10QSB

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 quarter ended September 30, 2004

  [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

Commission File Number 1-13270

FLOTEK INDUSTRIES, INC.

Incorporated pursuant to the Laws of the State of Delaware

Internal Revenue Service – Employer Indentification No. 90-0023731

7030 Empire Central Drive, Houston, Texas 77040

(713) 849-9911

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes [x] No [_]

The number of shares of the Registrant’s common stock outstanding on November 15, 2004 was 6,668,004.

Transitional Small Business Disclosure Format:

Yes [_] No [x]

FLOTEK INDUSTRIES, INC.

TABLE OF CONTENTS

PART I.    FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements (Unaudited)

                Consolidated Balance Sheets

                Consolidated Statements of Operations

                Consolidated Statement of Changes in Stockholders' Equity

                Consolidated Statements of Cash Flows

                Notes to Consolidated Financial Statements

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

Item 3.    Controls and Procedures

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

Item 6.    Exhibits and Reports on Form 8-K

SIGNATURE

CERTIFICATIONS
Rule 13a-15(e) and 15d-15(e) Certification of Chief Executive Officer	Exhibit 31.1
Rule 13a-15(e) and 15d-15(e) Certification of Chief Financial Officer	Exhibit 31.2
Certification of Periodic Report by Chief Executive Officer	Exhibit 32.1
Certification of Periodic Report by Chief Financial Officer	Exhibit 32.2

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Information

FLOTEK INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	For the Period Ended
	September 30, 2004			December 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	--		$	--
Accounts receivable, less reserve of $16,743 and $31,102
as of September 30, 2004 and December 31, 2003, respectively		2,961,503			1,977,926
Inventories		2,393,827			1,905,070
Other current assets		65,008			113,326
Total current assets		5,420,338			3,996,332
Property, plant and equipment, net		2,256,926			2,644,860
Goodwill, net		7,375,346			7,145,713
Patents and other intangible assets, net		140,810			183,443
Total assets	$	15,193,420		$	13,970,338
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,525,770		$	2,961,805
Accrued liabilities		1,256,028			623,006
Short-term notes payable		3,017,923			3,482,325
Current portion of long-term debt		1,051,328			1,596,221
Amounts due to related parties		518,491			581,151
Total current liabilities		8,369,540			9,244,508
Long-term debt		2,776,995			2,165,726
Stockholders' equity:
Preferred stock, $.0001 par value, 100,000 shares authorized,
no shares issued		--			--
Common stock, $.0001 par value, 20,000,000 shares authorized,
6,668,004 and 6,521,670 shares issued and outstanding
as of September 30, 2004 and December 31, 2003, respectively		666			652
Additional paid-in capital		17,080,842			16,973,056
Accumulated deficit		(13,034,623	)		(14,413,604	)
Total stockholders' equity		4,046,885			2,560,104
Total liabilities and stockholders' equity	$	15,193,420		$	13,970,338

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

FLOTEK INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues	$	5,671,044		$	4,165,961		$	15,278,420		$	11,112,275
Cost of sales		3,174,442			2,418,688			8,662,846			6,714,243
Gross margin		2,496,602			1,747,273			6,615,574			4,398,032
Expenses:
Selling, general and administrative		1,389,135			1,249,253			4,127,350			3,468,567
Depreciation and amortization		173,686			167,701			537,960			471,404
Research and development		--			5,967			--			46,654
Total expenses		1,562,821			1,422,921			4,665,310			3,986,625
Operating income		933,781			324,352			1,950,264			411,407
Other income (expense):
Interest expense		(178,900	)		(146,644	)		(522,961	)		(447,552	)
Other income, net		48,223			26,008			51,678			26,123
Total other income (expense)		(130,677	)		(120,636	)		(471,283	)		(421,429	)
Pretax income (loss) from continuing operations		803,104			203,716			1,478,981			(10,022	)
Provision for income taxes		(100,000	)		--			(100,000	)		--
Income (loss) from continuing operations		703,104			203,716			1,378,981			(10,022	)
Loss from discontinued operations		--			(58,642	)		--			(545,613	)
Loss on disposal of discontinued
operations		--			--			--			(1,157,835	)
Net income (loss)	$	703,104		$	145,074		$	1,378,981		$	(1,713,470	)
Basic and diluted income (loss) per common
share:
Income (loss) from continuing operations	$	0.11		$	0.03		$	0.21		$	--
Loss from discontinued operations		--			(0.01	)		--			(0.09	)
Loss on disposal of discontinued
operations		--			--			--			(0.20	)
Basic net income (loss)
per common share	$	0.11		$	0.02		$	0.21		$	(0.29	)
Diluted net income (loss)
per common share	$	0.10		$	0.02		$	0.19		$	(0.29	)
Weighted average number of common
shares outstanding		6,666,330			6,223,664			6,656,496			5,792,427
Weighted average common and commmon
equivalent shares outstanding		7,309,369			6,414,824			7,303,141			5,792,427

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

FLOTEK INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

	Common Stock Shares		Common Stock Amount		Additional Paid-in Capital		Accumulatd Deficit			Total
Balance at December 31, 2003		6,521,670		$ 652		$ 16,973,056		$ (14,413,604	)		$ 2,560,104
Stock issued for cash		146,334		14		107,786		--			107,800
Net income		--		--		--		1,378,981			1,378,981
Balance at September 30, 2004		6,668,004		$ 666		$ 17,080,842		$ (13,034,623	)		$ 4,046,885

