Unassociated Document

0001144204-06-044745.txt : 20061101 0001144204-06-044745.hdr.sgml : 20061101 20061101162820 ACCESSION NUMBER: 0001144204-06-044745 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061101 DATE AS OF CHANGE: 20061101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOTEK INDUSTRIES INC/CN/ CENTRAL INDEX KEY: 0000928054 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 900023731 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13270 FILM NUMBER: 061179198 BUSINESS ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7138499911 MAIL ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 10QSB 1 v055510_10qsb.htm Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 - QSB

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

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission File Number 1-13270

FLOTEK INDUSTRIES, INC.

(Exact name of small business issuer as specified in its charter)

Delaware	90-0023731
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification Number)

7030 Empire Central Drive, Houston TX 77040
(Address of Principal Executive Offices)

(713) 849-9911

(Issuer’s telephone number)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

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

There were 8,818,526 shares of the issuer’s common stock, $.0001 par value, outstanding as of November 1, 2006.

Transitional small business disclosure format: YES o NO x

TABLE OF CONTENTS

	Page

PART I - FINANCIAL INFORMATION	1

Item 1. Financial Statements	1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3. Controls and Procedures	20

PART II - OTHER INFORMATION	22

Item 6. Exhibits.	22

SIGNATURES	23

Forward-Looking Statements

Except for the historical information contained herein, the discussion in this Form 10-QSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipate", "believe", "expect", "plan", "intend”, "project", "forecast", "could" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this Form 10-QSB regarding the Company's financial position, business strategy, budgets and plans, and objectives of management for future operations are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those in the forward-looking statements for various reasons, including, but not limited to, the effect of competition, the level of petroleum industry exploration and production expenditures, world economic and political conditions, prices of and the demand for crude oil and natural gas, weather, the legislative environment in the United States of America and other countries, adverse changes in the capital and equity markets, and other risk factors including those identified herein.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FLOTEK INDUSTRIES, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share data)

	September 30, 2006		December 31, 2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	374	$	7,377
Accounts receivable, net		19,381		10,407
Inventories, net		14,205		10,658
Other current assets		848		234
Total current assets		34,808		28,676

Property, plant and equipment, net		16,853		9,961
Goodwill		24,465		12,388
Intangible and other assets, net		1,442		1,133
	$	77,568	$	52,158

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,651	$	3,805
Accrued liabilities		7,184		3,296
Current portion of long-term debt		2,486		2,016
Deferred tax liability, current		319		319
Total current liabilities		17,640		9,436

Long-term debt, less current portion		11,689		7,277
Deferred tax liability, noncurrent		254		240
Total liabilities		29,583		16,953

Stockholders’ equity:
Common stock, $.0001 par value; 20,000,000 shares authorized; shares issued and outstanding: September 30, 2006 - 8,818,526 and December 31, 2005 - 8,317,265		1		1

Additional paid-in capital		45,024		39,744
Retained earning (accumulated deficit)		2,960		(4,540	)
Total stockholders’ equity		47,985		35,205
	$	77,568	$	52,158

The accompanying notes are an integral part of these consolidated condensed financial statements.

FLOTEK INDUSTRIES, INC.

CONSOLIDATED CONDENSED INCOME STATEMENTS

(UNAUDITED)

(in thousands, except share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Revenues	$	29,196		$	13,304		$	67,370		$	36,805

Cost of revenues		17,253			7,576			40,059			21,746
Gross profit		11,943			5,728			27,311			15,059

Expenses:
Selling, general and administrative		5,086			2,416			12,348			6,461
Depreciation and amortization		725			422			1,975			1,000
Research and development		172			163			484			441
Total expenses		5,983			3,001			14,807			7,902
Income from operations		5,960			2,727			12,504			7,157

Other income (expense):
Interest expense		(327	)		(215	)		(750	)		(653	)
Other, net		69			(1	)		91			39
Total other income (expense)		(258	)		(216	)		(659	)		(614	)

Income before income taxes		5,702			2,511			11,845			6,543
Provision for income taxes		(2,193	)		(741	)		(4,345	)		(1,317	)
Net income	$	3,509		$	1,770		$	7,500		$	5,226

Basic and diluted earnings per common share:
Basic earnings per common share	$	0.40		$	0.24		$	0.87		$	0.75
Diluted earnings per common share	$	0.37		$	0.21		$	0.81		$	0.67

Weighted average common shares used in computing basic earnings per common share		8,819,544			7,387,467			8,580,745			6,976,915
Incremental common shares from stock options and warrants		610,442			955,062			653,233			865,177
Weighted average common shares used in computing diluted earnings per common share		9,429,986			8,342,529			9,233,978			7,842,092

The accompanying notes are an integral part of these consolidated condensed financial statements.

FLOTEK INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Nine Months Ended September 30,
	2006			2005
Cash flows from operating activities:
Net income	$	7,500		$	5,226
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,975			1,000
Gain on sale of assets		(72	)		¾
Deferred tax liability		14			(187	)
Change in assets and liabilities:
Restricted cash		¾			37
Accounts receivable		(7,746	)		(1,317	)
Inventories		(1,219	)		(886	)
Deposits and other		(600	)		(101	)
Accounts payable		2,484			(1,968	)
Accrued liabilities		3,882			407
Net cash provided by operating activities		6,218			2,211

Cash flows from investing activities:
Acquisition earn-out payment		¾			(154	)
Acquisitions, net of cash acquired		(12,763	)		(7,452	)
Proceeds from sale of assets		273
Other assets		(49	)		(268	)
Capital expenditures		(6,461	)		(1,425	)
Net cash used in investing activities		(19,000	)		(9,299	)

Cash flows from financing activities:
Issuance of stock		897			19,915
Proceeds from borrowings		22,961			9,603
Repayments of indebtedness		(18,079	)		(13,416	)
Payments to related parties		¾			(466	)
Net cash provided by financing activities		5,779			15,636

Net increase (decrease) in cash and cash equivalents		(7,003	)		8,548
Cash and cash equivalents at beginning of period		7,377			285
Cash and cash equivalents at end of period	$	374		$	8,833

Supplementary schedule of non-cash investing and financing activities (See Note 3):
Fair value of net assets acquired	$	17,354		$	17,411
Less cash acquired		(208	)		(134	)
Less debt issued		¾			(7,375	)
Less equity issued		(4,383	)		(2,450	)
Acquisition, net of cash acquired	$	12,763		$	7,452
Supplemental disclosure of cash flow information:
Interest paid	$	655		$	689
Income taxes paid	$	3,685		$	1,414

The accompanying notes are an integral part of these consolidated condensed financial statements.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 - General

The information contained in the following notes is condensed from that which would appear in the annual consolidated financial statements; accordingly, the consolidated condensed financial statements included herein should be reviewed in conjunction with the consolidated financial statements for the year ended December 31, 2005 and related notes thereto, included in the Annual Report on Form 10-KSB filed by Flotek Industries, Inc. (“Flotek”) with the Securities and Exchange Commission. All references to the “Company” include Flotek and its wholly-owned subsidiaries unless otherwise indicated or the context indicates otherwise.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes current estimates are reasonable and appropriate, actual results could differ from these estimates.

In the opinion of management, the unaudited consolidated condensed financial statements of the Company include all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of its financial position as of September 30, 2006 and its results of operations and cash flows for the three and nine month periods ended September 30, 2006 and 2005. The consolidated condensed statement of financial position as of December 31, 2005 is derived from the December 31, 2005 audited consolidated financial statements. Although management believes the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations and cash flow for the nine month period ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year.

Certain prior period amounts have been reclassified in the accompanying consolidated condensed financial statements to conform to the current period presentation.

Note 2 - Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes". FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income Taxes" and must be adopted by the Company no later than January 1, 2007. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in its tax returns. The Company is evaluating the impact of adopting FIN 48.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. The Company’s effective date for the pronouncement was December 15, 2005. SFAS No. 154 requires that all voluntary changes in accounting principles, including corrections of errors, are retrospectively applied to prior financial statements as if that principle had always been used, unless it is impracticable to do so. When it is impracticable to calculate the effects on all prior periods, SFAS No. 154 requires that the new principle be applied to the earliest period practicable. The Company has adopted SFAS No. 154 as of December 31, 2005.

In December 2004, the FASB issued Statement No. 123R, “Share Based Payment” (“SFAS 123R”). This statement revises Statement 123 and supersedes APB 25 and amends FASB Statement No. 95, “Statement of Cash Flows”. SFAS 123R requires companies to expense the fair value of employee services received in exchange for an award of equity instruments, including stock options. SFAS 123R also provides guidance on valuing and expensing these awards, as well as disclosure requirements with respect to these equity arrangements.

We adopted SFAS 123R effective as of January 1, 2006. We are following the “modified prospective” method of adoption of SFAS 123R whereby earnings for prior periods will not be restated as though stock based compensation had been expensed, rather than the “modified retrospective” method which would entail restatement of previously published earnings. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow, but this is not anticipated to have a significant impact on our cash flow reporting. The impact of adoption of SFAS 123R will depend on levels of share-based compensation, particularly stock options, granted in the future and the fair value assigned thereto. The adoption of SFAS 123R has not had a material financial impact on our consolidated financial position, results of operations or cash flows.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

On December 22, 2005, the Compensation Committee, on behalf of the Board of Directors (“Board”), approved the acceleration of the vesting of all previously unvested stock options granted under our 2003 and 2005 Long Term Incentive Plans (the "Plans"). The vesting acceleration represents options exercisable for a total of 313,140 shares of our common stock, including a total of 175,875 shares of common stock underlying options held by our executive officers. The options have exercise prices ranging from $4.25 to $9.40 per share. The closing price of our common stock on December 22, 2005 was $18.80. The acceleration of the vesting schedule of the options was effected pursuant to Section 4(c)(x) of the Plans, which authorizes the Board, in its sole discretion, to substitute an accelerated vesting schedule for options granted under the Plans. In most instances, stock options granted under the Plans vested over a four-year period.

The Board imposed selling restrictions on shares received through the exercise of accelerated options. These restrictions prohibit the sale of shares purchased under accelerated options until the date on which the options would otherwise have vested under the original option grants or six months after the date on which the options would otherwise have vested under the original option grants if the employee is no longer employed by the Company.

