UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

~~WASHINGTON,~~Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2009~~March 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission File ~~Number:~~number 1-13270

FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware

90-0023731

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2930 W. Sam Houston ~~Pkwy~~Parkway N., #300

Houston, ~~Texas~~TX

77043

(Address of principal executive offices)

(Zip Code)

(713) 849-9911

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate ~~website,~~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 files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

~~There~~As of May 12, 2010, there were ~~23,437,714~~30,091,151 outstanding shares of ~~the issuer’s~~Flotek Industries, Inc. common stock, ~~$.0001~~$0.0001 par ~~value, outstanding as of October 30, 2009.~~value.

TABLE OF CONTENTS


PART I –- FINANCIAL INFORMATION		13

Item 1.	~~Item 1.~~ Financial Statements	13

	Condensed Consolidated Balance Sheets at March 31, 2010 (Unaudited) and December 31, 2009	3
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009	5
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2010	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1920

Item 3.	~~Item 3.~~ Quantitative and Qualitative Disclosures ~~About~~about Market Risk	28

Item 4T.	~~Item 4.~~ Controls and Procedures	28

PART II –- OTHER INFORMATION		30

Item 1.	Legal Proceedings	30

Item ~~1. Legal Proceedings~~ 1A.	30
~~Item 1A.~~ Risk Factors	30

Item 2.	~~Item 2.~~ Unregistered Sales of Equity Securities and Use of Proceeds	3132

Item 3.	~~Item 3. Default~~Defaults Upon Senior Securities	3132

Item 4.	~~Item 4. Submission of Matters to Vote of Security Holders~~Reserved	3132

Item 5.	~~Item 5.~~ Other Information	32

Item 6.	~~Item 6.~~ Exhibits	3233

	SIGNATURES	3334

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

FLOTEK INDUSTRIES, INC.

CONDENSED CONSOLIDATED ~~CONDENSED~~ BALANCE SHEETS

(in ~~millions,~~thousands, except share data)


	September 30, 2009			December 31, 2008			March 31, 2010			December 31, 2009
	(Unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	0.6		$	0.2		$	6,458		$	6,485
Accounts receivable, net of allowance for doubtful accounts of $0.7 million and $1.5 million, respectively		15.9			37.2
Inventories, net		29.2			38.0
Deferred tax asset, current		—			0.9
Restricted cash								—			10
Accounts receivable, net of allowance for doubtful accounts of $961 and $948 at March 31, 2010 and December 31 2009, respectively								17,942			14,612
Inventories								27,183			27,232
Deferred tax assets								432			762
Income tax receivable		4.4			—			9,202			6,607
Other current assets		1.4			1.3			2,325			871

Total current assets		51.5			77.6			63,542			56,579
Property, plant and equipment, net		62.4			66.8

Property and equipment, net								57,933			60,251
Goodwill		27.0			45.5			26,943			26,943
Intangible assets, net		35.8			38.0
Deferred tax assets, less current portion		—			6.6
Other intangible assets, net								41,125			35,128

TOTAL ASSETS	$	176.7		$	234.5
Total assets							$	189,543		$	178,901


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	7.9		$	22.7		$	11,012		$	8,021
Accrued liabilities		6.1			13.5			8,685			4,941
Accrued interest payable		1.2			2.4
Income taxes payable		—			0.9
Interest payable								526			2,672
Deferred tax liabilities								344			—
Current portion of long-term debt		26.0			9.0			6,610			8,949

Total current liabilities		41.2			48.5			27,177			24,583

Convertible notes, net of discount								94,904			95,601
Long-term debt, less current portion		0.3			29.5			34,028			23,589
Convertible senior notes, net of discount of $20.6 million and $24.2 million at September 30, 2009 and December 31, 2008, respectively		94.4			90.8
Deferred tax liability, less current portion		2.7			—
Warrant liability								6,542			4,729
Deferred tax liabilities, less current portion								3,204			3,203

Total liabilities		138.6			168.8			165,855			151,705


Commitments and contingencies

Stockholders’ equity:
Cumulative convertible preferred stock, $0.0001 par value, 100,000 shares authorized, 16,000 issued and outstanding at September 30, 2009, net of discount		6.1			—
Common stock, $0.0001 par value; 40,000,000 shares authorized; September 30, 2009 shares issued: 23,697,430; outstanding: 22,914,532; December 31, 2008 shares issued: 23,174,286; outstanding: 22,782,091		—			—
Cumulative convertible preferred stock at accreted value, $0.0001 par value, 100,000 shares authorized; 13,220 and 16,000 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively								6,452			6,943
Common stock, $0.0001 par value, 80,000,000 shares authorized; shares issued and outstanding: 30,423,977 and 29,638,296, respectively, at March 31, 2010 and 24,168,292 and 23,362,907, respectively, at December 31, 2009								3			2
Additional paid-in capital		88.0			76.8			93,150			84,020
Accumulated other comprehensive income		0.1			0.1			111			118
Accumulated deficit		(55.6	)		(10.7	)		(75,483	)		(63,342	)
Treasury stock: 259,716 shares and 158,697 shares at September 30, 2009 and December 31,2008, respectively		(0.5	)		(0.5	)
Treasury stock at cost, 367,349 and 346,270 shares at March 31, 2010 and December 31, 2009, respectively								(545	)		(545	)

Total stockholders’ equity		38.1			65.7			23,688			27,196

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	176.7		$	234.5
Total liabilities and stockholders’ equity							$	189,543		$	178,901

See accompanying notes to unaudited condensed consolidated ~~condensed~~ financial statements.

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ STATEMENTS OF ~~INCOME (LOSS)~~

~~(UNAUDITED)~~OPERATIONS

(in ~~millions,~~thousands, except ~~share and~~ per share data)

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2009 2008 2009 2008
Revenue
   $ 23.8    $ 62.8    $ 88.0    $ 166.1
Cost of revenue
   17.5    36.2    65.5    95.9
Expenses:

Impairment of goodwill
   —      —      18.5    —
Selling, general and administrative
   7.2    12.4    26.6    34.3
Depreciation and amortization
   1.2    1.6    3.7    4.2
Research and development
   0.4    0.4    1.2    1.3

Total expenses
   8.8    14.4    50.0    39.8

Income (loss) from operations
   (2.5 ) 12.2    (27.5 ) 30.4
Other expense:

Interest expense
   (4.1 ) (3.9 ) (11.6 ) (9.7 )
Investment income and other, net
   0.1    —      (0.1 ) —

Total other expense
   (4.0 ) (3.9 ) (11.7 ) (9.7 )
Income (loss) before income taxes
   (6.5 ) 8.3    (39.2 ) 20.7
Provision for income taxes
   (15.8 ) (3.2 ) (4.9 ) (7.9 )

Net income (loss)
   (22.3 ) 5.1    (44.1 ) 12.8
Accrued dividends and accretion of discount on preferred stock
   (0.8 ) —      (0.8 ) —

Net income (loss) allocable to common stockholders
   $ (23.1 ) $ 5.1    $ (44.9 ) $ 12.8

Earnings (loss) per share allocable to common stockholders:

Basic
   $ (1.18 ) $ 0.27    $ (2.29 ) $ 0.68
Diluted
   $ (1.18 ) $ 0.27    $ (2.29 ) $ 0.66
Weighted average common shares used in computing basic earnings per common share (in thousands)
   19,645    18,972    19,578    18,832
Incremental common shares from stock options, warrants and restricted stock (in thousands)
   —      429    —      514

Weighted average common shares used in computing diluted earnings per common share (in thousands)
   19,645    19,401    19,578    19,346


	Three Months Ended March 31,
	2010			2009

Revenue	$	28,370		$	40,676

Cost of revenue		20,358			28,185

Gross margin		8,012			12,491


Expenses:
Selling, general and administrative		10,191			10,289
Depreciation and amortization		1,193			1,244
Research and development		362			429

Total expenses		11,746			11,962


Income (loss) from operations		(3,734	)		529

Other income (expense):
Loss on extinguishment of debt		(995	)		—
Interest expense		(4,218	)		(3,686	)
Other financing costs		(816	)		—
Change in fair value of warrant liability		(1,813	)		—
Other income (expense), net		62			(145	)

Total other income (expense)		(7,780	)		(3,831	)

Loss before income taxes		(11,514	)		(3,302	)
Income tax benefit		2,001			1,299


Net loss		(9,513	)		(2,003	)

Accrued dividends and accretion of discount on preferred stock		(2,628	)		—


Net loss attributable to common stockholders	$	(12,141	)	$	(2,003	)


Basic and diluted earnings (loss) per common share:
Basic and diluted earnings (loss) per common share	$	(0.60	)	$	(0.10	)

Weighted average common shares used in computing basic and diluted earnings (loss) per common share		20,167			19,177

See accompanying notes to unaudited condensed consolidated ~~condensed~~ financial statements.

FLOTEK INDUSTRIES, INC.

UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ STATEMENTS OF CASH FLOWS

~~(UNAUDITED)~~

(in ~~millions)~~thousands)

   Nine Months Ended
September 30,
   2009 2008
Cash flows from operating activities:

Net income (loss) allocable to common stockholders
   $ (44.9 ) $ 12.8
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization
   10.5    9.4
Amortization of deferred financing costs
   1.1    0.7
Accretion of debt discount
   3.6    2.5
Accretion of discount on preferred stock
   0.5    —
Impairment of goodwill
   18.5    —
Stock compensation expense
   1.3    2.1
Deferred tax expense
   11.0    —
Changes in working capital and other
   0.5    (4.1 )

Net cash provided by operating activities
   2.1    23.4

Cash flows from investing activities:

Acquisitions, net of cash acquired
   —      (98.0 )
Proceeds from sale of assets
   2.1    1.1
Capital expenditures
   (5.6 ) (16.6 )

Net cash used in investing activities
   (3.5 ) (113.5 )

Cash flows from financing activities:

Proceeds from exercise of stock options
   —      0.9
Purchase of treasury stock
   —      (0.3 )
Proceeds from borrowings
   12.6    46.7
Proceeds from convertible debt offering
   —      115.0
Debt issuance cost
   (0.8 ) (5.5 )
Repayments of indebtedness
   (24.8 ) (66.2 )
Proceeds from preferred stock offering
   16.0    —
Excess tax benefit of share based awards
   —      1.5
Preferred stock issuance cost
   (1.2 ) —

Net cash provided by financing activities
   1.8    92.1

Net increase in cash and cash equivalents
   0.4    2.0
Cash and cash equivalents at beginning of period
   0.2    1.3

Cash and cash equivalents at end of period
   $ 0.6    $ 3.3

Supplemental disclosure of cash flow information:

Interest paid
   $ 5.2    $ 5.6
Income taxes paid
   $ 3.4    $ 7.8


	Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(9,513	)	$	(2,003	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		3,498			3,454
Amortization of deferred financing costs		485			352
Accretion of debt discount		1,295			1,156
Loss on extinguishment of debt		995			—
Change in fair value warrant liability		1,813			—
(Gain) loss on sale of assets		(108	)		134
Stock compensation expense		375			486
Reduction in (excess) tax benefit of share-based awards		373			(8	)
Deferred income tax provision (benefit)		302			(4,224	)
Unrealized loss on interest rate swap		—			56
Change in current assets and liabilities:
Restricted cash		10			—
Accounts receivable		(3,330	)		15,197
Inventories		49			151
Income tax receivable		(2,595	)		—
Other current assets		(1,454	)		(1,557	)
Accounts payable		2,991			(3,788	)
Accrued liabilities		1,405			(5,170	)
Interest payable		(2,146	)		(1,435	)

Net cash (used in) provided by operating activities		(5,555	)		2,801

Cash flows from investing activities:
Proceeds from sale of assets		580			801
Purchase of patents		(4	)		—
Capital expenditures		(975	)		(3,872	)

Net cash used in investing activities		(399	)		(3,071	)

Cash flows from financing activities:
Proceeds from borrowings		40,000			3,304
Repayments of indebtedness		(31,951	)		(2,272	)
Debt issuance costs		(1,742	)		(368	)
Reduction in tax benefit of share-based awards		(373	)		—

Net cash provided by financing activities		5,934			664

Effect of exchange rate changes on cash and cash equivalents		(7	)		2

Net (decrease) increase in cash and cash equivalents		(27	)		396
Cash and cash equivalents at the beginning of the period		6,485			193

Cash and cash equivalents at the end of the period	$	6,458		$	589

See accompanying notes to unaudited condensed consolidated ~~condensed~~ financial statements.

FLOTEK INDUSTRIES, INC.

CONDENSED CONSOLIDATED ~~CONDENSED~~ STATEMENT OF STOCKHOLDERS’ EQUITY

(~~Amounts~~amounts subsequent to December 31, ~~2008~~2009 are ~~Unaudited)~~unaudited)

(in ~~millions)~~thousands)

   Common Stock    Preferred Stock Treasury Stock Additional
Paid-in
Capital Accumulated
Other
Comprehensive
Income    Accumulated
Deficit Total
   Shares
Issued    Par
Value    Shares
Issued    Value Shares Cost
Balance December 31, 2008
   23.2    $ —      —      $ —      (0.2 ) $ (0.5 ) $ 76.8    $ 0.1    $ (10.7 ) $ 65.7
Common stock issued
   0.5    —      —      —      —      —      —      —      —      —
Issuance of preferred stock and detachable warrants
   —      —      —      10.8    —      —      5.2    —      —      16.0
Issuance cost related to preferred stock
   —      —      —      —      —      —      (1.2 ) —      —      (1.2 )
Accretion of discount on preferred stock
   —      —      —      0.5    —      —      —      —      (0.5 ) —
Preferred stock dividends
   —      —      —      —      —      —      —      —      (0.3 ) (0.3 )
Beneficial conversion discount on preferred stock
   —      —      —      (5.2 ) —      —      5.2    —      —      —
Treasury stock purchased
   —      —      —      —      —      —      —      —      —      —
Restricted stock forfeited
   —      —      —      —      —      —      —      —      —      —
Tax benefit related to ASC 470
   —      —      —      —      —      —      0.7    —      0.7
Stock compensation expense
   —      —      —      —      —      —      1.3    —      1.3
Net loss
   —      —      —      —      —      —      —      —      (44.1 ) (44.1 )

Balance September 30, 2009
   23.7    $ —      —      $ 6.1    (0.2 ) $ (0.5 ) $ 88.0    $ 0.1    $ (55.6 ) $ 38.1


	Common Stock			Preferred Stock					Treasury Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total
	Shares issued	Value		Shares		Value			Shares	Cost			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total

Balance December 31, 2009	24,168	$	2	16		$	6,943		346	$	(545	)	$	84,020		$	118		$	(63,342	)	$	27,196
Net loss	—		—	—			—		—		—			—			—			(9,513	)		(9,513	)
Foreign currency translation adjustment	—		—	—			—		—		—			—			(7	)		—			(7	)

Comprehensive loss																							(9,520	)
Common stock issued in payment of debt issuance costs	3,431		1	—			—		—		—			4,356			—			—			4,357
Common stock issued in exchange for convertible notes	1,569		—	—			—		—		—			1,992			—			—			1,992
Accretion of discount on preferred stock	—		—	—			2,289		—		—			—			—			(2,289	)		—
Preferred stock dividends, net of forfeitures	—		—	—			—		—		—			—			—			(339	)		(339	)
Restricted stock forfeited	—		—	—			—		21		—			—			—			—			—
Restricted stock granted	47		—	—			—		—		—			—			—			—			—
Reduction in tax benefit of share-based awards	—		—	—			—		—		—			(373	)		—			—			(373	)
Stock compensation expense	—		—	—			—		—		—			375			—			—			375
Conversion of preferred stock into common stock	1,209		—	(3	)		(2,780	)	—		—			2,780			—			—			—

Balance March 31, 2010	30,424	$	3	13		$	6,452		367	$	(545	)	$	93,150		$	111		$	(75,483	)	$	23,688

See accompanying notes to unaudited condensed consolidated ~~condensed~~ financial statements.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS

Note ~~1 – Our Business, Recent Events~~1—Organization and Basis of Presentation

~~Our Business~~Organization

Flotek Industries, Inc. (“~~Flotek,” “Company,” “us” or “we”~~Flotek”) is ~~engaged in~~a global developer and supplier of drilling and production related products and services. Flotek’s core focus, and that of its wholly-owned subsidiaries (collectively referred to as the ~~manufacturing and marketing of innovative~~“Company”), is oilfield specialty chemicals and logistics, downhole drilling tools and downhole production ~~equipment, and~~tools used in the ~~management of~~energy and mining industries. The Company also manages automated bulk material handling, loading and blending facilities. ~~Flotek serves~~Flotek’s products and services help customers drill wells more efficiently, increase production from existing wells and decrease well operating costs. Major customers include leading oilfield service providers, major and independent ~~companies in the domestic and international oilfield service and mining industries.~~

~~Recent Events~~

~~The challenging economic conditions facing the~~ oil and gas ~~industry have adversely affected our financial performance~~exploration and ~~liquidity in 2009. Revenue has declined significantly across all of our segments due to decreased demand for our products~~production companies, and ~~services as natural gas prices~~onshore and the number of well completions and rig count continues to be depressed. At September 30, 2009, we were not in compliance with certain financial covenants contained in the New Credit Agreement. We requested and obtained a waiver of these financial covenant violations from our lenders. However, we expect that we will not be able to meet certain of the financial covenants under the New Credit Agreement as of December 31, 2009, and possibly throughout 2010. As a result, we have reclassified amounts owing under the New Credit Agreement as current.

We believe that, assuming current revenue levels and cost structure, our current cash balance and estimated cash flows will be sufficient to satisfy our anticipated cash requirements at least through September 30, 2010. However, if we are not in compliance with the financial covenants in our New Credit Facility as of December 31, 2009, or subsequent periods, and we are unable to obtain waivers of those covenant violations, our lenders would be entitled to exercise their remedies under the New Credit Facility, which could include accelerating all amounts due under the New Credit Facility. We would not have sufficient funds to repay all such amounts, and would be required to seek additional financing, which we might not be able to obtain on terms favorable to us or at all. Acceleration of amounts under our New Credit Facility could also constitute a default under our Convertible Notes. The Company expects that it will need to renegotiate the New Credit Facility or refinance all or a portion of its indebtedness on or before maturity. While the Company believes that it can be successful in renegotiating or refinancing its indebtedness, there can be no assurance that it will be able to on attractive terms or at all. We are working to lower our working capital needs and have focused on cash collections of our accounts receivable balances and reduction of inventory. In the event capital required is greater than the amount we have available at the time, we would reduce the expected level of capital expenditures, sell assets and/or seek additional capital. Cash generated by future asset sales may depend on the overall economic conditions of the industries served by these assets, the condition and location of the assets, and the number of interested buyers. We cannot assure you that needed capital will be available on acceptable terms or at all. Our ability to raise funds in the capital markets through the issuance of additional indebtedness may be limited by covenants in our credit facilities, our credit rating and the willingness of banks and other financial services companies to lend. At September 30, 2009, our net worth was less than the $50 million required by the continued listing standard of the NYSE. We intend to submit a plan to the NYSE that will provide for us to come back into compliance with the NYSE’s continued listing standards, although the NYSE may not accept our plan or we may be unable to accomplish the actions set forth in that plan to come back into compliance with the NYSE’s continued listing standards over the time period allowed by the NYSE. If we are not able to generate positive cash flows and profits or obtain adequate additional financing or refinancing, we may be required to curtail operations or be unable to continue as a going concern. A number of factors could influence our liquidity sources, as well as the timing and ultimate outcome of our on-going efforts.

As a result, management determined the realization of deferred tax assets is uncertain as the Company is unable to consider tax planning strategies or projections of future taxable income in its evaluation of the realizability of its deferred tax assets as of September 30, 2009. Under these circumstances, deferred tax assets may only be realized through future reversals of taxable temporary differences and carryback of net operating losses to available carryback periods. We have performed such an analysis and a valuation allowance of approximately $16.8 million has been provided against deferred tax assets as of September 30, 2009.offshore drilling contractors.

Basis of Presentation

~~These consolidated condensed financial statements~~The accompanying Unaudited Condensed Consolidated Financial Statements (the “Financial Statements”) reflect all adjustments that are, ~~unaudited but,~~ in the opinion of management, ~~reflect all adjustments~~ necessary for a fair presentation of the financial condition and results of operations for the periods ~~reported.~~presented. All such adjustments are of a normal recurring ~~nature unless disclosed otherwise. These Consolidated Condensed~~nature. The Financial Statements, including selected notes, have been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission ~~(“SEC”~~(the “SEC”) regarding interim financial reporting and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These interim ~~financial statements~~Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in ~~our 2008~~the Company’s 2009 Annual Report on Form ~~10-K.~~

10-K/A Amendment No. 2. A copy of Flotek’s 2009 Annual Report on Form 10-K may be obtained by visitingwww.sec.gov and conducting a search of the Company’s Ticker Symbol: FTK or by visiting the Company’s website,www.flotekind.com.The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the ~~consolidated condensed financial statements~~Financial Statements and accompanying notes. Actual results could differ from ~~those~~these estimates.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)~~

Certain amounts for the three and nine months ended September 30, 2008 have been reclassified in the accompanying consolidated condensed financial statements to conform to the current quarter presentation. In prior periods, we presented depreciation that related directly to the production of revenue as a component of depreciation and amortization within our Consolidated Condensed Statements of Income (Loss) rather than including the portion as a component of cost of revenue. During the three and nine months ended September 30, 2008 the amount of depreciation related to the production of revenue which we have reclassified to cost of revenue was $1.9 million and $5.2 million, respectively. Additionally, see Note 9 – Long-Term Debt for discussion on the retrospective adjustments to the December 31, 2008 Consolidated Condensed Balance Sheet and the Consolidated Condensed Statement of Income (Loss) for the three and nine months ended September 30, 2008 related to the accounting for certain debt instruments that may be settled into cash upon conversion, primarily codified in Accounting Standards Codification (“ASC”) Topic 470,~~“Debt.”~~

Note ~~2 –~~2—Recent Accounting Pronouncements

Application of New Accounting ~~Requirements and Disclosures~~Standard

~~In June 2009,~~Effective January 1, 2010, the ~~Financial Accounting Standards Board (“FASB”) released~~Company adopted the accounting guidance in Accounting Standards Update (“ASU”) ~~2009-01, Topic No. 105 (ASU Topic 105), “~~~~Generally Accepted Accounting Principles~~~~” which replaced FASB Statement No. 168, “~~~~The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles~~” (“Codification”) and identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP in the United States. Authoritative standards included in the Codification are designated by their ASC topical reference, with new standards designated as ASUs, with a year and assigned sequence number. The guidance is effective for financial statement issued for interim and annual periods ending after September 15, 2009. The Company adopted this standard for its September 30, 2009 interim report with no financial impact on its consolidated condensed financial statements.

In June 2009, the FASB issued accounting guidance related to accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing found primarily within ASC Topic 470,~~“Debt.”~~ ~~In October 2009, the FASB released ASU~~ No. 2009-15,“Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” which amends or added certain paragraphs to the related ~~ASC~~Accounting Standards Codification (“ASC” or “Codification”) Topic of470,“~~Debt.~~Debt.”~~These standards address~~ This standard addresses the accounting for an entity’s own-share lending arrangement initiated in conjunction with convertible debt or ~~other~~another financing offering and the effect a share-lending arrangement has on earnings per share. ~~Additionally, the~~The guidance also addresses the accounting and earnings per share implications for probable or actual defaults by the share ~~borrower, both when a default becomes probable of occurring and when a default actually occurs. This~~borrower. The new guidance ~~released in June 2009~~ is ~~effective for interim or annual periods beginning on or after June 15, 2009 for share-lending arrangements entered into in those periods. For all other arrangements within the scope, the guidance is~~required to be applied retrospectively to share-lending arrangements that are outstanding as of the beginning of the fiscal year beginning on or after December 15, 2009. Early adoption is prohibited. Update guidance released in October 2009 is effective for fiscal years beginning on or after December 15, 2009 and interimall periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The update guidance is effective for all arrangements entered into on or before the beginning of the first reporting period that begins on or is after June 15, 2009. Update content shall be applied retrospectively for all arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company is currently evaluating the effect this will have on our consolidated condensed financial statements.