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

FLOTEK INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	For the Nine Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Income from continuing operations	$	1,378,981		$	(10,022	)
Adjustments to reconcile net income from continuing operations      to net cash provided by (used in) operating activities:
Depreciation and amortization		537,960			471,404
Stock grant		--			75,000
Gain/loss on sale of assets		--			2,756
Changes in:
Accounts receivable		(983,577	)		(817,352	)
Inventories		(488,757	)		(199,224	)
Other current assets		48,318			(145,118	)
Accounts payable and accrued expenses		47,878			1,053,410
Net cash provided by continuing operations		540,803			430,854
Net cash provided by discontinued operations		--			(821,514	)
Net cash provided by (used in) operating activities		540,803			(390,660	)
Cash flows from investing activities:
Capital expenditures		(107,393	)		(434,419	)
Proceeds from sale of assets		--			8,924
Acquisition of goodwill due to contigent merger consideration		(80,524	)		--
Net cash used in investing activities		(187,917	)		(425,495	)
Cash flows from financing activities:
Issuance of common stock		107,800			525,000
Proceeds from borrowings		302,019			319,993
Repayments of indebtedness		(700,045	)		(670,097	)
Repayments of amounts due to related parties		(62,660	)		--
Proceeds from related parties		--			655,322
Net cash provided by (used in) financing activities from         continuing operations		(352,886	)		830,218
Net cash used in financing activities from discontinued operations		--			(14,063	)
Net cash provided by financing activities		(352,886	)		816,155
Net change in cash and cash equivalents		--			--
Cash and cash equivalents at beginning of period		--			--
Cash and cash equivalents at end of period	$	--		$	--
Supplimental cash flow information:
Cash paid for interest	$	531,000		$	474,123
Goodwill additions through accrued acquisition costs	$	149,109		$	--

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

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Basis of Presentation

The condensed consolidated financial statements included herein are unaudited and have been prepared by Flotek Industries, Inc. (the “Company”). These financial statements reflect all adjustments, which the Company considers necessary for the fair presentation of such financial statements for the interim periods presented and the Company believes that the disclosures included herein are adequate to make the interim information presented not misleading. Certain reclassifications of prior year data have been made to conform to 2004 classifications. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.

Note 2 – Discontinued Operations

During the third quarter of 2003, The Equipment Specialties (“ESI”) reporting unit, which designed, manufactured and rebuilt specialized cementing and stimulation equipment, was discontinued and the assets were sold to Special Equipment Manufacturing, Inc. (“SEM”). ESI assigned its remaining lease obligation of $1.3 million with Oklahoma Facilities, LLC (“Facilities”), a related party, to SEM eliminating any future liability for this capital lease obligation. To effect this assignment, the Company agreed to pay Facilities $91,000 of rent for the 17 month rental period beginning March 1, 2002 and ending July 31, 2003 in six equal installments beginning November 15, 2003. As of September 30, 2004, Facilities is owed $30,866 in payments for this obligation, which is recorded in accrued liabilities.

ESI has been accounted for as a discontinued operation and therefore, the results of its operations and its cash flows have been removed from the Company’s results of continuing operations for all periods presented in this document.

Note 3 – Inventories

Inventories consist of raw materials, finished goods and parts and materials used in manufacturing and construction operations. Finished goods inventories include raw materials, direct labor and production overhead. Inventories are carried at the lower of cost or market using the average cost method. The Company maintains a reserve for impaired or obsolete inventory, which is reviewed for adequacy on a periodic basis. The components of inventories at September 30, 2004 and December 31, 2003 were as follows:

	September 30, 2004			December 31, 2003
Raw materials	$	708,112		$	363,409
Finished goods		2,219,163			2,033,015
Total inventory		2,927,275			2,396,424
Inventory obsolescence reserve		(533,448	)		(491,354	)
Inventories, net	$	2,393,827		$	1,905,070

Note 4 – Property, Plant and Equipment

The Company evaluates the impairment of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 requires long-lived assets to be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment is recognized in the event that the net book value of an asset exceeds the sum of the future undiscounted cash flows attributable to such asset or the business to which such asset relates and the net book value exceeds fair value. During the nine months ended September 30, 2004, the Company did not recognize any impairment associated with its long-lived assets.

At September 30, 2004 and December 31, 2003, property, plant and equipment were comprised of the following:

	September 30, 2004			December 31, 2003
Land	$	68,000		$	68,000
Buildings and leasehold improvements		1,978,196			1,954,254
Machinery and equipment		953,224			942,129
Furniture and fixtures		108,481			89,981
Transportation equipment		514,651			470,416
Computer equipment		422,334			415,833
Total property plant and equipment		4,044,886			3,940,613
Less accumulated depreciation		(1,787,960	)		(1,295,753	)
Net property plant and equipment	$	2,256,926		$	2,644,860

Note 5 – Patents and Other Intangible Assets

The Company evaluates the recoverability of its intangible assets subject to amortization in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition and after they have been initially recognized in the financial statements. During the nine months ended September 30, 2004, the Company did not recognize any impairment associated with its intangible assets.

Patents and other intangible assets are comprised of the following:

	September 30, 2004				December 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents	$	284,554	$	143,744	$	281,434	$	129,331
Other Intangibles		104,464		104,464		104,464		73,124
Total	$	389,018	$	248,208	$	385,898	$	202,455

Note 6 – Goodwill

On February 19, 2002, the Company acquired 100% of the common stock of IBS 2000, Inc. (“IBS”), a Denver based company engaged in the development and manufacture of environmentally neutral chemicals for the oil industry. As part of the merger agreement, the Company agreed to pay IBS twenty-five percent of the division’s earnings before interest and taxes for the three one year periods ending on March 31, 2003, 2004 and 2005. During the three months and nine months ended September 30, 2004, the Company recorded additional goodwill of $84,263 and $229,633 respectively to reflect additional merger consideration related to this agreement. As of September 30, 2004, $80,524 had been paid. The remainder will be paid and is reflected as accrued liabilities in the accompanying condensed consolidated financial statements during 2004 and 2005. See Results by Segment.

Note 7 – Short-Term Notes Payable

Short-term notes payable at September 30, 2004 and December 31, 2003 consisted of the following:

	September 30, 2004		December 31, 2003
Revolving line of credit payable to bank, secured by accounts
receivable and inventory, bearing interest at the prime rate
(4.75% at September 30, 2004) plus 4.25%, due in August 2005,
with maximum borrowings of $2,553,968 (1)	$	2,552,968	$	2,250,948
Note payable to Facilities, secured by accounts receivable,
bearing interest at the prime rate plus 7.25%, payable in monthly
installments of $15,461, due in July 2005(2)		464,955		495,780
Note payable to bank, bearing interest at prime rate plus 4.25%,
payable in monthly installments of $16,005 including interest, due
in October 2008 (3)		--		735,597
Total short-term notes payable	$	3,017,923	$	3,482,325

⁽¹⁾ Limited to a borrowing base amount calculated as 60% of eligible accounts receivable and inventory. Eligible accounts receivable and inventory have increased 37% since December 31, 2003 as a result of increased receivables and inventory associated with higher sales levels. The Company negotiated an additional $300,000 of capacity to the line of credit on September 24, 2004 to fund working capital requirements.