Note 3 - Acquisitions

The Company has made three acquisitions in the nine months ended September 30, 2006. On January 2, 2006, the Company purchased the assets of Can-Ok Oil Field Services, Inc. and Stabilizer Technology, Inc. (collectively “Can-Ok”) a downhole oilfield tool company located in Chickasha, Oklahoma. On April 3, 2006, the Company purchased the tangible assets and licensed the rights to exercise the exclusive worldwide rights to a patented gas separator used in coal bed methane production from Total Well Solutions, Inc. (“TWS”). TWS markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers in the Powder River Basin. On June 6, 2006, the Company purchased the assets of LifTech, LLC (“LifTech”) which markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers in the Powder River Basin.

Acquisitions have been accounted for using the purchase method of accounting under SFAS No. 141 "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 the 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.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The assets acquired, liabilities assumed and consideration paid were as follows (in thousands, except share data):

	Can-Ok		TWS		LifTech
	(in thousands, except share data)
Assets acquired:
Cash	$	38	$	¾	$	170
Accounts receivable		476		¾		754
Inventory		85		1,565		863
Plant, property and equipment		1,972		170		291
Goodwill		4,923		2,977		3,898
Intangible and other assets		206		160		173
Total assets acquired	$	7,700	$	4,872	$	6,149

Liabilities assumed:
Accounts payable	$	394	$	¾	$	967
Accrued liabilities		6		¾		¾
Total liabilities assumed	$	400	$	¾	$	967

Net assets acquired	$	7,300	$	4,872	$	5,182

Consideration paid:
Cash	$	6,775	$	4,872	$	1,323
Common stock		525		¾		3,859
Total consideration paid	$	7,300	$	4,872	$	5,182

Common stock shares issued		25,020		¾		178,223

Note 4 - Inventories

The components of inventories as of September 30, 2006 and December 31, 2005 were as follows:

	September 30, 2006			December 31, 2005
	(in thousands)
Raw materials	$	3,591		$	2,409
Work-in-process		¾			51
Finished goods		11,371			8,603
Gross inventories		14,962			11,063
Less: Slow-moving and obsolescence reserve		(757	)		(405	)
Inventories, net	$	14,205		$	10,658

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 5 - Property, Plant and Equipment

As of September 30, 2006 and December 31, 2005, property, plant and equipment was comprised of the following:

	September 30, 2006			December 31, 2005
	(in thousands)
Land	$	523		$	409
Buildings and leasehold improvements		3,636			3,026
Machinery, equipment and rental tools		11,741			7,882
Equipment in progress		3,420			464
Furniture and fixtures		240			123
Transportation equipment		1,937			1,068
Computer equipment and other		490			433
Gross property, plant and equipment		21,987			13,405
Less: Accumulated depreciation and amortization		(5,134	)		(3,444	)
Net property, plant and equipment	$	16,853		$	9,961

Note 6 — Goodwill

The Company evaluates the carrying value of goodwill during the fourth quarter of each year and on an interim basis, if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (i) a significant adverse change in legal factors or in business climate, (ii) unanticipated competition, or (iii) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a discounted cash flows approach. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company’s evaluation of goodwill completed during 2005 resulted in no impairment losses.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 7 - Long-Term Debt

Long-term debt as of September 30, 2006 and December 31, 2005 consisted of the following:

	September 30, 2006			December 31, 2005
	(in thousands)
Senior Credit Facility
Equipment term loan	$	4,667		$	5,717
Real estate term loan		738			803
Revolving line of credit		6,031			¾
Amendments to Senior Credit Facility
Equipment term loan		1,196			1,289
Real estate term loan		212			222
Promissory notes to stockholders of acquired businesses, maturing February 2008		813			1,004
Other		518			258
Total		14,175			9,293
Less current maturities		(2,486	)		(2,016	)
Long-term debt, less current portion	$	11,689		$	7,277

The Company’s revolving line of credit as amended on August 19, 2005 provided for borrowing through February 14, 2007, bearing interest at prime rate plus 50 basis points. The maximum amount that may be outstanding under the amended line of credit is the lesser of (a) $6,000,000, or (b) the sum of 80% of eligible domestic trade receivables and 50% of eligible inventory, as defined. The terms are interest-only, maturing February 2007.

On August 8, 2006, the Company again amended the Senior Credit Facility. The maturity date and the maximum amount that may be outstanding were amended on the revolving line of credit. The amended revolving line of credit provides for borrowing through August 8, 2009. The maximum amount that may be outstanding was increased to the lesser of (a) $10.0 million (a $4.0 million increase from the August 2005 amended revolving line of credit of $6.0 million), or (b) the sum of 80% of eligible domestic trade receivables and 50% of eligible inventory, as defined. Based on the new maturity date, the current revolving line of credit is classified as long-term debt.

All Senior Credit Facility borrowings are collateralized by substantially all of our assets. Senior Credit Facility borrowings are subject to certain financial covenants and a material adverse change subjective acceleration clause. As of September 30, 2006, the Company was in compliance with all covenants.

The Company believes the fair value of its long-term debt approximates the recorded value as of September 30, 2006, as the majority of the long-term debt carries a floating interest rate based on the prime rate.

Note 8 - Common Stock

The amount of common shares issued and outstanding is summarized as follows:

Issued and outstanding as of December 31, 2005			8,317,265
Shares issued for Can-Ok acquisition (See Note 3)			25,020
Shares issued for LifTech acquisition (See Note 3)			178,223
Warrants converted through September 30, 2006			26,490
Stock options exercised through September 30, 2006			271,528
Issued and outstanding as of September 30, 2006			8,818,526

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 9 - Earnings Per Share (“EPS”)

Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is based on the weighted average number of shares outstanding during each period and the assumed exercise of dilutive instruments (stock options and warrants) less the number of treasury shares assumed to be purchased with the exercise proceeds using the average market price of the Company’s common stock for each of the periods presented.

The following table presents information necessary to calculate earnings per share for the periods presented.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2006		2005		2006		2005
	(in thousands, except share data)
Net income	$	3,509	$	1,770	$	7,500	$	5,226
Weighted-average common shares outstanding		8,819,544		7,387,467		8,580,745		6,976,915
Basic earnings per common share	$	0.40	$	0.24	$	0.87	$	0.75
Diluted earnings per common share	$	0.37	$	0.21	$	0.81	$	0.67

Weighted-average common shares outstanding		8,519,544		7,387,467		8,580,745		6,976,915
Effect of dilutive securities		610,442		955,062		653,233		865,177
Weighted-average common equivalent shares outstanding		9,429,986		8,342,529		9,233,978		7,842,092

Note 10 - Stock-Based Compensation

The Company adopted SFAS 123R effective as of January 1, 2006. SFAS 123R requires all stock-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values. The Company follows the “modified prospective” method of adoption of SFAS 123R whereby earnings for prior periods will not be restated as though stock-based compensation had been expensed.

Prior to the adoption of SFAS 123R, the Company accounted for stock based employee compensation under Accounting Principles Board Opinion No. 25 ”Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, no compensation expense is recognized in the financial statements because the exercise price of the employee stock options equals the market price of the common stock on the date of grant.

By accelerating the vesting of all outstanding options as of December 22, 2005 (see Note 2), the Company accounted for the stock options under the rules in effect when the stock options were granted, APB 25, versus SFAS 123R adopted on January 1, 2006.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Under SFAS 123R, the Company’s compensation costs based on the fair value at the grant date for its stock options, net income and EPS would have been reduced to the following pro forma amounts for the prior comparable quarter:

	For the Three Months Ended September 30, 2005		For the Nine Months Ended September 30, 2005
	(in thousands, except share data)
Net income:
As reported	$	1,770	$	5,226
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		¾		(44	)
Pro forma	$	1,770	$	5,182

Basic earnings per share:
As reported	$	0.24	$	0.75
Pro forma	$	0.24	$	0.74

Diluted earnings per share:
As reported	$	0.21	$	0.67
Pro forma	$	0.21	$	0.66

For the three and nine months ended September 30, 2006, the Company did not grant any stock options. As a result, no stock based compensation expense was recorded for the three and nine months ended September 30, 2006.

Note 11 - Income Taxes

A reconciliation of the effective income tax rate to the statutory income tax rate is as follows:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2006			2005			2006			2005
Income tax (benefit) at statutory rate		34.0	%		34.0	%		34.0	%		34.0	%
State taxes, net of federal benefit		2.9			2.0			2.5			2.0
Deductible items		(0.6	)		¾			(0.5	)		¾
Change in valuation allowance		¾			(6.5	)		¾			(15.9	)
Other		2.2			¾			0.7			¾
Provision for income taxes		38.5	%		29.5	%		36.7	%		20.1	%

Our effective income tax rate in 2006 and 2005 differs from the federal statutory rate primarily due to state income taxes and changes in the valuation allowances due to the change in management’s estimate of the utilization of net loss carryforwards. A valuation allowance was provided against our net deferred tax assets relating to our net operating losses in the amount that management believes is more likely than not to expire unrealized based on existing carryforward abilities. Certain Internal Revenue Code provisions may limit the use of our net operating loss carryforwards. We continue to assess the limitations on our net operating loss carryforwards, if any, on future periods. We are currently evaluating our historical Canadian performance and associated filings to verify the existence and usage of our Canadian net operating losses. As of September 30, 2006, we had estimated net operating loss carryforwards of approximately $6.3 million, expiring in various amounts in 2017 through 2025.

Our current corporate organization structure requires us to file two separate consolidated U.S. Federal income tax returns. As a result, taxable income of one group can not be offset by tax attributes, including net operating losses, of the other group. Accordingly, the effective tax rate in future periods may differ significantly from the expected statutory rates depending on the level of taxable income or loss for each group.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 12 - Related Party Transactions

The Company purchased from Phoenix E&P Technology, LLC (“Phoenix”), its manufacturing assets, inventory and intellectual property rights to produce oilfield shale shaker screens on January 28, 2005. The assets were purchased for $46,640 with a three-year royalty interest on all shale shaker screens produced. Phoenix is 75% owned by Chisholm Energy Partners (“CEP”). Jerry D. Dumas, Sr., our Chief Executive Officer and Chairman, and Dr. Glenn Penny, our President, Chief Technical Officer and director, each have a 2 1/2% indirect ownership interest in CEP, and John Chisholm, a director of Flotek, has a 30% ownership interest in CEP. No royalties were earned during the nine months ended September 30, 2006.

Note 13 - Segment Information

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

The Company has determined that there are three reportable segments:

The Chemicals and Logistics segment is made up of two business units:

The CESI chemical business unit develops, manufactures and markets specialty chemicals used by oilfield service companies in oil and gas well cementing, stimulation, drilling and production. Our research laboratories support the specific drilling and production needs of our customers.

The Materials Translogistics business unit designs and manages automated bulk material handling, loading facilities, and blending capabilities for oilfield service companies.

