
(2,004)
(1,744)
(38,572)
-
-
4,453
1,900
(21)
13,378
6,485
19,863
$
14,186
1,552
4,798
(465)
(1,365)
18,500
1,731
195
10,500
(199)
-
(1)
22,593
10,795
(6,607)
449
(14,645)
(9,768)
270
2,186
2,858
-
(2)
(6,555)
3,699
30
(48)
21,807
-
(819)
(195)
(27,764)
16,000
(1,199)
-
7,812
(7)
6,292
193
6,485
$
12,844
1,111
3,580
-
(2,881)
67,695
2,500
(2,020)
(20,881)
533
-
(1)
(8,543)
(14,522)
-
(233)
12,415
5,124
2,395
24,874
4,554
(97,973)
(48)
(23,711)
117,178
905
(307)
6,729
115,000
(5,485)
2,020
(27,647)
-
-
-
91,215
-
(1,089)
1,282
193
$
FLOTEK INDUSTRIES, INC. Form 10K 37
PART II
NOTE 1 Organization and Nature of Operations
Notes to Consolidated Financial Statements
NOTE 1
Organization and Nature of Operations
Flotek Industries, Inc. (“Flotek” or the “Company”) is a diversifi ed
global developer and supplier of drilling and production related products
and services. Th e Company’s strategic focus, and that of all wholly
owned subsidiaries, includes oilfi eld specialty chemicals and logistics,
down-hole drilling tools and down-hole production tools used in the
energy and mining industries. Th e Company also manages automated
material handling, loading facilities and blending capabilities for a
variety of bulk materials. Th e Company’s products and services enable
customers to drill wells more effi ciently, to increase production from
existing wells and to decrease well operating costs. Major customers
include leading oilfi eld service providers, major as well as, independent
oil and gas exploration and production companies, and onshore and
off shore drilling contractors.
Th e Company is headquartered in Houston, Texas, and has operational
locations in Colorado, Louisiana, New Mexico, North Dakota,
Oklahoma, Pennsylvania, Texas, Utah, Wyoming and the Netherlands.
Products are marketed domestically and internationally in over 20
countries.
Flotek was initially incorporated under the laws of the Province of
British Columbia on May 17, 1985. On October 23, 2001, Flotek
changed its corporate domicile to the state of Delaware.
NOTE 2
Summary of Signifi cant Accounting Policies
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable arise from product sales, product rentals and services
and are stated at net realizable value (“NRV”). NRV incorporates an
allowance for doubtful accounts which estimates the probability of
collectability. Th e Company regularly evaluates accounts receivable in
order to estimate the provision for doubtful accounts and corresponding
charge to operating expense. Th e valuation allowance considers the age
of the receivable balance, individual customer circumstances, credit
conditions and historical write-off s and collections.
Substantially all of the Company’s customers are engaged in the energy
industry. Th e cyclical nature of the energy industry can aff ect customers’
operating performance and cash fl ows, which directly impact the
Company’s ability to collect on outstanding obligations. Additionally,
certain customers are located in international areas that are inherently
subject to risks of economic, political and civil instability, which can
impact the collectability of receivables.
Changes in the allowance for doubtful accounts is as follows (in
thousands):
Year ended December 31,
2010
948
$
94
(780)
262
$
2009
1,465
$
45
(562)
948
$
2008
1,354
215
(104)
1,465
$
$
Accounting Principles
Th e Company’s consolidated fi nancial statements have been prepared
in accordance with the accounting principles generally accepted in the
United States of America (“US GAAP”).
Principles of Consolidation
Th e consolidated fi nancial statements include the accounts of Flotek
Industries, Inc. and all wholly owned subsidiary corporations. All
signifi cant intercompany accounts and transactions have been eliminated
in consolidation. Th e Company does not have investments in any
unconsolidated subsidiaries.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities
of three months or less at the date of purchase.
Beginning balance
Charge to cost and expense
Write-off s
Ending balance
38
FLOTEK INDUSTRIES, INC. Form 10K
Inventories
Inventories consist of raw materials, work-in-process and fi nished
goods and are stated at the lower of cost, using the weighted-average
cost method, or market. Finished goods inventories include raw
materials, direct labor and production overhead. Th e Company regularly
reviews inventory on hand, in order to identify any excess inventory or
obsolescence. A provision for identifi ed excess or obsolete inventory is
recorded based upon, but not limited to, forecasted product demand,
historical trends, market conditions, management’s knowledge of the
industry, production or procurement requirements and technological
developments and advancements.
Property and Equipment
Property and equipment are stated at cost. Th e cost of ordinary
maintenance and repair is charged to operating expense, while
replacement of critical components and improvements are capitalized.
Depreciation or amortization of property and equipment, including
assets held under capital leases, is calculated using the straight-line
method of depreciation over the asset’s estimated useful life:
Buildings and leasehold improvements
Machinery, equipment and rental tools
Furniture and fi xtures
Transportation equipment
Computer equipment
2-30 years
3 -10 years
3 years
2-5 years
3-7 years
Property and equipment are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset
or asset group may not be recoverable. Indicative events or circumstances
include signifi cant decline in market value and signifi cant change in
business climate. Loss of impairment is recognized when the carrying
value of an asset exceeds the forecasted undiscounted future cash fl ows
from the use of the asset, inclusive of eventual disposition. Th e amount
of impairment loss realized is the excess of the carrying value over the
fair value. Fair value is generally determined by an appraisal or by using
a discounted cash fl ow analysis. Assets to be disposed of are reported
at the lower of the carrying value or the fair value less the cost to sell.
Upon sale or other disposition of an asset, the Company recognizes
a gain or loss on disposal measured as the diff erence between the net
carrying value of the asset and the net proceeds received.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the fair
value assigned to identifi able assets acquired and liabilities assumed
in a business combination. Goodwill is not subject to amortization,
but rather is required to be tested for impairment annually, or more
frequently if events or circumstances are indicative of a decline in fair
value below corresponding carrying value. Events or circumstances
include any adverse change in business climate or change in future
operational considerations.
Goodwill is tested for impairment using a two step process at a reporting
unit level. Th e fi rst step is to compare the identifi ed reporting unit’s
fair value to carrying value. Determination of fair value considers a
combined market based approach and discounted cash fl ow income
approach. If a reporting unit’s fair value is less than the reporting
units’carrying value, a second step is performed to quantify the amount,
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
if any, of impairment loss. Th e second step in essence compares the
implied fair value of the reporting unit’s goodwill with the reporting
unit’s carrying value of goodwill. If the carrying value of the reporting
unit’s goodwill exceeds the implied fair value, an impairment loss is
recognized in an amount equal to the excess.
Other Intangible Assets
Other intangible assets primarily consist of customer relationships,
purchased patents and purchased brand names with determinable
lives. Th e cost of an intangible asset is amortized using the straight-line
method over an estimated period of economic benefi t, ranging from
two to 20 years. Intangible asset lives are adjusted whenever a change
in the estimated period of economic benefi t becomes apparent. No
residual value is assigned to intangible assets; however, the Company
capitalizes costs incurred to renew or extend the term of an intangible
asset. Th e Company has no intangible assets with indefi nite lives.
Intangible assets with defi nite lives are tested for impairment whenever
events or changes in circumstances indicate the carrying value may
not be recoverable, including any change in the extent or manner
in which the asset is being used or a change in future operational
considerations. Th e loss on impairment recognized is the amount by
which the carrying value of the intangible asset exceeds fair value. Fair
value is determined using various accepted fair value methodologies,
including the discounted cash fl ow methodology.
Warrant Liabilities
Warrant liabilities do not have readily determinable fair values. At the
end of each reporting period, the Company uses the Black-Scholes
option-pricing model to estimate the fair value of warrant liabilities.
Changes in the fair value of the warrant liabilities are recognized in
the statement of operations.
Fair Value Measurements
Th e Company categorizes fi nancial assets and liabilities using a three-
tier fair value hierarchy, based upon the nature of the inputs used in
the determination of fair value. Inputs refer broadly to assumptions
market participants would use to value an asset or liability and may
be observable or unobservable.
Revenue Recognition
Revenue for product sales and services is recognized when all of the
following criteria have been met: (i) persuasive evidence of an arrangement
exists, (ii) products are shipped or services rendered to the customer
and signifi cant risks and rewards of ownership have passed to the
customer, (iii) the price to the customer is fi xed and determinable and
(iv) collectability is reasonably assured. Products and services are sold
with fi xed or determinable prices and do not include right of return
provisions or other signifi cant post delivery obligations. Deposits and
other funds received in advance of delivery are deferred until the transfer
of ownership is complete. Shipping and handling costs are refl ected
in cost of revenue. Taxes collected are not included in revenue, rather
taxes are accrued for future remittance to governmental authorities.
Th e Logistics division recognizes revenue from design and construction
oversight contracts under the percentage-of-completion method of
FLOTEK INDUSTRIES, INC. Form 10K 39
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounting, measured by the percentage of “costs incurred to date” to
the “total estimated costs of completion.” Th is percentage is applied to
the “total estimated revenue at completion” to calculate proportionate
revenue earned to date. Contracts for services are inclusive of direct
labor and material costs, as well as, indirect costs of operations. General
and administrative costs are charged to expense as incurred. Changes
in job performance metrics and estimated profi tability, including
contract bonus or penalty provisions and fi nal contract settlements,
are recognized in the period such revisions appear probable. Known
or anticipated losses on contracts are recognized in full when amounts
are both probable and estimable. Bulk material loading revenue is
recognized as services are performed.
Drilling revenue is recognized upon receipt of a customer signed and
dated fi eld billing ticket. Customers are charged contractually agreed
amounts for oilfi eld rental equipment damaged or lost-in-hole (“LIH”).
LIH proceeds are recognized as revenue and the associated carrying value
is charged to cost of sales. LIH revenue totaled $3.1 million, $2.9 million
and $4.4 million for the years ended December 31, 2010, 2009 and
2008, respectively.
Th e Company generally is not contractually obligated to accept returns,
with the exception of defective products. Products determined to be
defective are typically replaced or the customer is issued a credit memo.
Based on historical return rates, no provision is made for returns at
the time of sale. All costs associated with product returns are expensed
as incurred.
Foreign Currency
Foreign subsidiary stand alone fi nancial statements are prepared in the
local currency with the exception of those subsidiaries that have elected
the US dollar as the functional currency. Assets and liabilities of foreign
subsidiaries are translated into US dollars at exchange rates in eff ect
as of the end of identifi ed reporting periods. Revenue and expense
transactions are translated using the average monthly exchange rate for
the reporting period. Resultant translation adjustments are recognized
as other comprehensive income (loss) within stockholders’ equity.
Research and Development Costs
Expenditures for research activities relating to product development
and improvement are charged to expense as incurred.
Income Taxes
Income tax expense is a factor of income, statutory tax rates and tax
planning opportunities available in the jurisdictions in which the
Company does business. Th e annual income tax provision is based upon
the interpretation of tax laws in numerous jurisdictions in which the
Company operates and requires the use of estimates and assumptions
regarding future events, including the amount, timing and character
of income, deductions and tax credits. Change in tax laws, regulations
and or profi tability in each jurisdiction impacts the fi nal tax liability.
Th e Company’s annual tax provision is based on available information
at time of estimation; however, years may elapse before recorded tax
liabilities are realized.
Th e Company’s income tax benefi t refl ects an estimate of current year
income tax liability/benefi t, as well as, changes in applicable tax rates
and other estimates. Deferred tax assets and liabilities are recognized
40
FLOTEK INDUSTRIES, INC. Form 10K
for expected future tax eff ects of temporary diff erences resulting from
diff erences in the fi nancial basis and the tax basis of assets and liabilities
calculated using the statutory tax rates in eff ect at the end of the period
presented. A valuation allowance for deferred tax assets is recorded
when it is probable that the benefi t of a deferred tax asset will not be
realized. Th e Company provides for uncertain tax positions pursuant
to current accounting standards.
It’s the Company’s intent to permanently reinvest all undistributed
earnings of non-US subsidiaries. Accordingly, the Company has not
provided for US deferred taxes on the undistributed earnings of non-
US subsidiaries. Any distributions made from undistributed earnings of
non-US subsidiaries are liable for additional taxes. Th e Company cannot
predict when, if at all, it will make a distribution of these undistributed
earnings and is unable to make a determination of the amount for
unrecognized deferred taxes.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net
income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding for the reported
period. Diluted earnings (loss) per share is computed by dividing net
income (loss) attributable to common stockholders by the weighted
average number of common shares outstanding; for the period reported
inclusive of potentially dilutive common share equivalents, if the eff ect
is dilutive. Potentially dilutive common share equivalents consist of
incremental shares of common stock issuable upon exercise of stock
options and warrants and conversion of convertible senior notes and
convertible preferred stock.
Debt Issuance Costs
Costs related to debt issuance are capitalized and amortized as interest
expense over the term of the related debt using the straight-line method,
which approximates the eff ective interest method. Prepayment of
debt proportionately accelerates the recognition of amortization of
debt issuance cost and interest expense associated with the payment.
Stock-Based Compensation
Stock-based compensation expense for share-based payments, related
to stock options and restricted stock awards, is recognized based on
their grant-date fair values. Th e Company recognizes compensation
expense, net of estimated forfeitures, on a straight-line basis over the
requisite service period of the award. Estimated forfeitures are based
on historical experience.
