UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

or

¨

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-13270

FLOTEK INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (713) 849-9911

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨  No x

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

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

Large accelerated filer¨ Accelerated filer¨

Non-accelerated filer  x (Do not check if a smaller reporting company) Smaller reporting company¨

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

NONE

Indicate by check mark if			YES	NO
• the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
• if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
• whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
• if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer	Accelerated filer	Non-accelerated filer (Do not check if a smaller reporting company)	Smaller reporting company
• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 20092010 (based on the closing market price on the New York Stock Exchange Composite Tape on June 30, 2009)2010) was approximately $45,224,000 (determined by subtracting the number of shares held by affiliates of Flotek Industries, Inc. on that date from the total number of shares outstanding on that date). $35,619,237.

At March 16, 2010,7, 2011, there were 24,215,28343,034,446 outstanding shares of Flotek Industries, Inc.the registrant’s common stock, $0.0001 par value.

DOCUMENTS INCORPORATED BY REFERENCE

The information required in Part III of the Annual Report on Form 10-K is incorporated by reference to the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A for the registrant’s 20102011 Annual Meeting of Stockholders.

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FORWARD-LOOKING STATEMENTSForward-Looking Statements

We have included in this

This Annual Report on Form 10-K (the “Annual Report”), and from time to time our management may make, statements that may constitutein particular, Item 7- “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995.1995 (the “Reform Act”). Forward-looking statements are not historical facts but instead represent only ourthe Company’s current beliefassumptions and beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside ourof the Company’s control. The forward-looking statements contained in this Annual Report are based onupon information available as of the date of this Annual Report. Many of these forward lookingThe forward-looking statements relate to future industry trends actions, futureand economic conditions, forecast performance or results of current and anticipatedfuture initiatives and the outcome of contingencies and other uncertainties that may have a significant impact on ourthe Company’s business, future operating results and liquidity. We try, whenever possible, to identify theseThese forward-looking statements generally are identified by using words such as “anticipate,” “believe,” “estimate,” “continue,” “intend,” “expect,” “plan,” “forecast,” “project” and similar expressions, foror future-tense or conditional constructions (“will,such as “will,” “may,” “should,” “could,” etc.). We caution you The Company cautions that these statements are onlymerely predictions and are not to be considered as guarantees of future performance. These forward-lookingForward-looking statements are based upon current expectations and our actual results, developments and businessassumptions that are subject to certainrisks and uncertainties that can cause actual results to differ materially from those projected, anticipated or implied. A detailed discussion of potential risks and uncertainties that could cause actual results and events to differ materially from those anticipated by these statements. By identifying theseforward-looking statements for youis included in Part I, Item 1A- “Risk Factors” in this manner, we are alerting you toAnnual Report and periodically in future reports filed with the possibility that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. We assumeSecurities and Exchange Commission (the “SEC”).

The Company has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events, except as required by law. Important factors that could cause actual results

Back to differ from those in the forward-looking statements include, among others, those discussed under “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and those described elsewhere in this Annual Report on Form 10-K and from time to time in our future reports filed with the Securities and Exchange Commission.Contents

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PART I

GeneralITEM 1  Business

General

Flotek Industries, Inc. (“Flotek” or the “Company”) is a diversified global supplier of drilling and production related products and servicesservices. The Company’s strategic focus, and that of all wholly owned subsidiaries (collectively referred to as the oil and gas industry. Our core focus is“Company”), includes oilfield specialty chemicals and logistics, downholedown-hole drilling tools and downholedown-hole production tools. Ontools used in the energy and mining industries. In December 27, 2007, ourthe Company’s common stock began trading on the New York Stock Exchange (“NYSE”(the “NYSE”) under the stock ticker symbol “FTK.” Our website is located athttp://www.flotekind.com. We make available free of charge on or through our internet website our Annual Reportsreports on Form 10-K, quarterly reports on Form 10-Q,10Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange(“the Exchange Act”), are posted to the Company’s website, www.flotekind.com as soon as reasonably practicable aftersubsequent to electronically filing such material with, or furnishing it to the Securities and Exchange Commission (“SEC”).SEC. Information contained in ouron the Company’s website or links contained on our website areis not to be considered as part of thisany regulatory filing. As used herein, “Flotek,” the “Company,” “we,” “our” and “us” may referrefers to Flotek Industries, Inc. and/or itsthe Company’s wholly owned subsidiaries. The use of these terms is not intended to connote any particular corporate status or relationships.relationship.