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

The Production Products segment manufactures and markets artificial lift equipment which includes the Petrovalve line of downhole beam pump components. We have recently expanded the artificial lift capability of this segment with the acquisition of TWS in April 2006 and LifTech in June 2006. The acquired companies provide a broad spectrum of 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. The accounting policies of the business segments are the same as those described in the consolidated financial statements for the year ended December 31, 2005 and the related notes thereto included in the Annual Report on Form 10-KSB filed by the Company with the Securities and Exchange Commission. Inter-segment sales are accounted for at fair value as if sales were to third parties and are eliminated in the consolidated financial statements.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Summarized financial information concerning the segments for the three and nine months ending September 30, 2006 and 2005 is shown in the following tables:

	Chemicals and Logistics			Drilling Products		Production Products			Corporate and Other			Total
	(in thousands)
Three months ended September 30, 2006
Net revenues to external customers	$	13,608	$	9,803	$	5,785		$	¾		$	29,196
Income (loss) from operations	$	4,769	$	1,974	$	846		$	(1,629	)	$	5,960

Three months ended September 30, 2005
Net revenues to external customers	$	7,727	$	5,372	$	205		$	¾		$	13,304
Income (loss) from operations	$	2,243	$	1,253	$	(33	)	$	(736	)	$	2,727

Nine months ended September 30, 2006
Net revenues to external customers	$	31,989	$	26,875	$	8,506		$	¾		$	67,370
Income (loss) from operations	$	10,056	$	4,961	$	938		$	(3,451	)	$	12,504

Nine months ended September 30, 2005
Net revenues to external customers	$	20,920	$	14,978	$	907		$	¾		$	36,805
Income (loss) from operations	$	5,598	$	3,355	$	33		$	(1,829	)	$	7,157

Total assets by reportable segment were as follows:

	September 30, 2006		December 31, 2005
	(in thousands)
Chemicals and Logistics	$	23,353	$	16,417
Drilling Products		38,289		26,787
Production Products		15,176		1,233
Corporate and Other		750		7,721
Total assets	$	77,568	$	52,158

Note 14 - Subsequent Events

On October 5, 2006 the Company entered into a definitive agreement to purchase a 50% interest in CAVO Drilling Motors, Ltd. Co. (“CAVO”) for approximately $6 million, subject to normal closing conditions. The transaction will be funded with cash, common stock and a seller note, and is anticipated to close by the end of October. This interest in CAVO will be accounted for under the equity method.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Item 1. Financial Statements” contained herein.

Business Overview

We provide a broad range of products and services worldwide, for use in mining and the exploration and production of crude oil and natural gas. We compete in the specialty chemicals and logistics, downhole drilling tool and downhole production tool markets.

We were incorporated in 1985. As of July 27, 2005 our common stock began trading on the American Stock Exchange under the stock ticker symbol “FTK”. Our headquarters are in Houston, Texas, and we have manufacturing operations in Texas, Oklahoma, Louisiana and Wyoming. We market our products domestically and internationally in over 20 countries.

Our product lines are divided into three segments within the oilfield service industry:

The Chemicals and Logistics segment is made up of two business units:

The CESI chemical business unit develops, manufactures and markets chemicals used by oilfield service companies in oil and gas well cementing, stimulation, drilling and production. Our research laboratories support the specific drilling and production needs of our customers.

The Materials Translogistics business unit designs and manages automated bulk material handling, loading and blending capabilities for oilfield service companies.

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

The Production Products segment manufactures and markets artificial lift equipment which include the Petrovalve line of downhole beam pump components. We have recently expanded the artificial lift capability of this segment with the acquisition of the assets of Total Well Solutions, Inc. (“TWS”) in April 2006 and LifTech, L.L.C. (“LifTech”), in June 2006. The acquired companies provide a broad spectrum of electric submersible pumps, gas separators, valves and services to support coal bed methane production.

The customers for our products and services include the major integrated oil and natural gas companies, independent oil and natural gas companies and state-owned national oil companies. Our ability to compete in the oilfield services market is dependent on our ability to differentiate our products and services, provide superior quality and service, and maintain a competitive cost structure. Activity levels in our three segments are driven primarily by current and expected commodity prices, drilling rig count, oil and gas production levels, and customer capital spending allocated for drilling and production.

Over the last year we have grown our sales internally and through acquisitions. During 2005 and 2006, we have entered into the following acquisitions that were outside the ordinary course of our business:

acquired manufacturing assets, inventory and intellectual property rights to produce oilfield shale shaker screens from Phoenix E&P Technology, LLC (“Phoenix”) on January 28, 2005;

acquired Spidle Sales and Services, Inc. (“Spidle”), a downhole tool company with rental, sales and manufacturing operations throughout the Rocky Mountains, on February 14, 2005;

acquired the assets of Harmon’s Machine Works, Inc. (“Harmon”), a downhole oilfield and mining tool company with manufacturing and sales operations located in Midland, Texas, on August 19, 2005;

acquired the assets of Precision-LOR, Ltd. (“LOR”), a drilling tool rental and inspection service provider in south Texas, on August 31, 2005;

acquired the assets of Can-Ok Oil Field Services, Inc. and Stabilizer Technology, Inc. (“Can-Ok”), a drilling tool sales and rental provider in Oklahoma, Louisiana and Arkansas, on January 2, 2006;

acquired the assets of TWS, which manufactures, markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers, on April 3, 2006; and

acquired the assets of LifTech, which manufactures, markets and services electric submersible pumps and downhole gas/water separators primarily to coal bed methane gas producers, on June 6, 2006.

In addition we contracted to acquire a 50% interest in CAVO Drilling Motors, Ltd. Co., which specializes in the rental, service and sale of high performance mud motors, on October 5, 2006. We continue to actively seek profitable acquisition or merger candidates in our core businesses to either decrease costs of providing products or add new products and customer base to diversify our market.

Results of Operations

	Three Months Ended September 30,						Nine Months Ended September 30,
		2006			2005			2006			2005
	(in thousands)
Revenues	$	29,196		$	13,304		$	67,370		$	36,805
Cost of revenues		17,253			7,576			40,059			21,746
Gross profit		11,943			5,728			27,311			15,059
Gross profit %		40.9	%		43.1	%		40.5	%		40.9	%
Expenses:
Selling, general and administrative		5,086			2,416			12,348			6,461
Depreciation and amortization		725			422			1,975			1,000
Research and development		172			163			484			441
Total expenses		5,983			3,001			14,807			7,902
Income from operations		5,960			2,727			12,504			7,157
Income from operations %		20.4	%		20.5	%		18.6	%		19.4	%
Other income (expense):
Interest expense		(327	)		(215	)		(750	)		(653	)
Other, net		69			(1	)		91			39
Total other income (expense)		(258	)		(216	)		(659	)		(614	)

Income before income taxes		5,702			2,511			11,845			6,543
Provision for income taxes		(2,193	)		(741	)		(4,345	)		(1,317	)
Net income	$	3,509		$	1,770		$	7,500		$	5,226

Consolidated - Comparison of Three Months Ended September 30, 2006 and 2005

Total revenues increased by $15.9 million or 119.5% in the third quarter of 2006 versus 2005. Acquisitions accounted for $7.1 million of the increase, with the remaining $8.8 million coming from internal revenue growth within the Chemical and Logistics segment and the established Drilling Products segment.

Gross profit increased by $6.2 million or 108.5% in the third quarter of 2006 versus 2005. Acquisitions accounted for $2.0 million of the increase. Gross profit as a percentage of sales decreased from 43.1% in the third quarter of 2005 to 40.9% in the third quarter of 2006. Gross profit is best analyzed on a segment by segment basis, as gross profit varies among operating segments and can vary significantly from year to year in certain operating segments.

Selling, general and administrative costs are not directly attributable to products sold or services rendered. Selling, general and administrative costs were $5.1 million in the third quarter of 2006 versus $2.4 million in the third quarter of 2005. The acquisitions noted above accounted for $1.1 million of the increase. We also incurred $0.6 million in professional fees in connection with a potential acquisition in the Drilling Products segment. Negotiations on the acquisition were terminated on August 22, 2006. The balance of the increase is primarily due to increased sales and field support costs in the Chemical and Logistics segment and increased administrative staff and professional fees associated with expanding the Company.

Depreciation and amortization increased from $0.4 million in the third quarter of 2005 to $0.7 million in the third quarter of 2006 due to the increased levels of property, plant and equipment. The increase in property, plant and equipment was primarily due to the addition of assets associated with the drilling tool acquisitions noted above.

A provision for income taxes of $2.2 million was recorded in the third quarter of 2006. An effective tax rate of 38.5% was applied in the third quarter of 2006 versus 29.5% in the third quarter of 2005, resulting in a $1.5 million increase in the tax provision quarter over quarter. The significant increase in taxes is a result of the release of valuation allowances previously offsetting the net operating losses, an increase in our projected federal statutory rate based on estimated income levels, and an increase in our estimated state income tax liability. The Company’s remaining NOL’s are subject to limitations and are not expected to significantly reduce our effective tax rate going forward. The provision was made for estimated federal income tax, state income tax and alternative minimum tax, which cannot be offset by our NOL carryforwards.

Consolidated - Comparison of Nine Months Ended September 30, 2006 and 2005

Total revenues increased by $30.6 million or 83.0% in the first nine months of 2006 versus 2005. Acquisitions accounted for $14.1 million of the increase in revenues, with the remaining $16.5 million coming from internal revenue growth within the Chemical and Logistics segment and the Drilling Products segment.

Gross profit increased by $12.3 million or 81.4% in the first nine months of 2006 versus 2005. The acquisitions noted above accounted for $4.3 million of the increase. Gross profit as a percentage of sales decreased from 40.9% in the first nine months of 2005 to 40.5% in the first nine months of 2006. The gross profit is best analyzed on a segment by segment basis, as gross profit varies between operating segments and can vary significantly from year to year in certain operating segments.

Selling, general and administrative costs are not directly attributable to products sold or services rendered. Selling, general and administrative costs were $12.3 million in the first nine months of 2006 versus $6.5 million in the first nine months of 2005. The acquisitions noted above accounted for $3.1 million of the increase. We also incurred $0.6 million in professional fees in connection with a potential acquisition in the Drilling Products segment. Negotiations on the acquisition were terminated August 22, 2006. The balance of the increase is primarily due to increased sales and field support costs in the Chemical and Logistics segment and increased administrative costs and professional fees.