Use of Estimates
Th e preparation of fi nancial statements in conformity with US GAAP
requires management to make estimates and assumptions that aff ect
reported amounts of assets and liabilities, disclosure of identifi ed
contingent liabilities and reported amounts of revenue and expense.
Actual results could diff er from estimates. Signifi cant items subject
to estimates and assumptions include application of the percentage-
of-completion method of revenue recognition, carrying amounts and
useful lives of property and equipment and intangible assets, share-based
compensation expense, valuation allowances for accounts receivable and
inventories and impairment assessments. While management believes
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
current estimates are reasonable and appropriate, actual results could
diff er from these estimates.
Reclassifi cations
Certain reclassifi cations have been made to prior year balances in order
to conform to the current year presentation.
Application of New Accounting Standard
Eff ective January 1, 2010, the Company adopted the accounting guidance
in Accounting Standards Update (“ASU”) No. 2009-15, “Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible
Debt Issuance or Other Financing ” which amended or added certain
paragraphs to the related Accounting Standards Codifi cation (“ASC” or
“Codifi cation”) Topic 470, “Debt.” Th is standard addresses the accounting
for an entity’s own-share lending arrangement initiated in conjunction
with convertible debt or another fi nancing off ering and the eff ect of
the share-lending arrangement on earnings per share. Th e guidance
also addresses the accounting and earnings per share implications for
probable or actual defaults by the share borrower. Th e new guidance is
required to be applied retrospectively to all periods presented.
Th e Company has adopted this guidance and applied it to the existing
share lending arrangement (See Note 10). Th e retrospective eff ect of
the adoption of ASU No. 2009-15 on the Company’s consolidated
balance sheet as of December 31, 2009 and the consolidated statements
of operations for the years ended December 31, 2009 and 2008 is
provided below (in thousands, except per share data):
Consolidated Balance Sheet
Other intangible assets, net
Total assets
Additional paid-in capital
Accumulated defi cit
Total stockholders’ equity
Total liabilities and stockholders’ equity
Consolidated Statement of Operations
Interest expense
Net loss
Net loss attributable to common stockholders
Basic and diluted loss per common share
Weighted average common shares used in computing basic and diluted loss
per common share
Consolidated Statement of Operations
Interest expense
Net loss
Net loss attributable to common stockholders
Basic and diluted loss per common share
Weighted average common shares used in computing basic
and diluted loss per common share
$
$
$
$
$
$
As of December 31, 2009
As Reported
Adjustment
As Adjusted
34,837
$
178,610
83,555
$
(63,168)
26,905
178,610
291
$
291
465
$
(174)
291
291
35,128
178,901
84,020
(63,342)
27,196
178,901
Year ended December 31, 2009
As Reported
Adjustment
As Adjusted
(15,431)
$
(50,240)
(52,471)
(2.68)
$
19,595
(93)
$
(93)
(93)
-
$
(15,524)
(50,333)
(52,564)
(2.68)
19,595
Year ended December 31, 2008
As Reported
Adjustment
As Adjusted
(13,813)
$
(34,161)
(34,161)
(81)
$
(81)
(81)
(1.78)
$
(0.01)
$
19,157
(13,894)
(34,242)
(34,242)
(1.79)
19,157
New Accounting Requirements and Disclosures
In January 2010, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2010-06, “Improving Disclosures about Fair Value
Measurements,” amending ASC Topic 820-10 which requires disclosure
related to movements in and out of fair value hierarchy Levels 1, 2 and 3
and clarifi es existing disclosures regarding the classifi cation and valuation
techniques used to measure fair value. ASU No. 2010-06 is eff ective for
interim and annual reporting periods beginning after December 15, 2009,
except for certain Level 3 fair value measurement disclosures, which are
eff ective for fi scal years beginning after December 31, 2010. Adoption
of this accounting guidance, eff ective January 1, 2010, resulted in no
additional disclosures as the Company experienced no movement in
fair value measurements between hierarchy levels.
FLOTEK INDUSTRIES, INC. Form 10K 41
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3
Supplemental Cash Flow Information
Supplemental cash fl ow information is as follows (in thousands):
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Fair value of assets acquired, net
$
Warrant liability recognized upon issuance of warrants
Fair value of share lending agreement treated as issuance cost
Value of common stock issued in payment of debt issuance costs
Value exchanged in conversion of preferred stock into common stock
Debt related commitment fees included in accrued liabilities
Value of common stock issued in exchange for convertible notes
Reduction in convertible debt upon note exchange
Property and equipment acquired through capital leases
Exercise of stock options by common stock surrender
Restricted shares issued in payment of accrued bonuses
SUPPLEMENTAL CASH PAYMENT INFORMATION:
Interest paid
Income taxes (refunded) paid, net
NOTE 4
Acquisitions
Year ended December 31,
2010
2009
2008
-
$
97,973
$
-
-
-
5,095
4,795
1,000
1,992
1,996
615
111
-
5,194
-
-
-
-
-
-
211
-
481
-
465
-
-
-
-
-
599
-
-
6,434
8,244
$
10,901
$
(6,186)
9,063
$
3,685
On February 14, 2008, Teledrift Acquisition, Inc, a wholly-owned
subsidiary of the Company, acquired substantially all of the assets of
Teledrift, Inc. (“Teledrift”), in an equity purchase acquisition, for an
aggregate cash purchase price of $98.0 million. Th e acquisition resulted
in recognition of goodwill of $46.4 million and intangible assets of
$31.6 million within the Company’s Drilling segment. Teledrift designs
and manufactures wireless survey and measurement while drilling
(“MWD”) tools.
NOTE 5
Product Revenue
Th e Company diff erentiates revenue and cost of revenue depending upon whether the source of revenue is related to Products, Rentals or Services
(in thousands):
Revenue:
Product
Rental
Service
Cost of revenue:
Product
Rental
Service
Depreciation
42
FLOTEK INDUSTRIES, INC. Form 10K
Year ended December 31,
2010
2009
2008
$
$
$
$
93,763
$
42,169
11,050
146,982
$
54,924 $
22,390
7,476
9,222
94,012
$
72,282
$
28,620
11,648
112,550 $
48,728
17,769
7,409
9,260
83,166
$
$
145,074
60,343
20,646
226,063
88,384
28,093
11,556
7,274
135,307
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6
Inventory
Inventory is comprised of the following (in thousands):
Raw materials
Work-in-process
Finished goods
Gross inventory
Less reserve for excess and obsolete inventory
INVENTORY, NET
Changes in the reserve for excess and obsolete inventory are as follows (in thousands):
December 31,
2010
10,920
$
25
19,533
30,478
(2,633)
27,845
$
$
$
Beginning balance
Charged to costs and expense
Deductions
ENDING BALANCE
NOTE 7
Property and Equipment
Property and equipment includes (in thousands):
Land
Buildings and leasehold improvements
Machinery, equipment and rental tools
Equipment in progress
Furniture and fi xtures
Transportation equipment
Computer equipment
Property and equipment
Less accumulated depreciation
PROPERTY AND EQUIPMENT, NET
Year ended December 31,
2010
3,080
$
771
(1,218)
2,633
$
2009
2,407
$
6,340
(5,667)
3,080
$
$
$
December 31,
2010
1,266
$
18,609
40,247
1,271
1,278
3,648
1,895
68,214
(25,690)
42,524
$
$
$
2009
9,653
-
20,659
30,312
(3,080)
27,232
2008
2,394
3,567
(3,554)
2,407
2009
1,338
19,143
62,369
133
1,306
4,252
1,750
90,291
(30,040)
60,251
Depreciation expense, inclusive of expense captured in cost of revenue,
was $11.3 million, $11.7 million and $9.4 million for the years ended
December 31, 2010, 2009 and 2008, respectively. During the fourth
quarter of 2010, the Company’s testing determined potential impairment
of certain rental fi xed assets within the Drilling segment was required
due to shifts in market demand. Drilling activity has become more
concentrated in horizontal and directional drilling versus vertical
drilling, which in recent years had been more dominant.
Th e estimated fair value of identifi ed asset groups was calculated based
on probability weighted future cash fl ows. Expected cash fl ows of each
identifi ed asset group took into consideration direct material cost
margins and serviceable costs, historic and expected utilization, and
remaining useful life. In addition, the Company used a present value
WACC technique to analyze the recoverability of the identifi ed asset
groups. Th e Company recognized impairment charges of $8.9 million
during the year ended December 31, 2010 and a net loss on disposal
of assets of $2.2 million.
NOTE 8
Goodwill
Goodwill is tested for impairment annually in the fourth quarter of
the calendar year, or more frequently if circumstances are indicative
of potential impairment. Of the Company’s four identifi ed reporting
units (Chemicals and Logistics, Artifi cial Lift, Drilling Products, and
Teledrift), only two, Chemicals and Logistics and Teledrift had goodwill
at December 31, 2010.
FLOTEK INDUSTRIES, INC. Form 10K 43
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Th e Company’s 2010 annual goodwill impairment assessment resulted
in no impairment of any reporting unit’s is goodwill. During 2009,
periodic assessments of goodwill were performed due to continuing
deterioration in global economies and oil and natural gas industry
conditions; as well as the declining fi nancial performance of all reporting
units. An impairment charge of $18.5 million was recognized for the
Teledrift reporting unit in June 2009. No additional impairment of
goodwill was deemed necessary during subsequent interim or annual
testing during the remainder of 2009. As a result of the Company’s 2008
annual assessment of goodwill impairment, the Company recognized
goodwill impairments totaling $61.4 million accross three of the four
reporting units.
In the determination of identifi ed reporting units, management made
estimates and judgments regarding future cash fl ows and market values
using both an income and market valuation approach, and Level 3
inputs as defi ned under the fair value measurement hierarchy. Th e
income approach, specifi cally a discounted cash fl ow analysis, included
assumptions for discount rates, cash fl ow projections, growth rates and
terminal value rates. Each assumption discussed above is reevaluated
at each testing date in order to take into consideration Company-
specifi c risk factors and market participant’s perspective of current
industry trends.
Th e changes in the carrying value of goodwill for each reporting unit
were as follows (in thousands):
Chemicals and
Logistics
Downhole Tool
Teledrift
Artifi cial Lift
Total
Balance at December 31, 2008:
Goodwill
Accumulated impairment losses
Goodwill balance, net
Activity during the year 2009:
Goodwill impairment recognized
Balance at December 31, 2009:
Goodwill
Accumulated impairment losses
Goodwill balance, net
Activity during the year 2010:
Goodwill impairment recognized
Balance at December 31, 2010:
Goodwill
Accumulated impairment losses
GOODWILL BALANCE, NET
$
NOTE 9
Other Intangible Assets
Other intangible assets are as follows (in thousands):
Patents
Customer lists
Non-compete agreements
Brand names
Supply contract
Other
Total intangible assets acquired
Deferred fi nancing costs
Total other intangible assets
Other intangible assets, net
$
11,610
$
43,009
$
46,396
$
-
(43,009)
11,610
-
11,610
-
11,610
-
-
-
43,009
(43,009)
-
-
(12,563)
33,833
(18,500)
46,396
(31,063)
15,333
-
5,861
$
(5,861)
-
-
5,861
(5,861)
-
-
11,610
-
11,610
$
43,009
(43,009)
$
46,396
(31,063)
15,333
$
5,861
(5,861)
$
106,876
(61,433)
45,443
(18,500)
106,876
(79,933)
26,943
-
106,876
(79,933)
26,943
December 31,
2010
2009
Carrying
Value
Accumulated
Amortization
Carrying
Value
Accumulated
Amortization
$
$
$
6,330 $
28,544
1,715
6,199
-
396
43,184
12,827
56,011
$
35,466
2,932 $
9,193
1,581
945
-
396
15,047
5,498
20,545
$
$
6,282 $
28,543
1,715
6,199
1,700
428
44,867
6,933
51,800 $
35,128
2,618
7,843
1,500
638
921
405
13,925
2,747
16,672
Other intangible assets acquired are amortized on a straight-line
basis from two to 20 years. Intangible asset amortization expense of
$2.5 million, $2.5 million and $3.4 million was recognized for the years
ended December 31, 2010, 2009 and 2008, respectively. Amortization
of deferred fi nancing costs of $4.0 million, $1.5 million and $1.1 million
was recognized for the years ended December 31, 2010, 2009 and
2008, respectively.
44
FLOTEK INDUSTRIES, INC. Form 10K
Estimated future amortization expense for other intangible assets
existing at December 31, 2010 for the next fi ve calendar years totals
(in thousands):
Year ending December 31,
2011
2012
2013
2014
2015
$
6,098
5,057
2,144
1,941
1,941
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter of 2010, the Company became aware of a
noncompliance with an exclusivity and preferential pricing arrangement
previously recorded as an intangible asset with remaining unamortized
residual value of $0.4 million. Consequently, the Company realized
an impairment loss of $0.4 million.
During the fourth quarter of 2008, the Company tested other intangible
assets for impairment as a result of continuing deterioration of the
global economic and oil and natural gas industry conditions; as well
as the Company’s declining fi nancial performance. As a result of this
testing an impairment loss of $6.3 million related to customer lists
and patents was recognized in 2008. During 2009 no impairment
was recognized related to other intangible assets. Other intangible
asset fair values were estimated utilizing a present values of estimated
future cash fl ows technique.