Historical Developments

Flotek was originally

The Company incorporated under the laws ofin the Province of British Columbia on May 17, 1985. On October 23, 2001, we approved a change in ourthe Company moved the corporate domicile to the state of Delaware and culminated a reverse stock split of 120 to 1. OnEffective October 31, 2001, wethe Company completed a reverse merger with CESI Chemical, Inc. (“CESI”). Since that date, we havethe Company has grown through a series of acquisitions.acquisitions and organic growth.

For information relating to our acquisitions during 2008 and 2007, refer to Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 to the consolidated financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data.”

Description of Operations

Our business is organized into

The Company has three strategic business units or segments: Chemicals and Logistics (“Chemicals”), Drilling Products (“Drilling”) and Artificial Lift. Each segment offers variouscompetitive products and services derived from patented technological advances that are reactive to industry demands in both domestic and requires different technology and marketing strategies. All three segments market products domestically and internationally.international markets.

For financialFinancial information regarding each segmentoperational segments and geographic areas in which we operate, see Note 17 to the consolidated financial statements included inconcentration is provided within this Annual Report. See Part II, “Item 8. Item 8-“Financial Statements and Supplementary Data.” and Note 17- Segment Information in the Notes to Consolidated Financial Statements for additional information.

Chemicals and Logistics

The chemicalChemicals business offers a full spectrum ofprovides oil field and natural gas field specialty chemicals used for use in drilling, cementing, stimulation and production activities designed to maximize recovery fromwithin both new and mature fields. OurThe Company’s specialty chemicals are key to the success of this business segment. Our specialty chemicals havepossess enhanced performance characteristics and are manufactured to withstand a widebroad range of downholedown-hole pressures, temperatures and other well-specific conditions. We operateconditions and compliant with customer specifications. The Company has two laboratories,operational laboratories: 1) a technical services laboratory and 2) a research and development laboratory, which focuslaboratory. Each focuses on design improvements, development and viability testing of new chemical formulations andformulations; as well as continued enhancement of existing products, often in cooperation with our customers.

Ourproducts. CESI branded micro-emulsions are patented (US & foreign)both domestically and internationally and are therefore unique in theproven strategically cost effective alternatives within both oil and natural gas market. Micro-emulsionsmarkets. The Company’s micro-emulsions are environmentally friendly stable mixtures of oil, water and surface active agents forming athat form complex nano-fluid innano-fluids which theorganize molecules are organized (or assembled) into nanostructures. The combinationcombined advantage of solvent,

solvents, surface active agent(s) and structure provide betterdrilling structures result in increased well treatment results thanas compared to the independent use of solventsolvents and surface active agent(s) alone.. CESI’s micro-emulsions are composed of renewable, plant derived, cleaning ingredients and oils andthat are certified as biodegradable. Some of theCertain micro-emulsions have received approvalbeen approved for use in the North Sea meetingwhich has some of the most stringent oil field environmental standards in the world. CESI’sThe Company’s micro-emulsions have documentedbenefited both operational and financial benefitresults in both low permeability sand and shale reservoirs.

Our

FLOTEK INDUSTRIES, INC. – Form 10-K – 1

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The logistics business designs, projectoperates and manages and operates automated bulk material handling and loading facilities for oilfield service companies. Thesefacilities. The bulk facilities handle oilfield products, including sand and other materials for well-fracturing operations, dry cement and additives for oil and natural gas well cementing, and supplies andsupply materials used in oilfield operations, which we blend to customer specification.operations.

Drilling Products

We areThe Company is a leading provider of downholedown-hole drilling tools usedfor use in the oilfield, mining, water-well and industrial drilling sectors. We manufacture, sell, rentactivities. Further, the Company manufactures, sells, rents and inspectinspects specialized equipment for useused in drilling, completion, production and workover activities. Through internal growth initiatives, operational best practices and acquisitions, we havethe Company has realized increased the size and breadth of our rental tool inventoryactivity and broadened its geographic scope of operations so that we now conductoperations. Established tool rental operations are strategically located throughout the United States (the “US”) and in selectan increasing number of international markets. Our rentalRental tools include stabilizers, drill collars, reamers, wipers, jars, shock subs, wireless survey, and measurement while drilling (“MWD”) tools and mud-motors, while equipmentmud-motors. Equipment sold primarily includes mining equipment, centralizers and drill bits. We focus ourThe Company remains focused on product marketing efforts primarily in the Southeast, Northeast, Mid-Continent and Rocky Mountain regions of the United States, withUS, as well as on international sales currently conducted throughexpansion using third party agents and employees.