~~In May 2009, the FASB issued accounting guidance related to subsequent events found within ASC Topic 855,~~~~“Subsequent Events.”~~ This guidance sets standards for the disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Additionally, the guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance effective June 30, 2009. The implementation of this standard did not have a material impact on our consolidated condensed financial position and results of operations.

~~In April 2009, the FASB issued accounting guidance related to interim disclosures about fair value of financial instruments found within ASC Topic 825,~~~~“Financial Instruments.”~~ This guidance requires fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance effective June 30, 2009. The implementation of this standard did not have a material impact on our consolidated condensed financial position and results of operations.

~~In June 2008, the FASB issued accounting guidance related to determining whether instruments granted in share-based payment transactions are participating securities found within ASC Topic 260,~~~~“Earnings Per Share (EPS).”~~ ~~This guidance states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are~~presented.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

~~participating securities~~The Company has applied this guidance to its share lending arrangement which is described in Note 9. The retrospective effect of the adoption of ASU No. 2009-15 on the Company’s consolidated financial statements as of December 31, 2009 and ~~shall be included in~~for the ~~computation of earnings~~three months ended March 31, 2009 is as follows (in thousands, except per share ~~pursuant~~data):

Balance Sheet Information


	As of December 31, 2009
	As Reported			Adjustment			As Adjusted

Other intangible assets (deferred financing costs)	$	34,837		$	291		$	35,128
Total assets		178,610			291			178,901


Additional paid-in-capital	$	83,555		$	465		$	84,020
Accumulated deficit		(63,168	)		(174	)		(63,342	)
Total stockholders’ equity		26,905			291			27,196
Total liabilities and stockholders’ equity		178,610			291			178,901

Statement of Operations Information


	Three Months Ended March 31, 2009
	As Reported			Adjustment			As Adjusted

Interest expense	$	(3,663	)	$	(23	)	$	(3,686	)
Net loss		(1,980	)		(23	)		(2,003	)
Net loss attributable to common stockholders		(1,980	)		(23	)		(2,003	)


Basic and diluted loss per common share	$	(0.10	)				$	(0.10	)

Weighted average common and common equivalent shares used in computing basic and diluted loss per common share		19,177						19,177

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,” which amends ASC Topic 820-10 to require new disclosures related to the ~~two-class method.~~movements in and out of Levels 1, 2, and 3 and clarifies existing disclosures regarding the classification and valuation techniques used to measure fair value. This guidance is effective for ~~financial statements issued~~interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about certain Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, ~~2008, and interim periods within those years.~~2010. The Company adopted the guidance regarding disclosure of movements in and out of the fair value measurement levels effective January 1, 2009. All prior period earnings per share (“EPS”) data presented has been adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this accounting guidance. The implementation2010. Adoption of this standard ~~did~~for these disclosures had no impact on the Company’s consolidated financial statements. The Company does not expect that adoption, effective January 1, 2011, of the new disclosure requirements regarding Level 3 fair value measurements will have a material impact on ~~our~~the Company’s consolidated ~~condensed~~ financial ~~position and results of operations.~~

~~In May 2008, the FASB issued accounting guidance related to debt with conversion and other options found primarily within ASC Topic 470,~~~~“Debt,”~~~~ASC Topic 815,~~~~“Derivatives and Hedging”~~ ~~and ASC Topic 825,~~~~“Financial Instruments.”~~ This guidance clarifies that convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate. The resulting debt discount would be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The guidance requires retrospective application to all periods presented in the financial statements with cumulative effect of the change reported in retained earnings as of the beginning of the first period presented. Our 5.25% Convertible Senior Notes due February 2028 (“Convertible Senior Notes”) are affected by this new standard. Upon adopting the provisions of this guidance, we retroactively applied its provisions and restated our Consolidated Condensed Financial Statements for prior periods. In applying this debt guidance, $27.8 million of the carrying value of our Convertible Senior Notes was reclassified to equity as of the February 2008 issuance date and offset by a related deferred tax liability of $10.6 million. This discount represents the equity component of the proceeds from the Convertible Senior Notes, calculated assuming an 11.5% non-convertible borrowing rate. The discount will be accreted to interest expense over the expected term of five years, which is based on the call/put option on the debt at February 2013. Accordingly, $1.2 million and $1.1 million of additional non-cash interest expense was recorded in the Consolidated Condensed Statement of Income (Loss) for the three months ended September 30, 2009 and 2008, respectively, and $3.5 million and $2.4 million of additional non-cash interest expense was recorded in the Consolidated Condensed Statement of Income (Loss) for the nine months ended September 30, 2009 and 2008, respectively.

~~In March 2008, the FASB issued accounting guidance related to derivative and hedging activities found within the ASC Topic 815,~~~~“Derivatives and Hedging.”~~ This guidance requires enhanced disclosures about our derivative and hedging activities. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the guidance effective January 1, 2009. The implementation of this standard did not have a material impact on our consolidated condensed financial position and results of operations.statements.

Note ~~3 – Acquisitions~~

~~In December 2007, the FASB issued accounting standards related to business combinations found within the ASC Topic 805,~~~~“Business Combinations.”~~ This guidance requires use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more other businesses. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. The Company has not acquired any companies since adopting this guidance or which would be applicable under this guidance. Additionally, the Company had no deferred acquisition costs capitalized on its balance sheet as of December 31, 2008 related to unconsummated acquisitions.

~~Acquisitions have been accounted for using the purchase method of accounting under grandfathered guidance as noted in ASU Topic 105,~~~~“Generally Accepted Accounting Principles,”~~ related to accounting for business combinations. The acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Allocation of the purchase price for acquisitions was based on estimates of fair value of the net assets acquired and is subject to adjustment upon finalization of the purchase price allocation within the one year anniversary of the acquisition.

On February 14, 2008, Teledrift Acquisition, Inc., a wholly-owned subsidiary of the Company, acquired substantially all of the assets of Teledrift, Inc. (“Teledrift”) for the aggregate cash purchase price of approximately $98.0 million, which includes a purchase price adjustment of $1.8 million recorded in the third quarter of 2008. Teledrift designs and manufactures wireless survey and measurement while drilling, or MWD, tools. The Company used the majority of the proceeds from issuance of the Convertible Senior Notes to fund this acquisition.

The following unaudited pro forma consolidated table presents information related to the Teledrift acquisition for the nine month period ended September 30, 2008 and assumes the acquisitions had been completed as of January 1, 20083—Supplemental Cash Flow Information (in ~~millions, except per share data):~~

thousands)

   Nine Months
Ended
September 30,
2008
Revenue
   $ 168.0
Income before income taxes
   24.0
Net income
   14.9
Basic earnings per common share
   $ 0.78
Diluted earnings per common share
   0.76


	Three Months Ended March 31,
	2010		2009
	(unaudited)
Supplemental non-cash investing and financing activities:
Shares of common stock issued in payment of debt issuance costs	$	4,357	$	—
Shares of common stock issued in exchange for convertible notes		2,000		—
Reduction of convertible debt upon note exchange		1,996		—
Property and equipment acquired through capital leases		51		62

Supplemental cash payment information:
Interest paid	$	5,351	$	3,652
Income taxes paid		115		2,852

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

Note ~~4 –~~4—Product Revenue

The Company generates revenue ~~through three main~~from (1) product sales, ~~channels: Products, Rentals~~(2) equipment rentals and ~~Services. In most instances, we generate~~(3) service provider engagements. Revenue, and associated cost of revenue, ~~through these channels on an integrated basis. Sales channel information is set out in~~resultant from each of the ~~table below:~~aforementioned activities are provided below (in thousands):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2009    2008    2009    2008
   (Unaudited)
   (in millions)
Revenue

Product
   $ 15.1    $ 42.0    $ 56.6    $ 109.5
Rental
   6.3    14.9    22.3    41.3
Service
   2.4    5.9    9.1    15.3

   $ 23.8    $ 62.8    $ 88.0    $ 166.1

Cost of revenue

Product
   $ 9.8    $ 23.6    $ 39.5    $ 64.2
Rental
   3.8    7.3    13.4    18.0
Service
   1.6    3.4    5.8    8.5
Depreciation
   2.3    1.9    6.8    5.2

   $ 17.5    $ 36.2    $ 65.5    $ 95.9

Within the Drilling Products segment amounts billed to customers for the cost of oilfield rental equipment that is damaged or lost-in-hole are reflected as rental revenue with the carrying value of the related equipment charged to cost of revenue. The revenue for lost-in-hole totaled $0.8 million and $0.9 million for the three months ended September 30, 2009 and 2008, respectively, and $2.4 million and $1.9 million for the nine months ended September 30, 2009 and 2008, respectively.


	Three Months Ended March 31,
	2010		2009
	(unaudited)
Revenue:
Product	$	18,294	$	26,944
Rental		7,629		9,867
Service		2,447		3,865

	$	28,370	$	40,676

Cost of Revenue:
Product	$	11,178	$	17,534
Rental		5,175		5,880
Service		1,700		2,562
Depreciation		2,305		2,209

	$	20,358	$	28,185

Note ~~5 –~~ 5—Inventories

~~The components of inventories~~Inventories, as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008 were~~2009, are as ~~follows:~~follows (in thousands):


	September 30, 2009			December 31, 2008
	(unaudited)						March 31, 2010			December 31, 2009
	(in millions)						(unaudited)
Raw materials	$	9.3		$	16.2		$	9,946		$	9,653
Work-in-process		1.2			1.9			45			—
Finished goods (includes in-transit)		23.0			22.3			20,478			20,659

Gross inventories		33.5			40.4			30,469			30,312
Less: slow-moving and obsolescence reserve		(4.3	)		(2.4	)		(3,286	)		(3,080	)

Inventories, net	$	29.2		$	38.0		$	27,183		$	27,232

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

Note ~~6 –~~ 6—Property ~~Plant~~ and Equipment

AsProperty and equipment as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008, property, plant and equipment comprised the following:~~2009 are as follows (in thousands):


	September 30, 2009			December 31, 2008
	(unaudited)						March 31, 2010			December 31, 2009
	(in millions)						(unaudited)
Land	$	1.3		$	1.3		$	1,338		$	1,338
Buildings and leasehold improvements		19.5			16.3			19,000			19,143
Machinery and equipment		10.8			8.8
Rental tools		50.9			47.1
Machinery, equipment and rental tools								61,283			62,369
Equipment in progress		0.1			5.5			519			133
Furniture and fixtures		1.3			1.2			1,301			1,306
Transportation equipment		4.3			4.9			4,201			4,252
Computer equipment		1.7			1.3			1,746			1,750

Total property, plant and equipment		89.9			86.4
Gross property and equipment								89,388			90,291
Less: accumulated depreciation		(27.5	)		(19.6	)		(31,455	)		(30,040	)

Property, plant and equipment, net	$	62.4		$	66.8
Property and equipment, net							$	57,933		$	60,251

Depreciation expense was $2.9 million for the three months ended ~~September 30, 2009~~March 31, 2010 and ~~2008 was $2.9 million and $3.0 million, respectively, and for nine months ended September 30, 2009 and 2008 was $8.6 million and $7.0 million, respectively.~~2009. Depreciation expense that directly relates to activities that generate revenue amounted to $2.3 million and ~~$1.9~~$2.2 million for the three months ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008,~~ respectively, and ~~$6.8 million and $5.2 million for the nine months ended September 30, 2009 and 2008, respectively. These amounts are~~is recorded ~~within~~in cost of ~~revenue in our Consolidated Condensed Statements of Income (Loss).~~revenue.

Note ~~7 –~~ 7—Goodwill

~~We evaluate the carrying value of~~The Company tests goodwill for impairment on an annual basis during the fourth quarter of each year, and ~~on an interim basis~~more frequently if ~~events occur or~~ circumstances ~~change that would more likely than not reduce the fair value~~indicate a potential impairment. The Company has identified four reporting units, of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (i) a significant adverse change in legal factors or in business climate, (ii) unanticipated competition, or (iii) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

~~The analysis conducted on the intangible assets of both the Teledrift and Chemical~~only two, Chemicals and Logistics ~~reporting units did~~and Teledrift have an unamortized goodwill balance at March 31, 2010. Goodwill was not ~~result in any~~tested for impairment as the calculated fair value of these assets exceeded their book value. Our recoverability assessment of these intangible assets considered company-specific projections, assumptions about market participant views and the Company’s overall market capitalization as of the testing date. Although certain factors surrounding market and industry risk rates utilized in the Company’s assessment decreased during the third quarter, the Company’s third quarter results of its Teledrift business continued to fluctuate, which negatively impacted the Company’s discounted cash flow forecast utilized in its impairment assessment compared to amounts used for the 2008 evaluations.

~~Due to the continued macro-economic conditions affecting the oil~~quarters ended March 31, 2010 and ~~gas industry and the financial performance of all of our reporting units, management tested for evidence of impairment in the second and again in the third quarter of~~ 2009. The assessment for impairment focused mainly on the Teledrift and Chemical and Logistics reporting units as these are the only reporting units with material amounts of goodwill and other intangible assets. Based upon these evaluations, we recorded an impairment charge of approximately $18.5 million primarily related the Teledrift reporting unit in the second quarter of 2009. No additional impairment charge was required in the third quarter of 2009. The impairment analysis for the Chemical and Logistics reporting unit did not result in any impairment.

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)~~

~~The following table summarizes the changes in our recorded goodwill by reporting units from December 31, 2007 through September 30, 2009:~~

   Reporting Units Total
   Chemical
and
Logistics    Artificial
Lift Teledrift Remaining
Drilling
Products
segment
   (in millions)
Goodwill

December 31, 2007
   $ 11.6    $ 5.9    $ —      $ 43.0    $ 60.5
Acquisition
   —      —      46.5    —      46.5
Impairment
   —      (5.9 ) (12.6 ) (43.0 ) (61.5 )

December 31, 2008
   $ 11.6    $ —      $ 33.9    $ —      $ 45.5
Impairment
   —      —      (18.5 ) —      (18.5 )

September 30, 2009
   $ 11.6    $ —      $ 15.4    $ —      $ 27.0

Note ~~8 –~~8—Other Intangible Assets

~~The components of~~Other intangible assets ~~at September 30, 2009~~as of March 31, 2010 and December 31, ~~2008~~2009 are as ~~follows:~~follows (in thousands):

   September 30,
2009 December 31,
2008
   (unaudited)
   (in millions)
Patents
   $ 6.4    $ 6.3
Customer lists
   28.6    28.6
Non-compete
   1.7    1.7
Brand name
   6.2    6.2
Supply contract
   1.7    1.7
Other
   0.4    0.5
Accumulated amortization
   (13.4 ) (11.5 )

Total
   31.6    33.5
Deferred financing costs
   6.4    5.6
Accumulated amortization
   (2.2 ) (1.1 )

Net deferred financing costs
   4.2    4.5

Intangible assets, net
   $ 35.8    $ 38.0


	March 31, 2010			December 31, 2009
	(unaudited)
Patents	$	6,282		$	6,282
Customer lists		28,543			28,543
Non-compete agreements		1,715			1,715
Brand name		6,199			6,199
Supply contract		1,700			1,700
Other		428			428

Other acquired intangible assets		44,867			44,867
Less accumulated amortization		(14,552	)		(13,925	)

Net other acquired intangible assets		30,315			30,942
Deferred financing costs, net		10,810			4,186

Other intangible assets, net	$	41,125		$	35,128

~~Intangible and other~~Other acquired intangible assets are ~~being~~ amortized on a straight-line basis ~~ranging~~ from two to 20 years. The Company ~~recorded~~recognized amortization expense ~~related to our intangible assets in depreciation and amortization in our Consolidated Condensed Statement of Income (Loss)~~ of $0.6 million and $0.5 million for the three months ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008, respectively, and $1.9 million and $2.4 million for~~respectively. Deferred financing costs are amortized using the ~~nine~~effective interest method. During the three months ended ~~September 30, 2009~~March 31, 2010, the Company incurred deferred financing costs of $8.1 million relating to its new term loan and ~~2008, respectively.~~the exchange of the convertible notes and expensed $1.0 million of unamortized deferred financing costs related to the senior credit facility with Wells Fargo, which was repaid on March 31, 2010.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

Note ~~9 –~~9—Convertible Notes and Long-Term Debt

~~Long-term~~Convertible notes and long-term debt ~~at September 30, 2009 and December 31, 2008 consisted of the following:~~are as follows (in thousands):


	September 30, 2009			December 31, 2008			March 31, 2010			December 31, 2009
	(unaudited)						(unaudited)
Convertible notes:
Convertible senior notes (2008 Notes)							$	75,000		$	115,000
Convertible senior secured notes (2010 Notes)								36,004			—
Less discount on notes								(16,100	)		(19,399	)
	(in millions)
Convertible Senior Notes	$	115.0		$	115.0
Discount on Convertible Senior Notes		(20.6	)		(24.2	)

Convertible Senior Notes, net of discount	$	94.4		$	90.8
Convertible senior notes, net of discount							$	94,904		$	95,601


Long-term debt:
Term loan							$	40,000		$	—
Senior credit facility
Equipment term loans	$	23.2		$	34.0			—			21,210
Revolving line of credit								—			9,953
Real estate term loans		0.7			0.8			—			717
Revolving line of credit		1.7			2.3
Promissory note to stockholders of acquired business, maturing December 2009		0.2			0.5
Other		0.5			0.9
Capital lease obligations								638			658

Total		26.3			38.5			40,638			32,538
Less: current portion		(26.0	)		(9.0	)
Less current portion								(6,610	)		(8,949	)

Long-term debt, less current portion	$	0.3		$	29.5		$	34,028		$	23,589

Convertible ~~Senior~~ Notes

The Company’s convertible notes consist of Convertible Senior Notes (the “2008 Notes”) and Convertible Senior Secured Notes (the “2010 Notes”).

On February ~~11,~~14, 2008, the Company ~~entered into~~issued the 2008 Notes at par, in the aggregate principal amount of $115 million. Net proceeds received from issuance of the Notes were $111.8 million. The 2008 Notes bear interest at 5.25% and mature on February 15, 2028.

On March 31, 2010, the Company executed an ~~underwriting~~exchange agreement ~~(“Convertible Notes Underwriting Agreement”)~~ with Whitebox Advisors LLC and a syndicate of lenders under the ~~subsidiary guarantors named therein (“Guarantors”)~~Amended and ~~Bear, Stearns & Co. Inc. (“Underwriter”). The Convertible Senior Notes Underwriting~~Restated Credit Agreement related to the ~~issuance~~Company’s term loan (described below). The exchange agreement permitted each lender to exchange the Company’s 2008 Notes which they held, up to the principal amount of its participation in the new $40 million term loan, for 2010 Notes and ~~sale (“Convertible Notes Offering”)~~shares of ~~$100.0 million aggregate~~the Company’s common stock.

Upon closing of the exchange, investors received, for each $1,000 principal amount of the ~~Company’s Convertible Senior Notes. The Convertible Senior~~2008 Notes ~~are guaranteed on~~exchanged, (a) 2010 Notes in a senior, unsecured basis by the Guarantors. Pursuant to the Convertible Notes Underwriting Agreement, the Company granted the Underwriter a 13-day over-allotment option to purchase up to an additional $15.0 million aggregate principal amount of ~~the Convertible Senior Notes, which was exercised~~$900 and (b) $50 in ~~full on February 12, 2008. The net proceeds received from the issuance~~shares of the ~~Convertible Senior~~Company’s common stock (based on the greater of 95% of the volume-weighted average price of the common stock for the preceding ten trading days or the closing price of the common stock on the day before the closing). The 2010 Notes ~~were $111.8 million.~~have the same maturity date, interest rate, conversion rights, conversion rate, Company redemption rights and guarantees as the 2008 Notes, except that in addition they are also secured by a second priority lien on substantially all of the Company’s assets.

The ~~Convertible~~Company exchanged $40 million of 2008 Notes ~~Underwriting Agreement contained customary representations, warranties~~for the aggregate consideration of $36 million in 2010 Notes and ~~agreements by~~$2 million in 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. The Company has treated this transaction as an exchange for accounting purposes. As a result, no gain or loss was recognized at the time of the transaction, and the ~~Guarantors,~~difference between the exchanged debt and customary conditions to closing, indemnification obligations of both the Company and the Guarantors, on the one hand, and the Underwriter, on the other hand, including liabilities under the Securities Act of 1933, obligationsits carrying amount has been recorded as a reduction of the ~~parties and termination provisions.~~ discount being amortized over the period the convertible debt is expected to be outstanding. The Company has capitalized commitment fees which are being amortized over the period the debt is expected to be outstanding using the effective interest method. Third-party transaction costs incurred in connection with this exchange transaction of $0.8 million have been expensed.

Because the Company is a holding company with no independent assets or operations, the ~~Convertible Senior~~2008 Notes and the 2010 Notes are guaranteed by the Company and each of ~~our 100% owned~~its wholly-owned subsidiaries. The guarantees are full and unconditional, and joint and ~~several.~~several, on a senior, unsecured basis. The agreements governing the Company’s long-term indebtedness do not contain any significant restrictions on the ability of the Company or any guarantor to obtain funds from its subsidiaries by dividend or loan.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Interest on the 2008 Notes and the 2010 Notes accrues at 5.25% per annum, and is payable semiannually in arrears on February 15 and August 15 of each year. The Company is also required to pay contingent interest to holders of the 2008 Notes and the 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 five trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals 120% or more of the principal amount of the note. The amount of 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 five trading days referred to above.

The 2008 Notes and 2010 Notes mature on February 15, 2028. On or after February 15, 2013, the Company ~~used~~may redeem for cash all or a portion of the ~~net proceeds from~~2008 Notes and the ~~Convertible~~2010 Notes ~~Offering~~at a redemption price of 100% of the principal amount of the notes to ~~finance~~be redeemed plus accrued and unpaid interest (including any contingent interest). Holders may require the ~~acquisition~~Company to purchase all or a portion of ~~Teledrift~~their 2008 Notes or 2010 Notes on each of February 15, 2013, February 15, 2018, and February 15, 2023. In addition, if the Company experiences specific types of corporate transactions, holders may require the Company to purchase all or a portion of their notes. Any repurchase of notes pursuant to these provisions will be for ~~general corporate purposes.~~cash at a price equal to 100% of the principal amount of the notes to be purchased plus accrued and unpaid interest (including any contingent interest).

~~Accounting standards guidance, primarily within ASC Topic 470,~~~~“Debt,”~~ ~~clarifies that~~The 2008 Notes and the 2010 Notes are convertible ~~debt instruments that~~into shares of the Company’s common stock at the option of the holder, subject to specified conditions. The conversion rate is 43.9560 shares per $1,000 principal amount of the notes (equal to a conversion price of approximately $22.75 per share), subject to adjustment. Upon conversion, the Company will deliver, at its option, either shares of its common stock or a combination of cash and shares of its common stock.