⁽²⁾ On July 25, 2002, the Company borrowed $500,000 under a promissory note from Facilities. An officer of the Company, who is also a director and principal shareholder, has a minority investment interest in and is an officer of Facilities. The majority of the note is secured by specific Petrovalve inventory. The note was amended on October 1, 2004 bearing interest at the prime rate plus 7.25%, payable in monthly installments of $15,461. A copy of the Amended and Restated Promissory Note agreement dated October 1, 2004 is included as Exhibit 10.1. See Note 8.

⁽³⁾ The Company amended the terms of the note on October 1, 2004 and has reclassed note to long term debt. A copy of the Change in Terms dated October 1, 2004 is included as Exhibit 10.2. See Note 8.

Note 8 – Long-Term Debt

Long-term debt at September 30, 2004 and December 31, 2003, consisted of the following:

	September 30, 2004		December 31, 2003
Promissory notes to shareholders and employees of acquired businesses,
unsecured, bearing interest at 9% payable quarterly, due in five annual
installments of $200,000 each beginning January 2002 (1)	$	800,000	$	800,000
Term loan payable to bank, bearing interest at the prime rate
(4.75% at September 30, 2004) plus 1%, payable in monthly
installments of $38,602 including interest, due in
March 2008 (2)		1,488,037		1,726,320
Term loan payable to bank, bearing interest at the prime
rate plus 3.75%, payable in monthly installments of $16,240
including interest, due in October 2008 (2)(3)		652,455		--
Term loan payable to bank, bearing interest at the prime
rate plus 4.25%, payable in monthly installments of $16,715
including interest, due in December 2007 (2)		591,767		681,852
Term loan payable to bank, bearing interest at the prime rate plus 1%,
payable in monthly installments of $15,337 including interest,
due in November 2004 (2)		27,439		176,030
Mortgage note secured by a first lien on property, payable to
Marvin E. Eckert, Jr. and Wanda Eckert, bearing interest at
10%, payable in monthly installments of $1,470 including
interest, due in December 2012		98,827		104,410
Note payable to Bauer & Skloss, LLP, bearing interest at 10%
annually, payable in monthly installments of $8,792 monthly
beginning April 2004		51,245		100,000
Note payable to Duncan Area Economic Development Foundation,
unsecured, interest at 6%, payable in monthly installments of
$1,934 including interest, due in May 2006		32,706		48,219
Secured vehicle and other equipment loans		85,847		125,116
Total		3,828,323		3,761,947
Less current maturities		1,051,328		1,596,221
Long-term debt	$	2,776,995	$	2,165,726

⁽¹⁾ On June 30, 2004 forbearance agreements made on December 31, 2003 were modified to defer the $200,000 payment due on or before June 30, 2004 to December 31, 2004, with no interest penalty. All other due dates for payments set forth in the promissory notes are extended three years from the original due dates specified in the promissory notes.

⁽²⁾ As of September 30, 2004, the Company was in arrears in the amount of $86,688 in interest and principal payments which was paid in October 2004. See Note 13.

⁽³⁾ The Company amended the terms of the note on October 1, 2004 and has reclassed note to long term debt. A copy of the Change in Terms dated October 1, 2004 is included as Exhibit 10.2.

During the nine months ended September 30, 2004, the Company had not received any notices of default or acceleration from any of its lenders.

The Company believes the fair value of its long-term debt approximates the recorded value at September 30, 2004.

Note 9 – Related Party Transactions

On August 27, 2003, CESI Chemical (“CESI”), a subsidiary, entered into an agreement with Stimulation Chemicals, LLC (“SCL”) for SCL to make purchases on CESI’s behalf. CESI agreed to pay SCL for purchases of $359,993 over a twelve month period. The agreement provides for monthly principal plus interest of 1% per month on the unpaid balance. At September 30, 2004 and December 31, 2003, the principal balance was $347,333 and $359,993, respectively. SCL is owned jointly by Dr. Penny and Mr. Beall, both of whom are directors as well as principal shareholders of Flotek Industries, Inc. Dr. Penny is also an employee of the Company.

On February 11, 2003, Mr. Jerry D. Dumas, Sr., Chairman of the Board and Chief Executive Officer of the Company, made a short-term loan to the Company for $135,000 to cover operating cash flow requirements. This note bears interest at 6% annually. This note was paid down to $95,000 as of September 9, 2003, and refinanced as of that date with a $10,000 principal payment due October 31, 2003 and monthly payments of $5,000 due until the note is paid in full, bearing interest at 10% per annum. As of September 30, 2004, this note had an unpaid balance of $30,000. Additional demand notes from Mr. Dumas total $141,158, and bear interest at 10% per annum.

On July 25, 2002 the Company borrowed $500,000 under a promissory note from Facilities. An officer, who is also a director and principal shareholder of the Company, has a minority investment interest in and is an officer of Facilities. See Note 7 to Condensed Consolidated Financial Statements.

On June 30, 2004, the Company entered into a forbearance agreement with two stockholders of acquired businesses, which are current employees of the Company, extending $200,000 of principal payments that were due on June 30, 2004 until December 31, 2004 with no interest penalty. The interest at 9% under the terms of the original note continues to be payable quarterly. See Note 8 to Condensed Consolidated Financial Statements.