Depreciation and amortization increased from $1.0 million in the first nine months of 2005 to $2.0 million in the first nine months of 2006 due to the increased levels of property, plant and equipment. The increase in property, plant and equipment was primarily due to the addition of assets associated with the drilling tool acquisitions noted above.

A provision for income taxes of $4.3 million was recorded in the first nine months of 2006. An effective tax rate of 36.7% was applied in the first nine months of 2006 versus 20.1% in the first nine months of 2005, resulting in a $3.0 million increase in the tax provision. The significant increase in taxes is a result of the release of valuation allowances previously offsetting the net operating losses, an increase in our projected federal statutory rate based on estimated income levels, and an increase in our estimated state income tax liability. The Company’s remaining NOL’s are subject to limitations and are not expected to significantly reduce our effective tax rate going forward. The provision was made for estimated federal income tax, state income tax and alternative minimum tax, which cannot be offset by our NOL carryforwards.

Results by Segment

Chemicals and Logistics

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(in thousands)
Revenues	$	13,608		$	7,727		$	31,989		$	20,920
Gross profit	$	6,332		$	3,181		$	14,004		$	8,287
Gross profit %		46.5	%		41.2	%		43.8	%		39.6	%

Operating income	$	4,769		$	2,243		$	10,056		$	5,598
Operating margin %		35.0	%		29.0	%		31.4	%		26.8	%

Chemicals and Logistics - Comparison of Three Months Ended September 30, 2006 and 2005

Chemical and Logistics revenues increased $5.9 million or 76.1% in the third quarter of 2006 compared to 2005. The increase in revenue is a result of an increase in volume coupled with higher prices, particularly of our proprietary specialty chemicals. The most significant sales growth occurred in the Rocky Mountains and the Permian Basin.

The majority of revenue growth is attributed to increased sales of our line of biodegradable environmentally benign ‘green’ chemicals which grew from $2.1 million in the third quarter of 2005 to $6.8 million in the third quarter of 2006. International sales dropped from 23.9% in the third quarter of 2005 to 10.6% in the third quarter of 2006.

Gross profit as a percentage of revenues increased from 41.2% in the third quarter of 2005 to 46.5% in the third quarter of 2006. The increase in gross profit is due to price increases, a reduction in cost of goods as a percentage of total revenues and increased revenues from our higher margin proprietary chemicals. Managing chemical feedstock and transportation prices and passing the increase in the costs on to our customers are critical to maintain our gross profits. We are nearing completion of a 30,000 square foot expansion to our production facilities which will triple our production capabilities and allow us to manage larger volumes of inputs to take further advantage of volume pricing discounts.

Operating income increased from $2.2 million in the third quarter of 2005 to $4.8 million in the third quarter of 2006. The operating profit as a percentage of revenue increased from 29.0% to 35.0%, respectively.

Chemicals and Logistics - Comparison of Nine Months Ended September 30, 2006 and 2005

Chemical and Logistics revenues increased $11.1 million or 52.9% in the nine months ended September 30, 2006 compared to 2005. The increase in revenue is a result of an increase in volume coupled with higher prices, particularly of our proprietary specialty chemicals. The most significant sales growth occurred in the Rocky Mountains and Mid-Continent regions for the nine months ended September 30, 2006 as compared to 2005.

The majority of revenue growth is attributed to increased sales of our line of biodegradable environmentally benign ‘green’ chemicals which grew from $5.6 million in the first three quarters of 2005 to $14.5 million in the first three quarters of 2006. International sales decreased as a percentage of sales from 16.3% in the nine months ended September 30, 2005 to 10.3% in the nine months ended September 30, 2006.

Gross profit as a percentage of revenues increased from 39.6% in the first three quarters of 2005 to 43.8% for the same period in 2006. The increase in gross profit is due to price increases and a reduction in cost of goods as a percentage of total revenues. Managing chemical feedstock and transportation prices and passing the increase in the costs on to our customers are critical to maintain our gross profits. We are nearing completion of a 30,000 square foot expansion to our production facilities which will triple our production capabilities and allow us to manage larger volumes of inputs to take further advantage of volume pricing discounts.

Operating income increased from $5.6 million in the first three quarters of 2005 to $10.1 million in the first three quarters of 2006, and the operating income percentage increased from 26.8% to 31.4%, respectively.

Drilling Products

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(in thousands)
Revenues	$	9,803		$	5,372		$	26,875		$	14,978
Gross profit	$	4,085		$	2,444		$	11,227		$	6,290
Gross profit %		41.7	%		45.5	%		41.8	%		42.0	%

Operating income	$	1,974		$	1,253		$	4,961		$	3,355
Operating margin %		20.1	%		23.3	%		18.5	%		22.4	%

Drilling Products - Comparison of Three Months Ended September 30, 2006 and 2005

During 2005 and 2006 an emphasis was placed on expanding our drilling products sales through acquisition, allowing us to expand geographically as well as expand the amount of products and services provided. In August 2005 we acquired the assets of Harmon, a downhole oilfield and mining tool company with manufacturing and sales operations located in Midland, Texas, and the assets of LOR, a drilling tool rental and inspection service provider in South Texas. In January 2006 we acquired the assets of Can-Ok, a drilling tool sales and rental provider in Oklahoma, Louisiana and Arkansas.

Drilling Products revenues increased $4.4 million in the third quarter of 2006 compared to the third quarter of 2005. The acquisitions noted above accounted for $1.4 million of this increase. The remaining increase in sales was due primarily to increased downhole centralizers sales both domestically and internationally.

Gross profit increased $1.6 million in the third quarter of 2006 compared to 2005. The acquisitions noted above accounted for $0.6 million of this increase. Gross profit as a percentage of sales decreased from 45.5% in the third quarter of 2005 to 41.7% in the third quarter of 2006. The decrease in gross profit as a percentage of revenues relates to inventory price volatility and equipment sub-rental costs. The gross profit in the third quarter was 4.3 percentage points higher than in the second quarter

Operating income increased from $1.3 million for the third quarter of 2005 to $2.0 million for the third quarter of 2006.

Drilling Products - Comparison of Nine Months Ended September 30, 2006 and 2005

Drilling Products revenues increased $11.9 million in the first three quarters of 2006 compared to 2005. The acquisitions noted above accounted for $6.1 million of this increase. The remaining increase in sales was due to increased downhole centralizers sales both domestically and internationally and increased sales in the Rockies.

Gross profit increased $4.9 million for the period ended September 30, 2006 compared to 2005. The acquisitions noted above accounted for $2.4 million of this increase. Gross profit as a percentage of sales declined slightly from 42.0% in the first three quarters of 2005 to 41.8% in the first three quarters of 2006.

Operating income increased by $1.6 million for the nine months ended September 30, 2006 compared to 2005.

Production Products

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(in thousands)
Revenues	$	5,785		$	205		$	8,506		$	907
Gross profit	$	1,526		$	102		$	2,080		$	483
Gross profit %		26.4	%		49.9	%		24.5	%		53.2	%

Operating income	$	846		$	(33	)	$	938		$	33
Operating margin %		14.6	%		(16.1	)%		11.0	%		3.6	%

Production Products - Comparison of Three Months Ended September 30, 2006 and 2005

In the second quarter of 2006 we acquired TWS and LifTech as part of our goal to develop a significant artificial lift segment and expand our production driven revenue base. The combined companies will provide a broad spectrum of electric submersible pumps, gas separators, valves and services to support the coal bed methane producers in the Powder River Basin and beyond. We believe the recent artificial lift acquisitions will provide additional marketing opportunities for our patented Petrovalve line of pump components, our patented gas separator, and our line of electric submersible pumps.

Production revenues were $5.8 million in the third quarter of 2006 versus $0.2 million in the third quarter of 2005. Acquisitions accounted for $5.6 million of the increase. Gross profit increased $1.5 million due to the acquisitions. The gross margin percentage decreased from 49.9% in the third quarter of 2005 to 26.4% in the third quarter of 2006. The decrease in gross margin as a percentage of revenues is due to a shift in sales mix. The product sales associated with the two acquisitions are lower margin product sales compared to our existing Petrovalve sales.

The gross margin in the third quarter was 6.1 percentage points higher than in the second quarter. We believe we can continue to improve the gross margins of the acquisitions primarily through better supply chain management.

Management continues to focus on effectively marketing the Petrovalve line of pump components. Our patented guided valves are the only product which can be placed horizontally allowing a pump to be placed at the production zone in horizontally completed wells reducing the effort needed to pump the product to the surface. The Petrovalve can effectively lift highly viscous oil in heavy oil or tar sand production zones. Because of this we signed an exclusive distribution agreement with C.E. Franklin in Canada and have aligned ourselves with a major domestic pump manufacturer to build pumps with our valve.

Production Products - Comparison of Nine Months Ended September 30, 2006 and 2005

Production revenues were $8.5 million in the first three quarters of 2006 versus $0.9 million in 2005. Acquisitions accounted for $8.0 million of the increase. Revenues for the Petrovalve line declined as the first three quarters of 2005 included a large sale to a customer in Russia. The gross margin percentage decreased significantly from 53.2% in the nine months ended September 30, 2005 to 24.5% in the same period of 2006, as a result of lower margins on domestic sales versus international sales, and the impact of the acquisitions.

The decrease in gross margin as a percentage of revenues is due to a shift in sales mix. The product sales associated with the two acquisitions are lower margin product sales compared to our existing Petrovalve sales. Management is negotiating more favorable product contracts for the acquired businesses to improve margins on pump and separator sales.

Capital Resources and Liquidity

Capital resources and liquidity continued to improve during the nine months ended September 30, 2006 compared to the same period in 2005. During the nine months ending September 30, 2006 we generated net income of $7.5 million based on a 36.7% effective tax rate, versus a 20.1% effective tax rate for the same period in 2005. Cash flows from operations were $6.2 million in the nine months ended September 30, 2006 versus $2.2 million for the same period in 2005. The improvement in cash flow from operations is a direct result of improved operating results offset by increased estimated tax payments based on the projected increase in our estimated effective tax rate. The decrease in cash and cash equivalents of $7.0 million for the nine months ended September 30, 2006 was primarily a result of the acquisition of Can-Ok, TWS and LifTech.

Net working capital increased $3.2 million in the nine months ended September 30, 2006 versus a net increase of $3.8 million for the same period in 2005. The increase in cash provided by operating activities during the nine months ended September 30, 2006 was driven by a net $6.4 million increase in accounts payable and accrued liabilities offset by a $7.7 million increase in receivables and a $1.2 million increase in inventory.