Because the 2008 Notes may be settled in cash upon conversion, ~~including partial cash settlement, should separately account~~the Company has accounted for the liability and equity components of the 2008 Notes in a manner that ~~will reflect~~reflects the ~~entity’s~~Company’s nonconvertible debt borrowing rate. The resulting debt discount would be accreted over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Our Convertible Senior Notes are affected by this guidance. The Company assumed an 11.5% ~~non-convertible~~nonconvertible debt interest rate and an expected term of the debt of five years to determine the debt discount. The expected term of five years is based upon the time until a call/put option ~~on the Convertible Senior Notes at February 2013~~ can be exercised ~~and~~on the 2008 Notes in February 2013. The effective tax rate assumed ~~at the inception of the Convertible Senior Notes~~ was 38.0%. ~~The guidance requires retrospective application to all periods presented. The effect~~At the date of ~~the application on stockholders’ equity as of December 31, 2008 was $15.0 million, which consisted of~~issuance, the discount on the ~~debt of~~2008 Notes was $27.8 million, ~~and the~~with a related deferred tax liability of $10.6 ~~million at inception net~~million. The resulting discount on the 2008 Notes is being accreted over the period the convertible debt is expected to be outstanding as additional noncash interest expense. At the date of the ~~accretion~~exchange described above, the unamortized discount related to the 2008 Notes exchanged was allocated to the 2010 Notes and continues to be amortized over the same period, at an assumed rate of 9.9%, on the ~~discount of $ 3.6 million and related tax effect of $1.4 million through December 31, 2008. For~~effective interest method. During the three months ended ~~September 30,~~March 31, 2010 and 2009, ~~and 2008 the~~noncash interest expense related to accretion of the discount was $1.3 million and $1.2 million, respectively.

Term Loan—Senior Credit Facility

On March 31, 2010, the Company executed an Amended and ~~$1.1~~Restated Credit Agreement with Whitebox Advisors LLC, as administrative agent for a syndicate of lenders, for a $40 million ~~respectively. For~~term loan. This term loan refinanced the ~~nine months ended September 30, 2009~~Company’s existing senior credit facility at Wells Fargo Bank and ~~2008~~provided net proceeds of $6.1 million to the ~~accretion~~Company.

The indebtedness under the term loan matures November 1, 2012 and has scheduled cash principal payments of $750,000 in 2010, $3,750,000 in 2011, and $3,000,000 in 2012 with and the remaining unpaid principal balance due at maturity. Interest is payable quarterly. The Company has the option to either pay the total amount of interest due in cash or to pay a portion of the ~~discount was $3.6~~interest in cash and capitalize the balance of the interest, thereby increasing the principal amount of the new senior credit facility. The 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 ~~$2.5~~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 new senior credit facility at a annualized rate of 6% when the principal balance exceeds $30 million, ~~respectively.~~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.

The Amended and Restated Credit Agreement requires additional mandatory principal payments of (a) 50% of EBITDA (earnings before interest, taxes, depreciation and amortization) in excess of $4.5 million in any fiscal quarter, (b) 50% of cash proceeds in excess of $5 million and up to $15 million from certain asset disposals, plus 75% of cash proceeds in excess of $15 million from certain asset disposals, (c) 75% of any Federal income tax refunds, and (d) $1 million of principal on quarterly payment dates, when the Company’s stock price is equal to or greater than $1.27 per share, payable by issuing common stock (based on 95% of the volume-weighted average price of the common stock for the preceding ten trading days).

The Amended and Restated Credit Agreement provides for a commitment fee of $7,300,000, payable as follows: (a) $925,975 in cash at closing, (b) $4,374,025 through the issuance of 3,431,133 shares of common stock at closing (based on 95% of the volume-weighted average price of the common stock for the preceding ten trading days), (c) $1,000,000 payable in September 2010 in cash or common stock (based on 90% of the greater of the volume-weighted average price of the common stock for the preceding ten trading days or $1.27 per share), and (d) $1,000,000 payable in March 2011 in cash

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

Asor common stock (based on 85% of ~~September 30, 2009~~the greater of the volume-weighted average price of the common stock for the preceding ten trading days or $1.27 per share). At March 31, 2010, the liability for the unpaid commitment fee of $2.0 million is recorded in accrued liabilities within the balance sheet. The election as to whether the commitment fee for (c) and ~~December 31, 2008, unamortized debt discount was $20.6 million~~(d) is payable in cash or common stock is made by the Company if the volume-weighted average price of the common stock is $1.00 or more per share and ~~$24.2 million, respectively. The following tables reflect~~by the ~~previously described retrospective adjustments related~~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 ~~impact~~exchange transaction involving the Company’s convertible notes (described above).

The Amended and Restated Credit Agreement does not contain a revolving line of credit facility or quarterly and annual financial covenants. The credit agreement restricts the payment of dividends on the Company’s common stock without the prior written consent of the ~~debt guidance on amounts previously reported as of December 31, 2008 and for the three and nine months ended September 30, 2008:~~lenders.

   December 31, 2008
   As reported As adjusted
   (in millions)
Deferred tax assets, less current portion
   $ 15.8    $ 6.6
Total assets
   243.7    234.5
Convertible Senior Notes, net of discount
   115.0    90.8
Additional paid-in capital
   59.6    76.8
Accumulated deficit
   (8.5 ) (10.7 )
Total stockholders’ equity
   50.7    65.7
Total liabilities and stockholders’ equity
   243.7    234.5

   Three Months Ended
September 30, 2008 Nine Months Ended
September 30, 2008
   As
reported As
adjusted As
reported As
adjusted
   (in millions, except
per share data)
(in millions, except
per share data)

Interest expense
   $ (2.7 ) $ (3.9 ) $ (7.2 ) $ (9.7 )
Total other expense
   (2.7 ) (3.9 ) (7.2 ) (9.7 )
Income before taxes
   9.4    8.3    23.1    20.7
Provision for income taxes
   (3.6 ) (3.2 ) (8.8 ) (7.9 )
Net income
   5.9    5.1    14.4    12.8
Basic earnings per common share
   0.31    0.27    0.76    0.68
Diluted earnings per common share
   0.30    0.27    0.74    0.66

~~Senior Credit Facility~~Share Lending Agreement

~~On February 4,~~Concurrent with the offering of the 2008 Notes, the Company entered into a ~~Second Amendment (“Amendment”~~share lending agreement (the “Share Lending Agreement”) with Bear, Stearns International Limited (the “Borrower”). In May 2008, the Borrower became an indirect, wholly-owned subsidiary of JPMorgan Chase & Company. Under the Share Lending Agreement, the Company agreed to loan 3,800,000 shares of common stock (the “Borrowed Shares”) to the ~~Amended~~Borrower during a period beginning February 11, 2008 and ~~Restated Credit~~ending on February 15, 2028. The Company may terminate the Share Lending Agreement ~~(as amended, modified or supplemented prior~~earlier, upon written notice to the ~~date thereof,~~Borrower that the ~~“Senior Credit Facility”), dated as~~entire principal balance of ~~August 31, 2007, between~~the 2008 Notes ceases to be outstanding or upon agreement with the Borrower. The Borrower is permitted to use the Borrowed Shares only for the purpose of directly or indirectly facilitating the sale of the convertible senior notes and the establishment of hedge positions by holders of the convertible senior notes. The Company did not require collateral in support of the Share Lending Agreement.

In February 2008, the Borrower borrowed all 3,800,000 shares available under the Share Lending Agreement. The number of shares is subject to certain adjustments for stock dividends, stock splits or reverse stock splits which change the number of shares of common stock outstanding. The 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. The Borrower received all proceeds from any sale of Borrowed Shares pursuant to the Share Lending Agreement. Upon conversion of the convertible senior notes, a number of Borrowed Shares proportional to the conversion rate for such notes must be returned to the Company. Any borrowed shares returned to the Company cannot be re-borrowed.

The Borrowed Shares are issued and ~~Wells Fargo Bank, National Association. The Senior Credit Facility consisted~~outstanding for corporate law purposes, and accordingly, the holders of the Borrowed Shares have all of the rights of a ~~revolving line~~holder of ~~credit, an equipment term loan~~the Company’s outstanding shares, including the right to vote the shares on all matters submitted to a vote of shareholders and ~~two real estate term loans. The Amendment permitted~~the right to receive any dividends or other distributions that the Company may pay or make on its outstanding shares of common stock. However, under the Share Lending Agreement, the Borrower has agreed to ~~consummate~~pay to the ~~acquisition of Teledrift,~~Company, within one business day after the relevant payment date, an amount equal to ~~issue up to $150 million of our Convertible Senior Notes to fund~~any cash dividends that the ~~purchase price of Teledrift,~~Company pays on the Borrowed Shares, and to ~~incur additional capital expenditures,~~pay or deliver to the Company, upon termination of the loan of Borrowed Shares, any other distribution, in liquidation or otherwise, that the Company makes 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 agreed that it will not vote any such borrowed shares of which it is the record owner. The Borrower has also agreed under the Share Lending Agreement that it will not transfer or dispose of any borrowed shares, other than to its affiliates, unless such transfer or disposition is pursuant to a registration statement that is effective under the Securities Act. However, investors that purchase the shares from the Borrower (and any subsequent transferees of such purchasers) will be entitled to the same voting rights with respect to those shares as any other holder of common stock.

Contractual undertakings of the borrower have the effect of substantially eliminating the economic dilution that otherwise would result from the issuance of the borrowed shares, and ~~includes new financial covenants and other amendments.~~

~~The Amendment increased~~all shares outstanding under the ~~principal payment~~Share Lending Agreement are required to be ~~made by~~returned to the Company ~~from $0.5 million monthly to $2.0 million quarterly effective June 30, 2008.~~

~~On March 31, 2008,~~in the ~~Company entered into~~future. As a new credit agreement with Wells Fargo Bank, National Association (“New Credit Agreement”). The New Credit Agreement provides for a revolving credit facility of a maximum of $25 million (“New Revolving Credit Facility”) and a term loan facility of $40 million (“New Term Loan Facility”) (collectively,result, the “New Senior Credit Facility”). The Company refinanced all but approximately $0.8 million of the outstanding indebtedness under its Senior Credit Facility with borrowings under the New Credit Facility. The amount under the Senior Credit Facility that was not refinanced relates to certain existing real estate loans.

The New Revolving Credit Facility will mature and be payable in full on March 31, 2011. The Company must make mandatory prepayments under the New Term Loan Facility annually beginning April 15, 2009, equal to 50%shares of the Company’s ~~excess cash flow~~stock lent under the Share Lending Agreement are not considered to be outstanding for the ~~previous calendar year~~purpose of computing and accordingly paid $4.8 million on that date. The Company is required to repay the aggregate outstanding principal amount of the New Term Loan Facility in quarterly installments of $2.0 million, commencing with the quarter ending June 30, 2008 and accordingly the Company has made $2.0 million quarterly payments in 2008 and 2009, including the payment on September 30, 2009. All remaining amounts owed pursuant to the New Term Loan Facility mature and will be payable in full on March 31, 2011.reporting earnings per share.

Interest accrues on amounts under the New Senior Credit Facility at variable rates based on, at the Company’s election, the prime rate or LIBOR, plus an applicable margin specified in the New Credit Agreement as amended by the Second Amendment to Credit Agreement dated as of March 13, 2009 (“Second Amendment”). A minimum of 50% of Advances as defined in the New Credit Agreement must be swapped from a floating to a fixed interest rate. At September 30, 2009, the interest rate swap had a notional amount of $21.0 million, swap rate of 2.785% and a fair value of ($0.4) million. The ~~Company records the~~ fair value of the ~~swap in Accrued liabilities~~Share Lending Agreement at its inception was $0.5 million and has been capitalized as an issuance cost and is being amortized to interest expense over its expected term of five years using the ~~unrealized loss in other expense. The Company has no other derivative instruments.~~effective interest method. At March 31, 2010, the unamortized issuance costs for fair value of the Borrowed Shares was $0.3 million.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

~~The rate of interest related to borrowings outstanding under the New Credit Agreement was approximately 8.2% at September 30, 2009.~~

The maximum amount of credit available under the New Revolving Credit Facility is based on a percentage of the Company’s eligible inventory and accounts receivable. The obligations of the Company under the New Credit Agreement are guaranteed by the Company’s domestic subsidiaries and are secured by substantially all present and future assets of the Company and its subsidiaries.

The New Credit Agreement contains certain financial and other covenants, including a minimum net worth covenant, a maximum leverage ratio covenant, a minimum fixed charge coverage ratio covenant, a maximum senior leverage ratio covenant, a covenant restricting capital expenditures, a covenant limiting the incurrence of additional indebtedness, and a covenant restricting acquisitions. Certain of these covenants were amended in February and March 2009 when the Company entered into the First Amendment and Temporary Waiver Agreement and the Second Amendment to our New Credit Agreement with our lenders (collectively the “Amendments”).

In August 2009, in connection with the private placement, we also entered into a Third Amendment to our New Senior Credit Facility (“Third Amendment”). The Third Amendment (i) waives certain potential defaults would have occurred pursuant to the Credit Agreement as of June 30, 2009 without such a waiver, (ii) modifies certain of the financial and other covenants contained in the Credit Agreement, (iii) provides that we are permitted to retain all of the net proceeds of the private placement, and also under most circumstances any proceeds derived by the Company from the exercise of any of the warrants issued in the private placement, and (iv) permits us to pay dividends in cash on the preferred stock in certain circumstances.Capital Lease Obligations

The Company ~~determined during the second quarter of 2009 that it would breach the leverage ratio, the fixed charge coverage ratio,~~leases certain equipment and the net worth covenants of the New Credit Agreement as of the quarter end of June 30, 2009 and during subsequent quarters unless the bank waived the possible June 30, 2009 breaches and these covenants were amended prospectively. The Third Amendment modified these covenants in the manner requested by the Company as described below.

The Third Amendment amended the Leverage Ratio covenant. “Leverage Ratio” is defined as the ratio that the debt of the Company bears to its trailing EBITDA (net income plus interest, tax, depreciation and amortization expense and other non-cash charges). The Third Amendment amended this covenant as follows: (i) there would be no Leverage Ratio covenant applicable to the periods beginning with the second quarter of 2009 through and including the first quarter of 2010, and (ii) thereafter, the Leverage Ratio could not exceed (a) 4.75 to 1.00 for the quarter ending on June 30, 2010, (b) 4.00 to 1.00 for the quarter ending on September 30, 2010, and (c) 3.75 to 1.00 for each quarter ending on or after December 31, 2010.

The Third Amendment also amended the Fixed Charge Coverage Ratio covenant of the New Credit Agreement. The New Credit Agreement defines “Fixed Charge Coverage Ratio” as the ratio of (a) the Company’s EBITDA for the trailing four quarters to (b) Fixed Charges for those four quarters. “Fixed Charges” is defined as the sum of (i) interest expense, (ii) scheduled debt payments, includingvehicles under capital leases payments, (iii) taxes payments, and (iv) actual maintenance capital expenditures. The Third Amendment modified this covenant by: (a) waiving the Fixed Charge Coverage Ratio for the second quarter of 2009, and (b) amending the Fixed Charge Coverage Ratio covenant for subsequent periods to provide that this ratio may not be less than: (i) 0.75 to 1.00 for the quarter ending September 30, 2009, (ii) 1.10 to 1.00 for the quarters ending December 31, 2009,leases. At March 31, 2010, and June 30, 2010, and (iii) 1.25 to 1.00 for each quarter ending on or after June 30, 2010. EBITDA and Fixed Charges will be determined for this purpose based on annualized results beginning with the results of the quarter ending September 30, 2009.

In addition, the Third Amendment amended the minimum Net Worth requirement set forth in the New Credit Agreement. “Net Worth” is defined as the shareholder’s equity of the Company and its subsidiaries, subject to certain adjustments. The Third Amendment modifies this covenant to now require that Net Worth at least equal (i) 90% of the Company’s Net Worth as of the end of the fiscal quarter ended June 30, 2009, plus (ii) 75% of the Company’s net income for each fiscal quarter ending after June 30, 2009 in which such net income is greater than $0, plus (iii) an amount equal to 100% of any proceeds of equity issuances by the Company after June 30, 2009.

Pursuant to the Third Amendment, the Company is required to maintain through June 30, 2010 at least $5.0 million of cash and availability under its revolving line of credit pursuant to the New Credit Agreement, and agreed to increase the amount of the annual principal payment it is required to make pursuant to the New Credit Agreement with respect to its term facility from 50% of Excess Cash Flow to 75% of Excess Cash Flow. “Excess Cash Flow” is the Company’s EBITDA, subject to certain adjustments, minus the sum of the following during such period: (i) taxes, (ii) permitted capital expenditures, (iii) cash interest expense, and (iv) principal installment payments and optional prepayments of the term facility.

~~In addition, the Third Amendment made certain other changes to the New Credit Agreement, including making changes relating to permitted debt, operating leases, acquisitions, and asset sales.~~

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)~~

~~At September 30, 2009, we were not in compliance with the Net Worth and the Fixed Charge Coverage covenants under our New Credit Agreement, as amended.~~

On November 16, 2009, we entered into a Waiver and Fourth Amendment with respect to our New Senior Credit Facility (“Fourth Amendment”). The Fourth Amendment (i) waives certain potential defaults that would have occurred pursuant to the New Credit Agreement as of September 30, 2009 as described above, (ii) provides that we may not make any draws with respect to the New Revolving Credit Facility until February 10, 2010, (iii) requires that we make on November 16, 2009 the $2,000,000 principal payment with respect to the New Term Loan Facility which otherwise would have been due on December 31, 2009, (iv) requires that we maintain availability under the New Revolving Credit Facility of at least $4,000,000, and (v) otherwise modifies certain of the reporting requirements and other covenants contained in the Credit Agreement. We do not expect to be able to meet certain of the financial covenants under the New Senior Credit Facility as of December 31, 2009 and possibly throughout 2010. As a result, we have reclassified amounts owed under the New Senior Credit Facility as short term debt in the Consolidated Balance Sheet at September 30, 2009. While we have been successful in obtaining waivers from our bank lenders in recent periods, however, there can be no assurance we will be successful obtaining such waivers for these events in the future.

Our availability under the revolving line of credit of the New Senior Credit Facility is defined by a borrowing base comprised of eligible accounts receivable and inventory. As of September 30, 2009, we had $1.7 million outstanding under the revolving line of credit of the New Senior Credit Facility. Total availability under our credit facility amounted to $13.2 million at September 30, 2009. During the period subsequent to this date through November 16, 2009, we borrowed an additional $9 million under this revolving line of credit. We paid the $2 million quarterly principal payment installment on November 16, 2009, which otherwise would have been due on December 31, 2009, according to the terms of the Fourth Amendment.

~~As of September 30, 2009,~~ the Company had approximately ~~$0.2~~$0.6 million ~~outstanding~~ in ~~vehicle loans and~~ capitalized ~~vehicle leases.~~lease obligations.

Note ~~10 –~~ 10—Fair Value ~~Disclosure~~of Financial Instruments

The following table presents unaudited fair value information ~~about~~regarding the Company’s ~~liability~~liabilities measured at fair value on a recurring basis as of ~~September 30, 2009, and indicates~~March 31, 2010. The table also identifies the fair value hierarchy of the valuation techniques ~~utilized~~used by the Company to determine ~~such~~these fair values (in thousands):


	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Levels 2)		Significant Unobservable Inputs (Level 3)		Total

2010
Common stock warrants⁽¹⁾	$	—	$	—	$	6,542	$	6,542

2009
Interest rate swap⁽²⁾	$	—	$	478	$	—	$	478

(1)	The fair value of the warrants is estimated using a Black-Scholes option-pricing model.

(2)	The swap valuation is obtained from a bank estimate using pricing models with market-based inputs.

The following table presents the changes in Level 3 liabilities measured at fair value on a recurring basis for the quarter ended March 31, 2010:


	Warrant Liability
	(unaudited)

Beginning balance at January 1, 2010	$	4,729
Fair value adjustments		1,813
Net transfers in/(out)		—


Ending balance at March 31, 2010	$	6,542

The estimated fair value and carrying value of the Company’s other financial instruments are as follows (in ~~millions)~~thousands):

Level 1 Level 2 Level 3 Total
Convertible Senior Notes
— $ 63.3 — $ 63.3


	March 31, 2010				December 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(unaudited)

Convertible notes⁽¹⁾	$	94,904	$	57,722	$	95,601	$	60,375
Term loan		40,000		40,000		—		—
Senior credit facility		—		—		31,880		31,880
Capital lease obligations		638		584		658		628

(1)	The convertible note carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note, which includes the convertible equity features.

The Company determined the estimated fair value ~~amount~~ of the ~~Convertible Senior Notes by using available~~convertible notes based on the quoted market ~~information~~price of the notes. Due to the March 31, 2010 transaction date of the term loan, the carrying value approximates market value for instruments with similar risks and ~~commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates~~maturities. The carrying value of ~~fair value. Accordingly,~~ the senior credit facility approximates fair value ~~estimate presented herein is not necessarily indicative~~because interest rates are variable, and accordingly, the carrying value approximates current market value for instruments with similar risks and maturities. Fair value of the ~~amount that the~~capital leases was determined based on recent lease rates adjusted for a risk premium. The Company had no cash equivalents at March 31, 2010 or ~~the debt-holder could realize~~December 31, 2009.

The Company’s non-financial assets, including goodwill, other intangible assets and property and equipment are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in ~~a current market exchange. The use~~certain circumstances (e.g., evidence of ~~different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.~~impairment).

Note ~~11 –~~ 11—Earnings (Loss) Per Share

Basic earnings (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding and potentially dilutive common equivalent shares outstanding, if the effect is dilutive. Because of the net loss during the three months ended March 31, 2010 and 2009, potentially dilutive securities have been excluded from the calculation of diluted earnings per share, as inclusion would have an anti-dilutive effect on net loss per share.

In connection with the sale of the 2008 Notes, the Company entered into a share lending agreement for 3,800,000 shares of its common stock. Contractual undertakings of the borrower have the effect 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 required to be returned to the Company in the future. As a result, the 3,800,000 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 earnings per share.

The computational components of basic and diluted earnings (loss) per common share are as follows (in thousands):


	Three Months Ended March 31,
	2010	2009
Weighted average common shares used in computing basic and diluted earnings (loss) per common share	20,167	19,177

Securities convertible into shares of common stock, not used because the effect would be anti-dilutive for the periods presented, are as follows (in thousands):


	2010	2009
Stock options under long-term incentive plans	1,591	857
Stock warrants	10,480	—
Convertible senior notes (if-converted)	4,879	5,055
Convertible preferred stock (if-converted)	5,748	—

	22,698	5,912

Note 12—Income Taxes

The effective income tax rate for the three months ended March 31, 2010 and 2009 was 17.4% and 39.4%, respectively.

The Company’s effective income tax rate in 2010 differs from the federal statutory rate primarily due to the change in valuation allowance on deferred tax assets, the nondeductible portion of the change in the warrant liability and state income taxes.

Note 13—Convertible Preferred Stock and Stock Warrants

On August 12, 2009, ~~we closed a private placement transaction with certain accredited investors, pursuant to which such investors purchased an aggregate of~~the Company sold 16,000 units ~~(“Units”~~(the “Units”) ~~at a purchase price~~, consisting of Series A cumulative convertible preferred stock and warrants, for $1,000 per ~~Unit.~~ Unit, yielding aggregate gross proceeds of $16.0 million. Net proceeds from issuance of the Units were $14.8 million. The Company used the net proceeds from the sale of Units to reduce borrowings under the Company’s bank credit facility, thereby providing additional availability of credit, and for general corporate purposes.

Each Unit was comprised of ~~(i)~~ one share of cumulative convertible preferred stock (“Convertible Preferred Stock”), ~~(ii)~~ warrants to purchase up to 155 shares of ~~our~~the Company’s common stock at an exercise price of $2.31 per share (“Exercisable Warrants”) and ~~(iii)~~ contingent warrants to purchase up to 500 shares of ~~our Common Stock~~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 ~~our~~the Company’s common ~~stock under certain conditions.~~stock. This conversion ~~ratio~~rate represents an equivalent conversion price of ~~$2.31~~approximately $2.30 per ~~share.~~share of common stock. The ~~closing of this private placement resulted~~conversion rate is subject to adjustment in the ~~receipt~~event of ~~proceeds of $14.8 million, net of transaction costs of $1.2 million. We used~~stock splits, stock dividends and distributions, reorganizations and similar events affecting the ~~net proceeds to reduce borrowings under our bank credit facility, thereby providing additional availability of credit, and for general corporate purposes.~~common stock.