Note 10 – Stock Based Compensation Expense

The Company recognizes compensation expense associated with stock-based awards under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Under APB No. 25‘s intrinsic value method, compensation expense is determined on the measurement date; that is, the first date on which both the number of shares the option holder is entitled to receive, and the exercise price, if any, are known. Any difference between the quoted market price as of the date of the grant and the contractual purchase price of shares is charged to operations over the vesting period. No compensation expense has been recognized for stock options with fixed exercise prices equal to the market price of the stock on the dates of grant. Pro forma net income and earnings per common share disclosures as if the Company recorded compensation expense based on the fair value method for stock-based awards have been presented in accordance with the provisions of Statement of Financial Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure”, and are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Income (loss) from continuing operations:
As Reported:	$	703,104	$	203,716	$	1,378,981	$	(10,022	)
Stock-based employee compensation expense determined under fair value based method		12,808		64,213		47,075		64,213
Pro forma net income	$	690,296	$	139,503	$	1,331,906	$	(74,235	)
Basic income (loss) per share from continuing operations:
As reported	$	0.11	$	0.03	$	0.21	$	(0.00	)
Pro forma		0.10		0.02		0.20		(0.01	)
Diluted income (loss) per share from continuing operations:
As reported		0.10		0.03		0.19		(0.00	)
Pro forma		0.09		0.02		0.18		(0.01	)

Note 11 – Net Income (Loss) Per Share

Net income (loss) per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding and potential dilutive common shares. For the nine months ended September 30, 2004, 56,029 stock warrants were excluded from the computation of diluted earnings per share because the warrant exercise prices of $13.13 per share were greater than the average market price of the Company’s common stock. The potentially dilutive securities for the nine months ended September 30, 2003 were not included in the computation of diluted earnings per share, since doing so would have been antidilutive due to our net loss position.

A reconciliation of the number of shares used for the basic and diluted earnings per share calculation is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Weighted average shares outstanding for basic EPS		6,666,330		6,223,664		6,656,496		5,742,927
Effect of dilutive securities		643,039		191,160		646,645		--
Adjusted weighted average common shares    outstanding for diluted EPS		7,309,369		6,414,824		7,303,141		5,742,927

Note 12 – Segment Information

The Company reports segment information in accordance with SFAS No. 131, “Disclosures about Segments of and Enterprise and Related Information”. Effective January 1, 2004, the Company reorganized the composition of its reportable segments, due to the sale of ESI. Certain reclassifications of prior year data have been made to conform to 2004 classifications.

The Company’s product lines are divided into three segments within the oilfield service industry:

o The Chemicals and Logistics segment which is made up of two business units. The CESI Chemical business unit develops, blends, packages and sells chemicals used by other oilfield service companies in oil and gas well drilling, cementing, stimulation and production. The Materials Translogistics, Inc. (“MTI”) business unit manages automated bulk material handling, loading facilities, and blending capabilities for other oilfield service companies.

o The Drilling Products segment manufactures and markets the Turbeco line of casing centralizers, Dura-Flo mud shaker screens and external casing packers for coal bed methane drilling.

o The Production Products segment manufactures and markets the Petrovalve line of downhole pump components which includes gas breakers for gas locking problems and standing valves to protect downhole pumps.

The Company’s reportable segments are strategic business units that offer different products and services. Each business segment requires different technology and marketing strategies and is managed independently. The accounting policies used in each of the segments are the same as those described in the significant accounting policies disclosed in Form 10K-SB for the year ended December 31, 2003. The Company evaluates the performance of its operating segments based on operating income excluding unusual charges. Intersegment sales and transfers are not material and are eliminated upon consolidation.

Segment performance is measured on revenues and operating income (loss) which reflect only the direct controllable expenses of the segments and does not include allocation of indirect corporate expenses, other income and expense, and income taxes. Assets and liabilities are not accounted for by segment.

The following table presents the revenues and operating income by business segment and on a comparable basis:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues:
Chemical and Logistics	$	4,889,427		$	3,281,568		$	12,377,008		$	9,026,005
Drilling Products		650,164			859,662			2,607,263			1,986,597
Production Products		131,453			24,731			294,149			99,673
Consolidated	$	5,671,044		$	4,165,961		$	15,278,420		$	11,112,275
Operating income (loss):
Chemical and Logistics	$	1,285,142		$	707,642		$	3,223,981		$	1,546,774
Drilling Products		93,510			186,438			382,034			429,522
Production Products		(92,397	)		(96,958	)		(330,138	)		(254,198	)
Corporate and Other		(352,474	)		(472,770	)		(1,325,613	)		(1,310,691	)
Consolidated	$	933,781		$	324,352		$	1,950,264		$	411,407

Note 13 – Subsequent Events

During October 2004, the Company paid $86,688 in delinquent interest and principal payments on its long-term debt and is current with all of its debt obligations.

In October 2004 our Production Products division received a material contract for valves to be delivered to a major producer in the Middle East. In November 2004 a material contract was executed for delivery of 400 valves to a major oil producer in Russia to be delivered December of this year.

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

Business Overview

Flotek Industries, Inc. provides a broad range of products and services worldwide, for use in the exploration for and production of crude oil and natural gas. Flotek was established in 1985 and is currently traded on the OTC Bulletin Board market. Management’s Discussion and Analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes to Consolidated Financial Statements.

The Company’s product lines are divided into three segments within the oilfield service industry:

o The Chemicals and Logistics segment which is made up of two business units. The CESI Chemical business unit develops, manufactures, packages and sells chemicals used by other oilfield service companies in oil and gas well cementing, stimulation and production. The Materials Translogistics, Inc. (“MTI”) business unit manages automated bulk material handling, loading facilities, and blending capabilities for other oilfield service companies.

o The Drilling Products segment manufactures and markets the Turbeco line of casing centralizers, Dura-Flo mud shaker screens and external casing packers for coal bed methane drilling.

o The Production Products segment manufactures and markets the Petrovalve line of downhole pump components which includes gas breakers for gas locking problems and standing valves to protect downhole pumps.

Our businesses serve the oil and gas industry and are affected by changes in the worldwide demand for and price of oil and natural gas. The majority of our products are dependent on the level of exploration and development activity and the completion phase of oil and gas well drilling. Other products and services, such as our Petrovalve downhole pump products and certain of our specialty chemicals are more closely tied to the production of oil and gas and are less dependent on drilling activity. We consider our key business drivers to include rig count, oil and natural gas production levels and current and expected future energy prices.

The oil and gas industry has remained strong through 2004, with prices and drilling activity continuing to increase. The U.S. rig count, as measured by Baker Hughes Incorporated, has steadily grown from an average of 1,093 in September of 2003 to an average of 1,240 in September 2004. Drilling activity should remain strong due to the growing global demand for crude and natural gas and projected high commodity prices. Natural gas and crude oil prices continued to hit record highs during the third quarter. The current 12-month strip for natural gas is $7.56/MCF and $47.05/BBL for light crude as of November 9, 2004. Our business should continue to benefit from these oil and gas commodity prices and the increase in drilling activity as we have seen this year.