NOTE 10 Convertible Notes and Long-Term Debt
Convertible notes and long-term debt are as follows (in thousands):
Convertible notes:
Convertible senior unsecured notes (2008 Notes)
Convertible senior secured notes (2010 Notes)
Less discount on notes
CONVERTIBLE NOTES, NET OF DISCOUNT
Long-term debt:
Term loan
Senior credit facility:
Equipment term loans
Revolving line of credit
Real estate term loans
Capital lease obligations
Total long term debt
Less current portion of long-term debt
LONGTERM DEBT, LESS CURRENT PORTION
Convertible Notes
Th e Company’s convertible notes consist of Convertible Senior Unsecured
Notes (the “2008 Notes”) and Convertible Senior Secured Notes (the
“2010 Notes”). On February 14, 2008, the Company issued the 2008
Notes at par, for an aggregate principal amount of $115 million. Net
proceeds received from issuance of the 2008 Notes totaled $111.8 million.
Th e 2008 Notes bear interest at 5.25% and mature on February 15,
2028. Th e 2008 Notes may be settled in cash upon conversion. Th e
Company has accounted for both the liability and equity components
of the 2008 Notes using the Company’s nonconvertible debt borrowing
rate. Th e Company assumed an 11.5% nonconvertible debt interest
rate and a fi ve year expected amortization term of the associated debt
discount. Th e fi ve year term represents the time period from inception
until contractual call/put options, contained within the 2008 Notes,
are exercisable (February 2013). An eff ective tax rate of 38.0% was
assumed. At the date of issuance, the discount on the 2008 Notes was
$27.8 million, with an associated deferred tax liability of $10.6 million.
December 31,
2010
2009
75,000 $
36,004
(12,449)
98,555 $
115,000
-
(19,399)
95,601
33,621 $
-
-
-
-
960
34,581
(6,454)
28,127 $
21,210
9,953
717
658
32,538
(8,949)
23,589
$
$
$
$
Th e remaining discount is being accreted over a fi ve year term as
additional non-cash interest expense.
On March 31, 2010, the Company executed an exchange agreement
(the “Exchange Agreement”) with Whitebox Advisors, LLC, the
administrative agent of a syndicate of lenders, in order to refi nance the
Company’s then existing term loan (described below). Th e Exchange
Agreement permitted each lender to exchange 2008 Notes, in proportion
to the lender’s principal amount of participation in the refi nanced
term loan, for 2010 Notes and shares of the Company’s common
stock. At March 31, 2010, the unamortized discount related to the
pro-rata portion of the 2008 Notes exchanged was allocated to the
2010 Notes and continues to be accreted over the same period, at an
assumed rate of 9.9%, using the eff ective interest method. Non-cash
interest expense related to accretion of the debt discount of $4.9 million,
$4.8 million and $3.6 million was recognized for the years ended
December 31, 2010, 2009 and 2008, respectively.
FLOTEK INDUSTRIES, INC. Form 10K 45
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the terms of the Exchange Agreement, on
March 31, 2010, investors received, for each $1,000 principal amount
of 2008 Notes exchanged, (a) $900 principal amount of 2010 Notes and
(b) $50 in shares of the Company’s common stock (based on the greater
of 95% of (1) the volume-weighted average price of the common
stock for the preceding ten trading days or (2) the closing price of the
common stock on the day before the closing). Th e 2010 Notes carry
the same maturity date, interest rate, conversion rights, conversion
rate, redemption rights and guarantees as the 2008 Notes. Th e only
diff erence in terms is the 2010 Notes are secured by a second priority
lien on substantially all of the Company’s assets, while the 2008
Notes remain unsecured.
Th e Company exchanged $40 million of 2008 Notes for aggregate
consideration of $36 million of 2010 Notes and $2.0 million worth
of shares of the Company’s common stock. On March 31, 2010, the
Company issued 1,568,867 shares of common stock to satisfy the
common stock component of the Exchange Agreement. Th e transaction
was accounted for as an exchange of debt. Appropriately, no gain or
loss was recognized and the diff erence between the debt exchanged
and the net carrying value of the debt was recorded as a reduction of
previously recognized debt discount. Th e remaining debt discount
continues to be amortized over the remaining period the convertible
debt is expected to remain outstanding. Th e Company capitalized
commitment fees ($7.3 million) related to the Exchange Agreement that
are being amortized using the eff ective interest method over the period
the convertible debt is expected to remain outstanding. Th ird-party
transaction costs of $0.8 million incurred as a result of the Exchange
Agreement were expensed as incurred.
Interest on the 2008 and 2010 Notes is accrued at 5.25% per annum
and is payable semiannually in arrears on February 15 and August 15.
Th e Company is also required to pay contingent interest to holders of
the 2008 and 2010 Notes during any six-month period from an interest
payment date to, but excluding, the following interest payment date,
commencing with the six-month period beginning on February 15, 2013,
if the trading price of a note for each of the fi ve trading days ending on
the third trading day immediately preceding the fi rst day of the relevant
six-month period equals 120% or more of the principal amount of the
Note. Contingent interest payable per note, with respect to any such
period, will be equal to 0.5% per annum of the average trading price
of such Note for the fi ve trading days referenced above.
Th e 2008 and 2010 Notes mature on February 15, 2028. On or
after February 15, 2013, the Company may redeem, for cash, all or a
portion of the 2008 and 2010 Notes at a redemption price equal to
100% of the principal note amount to be redeemed plus associated
accrued and unpaid interest, including any contingent interest.
Holders of either 2008 or 2010 Notes can require the Company to
purchase all, or a portion, of the holder’s outstanding notes on each
of February 15, 2013, February 15, 2018, and February 15, 2023.
If the Company engages in contractually specifi ed types of corporate
transactions, noteholders can require the Company to purchase all or a
portion of the holder’s outstanding Notes. Any repurchase of the 2008
and 2010 Notes pursuant to aforementioned provisions are to be for
a cash price equal to 100% of the principal amount of the Notes to
be purchased plus associated accrued and unpaid interest, including
any contingent interest.
Th e 2008 and 2010 Notes are convertible into shares of the Company’s
common stock at the option of the note holder, subject to contractual
46
FLOTEK INDUSTRIES, INC. Form 10K
conditions. Th e conversion rate is 43.9560 shares per $1,000 principal
note amount (equal to a conversion price of approximately $22.75 per
share), subject to adjustment, as contractually defi ned. Upon conversion,
the Company will deliver, at the Company’s option, cash or shares of
common stock or a combination of cash and shares of common stock.
Term Loan
On March 31, 2010, the Company executed an Amended and Restated
Credit Agreement (the “Senior Credit Facility” or “term loan”) with
Whitebox Advisors, LLC, the administrative agent for a syndicate of
lenders, for a $40 million term loan. Th e term loan was used to repay the
Company’s then existing senior credit facility and provided net proceeds
of $6.1 million to be used for general corporate operating purposes.
Term loan indebtedness matures November 1, 2012 and, as of
December 31, 2010, has scheduled cash principal payments of
$3,750,000 in 2011 and $3,000,000, plus as any remaining unpaid
principal balance, in 2012. Interest is payable quarterly. Th e Company
has the option to fully pay the interest due in cash or to pay a portion
of the interest due in cash and capitalize the remaining unpaid interest
due. Any capitalization of interest results in an increase in the principal
amount due under the term loan. Th e annualized cash interest rate
is 12.5% when the principal balance exceeds $30 million, 11.5%
when the principal balance is $20 million or more but not in excess
of $30 million, and 10.5% when the principal balance is less than
$20 million. If the Company elects to capitalize a portion of the
interest, the annualized cash interest rate is 8% and additional interest
is capitalized and added to the principal amount of the Senior Credit
Facility at a annualized rate of 6% when the principal balance exceeds
$30 million, 4.5% when the principal balance is $20 million or more
but not in excess of $30 million, and 3.5% when the principal balance
is less than $20 million.
Th e Senior Credit Facility requires additional mandatory principal
payments of (a) 50% of EBITDA (earnings before interest, taxes,
depreciation and amortization, and other non-cash items) in excess
of $4.5 million in any fi scal quarter, (b) 50% of cash proceeds in
excess of $5 million and up to $15 million from certain identifi ed
asset disposals, plus 75% of cash proceeds in excess of $15 million
from certain identifi ed asset disposals, (c) 75% of any Federal income
tax refunds, and (d) upon election by the lenders, up to $1 million
of additional principal repayment on quarterly payment dates, when
the volume-weighted average price of the Company’s stock price is
equal to or greater than $1.3419 per share, payable by common stock
issuance (based on 95% of the volume-weighted average price of the
common stock for the preceding ten trading days).
Th e Senior Credit Facility provided for a commitment fee of $7.3 million.
As of December 31, 2010, $6.3 million of the commitment fee has
been settled through payments of $1.2 million in cash and issuance of
4,042,248 shares of common stock. Th e remaining commitment fee at
December 31, 2010, of $1,000,000 is payable at March 31, 2011, in
cash, common stock or a combination of both cash or common stock
(calculated on $1.1406 per share). At December 31, 2010, the unpaid
commitment fee of $1.0 million is recorded in accrued liabilities. Th e
election as to whether the remaining commitment fee will be paid in
cash, common stock or combination of both cash and common stock
is decided by the Company if the volume-weighted average price of the
common stock is $1.00 or more per share and by the lenders if such
average is less than $1.00 per share at the payment date. One half of
the commitment fee has been allocated to the term loan and one half
of the commitment fee has been allocated to the Exchange Agreement
(see above). Commitment fees capitalized as deferred fi nancing costs are
amortized as additional interest expense over the remaining periods the
term loan and the convertible debt are expected to remain outstanding.
Borrowings under the Senior Credit Facility are secured by substantially
all present and future assets of the Company. Th e Senior Credit Facility
does not contain a revolving line of credit facility nor require quarterly
or annual fi nancial covenants; however, the credit agreement does
restrict the payment of dividends on the Company’s common stock
without the prior written consent of the lenders, as well as, limit the
amount of capital investment allowed the Company.
Convertible Notes and Term Loan Guarantees
Th e 2008 Notes and 2010 Notes and the term loan are guaranteed by
substantially all of the Company’s wholly-owned subsidiaries. Flotek
Industries, Inc., the parent company, is a holding company and has
no independent assets or operations. Th e guarantees provided by the
Company’s subsidiaries are full and unconditional, and joint and
several. Any subsidiaries of the Company that are not guarantors are
deemed to be “minor” subsidiaries in accordance with SEC Regulation
S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of
Guaranteed Securities Registered or Being Registered.” Th e agreements
governing the Company’s long-term indebtedness do not contain any
signifi cant restrictions on the ability of the Company, or any guarantor,
to obtain funds from subsidiaries by dividend or loan.
Interest Rate Swap
Th e Company’s senior credit facility at Wells Fargo Bank required the
Company to enter into an interest rate swap agreement on a minimum
of 50% of the term loan facility in order to mitigate exposure to interest
rate risk. In March 2010, the Company repaid the Wells Fargo senior
credit facility and terminated the interest rate swap. Th e fair value of
the interest rate swap was recorded in accrued liabilities and the change
in the unrealized gain or loss was recorded as interest expense. For
the years ended December 31, 2010, 2009 and 2008, the Company
recognized a loss of $0.1 million, a gain of $0.2 million, and a loss of
$0.5 million, respectively, on the interest rate swap.
Share Lending Agreement
Concurrent with the off ering of the 2008 Notes, the Company entered
into a share lending agreement (the “Share Lending Agreement”) with
Bear, Stearns International Limited (the “Borrower”). Th e Borrower
became an indirect, wholly owned subsidiary of JP Morgan Chase &
Company. In accordance with the Share Lending Agreement, the
Company loaned 3.8 million shares of common stock (the “Borrowed
Shares”) to the Borrower for a period commencing February 11, 2008
and ending on February 15, 2028. Th e Company may terminate
the Share Lending Agreement earlier, upon written notice to the
Borrower, if the principal balance of the 2008 Notes has been repaid
or upon agreement with the Borrower. Th e Borrower is permitted to
use the Borrowed Shares only for the purpose of directly or indirectly
facilitating the sale of the 2008 Notes and for the establishment of
hedge positions by holders of the 2008 Notes. Th e Company did not
require collateral to mitigate any inherent or associated risk of the
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share Lending Agreement.
In February 2008, the Borrower borrowed all 3.8 million shares
available under the Share Lending Agreement. Th e shares are subject
to adjustments for stock dividends, stock splits or reverse stock splits.
Th e Company did not receive any proceeds for the Borrowed Shares
but did receive a nominal loan fee of $0.0001 for each share loaned.
Th e Borrower retains all proceeds from the sale of Borrowed Shares
pursuant to the Share Lending Agreement. Upon conversion, the
number of Borrowed Shares proportionate to the conversion rate for
such notes must be returned to the Company. Any borrowed shares
returned to the Company cannot be re-borrowed.
Th e Borrowed Shares are issued and outstanding for corporate law
purposes; accordingly, holders of Borrowed Shares possess all of the rights
of a holder of the Company’s outstanding shares, including the right
to vote the shares on all matters submitted to a vote of shareholders, as
well as the right to receive any dividends or other distributions declared
or paid on outstanding shares of common stock. Under the Share
Lending Agreement, the Borrower has agreed to pay to the Company,
within one business day after a payment date, an amount equal to any
cash dividends that the Company paid on the Borrowed Shares, and
to pay or deliver to the Company, upon termination of the loan of
Borrowed Shares, any other distribution, in liquidation or otherwise,
that the Company made on the Borrowed Shares.