Each share of Convertible Preferred Stock has a liquidation preference of $1,000. Dividends ~~will~~ accrue at the rate of 15% of the liquidation preference per year and ~~will~~ accumulate if not paid quarterly. AsThe Company may pay dividends, at its option, in cash, common stock (based on the market value of ~~September 30, 2009,~~ the ~~Company had accrued dividends of $0.3 million.~~common stock) or a combination thereof.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The ~~Convertible Preferred Stock will,~~Company may, at its option after February 11, 2010, automatically convert the ~~Company’s option (but not earlier than February 12, 2010), be automatically converted~~preferred shares into ~~shares of our~~ common ~~stock~~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

~~FLOTEK INDUSTRIES, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)~~

automatically converts and the Company has not previously paid holders amounts equal to at least eight quarterly dividends on the Convertible Preferred Stock, the Company will also pay to the holders, in connection with any automatic conversion, ~~and~~an amount, in cash or shares of ~~our~~ common stock, ~~(based on the market value of the common stock),~~ equal to eight quarterly dividends less any dividends previously paid to holders of the Convertible Preferred Stock.

The Company may redeem any of the Convertible Preferred Stock beginning on August 12, 2012. The 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 plus accrued and unpaid dividends to the redemption date.

The Exercisable Warrants are immediately exercisable and will expire if not exercised by August 12, 2014. The Contingent ~~warrants~~Warrants became exercisable ~~after we obtained shareholder approval~~ on November 9, 2009 and will expire if not exercised by November 9, 2014. Both the Exercisable Warrants and Contingent Warrants contain anti-dilution price protection in the event the Company issues shares of ~~Common Stock~~common stock or securities exercisable for or convertible into ~~Common Stock~~common stock at a price per share less than their exercise price. Due to the anti-dilution price ~~subject~~adjustment provision in the warrant agreements, the warrants were not considered equity and were recorded at fair value as warrant liabilities when issued and will be adjusted to ~~certain exceptions.~~fair value through the statement of operations at the end of each reporting period over the life of the warrants.

The gross proceeds from the issuance of the Units ~~were accounted for in accordance with ASC 470-20,~~~~“Debt – Debt with Conversion and Other Options”~~ ~~and~~ were allocated at the date of the transaction based on the relative fair values of the preferred stock and the warrants. In order to calculate the relative fair values, the Company obtained third-party valuations to assist it in establishing the fair value of the debt and equity components of the Units. The fair value of the warrants was determined using the Black-Scholes option-pricing model using a five-year term, volatility of 54%, a risk-free rate of 2.7% and assumed dividend rate of zero. The fair value of the preferred stock component was determined via separate valuations of the conversion rights and the host contract. The 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 a lack of comparable transactions by companies with similar credit ratings, the 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 ~~detached~~detachable warrants were recorded ~~in additional paid-in capital at $5.2 million.~~as a warrant liability.

The Company ~~evaluated whether~~determined that the embedded conversion option within the preferred stock was beneficial (had intrinsic value) to the holders of the preferred stock. The intrinsic value of the conversion option was determined to be $5.2 million and was recognized as a beneficial conversion discount with offset to additional paid-in capital at the date of the transaction.

The conversion period for the preferred stock was estimated to be 36 months based on an evaluation of the conversion options. The accretion of the discount on the preferred stock recorded during the three months ended March 31, 2010 was $0.6 million (before the effect of the conversions occurring in March 2010 which are discussed below).

The fair value of the warrants has been calculated at each period end using the Black-Scholes option-pricing model. At March 31, 2010, inputs for the ~~three~~fair value calculation included the actual remaining term of the warrants, volatility of 57.6%, a risk-free rate of 2.6%, and ~~nine months ended September 30, 2009 was $0.5 million.~~an assumed dividend rate of zero.

~~Note 12 – Treasury~~Conversions of Preferred Stock

~~For the three and nine month periods ended September 30, 2009, 11,975 and 88,619~~In March 2010, holders of 2,780 shares ~~respectively, previously issued as Restricted Stock Awards (“RSAs”) to employees, were forfeited or cancelled during 2009 and accounted for as treasury stock.~~

The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders’ equity. The Company currently neither has nor intends to initiate a share repurchase program.

~~Note 13 – Earnings Per Share~~

Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period including “contingent shares” if any. Contingent shares include common shares that would be issued from the conversion of preferred stock elected conversion into 1,208,692 shares of the Company’s common stock. The Company did not receive any proceeds from the conversions. The holders of the preferred stock were not entitled to accumulated and ~~exercisable stock warrants. For~~unpaid dividends on the converted shares; therefore, $0.3 million of accrued and unpaid dividends were reversed and are reported as a reduction of accrued dividends during the three ~~and nine~~ months ended ~~September 30, 2009, weighted average common shares related to convertible~~March 31, 2010. At March 31, 2010, the Company had accrued and unpaid dividends on its preferred stock of ~~3,705,099 and 1,248,605, respectively, were excluded from dilutive earnings per share because they were anti-dilutive. Additionally, warrants to purchase 10,480,000~~$1.2 million.

Upon conversion of the preferred stock, the Company recognized the unamortized discount remaining on the converted preferred shares of ~~common stock were excluded from dilutive earnings per share,~~$1.4 million as ~~the inclusion~~additional accretion of ~~such shares would have been antidilutive.~~discount on preferred stock.

~~Diluted earnings per share is based on the weighted average number~~Re-pricing of shares outstanding during each period and the assumed exercise of dilutive instruments (stock options) less the number of common shares assumed to be purchased with the exercise proceeds using the average market price of the Common Stock for each of the periods presented. Due to the net loss for the three and nine month periods ended September 30, 2009, approximately 91,000 and 96,000 shares, respectively, of dilutive shares relating to stock options have been excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.Warrants

In connection with the ~~Convertible Notes Offering,~~Amended and Restated Credit Agreement related to the ~~Company entered into a Share Lending Agreement~~Company’s term loan, the stock warrants issued in August 2009 in connection with Bear Stearns International Ltd. (“BSIL”). In view of the contractual undertakings of BSIL in the Share Lending Agreement, which have the effect of substantially eliminating the economic dilution that otherwise would result from the issuance of Series A cumulative convertible preferred stock have been re-priced, effective March 31, 2010. The Exercisable Warrants and the ~~borrowed shares,~~Contingent Warrants both contained anti-dilution price protection. As a result of this new pricing, the Company ~~believes that under accounting principles generally accepted in the United States~~now has outstanding warrants to purchase up to 10,480,000 shares of ~~America, the borrowed shares should not be considered outstanding for the purpose of computing and reporting~~ the Company’s ~~earnings~~common stock at an exercise price of $1.2748 per share.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

Note ~~14 – Share-Based Compensation~~14—Common Stock

~~The Company follows accounting guidance found~~A reconciliation of the change in ~~ASC Topic 715,~~~~“Compensation – Stock Compensation”~~ ~~and ASC Topic 505,~~~~“Equity.”~~ ~~This guidance requires all share-based payments, including grants~~issued shares of Company’s common stock ~~options, to be recognized in~~during the ~~income statement as an operating expense over the vesting period, based on their fair values.~~

In 2009, the Company awarded approximately 690,000 stock options to certain employees under the 2007 Long-Term Incentive Plan (“2007 Plan”). The fair value of these stock options, based on the Black-Scholes calculation, range from $0.80 to $1.66 per share. As of September 30, 2009, the Company has approximately 1,223,000 stock options outstanding of which approximately 511,000 are vested.

In 2009, the Company awarded approximately 423,000 RSAs to certain employees and non-employee directors under the 2007 Plan, all of which vest over a 4 year period. A summary of RSA activity for the ninethree months ended ~~September 30, 2009~~March 31, 2010 is as follows:


		~~2009~~
~~Unvested as of January 1,~~Shares issued at December 31, 2009		~~233,498~~	24,168,292
~~Granted~~Issued upon conversion of preferred stock		~~423,144~~	1,208,692
~~Vested~~Issued in connection with exchange for convertible notes		~~(44,841~~	) 1,568,867
~~Forfeited~~Issued in payment of debt issuance costs		~~(88,619~~3,431,133
Restricted shares granted	)	46,993

~~Unvested as of September 30,~~Shares issued at March 31, 2010		~~523,182~~	30,423,977

Approximately $0.7 million and $0.6 million of share-based compensation expense was recognized during the three-month periods ended September 30, 2009 and 2008, respectively, related to stock option grants and RSAs. Approximately $1.3 million and $2.1 million of share-based compensation expense was recognized during the nine month periods ended September 30, 2009 and 2008, respectively, related to stock option grants and RSAs. As of September, 30, 2009 total share-based compensation related to unvested awards (stock options and RSAs) was approximately $5.7 million, and the weighted-average period over which this cost will be recognized is approximately 3.0 years.

Note ~~15 – Income Taxes~~15—Commitments and Contingencies

Class Action Litigation

On August 7, 2009, a putative class action suit was commenced in the United States District Court for the Southern District of Texas on behalf of purchasers of the Company’s common stock between May 8, 2007 and January 23, 2008, inclusive, seeking to pursue remedies under the Securities Exchange Act of 1934. The plaintiffs filed a consolidated amended complaint (the “Amended Complaint”) on February 4, 2010. The Amended Complaint alleges that, throughout the time period indicated, the Company provided inaccurate financial guidance and failed to disclose material adverse facts about its true financial condition and business prospects. The Amended Complaint also alleges that the Company made false statements and material omissions regarding its tool inventories and its integration of acquired companies. The Amended Complaint does not quantify the alleged actual damages.

The ~~effective income tax rate for~~Company has filed a motion to dismiss the ~~three months ended September 30, 2009~~Amended Complaint and 2008 was 243.1% and 38.1%, respectively. The effective income tax rate for the nine months ended September 30, 2009 and 2008 was 12.5% and 38.0%, respectively. Our effective income tax rate in 2009 differs from the federal statutory rate primarily dueintends to ~~state income taxes, and the valuation allowance recorded against certain deferred tax assets. Our effective income tax rate in 2008 differs from the federal statutory rate primarily due~~mount a vigorous defense to ~~state income taxes and the domestic production activities deduction.~~

Our current corporate organization structure requires us to file two separate consolidated U.S. federal income tax returns. As a result, taxable income of one group cannot be offset by tax attributes, including net operating losses, of the other group. As of September 30, 2009, one of the groupthese claims. Discovery has net operating loss (“NOL”) carryforwards and other net deferred tax assets of approximately $16.8 million. Our ability to utilize our net operating losses and other tax attributes could be subject to a significant limitation if we were to undergo an “ownership change” for purpose of Section 382.

~~ASC Topic 825,~~~~“Income Taxes”~~ requires all available evidence, both positive and negative, to be considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. As discussed in “Note 1 – Our Business, Recent Events and Basis of Presentation,” we may need to generate additional financial resources in order to meet our business objectives and make scheduled payments or mandatory prepayments on our current debt obligations. If we are not able to generate positive cash flows and profits or obtain adequate additional financing or refinancing, we may be required to curtail operations or be unable to continue as a going concern. As a result, management determined the realization of deferred tax assets is uncertain asyet commenced. At this time, the Company is unable to ~~consider tax planning strategies~~reasonably estimate the outcome of this litigation.

Other Litigation

The 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 ~~projections~~threatened lawsuits or proceedings which would have a material effect on the Company’s financial position, results of ~~future taxable income~~operations or liquidity.

Common Stock Listing on the New York Stock Exchange

The Company’s common stock is listed on the New York Stock Exchange (NYSE). Under the NYSE’s continued listing standards, a company is considered to be below compliance standards if, among other things, both its average global market capitalization is less than $50 million over a 30 trading-day period and its stockholders’ equity is less than $50 million. The Company failed to meet this compliance standard during the fourth quarter of 2009 and remained out of compliance at March 31, 2010.

In March 2010, the NYSE accepted the Company’s plan of action to achieve compliance with the continued listing standards during the 18-month cure period, which ends in ~~its evaluation~~June 2011. During implementation and execution of the ~~realizability of it is deferred tax assets as of September 30, 2009. Under these circumstances, deferred tax assets may only~~Company’s plan, the Company’s common stock will continue to be ~~realized through future reversals of taxable temporary differences and carryback of net operating losses~~listed on the NYSE, subject to ~~available carryback periods. We have performed such an analysis and a valuation allowance of approximately $16.8 million has been provided against deferred tax assets as of September 30, 2009.~~compliance with other NYSE continued listing requirements.

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

Note ~~16 – Commitments and Contingencies~~

The Company is involved, on occasion, in routine litigation incidental to its business. The Company believes that the ultimate resolution of the routine litigation that may develop will not have a material adverse impact on the Company’s financial position, results of operations or cash flows.

~~Note 17 –~~ 16—Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.

The Company has determined that there are three reportable segments:

The Chemicals and Logistics segment is ~~comprised~~made up of two business units. The specialty chemical business unit designs, develops, manufactures, packages and sells chemicals used by oilfield service companies in oil and gas well drilling, cementing, stimulation and production. The logistics business unit manages automated bulk material handling, loading facilities, and blending capabilities for oilfield service companies.

The Drilling Products segment rents, inspects, manufactures and markets downhole drilling equipment for the energy, mining, water well and industrial drilling sectors.

The Artificial Lift segment manufactures and markets artificial lift equipment which includes the Petrovalve line of beam pump components, electric submersible pumps, gas separators, valves and services to support coal bed methane production.

The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. Certain functions, including certain sales and marketing activities and corporate general and administrative expenses, are provided centrally from the corporate office. The ~~accounting policies~~costs of ~~the business segments~~these functions, together with other expense and income tax provision (benefit), are ~~the same as those described in “Note 2 – Summary of Significant Accounting Policies” in our December 31, 2008 Form 10-K. Inter-segment~~not allocated to these segments. Intersegment sales are accounted for at fair value as if sales were to third ~~parties and~~parties. Intersegment revenues are ~~eliminated in the consolidated financial statements.~~not material.

Summarized ~~unaudited~~ financial information concerning the segments as of and for the three months ended March 31, 2010 and ~~nine months ending September 30,~~ 2009 ~~and 2008~~ is shown in the following ~~tables~~table (in ~~millions)~~thousands):

Three months ended September 30, 2009
   Chemicals
and
Logistics    Drilling
Products Artificial
Lift    Corporate
and
Other Total
Revenue
   $ 11.0    $ 10.2    $ 2.6    $ —      $ 23.8
Income (loss) from operations
   $ 3.5    $ (3.2 ) $ 0.1    $ (2.9 ) $ (2.5 )
Capital expenditures
   $ 0.3    $ 0.4    $ —      $ —      $ 0.7
Three months ended September 30, 2008

Revenue
   $ 30.4    $ 26.6    $ 5.8    $ —      $ 62.8
Income (loss) from operations
   $ 10.5    $ 5.4    $ 0.9    $ (4.6 ) $ 12.2
Capital expenditures
   $ 0.8    $ 6.4    $ 0.1    $ 0.1    $ 7.4
Nine months ended September 30, 2009
   Chemicals
and
Logistics    Drilling
Products Artificial
Lift    Corporate
and
Other Total
Revenue
   $ 37.7    $ 40.1    $ 10.2    $ —      $ 88.0
Income (loss) from operations (1)
   $ 9.5    $ (27.3 ) $ 0.9    $ (10.6 ) $ (27.5 )
Capital expenditures
   $ 0.4    $ 5.2    $ —      $ —      $ 5.6
Nine months ended September 30, 2008

Revenue
   $ 82.4    $ 70.3    $ 13.4    $ —      $ 166.1
Income (loss) from operations
   $ 29.5    $ 12.9    $ 1.5    $ (13.5 ) $ 30.4
Capital expenditures
   $ 1.9    $ 13.9    $ 0.2    $ 0.6    $ 16.6


	Chemicals and Logistics		Drilling Products			Artificial Lift		Corporate and Other			Total
	(unaudited)

2010
Net revenue from external customers	$	13,112	$	12,911		$	2,347	$	—		$	28,370
Gross margin		5,837		1,494			681		—			8,012
Income (loss) from operations		3,720		(3,193	)		255		(4,516	)		(3,734	)
Depreciation and amortization		432		2,929			57		80			3,498
Total assets at end of period		36,146		117,793			6,977		28,627			189,543
Capital expenditures		39		928			8		—			975

2009
Net revenue from external customers	$	17,250	$	18,287		$	5,139	$	—		$	40,676
Gross margin		6,925		4,155			1,411		—			12,491
Income (loss) from operations		4,404		(673	)		819		(4,021	)		529
Depreciation and amortization		478		2,885			87		4			3,454
Total assets at end of period		35,850		170,940			15,287		2,641			224,718
Capital expenditures		105		3,767			—		—			3,872

One customer and its affiliates accounted for $3.7 million and $7.8 million of consolidated revenue for the three months ended March 31, 2010 and 2009, respectively. Over 97% of this revenue related to sales by the Chemicals and Logistics segment.

~~(1)~~

~~Drilling Products segment includes a goodwill impairment charge of $18.5 million recorded during the second quarter of 2009.~~

FLOTEK INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED ~~CONDENSED~~ FINANCIAL STATEMENTS—(Continued)

Revenue ~~generated from international sales for~~by country is determined based on the ~~three months ended September 30, 2009~~location of services provided and ~~2008 was $3.5 million and $3.9 million, respectively.~~products sold. Revenue ~~generated from international sales for the nine months ended September 30, 2009 and 2008 was $11.8 million and $13.4 million, respectively.~~

~~Identifiable assets~~ by ~~reportable segment were~~geographic location is as follows (in ~~millions)~~thousands):

   September 30,
2009    December 31,
2008
   (unaudited)
Chemicals and Logistics
   $ 34.7    $ 44.1
Drilling Products
   124.2    176.3
Artificial Lift
   7.3    16.1
Corporate and Other
   10.5    (2.0 )

Total assets
   $ 176.7    $ 234.5


	Three Months Ended March 31,
	2010		2009
	(unaudited)
United States	$	24,254	$	35,588
Other countries		4,116		5,088

Total	$	28,370	$	40,676

~~Goodwill by reportable segment was as follows (in millions):~~

   September 30,
2009    December 31,
2008
   (unaudited)
Chemicals and Logistics
   $ 11.6    $ 11.6
Drilling Products
   15.4    33.9
Artificial Lift
   —      —

Total goodwill
   $ 27.0    $ 45.5

~~Note 18 – Subsequent Events~~

~~Through November 16, 2009, management has evaluated~~Long-lived assets held in countries other than the events or transactions that have occurred for potential recognition or disclosure in the financial statements, the circumstances under which the Company should recognize events or transactions occurring after the September 30, 2009 balance sheet date in its financial statements and the disclosures that the Company should make about events or transactions that occurred after the balance sheet date.

On November 9, 2009, the Company held a special meeting of stockholders of record as of September 14, 2009. At the meeting, our stockholders voted on and approved (i) the amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 40,000,000 to 80,000,000 shares; (ii) the ability of the Company to pay dividends in the future in respect of its shares of preferred stock by issuing shares of the Company’s common stock; (iii) the anti-dilution price protection provision contained in certain warrants issued by the Company in a private placement in August 2009 and (iv) the contingent warrants issued by the Company in a private placement in August 2009.U.S. are not material.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.

Special Note About Forward-Looking Statements

Certain statements in “Management’s Discussion and Analysis ~~(“MD&A”),~~of Financial Condition and Results of Operations” other than purely historical information, including estimates, projections and statements relating to the Company’s business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of ~~1995, Section 27A~~1995. Forward-looking statements are not historical facts but instead represent only our current belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. The forward-looking statements contained in this Quarterly Report are based on information as of the ~~Securities Act~~date of ~~1933~~this Quarterly Report. Many of these forward looking statements relate to future industry trends, actions, future performance or results of current and ~~Section 21E~~anticipated initiatives and the outcome of ~~the Securities Exchange Act of 1934.~~contingencies and other uncertainties that may have a significant impact on our business, future operating results and liquidity. These forward-looking statements generally are identified by ~~the~~ words such as “anticipate,” “believe,” ~~“project,~~“estimate,” “continue,” “intend,” “expect,” ~~“anticipate,~~“plan,” ~~“estimate,~~“forecast,” ~~“intend,” “strategy,” “plan,~~“project” and similar expressions, or future-tense or conditional constructions such as “will,” “may,” “should,” ~~“will,~~“could,” ~~“would,” “will be,” “will continue,” “will likely result,”~~etc. We caution you that these statements are only predictions and ~~similar expressions.~~are not guarantees of future performance. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled ~~“Risk Factors”~~“Risk Factors” in our Annual Report on Form ~~10-K~~10-K/A Amendment No. 2 for the fiscal year ended December 31, ~~2008, in our Quarterly Report on Form 10-Q for the quarter ended June 30,~~ 2009, and in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information or future events, ~~or otherwise.~~except as required by law.

~~Overview~~Executive Summary

~~The following MD&A~~Flotek is ~~intended to help the reader understand the results of operations, financial condition, and cash flows of Flotek. MD&A is provided as~~ a ~~supplement to, and should be read in conjunction with, our consolidated condensed financial statements and the accompanying notes to the consolidated condensed financial statements (“Notes”).~~

~~We are a~~global technology-driven growth company ~~serving~~that provides oilfield products, services and equipment to the oil, gas, and mining industries. ~~We operate~~Operations are based in ~~select~~both domestic (Gulf Coast, Southwest, Rocky Mountain, Northeastern and Mid-Continental regions of the United States) and international ~~markets including the Gulf Coast, the Southwest and the Rocky Mountains, Canada,~~(Canada, Mexico, Central America, South America, Europe, Africa and ~~Asia. We provide products~~Asia) markets. Products and services to address the drilling and production-related needs of oil and gas companies through our three business segments: Chemicals and Logistics, Drilling Products and Artificial Lift. The Chemicals and Logistics segments provides a full spectrum of oilfield specialty chemicals used for drilling, cementing, stimulation, and production designed to maximize recovery from both new and mature fields. The Drilling Products segment provides down-hole drilling tools usedare actively marketed in the oilfield, mining, water-well and industrial drilling sectors. We manufacture, sell, rent and inspect specialized equipment for use in drilling, completion, production and work-over activities. The Artificial Lift segment provides pumping system components, including electric submersible pumps, or ESPs, gas separators, production valves and services. Our products address the needs of coal bed methane and traditional oil and gas production to efficiently move gas, oil and other fluids from the producing horizon to the surface. The customers for our products and servicesover 20 countries worldwide. Customers include ~~the~~ major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies and state-owned national oil companies. ~~Our ability to compete in~~

Success within the oilfield services ~~market~~industry is dependent ~~on our~~upon the Company’s ability to differentiate ~~our~~its products and services, to provide superior quality products and services, and to maintain a competitive cost structure. ~~Activity levels~~In North America, operations are ~~driven~~ primarily impacted by natural gas exploration and production activity and, to a lesser extent, oil well drilling activity. Drilling activity, most directly impacting the Company, is primarily influenced by current natural gas prices, natural gas price volatility, forward natural gas/crude oil price forecasts and expected commodity prices, drilling rig count, oil and gas production levels, and customer capital spending allocated for drilling and production. See “Business” included in our Annual Report on Form 10-K foravailability of capital. Further, the ~~year ended December 31, 2008 for more information on these operations.~~

~~The challenging economic conditions facing~~Company’s gross margins are directly impacted by the ~~oil and gas industry have adversely affected our financial performance and liquidity in 2009. Revenue has declined significantly across all~~variable pricing of ~~our segments due to decreased demand for our~~ products and services ~~as natural gas prices and~~inherent within the number of well completions and rig count continues to be depressed. At September 30, 2009, we were not in compliance with certain financial covenants contained in the New Credit Agreement. We requested and obtained a waiver of these financial covenant violations from our lenders. However, we expect that we will not be able to meet certain of the financial covenants under the New Credit Agreement as of December 31, 2009, and possibly throughout 2010. As a result, we have reclassified amounts owing under the New Credit Agreement as current.