Management continues to actively seek profitable acquisition or merger candidates in our core business to either decrease costs of providing products or add new products and customer base to diversify the Company’s market.

Results of Operations

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues	$	5,671,044		$	4,165,961		$	15,278,420		$	11,112,275
Cost of sales		3,174,442			2,418,688			8,662,846			6,714,243
Gross margin		2,496,602			1,747,273			6,615,574			4,398,032
Gross margin percentage		44.0%			42.9%			43.3%			39.6%
Expenses:
Selling, general and administrative		1,389,135			1,249,253			4,132,671			3,468,567
Depreciation and amortization		173,686			167,701			532,639			471,404
Research and development		--			5,967			--			46,654
Total expenses		1,562,821			1,422,921			4,665,310			3,986,625
Operating income		933,781			324,352			1,950,264			411,407
Operating income percentage		16.5%			7.8%			12.8%			3.7%
Other income (expense):
Interest expense		(178,900	)		(146,644	)		(522,961	)		(447,552	)
Other income (expense), net		48,223			26,008			51,678			26,123
Income (loss) from continuing operations before taxes	$	803,104		$	203,716		$	1,478,981		$	(10,022	)

Total revenues increased by $1,505,083 or 36.1% during the third quarter of 2004 over the same period in 2003. As discussed in the segment analysis that follows, this significant increase in revenues was due to strong performance by our Chemicals and Logistics segment, particularly with our line of proprietary chemicals. Currently, international sales make up approximately 15% of total revenues. The Company has expanded it’s international geographic footprint and customer base as evidenced by penetration into new markets this year in Russia, Mexico and the Middle East. The Company will continue to focus on growing international revenues.

Total revenues increased by $4,166,145 or 37.5% during the first three quarters of 2004 over the same period in 2003. The increase in sales of specialty chemicals and Turbeco casing centralizers is partially attributable to the increased exploration and production activity for oil and gas as evidenced by a 13.4% increase in U. S. average daily rig count from 1,032 over the first nine months in 2003 versus 1,170 for the first nine month period in 2004. Strong sales in our Chemicals and Logistics segment and Drilling Products segment contributed to the improvement.

Gross margin as a percentage of revenues for the three months ended September 30, increased from 42.9% in 2003 to 44.0% in 2004. For the nine months the gross margin percentage also increased from 39.6% in 2003 to 43.3% in 2004. Improved margins in the Chemical and Logistics segment were primarily responsible for the growth in margins. The gross margin is best analyzed on a segment by segment basis, discussed below, as the gross margin varies significantly between operating segments and can vary significantly from period to period in certain operating segments.

Selling and general and administrative expenses are costs not directly attributable to products sold or services rendered. SG&A costs as a percentage of revenue continued to decrease, and amounted to 24.5% of revenues for the third quarter of 2004 versus 30.0% of revenues for the same period in 2003. SG&A costs as a percentage of revenue for the first nine months of 2004 were 27.0% down from 31.2% for the same nine month period in 2003. Significant emphasis continues to be placed on growing sales while containing SG&A costs across the organization.

Interest expense in the third quarter and first nine months of 2004 compared to same period in 2003 was higher due to higher interest rates, which were offset by lower overall debt levels. The majority of the Company’s indebtedness carries a variable interest rate tied to the prime rate and is adjusted on a quarterly basis.

Results by Segment

Chemicals and Logistics

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Revenues	$	4,889,426	$	3,281,568	$	12,377,009	$	9,026,005
Gross margin		2,001,007		1,286,925		5,149,683		3,211,997
Gross margin percentage		40.9%		39.2%		41.6%		35.6%
Operating income	$	1,285,142	$	707,642	$	3,223,981	$	1,546,774
Operating margin percentage		26.3%		21.6%		26.1%		17.1%

Chemicals and Logistics revenues increased $1,607,858 or 49.0%, during the third quarter 2004 compared to the same period in 2003. The increase in sales is attributable to continued increase in drilling activity and expanded market penetration in the U.S., Canada, Mexico and Russia. The most significant revenue growth relates to our environmental friendly “green” chemicals in the U.S., which have more than doubled from $352,110 for the third quarter of 2003 to $1,290,400 for the same period in 2004. CESI Chemical’s focus on applied research has resulted in the penetration of new markets, a continued expanding customer base, product portfolio and increased margins. Recently our applied research resulted in the development and subsequent sale of products to the drilling fluids industry, a new sales segment to the Company.

The gross margin in this segment also increased, from 39.2% for the third quarter of 2003 to 40.9% in the same comparable period in 2004. The increase in margin is attributable to increased sales of our novel and proprietary chemicals that command higher margins than other products sold by this segment.

Operating income increased $577,500, or 81.6%, in the third quarter 2004 compared to the same period in 2003, primarily as a result of increased sales in the Chemical division and improved gross margins in the Chemical and Logistics business unit.

For the nine months ended September 30, revenues increased 37.1% from $9,026,005 in 2003 to $12,377,009. In addition margins also improved, growing from 35.6% to 41.6% for the first nine months of 2003 versus 2004 resulting in a 108% increase in operating income. Expansion of our proprietary product line and customer base has driven the increase in sales and margin year to date.

Drilling Products

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Revenues	$	650,164	$	859,662	$	2,607,263	$	1,986,597
Gross margin		416,357		452,063		1,320,724		1,122,694
Gross margin percentage		64.0%		52.6%		50.7%		56.5%
Operating income	$	93,510	$	186,438	$	382,031	$	429,522
Operating margin percentage		14.4%		21.7%		14.7%		21.6%

Drilling Products revenues decreased $209,498 or 24.4% during the third quarter of 2004 over 2003 due to reduced sales of the integral joint product line.

Although sales were down for the quarter in the third quarter 2004 versus third quarter 2003, the increase in our gross margin percentage is due to the sale of inventory that had previously been reserved. Excluding these sales, gross margin for the quarter was 55% versus 53% for third quarter 2003.