To the extent the Borrowed Shares loaned under the Share Lending
Agreement are not sold or returned to the Company, the Borrower
has agreed to not vote any borrowed shares of which the Borrower is
the owner of record. Th e Borrower has also agreed, under the Share
Lending Agreement, to not transfer or dispose of any borrowed shares,
other than to Borrower’s affi liates, unless such transfer or disposition
is pursuant to a registration statement that is eff ective under the
Securities Act. Investors that purchase shares from the Borrower, and
all subsequent transferees of such purchasers, will be entitled to the
same voting rights, with respect to owned shares, as any other holder
of common stock.
Contractual undertakings of the Borrower have the eff ect of substantially
eliminating the economic dilution that otherwise would result from
the issuance of the Borrowed Shares. Further, all shares outstanding
under the Share Lending Agreement are required to be returned to the
Company at a future date. Consequently, the shares of the Company’s
stock loaned under the Share Lending Agreement are not considered to
be outstanding for the purpose of computing and reporting earnings
per share.
Th e Company determined that the fair value of the share lending
arrangement was $0.5 million at the date of issuance. Th e fair value
has been recognized as a debt issuance cost and is being amortized,
with the amortization included in interest expense, over a period
from the date of issuance through the earliest put date of the related
debt, February 15, 2013 (see Note 2). As of December 31, 2010 and
2009, unamortized debt issuance costs relating to the share lending
arrangement were $0.2 million and $0.3 million, respectively. Th e
Company estimates that this unamortized value approximates the
fair value of the loaned shares outstanding at December 31, 2010 and
2009. Th e fair value of similar common shares not subject to the share
lending arrangement, based on the closing price of the Company’s
common stock on December 31, 2010, was $20.7 million.
FLOTEK INDUSTRIES, INC. Form 10K 47
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital Lease Obligations
Th e Company leases equipment and vehicles under capital leases. At December 31, 2010, the Company had $1.0 million of capital lease obligations.
Maturities of convertible notes and long-term debt at December 31, 2010 are as follows (in thousands):
Year Ending December 31,
2011
2012
2013
TOTAL
Convertible
Senior Notes
- $
-
111,004
111,004 $
$
$
Term Loan
3,750 $
29,871
-
33,621 $
Capital
Leases
Total
Convertible Notes
and Long-Term Debt
403
361
196
960
$
$
4,153
30,232
111,200
145,585
NOTE 11 Fair Value Measurements
Fair value is defi ned as the amount that would be received for selling
an asset or paid to transfer an asset in an orderly transaction between
market participants at the measurement date. Th e Company categorizes
fi nancial assets and liabilities into the three tiered levels of the fair value
hierarchy. Th e hierarchy prioritizes the inputs to valuation techniques
used to measure fair value and bases the categorization within the
hierarchy on the lowest level of input that is available and signifi cant
to the fair value measurement.
• Level 1 – Quoted prices in active markets for identical assets or liabilities;
• Level 2 – Observable inputs other than Level 1, such as quoted prices
for similar assets or liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets
or liabilities; and
• Level 3 – Signifi cant unobservable inputs that are supported by little
or no market activity or that are based upon the reporting entity’s
assumptions about the inputs.
Liabilities Measured at Fair Value on a Recurring Basis
Th e Company’s liabilities required to be measured at fair value on a recurring basis, including identifi cation of the fair value hierarchy of the
valuation techniques used by the Company to determine these fair values, are as follows (in thousands):
At December 31, 2010:
Common stock warrants (1)
At December 31, 2009:
Common stock warrants (1)
Interest rate swap (2)
Fair Value Measurements
Level 1
Level 2
Level 3
Total
$
$
$
- $
- $
- $
- $
26,193 $
26,193
- $
334 $
4,729 $
- $
4,729
334
(1) The fair value of common stock warrants was estimated using a Black-Scholes option-pricing model. See Note 14 for additional information regarding warrants.
(2) The interest rate swap valuation was obtained from bank estimates utilizing pricing models with market-based inputs. See Note 10 for additional information regarding the interest
rate swap.
Th ere were no signifi cant transfers in or out of either Level 1 or Level 2 fair value measurements during the years ended December 31, 2010
and 2009.
Changes in Level 3 liabilities are as follow (in thousands):
Warrant Liability
Balance, beginning of year
Fair value of warrants upon issuance
Fair value adjustments, net
Net transfers in/(out)
BALANCE, END OF YEAR
48
FLOTEK INDUSTRIES, INC. Form 10K
Year ended December 31,
$
$
2010
4,729 $
-
21,464
-
26,193 $
2009
-
5,194
(465)
-
4,729
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured at Fair Value on a Nonrecurring
Basis
Th e Company’s non-fi nancial assets, including property and equipment,
goodwill and other intangible assets are measured at fair value on
a non-recurring basis and are subject to fair value adjustment in
certain circumstances. See Notes 7, 8 and 9 for discussion of non-
fi nancial assets and assessment of impairment. During the year
ended December 31, 2010, the Company recorded an impairment
of $8.9 million relating to property and equipment held and used
and $0.4 million relating to other intangible assets. During the year
ended December 31, 2009, the Company recorded $18.5 million of
goodwill impairment. During the year ended December 31, 2008, the
Company recorded $61.4 million and $6.3 million of goodwill and
other intangible assets impairment, respectively. Loss on impairment
is reported in operating expenses. Th e fair value of impaired assets was
measured using Level 2 and Level 3 inputs.
Fair Value of Other Financial Instruments
Th e carrying amounts of certain fi nancial instruments, including
cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses, approximate fair value due to the short-term
nature of these accounts. Th e Company had no cash equivalents at
December 31, 2010 or 2009.
Th e carrying value and estimated fair value of the Company’s Convertible
Notes and Long-Term Debt are as follows (in thousands):
Convertible senior unsecured notes (2008 Notes) (1)
Convertible senior secured notes (2010 Notes) (1)
Term loan
Senior credit facility
December 31, 2010
December 31, 2009
Carrying Value
Fair Value
Carrying Value
Fair Value
$
65,858 $
32,697
33,621
-
64,688 $
32,684
33,875
-
95,601 $
-
-
31,880
60,375
-
-
31,880
Capital lease obligations
628
(1) The carrying value of the convertible senior secured notes and unsecured notes is representative of the bifurcated debt component only, while the fair value is based on the market value
942
960
658
of the notes, which incorporates the convertible equity component.
Th e Company determined the estimated fair value of the 2008
Notes based on the quoted market price of the notes. Th e estimated
fair values of the 2010 Notes and term loan were determined based on
rates available for instruments with similar risks and maturities. Th e
carrying value of the Wells Fargo senior credit facility approximated
fair value as interest rates were variable; accordingly, the carrying value
NOTE 12 Loss Per Share
Basic loss per common share is calculated by division of the net
loss attributable to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted loss
per common share is calculated by division of the net loss attributable
to common stockholders by the weighted average number of common
shares outstanding and potentially dilutive common share equivalents
outstanding, if dilutive. As net losses were realized during the years ended
December 31, 2010, 2009 and 2008, potentially dilutive securities were
excluded from the diluted earnings per share calculation as inclusion
would have an anti-dilutive eff ect on net loss per share.
In connection with the sale of the 2008 Notes in February 2008, the
Company entered into a Share Lending Agreement for 3,800,000
Stock options under long-term incentive plans
Stock warrants related to sales of preferred stock
Convertible senior notes (if-converted)
Convertible preferred stock (if-converted)
TOTAL ANTIDILUTIVE SHARES
approximated the current market value for instruments with similar
risks and maturities. Th e fair value of capital lease obligations was
determined based on recent lease rates adjusted for a risk premium.
Th e estimated fair value of the convertible notes and long-term debt
were measured using Level 2 inputs.
shares of the Company’s common stock (see Note 10). Contractual
undertakings of the Borrower have the eff ect of substantially eliminating
the economic dilution that otherwise would result from the issuance
of the Borrowed Shares, and all shares outstanding under the Share
Lending Agreement are contractually obligated to be returned to the
Company. As a result, shares lent under the Share Lending Agreement
are not considered to be outstanding for the purpose of computing
and reporting earnings or loss per share.
Securities convertible into shares of common stock that were not
considered in calculating the loss per common share, as inclusion would
be anti-dilutive for 2010, 2009 and 2008, are as follows (in thousands):
2010
1,605
5,853
4,879
4,872
17,209
2009
1,605
10,480
5,055
6,957
24,097
2008
857
-
5,055
-
5,912
FLOTEK INDUSTRIES, INC. Form 10K 49
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 Income Taxes
Signifi cant components of the income tax provision (benefi t) are as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
PROVISION BENEFIT FOR INCOME TAXES
Year ended December 31,
2010
2009
$
$
(2,729) $
137
658
(1,934)
(3,499)
(112)
(3,611)
5,545 $
(9,196) $
273
439
(8,484)
10,474
26
10,500
2,016 $
A reconciliation of the eff ective tax rate to the US federal statutory tax rate is as follows:
Federal statutory tax rate
State income taxes, net of federal benefi t
Change in valuation allowance
Goodwill impairment
Warrant liability fair value adjustment
Other
EFFECTIVE INCOME TAX RATE
Year ended December 31,
2010
35.0 %
0.1
(8.40)
-
(15.3)
(0.1)
11.3 %
2009
35.0 %
0.9
(38.6)
-
(0.1)
(1.4)
4.2 %
2008
8,681
1,254
447
10,382
(20,287)
(594)
(20,881)
10,499
2008
35.0 %
(0.8)
-
(11.6)
-
0.9
23.5 %
Deferred income taxes refl ect the tax eff ect of temporary diff erences
between the carrying value of assets and liabilities for fi nancial reporting
purposes and the value reported for income tax purposes, at the enacted
tax rates in eff ect when the diff erences reverse. Th e components of
deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Allowance for doubtful accounts
Inventory valuation reserves
Equity compensation
Intangible assets
Tax credit carryforwards
Other
Total deferred tax assets
Valuation allowance
TOTAL DEFERRED TAX ASSETS, NET
Deferred tax liabilities:
Property, plant and equipment
Convertible debt, net of discount
Prepaid insurance and other
Total deferred tax liabilities
NET DEFERRED TAX LIABILITIES
December 31,
2010
2009
$
14,238
$
11,994
37
565
414
18,266
869
7
34,396
(22,940)
11,456
(2,422)
(9,480)
(132)
(12,034)
(578)
$
213
578
881
19,820
270
134
33,890
(18,784)
15,106
(7,420)
(10,021)
(106)
(17,547)
(2,441)
$
As of December 31, 2010, the Company had estimated US net operating
loss carryforwards of approximately $38.7 million, expiring in various
amounts during 2021 through 2029. Th e ability to utilize NOLs and
other tax attributes could be subject to a signifi cant limitation if the
Company were to undergo an “ownership change” for purposes of
Section 382 of the tax code.
50
FLOTEK INDUSTRIES, INC. Form 10K
Th e Company’s corporate organizational structure requires the fi ling of
two separate consolidated US Federal income tax returns. As a result,
taxable income of one group cannot be off set by tax attributes, including
NOLs, of the other group. As of December 31, 2010, one group had
net deferred tax assets of approximately $22.9 million. Th e Company
has considered all available evidence, both positive and negative, to
determine whether, a valuation allowance is necessary. Based upon
the Company’s assessment a valuation allowance of $22.9 million
was recorded in 2010 as management believes it is more likely than
not that the deferred tax assets will not be realized. Th e other group
incurred a NOL of approximately $8.9 million during the year ended
December 31, 2010 which will be carried back to prior years for an
anticipated refund of $2.9 million. Th e anticipated tax refund has been
recorded as an income tax receivable at December 31, 2010.
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Th e Company has not calculated US taxes on unremitted earnings of
certain non-US subsidiaries due to the Company’s intent to reinvest the
unremitted earnings of the non-US subsidiaries. At December 31, 2010,
the Company had approximately $2.7 million in unremitted earnings
outside the US which were not included for US tax purposes. US
income tax liability would be incurred if these funds were remitted to
the US. It is not practicable to estimate the amount of the deferred
tax liability on such unremitted earnings.
Th e Company has performed an evaluation and concluded that there
are no signifi cant uncertain tax positions requiring recognition in the
Company’s fi nancial statements. Th e evaluation was performed for the
tax years which remain subject to examination by tax jurisdictions as of
December 31, 2010, which include the years ended December 31, 2007
through December 31, 2010 for US federal taxes and years ended
December 31, 2006 through December 31, 2010 for state tax
jurisdictions. Th e Company’s policy is to record penalties related to
income tax matters as income tax expense.
NOTE 14 Convertible Preferred Stock and Stock Warrants
On August 12, 2009, the Company sold 16,000 units (the “Units”),
consisting of Series A cumulative convertible preferred stock and warrants,
for $1,000 per Unit, yielding aggregate gross proceeds of $16.0 million.
Net proceeds from issuance of the Units were $14.8 million. Th e
Company used the net proceeds from the sale of Units to reduce
borrowings under the Wells Fargo credit facility, ensure availability of
credit, and for general corporate purposes.