Artificial Lift

We provideThe Company provides pumping system components, including electric submersible pumps or ESPs,(“ESP’s”), gas separators, production valves and complementary services. OurArtificial Lift products addresssatisfy the needsrequirements of coal bed methane and traditional oil and natural gas production to efficiently moveand assist natural gas, oil and other fluids movement from the producing horizon to the surface. Several of our Artificial Lift products employ uniqueproprietary technologies instrumental to improveimproved well performance. Our patentedPatented Petrovalve product optimizesproducts optimize pumping efficiency in horizontal completions as well as heavy oil wells and wells with high liquid to gas ratios. This unique valve can bePetrovalve products placed horizontally results in increasedincrease flow per stroke, and eliminateseliminate gas locking by replacing theof traditional ball and seat valvevalves that requiresrequire more maintenance. Furthermore, ourThe patented gas separation technology is particularly applicable foreffective in coal bed methane production, as it efficiently separatesseparating gas and water downhole,down-hole as well as ensuring solution gas is not lost in water production. Because gas isGas separated downhole, it reducesdown-hole, contributes to a reduction in the environmental impact of escaped gas at the surface. The majority of our products for Artificial Lift products are manufactured in China, assembled domestically and distributed globally.

Seasonality

On an overall basis, our segment

Overall, operations are not generally affected by seasonality. CertainWhile certain working capital components may build and recede duringthroughout the year reflectingin conjunction with established selling cycles and business cyclesthat can impact our operations and financial position, when compared to other periods, but we dothe Company does not consider our operations to be highly seasonal. However, theThe performance, of certain services in allwithin each of the Company’s segments may be temporarily affected byhowever, is susceptible to both weather and natural phenomena. Examples of how suchnaturally occurring phenomena, can impact our business include:including:

•

•

•

In addition, theArtificial Lift results of operations of the Chemical and Logistics segment are historically stronger in the fourth quarter of the year due to higher spending near the end of the year by our customers. Also, the results of operations of our Artificial Lift segment are historically weakerweakest in the second quarter of the calendar year due to Federal land drilling restrictions on drilling on federal lands becauseduring identified breeding seasons of the breeding season of certainprotected bird species.

Product Demand and Marketing

The demand

Demand for ourthe Company’s products and services is generally correlatedreactive to the level of natural gas storage and to a lesser extentproduction, oil and natural gas well drilling, activity,and corresponding work-over activity, and gas production levels, both in the United Statesdomestically and internationally. We market our products primarily through direct salesProducts are marketed directly to our customers through sales employees with the assistance of operations employeescontractual agency agreements and Company management. We have establishedemployees. Established customer relationships which provide for repeat sales inopportunities within all of our segments. The majority of our marketingMarketing is currently conductedconcentrated within the United States.US. Internationally we operatethe Company primarily throughoperates using third party agents in Canada, Mexico, Central andAmerica, South America, the Middle East, and Asia.

Customers

The customers for our products and services includeCompany’s customer base includes major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies and state-owned national oil companies. One of our customers, Halliburton Companycustomer and its affiliated companies,affiliates accounted for 17%12%, 17% and 20% and 21% of ourthe Company’s consolidated revenuesrevenue for the years ended December 31, 2010, 2009 and 2008, and 2007, respectively. OurThe Company’s top three customers together accounted for 22%18%, 26%22% and 25%26% of consolidated revenuesrevenue for the years ended December 31, 2010, 2009 2008 and 2007,2008, respectively.

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Research and Development

We are

The Company is engaged in research and development activities directed primarily towardfocused on the improvement of existing products and services, the design of specialized “customer need” products to meet customer needs and the development of new products, processes and services. WeFor the years ended December 31, 2010, 2009 and 2008 the Company incurred $1.4 million, $2.1 million $1.9 million and $0.8$1.9 million in research and development expenses, for the years ended December 31, 2009, 2008 and 2007, respectively. In 2009, our2010, research and development spending was approximately 1.9%expenditures approximated 1% of consolidated revenues. We intendrevenue. The Company intends to maintain our near-term research and development investment at levels consistent with 20092010 expenditures.

Backlog

Due to the nature of our businessthe Company’s contractual customer relationships and contracts with our customers, we dooperational management, the Company has historically not experience anyhad significant amount of backlog orders.order activity.