We believe that, assuming current revenue levels and cost structure, our current cash balance and estimated cash flows will be sufficient to satisfy our anticipated cash requirements at least through September 30, 2010. However, if we are not in compliance with the financial covenants in our New Credit Facility as of December 31, 2009, or subsequent periods, and we are unable to obtain waivers of those covenant violations, our lenders would be entitled to exercise their remedies under the New Credit Facility, which could include accelerating all amounts due under the New Credit Facility. We would not have sufficient funds to repay all such amounts, and would be required to seek additional financing, which we might not be able to obtain on terms favorable to us or at all. Acceleration of amounts under our New Credit Facility could also constitute a default under our Convertible Notes. The Company expects that it will need to renegotiate the New Credit Facility or refinance all or a portion of its indebtedness on or before maturity. While the Company believes that it can be successful in renegotiating or refinancing its indebtedness, there can be no assurance that it will be able to on attractive terms or at all. We are working to lower our working capital needs and have focused on cash collections of our accounts receivable balances and reduction of inventory. In the event capital requiredoilfield services industry. Variable pricing is greater than the amount we have available at the time, we would reduce the expected level of capital expenditures, sell assets and/or seek additional capital. Cash generated by future asset sales may depend on the overall economic conditions of the industries served by these assets, the condition and location of the assets, and the number of interested buyers. We cannot assure you that needed capital will be available on acceptable terms or at all. Our ability to raise funds in the capital markets through the issuance of additional indebtedness may be limited by covenants in our credit facilities, our credit rating and the willingness of banks and other financial services companies to lend. At September 30, 2009, our net worth was less than the $50 million required by the continued listing standard of the NYSE. We intend to submit a plan to the NYSE that will provide for us to come back into compliance with the NYSE’s continued listing standards, although the NYSE may not accept our plan or we may be unable to accomplish the actions set forth in that plan to come back into compliance with the NYSE’s continued listing standards over the time period allowed by the NYSE. If we are not able to generate positive cash flows and profits or obtain adequate additional financing or refinancing, we may be required to curtail operations or be unable to continue as a going concern. A number of factors could influence our liquidity sources, as well as the timing and ultimate outcome of our on-going efforts.

~~Market Conditions~~

~~Our operations are driven primarily by the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and~~based upon the level of ~~work-over~~customer activity, in North America. Drilling activity, in turn, is largely dependent on the price of crude oil and natural gas and the volatility and expectations of future oil and natural gas prices. Our results of operations also depend heavily on the pricing we receive from our customers, which depends on activity levels, availability of ~~equipment and other~~ equipment/resources, and competitive pressures. ~~These market factors often lead to volatility in our revenue and profitability.~~ Historical market conditions are reflected in the table below:

   As of September 30,
   2009    % Change 2008
Rig Count: (1)

U.S.
   1,017    (49.0 )% 1,995
Canada
   228    (51.0 )% 465
Commodity Prices :

Crude Oil (West Texas Intermediate)
   $ 70.46    (30.0 )% $ 100.70
Natural Gas (Henry Hub)
   $ 3.24    (60.2 )% $ 8.15

~~(1)~~

~~Estimate of drilling activity as measured by active drilling rigs based on Baker Hughes Inc. rig count information.~~


	Three Months Ended March 31,				Percentage Change
	2010		2009		Percentage Change

Average Active Drilling Rigs

United States		1,354		1,344	0.7	%
Canada		445		332	34.0	%

Total North America		1,799		1,676	7.3	%


Vertical rigs (U.S.)		463		584	(20.7	)%
Horizontal rigs (U.S.)		669		495	35.2	%
Directional rigs (U.S.)		222		265	(16.2	)%

Total drilling type (U.S.)		1,354		1,344	0.7	%


Oil vs. Natural Gas Drilling Rigs

Oil		694		403	72.2	%
Natural Gas		1,105		1,273	(13.2	)%

Total North America		1,799		1,676	7.3	%


Average Commodity Prices
West Texas Intermediate Crude Prices (per barrel)	$	78.64	$	42.91	83.3	%

Natural Gas Prices ($/mmbtu)	$	4.78	$	4.35	9.9	%

~~U.S.~~Source: Rig ~~Count~~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).

~~Demand~~North American demand for ~~our~~products and services inis directly impacted by the ~~United States is driven primarily by oil and~~price of natural gas and related drilling ~~activity, which tends to be extremely volatile, depending on the current and anticipated prices~~activity. The price of ~~crude oil and natural gas. During the last 10 years, the lowest average annual U.S. rig count was 601 in fiscal 1999 and the highest average annual U.S. rig count was 1,851 in fiscal 2008.~~

~~With the decline and volatility of oil and~~ natural gas, ~~prices over the past nine months, tightening and uncertainty~~which has remained low in ~~the~~2010, combined with continued tight credit markets and ~~the global~~slow economic recovery, contributed to a negative variance in first quarter 2010 activity as compared to first quarter 2009 activity.

The 2009 economic slowdown ~~drilling rig activity~~ in North America, ~~has declined significantly~~particularly within the industrial sector, coupled with successful exploration and production results in unconventional shale and tight sands plays in the U.S., contributed to excess reserves of natural gas. The excess reserve situation, in turn, contributed to a decline in natural gas price forecasts. Expectations of decreased returns from ~~October, 2008~~drilling projects resulted in a reduction of drilling activity as exploration and production (“E&P”) companies reacted with decreased capital spending. Oil prices showed some resilience in the latter part of 2009; however, as the Company is primarily reliant upon the North American natural gas market, the recovery of oil prices did little to improve the Company’s financial performance. These circumstances, taken as a whole, translated into lower customer demand and falling prices for oilfield products and services in North America. Revenue from the Company’s Drilling Products segment is tied closely to rig count, in particular, vertical rig count. The 20% reduction in vertical rig count during the first quarter of 2010, as compared to the first quarter of 2009, had an adverse effect upon the Company’s business. Despite these pressures we were able to maintain market share through ~~October, 2009. We have begun to see an abatement~~service quality, product innovation, and competitive bundling of product offerings. In addition, margins were under significant pressure as customers sought lower prices for oilfield services and we, in turn sought price reductions from our suppliers.

Forecasting the depth and length of the ~~decline in~~current cycle is challenging, as it differs from past cycles due to the overlay of the worldwide financial crisis combined with broad demand weakness. During the first quarter of 2010, U.S. drilling rig ~~activity~~count remained comparable at 1,345 as compared to 1,326 in ~~recent weekly rig count reports; however, while we expect to see eventual increases~~the first quarter of 2009. The timing and magnitude of any increase in U.S. drilling activity infor 2010 ~~the timing and magnitude of the increase~~ remains uncertain. The acceleration of drilling activity is influenced by 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 such as government monetary and fiscal policy.

~~Canadian~~The oil field services sector seems to have experienced its low point early in the third quarter of 2009. Our business stabilized and the cost containment measures that we implemented in late 2008 and early 2009 have begun to take effect. Rig ~~Count~~activity in North America began to improve toward the latter part of 2009 with improved gas price forecasts. Supply overages began to shrink as a result of some improvement in the economy and colder than normal temperatures. We expect that these improved

economic conditions will continue throughout 2010. As E&P companies’ outlooks improve and higher gas prices are realized, we expect this will lead to increased capital budgets for drilling and completion activities. Oil prices have currently stabilized and this should continue to add rig count in the oil basins which should help improve our Drilling Products revenue and lead to margin relief on pricing.

We expect the North American gas market activity to increase in the unconventional plays such as the Barnett, Haynesville, Marcellus, Eagle Ford and other basins where our drilling tools are utilized. Our chemical additives enhance performance when added to fracturing fluids utilized in this type of drilling. Our Chemicals and Logistics segment is also tied to rig counts, especially horizontal drilling rigs. We expect to see additional international opportunities in 2010, particularly in our Chemical and Down-hole Tool business units.

Our business is comprised of three reportable segments: Chemicals and Logistics, Drilling Products and Artificial Lift. We focus on serving the drilling-related needs of oil and gas companies primarily through our Chemicals and Logistics and Drilling Products segments, and the production-related needs of oil and gas companies through our Artificial Lift and Chemicals and Logistics segments. We believe that our product offerings and geographical presence throughout these three business segments provides us with diverse sources of cash flow. Each segment has its own technical expertise and a common commitment to provide its customers with competitively priced quality equipment and services.

The Chemicals and Logistics segment is made up of two business units. The specialty chemical business unit designs, develops, manufactures, packages and sells chemicals used by oilfield service companies in oil and gas well drilling, cementing, stimulation and production. The logistics business unit manages automated bulk material handling, loading facilities, and blending capabilities for oilfield service companies.

The Drilling Products segment rents, inspects, manufactures and markets downhole drilling equipment for the energy, mining, water well and industrial drilling sectors.

The Artificial Lift segment assembles and markets artificial lift equipment, which includes the Petrovalve line of rod pump components, electric submersible pumps, gas separators, valves and services to support coal bed methane production.

Consolidated Results of Operations (in thousands):

~~The~~

   Three Months Ended March 31,
   2010 2009
Revenue
   $ 28,370    $ 40,676
Cost of revenue
   20,358    28,185

Gross margin
   8,012    12,491
Selling, general and administrative costs
   10,191    10,289
Depreciation and amortization
   1,193    1,244
Research and development costs
   362    429

Income (loss) from operations
   (3,734 ) 529
Loss on extinguishment of debt
   (995 ) —
Interest and other expense, net
   (4,156 ) (3,831 )
Other financing costs
   (816 ) —
Change in fair value of warrant liability
   (1,813 ) —

Loss before income taxes
   (11,514 ) (3,302 )
Income tax benefit
   2,001    1,299

Net loss
   $ (9,513 ) $ (2,003 )

Consolidated Results of Operations Comparison of Quarters Ended March 31, 2010 and March 31, 2009
Revenue for the quarter ended March 31, 2010 was $28.4 million, a decrease of $12.3 million, or 30.3%, compared to $40.7 million for the same period in 2009. Revenue decreased in all three segments as recovery of products and services price reductions and customer demand ~~for our services in Canada is driven primarily by oil~~had not yet attained comparable 2009 levels. Natural gas prices remained low and natural gas drilling ~~activity, and similar to the United States, tends to be extremely volatile. During the last 10 years, the lowest average annual~~ rig count ~~was 212 in fiscal 1999~~ and ~~the highest average annual~~vertical drilling rig count ~~was 502 in fiscal 2006. Similar to activity in the United States, drilling rig activity in Canada has trended~~were 15% and 20%, respectively, lower ~~over the past twelve months.~~
~~Outlook~~
As described under “Market Conditions” above, our operations are driven primarily by the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of work-over activity in North America. The global economic slowdown has led to a steep decline in oil and natural gas prices in the first quarter of ~~this year. Since that time~~2010 as compared to the ~~price~~first quarter of oil has increased while natural gas prices have remained relatively stagnant, with current prices significantly below their historic highs in July 2008. The result of this price volatility is a reduction in cash flows of oil2009. Reduced rig counts and ~~gas producers that has led to significant reductions in~~related drilling activity ~~particularly~~negatively affected volumes in all segments. Pricing pressures further contributed to the quarter to quarter decrease in revenue as some customers moved to less expensive products to manage their own costs of operations.
Consolidated gross margin decreased $4.5 million. Gross margin as a percentage of sales decreased to 28.2% for the quarter ended March 31, 2010 from 30.7% in the ~~U.S. market.~~
~~The average U.S. drilling rig activity was 970 during the third quarter, slightly greater than the average rig count~~same period of ~~934 rigs working~~2009 due primarily to decreased product sales and recognition of corresponding increased cost of sales in the ~~second quarter. We expect continued stabilization~~Drilling Products segment. Gross margin is calculated as revenue less the corresponding cost of revenue, which includes personnel, occupancy, depreciation and other expenses directly associated with the ~~rig count in the fourth quarter and, while the timing and magnitude~~generation of the improvement remains uncertain, further improvement into 2010. Fourth quarter activity is traditionally influenced by periods of moderating activity resulting from seasonal holidays. While we have experienced a modest increase in overall business activity, pricing power and future pricing direction remains uncertain, a tenet which is consistent with historical pricing behavior as oilfield activity accelerates from the bottom of the business cycle. We continue to monitor customer activities and continue to take measures we consider appropriate within our organization to balance costs with our abilities to meet current and anticipated customer demand.
Third quarter drilling activity in Canada increased from second quarter as summer seasonal drilling programs reached peak activity levels. However, on a year-over-year basis, third quarter 2009 drilling activity was approximately 51% below levels a year ago.
~~Results of Operations~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2009 2008 2009 2008
   (in millions, except per share data)
Revenue
   $ 23.8    $ 62.8    $ 88.0    $ 166.1
Cost of revenue (1)
   17.5    36.2    65.5    95.9
Expenses:

Impairment of Goodwill
   —      —      18.5    —
Selling, general and administrative
   7.2    12.4    26.6    34.3
Depreciation and amortization
   1.2    1.6    3.7    4.2
Research and development
   0.4    0.4    1.2    1.3

Total expenses
   8.8    14.4    50.0    39.8

Income (loss) from operations
   (2.5 ) 12.2    (27.5 ) 30.4
Income (loss) from operations %
   (10.5 )% 19.3 % (31.3 )% 18.3 %
Other expense:

Interest expense (2)
   (4.1 ) (3.9 ) (11.6 ) (9.7 )
Investment income and other
   0.1    —      (0.1 ) —

Total other expense
   (4.0 ) (3.9 ) (11.7 ) (9.7 )
Income (loss) before income taxes
   (6.5 ) 8.3    (39.2 ) 20.7
Provision for income taxes (3)
   (15.8 ) (3.2 ) (4.9 ) (7.9 )

Net income (loss)
   $ (22.3 ) $ 5.1    $ (44.1 ) $ 12.8
Accrued dividends and accretion of discount on cumulative convertible preferred stock
   (0.8 ) —      (0.8 ) —

Net income (loss) allocable to common stockholders
   $ (23.1 ) $ 5.1    $ (44.9 ) $ 12.8

Basic Earnings Per Share
   $ (1.18 ) $ 0.27    $ (2.29 ) $ 0.68
   ��
Diluted Earnings Per Share
   $ (1.18 ) $ 0.27    $ (2.29 ) $ 0.66

~~(1)~~ Includes Depreciation directly related to production of Revenue of $2.3 million and $1.9 million for the three months ended September 30, 2009 and 2008, respectively, and $6.8 million and $5.2 million for the nine months ended September 30, 2009 and 2008, respectively.
~~(2)~~ Includes Interest expense related to the application of Accounting Standards Codification (“ASC”) Topic 470, “Debt” of $1.2 million and $1.1 million for the three months ended September 30, 2009 and 2008, respectively, and $3.6 million and $2.5 million for the nine months ended September 30, 2009 and 2008, respectively.
~~(3)~~ ~~Includes Income tax expense of $18.6 million primarily related to the deferred tax valuation allowance recorded for the three and nine months ended September 30, 2009.~~
~~Consolidated – Comparison of Three and Nine Months Ended September 30, 2009 and 2008~~
Revenue declined in all periods across all of our segments due to a decrease in demand for our products and services as natural gas prices, well completions and rig count fell approximately 40%. We also experienced pricing pressure due to increased competition and decreased demand.
~~Gross profit decreased in all periods due to continued pricing pressures and lower demand for our services.~~revenue.
Selling, general and administrative costs are not directly attributable to products sold or services rendered. ~~We implemented a program to reduce fixed~~Selling, general and administrative costs during the first half of this year designed to more closely align these costs with our current level of operations. We accomplished these reductions through strategic in-sourcing of certain professional fees, personnel reductions and elimination of certain initiatives not aligned with our current operations.
Depreciation and amortization was flat year over year due to higher depreciation associated with acquired assets and increased capital expenditures during 2008 offset by a reduction of amortization costs associated with the impairment charge taken in the fourth quarter of 2008. Amortization charges were ~~lower than the previous year due to the impairment charge recorded in 2008.~~
Research and development (“R&D”) costs as a percentage of revenue increased approximately 100 basis points and 50 basis points for the quarter and year-to-date compared to 2008. Due to the dramatic reduction in revenue, we have reduced spending in this area but maintain a minimum level of spending as an investment in our future growth.
Interest expense increased as a result of higher debt levels incurred to finance the Teledrift acquisition, the accretion of the debt discount associated with our Convertible Senior Notes and increased working capital needs. To finance the Teledrift acquisition, we issued $115.0$10.2 million ~~of our Convertible Senior Notes bearing an interest rate of 5.25% that are due in 2028.~~
~~The effective income tax rate~~ for the three months ended ~~September 30, 2009 and 2008~~March 31, 2010, a decrease of 1.0%, compared to $10.3 million in 2009. The decrease was 243.1% and 38.1%, respectively. The effective income tax rate for the nine months ended September 30, 2009 and 2008 was 38.1% and 38.0%, respectively. Our effective income tax rate in 2009 differs from the federal statutory rate primarily due to ~~state income taxes,~~efficiencies realized in indirect personnel related costs and office costs resultant from cost containment efforts partially offset by a $1.8 million increase in professional fees.
Depreciation and amortization costs were $1.2 million for the ~~valuation allowance recorded against certain~~quarters ended March 31, 2010 and 2009.
Research and development (R&D) costs were $0.4 million for the quarters ended March 31, 2010 and 2009. The Company anticipates 2010 R&D spending levels to remain consistent with 2009 expenditures. R&D expenditures are charged to expense as incurred.
Management believes its cost structure is appropriate for its forecast level of ~~our deferred tax assets. Our effective~~activity and does not foresee significant adjustments; however, changes in market demands or forecast may cause management to further reduce headcount or carry out additional cost containment efforts.
Interest expense and loss on extinguishment of debt was $5.2 million for the quarter ended March 31, 2010 versus $3.7 million in 2009. The increase was primarily related to realization of $1.0 million of unamortized transaction costs associated with the refinancing and subsequent extinguishment of the Company’s term loan with Wells Fargo as well as $0.4 million paid to Wells Fargo in settlement of the Company’s interest rate swap in March 2010.
An income tax benefit of $2.0 million was recorded for the three months ended March 31, 2010, reflecting an effective tax rate of 17.4%, compared to a tax benefit of $1.3 million for the three months ended March 31, 2009, reflecting an effective tax rate of 39.4%. The change in ~~2008 differs from the federal statutory~~our effective tax rate is primarily due to ~~state income taxes and~~ the ~~domestic production activities deduction.~~
Our current corporate organization structure requires us to file two separate consolidated U.S. federal income tax returns. As a result, taxable income of one group cannot be offset by tax attributes, including net operating losses, of the other group. As of September 30, 2009 one of the groups has net operating loss (“NOL”) carryforwards and other netchange in valuation allowance on deferred tax assets, the non-deductible portion of ~~approximately $16.8 million. Primarily due to our inability under generally accepted accounting principles to assume future profits~~the change in the warrant liability and due to our reduced ability to implement tax planning strategies to utilize our NOLs if we are unable to continue as a going concern, we concluded that valuation allowances on these deferred tax assets were required.state income taxes.
Results by Segment
Revenue and operating income amounts in this section are presented on a basis consistent with U.S. GAAP and include certain reconciling items attributable to each of the segments. Segment information appearing in “Note 17 – Segment Information” of the Notes is presented on a basis consistent with the Company’s current internal management reporting, in accordance with accounting guidance found in the~~“Classification”~~ ~~and~~~~“Financial Statements”~~ ~~topics of the Accounting Standards Codification. Certain corporate-level activity has been excluded from segment operating results and is presented separately.~~
Chemicals and Logistics (in thousands)
   Quarters Ended March 31,
   2010 2009
Revenue
   $ 13,112    $ 17,250
Gross margin
   $ 5,837    $ 6,925
Gross margin %
   44.5 % 40.1 %
Income from operations
   $ 3,720    $ 4,404
Income from operations %
   28.4 % 25.5 %
~~Chemicals and Logistics~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2009 2008 2009 2008
   (in millions)
Revenue
   $ 11.0    $ 30.4    $ 37.7    $ 82.4
Income from operations
   3.5    10.5    9.5    29.5
Income from operations (% of revenue)
   31.8 % 34.6 % 25.2 % 35.8 %
~~Chemicals~~Chemical and Logistics ~~– Comparison~~Results of ~~Three~~Operations Comparison: Quarters Ended March 31, 2010 and ~~Nine Months Ended September 30,~~March 31, 2009 ~~and 2008~~
Chemicals and Logistics revenue for the quarter ended March 31, 2010 was $13.1 million, a decrease of $4.1 million, or 24.0%, compared to $17.2 million for the quarter ended March 31, 2009. The decrease in Chemicals and Logistics revenue was due to less favorable price, volume and product mix economics. Pricing pressures drove customers to lower priced products resulting in a 12% decrease in average sales dollars per units sold. The Chemical and Logistics segment was also impacted by a 19% reduction in volume of unit sales. Low natural gas prices continue to contribute to a business environment of cost cutting and discounting of well completion products and services.
Gross margin decreased $1.1 million primarily due to reductions in revenue; however, strong material cost management and other cost containment measures related to direct expenses improved our gross margin percentage from 40.1% in the first quarter of 2009 to 44.5% in the first quarter of 2010.
Income from operations was $3.7 million for the quarter ended March 31, 2010, a decrease of approximately 15.5% compared to the same period in 2009; however, income from operations as a ~~result~~percentage of ~~decreased sales volume related~~revenue increased to 28.4% for the quarter ended March 31, 2010 as compared to 25.5% for the same period in 2009. This improvement can be attributed to the cost containment initiatives implemented when the market began to deteriorate.
Drilling Products (in thousands)
   Quarters Ended March 31,
   2010 2009
Revenue
   $ 12,911    $ 18,287
Gross margin
   $ 1,494    $ 4,155
Gross margin %
   11.6 % 22.7 %
Loss from operations
   $ (3,193 ) $ (673 )
Loss from operations %
   (24.7 )% (3.7 )%
Drilling Products Results of Operations Comparison: Quarters Ended March 31, 2010 and March 31, 2009
Drilling Products revenue for the quarter ended March 31, 2010 was $12.9 million, a decrease of $5.4 million, or 29.4%, compared to $18.3 million for the quarter ended March 31, 2009. The quarter to quarter decrease in revenue as compared to 2009 was primarily due to decreased ~~well fracturing activities~~demand for products and services as targeted customers, exploration and production companies, continued to explore other alternatives to reduce drilling costs. Reductions in volume were experienced in all product lines and nearly all products; with the majority being, the motor lines and Teledrift lines. An oversupply of tools available for rent or sale by the Company and in the market due to the economic slowdown also contributed to pricing pressures which reduced revenue on a per-rental basis.
Gross margin decreased $2.7 million due to a combination of reductions in revenue and decreased margins. Product and rental gross margins as a percentage of related revenue decreased to 11.6% in the first quarter of 2010 from 22.7% in the first quarter of 2009.
Loss from operations was $3.2 million in the first quarter of 2010, an increase of $2.5 million as compared to the same period in 2009. The larger loss was primarily due to increased pricing pressures which caused decreased revenue and gross margin on effectively the same amount of activity. Field indirect costs were fairly constant over the first quarter of 2010 as compared to the first quarter of 2009 as the sales effort required to obtain the discounted revenue remained stable.
We anticipate modest rig count growth in 2010, continuing the trend observed during late 2009. While market conditions should improve slightly during 2010, we expect that pricing will remain competitive throughout 2010. We also intend to continue to pursue international market opportunities with the Teledrift line of measurement while drilling products during 2010. We anticipate the Teledrift line to steadily improve, domestically, over the remainder of 2010.
Management has forecast Drilling Products capital expenditures of $3.4 million in 2010; however, this amount may fluctuate dependent upon market demand and results of operations.
Artificial Lift ( in thousands)
   Quarters Ended March 31,
   2010 2009
Revenue
   $ 2,347    $ 5,139
Gross margin
   $ 681    $ 1,411
Gross margin %
   29.0 % 27.5 %
Income from operations
   $ 255    $ 819
Income from operations %
   10.9 % 15.9 %
Artificial Lift Results of Operations Comparison: Quarters Ended March 31, 2010 and March 31, 2009
Artificial Lift revenue for the quarter ended March 31, 2010 were $2.3 million, a decrease of $2.8 million, or 54.3%, compared to $5.1 million for the quarter ended March 31, 2009. The majority of Artificial Lift revenues were derived from coalbed methane (“CBM”) drilling. CBM drilling activity is highly correlated to the price of natural gas and as the price of natural gas decreased throughout most of 2009 and has remained depressed, drilling activity slowed considerably, resulting in a reduction in the volume of units sold in 2010. Gross margin decreased $0.7 million primarily due to reductions in revenue as cost containment improved the ~~recent decline in oil and gas exploration activities. Sales of our proprietary, biodegradable, ‘green’ chemicals declined as the number of well completions declined throughout the year.~~gross margin percentage by 1.5%.
Income from operations decreased ~~due~~$0.6 million to ~~lower revenues. We have partially mitigated~~$0.3 million in the ~~effect~~first quarter of 2010 from $0.8 million in the first quarter of 2009. The majority of this decrease was driven by revenue reduction. Although, field indirect costs decreased by 28% over the same first quarter period in 2009, sales costs as a percentage of revenue were higher.
Consolidated Results of Operations Comparison of Quarters Ended March 31, 2010 and December 31, 2009
Revenue for the three months ended March 31, 2010 was $28.4 million, an increase of $3.8 million, or 15.4%, compared to $24.6 million for the three months ended December 31, 2009. Revenue increased in all three of our ~~lower demand and pricing pressure through indirect cost containment efforts related to professional fees and employee costs.~~
~~With product pricing pressures leveling off~~segments as rig activity in North America ~~and anticipated improvement in international sales, we anticipate modest improvement in revenue growth and margins for the segment~~began to improve in the ~~fourth quarter~~early part of ~~2009.~~
~~Drilling Products~~