Each Unit is comprised of one share of cumulative convertible preferred
stock (“Convertible Preferred Stock”), warrants to purchase up to 155
shares of the Company’s common stock at an exercise price of $2.31
per share (“Exercisable Warrants”) and contingent warrants to purchase
up to 500 shares of the Company’s common stock at an exercise price
of $2.45 per share (“Contingent Warrants”).
Each share of Convertible Preferred Stock is convertible at the holder’s
option, at any time, into 434.782 shares of the Company’s common
stock. Th is conversion rate represents an equivalent conversion price of
approximately $2.30 per share of common stock. Th e conversion rate
is subject to adjustment in the event of stock splits, stock dividends,
stock distributions, reorganizations and other events aff ecting the
common stock.
Each share of Convertible Preferred Stock has a liquidation preference of
$1,000. Dividends accrue at a rate of 15% of the liquidation preference
per year and accumulate if not paid quarterly. Dividends may be paid,
at the Company’s election, as restricted by applicable debt covenants,
in cash, common stock or a combination thereof. No dividends have
been declared or paid on the Convertible Preferred Stock through
December 31, 2010. If the Company does not declare or pay dividends
or if dividends are in arrears for an aggregate number of days equal to
six calendar quarters, the holders of the Convertible Preferred Stock are
entitled to elect two new directors to the Company’s board of directors
at each meeting until all accumulated and unpaid dividends have been
fully paid or set aside for payment.
After February 11, 2010, the Company may automatically convert the
preferred shares into common shares if the closing price of the common
stock is equal to or greater than 150% of the then current conversion
price for any 15 trading days during any 30 consecutive trading day
period. If the Convertible Preferred Stock is automatically converted
and the Company has not previously paid holders amounts equal to at
least eight quarterly dividends, the Company will be obligated pay an
amount, in cash or common stock, equal to the value of eight quarterly
dividend payments less any dividends previously paid.
Th e Company may redeem the Convertible Preferred Stock beginning
on August 12, 2012. Th e initial redemption price will be 105% of
the liquidation preference, declining to 102.5% on August 12, 2013,
and to 100% on or after August 12, 2014, in each case inclusive of all
accrued and unpaid dividends to the redemption date.
Th e Exercisable Warrants are immediately will exercisable and expire if
not exercised by August 12, 2014. Th e Contingent Warrants became
exercisable on November 9, 2009 and will expire if not exercised by
November 9, 2014. Both the Exercisable and Contingent Warrants
contain anti-dilution price protection in the event the Company issues
shares of common stock or securities exercisable for or convertible into
common stock at a price per share less than the warrant’s exercise price.
Due to the anti-dilution price adjustment provision in the warrant
agreements, the warrants are not considered equity and are recorded
at fair value as a warrant liability when issued. Warrant liability is
adjusted to fair value through the statement of operations at the end
of each reporting period over the life of the warrants. Th e Company
uses the Black-Scholes option-pricing model to estimate the value of
the warrant liability at the end of each reporting period.
Th e gross proceeds from the issuance of the Units were allocated, at the
date of the transaction, based upon the preferred stock and warrants
relative fair values. In order to calculate the relative fair values, the
Company obtained third-party valuations to assist in establishing the
fair value of the debt and equity components of the Units. Th e initial
fair value of the warrants was determined with the Black-Scholes option-
pricing model using a fi ve-year term, volatility of 54%, risk-free rate of
return of 2.7% and an assumed dividend rate of zero. Th e initial fair
value of the preferred stock component was determined based upon
external third party valuations of the conversion rights and the host
contract. Th e initial fair value of the conversion rights were determined
based on a Monte Carlo simulation of the Company’s possible future
stock prices, which generated potential conversion outcomes. Due to
FLOTEK INDUSTRIES, INC. Form 10K 51
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a lack of comparable transactions by companies with similar credit
ratings, the initial value of the host contract was determined by applying
a risk-adjusted rate of return to the annual dividend. At the date of the
transaction, the Company recorded approximately 68% of the proceeds
or $10.8 million (net of the discount resulting from the allocation of
the proceeds to the warrants) as preferred stock in stockholders’ equity
and the detachable warrants were recorded as a warrant liability with
a fair value of $5.2 million.
Th e Company determined the embedded conversion option within
the preferred stock was benefi cial (had intrinsic value) to the holders of
the preferred stock. Th e initial intrinsic value of the conversion option
was determined to be $5.2 million and was recognized as a benefi cial
conversion discount with an off set to additional paid-in capital at the
date of the transaction.
Th e conversion period for the preferred stock was estimated to be
36 months based upon an evaluation of the conversion options. Th e
accretion of the discount on the preferred stock recorded during
the year ended December 31, 2010 and 2009 was $5.1 million and
$1.3 million, respectively, including the eff ect of the conversions which
occurred during the annual 2010 twelve month period (described in
“Conversions of Preferred Stock” below).
Th e change in the fair value of the warrants from date of issuance through
December 31, 2010 has been recorded in the statement of operations.
Th e fair value of the warrants has been calculated at each period end
using the Black-Scholes option-pricing model. At December 31, 2010,
inputs for the fair value calculation included the actual remaining
term of the warrants (approximately four years), volatility of 68.0%,
risk-free rate of return of 1.5%, and an assumed dividend rate of zero.
At December 31, 2009, inputs for the fair value calculation included
NOTE 15 Common Stock
The Company’s Certificate of Incorporation, as amended
November 9, 2009, authorizes the Company to issue up to 80.0 million
shares of common stock, par value $0.0001 per share, and 100,000 shares
of one or more series of preferred stock, par value $0.0001 per share.
A reconciliation of the change in issued shares of the Company’s
common stock during the year ended December 31, 2010 is as follows:
Shares issued at December 31, 2009
24,168,292
Issued upon conversion of preferred stock
Issued in exchange of convertible notes
Issued in payment of debt issuance costs
Issued upon exercise of warrants
Issued as restricted stock award grants
Issued upon exercise of stock options
2,084,776
1,568,874
4,042,241
3,922,854
826,575
140,279
SHARES ISSUED AT DECEMBER 31, 2010
36,753,891
the actual remaining term of the warrants of approximately fi ve years,
volatility of 55.8%, risk-free rate of return of 2.7%, and an assumed
dividend rate of zero.
Conversions of Preferred Stock
During the year ended December 31, 2010, holders of 4,795 shares
of preferred stock elected conversion into approximately 2.1 million
shares of the Company’s common stock. Th e Company did not receive
any proceeds as a result of the conversions. Th e holders of the preferred
stock; however, forfeited $0.7 million of accrued and unpaid dividends
on the converted shares. Th e forfeitures are reported as a reduction of
accrued dividends. At December 31, 2010 and 2009, the Company
had accrued and unpaid dividends on preferred stock of $2.3 million
and $0.9 million, respectively.
Upon conversion of the preferred stock, the Company recognized the
proportional unamortized discount as additional accretion of discount
on preferred stock.
Re-pricing and Exercises of Stock Warrants
Th e Exercisable and Contingent Warrants both contain anti-dilution
price protection. In accordance with contractual anti-dilution price
adjustment provisions, the warrants, were re-priced as a result of
payment of a portion of deferred commitment fees with common stock
on March 31, 2010 and September 30, 2010 (See Note 11). During
2010, warrants were exercised to purchase approximately 3.9 million
shares of the Company’s common stock. At December 31, 2010,
warrants to purchase up to 5,853,350 shares of common stock at an
exercise price of $1.21 per share remain outstanding.
Stock-Based Incentive Plans
Stockholders approved long term incentive plans in 2010, 2007, 2005
and 2003 (the “2010” Plan, the “2007 Plan,” the “2005 Plan” and the
“2003 Plan,” respectively) under which the Company may grant equity
awards to offi cers, key employees, and non-employee directors in the
form of stock options, restricted stock and certain other incentive awards.
At December 31, 2010, the maximum number of shares that may be
issued under the 2010 Plan, 2007 Plan, 2005 Plan and 2003 Plan are
4.0 million, 2.2 million, 1.9 million and 1.4 million, respectively. Th e
Company had approximately 2.6 million shares remaining to be granted
under the 2010 Plan and 0.1 million shares remaining to be granted
under both the 2007 and 2005 Plans at December 31, 2010. No shares
remain to be granted under the 2003 Plan. At December 31, 2010,
options to purchase a total of 1.6 million shares remain outstanding
under the Company’s long term incentive plans.
52
FLOTEK INDUSTRIES, INC. Form 10K
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
All stock options are granted with an exercise price equal to the market
value of the Company’s common stock on the date of grant. Options
expire no later than ten years from the date of grant and generally
vest within four years or less. Proceeds received from stock option
exercises are credited to common stock and additional paid-in capital, as
appropriate. Th e Company uses historical data to estimate pre-vesting
option forfeitures. Estimates are adjusted when actual forfeitures diff er
from estimates. Stock-based compensation expense is recorded for
equity awards expected to vest. Th e fair value of stock-based awards at
the date of grant is calculated using the Black-Scholes option pricing
model and metrics provided below.
Th e risk free interest rate is based on the implied yield of US Treasury
zero-coupon securities that correspond to the expected life of the option.
Volatility is estimated based on historical and implied volatilities of
the Company’s stock and of identifi ed companies considered to be
representative peers of the Company. Th e expected life of awards
granted represents the period of time the options are expected to remain
outstanding. Th e Company uses the “simplifi ed” method which is
allowed for companies that cannot reasonably estimate the expected
life of options based on historical share option exercise experience.
Th e Company does not expect to pay dividends on common stock.
Assumptions used in the Black-Scholes model for stock options
granted include:
Risk-free interest rate
Expected volatility of common stock
Expected life of options in years
Dividend yield
Vesting period in years
Year ended December 31,
2010
2009
.55% - 2.275%
1.29% - 2.32%
61.4% - 69.3%
3.34* - 6.25
68.8% - 71.7%
3.50* and 4.25
0%
3.4 - 6.3
0%
0.4 - 4.0
2008
2.30%
47.0%
4.25
0%
4.0
*
In 2010 and 2009, grants were made to an optionee for whom the Company was able to reasonably estimate the expected life of the award.
Th e Black-Scholes option pricing valuation model was developed to
estimate the fair value of fully-transferable traded options with no
vesting restrictions. As option valuation models require the use of
subjective assumptions, changes in assumptions can materially aff ect
fair value calculations. Th e Company’s options are not characteristic
of fully-transferable traded options; therefore, the option valuation
models do not necessarily provide a reliable measure of the fair value
of the Company’s options.
A summary of stock option activity for the year ended December 31, 2010 is as follows:
Options
Outstanding as of January 1, 2010
Granted
Exercised
Forfeited
Expired
Outstanding as of December 31, 2010
Vested or expected to vest as of December 31, 2010
Options exercisable as of December 31, 2010
Shares
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
1,605,398 $
604,359
(140,279)
(14,043)
(450,300)
$
1,605,135
1,545,746
745,786
$
$
5.13
2.06
0.30
8.14
6.76
3.90
3.41
3.73
8.42
8.39
7.85
$
$
$
4,208,345
4,063,028
2,071,845
Th e weighted-average fair value of stock options at grant date during
the years ended December 31, 2010, 2009 and 2008 was $1.02, $1.07
and $4.37 per share, respectively. Th e total intrinsic value of stock
options exercised during the years ended December 31, 2010, 2009 and
2008 was $0.01 million, $0.1 million and $9.0 million, respectively.
Th e total fair value of stock options vesting during the years ended
December 31, 2010, 2009 and 2008 was $0.8 million, $0.4 million
and $1.0 million, respectively.
At December 31, 2010, there was $0.9 million of measured but
unrecognized compensation expense related to non-vested stock options.
Th is cost is expected to be recognized over a weighted-average period of
2.2 years. Th e tax benefi t realized from stock options exercised during
the year ended December 31, 2010 was not immaterial.
Restricted Stock
Th e Company grants employees either time-vesting or performance-
based restricted shares in accordance with applicable terms underlying
Restricted Stock Agreements (“RSAs”). Time-vesting restricted shares
vest after a stipulated period of time has elapsed subsequent to the date
of grant, generally four to fi ve years. Certain time-vested shares have also
been issued with a portion of the shares granted vesting immediately.
Performance-based restricted shares are issued with performance criteria
defi ned over a designated performance period and vest only when,
and if, the outlined performance criteria is met. Grantees of restricted
shares retain voting rights for the shares granted.
FLOTEK INDUSTRIES, INC. Form 10K 53
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2010, the Company awarded 826,575 restricted stock shares to employees under the 2007 Plan. All of
these awards were time-vesting. A summary of restricted stock activity for the year ended December 31, 2010 is as follows:
Restricted Stock
Non-vested at January 1, 2010
Granted
Vested
Forfeited
NONVESTED AT DECEMBER 31, 2010
Th e weighted-average grant-date fair value of restricted stock granted
during the years ended December 31, 2010, 2009 and 2008 was $1.88,
$1.18 and $15.13, respectively. Th e total fair value of restricted stock
that vested during the years ended December 31, 2010, 2009 and
2008 was $4.2 million, $1.2 million, and $2.2 million, respectively.
At December 31, 2010, there was $1.5 million of unrecognized
compensation expense related to non-vested restricted stock awards.
Th e referenced unrecognized compensation expense is expected to be
recognized over a weighted-average period of 2.2 years.
Share-Based Compensation Expense
Non-cash share-based compensation expense related to stock options
and restricted stock grants totaled $4.7 million, $1.7 million and
$2.5 million during the years ended December 31, 2010, 2009 and
2008, respectively.