Intellectual Property

We have followed a

The Company’s policy of seekingis to ensure patent protection, both within and outside of the United StatesUS, for all products and methods that appeardeemed to have commercial significance and qualify for patent protection. The decision to seekpursue patent protection depends onis dependent upon whether suchpatent protection can be obtained, on a cost-effective basiscost-effectiveness and is likely to be effective in protecting ouralignment with commercial interests. We believe ourThe Company believes patents and trademarks, togethercombined with our trade secrets, and proprietary design,designs, manufacturing and operational expertise, are reasonably adequateappropriate to protect our intellectual property and provide for theensure continued operation of our business. We maintainstrategic business operations. The Company currently has patents pending on our production valve design, casing centralizer design, ProSeries tools,tool design and trade secrets, and havesecrets. Existing patents pending on certain specialty chemicals. Patents expire at various dates during 20212022 and 2022.2023.

Competition

Our

The ability to compete in the oilfield services marketindustry is dependent on ourupon the Company’s ability to differentiate our products and services, provide superior quality and service, and maintain a competitive cost structure. Activity levels in our threeall segments are driven primarilyimpacted by current and expected commodity prices, vertical and horizontal drilling rig count, other oil and natural gas

drilling activity, production levels and customer capital spending allocated for drilling and production. Theproduction designated capital spending. Domestic and international regions in which we operateFlotek operates are highly competitive. The competitive environment has recently intensified as recentdue to mergers among oil and gas companies have reducedand the reduction in the number of available customers. Additionally, the recentThe 2009 global economic downturn in the economy and corresponding commodity prices haveprice fluctuations caused the market for ourthe Company’s services, and that of our competitors which may vary significantly by geographical region, to contract. Many otherdecline. Certain competing oil and natural gas service companies are larger than we areFlotek and have greater resources than we have.access to more resources. These competitors maycould be better ablesituated to withstand industry downturns, compete on the basis of price and acquire and develop new equipment and technologies,technologies; all of which, could affect ourthe Company’s revenue and profitability. These competitorsOil and natural gas service companies also compete with us both for customers and for acquisitions of other businesses. Thisstrategic business opportunities. Thus, competition may cause our business to suffer. We believecould have a detrimental impact upon the Company’s business. The Company expects that competition for contracts and margins will continue to be intense in the foreseeable future.

Raw Materials

We believe that materials

Materials and components used in ourthe Company’s servicing and manufacturing operations, andas well as those purchased for sale are generally available on the open market and from multiple sources, although collectionsources. Collection and transportation of these raw materials to ourCompany facilities canhowever could be adversely affected by extreme weather conditions. However,Additionally, certain raw materials used by our Chemical and Logistics segment in the manufacture of our patented micro-emulsion chemicalsChemicals segments are available from limited sources, and disruptionssources. Disruptions to our suppliers could materially impact our sales. The prices we paypaid for raw materials may be affected by, among other things,are contingent on energy, steel and other commodity prices;price fluctuations; tariffs, and duties on imported materials;materials, foreign currency exchange rates; the generalrates, business cycle position and global demand. During 2009,2010, the pricesprice of many raw materials declined; however, we expect to see prices increaseincreased and additional increases are anticipated in 2010.2011. Higher prices andcombined with lower availability of chemicals, steel and other raw materials used in our business maycould adversely impact future period sales and margins. Ourcontract fulfillments.

The Drilling Products and Artificial Lift segments purchase the principal raw materialmaterials and steel on the open market. Except for a few chemical additives,market from numerous suppliers. When able, the raw materials are available in most cases from several suppliers at market prices. Where we can, we useCompany uses multiple suppliers, both domestically and internationally, for our keyall raw materials purchases.

We also maintainThe Drilling segment maintains a three to six month supply of key mud-motor inventory parts that are primarily sourced from China as well as an equivalent amount of stock of parts necessary to meet forecast demand within our Artificial Lift segment. Thisoperations. The Company’s inventory stock position approximates the lead time required to secure these parts in order to avoid disruption of service to our customers.