Capital expenditures for the nine months ended September 30, 2006 totaled approximately $6.5 million. During the nine months ended September 30, 2006, we purchased approximately $2.4 million in rental equipment for our Drilling Products segment and invested approximately $2.1 million to expand our manufacturing plant and research and laboratory facilities within our Chemicals and Logistics segment.

As amended August 19, 2005, our Senior Credit Facility consists of a revolving line of credit, two equipment term loans and two real estate term loans. Our bank borrowings are collateralized by substantially all of our assets. On August 8, 2006, the Company again amended the Senior Credit Facility. The maturity date and the maximum amount that may be outstanding were amended on the revolving line of credit. The amended revolving line of credit provides for borrowing through August 8, 2009. The maximum amount that may be outstanding was increased to the lesser of (a) $10.0 million (a $4.0 million increase from the August 2005 amended revolving line of credit of $6.0 million), or (b) the sum of 80% of eligible domestic trade receivables and 50% of eligible inventory, as defined. Based on the new maturity date, the current revolving line of credit is classified as long-term debt. As of September 30, 2006, we had $6.0 million outstanding under the revolving line of credit of the amended Senior Credit Facility. Bank borrowings are subject to certain covenants and a material adverse change subjective acceleration clause. Affirmative covenants include compliance with laws, various reporting requirements, visitation rights, maintenance of insurance, maintenance of properties, keeping of records and books of account, preservation of existence of assets, notification of adverse events, ERISA compliance, joinder agreement with new subsidiaries, borrowing base audits, and use of treasury management services. Negative covenants include limitations associated with liens, indebtedness, change in nature of business, transactions with affiliates, investments, distributions, subordinate debt, leverage ratio, fixed charge coverage ratio, consolidated net income, prohibition of fundamental changes, asset sales and capital expenditures. As of September 30, 2006 we were in compliance with all covenants.

We have funded our capital requirements with operating cash flows, debt borrowings, and by issuing shares of our common stock. Common stock issued during the nine months ended September 30, 2006 is described below:

·	In the acquisition of Can-Ok in January 2006, we issued 25,020 shares of common stock.

·	In the acquisition of LifTech in April 2006, we issued 178,223 shares of common stock.

·	Warrants to purchase 26,490 shares were exercised with proceeds of approximately $0.3 million paid to the Company.

·	Stock options to purchase 271,528 shares were exercised by officers, directors and employees with proceeds of approximately $0.6 million paid to the Company.

Impact of Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes". FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income Taxes" and must be adopted by the Company no later than January 1, 2007. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in its tax returns. The Company is evaluating the impact of adopting FIN 48.

In December 2004, the FASB issued Statement No. 123R, “Share Based Payment”. This statement revises Statement 123 and supersedes APB 25 and amends FASB Statement No. 95, “Statement of Cash Flows”. SFAS 123R requires companies to expense the fair value of employee services received in exchange for an award of equity instruments, including stock options. SFAS 123R also provides guidance on valuing and expensing these awards, as well as disclosure requirements with respect to these equity arrangements.

We adopted SFAS 123R effective as of January 1, 2006. We are following the “modified prospective” method of adoption of SFAS 123R whereby earnings for prior periods will not be restated as though stock based compensation had been expensed, rather than the “modified retrospective” method which would entail restatement of previously published earnings. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow, but this will not have a significant impact on our cash flow reporting. The impact of adoption of SFAS 123R will depend on levels of share-based compensation, particularly stock options, granted in the future and the fair value assigned thereto. The adoption of SFAS 123R has not had a material financial impact on our consolidated financial position, results of operations or cash flows.

Item 3. Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer (collectively, the “Certifying Officers”) have evaluated the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, and have concluded that, as of the date of this report, our disclosure controls and procedures are effective in enabling us to record, process, summarize, and report information required to be included in our SEC filings within the required time period, and to ensure that such information is accumulated and communicated to our management, including the Certifying Officers, to allow for timely decisions regarding required disclosure. Since the date of this report, there have not been any significant changes in our internal controls, or in other factors that could significantly affect these controls subsequent to the date of this report.

In anticipation of our compliance with the Sarbanes-Oxley Act of 2002 (the “Act”), we have increased our finance and accounting staff dedicated to the documentation and testing required under this Act.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

PART II - OTHER INFORMATION

Item 6. Exhibits.

Exhibit No.		Description of Exhibit

10.1		Membership Interest Purchase Agreement dated October 5, 2006 between Turbeco, Inc. and the owner of a 50% interest in CAVO Drilling Motors, Ltd Co.

31.1		Rule 13a-15(e) and 15d-15(e) Certification of Chief Executive Officer

31.2		Rule 13a-15(e) and 15d-15(e) Certification of Chief Financial Officer

32.1		Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	FLOTEK INDUSTRIES, INC.

	By:	/s/ Jerry D. Dumas Sr.
		Jerry D. Dumas, Sr.
		Chairman and Chief Executive Officer


	By:	/s/ Lisa Meier
		Lisa Meier
		Chief Financial Officer

November 1, 2006

EXHIBIT INDEX

Exhibit No.		Description of Exhibit

10.1		Membership Interest Purchase Agreement dated October 5, 2006 between Turbeco, Inc. and the owner of a 50% interest in CAVO Drilling Motors, Ltd Co.

31.1		Rule 13a-15(e) and 15d-15(e) Certification of Chief Executive Officer

31.2		Rule 13a-15(e) and 15d-15(e) Certification of Chief Financial Officer

32.1		Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer

EX-10.1 2 v055510_ex10-1.htm

Exhibit 10.1

MEMBERSHIP INTEREST

PURCHASE AGREEMENT

THIS MEMBERSHIP INTEREST PURCHASE AGREEMENT, dated as of October 5, 2006 (the “Agreement”), is by and among PRESTON PHENES (“Seller”) and TURBECO, INC., a Texas corporation (“Buyer”).

WITNESSETH:

WHEREAS, Buyer desires to purchase the ownership interest of Seller in and with respect to CAVO Drilling Motors, Ltd. Co., a Texas limited liability company, and its business and assets (the “Company”);

WHEREAS, pursuant to Section 6.1(d) of this Agreement it is contemplated that Buyer will prior to Closing exchange his interest in the Company for a fifty percent (50%) interest in the New Company (as defined herein);

NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE I

THE PURCHASE

Section 1.1. Purchase. On and subject to the terms and conditions of this Agreement, at the Closing, Buyer will purchase: (i) the Acquired Interest, and (ii) Seller’s fifty percent (50%) general partnership interest in Diamond Rock, a Texas general partnership with B.L. Perez (“Diamond Rock”) which owns the facility located at 2450 Black Gold Court, Houston, Texas 77073 and the adjacent property at 2425 Black Gold Court, Houston, Texas 77073 (the “Real Estate”). For purposes hereof, the term “Acquired Interest” shall mean all of the rights and interests of the Seller with respect to the New Company, including but not limited to: (i) all of his rights under the Texas Limited Liability Company Act with respect to the New Company, (ii) any agreement entered into by him with respect to the New Company, (iii) his capital account with respect to the New Company, and (iv) all of his rights to share in the profits and losses of the New Company, and (v) all of his rights to receive distributions from the New Company. If the New Company is not formed and the Buyer waives in writing the condition set forth in Section 6.1(d), references to the “New Company” in the immediately preceding sentence shall instead refer to the Company.

Section 1.2. Purchase Price for Acquired Interest. As consideration for the sale to it of the Acquired Interest, Buyer shall:

(a) Pay cash at Closing in the aggregate amount of Two Million Seven Hundred Eighty-One Thousand Seven Hundred Four and No/100 Dollars ($2,781,704) (the “Cash Payment”);

(b) Cause Flotek Industries, Inc. (“Flotek”) to issue to Seller, as additional purchase price for the Acquired Interest, an aggregate number of shares (the “Flotek Shares”) of the common stock of Flotek, .0001 par value per share (the “Flotek Common Stock”) determined by dividing One Million Eight Hundred Fifty-Four Thousand Four Hundred Sixty-Nine and No/100 Dollars ($1,854,469) by the Share Value. For purposes herein, the term “Share Value” shall mean the value of the Flotek Shares based on the average for the ten business days that precede the Closing Date of the daily closing trading prices of the Flotek Common Stock on the American Stock Exchange;

(c) Issue to Seller a promissory note substantially in the form attached hereto as Exhibit 1.2(c) in the original principal amount of One Million Five Hundred Forty-Five Thousand Three Hundred Ninety-One and No/100 Dollars ($1,545,391); and

(d) Assume the liability of Seller with respect the Wells Fargo mortgage which encumbers the Real Estate (the “Diamond Rock Mortgage”).

Section 1.3. Assumption of Liabilities. Buyer has not and will not assume from the Company or the Seller any liability or obligation with the exception of the Diamond Rock Mortgage.

Section 1.4. Allocation. The parties will allocate for all purposes (including, but not limited to, financial accounting and tax purposes) the purchase price of the Acquired Interest as indicated on Schedule 1.4.

Section 1.5. Closing. The closing (the “Closing”) of the transactions contemplated by this Agreement (the “Purchase Transaction”) shall take place at the offices of the attorneys for Buyer in Houston, Texas as promptly as practicable (but in any event within five business days) following the date on which the last of the conditions set forth in Article VI is fulfilled or waived, or at such other time and place as Buyer and the Company shall agree. The date on which the Closing occurs is referred to in this Agreement as the “Closing Date.” The Closing will be effective as of October 1, 2006 (the “Effective Time”).

Section 1.6. Transfer Documents. At the Closing, each of the parties hereto will perform such acts and deliver such documents as are required pursuant to the terms hereof to be delivered at Closing, including but not limited to:

(a) Seller shall execute, acknowledge and deliver to Buyer:

(i) all assignments, and other good and sufficient instruments of conveyance, sale, transfer and assignment as shall be required to vest effectively in Buyer good and indefeasible title in and to the Acquired Interest, free and clear of all liens or encumbrances, including specifically, but not by way of limitation, a membership interest assignment in the form of Exhibit 1.6(a) (the “Assignment”);

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(ii) Employment Agreement in the form of Exhibit 5.6 (the “Employment Agreement”);

(iii) execute and deliver to Buyer a voting agreement concerning the voting by Seller of its interest in the Company on behalf of Buyer in the form required by Buyer, in its sole and absolute discretion, in the event the New Company is not formed before Closing;

(iv) execute and deliver to Buyer a general warranty deed and any other documents required to vest in Buyer title to his interest in Diamond Rock and the Real Estate.