Treasury Stock
Th e Company accounts for treasury stock using the cost method and
includes treasury stock as a component of stockholders’ equity. During
the years ended December 31, 2010 and 2009, the Company purchased
195,442 shares and 34,890 shares of the Company’s common stock at
market value as payment of income tax withholding owed by employees
upon vesting of restricted shares. Shares previously issued as restricted
stock awards to employees that were forfeited during 2010 and 2009
were also accounted for as treasury stock.
Th e Company currently does not have nor intend to initiate a share
repurchase program.
Share Lending Agreement
Concurrent with the off ering of the 2008 Notes, the Company entered
into a Share Lending Agreement with Bear, Stearns International Limited
(the “Borrower”). Under the Share Lending Agreement, the Company
loaned 3.8 million shares of common stock (the “Borrowed Shares”)
to the Borrower during a period commencing February 11, 2008 and
ending February 15, 2028. Th e Company may terminate the Share
Lending Agreement earlier, upon written notice to the Borrower
that the entire principal balance of the convertible notes is no longer
outstanding or upon agreement of the Borrower. Th e Borrower is only
permitted to use the Borrowed Shares to directly or indirectly facilitate
sale of the 2008 Notes or to establish hedge positions for holders of
the 2008 Notes. Th e Company did not require collateral in support
of the Share Lending Agreement.
In February 2008, the Borrower borrowed all 3.8 million shares
available under the Share Lending Agreement. Th e Borrowed Shares
54
FLOTEK INDUSTRIES, INC. Form 10K
Weighted-Average
Fair Value - Date of
Grant
Shares
459,115 $
826,575
(401,570)
(23,326)
860,794 $
10.26
1.88
10.15
11.75
2.22
are subject to adjustments for stock dividends, stock splits, reverse stock
splits or any activity which impacts the number of shares of common
stock outstanding. Th e Company did not receive any proceeds for the
Borrowed Shares, but the Company did receive a nominal loan fee of
$0.0001 for each share loaned to the Borrower. Th e Borrower retains
all proceeds from any sale of the Borrowed Shares pursuant to the Share
Lending Agreement. Upon conversion of the 2008 Notes, a number
of Borrowed Shares proportional to the conversion rate for such notes
must be returned to the Company. Borrowed Shares returned to the
Company cannot be re-borrowed.
Borrowed Shares are issued and outstanding for corporate law purposes;
accordingly, the holders of the Borrowed Shares have all of the rights
of a holder of the Company’s outstanding shares, including the right
to vote the shares on all matters submitted to a vote of shareholders
and the right to receive any dividends or other distributions that
the Company may pay or make on outstanding shares of common
stock. Under the Share Lending Agreement; however, the Borrower
has agreed to pay to the Company, within one business day after a
relevant payment date, an amount equal to any cash dividends that
the Company pays on the Borrowed Shares, and to pay or deliver to
the Company, upon termination of the loan of Borrowed Shares, any
other distribution, in liquidation or otherwise, that the Company has
made on the Borrowed Shares.
To the extent the Borrowed Shares lent under the Share Lending
Agreement have not been sold or returned to the Company, the
Borrower has contractually agreed not to vote any Borrowed Shares
of which it is owner of record. Th e Borrower has also agreed not to
transfer or dispose of Borrowed Shares, other than to affi liates, unless
such transfer or disposition is pursuant to a registration statement that
is eff ective under the Securities Act. Investors that purchase the shares
from the Borrower (and any subsequent transferees of such purchasers);
however, are entitled to the same voting rights as any other holder of
common stock.
In May 2008, JP Morgan Chase & Co. completed the acquisition of
Bear Stearns Companies Inc., at which time the Borrower became an
indirect, wholly-owned subsidiary of JPMorgan Chase & Company.
Contractual undertakings of the Borrower have the eff ect of substantially
eliminating the economic dilution that otherwise would result from
the issuance of the Borrowed Shares. Further, all shares outstanding
under the Share Lending Agreement are required to be returned to
the Company in the future. As a result, the shares of the Company’s
stock lent under the Share Lending Agreement are not considered to
be outstanding for the purpose of computing and reporting loss per
share or included in the section 382 limitation calculation.
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 Commitments and Contingencies
Litigation
401(k) Retirement Plan
Th e Company maintains a 401(k) retirement plan for the benefi t of
eligible employees in the US. All employees are eligible to participate in the
plan upon employment. As of January 1, 2008, the Company increased
the Company’s match to 100% of each employee’s 401(k) contribution
up to 4% of qualifi ed compensation. In April 2009, the Company
discontinued the matching of employees’ 401(k) contributions. Th e
consolidated fi nancial statements for the years ended December 31, 2009
and 2008 include compensation expense of $0.3 million and $0.9 million,
respectively, related to the Company’s 401(k) matching. Due to the
discontinuation of 401(K) matching in 2009, no related compensation
expense was recognized in 2010. As of January 1, 2011, the Company
reinstated a Company match of 50% on employee 401(k) contributions
of up to 4% of qualifi ed compensation.
Concentrations and Credit Risk
Financial instruments that potentially subject the Company to signifi cant
concentrations of credit risk include of trade accounts receivable as
the Company does not generally require collateral in support of trade
receivables. In addition, the majority of cash and cash equivalents
are maintained at one major fi nancial institution and balances often
exceed insurable amounts.
Th e majority of revenue is derived from the oil and natural gas industry.
Th is concentration of customers in one industry increases credit and
business risk, particularly given the recent volatility of activity levels
within the industry. Customers include major integrated oil and natural
gas companies, independent oil and natural gas companies, pressure
pumping service companies and state-owned oil companies. Th e
Company’s top three customers accounted for 18%, 22% and 26%
of consolidated revenue for the years ended December 31, 2010, 2009
and 2008, respectively.
Certain raw materials used by the Chemicals segment in the manufacture
of micro-emulsion products are obtainable from limited sources. Certain
mud-motor inventory parts in the Drilling segment and stock parts in
the Artifi cial Lift segment are primarily sourced from China.
Th e Company is subject to routine litigation and other claims that
arise in the normal course of business. Management is not aware
of any pending or threatened lawsuits or proceedings which would
have a material eff ect on the Company’s fi nancial position, results of
operations or liquidity.
Common Stock Listing on the New York Stock
Exchange
Th e Company’s common stock is listed on the New York Stock Exchange
(“NYSE”) under the stocker ticker symbol “FTK”. Under the NYSE’s
continued listing standards, a company is considered to be below
compliance standards if, among other things, the average global market
capitalization over a 30 trading-day period and the stockholders’ equity
are both less than $50 million. Th e Company received notifi cation of
non-compliance during the fourth quarter of 2009. At such time the
NYSE required the Company to fi le a plan addressing the compliance
breach and the Company proposed remedy.
In March 2010, the Company submitted a plan of action to the NYSE
that outlined the Company’s plan to achieve compliance with the
NYSE continued listing standards within the 18-month cure period
ending in June 2011. During implementation and execution of the
plan of action, the Company’s common stock continues to be listed
and traded on the NYSE, subject to the Company’s compliance with
other NYSE continued listing requirements.
Th e Company recently returned to compliant levels; however, the
NYSE reserves the right to monitor the Company until the end of the
compliance plan period. If the Company remains compliant to the
end of the plan period, the Company will be reinstated in accordance
with continued listing standards.
Operating Lease Commitments
Th e Company has operating leases for offi ce space, vehicles and
equipment. Future minimum lease payments under operating leases
at December 31, 2010 are as follows (in thousands):
Year Ending December 31,
Minimum Lease
Payments
2011
2012
2013
2014
2015
Th ereafter
TOTAL
$
$
1,508
1,039
357
74
73
1,356
4,407
Rent expense under operating leases totaled approximately
$2.0 million, $2.3 million and $1.7 million during the years ended
December 31, 2010, 2009 and 2008, respectively.
FLOTEK INDUSTRIES, INC. Form 10K 55
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 Segment Information
Operating segments are defi ned as components of an enterprise for which
separate fi nancial information is available that is regularly evaluated by
chief operating decision-makers in deciding how to allocate resources
and assess performance.
Th e Company is comprised of three reportable segments; Chemicals,
Drilling, and Artifi cial Lift:
• Th e Chemicals segment consists of two business divisions: 1) Specialty
Chemicals and 2) Logistics. Specialty Chemicals designs, develops,
manufactures, packages and sells chemicals used by oilfi eld service
companies in oil and natural gas well drilling, cementing, stimulation
and production activities. Th e Logistics division manages automated
handling, loading facilities, and blending capabilities of bulk materials
for oilfi eld service companies.
• Th e Drilling segment rents, inspects, manufactures and markets
down-hole drilling equipment used in energy, mining, water well
and industrial drilling activities.
• Th e Artifi cial Lift segment manufactures and markets artifi cial lift
equipment, including the Petrovalve line of beam pump components,
electric submersible pumps and gas separators, valves and services
that support coal bed methane production activities.
Th e Company evaluates performance based upon several criteria. Th e
primary fi nancial measure is business segment income before taxes.
Various functions, including certain sales and marketing activities
and general and administrative activities, are provided centrally by
the corporate offi ce. Costs associated with corporate offi ce functions,
other corporate income and expense items as well as estimated income
tax provisions (benefi ts), are not allocated to reportable segments.
Intersegment revenue is not considered material to the consolidated
fi nancial statements.
Summarized fi nancial information regarding reportable segments as of
and for the years ended December 31, 2010, 2009 and 2008 is shown
in the following table (in thousands):
2010
Net revenue from external customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Total assets
Capital expenditures
2009
Net revenue from external customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Total assets
Capital expenditures
2008
Net revenue from external customers
Gross margin
Income (loss) from operations
Depreciation and amortization
Total assets
Capital expenditures
Chemicals
and Logistics
Drilling Products
Artifi cial Lift
Corporate
and Other
$
$
$
66,121 $
29,249
19,833
1,671
44,102
1,227
49,296 $
21,667
12,964
1,844
33,053
291
109,356 $
49,119
37,433
1,782
44,060
2,464
65,782 $
18,991
(9,738)
11,445
102,949
4,679
50,774 $
4,781
(32,084)
11,826
119,960
6,189
98,262 $
36,897
(43,840)
10,121
176,287
19,840
15,079 $
4,730
3,070
219
9,062
32
12,480 $
2,936
1,161
292
7,084
42
18,445 $
4,740
(6,709)
633
16,104
293
- $
-
(19,432)
430
28,694
122
- $
-
(15,144)
224
18,804
33
- $
-
(17,635)
308
(1,492)
1,114
Total
146,982
52,970
(6,267)
13,76 5
184,807
6,060
112,550
29,384
(33,103)
14,186
178,901
6,555
226,063
90,756
(30,751)
12,844
234,959
23,711
One customer and its affi liates accounted for $16.9 million, $18.7 million and $44.6 million of consolidated revenue for the years ended
December 31, 2010, 2009 and 2008, respectively. Over 97% of this revenue related to sales by the Chemicals segment for all years.
56
FLOTEK INDUSTRIES, INC. Form 10K
PART II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue by country is determined based upon the location of services provided and products sold. Revenue by geographic location is as follows
(in thousands):
United States
Other countries
TOTAL
Year ended December 31,
2010
127,285 $
19,697
146,982 $
2009
97,737 $
14,813
112,550 $
$
$
2008
208,228
17,835
226,063
Long-lived assets held in countries other than the US are not considered material to the consolidated fi nancial statements.
NOTE 18 Quarterly Financial Data (Unaudited)
(in thousands, except per share data)
First Quarter
Second Quarter
Th ird Quarter
Fourth Quarter
2010
Revenue
Gross margin
Net loss
Loss per share:
Basic and diluted
2009
Revenue
Gross margin
Net loss
Loss per share:
Basic and diluted
$
$
28,370 $
8,012
(9,513)
31,174 $
11,351
(6,162)
39,982 $
16,067
(1,163)
47,456
17,540
(26,627)
(0.60)
(0.28)
(0.09)
(0.95)
40,676 $
12,491
(2,003)
23,503 $
3,648
(19,817)
23,818 $
6,403
(23,175)
24,553
6,842
(5,338)
(0.10)
(1.01)
(1.22)
(0.35)
(1) The sum of the quarterly loss per share applicable to common stockholders (basic and diluted) does not agree to the loss per share for the year due to the timing of common stock issuances.
NOTE 19 Subsequent Events
Payments of Preferred Stock Dividends and
Conversion of Preferred Stock into Shares of
Common Stock
On January 6, 2011, the Company paid all accumulated and unpaid
dividends on the Company’s outstanding shares of Series A cumulative
convertible preferred stock. Th e payment, at an annual rate of 15%
of the liquidation preference, covered the period from issuance,
August 12, 2009, through December 31, 2010. In accordance with the
Certifi cate of Designations governing the preferred stock, the dividends
were paid in shares of the Company’s common stock. Dividends per
share of $208.33 were paid in shares of common stock valued at $4.81,
based upon the prior ten business day volume-weighted average price
per share. Fractional shares were paid in cash.