For the nine months ended September 30, revenues increased 31.2% from $1,986,597 in 2003 to $2,607,262. Margins dropped from 56.5% to 50.7% for the first nine months of 2003 versus 2004 primarily due to an increase in the sale of our EconoBows and IJ Pups which are lower margin products. This shift in product mix resulted in a decrease in operating income from $429,522 in the first nine months of 2003 to $382,031 for the same period in 2004. Management has added higher margin product lines including the Duraflow mud shaker screen line to improve margins on a go forward basis.

Production Products

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Revenues	$	131,453	$	24,731	$	294,149	$	99,673
Gross margin		79,238		8,286		145,167		63,341
Gross margin percentage		60.3%		33.5%		49.4%		63.6%
Operating income (loss)	$	(92,397)	$	(96,958)	$	(330,139)	$	(254,198)
Operating margin percentage		(70.3)%		(392.1)%		(112.2)%		(255.0)%

Production Products revenues increased over the third quarter of 2004 compared to the same period in 2003 as a result of the new management team expanding its customer base. Additionally, sales to Venezuela resumed during the third quarter of 2004. Production Products sales almost tripled over the first nine months of 2004 compared to the same period in 2003 offset by reduced margins and management reorganization costs in 2004.

Petrovalve is actively marketed in the U.S., Canada, Mexico, South America and the Middle East based on outstanding performance of the valve in client test wells. Currently Petrovalve has representation in 14 countries. The Petrovalve is a guided valve assembly used in sucker rod pumps as a replacement for conventional ball and seat valves. Operationally, the Petrovalve has continued to outperform conventional valves in the field.

Capital Resources and Liquidity

In third quarter of 2004, the Company produced net income of $703,104 and had positive cash flow from operations of $227,786. For the first nine months of 2004 the Company produced net income of $1,378,981 and had positive cash flow from operations of $540,808. This turnaround from 2003 is a result of significant improvement in operating results for our reporting units due to increased sales and operational efficiencies. The positive cash flow from operations is a result of higher net income offset by increased net working capital requirements to grow operations in 2004.

Cash and cash equivalents are $0.00 at September 30, 2004. Overall, the level of business activity is increasing and cash flow from operations is improving, however strict cash flow management is still vital.

Current liabilities include a line of credit of $2,552,968 that has been used to fund increased working capital needs associated with increase sales. Our primary lender increased our line of credit from $2,252,968 to $2,553,968 in September 2004 based on improved operating results. Both accounts receivable and inventories have increased due to increased sales levels during the year. Accounts payable have decreased, offset by an increase in accrued liabilities. Current assets have increased $1,424,016 during the first nine months of 2004, while current liabilities have decreased $874,968 over the same period, strengthening our balance sheet.

Capital expenditures in the third quarter 2004 were $37,269 and were used for furniture and fixture purchases and expansion of our laboratory facility, versus $131,586 for the same period in 2003. The 2003 expenditures for the first nine months were related to financial software that was implemented during the third quarter of 2003.

In January, 2004, the Company issued 133,333 shares of its common stock in a private offering to “accredited investors” in exchange for $100,000 subscription proceeds, which was paid by the tender to the Company of $100,000 of cash.

The Company made debt service payments of $700,045 and repayments to related parties of $62,660 during the first three quarters of 2004. Without renegotiating any of its current debt terms, the Company has estimated debt service payments of approximately $610,000 for the remainder of 2004. This includes minimum principal and interest payments on related party indebtedness, short-term notes payable, and long-term debt as discussed in Notes 7 and 8 of the Notes to Consolidated Financial Statements. Included in this amount is a principal payment of $200,000 due December 31, 2004 to shareholders of an acquired business which the Company plans to negotiate to defer until 2005. The Company has been actively renegotiating the terms of debt agreements during the third quarter of 2004 and will continue to pursue more favorable terms with its lenders through the end of the year.

The Company believes its continuing operations are capable of generating sufficient cash flow to currently meet its debt service obligations under current market conditions assuming we are able to defer the principal payment of $200,000 due December 31, 2004. However, if a market downturn occurred it would be difficult to meet debt service obligations without increased sales or the addition of capital through the sale of debt or equity securities. Although we have met our debt service obligations during the year, our insufficient liquidity remains a financial risk particularly if a debt holder were to demand immediate payment.

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. Forward-looking information involves risks and uncertainties and reflects our best judgment based on current information. Our results of operations can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. In addition, other factors may affect the accuracy of our forward-looking information. As a result, no forward-looking information can be guaranteed. Actual events and the results of operations may vary materially. While it is not possible to identify all factors, we continue to face many risks and uncertainties that could cause actual results to differ from our forward-looking statements including:

o The Company is dependent on the oil and gas industry, and activity levels in the industry have been volatile historically.

o Oil and gas prices have been volatile historically and have a direct impact on the spending levels of our customers.

o Severe weather conditions, for example, hurricanes, can have a direct impact on activity levels in the affected areas, and oil and gas prices.

o The oilfield service industry is highly competitive and we must compete with many companies possessing greater financial resources and more established market positions.

o The introduction of new products and technologies by competitors may adversely affect the demand for our products and services.

o The Company’s debt service obligations may limit our ability to fund operations and capital spending or provide for future growth.

o Changes in political conditions, governmental regulations, economic and financial market conditions, unexpected litigation and other uncertainties may have an adverse effect on our operations.

Item 3 – Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for the Company. Such officers have concluded (based upon their evaluation of these controls and procedures as of a date within 90 days of the filing of this report) that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company’s management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

The Certifying Officers also have indicated that there were no significant changes in the Company’s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Currently the Company is not named or involved in any litigation.

Item 6 – Exhibits

        (a) Exhibits:

        Index to Exhibits

Exhibit Number	Description of Exhibit
10.1	Amended and Restated Promissory Note, dated October 1, 2004, between Flotek Industries, Inc. and Oklahoma Facilities LLC. Reference Note 7 of the Notes to Consolidated Financial Statements.
10.2	Change in Terms Agreement, dated October 1, 2004, between Flotek Industries, Inc. and Legacy Bank. Reference Note 8 of the Notes to Consolidated Financial Statements.
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
32.2	Certification of Periodic Report by Chief Financial Officer

        (b) Reports on Form 8-K:

Exhibit Number		Description of Exhibit
(i)	*	Current Report on Form 8-K filed with the Securities and Exchange Commission on Octrober 18, 2004, reporting under Item 12 – Results of Operations and Financial Condition – This exhibit is incorporated by reference.