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Government Regulations

We are

The Company is subject to federal, state and local environmental, and occupational safety and health laws and regulations inwithin the United StatesUS and other countries in which we dothe Company does business. We are subjectThe Company strives to numerous environmental, legal, andensure full compliance with all regulatory requirements related to our operations worldwide. We strive to comply fully with these requirements and are not awareis unaware of any material instances of noncompliance. In the United States, theseUS, compliance laws and regulations include, among others:

•

•

•

•

•

In addition to theUS federal laws and regulations, states andthe Company does business in other countries where we do business may have numerouswith extensive environmental, legal, and regulatory requirements by which wethe Company must abide. We evaluate and addressThe Company evaluates the environmental impact of our operations by assessingall Company actions and remediatingattempts to quantify the price of contaminated propertiesproperty in order to identify and avoid future liabilities and complyliability, as well as maintain compliance with environmental, legal, and regulatory requirements. ManySeveral of theChemicals products

within our Chemicals and Logistics segment are considered hazardous or flammable. IfIn the event of a leak or spill occurs in connectionassociation with ourCompany operations, we could incurthe Company is exposed to risk of material costs,cost, net of insurance proceeds, to remediate any resulting contamination. On occasion, we areThe Company is occasionally involved in specific environmental litigation and claims, including the remediation of properties we ownowned or have operated, as well as efforts to meet or correct compliance-related matters. We dooperated. The Company does not expect costs related to theseknown remediation requirements to have a material adverse effect on ourthe Company’s consolidated financial position or our results of operations.

Employees

As of March 16,

At December 31, 2010, wethe Company had approximately 320312 employees, worldwide. Noneexclusive of our employees areexisting worldwide agency relationships. No company employee is covered by collective bargaining agreementsagreement and our labor relations are generally good. In certainpositive. Certain international locations,location changes in staffing or work arrangements may need approval ofare contingent upon local workswork councils or other bodies.regulatory approval.

Available Information

We maintain a web site

The Company’s website is accessible atwww.flotekind.comhttps://www.flotekind.com.. We make available, free of charge, on the “Investor Relations” section of our web site, our Annual Reportsreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available (see “Investor Relations” section on the Company’s website), as soon as reasonably practicable after wesubsequent to the Company electronically filefiling or furnish such materialsotherwise providing reports to the SEC. Additionally, our corporateCorporate governance materials, including governance guidelines; the charters of the Audit, Compensation,guidelines, charter and Governance and Nominating Committees; and the code of conduct mayare also be found underavailable on the “Investor Relations” section of our web site atwww.flotekind.com.website. A copy of the foregoing corporate governance materials is available upon written request.request to the Company.

You may read and copy any materials we fileAll material filed with the SEC at the SEC’s Public“Public Reference RoomRoom” at 100 F Street NE, Washington, DC 20549. You may obtain information20549 is available to be read or copied. Information regarding the Public“Public Reference RoomRoom” can be obtained by callingcontacting the SEC at 1-800-SEC-0330. In addition,Further, the SEC maintains an internet website atthe www.sec.gov thatwebsite, which contains reports and other registrant information regarding registrants that filefiled electronically with the SEC, including us.SEC.

WeThe 2010 Annual Chief Executive Officer Certification required by the NYSE was submitted our 2009 annual CEO certification with the New York Stock Exchange (“NYSE”) on July 9, 2009.September 8, 2010. The certification was not qualified in any respect. Additionally, wethe Company has filed with this Form 10-K theAnnual Report principal executive officer and principal financial officer certifications as required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

Information with respect to ourthe Company’s executive officers and directors is incorporated herein by reference to information to be included in the Proxy Statementproxy statement for our 2010Flotek’s 2011 Annual Meeting of Stockholders.

We haveThe Company has disclosed and intend towill continue to disclose any changes or amendments to ourFlotek’s code of ethics oras well as waivers from ourto the code of ethics applicable to our chief executive officer and chief financial officer by controllermanagement by posting such changes or waivers on the Company’s website.

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ITEM 1A  Risk Factors

Item 1A.

Risk Factors.

This document, our other filings withThe Company’s business, financial condition, results of operations and cash flows are subject to various risks and uncertainties, including those described below. These risks and uncertainties could cause actual results to vary materially from current or forecast results. The risks below are not all-inclusive of risks that could impact the SEC, and other materials releasedCompany. Additional risks, not currently known to the public containCompany, or that the Company presently considers immaterial could impact the Company’s business operations.

This Annual Report contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act of 1995.1995, that involve risks and uncertainties. Forward-looking statements discuss Company prospects, expected revenue, expenses and profits, strategic initiatives for operations and other activity. Forward-looking statements also contain suppositions regarding future conditions in the oil and natural gas industry within both domestic and international economies. The Company’s results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including risks described below and elsewhere. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K. These forward-looking statements may discuss our prospects, expected revenue, expenses and profits, strategies for our operations and other subjects, including conditions in the oilfield service and oil and natural gas industries and in the United States and international economy in general.Report.