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2009 2008 2009 2008
   (in millions)
Revenue
   $ 10.2    $ 26.6    $ 40.1    $ 70.3
Income (loss) from operations
   (3.2 ) 5.4    (27.3 ) 12.9
Income (loss) from operations (% of revenue)
   (31.4 )% 20.6 % (68.1 )% 18.4 %
~~Drilling Products – Comparison of Three and Nine Months Ended September 30, 2009 and 2008~~
~~In February 2008 we acquired substantially all the assets of Teledrift, which specializes in designing and manufacturing wireless survey and measurement while drilling (“MWD”) tools.~~
2010 with higher gas price forecasts. Drilling Products revenue ~~decreased~~increased 21.7% and Chemicals and Logistics revenue increased 12.9% on a sequential basis over the previous quarter. Consolidated gross margin increased $1.2 million to $8.0 million for the three months ended March 31, 2010, compared to $6.8 million for the three months ended December 31, 2009. Gross margin as a ~~result~~percentage of ~~lower drilling activities~~sales improved to 28.2% for the three months ended March 31, 2010 from 27.9% for the three months ended December 31, 2009, as the Company successfully implemented targeted price increases in ~~North America related to both oil and gas and competitive pricing pressures.~~
~~Income (loss)~~selected products. Loss from operations ~~decreased and can also be attributed to a declining sales base and increased pricing pressure as well as the goodwill impairment~~ for the ~~nine~~three months ended ~~September 30,~~March 31, 2010 was $3.7 million, a decrease of $1.9 million, compared to the loss from operations of $5.6 million for the three months ended December 31, 2009. ~~We have partially mitigated the effect of our lower demand~~
Capital Resources and ~~pricing pressure through staff reduction.~~
In Drilling Products, we expect international sales to gradually improve our Teledrift product line in the fourth quarter through year end. Copper prices, which have rebounded from second quarter lows, will drive more revenue in our mining business in 2010. We believe that as horizontal drilling increases, Drilling Products is well positioned to capitalize on this market as we have equipment well suited for these applications.Liquidity
~~Artificial Lift~~Overview

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2009 2008 2009 2008
   (in millions)
Revenue
   $ 2.6    $ 5.8    $ 10.2    $ 13.4
Income from operations
   0.1    0.9    0.9    1.5
Income from operations (% of revenue)
   3.8 % 15.8 % 8.8 % 10.8 %
~~Artificial Lift – Comparison~~The Company’s ongoing capital requirements arise primarily from the need to service debt, to acquire and maintain equipment, to fund working capital requirements and to complete acquisitions. The Company has funded capital requirements with operating cash flows, debt borrowings, and by issuing shares of ~~Three~~preferred and ~~Nine Months Ended September 30, 2009 and 2008~~
~~Artificial Lift revenue declined on a year-to-date basis and quarterly basis. The revenue decreased due to lower rig count and lower gas prices.~~
~~Income from operations decreased in~~common stock. At March 31, 2010, the ~~quarterly period mainly due to the revenue decrease and pricing pressure from our customer base. In all periods, we reduced indirect costs related to professional fees and employee related costs.~~
~~Liquidity and Capital Resources~~Company has not identified any acquisition candidates, nor is it actively looking for acquisition candidates.
The challenging economic conditions facing the oil and gas industry, which began just before the end of 2008, have adversely affected our financial performance and liquidity ~~in 2009. Revenue has declined significantly across all~~throughout 2009 and during the first quarter of ~~our segments due to decreased demand for our products~~2010. As discussed earlier, as oil and ~~services as~~ natural gas prices, ~~and~~ the number of well completions and rig count ~~continues~~declined during 2009, the Company experienced lower demand for its products and services across all of the Company’s segments. With the increase in oil and natural gas prices and the increase in rig count during the first quarter of 2010, the Company’s operations have begun to ~~be depressed.~~ improve. The Company experienced an increase in quarterly revenue and a slight improvement in the gross margin percentage.
On March 31, 2010, the Company executed an Amended and Restated Credit Agreement with Whitebox Advisors LLC for a $40 million term loan. This term loan replaced the Company’s former senior credit facility at Wells Fargo Bank and provided net proceeds of $6.1 million. The current term loan reduces the Company’s scheduled principal payment requirements during 2010 and 2011. The significant terms of the Company’s term loan are discussed in Part I, “Item 1. Financial Statements” in Note 9 to the Company’s condensed consolidated financial statements.
At ~~September 30, 2009,~~March 31, 2010, we were not in compliance with ~~certain financial covenants contained in~~the continued listing standards of the New ~~Credit Agreement. We requested~~York Stock Exchange (NYSE) because both the Company’s global market capitalization and ~~obtained a waiver~~the Company’s stockholders’ equity fell below $50 million. In March 2010, the NYSE accepted the Company’s plan of ~~these financial covenant violations from our lenders. However, we expect that we will not be able~~action to meet certain of the financial covenants under the New Credit Agreement as of December 31, 2009, and possibly throughout 2010. As a result, we have reclassified amounts owing under the New Credit Agreement as current.
We believe that, assuming current revenue levels and cost structure, our current cash balance and estimated cash flows will be sufficient to satisfy our anticipated cash requirements at least through September 30, 2010. However, if we are not inachieve compliance with the financial covenants in our New Credit Facility as of December 31, 2009, or subsequent periods, and we are unable to obtain waivers of those covenant violations, our lenders would be entitled to exercise their remedies under the New Credit Facility, which could include accelerating all amounts due under the New Credit Facility. We would not have sufficient funds to repay all such amounts, and would be required to seek additional financing, which we might not be able to obtain on terms favorable to us or at all. Acceleration of amounts under our New Credit Facility could also constitute a default under our Convertible Senior Notes. The Company expects that it will need to renegotiate the New Credit Facility or refinance all or a portion of its indebtedness on or before maturity. While the Company believes that it can be successful in renegotiating or refinancing its indebtedness, there can be no assurance that it will be able to on attractive terms or at all. We are working to lower our working capital needs and have focused on cash collections of our accounts receivable balances and reduction of inventory. In the event capital required is greater than the amount we have available at the time, we would reduce the expected level of capital expenditures, sell assets and/or seek additional capital. Cash generated by future asset sales may depend on the overall economic conditions of the industries served by these assets, the condition and location of the assets, and the number of interested buyers. We cannot assure you that needed capital will be available on acceptable terms or at all. Our ability to raise funds in the capital markets through the issuance of additional indebtedness may be limited by covenants in our credit facilities, our credit rating and the willingness of banks and other financial services companies to lend. At September 30, 2009, our net worth was less than the $50 million required by the continued listing standard of the NYSE. We intend to submit a plan to the NYSE that will provide for us to come back into compliance with the NYSE’s continued listing standards ~~although~~during the 18-month cure period, which ends in June 2011. During implementation and execution of the Company’s plan, the Company’s common stock will continue to be listed on the NYSE, ~~may not accept our plan or we may be unable~~subject to ~~accomplish the actions set forth in that plan to come back into~~ compliance with ~~the NYSE’s~~other NYSE continued listing standards over the time period allowed by the NYSE. If we are not able to generate positive cash flows and profits or obtain adequate additional financing or refinancing, we may be required to curtail operations or be unable to continue as a going concern. A number of factors could influence our liquidity sources, as well as the timing and ultimate outcome of our on-going efforts.requirements.
~~On August 12, 2009, we closed on the issuance of convertible preferred stock and received net cash proceeds of $14.8 million.~~ We had cash and cash equivalents of ~~$0.6~~approximately $6.5 million at ~~September 30,~~March 31, 2010. The Company’s capital budget for 2010 reduces capital expenditures to $3.4 million until we achieve improved operating cash flows.
The Company believes that sufficient cash reserves are available to meet anticipated operating and capital expenditure requirements during the remainder of 2010 and the first half of 2011. However, the Company will continue to seek additional debt and equity funding.
Plan of Operations for 2010 and the First Six Months of 2011
Since the 2008 cyclical peak, natural gas prices and drilling activity have declined precipitously, directly impacting demand for the Company’s products and services. The Company experienced operating losses during each of the four quarters in 2009 and during the first quarter of 2010. Forecasting the depth and length of the decline in the current cycle is challenging due to the overlay of the worldwide financial crisis in combination with broad demand weakness in each of our business segments. During the first quarter of 2010, the average North American drilling rig count increased 21.4%, compared to ~~$0.2 million at~~the average in the fourth quarter of 2009. During the three months ended March 31, 2010, the Company experienced revenue growth of 15.5% and an increase in gross margin of 1.3%, as compared to the three months ended December 31, ~~2008.~~2009.
~~On November 16,~~The Company’s plan of operations for 2010 and the first half of 2011 anticipate a continuing, gradual improvement in economic conditions. The Company’s executed business plan includes the following:
Replacing the Company’s existing senior credit facility. The Company successfully closed on a senior credit facility on March 31, 2010. This provided net proceeds of $6.1 million. The senior credit facility significantly reduced the Company’s scheduled principal payment requirements during 2010 and 2011, but will ultimately increase borrowing costs.
Exploring deleveraging options to reduce the Company’s debt. In March 2010, the Company issued shares of common stock to decrease the outstanding principal balance of its convertible debt. The Company intends to continue to evaluate other debt and equity strategies to deleverage and strengthen the Company’s balance sheet.
Seeking additional equity funding. In August 2009, ~~we entered into~~the Company raised $16 million through an offering of convertible preferred stock and stock warrants. The warrants, if fully exercised, would provide an additional $13.4 million of capital. The Company continues to discuss funding opportunities with its advisors. The likelihood of obtaining additional equity funding should increase if the economy continues to improve and if the oil and gas industry experiences continued growth.
Managing capital expenditures until cash flows improve. The Company’s capital expenditure budget for 2010 is approximately $3.4 million, a ~~Waiver~~decrease from the $7.0 million spent in 2009. The Company has identified additional capital items that may be acquired as cash flows improve. The Company has begun to identify capital expenditures that will promote growth as the economy improves.
Integrating oversight and ~~Fourth Amendment with respect~~actions of the new senior management team. The Company created an “Office of the President,” to ~~our~~increase collaboration throughout the Company’s organization. New ~~Senior Credit Facility (“Fourth Amendment”). The Fourth Amendment (i) waives certain potential defaults would have occurred pursuant~~members were appointed to the ~~Credit Agreement as~~Company’s Board of ~~September 30,~~Directors during November 2009, ~~without such~~and the addition of more members with the requisite qualifications and skills during 2010 is anticipated.
Investigating and determining whether expansion in foreign markets can provide strategic benefits for the Company’s existing business segments. The Company seeks potential business partners that offer a ~~waiver, (ii) provides~~broad geographic reach, or new and unique ways to use existing products and services.
Identifying and selling non-core assets and underperforming product lines. The Company is undertaking a comprehensive review within each of its business segments to identify assets that we may ~~not make any draws~~no longer meet strategic objectives. In addition to providing liquidity, the sale of non-strategic assets should allow the Company to concentrate its efforts and resources on improving and expanding the reach of its products.
Continuing to monitor actions taken during 2009 and the first quarter of 2010, which included closing identified operating locations and reducing personnel levels. Further adjustments may be required during the remainder of 2010. An expanded emphasis on certain product lines is anticipated to improve margins. The Company continues to emphasize the review of both outsourced and in-house opportunities to improve its operations. The Company has also identified areas where reductions can be realized in selling, general and administrative expenses. If economic conditions continue to improve, the Company anticipates hiring additional personnel.
Managing the Company’s assets and ongoing operations. During the first quarter of 2010, the Company continued with ~~respect~~efforts begun in 2009 to the New Revolving Credit Facility until February 10, 2010, (iii) requires that we make on November 16, 2009 the $2,000,000 principal payment with respect to the New Term Loan Facility which otherwise would have been due on December 31, 2009, (iv) requires that we maintain availability under the New Revolving Credit Facility of at least $4,000,000, and (v) otherwise modifies certain of the reporting requirements and other covenants contained in the Credit Agreement.
~~Our availability under the revolving line of credit of the New Senior Credit Facility is defined by a borrowing base comprised of eligible~~actively manage accounts receivable and inventory. As of September 30, 2009, we had $1.7 million outstanding under the revolving line of credit of the New Senior Credit Facility. Total availability under our credit facility amounted to $13.2 million at September 30, 2009. During the period subsequent to this date through November 16, 2009, we borrowed an additional $9 million under this revolving line of credit. We paid the $2 million quarterly principal payment installment on November 16, 2009, which otherwise would have been due on December 31, 2009, according to the terms of the Fourth Amendment. We do not expect to be able to meet certain of the financial covenants under the New Senior Credit Facility as of December 31, 2009 and possibly throughout 2010. As a result, we have reclassified amounts owed under the New Senior Credit Facility as short term debt in the Consolidated Balance Sheet at September 30, 2009. While we haveinventory balances. The Company has been successful in ~~obtaining waivers~~increasing operating cash flow through receivables management. The Company is poised to realize increased cash flows from inventory management as demand for products increases. Overall management of working capital is being stressed. In addition, the Company is focused upon conservation of capital, and has identified certain capital expenditures to be made only if improvement in the Company’s business and liquidity are realized.
Enhancing the technology used in each of the Company’s business segments. The Company believes technological innovations are important to its future. A longer-term goal is to expand the scope of current research and development activities. It is likely, however, that cash flow constraints will limit expansion of research and development activities during 2010.
Cash Flows
Cash flow metrics from our ~~bank lenders in recent periods, however, there can be no assurance we will be successful obtaining such waivers for these events in the future.~~condensed consolidated statements of cash flows are as follows (in thousands):
   Quarter Ended March 31,
   2010 2009
Net cash (used in) provided by operating activities
   $ (5,555 ) $ 2,801
Net cash used in investing activities
   (399 ) (3,071 )
Net cash provided by financing activities
   5,934    664
Effect of exchange rate changes
   (7 ) 2

Net (decrease) increase in cash and cash equivalents
   $ (27 ) $ 396

Operating Activities
InThe Company used net cash in operating activities totaling $5.6 million in the ~~nine~~three months ended ~~September 30, 2009, we generated $2.1~~March 31, 2010. Net cash provided by operating activities totaling $2.8 million in ~~cash from operating activities. Net~~the three months ended March 31, 2009. The net loss ~~allocable~~was $9.5 million in the three months ended March 31, 2010, compared to ~~common stockholders~~a net loss totaling $2.0 million for the ~~nine months ended September 30, 2009 was $44.9 million. Non-cash~~similar period in 2009.
Noncash additions to net loss ~~during~~in the ~~nine~~three months ended ~~September 30, 2009 consisted~~March 31, 2010 were $9.0 million, consisting primarily ~~of $10.5 million~~ of depreciation and amortization ~~$11.0 million~~($3.5 million), change in the fair value of ~~deferred tax expense, $1.3 million of compensation expense related to options and restricted stock awards, $3.6 million related to~~ the warrant liability ($1.8 million), accretion of the debt discount ~~related~~($1.3 million), and loss on extinguishment of debt ($1.0 million), amortization of deferred financing costs ($0.5 million), stock compensation expense ($0.4 million) and tax impacts ($0.7 million). Noncash additions to ~~our Convertible Senior Notes, $0.5~~net loss in the three months ended March 31, 2009 were $1.4 million, ~~related to~~consisting primarily of depreciation and amortization ($3.5 million), accretion of the debt discount ~~on cumulative convertible preferred~~($1.2 million), and stock ~~and $18.5 million related to~~compensation expense ($0.5 million), offset by the ~~impairment of goodwill.~~deferred tax benefit ($4.2 million).
During the ~~nine~~three months ended ~~September 30, 2009,~~March 31, 2010, changes in working capital ~~increased operating cash flow by $0.8~~used $5.1 million due primarily to the increase in accounts receivable ($3.3 million) and the reduction in interest payable ($2.1 million). During the three months ended March 31, 2009, changes in working capital provided $3.4 million due mainly to the collection of accounts receivable ~~and inventory reductions partially~~of ($15.2 million), offset by ~~payments of~~the reduction in accrued liabilities ($5.2 million), the decrease in accounts payable ($3.8 million), the increase in other current assets ($1.6 million) and ~~accrued liabilities.~~the decrease in interest payable ($1.4 million).
Investing Activities
During the ~~nine~~three months ended ~~September 30,~~March 31, 2010, and March 31, 2009, ~~we used $3.5~~the Company’s capital expenditures were $1.0 million ~~in investing activities primarily due to capital expenditures.~~and $3.9 million, respectively. Capital expenditures ~~for~~declined during the ~~nine~~first three months ended ~~September 30, 2009 totaled approximately $5.6 million. Capital~~March 31, 2010, as the Company is closely managing its capital expenditures for the remainder of 2009 are expected to be approximately $1.0 million. Management has not established the capital expenditure budget for 2010; however, the capital expenditure budget for 2010 must be less than $11.0 million according to the Fourth Amendment. The most significant expenditures were related to our Drilling Products segment and the expansion of our Teledrift MWD tools, CAVO mud motor fleet and the addition of rental tools to expand our rental tool base. We also recognized approximately $2.1 million of proceeds related to the sale of assets that were mainly lost-in-hole by our rental customers during normal drilling activities.until its cash flows improve.
Financing Activities
AsDuring the three months ended March 31, 2010, the Company’s financing activities provided net cash of ~~September 30, 2009, we had $1.7 million outstanding under~~$5.9 million. On March 31, 2010, the revolving line of credit of the New Senior Credit Facility and $0.6 million of cash. Total availability under the revolving line of credit as of September 30, 2009 was approximately $13.2 million. Bank borrowings are subject to certain covenants andCompany closed on a material adverse change subjective acceleration clause. As of September 30, 2009 we were not in compliance with certain of the financial covenants under our New Senior Credit Facility. We requested and obtained a waiver of these financial covenant violations from our bank lenders on November 16, 2009.
~~The following is a listing of our contractually required and actual covenant ratios as of September 30, 2009:~~
~~Covenant~~
~~Required $/Ratio~~
~~Actual $/Ratio~~
~~Minimum Net Worth~~
~~Minimum $42.8 million~~ ~~$24.7 million~~
~~Leverage Ratio (1)~~
~~Waived~~ ~~10.41 to 1.00~~
~~Fixed Charge Coverage~~
~~Minimum 0.75 to 1.00~~ ~~0.29 to 1.00~~
~~Senior Leverage~~
~~Maximum 2.00 to 1.00~~ ~~1.93 to 1.00~~
~~(1)~~ ~~Maximum leverage ratio was waived until June 30, 2010 in the August 6, 2009 amendment to our New Senior Credit Facility.~~
On August 6, 2009, we entered into an amendment (“Third Amendment”) to our New Senior Credit Facility. The Third Amendment changed the calculation of availability under our revolving line of credit, set a minimum liquidity maintenance amount, amended the annual Excess Cash Flow Recapture, waived the Mandatory Prepayment Requirement related to certain equity transactions, reduced the aggregate minimum threshold to trigger prepayment on an asset sale, increased interest charges related to margin rates and commitment fees, amended financial covenants related to Maximum Total Funded Debt to EBITDA, Minimum Fixed Charge Coverage Ratio and Minimum Net Worth, increased allowable capital expenditures for 2009, reduced additional indebtedness, changed certain reporting requirements and limited or restricted the company’s ability to acquire new ~~business, sell assets, enter into operating leases, accelerate payments of subordinated debt or pay cash dividends.~~
On August 12, 2009, we closed a private placement transaction with certain accredited investors, pursuant to which such investors purchased an aggregate of 16,000 units (“Units”) at a purchase price of $1,000 per Unit. Each Unit was comprised of (i) one share of cumulative redeemable convertible preferred stock (“Convertible Preferred Stock”), (ii) warrants to purchase up to 155 shares of our common stock at an exercise price of $2.31 per share (“Exercisable Warrants”) and (iii) contingent warrants to purchase up to 500 shares of our 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 our common stock under certain conditions. This conversion ratio represents an equivalent conversion price of $2.31 per share. The closing of this private placement resultedterm loan in the ~~receipt~~principal amount of ~~proceeds of $14.8~~$40.0 million ~~net of transaction costs of $1.2 million. We used the net proceeds to reduce borrowings under our bank credit facility, thereby providing additional availability of credit,~~ and ~~for general corporate purposes.~~
Each share of Convertible Preferred Stock has a liquidation preference of $1,000. Dividends will accrue at the rate of 15% of the liquidation preference per year and will accumulate if not paid quarterly. As of September 30, 2009, the Company had accrued and unpaid dividends of $0.3 million.
The Convertible Preferred Stock will, at our option (but not earlier than February 12, 2010), be automatically converted into shares of our common stock 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 automatically converts and the Company has not previously paid holders amounts equal to at least eight quarterly dividends on the Convertible Preferred Stock, the Company will also pay to the holders, in connection with any automatic conversion, and amount, in cash or shares of our common stock (based on the market value of the common stock), equal to eight quarterly dividends less any dividends previously paid to holders of the Convertible Preferred Stock.
The Company may redeem any of the Convertible Preferred Stock beginning on August 12, 2012. The 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 plus accrued and unpaid dividends to the redemption date.
The Exercisable Warrants are immediately exercisable and will expire if not exercised by August 12, 2014. The Contingent warrants became exercisable after we obtained shareholder approval on November 9, 2009 and will expire if not exercised by November 9, 2014. Both the Exercisable Warrants and Contingent Warrants contain anti-dilution price protection in the event we issues shares of Common Stock or securities exercisable for or convertible into Common Stock at a price per share less than their exercise price, subject to certain exceptions.
~~The Company~~ used a portion of the net proceeds ~~from the private placement~~ to ~~repay amounts outstanding under~~refinance its ~~revolving line of~~existing senior credit ~~and will use the balance of the proceeds for general working capital needs and to satisfy future scheduled debt payments.~~
~~Contractual Obligations~~
As of September 30, 2009 the Company had approximately $0.2 million in vehicle loans and capitalized vehicle leases. Other than those discussed above related to our preferred stock offering, commitments under contractual obligations have not materially changed since our prior year end on December 31, 2008.
~~Impact of Recently Issued Accounting Standards~~
~~In June 2009, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (“ASU”) 2009-01, Topic No. 105 (ASU Topic 105), “~~~~Generally Accepted Accounting Principles,~~~~” which replaced FASB Statement No. 168, “~~~~The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles~~” and identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP. Authoritative standards included in the Codification are designated by their ASC topical reference, with new standards designated as ASUs, with a year and assigned sequence number. The guidance is effective for financial statement issued for interim and annual periods ending after September 15, 2009.facility ($32.0 million). The Company ~~adopted this standard~~used cash for ~~its September 30, 2009 interim report with no financial impact on its consolidated condensed financial statements.~~
~~In June 2009, the FASB issued accounting guidance related to accounting for own-share lending arrangements in contemplation of convertible~~ debt issuance ~~or other financing found primarily within ASC Topic 470,~~~~“Debt.”~~ ~~In October 2009, the FASB released ASU No. 2009-15,~~~~“Accounting for Own-Share Lending Arrangements in Contemplation~~costs of ~~Convertible Debt Issuance or Other Financing”~~ ~~which amends or added certain paragraphs to the related ASC Topic 470,~~~~“Debt~~.” These standards address the accounting for an entity’s own-share lending arrangement initiated in conjunction with convertible debt or other financing offering and the effect a share-lending arrangement has on earnings per share. Additionally, the guidance addresses the accounting and earnings per share
implications for defaults by the share borrower, both when a default becomes probable of occurring and when a default actually occurs. This guidance released in June 2009 is effective for interim or annual periods beginning on or after June 15, 2009 for share-lending arrangements entered into in those periods. For all other arrangements within the scope, the guidance is applied retrospectively to share-lending arrangements that are outstanding as of the beginning of the fiscal year beginning on or after December 15, 2009. Early adoption is prohibited. Update guidance released in October 2009 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The update guidance is effective for all arrangements entered into on or before the beginning of the first reporting period that begins on or is after June 15, 2009. Update content shall be applied retrospectively for all arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company is currently evaluating the effect this will have on our consolidated condensed financial statements.
~~In May 2009, the FASB issued accounting guidance related to subsequent events found within ASC Topic 855,~~~~“Subsequent Events.”~~ This guidance sets standards for the disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Additionally, the guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance effective June 30, 2009. The implementation of this standard did not have a material impact on our consolidated condensed financial position and results of operations.
~~In April 2009, the FASB issued accounting guidance related to interim disclosures about fair value of financial instruments found within ASC Topic 825,~~~~“Financial Instruments.”~~ This guidance requires fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance effective June 30, 2009. The implementation of this standard did not have a material impact on our consolidated condensed financial position and results of operations.
~~In June 2008, the FASB issued accounting guidance related to determining whether instruments granted in share-based payment transactions are participating securities found within the ASC Topic 260,~~~~“Earnings Per Share (EPS).”~~ This guidance states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company adopted the guidance effective January 1, 2009. All prior-period earnings per share (“EPS”) data presented have been adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this Staff Position. The implementation of this standard did not have a material impact on our consolidated condensed financial position and results of operations.
~~In May 2008, the FASB issued accounting guidance related to debt with conversion and other options found primarily within ASC Topic 470,~~~~“Debt,”~~ ~~ASC Topic 815,~~~~“Derivatives and Hedging”~~ ~~and ASC Topic 825,~~~~“Financial Instruments.”~~ This guidance clarifies that convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate. The resulting debt discount would be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The guidance requires retrospective application to all periods presented in the financial statements with cumulative effect of the change reported in retained earnings as of the beginning of the first period presented. Our 5.25% Convertible Senior Notes due February 2028 are affected by this new standard. Upon adopting the provisions of this guidance, we retroactively applied its provisions and restated our consolidated condensed financial statements for prior periods.
In applying this debt guidance, $27.8 million of the carrying value of our Convertible Senior Notes was reclassified to equity as of the February 2008 issuance date and offset by a related deferred tax liability of $10.6$1.7 million. This discount represents the equity component of the proceeds from the Convertible Senior Notes, calculated assuming an 11.5% non-convertible borrowing rate. The discount will be accreted to interest expense over the expected term of five years, which is based on the call/put option on the debt at February 2013. Accordingly, $1.2 million and $1.1 million of additional non-cash interest expense was recorded in the Consolidated Condensed Statement of Income (Loss) forDuring the three months ended ~~September 30,~~March 31, 2009, ~~and 2008, respectively, and $3.5 million and $2.5 million~~the Company’s financing activities provided net cash of additional non-cash interest expense was recorded in the Consolidated Condensed Statement of Income (Loss) for the nine months ended September 30, 2009 and 2008, respectively. See Note 9 – Long-Term Debt for more details on the retrospective application of this debt guidance.
~~In March 2008, the FASB issued accounting guidance related to derivative and hedging activities found within the ASC Topic 815,~~~~“Derivatives and Hedging.”~~ This guidance requires enhanced disclosures about our derivative and hedging activities. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.$0.7 million. The Company ~~adopted the guidance effective January 1, 2009. The implementation~~received net advances from its bank credit facilities of ~~this standard did not have a material impact on our consolidated condensed financial position and results of operations.~~$1.2 million.
Off-Balance Sheet Arrangements
~~At September 30, 2009,~~As part of our ongoing business, we ~~did~~have not ~~have any~~participated in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet ~~arrangements.~~arrangements or other contractually narrow or limited purposes. As of March 31, 2010, we are not party to any unconsolidated SPEs.
We have not made guarantees to any of our customers or vendors. We do not have any off-balance sheet arrangements or commitments, other than operating leases which are discussed below, that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Contractual Obligations
Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results, accounts receivable collections, inventory management, and the timing of payments for goods and services. As a result, the impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors.
Our material contractual obligations are composed of repayment of amounts borrowed through our convertible notes and long-term debt and obligations under capital and operating leases. Contractual obligations at March 31, 2010 are as follows (in thousands):
   Payments Due by Period
   Total    Less than
1 year    1 - 3 years    3 - 5 years    More than
5 years
Convertible notes
   $ 111,004    $ —      $ —      $ 111,004    $ —
Long-term debt obligations
   40,000    6,373    33,627    —      —
Capital lease obligations
   638    237    356    45    —