(b) Buyer shall:

(i) deliver to the Company the Cash Payment in the form of bank check or wire transfer;

(ii) execute and deliver the Assignment and the Employment Agreements;

(iii) execute and deliver the Promissory Note; and

(iv) execute and deliver such documents as are required to assume the Diamond Rock Mortgage.

Section 1.7. Index. An index identifying the sections in which the definitions of certain terms are set forth in Exhibit A.

ARTICLE II

REPRESENTATIONS AND

WARRANTIES OF BUYER

Buyer represents and warrants to the Seller as follows:

Section 2.1. Organization and Qualification. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. Flotek is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted.

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Section 2.2. Authority; Non-Contravention; Approvals.

(a) Buyer and Flotek each have full corporate power and authority to execute and deliver this Agreement to consummate the transactions contemplated hereby. Other than the approval by the Board of Directors of Buyer and Flotek, no corporate proceedings on the part of Buyer or Flotek are necessary to authorize the execution and delivery of this Agreement or the consummation by Buyer and Flotek of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer and Flotek, and, assuming the due authorization, execution and delivery hereof by Seller, constitutes a valid and legally binding agreement of Buyer and Flotek enforceable against each of them in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles.

(b) The execution and delivery of this Agreement by Buyer and Flotek and the consummation by Buyer and Flotek of the transactions contemplated hereby do not and will not violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Buyer or Flotek under any of the terms, conditions or provisions of (i) the charter or bylaw of Buyer and Flotek, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to Buyer or Flotek or any of their properties or assets or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Buyer or Flotek is now a party or by which Buyer or Flotek or any of its properties or assets may be bound or affected.

Section 2.3. Reports. Flotek has previously made available or delivered to the Company and Seller copies of the Form 10-KSB filed by it with the Securities and Exchange Commission for the period ended December 31, 2005 (the “SEC”) and its quarterly report filed with the SEC on Form 10-QSB for the periods ending March 31, 2006 and June 30, 2006 (“Flotek SEC Reports”). As of their respective dates, the Flotek SEC Reports did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Neither Buyer nor Flotek has made any other representation to the Company or Seller regarding the Flotek Shares. The Flotek Shares will be restricted stock which will not be tradable on the open market under the applicable securities laws for a period of one year.

Section 2.4. Brokers and Finders. Buyer has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Buyer to pay any finder's fees, brokerage or agent commissions or other like payments in connection with the transactions contemplated hereby. There is no claim for payment by Buyer of any investment banking fees, finder's fees, brokerage or agent commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES

OF SELLER

The Seller represents and warrants to Buyer that:

Section 3.1. Organization and Qualification. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Texas and has the requisite power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which the properties owned, leased, or operated by it or the nature of the business conducted by it makes such qualification necessary. True, accurate and complete copies of the Company’s organizational documents, as in effect on the date hereof, including all amendments thereto, have heretofore been delivered to Buyer.

Section 3.2. Ownership. Seller owns fifty percent (50%) of the issued and outstanding membership interest in the Company and B.L. Perez (“Perez”) owns the remaining fifty percent (50%) of the issued and outstanding membership interest in the Company. The only members and managers of the Company are the Seller and Perez. There are no agreements between the Seller and Perez with respect to the management, operation, ownership, or tax classification of the Company, or any other matter relating to the Company. The Acquired Interest is owned by the Seller free and clear of any lien, encumbrance or agreement. The Acquired Interest has been duly authorized and issued, is nonassessable, and is not subject to any agreement to contribute capital to the Company or any other agreement. The transfer of the Acquired Interest by the Seller to Buyer pursuant to the terms hereof is not subject to any right of first refusal or similar right, and will not violate any agreement or understanding between the Seller and Perez. There are no outstanding options, conversion rights or similar rights granting any party the right to acquire any ownership interest in the Company other than the Acquired Interest and the interest held by Perez as described herein.

Section 3.3. Other Entities. The Company does not own stock or other ownership interests in any other entity.

Section 3.4. Authority; Non-Contravention; Approvals.

(a) No further actions on the part of the Company are necessary to authorize the execution and delivery of this Agreement or the consummation by the Company of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Seller, and, assuming the due authorization, execution and delivery hereof by Buyer, constitutes a valid and legally binding agreement of Seller, enforceable against Seller in accordance with its terms, except that such enforcement may be subject to (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (b) general equitable principles.

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(b) Except as set forth in the disclosure schedule attached to this Agreement (the “Disclosure Schedule”), the execution and delivery of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby do not and will not violate or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company under any of the terms, conditions or provisions of (i) the organizational documents of the Company or Diamond Rock, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Seller, Diamond Rock, or the Company or any of their properties or assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, or any agreement to which the Seller, Diamond Rock, or the Company is now a party or by which the Company or any of its properties or assets may be bound or affected.

Section 3.5. Financial Statements. The Seller has furnished Buyer with a balance sheet of the Company as of December 31, 2004 and December 31, 2005, and the related statement of income for the calendar years then ended (including the notes thereto) and a balance sheet as of August 31, 2006 and the related statement of income for the seven month period then ended (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles, consistently applied, and are accurate and complete and fairly present the financial condition and result of operations of the Company.

Section 3.6. Absence of Undisclosed Liabilities. Except as disclosed in the Disclosure Schedule, neither the Company nor Diamond Rock has incurred any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature, except liabilities or obligations (a) which are provided for in the Financial Statements or reflected in the notes thereto, (b) which were incurred after August 31, 2006, and were incurred in the ordinary course of business and consistent with past practices, or (c) liabilities or obligations under this Agreement.

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Section 3.7. Absence of Certain Changes or Events. Since August 31, 2006, the business of the Company has been conducted in the ordinary course of business consistent with past practices, and there has not been any event, occurrence, development or state of circumstances or facts which has had, or could reasonably be anticipated to have, individually or in the aggregate, a Material Adverse Effect. Specifically, but not by way of limitation, since August 31, 2006, the Company has not engaged in or been subject to any of the actions described in Section 4.1. "Material Adverse Effect" means any event, occurrence, fact, condition, change, development, circumstance, or effect with respect to the business, assets (including intangible assets), liabilities, condition (financial or other), operations, properties (including intangible properties), results, or prospects of the Company with respect to which there is a substantial likelihood that the event, occurrence, fact etc. would have been viewed by a reasonable investor as having a significantly negative effect on the value of the consideration such reasonable investor would have been willing to pay for the purchase of the Acquired Interest.

Section 3.8. Accounts Receivable. The accounts receivable of the Company indicated on the Financial Statements are valid, genuine and subsisting, arise out of bona fide sales and delivery of goods, performance of services or other business transactions in the ordinary course of business and are current and collectible. Each of the accounts receivable will be collected in full, without any set-off and without resort to litigation, within 120 days after the Closing except as indicated in the Disclosure Schedule.

Section 3.9. Tangible Assets. The Financial Statements reflect all of the items of tangible personal property owned by the Company (the “Tangible Personal Property”) and all of the assets leased by the Company (the “Leased Assets”). The Tangible Personal Property and the Leased Assets constitute all of the tangible personal property necessary for the conduct by the Company of its business as now conducted. The Company has good and indefeasible title to the Tangible Personal Property, free and clear of all mortgages, liens, pledges, charges, or encumbrance of any nature whatsoever. The Tangible Personal Property and Leased Assets are in good, serviceable condition and fit for the particular purposes for which they are used in the business of the Company, subject only to normal maintenance requirements and wear and tear reasonably expected in the ordinary course of business.

Section 3.10. Employee Benefits. Each employee benefit plan of the Company (a ”Company Plan”) is or was in compliance with the provisions of all applicable laws, rules and regulations, including, without limitation, ERISA and the Code. None of the Company Plans has incurred any “accumulated funding deficiency” (as defined in Section 412(a) of the Code). The Company has not incurred any liability to the Pension Benefit Guaranty Corporation under Section 4062, 4063 or 4064 of ERISA, or any withdrawal liability under Title IV of ERISA with respect to any multiemployer plan. The Disclosure Schedule describes all bonuses and other compensation which will be payable to any of the employees of the Company as a result of the consummation of the Purchase Transaction, and any obligation to pay severance payments.

Section 3.11. Litigation. There are no claims, suits, actions, or proceedings pending or, to the Knowledge of the Company, threatened against or relating to the Company, before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. The Company is not subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator. For purposes of this Agreement, “Knowledge” means actual or constructive knowledge of officers of the Seller after reasonable inquiry.

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Section 3.12. No Violation of Law. The Company is not in violation of or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable Environmental Law) of any governmental or regulatory body or authority. Except as disclosed in the Disclosure Schedule, as of the date of this Agreement, to the Knowledge of the Seller, no investigation or review by any governmental or regulatory body or authority is pending or threatened, nor has any governmental or regulatory body or authority indicated an intention to conduct the same. The governmental permits or licenses of the Company (the “Permits”) are sufficient for the Company to conduct its business in the manner currently conducted, and the Company is not in violation of the terms thereof. The Company is not in violation of the terms of any of its Permits and is not required to possess any other permit, license, franchise, variance, exemption, order or other governmental authorization, consent or approval.

Section 3.13. Labor Matters. Except as set forth in the Disclosure Schedule, (a) there are no material controversies pending or, to the Knowledge of the Seller, threatened between the Company on the one hand and any of its employees on the other, (b) the Company is not a party to a collective bargaining agreement of other labor union contract applicable to persons employed by the Company, nor does the Company have any Knowledge of any activities or proceedings of any labor union to organize any such employees, (c) the Company is not a party to any written agreement, memorandum, or understanding with respect to the employment of any individual, and (d) Seller is not aware of any intention of any employee to terminate his or her employment with the Company, either as a result of the Purchase Transaction or otherwise.

Section 3.14. Customer Relationships. The Disclosure Schedule lists all of the material customers of the Company. Except as set forth in the Disclosure Schedule, there has not been (a) any adverse change in the business relationship of the Company with any customer; or (b) any change in any term (including credit terms) of the agreements with any such customer. The Company has not received any customer complaints concerning its products and services.

Section 3.15. Real Property.

(a) Except as set forth in the Disclosure Schedule, the Company does not own and has never owned any interest of any kind (whether ownership, lease or otherwise) in any real property, except the real estate leased by it at 2425 & 2450 Black Gold Court, Houston, Texas 77073 (the “Company Facilities”).

(b) The Company Facilities are in good condition (reasonable wear and tear excepted), and are adequate for the operation of the Company's business as presently conducted.

(c) The Company’s use of the Company Facilities in the normal conduct of its business does not violate any applicable building, zoning or other law, ordinance or regulation affecting such real property, and no covenants, easements, rights of way or other such conditions of record impair the Company’s use of the Company Facilities in the normal conduct of its business.