9 

SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 15, 2004


/s/ Lisa G. Bromiley
—————————————————
Lisa G. Bromiley
Chief Financial Officer

EX-10

Exhibit 10.1

$465,495.00      October 1, 2004      Houston, Texas

AMENDED AND RESTATED PROMISSORY NOTE

        Flotek Industries, Inc., a Delaware corporation (hereinafter called “Maker”), for value received, promises and agrees to pay on or before the Maturity Date (as hereafter defined), to Oklahoma Facilities LLC, an Oklahoma limited liability company, or its assigns (hereinafter called “Payee”) in lawful money of the United States of America the principal sum $465,495.00, together with interest on the unpaid principal balance at a rate equal to the “National Prime” Rate Floating (as reported in the Wall Street Journal ) + 7.25% per annum, adjustable as of date of change, (calculated on the basis of a 365-day year).

        Maker shall pay the holder hereof on a monthly basis beginning on January 1, 2005 the amount of $15,461.10 per calendar month, with such payments continuing on the first day of each calendar month thereafter until the principal and all accrued interest under this Note is paid in full. Maker shall pay the holder hereof on October 8, 2004 the amount of all accrued and unpaid interest though September 30, 2004, totaling approximately $6,816.00. Maker shall pay monthly accrued interest of $4,654.95 on November 1, 2004 and December 1, 2004. Principal and accrued interest remaining unpaid shall be due and payable in one lump sum payment upon the day or date (“Maturity Date”) that is the earlier of (i) July 1, 2005, or (ii) within a reasonable period of time (not to exceed three (3) days) following receipt in full by Maker of the amount owing to Maker or its affiliate by Servicios Tecnicos Petrovalve under Invoice No. IN000995 dated April 11, 2002 in the full amount of $406,790.00. Partial payments made following receipt in full or part by Maker of the amount owing to Marker or its affiliate by Servicios Tecnicos Petrovalve under Invoice No. IN000995 dated April 11, 2002 shall defer the scheduled following calendar month payment of $15,461.10 by Maker to Payee if amount paid is equal to or greater than $15,461.10. If any amount owing under this Note is due and payable on a day that is not a business day, such payment shall instead be due and payable on the next succeeding business day. If any amount owing under this Note is due and payable, payment must be made within 3 business days of the scheduled payment or a $500.00 late payment penalty will be incurred and owed by Maker to Payee. Maker has the right to prepay this Note in whole or in part at any time and from time to time without penalty, on not less than five business days’ prior notice. Any such prepayment shall be applied ratably to all remaining installments of principal not then due.

        For purposes of this Note, an “Event of Default” shall occur whenever: (a) default is made in the payment when due of any installment of principal on this Note and such default has not been cured within fifteen (15) days of written notice thereof, (b) default is made in the payment when due of any installment of interest on this Note and such default has not been cured within fifteen (15) days of written notice thereof, (c) Maker shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect, and (d) an involuntary case or other proceeding shall be commenced against Maker which seeks liquidation, reorganization or other relief with respect to Maker or its debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect and such involuntary case or other proceeding shall remain undismissed for a period of 90 days.

        If an Event of Default shall occur, the holder hereof may, at the option of the holder, without demand, notice, or presentment, declare the entire unpaid principal balance of this Note, together with all accrued unpaid interest thereon, to be due and payable immediately. Upon any such declaration, the principal of this Note and all accrued interest shall become and be immediately due and payable, and the holder hereof may thereupon proceed to protect and enforce the obligations of the Maker hereunder by suit in equity, by action of law, or by other appropriate proceedings, whether for specific performance (to the extent permitted by law) of any covenant or agreement contained herein or in aid of the exercise of any power granted herein, or proceed to enforce the payment of this Note or to enforce any other legal or equitable right of the holder hereof.

        Maker agrees to pay all reasonable costs and expenses (including attorneys’ fees and expenses) expended or incurred by Payee in connection with the enforcement of this Note and collection of any sums due hereunder.

        It is the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the transactions contemplated hereby would be usurious under applicable law (including the laws of the State of Texas and the laws of the United States of America), then, in that event, notwithstanding anything to the contrary herein or in any agreement entered into in connection with or as security for this Note, it is agreed that the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note or under any of the other aforesaid agreements or otherwise in connection with this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be canceled automatically and, if theretofore paid, shall be credited on the Note by the holder hereof (or, to the extent that this Note shall have been or would thereby be paid in full, refunded to the Maker).

        The payment of this Note is secured pursuant to the terms of a Security Agreement dated the date hereof between Maker and Payee (the “Security Agreement”).

        This note has been executed and delivered in and shall be construed in accordance with and governed by the laws of the State of Texas and of the United States of America.

FLOTEK INDUSTRIES, INC.

By: /s/ Jerry D. Dumas, Sr.
—————————————————
Jerry D. Dumas, Sr., Chairman and CEO

EX-10

      Exhibit 10.2

CHANGE IN TERMS AGREEMENT

Principal: $652,955.52; Loan Date: 10-01-2004; Maturity: 10-30-2008.

Borrower: Flotek Industries, Inc. (TIN: 77-0709256); 7030 Empire Central Drive; Houston, Texas 77040.

Lender: Legacy Bank; Legacy Bank; PO Box 1109; 2024 N. Hwy 81; Duncan, Oklahoma 73534-1109.

Principal Amount: $652,955.52; Initial Rate: 8.500%; Date of Note: October 1, 2004.

PROMISE TO PAY. Flotek Industries, Inc. (“Borrower”) promises to pay to Legacy Bank (“Lender”), or order, in lawful money of the United States of America, the principal amount of Six Hundred Fifty-two Thousand Nine Hundred Fifty-five & 52/100 Dollars ($652,955.52) together with interest on the unpaid principal balance from October 1, 2004, until paid in full.