On February 4, 2011, the Company exercised the right to convert all
outstanding shares of cumulative convertible preferred stock into shares
of common stock at the prevailing conversion rate of 434.782 shares of
common stock for each share of preferred stock. Th e Company issued
4,871,719 shares of common stock for preferred shares converted during
2011, including those converted upon the mandatory conversion. In
accordance with the Certifi cate of Designations governing the preferred
stock, holders of preferred shares subject to the mandatory conversion
were entitled to a total of eight quarters of dividend payments. At the
date of the mandatory conversion a dividend per share of $91.67 was
paid in shares of common stock valued at $6.63, based upon the prior
ten business day volume-weighted average price per share. Fractional
shares were paid in cash.
Exercise of Stock Warrants
From January 1 through March 1, 2011, warrants were exercised to
purchase 2,176,000 shares of the Company’s common stock at $1.21
per share. Th e Company received cash proceeds of $2.6 million in
connection with the warrants exercised.
FLOTEK INDUSTRIES, INC. Form 10K 57
PART II
ITEM 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
ITEM 9
PART II
None.
Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
ITEM 9A Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Th e Company’s disclosure controls and procedures are designed to
ensure that such information required to be disclosed by the Company
in reports fi led or submitted under the Exchange Act as amended, is
recorded, processed, summarized and reported within the time periods
specifi ed in the SEC’s rules and forms. Th e Company’s disclosure controls
and procedures are also designed to ensure that such information is
accumulated and communicated to management, including the principal
executive and principal fi nancial offi cers, as appropriate to allow timely
decisions regarding required disclosures. Th ere are inherent limitations
to the eff ectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or
overriding of controls and procedures. Accordingly, even eff ective
disclosure controls and procedures can only provide reasonable assurance
that control objectives are attained. Th e Company’s disclosure controls
and procedures are designed to provide such reasonable assurance.
Th e Company’s management, with the participation of the principal
executive and principal fi nancial offi cers, evaluated the eff ectiveness
of the design and operation of the Company’s disclosure controls and
procedures as of December 31, 2010, as required by Rule 13a-15(e) of the
Exchange Act. Based upon that evaluation, the principal executive and
principal fi nancial offi cers have concluded that the Company’s disclosure
controls and procedures were not eff ective as of December 31, 2010
due to a material weakness in internal control relating to preparation
of the Company’s fi nancial statements.
Management’s Report on Internal Control over Financial Reporting
Th e Company’s management is responsible for establishing and
maintaining adequate internal control over fi nancial reporting, as
defi ned in Rule 13a-15(f ) of the Exchange Act. Th e Company’s
management, including the principal executive and principal fi nancial
offi cers, assessed the eff ectiveness of internal control over fi nancial
reporting as of December 31, 2010, based on criteria issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) entitled “Internal Control—Integrated Framework.” Upon
evaluation, the Company’s management identifi ed control defi ciencies
regarding timeliness and eff ective preparation of account reconciliations
in connection with the monthly close process. Th e defi ciencies
identifi ed constitute a material weakness in internal control as of
December 31, 2010. Accordingly, management has concluded that the
Company’s internal control over fi nancial reporting was not eff ective in
connection with the preparation of the consolidated fi nancial statements
as of December 31, 2010.
Remediation Plan and Status
Th e Company’s management is actively committed to and engaged in
the implementation and execution of remediation eff orts to resolve the
material weakness; as well as, to proactively manage any other areas of
risk that may be identifi ed. In-process remediation eff orts with respect
to standardization of the monthly fi nancial close process have not yet
been fully completed.
Th e Company’s executive management team and Board of Directors are
committed to achieving and maintaining a strong control environment,
high ethical standards, and fi nancial reporting integrity.
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2010, the Company continued implementation and execution of remediation eff orts to standardize
the monthly fi nancial close process in order to enhance the eff ectiveness of the Company’s overall fi nancial control environment.
58
FLOTEK INDUSTRIES, INC. Form 10K
ITEM 9B Other Information
None.
PART II
ITEM 9B Other Information
FLOTEK INDUSTRIES, INC. Form 10K 59
PART III
ITEM 14 Principal Accounting Fees and Services
PART III
ITEM 10 Directors, Executive Offi cers and Corporate
Governance
Information under the caption “Directors, Executive Offi cers and Corporate Governance,” will be contained in the Company’s Defi nitive Proxy
Statement for the 2011 Annual Meeting of Stockholders to be fi led within 120 days of year end, is incorporated herein by reference.
ITEM 11 Executive Compensation
Information under the caption “Executive Compensation,” will be contained in the Company’s Defi nitive Proxy Statement for the 2011 Annual
Meeting of Stockholders to be fi led within 120 days of year end, is incorporated herein by reference.
ITEM 12 Security Ownership of Certain Benefi cial Owners
and Management and Related Stockholder Matters
Information under the caption “Security Ownership of Certain Benefi cial Owners and Management and Related Stockholder Matters,” will be
contained in the Company’s Defi nitive Proxy Statement for the 2011 Annual Meeting of Stockholders to be fi led within 120 days of year end,
is incorporated herein by reference.
ITEM 13 Certain Relationships and Related Transactions,
and Director Independence
Information under the caption “Certain Relationships and Related Transactions, and Director Independence,”will be contained in the Company’s
Defi nitive Proxy Statement for the 2011 Annual Meeting of Stockholders to be fi led within 120 days of year end, is incorporated herein by reference.
ITEM 14 Principal Accounting Fees and Services
Information under the caption “Principal Accounting Fees and Services,” will be contained in the Company’s Defi nitive Proxy Statement for the
2011 Annual Meeting of Stockholders to be fi led within 120 days of year end, is incorporated herein by reference.
FLOTEK INDUSTRIES, INC. Form 10K 61
PART IV
ITEM 15 Exhibits and Financial Statement Schedules
PART IV
ITEM 15 Exhibits and Financial Statement Schedules
Exhibit index
Exhibit Number
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Exhibit Title
Amended and Restated Certifi cate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for
the quarter ended September 30, 2007).
Certifi cate of Designations for Series A Cumulative Convertible Preferred Stock dated August 11, 2009 (incorporated by reference
to Exhibit 3.1 to the Company’s Form 8-K fi led on August 17, 2009).
Certifi cate of Amendment to the Amended and Restated Certifi cate of Incorporation (incorporated by reference to Exhibit 3.1 to
the Company’s Form 10-Q for the quarter ended September 30, 2009).
Bylaws (incorporated by reference to Appendix F to the Company’s Defi nitive Proxy Statement fi led on September 27, 2001).
Form of Certifi cate of Common Stock (incorporated by reference to Appendix E to the Company’s Defi nitive Proxy Statement
fi led on September 27, 2001).
Form of Certifi cate of Series A Cumulative Convertible Preferred Stock (incorporated by reference to Exhibit A to the Certifi cate
of Designations for Series A Cumulative Convertible Preferred Stock fi led as Exhibit 3.1 to the Company’s Form 8-K fi led on
August 17, 2009).
Form of Warrant to Purchase Common Stock of the Company, dated August 31, 2000 (incorporated by reference to Exhibit 4.3
to the Company’s Registration Statement on Form SB-2 (fi le no. 333-129308) fi led on October 28, 2005).
Base Indenture, dated February 14, 2008, by and among the Company, the subsidiary guarantors named therein and
American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K fi led on
February 14, 2008).
First Supplemental Indenture, dated February 14, 2008, by and among the Company, the subsidiary guarantors named therein
and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K fi led on
February 14, 2008).
Form of Global Security (incorporated by reference to Exhibit A to the First Supplemental Indenture fi led as Exhibit 4.2 to the
Company’s Form 8-K fi led on February 14, 2008).
Form of Exercisable Warrant, dated August 11, 2009 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K fi led
on August 17, 2009).
Form of Contingent Warrant, dated August 11, 2009 (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K fi led
on August 17, 2009).
62
FLOTEK INDUSTRIES, INC. Form 10K
PART IV
ITEM 15 Exhibits and Financial Statement Schedules
Exhibit Title
Amended and Restated Credit Agreement between the Company and Wells Fargo Bank, National Association, dated
August 31, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended
September 30, 2009).
Amendment to Amended and Restated Credit Agreement between the Company and Wells Fargo Bank, N.A., dated
November 15, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-K for the year ended
December 31, 2007).
Second Amendment to Amended and Restated Credit Agreement between the Company and Wells Fargo Bank, N.A., dated
February 4, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K fi led on February 7, 2008).
Fourth Amendment to Amended and Restated Credit Agreement between the Company and Wells Fargo Bank, National
Association, dated May 12, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K fi led on May 15, 2009).
2003 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8
fi led on October 27, 2005).
2005 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8
fi led on October 27, 2005).
2007 Long Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-K for the year ended
December 31, 2007).
Asset Purchase Agreement, dated April 3, 2006, among Total Energy Technologies, LLC, USA Petrovalve, Inc. and Total Well
Solutions, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSB for the quarter ended June 30, 2006).
Exclusive License Agreement, dated April 3, 2006, among the Company, USA Petrovalve, Inc. and Total Well Solutions, LLC
(incorporated by reference to Exhibit 10.2 to the Company’s Form 10-QSB for the quarter ended June 30, 2006).
Asset Purchase Agreement, dated June 6, 2006, among LifTech, LLC, its owners and USA Petrovalve, Inc. (incorporated by
reference to Exhibit 10.3 to the Company’s Form 10-QSB for the quarter ended June 30, 2006).
Membership Interest Purchase Agreement, dated October 5, 2006, between Turbeco, Inc. and the owner of a 50% interest in
CAVO Drilling Motors, Ltd Co. (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSB for the quarter
ended September 30, 2006).
Asset Purchase Agreement, dated November 17, 2006, among Teal Supply Co., dba Triumph Drilling Tools, Inc., Turbeco
Inc. and Michael E. Jensen (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-K for the year ended
December 31, 2006).
Stock Purchase Agreement, dated August 31, 2007, among the Company, SES Holdings, Inc. and the stockholders thereof
(incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended September 30, 2007).
Assignment of Membership Interest, dated November 15, 2007, between Turbeco, Inc. and the owner of the remaining 50%
interest in CAVO Drilling Motors, Ltd Co. (incorporated by reference to Exhibit 10.13 to the Company’s Form 10-K for the year
ended December 31, 2007).
Asset Purchase Agreement, dated February 4, 2008, by and among Teledrift Acquisition, Inc., the Company, Teledrift,
Inc. and the stockholders named therein (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K fi led on
February 7, 2008).
Share Lending Agreement among the Company, Bear Stearns & Co. Inc. and Bear Stearns International Limited (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K fi led on February 13, 2008).
Credit Agreement, dated March 31, 2008, among the Company, Wells Fargo Bank, National Association and the Lenders named
therein (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended September 30, 2009).
Pledge and Security Agreement, dated March 31, 2008, among the Company and the subsidiaries named therein, in favor
of Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-Q for the quarter ended
March 31, 2008).
Guaranty Agreement, dated March 31, 2008, among the guarantors named therein, Wells Fargo Bank, N.A., the Lenders named
therein, the Issuing Lender named therein and the Swap Counterparties named therein (incorporated by reference to Exhibit 10.6
to the Company’s Form 10-Q for the quarter ended March 31, 2008).
First Amendment and Temporary Waiver, dated February 25, 2009, among the Company, Wells Fargo Bank, National
Association and the Lenders named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K fi led on
March 3, 2009).
Second Amendment to Credit Agreement, dated March 13, 2009, among the Company, Wells Fargo Bank, N.A. and the
Lenders named therein (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended
September 30, 2009).
Th ird Amendment and Waiver to Credit Agreement, dated August 6, 2009, among the Company, Wells Fargo Bank, N.A. and
the Lenders named therein (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K fi led on August 12, 2009).
Waiver Agreement and Fourth Amendment to Credit Agreement, dated November 16, 2009, among the Company, Wells Fargo
Bank, N.A. and the Lenders named therein (incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q for the
quarter ended September 30, 2009).
Separation and Release Agreement, dated August 5, 2008, between Lisa Meier and the Company (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K fi led on August 6, 2008).
Form of Unit Purchase Agreement, dated August 11, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K fi led on August 12, 2009).
Retirement Agreement, dated August 11, 2009, between Jerry D. Dumas, Sr. and the Company (incorporated by reference to
Exhibit 10.3 to the Company’s Form 8-K fi led on August 12, 2009).
Exhibit Number
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
FLOTEK INDUSTRIES, INC. Form 10K 63
PART IV
ITEM 15 Exhibits and Financial Statement Schedules
Exhibit Number
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
12*
21*
23.1*
23.2*
31.1*
31.2*
32.1*
32.2*
*
Filed herewith.
Exhibit Title
Employment Agreement, dated August 11, 2009, between the Company and Jesse Neyman (incorporated by reference to
Exhibit 10.4 to the Company’s Form 8-K fi led on August 12, 2009).
Service Agreement, dated August 11, 2009, among Chisholm Management, Inc., Protechnics II, Inc. and the Company
(incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K fi led on August 12, 2009).
Employment Agreement, dated September 1, 2009, between the Company and Scott Stanton (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K fi led on September 17, 2009).
Indenture, dated as of March 31, 2010, among the Company, the subsidiary guarantors named therein and U.S. Bank National
Association (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K fi led on April 6, 2010).
First Supplemental Indenture, dated as of March 31, 2010, among the Company, the subsidiary guarantors named therein and
U.S. Bank National Association (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K fi led on April 6, 2010).
Form of 5.25% Convertible Senior Secured Notes due 2028 (incorporated by reference to Exhibit A to the First Supplemental
Indenture fi led as Exhibit 4.2 to the Company’s Form 8-K fi led on April 6, 2010).