Total
   $ 151,642    $ 6,610    $ 33,983    $ 111,049    $ —

Critical Accounting Policies and Estimates
Our consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2008 Form 10-K, filed on March 16, 2009 as amended in the Form 8-K filed on August 26, 2009, in the Notes to the Consolidated Financial Statements found in our Form 8-K filed on August 26, 2009, Note 2, and the Critical Accounting Policies section.
~~Impairment Charge~~Warrant Liabilities
~~Flotek records goodwill related to business acquisitions when the purchase price exceeds the fair value of identified assets~~We evaluate financial instruments for freestanding and embedded derivatives. Warrant liabilities acquired. Under accounting guidance found in ASC Topic 350, “Intangibles – Goodwill and Other,” goodwill is subject to an annual impairment test. Flotek normally performs its annual goodwill impairment testing in the fourth quarter. If an event occurs, or circumstances change, that would more likely thando not reduce the fair value of a reporting unit below its carrying value, an interim impairment test would be performed between annual tests. In the second quarter of 2009, the continued global financial and credit crisis and economic slowdown impacted our businesses and resulted in management reassessing the operating plans for its reporting units. As a result, we performed an interim impairment test at June 30, 2009. During the third quarter as a result of the continued slow-down in our businesses and liquidity concerns, we also performed an interim impairment test as of September 30, 2009. These impairment tests incorporated the revised plans included in our initial long range financial forecast and updated market and industry rates for each reporting unit to reflect our most current assessment of estimated fair value used for purposes of the goodwill impairment tests performed as of June 30 and September 30, 2009.
Goodwill impairment is evaluated using a two-step process. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying value. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed. The second step compares the implied fair value of the reporting unit’s goodwill to the carrying amount of its goodwill to measure the amount of impairment loss. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (e.g., the fair value of the reporting unit is allocated to all of the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit).
The primary technique we utilize in estimating the fair value of our reporting units is discounted cash flow analysis. Discounted cash flow analysis requires us to examine market risk and equity rates and also to make various judgments, estimates and assumptions about future sales, operating margins, growth rates, capital expenditures, working capital and discount rates.
~~The long-range financial forecast is normally completed in the fourth quarter of each year, and it serves as the primary basis for our estimate of reporting unit~~have readily determinable fair values, absent significant changes in our outlook on future results. In addition, we compared the sum of the fair values that resulted from our discounted cash flow analysis of our reporting units to our current market capitalization to determine that our estimates of fair value were reasonable.
For purposes of the impairment testing, we determined that our Chemical and Logistics operating segment and our Artificial Lift operating segment to be reporting units. Additionally, we determined that a component of our Drilling Products operating segment, Teledrift, to be a reporting unit due to the availability of discrete financial information and that operating segment management regularly reviews its results. The remaining components of the Drilling Products operating segment were considered to be a reportable unit due to their similar economic characteristics.
In the first step of the impairment tests performed as of June 30 and September 30, 2009, we determined that the carrying value of our Teledrift reporting unit exceed its estimated fair value; therefore, step two of the goodwill impairment test was required for that reporting unit. Additionally, in our impairment test of the Chemical and Logistics reporting unit, we determined an estimated fair value that exceed the carrying value of this reporting unit by more than as of June 30 and September 30, 2009 by more than 50%.
The second step of the goodwill impairment test determines the amount of impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied goodwill is determined in a manner similar to determining the amount of goodwill recognized in a business combination. Accordingly, we assigned the fair value of the reporting unit to all the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of fair value of the reporting unit over the amounts assigned to the reporting units is the implied goodwill. We performed this assignment process only for purposes of testing goodwill and did not write-up or write-down a recognized asset or liability, nor did we recognize a previously unrecognized intangible asset as a result of this allocation process. We determined that the carrying amount exceeded the implied goodwill for the Teledrift reporting unit and recognized an impairment loss of $18.5 million equal to that excess at June 30, 2009. At September 30, 2009 the implied fair value of goodwill of the Teledrift reporting unit exceeded the carrying amount by approximately 20% and therefore ~~we did not record an impairment charge.~~
~~There are~~require significant ~~inherent uncertainties~~management judgment and ~~judgment involved in estimating~~estimation. We use the ~~fair value of our reporting units. While we believe we have used reasonable estimates and assumptions~~Black-Scholes option-pricing model to estimate the ~~fair~~ value of ~~our~~warrant liabilities at the end of each reporting ~~units, it is possible that material changes could occur due to factors impacting~~period. Changes in warrant liabilities during each reporting period are included in the ~~global financial markets and our industry in particular.~~statement of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to ~~financial instrument~~ 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 flows or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over the next year. We manage the exposure to market risks at the corporate level. The portfolio of interest-sensitive assets and liabilities is monitored and adjusted to provide liquidity necessary to satisfy anticipated short-term needs. Our risk management policies allow the use of specified financial instruments for hedging purposes only; speculation on interest rates or foreign currency rates is not permitted. We do not consider any of these risk management activities to be material. Our New Senior Credit Facility has variable-rates. As required by the New Senior Credit Facility, the Company has entered into an interest rate swap agreement on 50% of the New Term Loan Facility to partially reduce our exposure to interest rate risk.
Financial instruments that potentially subject us to credit risk consist of cash and cash equivalents and accounts receivable. Certain of our cash and cash equivalents balances exceed FDIC insured limits or are invested in money market accounts with investment banks that are not FDIC insured. We place our cash and cash equivalents in what we believe to be credit-worthy financial institutions. Additionally, we actively monitor the credit risk of our receivable and derivative counterparties.
Furthermore, we are exposed to the impact of interest rate changes on our variable rate indebtedness within our New Senior Credit Facility. The impact on the average outstanding balance of our variable rate indebtedness as of September 30, 2009 from a hypothetical 10% increase in interest rates would be an increase in interest expense of approximately $2.6 million.

Item 4.4T. Controls and Procedures.
~~(a) Evaluation~~Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
~~We maintain disclosure~~Disclosure controls and procedures ~~that~~ are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended ~~(“Exchange~~(the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. ~~Our~~The Company’s disclosure controls and procedures ~~include controls and procedures~~are designed to ensure that information required to be disclosed in the reports ~~we file~~filed or ~~submit~~submitted under the Exchange Act is accumulated and communicated to management, including ~~our~~the principal executive ~~officer~~ and principal financial ~~officer, or persons performing similar functions,~~officers, as appropriate, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness 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 effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Disclosure controls and procedures are designed to provide such reasonable assurance.
~~Our~~As of the end of the fiscal quarter covered by this report, the Company’s management evaluated, with the participation of ~~our~~the principal executive and principal financial officers, ~~or persons performing similar functions, evaluated~~ the effectiveness of the design and operation of ~~our~~the Company’s disclosure controls and procedures. Based upon this evaluation, the Company’s management concluded that previously identified material weaknesses in internal controls, related to the Company’s preparation of financial statements as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and discussed below, as of March 31, 2010, still exist and the Company’s disclosure controls and procedures in connection with the preparation of our financial statements for the period ended September 30, 2009. As a result of that evaluation, our principal executive and principal financial officers, or persons performing similar functions, identified the following control deficiencies that constituted a material weakness in connection with the preparation of our financial statements for the period ended September 30, 2009:remain ineffective.
Control ~~environment~~Environment – ~~We did not maintain an effective control environment.~~ The control environment, which is the responsibility of the Company’s senior management, sets the tone of the organization, influences the control consciousness of its people, and is the foundation for all other components of internal control over financial reporting. ~~We did not maintain an effective~~The control environment ~~because of~~was judged as ineffective due to the following:
~~(a) As a result of numerous resignations, we did not maintain an appropriate level of senior management and Board level oversight related to financial reporting and internal controls.~~
~~(b) We did not maintain a sufficient complement of personnel with an appropriate level~~
a) Lack of personnel with appropriate levels of accounting knowledge, experience, and training to ensure proper application of generally accepted accounting principles (GAAP) consistent with the Company’s financial reporting requirements.
b) Lack of sufficient controls related to the monthly financial close process. These control deficiencies included:
inadequate analysis of variances in the ~~application~~Company’s statement of ~~GAAP commensurate with our financial reporting requirements.~~operations from expected and historical results; and
~~Based on management’s evaluation, because~~
absence of an adequate journal entry review process by supervisory accounting personnel.
Because of the material ~~weakness~~weaknesses described above and the fact that in-process remediation efforts have not yet been fully completed and tested, the Company’s management has concluded that ~~our~~ internal ~~control~~controls over financial reporting ~~was not effective~~continue to be ineffective in connection with the preparation of ~~our~~ financial statements for the ~~period~~quarter ended ~~September 30, 2009.~~March 31, 2010.
Remediation Plan and Status
~~Our~~The Company’s management ~~under new leadership as described below, has been~~continues to be actively committed to and engaged in the ~~planning for,~~implementation and ~~the implementation~~execution of remediation efforts to ~~address~~resolve the material ~~weakness,~~weaknesses previously identified, as well as to proactively manage any other identified areas of risk. These remediation efforts, outlined below, are intended to address the identified material ~~weakness~~weaknesses and to enhance ~~our~~the Company’s overall financial control environment.
In ~~October,~~December 2009, the ~~Board~~Company hired a national executive services firm to perform an assessment of ~~Directors restructured~~ the Company’s ~~executive management~~finance and accounting structure. Based upon this assessment, a team of independent consultants was assembled to ~~more effectively manage~~address the immediate needs identified. Responsibilities included: (a) oversight of the preparation and filing of required SEC documents, (b) reinforcement of the Company’s ~~day-to-day operations. Mr. Jesse “Jempy” Neyman, Executive Vice President, Finance~~tactical accounting needs, (c) identification and ~~Strategic Planning, was designated by~~research of applicable reporting issues, (d) assistance with preparation and modeling of future cash flow and financial forecasts, (e) advising senior management on any financial and accounting issues related to strategic projects, (f) analysis of the ~~Board~~month-end close process and an assessment of the skill sets of the accounting staff, and (g) recommended changes to ~~act as~~ the ~~Company’s principal financial officer~~current accounting and ~~principal accounting officer and Mr. Steve Reeves was appointed to serve as Executive Vice President, Business Development and Special Projects,~~finance organizational structure of the Company.
In ~~November 2009,~~March 2010, the ~~Board elected Mr. Kenneth T. Hern~~Company hired a Vice President/Corporate Controller whose responsibilities include facilitating and ~~Mr. John Reiland as directors. Mr. Hern was also elected~~implementing our remediation plan to ~~serve as a member~~address the identified weaknesses.
The Company has established new procedures to enhance the monthly variance analyses of the ~~Compensation~~statement of operations and ~~Audit Committees and as the Chairman~~provide oversight of the ~~Governance~~journal entry review processes. The Company is in the process of updating and ~~Nominating Committee. Mr. Reiland was elected~~completing revisions to ~~serve as a member of the Compensation~~accounting policies and ~~Governance and Nominating Committees and as the Chairman of the Audit Committee. Mr. Richard Wilson, who has been a director of~~procedures.
In February 2010, the Company ~~since 2003, was also elected to serve as a member of the Governance and Nominating Committee and the Audit Committee and as the Chairman of the Compensation Committee.~~successfully remediated system access issues by restricting employee access rights in alignment with current job responsibilities.
~~Our new~~The Company’s executive management team, together with ~~our~~its reconstituted Board of Directors, is committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity. ~~In addition, we are in the process of evaluating our personnel and plan to make the necessary changes to strengthen the level of competency in key accounting and financial reporting functions.~~
~~(b)~~ Changes in Internal Control ~~over~~Over Financial Reporting
During the ~~fourth~~first quarter ~~we have begun~~of 2010, the Company continued implementation ~~of some~~and execution of the remedial measures described above, including the appointment of ~~our~~a new ~~executive management team and members of~~Vice President/Corporate Controller. Further, the ~~Board of Directors. We also expect to commence an~~Company completed a preliminary assessment of ~~our~~its current financial ~~business processes and our~~processes. All impacted departments; in particular, accounting and finance, ~~department shortly. We plan to implement~~were actively involved in the ~~recommendations derived from this assessment.~~development of practical solutions and the implementation of recommendations.
PART II – OTHER INFORMATION

Item 1. Legal Proceedings.
Class Action Litigation
On August 7, 2009, a putative class action suit was commenced in the United States District Court for the Southern District of Texas on behalf of purchasers of ~~the~~our common stock ~~of the Company~~ between May 8, 2007 and January 23, 2008, inclusive, seeking to pursue remedies under the Securities Exchange Act of 1934. ~~There~~The plaintiffs filed a consolidated amended complaint (the “Amended Complaint”) on February 4, 2010. The Amended Complaint alleges that, throughout the time period indicated, we provided inaccurate financial guidance and failed to disclose material adverse facts about our true financial condition and business prospects. The Amended Complaint also alleges that we made false statements and material omissions regarding our tool inventories and our integration of acquired companies. The Amended Complaint does not quantify the alleged actual damages.
We have ~~been no material changes in~~filed a motion to dismiss the ~~class action suit disclosed in~~Amended Complaint and intend to mount a vigorous defense to these claims. Discovery has not yet commenced. At this time, we are unable to reasonably estimate the ~~“Legal Proceedings” section~~outcome of ~~our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009. See “Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009.~~this litigation.
Other Litigation
We are subject to routine litigation and other claims ~~and legal actions~~that arise in the ~~ordinary~~normal course of ~~our~~ business. We ~~believe that all such claims and actions currently~~are not aware of any pending ~~against us are either adequately covered by insurance~~ or threatened lawsuits or proceedings which would ~~not~~ have a material ~~adverse~~ effect on ~~us.~~our financial position, results of operations or liquidity.

Item 1A. Risk ~~Factors.~~Factors
This document, our other filings with the SEC, and other materials released to the public contain “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995. See “WeSpecial Note About Forward-Looking Statements” included in Part I, “Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements may discuss our prospects, expected revenue, expenses and profits, strategies for our operations and other subjects, including conditions in the oilfield service and oil and natural gas industries and in the United States and international economy in general.

Our forward-looking statements are based on assumptions that we believe to be reasonable, but that may not ~~be able to continue as a going concern.~~

Our consolidated financial statements have been prepared on the basis that we will continue as a going concern. At September 30, 2009, we were not in compliance with certain financial covenants contained in the New Credit Agreement. We requested and obtained a waiver of these financial covenant violations from our bank lenders. We do not expectprove to be ~~able~~accurate. All of our forward-looking information is, therefore, subject to ~~meet certain of~~risks and uncertainties that could cause actual results to differ materially from the ~~financial covenants under~~results expected. Although it is not possible to identify all factors, these risks and uncertainties include the ~~New Credit Facility as of~~risk factors included in our Annual Report on Form 10-K/A Amendment No. 2 for the fiscal year ended December 31, 2009 and possibly throughout 2010. As a result, we have reclassified amounts owing under the New Senior Credit Facility as short term debt in the Consolidated Balance Sheet at September 30, 2009. Management recognizes that we will needthose discussed below.

Risks Related to generate additional financial resources in order to meet our objectives and make scheduled payments or mandatory prepayments on our current debt obligations. If we are not able to generate positive cash flows and profits or obtain adequate additional financing or refinancing, we will be required to curtail operations. Furthermore, our inability to continue as a going concern would require us to restate our assets and liabilities on a liquidation basis, which could differ significantly from the going concern basis.Our Business

We may not be able to generate sufficient cash flows to meet our debt service obligations or other liquidity ~~needs, and we may not be able to successfully negotiate waivers, a forbearance or a new credit agreement to cure any covenant violations under our current credit agreements.~~needs.

On several occasions we have failed to meet, or have projected that we would in the future fail to meet, the financial covenant requirements in our bank credit facilities. We have been required on these occasions to seek waivers of such covenant violations and amendments to our bank credit facility to modify these covenants. Most recently, we were not in compliance with certain of the financial covenants in our bank credit facility as of September 30, 2009, and we sought and obtained a waiver of these financial covenant violations from our bank lenders.

Our ability to generate sufficient cash flows from operations to make scheduled payments or mandatory prepayments on our current debt obligations and other future debt obligations we may incur will depend on our future financial performance, which may be affected by a range of economic, competitive, regulatory and industry factors, many of which are beyond our control. ~~In addition,~~If we may be required under generally accepted accounting principles to record further impairment charges in the future relating to the carrying value of our goodwill and intangible assets. If as a result of our financial performance, future impairment charges or other events we violate the financial covenants in our debt agreements or are unable to generate sufficient cash flows or otherwise obtain the funds required to make principal and interest payments on our indebtedness, we may have to ~~seek waivers or a forbearance of these covenants from our lenders or~~ undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital expenditures or seeking to raise additional capital through the issuance of debt securities or other securities. We cannot assure you that we will be able to ~~obtain any required waivers or a forbearance from our lenders or that we will be able to~~ accomplish any necessary refinancing, sale of assets or issuance of securities on terms that are acceptable. Our inability ~~to obtain any required waivers or a forbearance,~~ to generate sufficient cash flows to satisfy such obligations or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.