PAYMENT.     Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan in 48 regular payments of $16,240.14 each. Borrower’s first payment is due November 30, 2004, and all subsequent payments are due on the same day of each month after that. Borrower’s final payment will be due on October 30, 2008, and will be for all principal and all accrued interest not yet paid. Payments include principal and interest. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs; then to any late charges; then to any accrued unpaid interest; and then to principal. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender’s address shown above or at such other place as Lender may designate in writing.

VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an independent index which is the minimum prime lending rate for large U.S. Money Center Commercial banks as published in the Money Rate Section of the Wall Street Journal (the “Index.). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each quarter. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 4.750% per annum. Prior to adding or subtracting any margin to the Index, the Index is rounded up to the nearest 0.001 per cent, resulting in a current rounded Index of 4.750%. The interest rate to be applied to the unpaid principal balance of the Note will be at a rate of 3.750 percentage points over the Index, rounded up to the nearest 0.001 percent, resulting in an initial rate of 8.500% per annum. NOTICE: Under no circumstances will the interest rate on the Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (A) increase Borrower’s payments to ensure Borrower’s loan will pay off by its original final maturity date, (B) increase Borrower’s payments to cover accruing interest, (C) increase the number of Borrower’s payments, and (D) continue Borrower’s payments at the same amount and increase Borrower’s final payment.

PREPAYMENT.     Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower’s making fewer payments. Borrower agrees not to send Lender payments marked “paid in full” “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Legacy Bank, Legacy Bank, PO Box 1109, 2024 N. Hwy 81, Duncan, OK 73534-1109.

LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $20.00, whichever is greater.

INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 21.000% per annum. The interest rate will not exceed the maximum rate permitted by applicable law.

DEFAULT. Each of the following shall constitute an event of default (“Event of Default”) under this Note:   Payment Default. Borrower fails to make any payment when due under this Note.

  Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

  Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s property or Borrower’s ability to repay this Note or perform Borrower’s obligations under this Note or any of the Related Documents.

  False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

  Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

  Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

  Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

  Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

  Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.

          Insecurity. Lender in good faith believes itself insecure.

  Cure Provisions. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within ten (10) days; or (2) if the cure requires more than ten (10) days, immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

LENDER’S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.

ATTORNEYS’ FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender’s attorneys’ fees and Lender’s legal expenses, whether or not there is a lawsuit, including without limitation all attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.

GOVERNING LAW. This Note will be governed by, construed and enforced in accordance with federal law and the laws of the State of Ok1ahoma. This Note has been accepted by Lender in the State of Oklahoma.

DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower’s loan and the check or other payment order including any preauthorized charge with which Borrower pays is later dishonored.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

COLLATERAL.     Borrower, acknowledges this Note is secured by commercial security agreements from Chemical and Equipment Specialties, Inc., Neal’s Technology, Inc., Padko International, Inc., Plainsman Technology, Inc. and Esses, Inc. dated 5-30-2001 and filed centrally with the clerks of Oklahoma, Texas, Delaware and Louisiana, guaranteed by Dr. Glenn S. Penny and commercial security agreements from Flotek Industries, Inc. and its subsidiaries i.e.; Chemical and Equipment Specialties, Inc., Neal’s Technology, Inc., Esses, Inc., Plainsman Technology, Inc., Padko International, Inc., Turbeco, Inc., USA Petrovalve, Inc., Trinity Tool, Inc., Material Translogistics, Inc., and Petrovalve, Inc. dated 1-7-2002 to lender and filed centrally with the clerks of Oklahoma, Texas, Delaware and Louisiana on all UCC collateral.

ADDITIONAL FEES. Borrower(s) agrees to pay any and all fees or costs associated with this indebtedness as deemed necessary by Lender, for file documentation or security perfection. These additional fees or costs may include, but not be limited to, attorney fees, appraisal fees, title fees, filing and recording fees, or abstracting fees. Said fees, if not paid when incurred, will be added to the principal of this indebtedness.

PRIOR NOTE. Legacy Bank loan numbers 9592507 and 9658178.

SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.

NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing the specific inaccuracy(ies) should be sent to us at the following address: Legacy Bank, PO Box 1038, Hinton, OK 73047.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD All THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. EACH BORROWER AGREES TO THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

BORROWER:

FLOTEK INDUSTRIES, INC.

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

Jerry D. Dumas, Sr., CEO of Flotek Industries, Inc.

By: /s/ Lisa G. Bromiley Meier

Lisa G. Bromiley Meier, Chief Financial Officer of Flotek Industries, Inc.

EX-31

Exhibit 31.1

CERTIFICATION

I, Jerry D. Dumas, Sr., certify that:

1. I have reviewed this quarterly report on Form 10-QSB for the period ended September 30, 2004 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 quarterly 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 quarterly report;

4. 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)) for the registrant and have:

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

b. 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

c. Disclosed in this quarterly report any change in the registrant’s internal controls 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; 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 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 15, 2004

/s/ Jerry D. Dumas, Sr.
—————————————————
Jerry D. Dumas, Sr.
Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION

I, Lisa G. Bromiley, certify that:

1. I have reviewed this quarterly report on Form 10-QSB for the period ended September 30, 2004 of Flotek Industries, Inc.

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant’s other certifying officers 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)) for the registrant and have:

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

b. 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 quarterly report based on such evaluation; and

c. Disclosed in this quarterly report any change in the registrant’s internal controls that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of 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 controls 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 controls.

Date: November 15, 2004

/s/ Lisa G. Bromiley
—————————————————
Lisa G. Bromiley
Chief Financial Officer

EX-32

         Exhibit 32.1

Certification of Chief Executive 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, 2004 as filed with the Securities and Exchange Commission on the date hereof (“the Report”), Jerry D. Dumas, Sr., Chief Executive Officer 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 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.

Date: November 15, 2004

/s/ Jerry D. Dumas, Sr.
—————————————————
Jerry D. Dumas, Sr.
Chief Executive Officer

EX-32

         Exhibit 32.2

Certification of 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, 2004 as filed with the Securities and Exchange Commission on the date hereof (“the Report”), Lisa G. Bromiley, Chief Financial Officer 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 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.

Date: November 15, 2004

/s/ Lisa G. Bromiley
—————————————————
Lisa G. Bromiley
Chief Financial Officer