Exchange Agreement, dated as of March 31, 2010, among the Company, the subsidiary guarantors named therein and the
investors named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K fi led on April 6, 2010).
Lien Subordination and Intercreditor Agreement, dated as of March 31, 2010, among the Company, the subsidiaries named
therein, Whitebox Advisors LLC and U.S. Bank National Association (incorporated by reference to Exhibit 10.2 to the
Company’s Form 8-K fi led on April 6, 2010).
Junior Lien Pledge and Security Agreement, dated as of March 31, 2010, by the Company and the subsidiaries named therein
in favor of U.S. Bank National Association (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K fi led on
April 6, 2010).
Junior Lien Patent and Trademark Security Agreement, dated as of March 31, 2010, by the Company and the subsidiaries named
therein in favor of U.S. Bank National Association (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K fi led
on April 6, 2010).
Registration Rights Agreement (5.25% Convertible Senior Secured Notes due 2028), dated March 31, 2010, among the
Company and the investors named therein (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K fi led on
April 6, 2010).
Amended and Restated Credit Agreement, dated as of March 31, 2010, among the Company, Whitebox Advisors LLC and the
lenders named therein (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K fi led on April 6, 2010).
Amended and Restated Guaranty Agreement, dated as of March 31, 2010, by the Company and the subsidiary guarantors named
therein in favor of Whitebox Advisors LLC (incorporated by reference to Exhibit 10.7 to the Company’s Form 8-K fi led on
April 6, 2010).
Amended and Restated Pledge and Security Agreement, dated as of March 31, 2010, by the Company and the subsidiaries named
therein in favor of Whitebox Advisors LLC (incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K fi led on
April 6, 2010).
Amended and Restated Patent and Trademark Security Agreement, dated as of March 31, 2010, by the Company and the
subsidiaries named therein, in favor of the secured parties named therein (incorporated by reference to Exhibit 10.9 to the
Company’s Form 8-K fi led on April 6, 2010).
Registration Rights Agreement (Amended and Restated Credit Agreement), dated as of March 31, 2010, among the Company
and the investors named therein (incorporated by reference to Exhibit 10.10 to the Company’s Form 8-K fi led on April 6, 2010).
Amended and Restated Service Agreement, dated as of April 30, 2010, between the Company and Protechnics II, Inc.
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K fi led on May 5, 2010).
Employment Agreement, dated as of May 10, 2010, between the Company and Steve Reeves (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K fi led on May 14, 2010).
Employment Agreement, dated as of February 28, 2011, between the Company and Johnna Kokenge (incorporated by reference
to Exhibit 10.1 to the Company’s Form 8-K fi led on March 2, 2011).
2010 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company’s Defi nitive Proxy Statement fi led on
July 13, 2010).
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
List of Subsidiaries.
Consent of Hein & Associates, LLP.
Consent of UHY LLP
Rule 13a-14(a) Certifi cation of Principal Executive Offi cer.
Rule 13a-14(a) Certifi cation of Principal Financial Offi cer.
Section 1350 Certifi cation of Principal Executive Offi cer.
Section 1350 Certifi cation of Principal Financial Offi cer.
64
FLOTEK INDUSTRIES, INC. Form 10K
PART IV
ITEM 15 Exhibits and Financial Statement Schedules
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FLOTEK INDUSTRIES, INC.
By:
/s/ JOHN W. CHISHOLM
John W. Chisholm
President
Date: March 16, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
s/ JOHN W. CHISHOLM
John W. Chisholm
/s/ JESSE E. NEYMAN
Jesse E. Neyman
/s/ JOHNNA KOKENGE
Johnna Kokenge
/s/ L.V. “BUD” MCGUIRE
L.V. “Bud” McGuire
/s/ KENNETH T. HERN
Kenneth T. Hern
/s/ JOHN S. REILAND
John S. Reiland
/s/ L. MELVIN COOPER
L. Melvin Cooper
/s/ RICHARD O. WILSON
Richard O. Wilson
Title
President (Principal Executive Offi cer)
Executive Vice President, Finance and
Strategic Planning (Principal Financial
Offi cer)
Vice President, Chief Accounting Offi cer
(Principal Accounting Offi cer)
Director
Director
Director
Director
Director
Date
March 16, 2011
March 16, 2011
March 16, 2011
March 16, 2011
March 16, 2011
March 16, 2011
March 16, 2011
March 16, 2011
FLOTEK INDUSTRIES, INC. Form 10K 65
PART IV
EXHIBIT 12 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends
Unaudited
(dollars in thousands)
COMPUTATION OF EARNINGS
Income (loss) from continuing operations before income
taxes and fi xed charges
$
Add:
Fixed charges
Subtract:
Minority interest in pretax income of subsidiaries that
have not incurred fi xed charges
Earnings (loss), as defi ned
COMPUTATION OF FIXED CHARGES AND
PREFFERED STOCK DIVIDENDS:
Interest expense (no capitalized interest)
Estimate of interest within rental expense (1)
Fixed charges, as defi ned
Dividends on preferred stock and accretion of
discount (2)
Combined fi xed charges, preferred stock dividends and
accretion of discount
$
$
$
Year ended December 31,
2006
2007
2008
2009
2010
17,933 $
27,141 $
(44,741) $
(48,317) $
(49,010)
1,121
3,738
14,377
16,164
20,073
-
19,054 $
916
29,963 $
-
(30,364) $
-
(32,153) $
-
(28,937)
1,005 $
116
1,121
-
3,501
237
3,738
-
$ 13,894 $
483
14,377
15,524 $
640
16,164
-
2,231
19,399
674
20,073
6,543
1,121 $
3,738 $
14,377 $
18,395 $
26,616
Ratio of earnings to fi xed charges
17.00
8.02
N/A
N/A
N/A
Defi ciency of earnings to cover fi xed charges
Ratio of earnings to fi xed charges and preferred stock
dividends
Defi ciency of earnings to cover combined fi xed charges
and preferred stock dividends
(1) One third of rental expense is deemed to be representative of interest.
(2) Amount has not been grossed up to a pre-tax amount due to a negative effective tax rate.
17.00
N/A
N/A
N/A $
(44,741) $
(48,317) $
(49,010)
8.02
N/A
N/A
N/A
N/A $
(44,741) $
(50,548) $
(55,553)
66
FLOTEK INDUSTRIES, INC. Form 10K
PART IV
EXHIBIT 23.2 Consent of Independent Registered Public Accounting Firm
EXHIBIT 21
List of Subsidiaries
CESI Chemical, Inc. (Oklahoma Corporation)
Material Translogistics, Inc. (Texas Corporation)
Padko International Incorporated (Oklahoma Corporation)
Petrovalve International, Inc. (Alberta Corporation)
Petrovalve, Inc. (Delaware Corporation)
USA Petrovalve, Inc. (Texas Corporation)
Turbeco, Inc. (Texas Corporation)
Flotek Paymaster, Inc. (Texas Corporation)
Sooner Energy Services, LLC (Oklahoma Limited Liability Company)
Teledrift Company (Delaware Corporation)
CESI Manufacturing, LLC (Oklahoma Limited Liability Company)
Flotek Industries FZE (Jebel Ali Free Zone Establishment)
Flotek International, Inc. (Delaware Corporation)
Flotek Ecuador Investments, LLC (Texas Limited Liability Company)
Flotek Ecuador Management, LLC (Texas Limited Liability Company)
Flotek Chemical Ecuador Cia. Ltda. (Ecuador Limited Liability Company)
EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration
Statements fi led on Form S-8 (No. 333-129268, No. 333-157276 and
No. 333-172596) and on Form S-3 (No. 333-161552, No. 333-166442
and No. 333-166443) of Flotek Industries, Inc. and Subsidiaries
(the “Company”) of our report dated March 16, 2011, relating to
the consolidated fi nancial statements of Flotek Industries, Inc. and
Subsidiaries as of December 31, 2010, and for the year then ended,
which is included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2010, as fi led with the Securities and
Exchange Commission on March 16, 2011.
We also consent to the reference to our fi rm under the heading “Experts”
in such Registration Statements.
/s/ Hein & Associates, LLP
Houston, Texas
March 16, 2011
EXHIBIT 23.2 Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration
Statements fi led on Form S-8 (No. 333-129268, No. 333-157276 and
No. 333-172596) and on Form S-3 (No. 333-161552, No. 333-166442
and No. 333-166443) of Flotek Industries, Inc. and Subsidiaries
(the “Company”) of our report dated May 21, 2010, except for the
eff ect in 2009 and 2008 of the change in the method of accounting
for a share lending arrangement, described in Note 2, which is as of
March 16, 2011, relating to the consolidated fi nancial statements of
Flotek Industries, Inc. and Subsidiaries as of December 31, 2009, and
for each of the years in the two-year period ended December 31, 2009,
which is included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2010, as fi led with the Securities and
Exchange Commission on March 16, 2011.
We also consent to the reference to our fi rm under the heading “Experts”
in such Registration Statements.
/s/ UHY LLP
Houston, Texas
March 16, 2011
FLOTEK INDUSTRIES, INC. Form 10K 67
PART IV
EXHIBIT 31.1 Certifi cation
EXHIBIT 31.1 Certifi cation
I, John W. Chisholm, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Flotek
Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the fi nancial statements, and other
fi nancial information included in this report, fairly present in all
material respects the fi nancial condition, results of operations and
cash fl ows of the registrant as of, and for, the periods presented
in this report;
4. Th e registrant’s other certifying offi cer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defi ned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over fi nancial reporting (as defi ned in Exchange
Act Rules 13a-15(f ) and 15d-15(f )) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over fi nancial reporting,
or caused such internal control over fi nancial reporting to
be designed under our supervision, to provide reasonable
assurance regarding the reliability of fi nancial reporting and
the preparation of fi nancial statements for external purposes
in accordance with generally accepted accounting principles;
EXHIBIT 31.2 Certifi cation
I, Jesse E. Neyman, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Flotek
Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the fi nancial statements, and other
fi nancial information included in this report, fairly present in all
material respects the fi nancial condition, results of operations and
cash fl ows of the registrant as of, and for, the periods presented
in this report;
4. Th e registrant’s other certifying offi cer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defi ned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over fi nancial reporting (as defi ned in Exchange
Act Rules 13a-15(f ) and 15d-15(f )) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
68
FLOTEK INDUSTRIES, INC. Form 10K
(c) Evaluated the eff ectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the eff ectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal
control over fi nancial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s
fourth fi scal quarter in the case of an annual report) that
has materially aff ected, or is reasonably likely to materially
aff ect, the registrant’s internal control over fi nancial reporting;
and
5. Th e registrant’s other certifying offi cer and I have disclosed, based
on our most recent evaluation of internal control over fi nancial
reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All signifi cant defi ciencies and material weaknesses in the
design or operation of internal control over fi nancial reporting
which are reasonably likely to adversely aff ect the registrant’s
ability to record, process, summarize and report fi nancial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a signifi cant role in the
registrant’s internal control over fi nancial reporting.
/s/ JOHN W. CHISHOLM
John W. Chisholm
President
March 16, 2011
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over fi nancial reporting,
or caused such internal control over fi nancial reporting to
be designed under our supervision, to provide reasonable
assurance regarding the reliability of fi nancial reporting and
the preparation of fi nancial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the eff ectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the eff ectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal
control over fi nancial reporting that occurred during the
registrant’s most recent fi scal quarter (the registrant’s fourth
fi scal quarter in the case of an annual report) that has materially
aff ected, or is reasonably likely to materially aff ect, the
registrant’s internal control over fi nancial reporting; and
PART IV
EXHIBIT 32.2 Certifi cation Pursuant to18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
5. Th e registrant’s other certifying offi cer and I have disclosed, based
on our most recent evaluation of internal control over fi nancial
reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All signifi cant defi ciencies and material weaknesses in the
design or operation of internal control over fi nancial reporting
which are reasonably likely to adversely aff ect the registrant’s
ability to record, process, summarize and report fi nancial
information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a signifi cant role in the
registrant’s internal control over fi nancial reporting.
/s/ JESSE E. NEYMAN
Jesse E. Neyman
Executive Vice President, Finance and Strategic Planning
March 16, 2011
EXHIBIT 32.1 Certifi cation Pursuant to18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Flotek Industries, Inc. (the
“Company”) on Form 10-K for the year ended December 31, 2010,
as fi led with the Securities and Exchange Commission on the date
hereof (the “Report”), the undersigned hereby certifi es, pursuant to
18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) Th e Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) Th e information contained in the Report fairly presents, in all
material respects, the fi nancial condition and result of operations
of the Company.
/s/ JOHN W. CHISHOLM
John W. Chisholm
President
March 16, 2011
EXHIBIT 32.2 Certifi cation Pursuant to18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Flotek Industries, Inc. (the
“Company”) on Form 10-K for the year ended December 31, 2010,
as fi led with the Securities and Exchange Commission on the date
hereof (the “Report”), the undersigned hereby certifi es, pursuant to
18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) Th e Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) Th e information contained in the Report fairly presents, in all
material respects, the fi nancial condition and result of operations
of the Company.
/s/ JESSE E. NEYMAN
Jesse E. Neyman
Executive Vice President, Finance and Strategic Planning
March 16, 2011
FLOTEK INDUSTRIES, INC. Form 10K 69