The tightening of the credit markets or a downgrade in our credit ratings could increase our borrowing costs and make it more difficult for us to access funds, to refinance our existing indebtedness, to enter into agreements for new indebtedness or to obtain funding through the issuance of securities. If such conditions were to persist, we would seek alternative sources of liquidity, but may not be able to meet our obligations as they become due.

Our principal source of liquidity, other than cash flows from operations, is the revolving line of credit under our amended senior credit facility. The borrowing base under our revolving line of credit is based on our eligible accounts receivable and inventory. If our revenues and inventory decrease as a result of the current economic environment or otherwise, our borrowing capacity under our

revolving line of credit could decrease, and such decreases could require us to repay excess borrowings under the revolving line. Any such decreases could also outpace any offsetting reductions in our working capital requirements, which could lead to reduced liquidity. While we believe that the proceeds of our equity private placement in August 2009, our cash flows from operations and amounts available under our new revolving line of credit are sufficient to meet our obligations in the near term, our needs for cash may exceed the levels generated from operations and available to us under our revolving line of credit due to factors which are beyond our control.

~~Our~~ debt agreements also contain representations, warranties, fees, affirmative and negative covenants, and default provisions. A breach of any of these covenants could result in a default under these agreements. Upon the occurrence of an event of default under our debt agreements, the lenders could elect to declare all amounts outstanding to be immediately due

and payable and terminate all commitments to extend further credit. If the lenders accelerate the repayment of borrowings, we may not have sufficient assets to repay our indebtedness. Also, should there be an event of default, or should we need to obtain waivers ~~or a forbearance~~ following an event of default, we may be subject to higher borrowing costs and/or more restrictive covenants in future periods. Acceleration of any obligation under any of our material debt instruments will permit the holders of our other material debt to accelerate their obligations.

Our senior credit facility contains certain covenants that could limit our flexibility and prevent us from taking certain actions, which could adversely affect our ability to execute our business strategy.

Our senior credit facility, as amended includes a number of significant restrictive covenants. These covenants could adversely affect us by limiting our ability to plan for or react to market conditions, meet our capital needs and execute our business strategy. The senior credit facility contains covenants that, among other things, limit our ability, without the consent of the lenders, to:

incur certain types and amounts of additional debt;

consolidate, merge or sell our assets or materially change the nature of our business;

pay dividends on capital stock and make restricted payments;

make voluntary prepayments, or materially amend the terms, of subordinated debt;

enter into certain types of transactions with affiliates;

make certain investments;

enter into certain amounts of operating leases;

expend more than a certain amount for annual capital expenditures; and

incur certain liens.

These covenants may restrict our operating and financial flexibility and limit our ability to respond to changes in our business or competitive activities. If we fail to comply with these covenants, we could be in default, and our senior credit facility lenders could elect to declare all the amounts borrowed and due to them, together with accrued and unpaid interest, to be due and payable. In addition, we or one or more of our subsidiaries could be forced into liquidation or bankruptcy. Any of the foregoing consequences could restrict our ability to execute our business strategy. In addition, such default and acceleration of our senior credit facility could lead to a default under our convertible senior notes.

If our stockholders do not ~~meet~~approve the ~~New York Stock Exchange continued listing requirements,~~payment of future installments of commitment fees under our senior credit facility by issuing shares of our common stock, we will be required to pay these fees in cash, which will adversely impact our liquidity.

Our senior credit facility requires us to pay additional installments of commitment fees of $1,000,000 in September 2010 and $1,000,000 in March 2011. These fees are payable in cash or, if we have obtained stockholder approval as required under NYSE rules, by the issuance of shares of our common stock. The election as to whether these installments of the commitment fee are payable in cash or common stock is made by us 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. If we are not able to obtain stockholder approval of the payment of these additional installments of commitment fees by issuing shares of our common stock, we will be required to pay these fees in cash, which would adversely affect our liquidity, and which would reduce our flexibility to retain cash for other uses, such as debt service payments and capital expenditures.

Risks Related to Our Securities

Future issuance of additional shares of our common stock could cause dilution of ownership interests and adversely affect our stock price.

We may ~~be delisted,~~in the future issue our previously authorized and unissued shares of common stock, resulting in the dilution of the ownership interests of our current stockholders. We are currently authorized to issue 80,000,000 shares of common stock, of which ~~could have an adverse impact~~30,091,151 were issued as of May 12, 2010. Additional shares are subject to future issuance through the exercise of options previously granted under our equity compensation plans or through exercise of options that are still available for future grant. The potential issuance of such additional shares of common stock, whether directly or pursuant to any conversion right of our convertible senior notes or other convertible securities, including our convertible preferred stock, we may issue in the future, may create downward pressure on the ~~liquidity and market~~trading price of our common stock.

Our common stock is currently listed on the New York Stock Exchange (“NYSE”). Under the NYSE’s continued listing standards, a company will be considered to be below compliance standards if, among other things, (i) both its average market capitalization is less than $50 million over a 30 trading-day period and its stockholders’ equity is less than $50 million; (ii) its average market capitalization is less than $15 million over a 30 trading-day period, which will result in immediate initiation of suspension procedures; or (iii) the average closing price of a listed security is less than $1.00 over a consecutive 30 trading-day period. As of September 30, 2009, our stockholders’ equity was less than $50 million. When a listed company’s stock falls below the market capitalization and stockholders’ equity standard, a company is considered “below criteria,” and the company is permitted to submit a business plan demonstrating its ability to return to compliance with these continued listing standards within 18 months of receipt of receipt from the NYSE of notification that it is below criteria. We intend to submit a business plan that will advise the NYSE of definitive action we intend to take that will bring us into conformity with the NYSE continued listing standards within the required period. However, if our plan is not approved or if we are unable to regain compliance with the NYSE listing requirements, our stock could be delisted from trading on the NYSE. A delistingmay also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock for raising capital or other business purposes. Future sales of substantial amounts of common stock, or the perception that sales could ~~negatively impact us by: (i) reducing~~occur, could have a material adverse effect on the ~~liquidity and market~~ price of our common ~~stock; (ii) reducing the number~~stock.

Disclaimer of ~~investors willing~~Obligation to ~~hold~~Update

Except as required by applicable law or ~~acquire our common stock, which could negatively impact our ability to raise equity financing; and (iii) decreasing the amount of news and analyst coverage for us. In addition,~~regulation, we may experience other adverse effects, including, without limitation, the loss of confidence in us by current and prospective suppliers, customers, employees and others with whom we have or may seek to initiate business relationships, and our ability to attract and retain personnel by means of equity compensation could be impaired. If our common stock is delisted from the NYSE and we are unable within 30 days to obtain a listing of our common stock on another national securities exchange, we are required to make an offer to repurchase our Convertible Senior Notes, and we could be unable to raise the required funds to makeassume no obligation (and specifically disclaim any such ~~repurchases.~~obligation) to update these Risk Factors or any other forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

~~Not Applicable.~~Issuer Purchases of Equity Securities

During the first quarter of 2010, we purchased 261 shares of our common stock attributable to withholding to satisfy the payment of tax obligations related to the vesting of restricted shares.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchase as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
January 1, 2010 to January 31, 2010	261	$	1.77	—	—
February 1, 2010 to February 28, 2010	—		—	—	—
March 1, 2010 to March 31, 2010	—		—	—	—

Total	261	$	1.77	—	—

Item 3.

Defaults Upon Senior Securities.

~~Not Applicable.~~None.

Item 4.

~~Submission of Matters to a Vote of Security Holders.~~(Removed and Reserved).

On November 9, 2009, we held a special meeting of our stockholders of record as of September 14, 2009. At the meeting, our stockholders voted on and approved (i) the amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 40,000,000 to 80,000,000 shares (“Charter Amendment”); (ii) the ability of the Company to pay dividends in the future in respect of its shares of preferred stock by issuing shares of the Company’s common stock (“Preferred Stock PIK Dividend Provision”); (iii) the anti-dilution price protection provision contained in certain warrants issued by the Company in a private placement in August 2009 (“Exercisable Warrant Anti-dilution Provision”) and (iv) the contingent warrants issued by the Company in a private placement in August 2009 (“Contingent Warrants”).

The holders of a total of 13,966,964 shares of common stock, representing 59.6% of the total shares of common stock outstanding and entitled to vote, were present in person or by proxy at the special meeting, constituting a quorum. At the meeting, the votes cast for and against, and those abstaining from voting with respect to each of the proposals described above, were as follows:Not Applicable.

   Charter
Amendment (1)    Preferred Stock PIK
Dividend Provision    Exercisable Warrant
Anti-dilution Provision    Contingent
Warrants
For
   12,320,492    12,427,677    12,666,434    12,420,149
Against
   1,422,139    1,281,885    1,012,029    1,201,156
Abstain
   224,333    257,402    288,501    345,659
Broker and Other Non-Votes
   —      —      —      —

~~(1)~~

~~The proposal of the Charter Amendment required a majority vote “for” of all common shares outstanding to be approved. All other proposals required a majority vote “for” of all shares voted.~~

Item 5.

Other Information.

In the Current Report on Form 8-K filed on November 10, 2009, the Company reported the resignation of Mr. Scott Stanton, Mr. Barry Stewart and Mr. Kevin McMahon as occurring on November 5, 2005. This was a typographical error. Messrs. Stanton, Steward and McMahon resigned on November 5, 2009.None.

Item 6.

Exhibits.


Exhibit ~~No.~~Number		Description of Exhibit

~~3.1~~ 4.1		~~Certificate~~Indenture, dated as of ~~Amendment~~March 31, 2010, among Flotek Industries, Inc., the subsidiary guarantors named therein and U.S. Bank National Association (incorporated by reference to ~~the Amended and Restated Certificate of Incorporation,~~Exhibit 4.1 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on ~~November 9, 2009.~~April 6, 2010).

4.2		First Supplemental Indenture, dated as of March 31, 2010, among Flotek Industries, Inc., the subsidiary guarantors named therein and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

4.3		Form of 5.25% Convertible Senior Secured Notes due 2028 (incorporated by reference to Exhibit A to the First Supplemental Indenture filed as Exhibit 4.2 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

10.1		Exchange Agreement, dated as of March 31, 2010, among Flotek Industries, Inc., the subsidiary guarantors named therein and the investors named therein (incorporated by reference to Exhibit 10.1 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

10.2		Lien Subordination and Intercreditor Agreement, dated as of March 31, 2010, among Flotek Industries, Inc., the subsidiaries named therein, Whitebox Advisors LLC and U.S. Bank National Association (incorporated by reference to Exhibit 10.2 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

10.3		Junior Lien Pledge and Security Agreement, dated as of March 31, 2010, by Flotek Industries, Inc. and the subsidiaries named therein in favor of U.S. Bank National Association (incorporated by reference to Exhibit 10.3 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

10.4		Junior Lien Patent and Trademark Security Agreement, dated as of March 31, 2010, by Flotek Industries, Inc. and the subsidiaries named therein in favor of U.S. Bank National Association (incorporated by reference to Exhibit 10.4 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

10.5		Registration Rights Agreement (5.25% Convertible Senior Secured Notes due 2028), dated as of March 31, 2010, among Flotek Industries, Inc and the investors named therein (incorporated by reference to Exhibit 10.5 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

10.6		Amended and Restated Credit Agreement, ~~between~~dated as of March 31, 2010, among Flotek Industries, Inc., Whitebox Advisors LLC and the ~~Company and Wells Fargo Bank, N.A. dated August 31, 2007.~~lenders named therein (incorporated by reference to Exhibit 10.6 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

~~10.2~~ 10.7		~~Credit~~Amended and Restated Guaranty Agreement, dated as of March 31, ~~2008, among~~2010, by Flotek Industries, Inc.~~, Wells Fargo Bank, National Association~~ and the ~~Lenders~~subsidiary guarantors named ~~therein.~~therein in favor of Whitebox Advisors LLC (incorporated by reference to Exhibit 10.7 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

~~10.3~~ 10.8		~~Second Amendment to Credit~~Amended and Restated Pledge and Security Agreement, dated as of March ~~13, 2009, among~~31, 2010, by Flotek Industries, Inc.~~, Wells Fargo Bank, N.A.~~ and the ~~Lenders~~subsidiaries named ~~therein.~~therein in favor of Whitebox Advisors LLC (incorporated by reference to Exhibit 10.8 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

~~10.4~~ 10.9		~~Waiver Agreement~~Amended and ~~Fourth Amendment to Credit~~Restated Patent and Trademark Security Agreement, dated as of ~~November 16, 2009, among~~March 31, 2010, by Flotek Industries, Inc.~~, Wells Fargo Bank, N.A.~~ and the ~~Lenders~~subsidiaries named ~~therein.~~therein in favor of the secured parties named therein (incorporated by reference to Exhibit 10.9 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

~~31.1~~ 10.10		~~Certification (pursuant~~Registration Rights Agreement (Amended and Restated Credit Agreement), dated as of March 31, 2010, among Flotek Industries, Inc. and the investors named therein (incorporated by reference to ~~Rule 13a-14(a) and 15d-14(a) of the Exchange Act) by Principal Executive Officer.~~Exhibit 10.10 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on April 6, 2010).

~~31.2~~ 10.11		~~Certification (pursuant~~Amended and Restated Service Agreement, dated as of April 30, 2010, between Flotek Industries, Inc. and Protechnics II, Inc. (incorporated by reference to ~~Rule 13a-14(a) and 15d-14(a) of the Exchange Act) by Principal Financial Officer.~~Exhibit 10.1 to Flotek Industries, Inc.’s Current Report on Form 8-K filed on May 5, 2010).

~~32.1~~ 31.1*		~~Section 1350~~ Certification of ~~Periodic Report by~~ Principal Executive Officer ~~and~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial ~~Officer.~~Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.

SIGNATURES

Pursuant to the requirements 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.~~
~~(Registrant)~~

FLOTEK INDUSTRIES, INC.

By:		/s/S/ JOHN W. CHISHOLM
		John W. Chisholm
		Interim President

By:		/s/S/ JESSE E. NEYMAN
		Jesse E. Neyman
		Executive Vice President, Finance and Strategic Planning ~~Principal Financial Officer and~~ ~~Principal Accounting Officer~~

~~November 16, 2009~~Date: May 21, 2010

~~EXHIBITS~~


~~Exhibit~~ ~~No.~~		~~Description of Exhibit~~

~~3.1~~		~~Certificate of Amendment to the Amended and Restated Certificate of Incorporation, filed on November 9, 2009.~~

~~10.1~~		~~Amended and Restated Credit Agreement between the Company and Wells Fargo Bank, N.A. dated August 31, 2007.~~

~~10.2~~		~~Credit Agreement, dated as of March 31, 2008, among Flotek Industries, Inc., Wells Fargo Bank, National Association and the Lenders named therein.~~

~~10.3~~		~~Second Amendment to Credit Agreement, dated as of March 13, 2009, among Flotek Industries, Inc., Wells Fargo Bank, N.A. and the Lenders named therein.~~

~~10.4~~		~~Waiver Agreement and Fourth Amendment to Credit Agreement, dated as of November 16, 2009, among Flotek Industries, Inc., Wells Fargo Bank, N.A. and the Lenders named therein.~~

~~31.1~~		~~Certification (pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act) by Principal Executive Officer.~~

~~31.2~~		~~Certification (pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act) by Principal Financial Officer.~~

~~32.1~~		~~Section 1350 Certification of Periodic Report by Principal Executive Officer and Principal Financial Officer.~~


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Revenue	$	23.8		$	62.8		$	88.0		$	166.1

Cost of revenue		17.5			36.2			65.5			95.9

Expenses:
Impairment of goodwill		—			—			18.5			—
Selling, general and administrative		7.2			12.4			26.6			34.3
Depreciation and amortization		1.2			1.6			3.7			4.2
Research and development		0.4			0.4			1.2			1.3

Total expenses		8.8			14.4			50.0			39.8

Income (loss) from operations		(2.5	)		12.2			(27.5	)		30.4

Other expense:
Interest expense		(4.1	)		(3.9	)		(11.6	)		(9.7	)
Investment income and other, net		0.1			—			(0.1	)		—

Total other expense		(4.0	)		(3.9	)		(11.7	)		(9.7	)
Income (loss) before income taxes		(6.5	)		8.3			(39.2	)		20.7
Provision for income taxes		(15.8	)		(3.2	)		(4.9	)		(7.9	)

Net income (loss)		(22.3	)		5.1			(44.1	)		12.8
Accrued dividends and accretion of discount on preferred stock		(0.8	)		—			(0.8	)		—

Net income (loss) allocable to common stockholders	$	(23.1	)	$	5.1		$	(44.9	)	$	12.8


Earnings (loss) per share allocable to common stockholders:
Basic	$	(1.18	)	$	0.27		$	(2.29	)	$	0.68
Diluted	$	(1.18	)	$	0.27		$	(2.29	)	$	0.66
Weighted average common shares used in computing basic earnings per common share (in thousands)		19,645			18,972			19,578			18,832
Incremental common shares from stock options, warrants and restricted stock (in thousands)		—			429			—			514

Weighted average common shares used in computing diluted earnings per common share (in thousands)		19,645			19,401			19,578			19,346


	Nine Months Ended September 30, 2008
Revenue	$	168.0
Income before income taxes		24.0
Net income		14.9
Basic earnings per common share	$	0.78
Diluted earnings per common share		0.76


	Reporting Units											Total
	Chemical and Logistics		Artificial Lift			Teledrift			Remaining Drilling Products segment			Total
	(in millions)
Goodwill
December 31, 2007	$	11.6	$	5.9		$	—		$	43.0		$	60.5
Acquisition		—		—			46.5			—			46.5
Impairment		—		(5.9	)		(12.6	)		(43.0	)		(61.5	)

December 31, 2008	$	11.6	$	—		$	33.9		$	—		$	45.5
Impairment		—		—			(18.5	)		—			(18.5	)

September 30, 2009	$	11.6	$	—		$	15.4		$	—		$	27.0


	Three Months Ended September 30, 2008						Nine Months Ended September 30, 2008
	As reported			As adjusted			As reported			As adjusted
	(in millions, except per share data)						(in millions, except per share data)
Interest expense	$	(2.7	)	$	(3.9	)	$	(7.2	)	$	(9.7	)
Total other expense		(2.7	)		(3.9	)		(7.2	)		(9.7	)
Income before taxes		9.4			8.3			23.1			20.7
Provision for income taxes		(3.6	)		(3.2	)		(8.8	)		(7.9	)
Net income		5.9			5.1			14.4			12.8

Basic earnings per common share		0.31			0.27			0.76			0.68
Diluted earnings per common share		0.30			0.27			0.74			0.66


	Level 1	Level 2		Level 3	Total
Convertible Senior Notes	—	$	63.3	—	$	63.3


Three months ended September 30, 2009	Chemicals and Logistics		Drilling Products			Artificial Lift		Corporate and Other			Total
Revenue	$	11.0	$	10.2		$	2.6	$	—		$	23.8
Income (loss) from operations	$	3.5	$	(3.2	)	$	0.1	$	(2.9	)	$	(2.5	)
Capital expenditures	$	0.3	$	0.4		$	—	$	—		$	0.7

Three months ended September 30, 2008
Revenue	$	30.4	$	26.6		$	5.8	$	—		$	62.8
Income (loss) from operations	$	10.5	$	5.4		$	0.9	$	(4.6	)	$	12.2
Capital expenditures	$	0.8	$	6.4		$	0.1	$	0.1		$	7.4

Nine months ended September 30, 2009	Chemicals and Logistics		Drilling Products			Artificial Lift		Corporate and Other			Total
Revenue	$	37.7	$	40.1		$	10.2	$	—		$	88.0
Income (loss) from operations (1)	$	9.5	$	(27.3	)	$	0.9	$	(10.6	)	$	(27.5	)
Capital expenditures	$	0.4	$	5.2		$	—	$	—		$	5.6

Nine months ended September 30, 2008
Revenue	$	82.4	$	70.3		$	13.4	$	—		$	166.1
Income (loss) from operations	$	29.5	$	12.9		$	1.5	$	(13.5	)	$	30.4
Capital expenditures	$	1.9	$	13.9		$	0.2	$	0.6		$	16.6


	As of September 30,
	2009		% Change		2008
Rig Count: (1)
U.S.		1,017	(49.0	)%		1,995
Canada		228	(51.0	)%		465
Commodity Prices :
Crude Oil (West Texas Intermediate)	$	70.46	(30.0	)%	$	100.70
Natural Gas (Henry Hub)	$	3.24	(60.2	)%	$	8.15


	Three Months Ended March 31,
	2010			2009
Revenue	$	28,370		$	40,676
Cost of revenue		20,358			28,185

Gross margin		8,012			12,491

Selling, general and administrative costs		10,191			10,289
Depreciation and amortization		1,193			1,244
Research and development costs		362			429

Income (loss) from operations		(3,734	)		529

Loss on extinguishment of debt		(995	)		—
Interest and other expense, net		(4,156	)		(3,831	)
Other financing costs		(816	)		—
Change in fair value of warrant liability		(1,813	)		—

Loss before income taxes		(11,514	)		(3,302	)

Income tax benefit		2,001			1,299

Net loss	$	(9,513	)	$	(2,003	)


*Chemicals and Logistics (in thousands)*

	Quarters Ended March 31,
	2010			2009

Revenue	$	13,112		$	17,250

Gross margin	$	5,837		$	6,925

Gross margin %		44.5	%		40.1	%

Income from operations	$	3,720		$	4,404

Income from operations %		28.4	%		25.5	%


*Drilling Products (in thousands)*

	Quarters Ended March 31,
	2010			2009

Revenue	$	12,911		$	18,287

Gross margin	$	1,494		$	4,155

Gross margin %		11.6	%		22.7	%

Loss from operations	$	(3,193	)	$	(673	)

Loss from operations %		(24.7	)%		(3.7	)%


*Artificial Lift ( in thousands)*

	Quarters Ended March 31,
	2010			2009

Revenue	$	2,347		$	5,139

Gross margin	$	681		$	1,411

Gross margin %		29.0	%		27.5	%

Income from operations	$	255		$	819

Income from operations %		10.9	%		15.9	%


	Quarter Ended March 31,
	2010			2009

Net cash (used in) provided by operating activities	$	(5,555	)	$	2,801
Net cash used in investing activities		(399	)		(3,071	)
Net cash provided by financing activities		5,934			664
Effect of exchange rate changes		(7	)		2

Net (decrease) increase in cash and cash equivalents	$	(27	)	$	396


~~Covenant~~	~~Required $/Ratio~~	~~Actual $/Ratio~~
~~Minimum Net Worth~~	~~Minimum $42.8 million~~	~~$24.7 million~~
~~Leverage Ratio (1)~~	~~Waived~~	~~10.41 to 1.00~~
~~Fixed Charge Coverage~~	~~Minimum 0.75 to 1.00~~	~~0.29 to 1.00~~
~~Senior Leverage~~	~~Maximum 2.00 to 1.00~~	~~1.93 to 1.00~~


	Payments Due by Period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years

Convertible notes	$	111,004	$	—	$	—	$	111,004	$	—
Long-term debt obligations		40,000		6,373		33,627		—		—
Capital lease obligations		638		237		356		45		—

Total	$	151,642	$	6,610	$	33,983	$	111,049	$	—


	Charter Amendment (1)	Preferred Stock PIK Dividend Provision	Exercisable Warrant Anti-dilution Provision	Contingent Warrants
For	12,320,492	12,427,677	12,666,434	12,420,149
Against	1,422,139	1,281,885	1,012,029	1,201,156
Abstain	224,333	257,402	288,501	345,659
Broker and Other Non-Votes	—	—	—	—

Large accelerated filer

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Smaller reporting company