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(d) The Company has not experienced any material interruption in the delivery of adequate quantities of any utilities or other public services to the Company Facilities required by the Company in the normal operation of its business.

Section 3.16. Environmental Matters. Except as set forth in the Disclosure Schedule:

(a) no notice, demand, request for information, citation, summons or order has been received, no complaint has been served, no penalty has been assessed, and no investigation, action, claim, suit, proceeding or review is pending or, to the Knowledge of the Seller, is threatened by any governmental entity or other person relating to or arising out of any environmental law;

(b) each of the Company and Diamond Rock have been in compliance with all environmental laws and environmental permits; and

(c) there are no liabilities of or relating to the Company or Diamond Rock of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any environmental law and there are no facts, conditions, situations or set of circumstances which could reasonable be expected to result in or be the basis for any such liability.

Section 3.17. Material Contracts. The Disclosure Schedule lists all agreements, leases, commitments, contracts, undertakings or understandings, to which the Company, Diamond Rock, or the Seller (with respect to the Company or Diamond Rock) is a party, including but not limited to service agreements, manufacturing agreements, purchase or sale agreements, master service agreements, supply agreements, distribution or distributor agreements, real estate leases, purchase orders, license agreements, customer orders and equipment rental agreements (the “Operating Agreements”). Each Operating Agreement is a valid, binding and enforceable agreement of the Company, Diamond Rock, or the Seller and, to the Knowledge of the Company, the other parties thereto. There has not occurred any breach or default under any Operating Agreement on the part of the Company Diamond Rock, or the Seller or, to the Knowledge of Seller, any other parties thereto. No event has occurred which with the giving of notice or the lapse of time, or both, would constitute a default under any Operating Agreement on the part of the Company Diamond Rock, or the Seller, Diamond Rock, or the Seller, or, to the Knowledge of Seller, any of the other parties thereto. There is no dispute between the parties to any Operating Agreement as to the interpretation thereof or as to whether any party is in breach or default thereunder, and no party to any Operating Agreement has indicated its intention to, or suggested it may evaluate whether to, terminate any Operating Agreement.

Section 3.18. Inventory. All inventory of the Company is usable and saleable in the ordinary course of business by the Company, and is owned by the Company free and clear of any lien or encumbrance, and are in good condition. No items of Company inventory are held by the Company on consignment from others.

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Section 3.19. Taxes. The Company has throughout its existence been classified as an S corporation pursuant to Section 1361 of the Internal Revenue Code of 1986. The Company has filed all tax returns required to be filed by it and has paid all taxes required to be paid prior to the date hereof. The New Company will be a newly formed entity classified as a partnership for federal income tax purposes.

Section 3.20. Brokers and Finders. Neither the Seller nor the Company has entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of the Company or Seller to pay any finder's fees, brokerage or agent commissions or other like payments in connection with the transactions contemplated hereby. There is no claim for payment by the Company or Seller of any investment banking fees, finder's fees, brokerage or agent commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby.

Section 3.21. Purchase for Own Account. The Flotek Shares are being or will be acquired by Seller for his own account and with no intention of distributing or reselling such securities or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state, without prejudice, however, to the rights of Seller at all times (subject to Section 9.4) to sell or otherwise dispose of all or any part of such securities under an effective registration statement under the Securities Act, or under an exemption from such registration available under the Securities Act of 1933 (the “Securities Act”). Seller is experienced in evaluating companies such as Flotek and has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of his investment and has the ability to suffer the total loss of his investment. Seller has had the opportunity to ask questions of and receive answers from executive officers of Flotek concerning the terms and conditions of the offering of the Flotek Shares and to obtain additional information to the satisfaction of Seller. Seller is an “accredited investor” as that term is defined by Rule 501 of Regulation D promulgated under the Securities Act. The Flotek Shares will not be registered at the time of their issuance under the Securities Act for the reason that the sale provided for in this Agreement is exempt pursuant to Section 4(2) of the Securities Act and that the reliance of Flotek on such exemption is predicated in part on the representations set forth herein. Seller will not sell or assign any Flotek Shares except pursuant to a valid registration statement filed pursuant to the Securities Act or pursuant to a valid exemption from the registration requirements thereof for a period of one year.

Section 3.22. Diamond Rock. Diamond Rock is a partnership formed pursuant to the laws of the State of Texas. The Seller owns a fifty percent (50%) interest in Diamond Rock and Perez owns the other fifty percent (50%) interest in Diamond Rock. There is no written partnership agreement with respect to Diamond Rock or any other document or agreement between the Seller and Perez with respect to Diamond Rock. Diamond Rock owns in fee simple all right, title and interest in and with respect to the Real Estate, free and clear of any liens or encumbrances, except as indicated in the Disclosure Schedule. The Company Facilities are leased by Diamond Rock to the Company pursuant to the written lease agreement a copy of which has been provided to the Buyer. No other person has the right to utilize any of the Company Facilities or the Real Estate. The amount of the Wells Fargo Mortgage will not exceed $958,000 as of Closing.

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Section 3.23. Disclosure. No representation or warranty of Seller set forth hereunder or in the schedules attached hereto or in any certificate delivered pursuant to Section 6.2(a) contains any untrue statement of the material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.

ARTICLE IV

CONDUCT OF BUSINESS PENDING THE CLOSING

Section 4.1. Conduct of Business of the Company. Prior to the Effective Time, Seller shall cause the Company to operate its business in, and only in, the usual, regular and ordinary course of business in substantially the same manner as operated on the date of this Agreement. Without limiting the generality of the foregoing, during the period from the date of this Agreement to the Effective Time, the Company will not:

(a) Sell, lease or otherwise dispose of, or agree to sell, lease or otherwise dispose of, any of its assets other than inventory in the ordinary course of business consistent with past practice;

(b) Adopt, amend or terminate any Company Plan;

(d) Enter into or modify any employment or severance agreement with any director, officer, or employee, or agree to increase the compensation of any officer, director or employee; and/or

(e) Incur any indebtedness other than indebtedness incurred in the ordinary course of business.

Section 4.2. Business Organization. Prior to the Effective Time, Seller shall use his best efforts to (a) preserve intact the business organization of the Company, (b) keep available the services of the officers and employees of the Company, (c) preserve the goodwill of the Company, (d) maintain and keep the properties and assets of the Company in as good a repair and condition as presently exists, and (e) maintain in full force and effect its insurance coverage of the Company.

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ARTICLE V

ADDITIONAL AGREEMENTS

Section 5.1. Cooperation. Seller shall cause the Company to afford to Buyer and its accountants, counsel, financial advisors and other representatives reasonable access during normal business hours throughout the period prior to the Effective Time to all of its properties, books, contracts, personnel, representatives of or contacts with governmental or regulatory authorities, agencies or bodies, commitments, and records (including, but not limited to, tax returns and any and all records or documents which are within the possession of governmental or regulatory authorities, agencies or bodies, and the disclosure of which the Company can facilitate or control) and, such parties as its representatives may reasonably request. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Company or with the performance of any of the employees of the Company. No investigation pursuant to this Section shall affect any representation or warranty made by any party. Each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement,

Section 5.2. Further Assurances. Seller and the Company shall execute, acknowledge and deliver or cause to be executed, acknowledged and delivered to Buyer such assignments or other instruments of transfer, assignment and conveyance, in form and substance satisfactory to counsel of Buyer, as shall be necessary to vest in Buyer all of the right, title and interest in and to the Acquired Interest, in each case free and clear of all liens, charges, encumbrances, rights of others, mortgages, pledges or security interests, and any other document reasonably requested by Buyer in connection with this Agreement.

Section 5.3. Expenses and Fees. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, regardless of whether the Closing occurs. The Company shall not be subject to the legal fees or other transaction costs of Seller.

Section 5.4. Public Statements. The parties shall consult with each other prior to issuing any press release or any written public statement with respect to this Agreement or the transactions contemplated hereby and shall not issue any such press release or written public statement prior to such consultation.

Section 5.5. Notification of Certain Matters. Each of the parties agrees to give prompt notice to each other of, and to use their respective reasonable best efforts to prevent or promptly remedy, (a) the occurrence or failure to occur or the impending or threatened occurrence or failure to occur, of any event which occurrence or failure to occur would be likely to cause any of its representations or warranties in this Agreement to be untrue or inaccurate in any material respect (or in all respects in the case of any representation or warranty containing any materiality qualification) at any time from the date hereof to the Effective Time and (b) any material failure (or any failure in the case of any covenant, condition or agreement containing any materiality qualification) on its part to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

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Section 5.6. Employment Agreement. At the Closing, Seller will enter into with the Buyer an employment agreement in the form included on Exhibit 5.6.

Section 5.7. Prohibited Activities. Seller will not, during the period beginning on the date hereof and ending on the second anniversary of the Closing Date, directly or indirectly, for any reason, for his own account or on behalf of or together with any other person:

(a) engage as an officer, director or in any other managerial capacity or as an owner, co-owner or other investor of or in, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, dealer or distributor of any kind, in the business of manufacturing, selling, distributing, or marketing downhole motors for use in the oil and gas industry within the United States of America (the “Territory”);

(b) call on or otherwise solicit any natural person who is at that time employed by the Company in any managerial capacity with the purpose or intent of attracting that person from the employ of the Company; or

(c) call on, solicit or perform services for, either directly or indirectly, any person that at that time is, or at any time within two years prior to that time was, a customer of any of the Company within any Territory, for the purpose of soliciting or selling any product or service in competition with the Companies within that Territory.

ARTICLE VI

CONDITIONS TO CLOSING

Section 6.1. Conditions to Obligation of Seller to Effect the Purchase Transaction. Unless waived by Seller, the obligation of Seller to effect the Purchase Transaction shall be subject to the fulfillment at or prior to the Effective Time of the following additional condition:

(a) Buyer shall have performed in all material respects (or in all respects in the case of any agreement containing any materiality qualification) its agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made and on and as of the Closing Date as if made at and as of such date, and the Company shall have received a certificate executed on behalf of Buyer by the President or a Vice President of Buyer and on behalf of Buyer by the Chief Executive Officer of Buyer to that effect;

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Section 6.2. Conditions to Obligations of Buyer to Effect the Purchase Transaction. Unless waived by Buyer, the obligations of Buyer to effect the Purchase Transaction shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions:

(a) Seller shall have performed in all material respects (or in all respects in the case of any agreement containing any materiality qualification) his agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made and on and as of the Closing Date as if made at and as of such date, and Buyer shall have received a certificate executed on behalf of the Company by the President and Chief Executive Officer of the Company to that effect.

(b) Except as stated in the Disclosure Statement, since August 31, 2006, there shall have been no changes that constitute, and no event or events shall have occurred which have resulted in or constitute, a Material Adverse Effect.

(c) Buyer shall have performed such due diligence with respect to the membership interest of Perez as shall be deemed appropriate by it, to its satisfaction (in its sole discretion).

(d) The Seller shall have exchanged his membership interest in the Company for a fifty percent (50%) membership interest in a Texas limited liability company which owns substantially all of the assets owned by the Company as of the date hereof, which new limited liability company will be taxable as a partnership for federal income tax purposes (rather than as an S corporation) (the “New Company”), which interest is subject to a limited liability company agreement between Seller and his successors on the one hand, and the Company, on the other, with terms and conditions which are acceptable to Buyer, in its sole and absolute discretion.

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ARTICLE VII

INDEMNIFICATION

Section 7.1. Indemnification of Buyer. Seller shall indemnify Buyer, its affiliates, and their respective officers, directors, employees and agents against, and hold each of them harmless from and against, any and all claims, actions, causes of action, arbitrations, proceedings, losses, damages, liabilities, judgments and expenses (including, without limitation, reasonable attorneys' fees) ("Indemnified Amounts") incurred by the indemnified party as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of the Company or Seller in this Agreement, and/or (b) any violation or breach by the Company or Seller of or default by the Company or Seller under the terms of this Agreement. The indemnified party shall be entitled to recover its reasonable and necessary attorneys' fees and litigation expenses incurred in connection with successful enforcement of its rights under this Section.

Section 7.2. Indemnification of Seller and the Company. Buyer shall indemnify Seller against, and hold him harmless from and against, any and all Indemnified Amounts incurred by Seller or the Company as a result of (a) any error, inaccuracy, breach or misrepresentation in any of the representations and warranties made by or on behalf of Buyer in this Agreement, and/or (b) any violation or breach by Buyer of or default by Buyer under the terms of this Agreement. The indemnified party shall be entitled to recover its reasonable and necessary attorneys' fees and litigation expenses incurred in connection with successful enforcement of his rights under this Section.

Section 7.3. Procedure. The defense of any claim, action, suit, proceeding or investigation subject to indemnification under this Article shall be conducted by the indemnifying party. If the indemnifying party fails to conduct such defense, the indemnified parties may retain counsel satisfactory to them and the indemnifying party shall pay all reasonable fees and expenses of such counsel for the indemnified parties promptly as statements therefor are received. The party not conducting the defense will use reasonable efforts to assist in the vigorous defense of any such matter, provided that such party shall not be liable for any settlement of any claim effected without its written consent, which consent, however, shall not be unreasonably withheld. Any indemnified party wishing to claim indemnification under this Article VII, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the indemnifying party (but the failure so to notify a party shall not relieve such party from any liability which it may have under this Article VII except to the extent such failure materially prejudices such party). If the indemnifying party is responsible for the attorneys’ fees of the indemnified parties, then the indemnified parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more indemnified parties.

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Section 7.4. Express Negligence Rule. The indemnification obligations under this Article VII shall apply regardless of whether any suit or action results solely or in part from the passive or concurrent negligence of the indemnified party. The rights of the parties to indemnification under this Article VII shall not be limited due to any investigations heretofore or hereafter made by such parties or their representatives, regardless of negligence in the conduct of any such investigations.

ARTICLE VIII

MISCELLANEOUS

Section 8.1. Termination. This Agreement may be terminated at any time prior to the Effective Time, as follows:

(a) the Company shall have the right to terminate this Agreement:

(i) if the representations and warranties of Buyer shall fail to be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made or, except in the case of any such representations and warranties made as of a specified date, on and as of any subsequent date as if made at and as of the subsequent date and such failure shall not have been cured in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) within 15 days after written notice of such failure is given to Buyer by the Company;

(ii) if the Purchase Transaction is not completed by October 15, 2006 (provided that the right to terminate this Agreement under this Section 8.1(a)(ii) shall not be available to the Company if the failure of the Company or Seller to fulfill any obligation to Buyer under or in connection with this Agreement has been the cause of or resulted in the failure of the Purchase Transaction to occur on or before such date); or

(iii) if Buyer (A) fails to perform in any material respects any of its covenants (or in all respects in the case of any covenant containing any materiality qualification) in this Agreement and (B) does not cure such default in all material respects (or in all respects in the case of any covenant containing any materiality qualification) within 30 days after written notice of such default is given to Buyer by the Company.

(b) Buyer shall have the right to terminate this Agreement:

(i) if the representations and warranties of the Company shall fail to be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made or, except in the case of any such representations and warranties made as of a specified date, on and as of any subsequent date as if made at and as of such subsequent date and such failure shall not have been cured in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) within 15 days after written notice of such failure is given to the Company by Buyer;

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(ii) if the Purchase Transaction is not completed by October 15, 2006 (provided that the right to terminate this Agreement under this Section 8.1(b)(ii) shall not be available to Buyer if the failure of Buyer to fulfill any obligation to the Company under or in connection with this Agreement has been the cause of or resulted in the failure of the Purchase Transaction to occur on or before such date); or

(iii) if the Company or Seller (A) fails to perform in any material respect (or in all respects in the case of any covenant containing any materiality qualification) any of their covenants in this Agreement and (B) do not cure such default in all material respects (or in all respects in the case of any covenant containing any materiality qualification) within 30 days after notice of such default is given to the Company by Buyer.

Section 8.2. Effect of Termination. In the event of termination of this Agreement by either Buyer or the Company pursuant to the provisions of Section 8.1, this Agreement shall forthwith become void and there shall be no further obligations on the part of the Company, Buyer, or its respective officers or directors, or Seller to perform any covenant or provision of this Agreement which otherwise would be required to be performed after the date of termination (except as set forth in this Section 8.2 and in Sections 5.3 and 8.9, all of which shall survive the termination). Nothing in this Section 8.2 shall relieve any party from liability for any breach of this Agreement.

Section 8.3. Remedies. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding in addition to any other relief to which it or he may be entitled at law or equity.

Section 8.4. Notices. All notices, consents, demands or other communications required or permitted to be given pursuant to this Agreement shall be deemed sufficiently given: (i) when delivered personally during a business day to the appropriate location described below or telefaxed to the telefax number indicated below, or (ii) five (5) business days after the posting thereof by United States first class, registered or certified mail, return receipt requested, with postage fee prepaid and addressed:

	If to Buyer:	7030 Empire Central Drive
		Houston, Texas 77040
		Telefax No. (713) 466-8386

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	With a copy to:	Casey W. Doherty
		Doherty & Doherty LLP
		1717 St. James Place, Suite 520
		Houston, Texas 77056
		Telefax No. (713) 572-1001

	If to Seller:	102 North Delmont East
		Conroe, Texas 77301

Section 8.5. Successors. This Agreement shall be binding upon each of the parties upon their execution, and inure to the benefit of the parties hereto and their successors and assigns.

Section 8.6. Severability. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement or any such other instrument.

Section 8.7. Section Headings. The section headings used herein are descriptive only and shall have no legal force or effect whatsoever. Except to the extent the context specifically indicates otherwise, all references to articles and sections refer to articles and sections of this Agreement, and all references to the exhibits and schedules refer to exhibits and schedules attached hereto, each of which is made a part hereof for all purposes.

Section 8.8. Gender. Whenever the context so requires, the masculine shall include the feminine and neuter, and the singular shall include the plural and conversely.

Section 8.9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, U.S.A., applicable to agreements and contracts executed and to be wholly performed there, without giving effect to the conflicts of law principles thereof.

Section 8.10. Multiple Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original. The parties agree to accept facsimile transmissions of signed counterparts of this Agreement, to be followed by delivery of signed original counterparts.

Section 8.11. Waiver. Any waiver by either party to be enforceable must be in writing and no waiver by either party shall constitute a continuing waiver.

Section 8.12. Entire Agreement. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first set forth above.

	BUYER:

	TURBECO, INC., a Texas corporation


	By:	/s/ Jerry D. Dumas, Sr.
		Jerry D. Dumas, Sr., President

	SELLER:


	/s/ Preston Phenes
	Preston Phenes

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EXHIBIT A

INDEX OF DEFINITIONS

Acquired Interest	Section 1.1
Cash Payment	Section 1.2
Closing	Section 1.5
Closing Date	Section 1.5
Company Plans	Section 3.10
Diamond Rock	Section 1.1
Diamond Rock Mortgage	Section 1.2(d)
Disclosure Schedule	Section 3.4(b)
Effective Time	Section 1.5
Financial Statements	Section 3.5
Flotek	Section 1.2(b)
Flotek Common Stock	Section 1.2(b)
Flotek Shares	Section 1.2(b)
Indemnified Amounts	Section 7.1
Knowledge	Section 3.11
Leased Assets	Section 3.9
Material Adverse Effect	Section 3.7
New Company	Section 6.2(d)
Operating Agreements	Section 3.17
Perez	Section 3.2
Purchase Transaction	Section 1.5
Real Estate	Section 1.1
Tangible Personal Property	Section 3.9

EX-31.1 3 v055510_ex31-1.htm Unassociated Document

Exhibit 31.1

CERTIFICATION

I, Jerry D. Dumas, Sr., Chief Executive Officer of Flotek Industries, Inc., certify that:

1.	I have reviewed this quarterly report on Form 10-QSB for the period ended September 30, 2006 of Flotek Industries, Inc.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 1, 2006		/s/ Jerry D. Dumas, Sr.
		Jerry D. Dumas, Sr. Chief Executive Officer

EX-31.2 4 v055510_ex31-2.htm Unassociated Document

Exhibit 31.2

CERTIFICATION

I, Lisa Meier, Chief Financial Officer of Flotek Industries, Inc. certify that:

1.	I have reviewed this quarterly report on Form 10-QSB for the period ended September 30, 2006 of Flotek Industries, Inc.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 1, 2006		/s/ Lisa Meier
		Lisa Meier Chief Financial Officer

EX-32.1 5 v055510_ex32-1.htm Unassociated Document

Exhibit 32.1

Certification of the Chief Executive Officer and of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Flotek Industries, Inc. (the “Company”) on Form 10-QSB for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (“the Report”), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.


		/s/ Jerry D. Dumas, Sr.
Date: November 1, 2006		Jerry D. Dumas, Sr. Chief Executive Officer


		/s/ Lisa Meier
Date: November 1, 2006		Lisa Meier Chief Financial Officer