Our forward-looking statements are based on assumptions that we believe to be reasonable, but that may not prove to be accurate. All of our forward-looking information is, therefore, subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors discussed below.

Risks Related to Ourthe Company’s Business

We

The Company did not have not had profitable operations during 20092010 and may not be profitable in 2010.2011.

We haveThe Company experienced net losses during the last two fiscalthree calendar years, including a lossnet losses in each of the four quarters of 2009. There2010. The Company can beprovide no assurance that wethe 2011 operational plan (the “2011 Plan”), will be able toexecuted successfully execute our plan of operations for 2010, and that even if we are successful in execution of our plan, that wethe Company will be profitable in 2010.2011.

Demand for thea majority of ourCompany products and services is substantially dependent on the levels of expenditures bywithin the oil and natural gas industry. Current global economic conditions continue to result in low oil and gas prices. If current global economic conditions and the availability of credit worsen or continueoil and natural gas prices materially weaken for an extended period this could reduce ourof time, possible reductions in customers’ levels of expenditures andcould have a significant adverse effect on our revenue, margins and overall operating results.

The current global credit and economic environment has reducedtempered worldwide demand for energy and resulted in depressed crudeenergy. Crude oil and natural gas prices.prices have continued to be volatile. A substantial or extended decline in oil andor natural gas prices can reduce ourcould affect customers’ activitiesspending for products and their spending on our services and products.services. Demand for the majority of ourthe Company’s services substantially depends onis dependent upon the level of expenditures bywithin the oil and gas industry for the exploration, development and production of crude oil and natural gas reserves. These expendituresExpenditures are sensitive to oil and natural gas prices, and generally dependent onas well as the industry’s view ofoutlook regarding future oil and natural gas prices. During the current worldwide deterioration in the financial and credit markets,Reduced demand for oilCompany products and gas has reduced dramatically and oil and gas prices have fallen, causing some of our customers to reduce or delay their oil and gas exploration and production spending. This has reduced the demand for our services and exerted downward pressure on the prices that we charge.charged in 2009. Limited recovery occurred in 2010. If economic conditions do not continue to improve it could resultor weaken from current levels, additional reductions in further reductions ofcustomer exploration and production expenditures by our customers,could result, causing further declines in thereduced demand for ourCompany products and services and products. This could result in a significant adverse effect on ourthe Company’s operating results. Furthermore, itIt is difficult to predict how long the economic downturnpace of the current recovery, whether the economy will continue, to what extent it might worsen, and to what extent this will continue tocould affect us.the Company.

The reduction inReduced cash flows being experienced by ourflow of some of the Company’s customers resulting from declines inas a result of depressed commodity prices, together withreduced the reduced availability of credit and increased coststhe cost of borrowing due to the tightening of thetight credit markets,markets. Reduced cash flow and capital availability could have significant adverse effects onadversely impact the financial condition of some of our customers. Thisthe Company’s customers, which could result in customer project modifications, delays or cancellations, general business disruptions, and delay in, or nonpayment of, amounts that are owed to us, whichthe Company, that could haveresult in a significant adverse effectnegative impact on ourthe Company’s results of operations and cash flows. Additionally, our suppliers could be negatively impacted by current global economic conditions.

If certain of ourthe Company’s suppliers were to experience significant cash flow issuesconstraints or become insolvent as a result of such conditions, it could result in a reduction or interruption in supplies or a significant increase in the price of supplies could occur, and adversely impact ourthe Company’s results of operations and cash flows.

The pricesprice for oil and natural gas areis subject to a variety of additional factors, including:

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OurThe Company’s business depends primarily onis dependent upon domestic spending bywithin the oil and natural gas industry, and this spending and our business mayindustry. Spending could be adversely affected by industry conditions or by new or increased governmentgovernmental regulations that are beyond ourthe Company’s control.

We depend primarily on ourThe Company is dependent upon customers’ willingness to make operating and capital expenditures to explore for developexploration, development and produceproduction of oil and natural gas in both the United States.US and abroad. Customers’ expectations of future oil and natural gas market prices for oil and gas maycould curtail spending thereby reducing demand for ourthe Company’s products and services. Industry conditions in the United StatesUS are influenced by numerous factors over which we havethe Company has no control, such asincluding the supply of and demand for oil and natural gas, domestic and international economic conditions, political instability in oil and natural gas producing countries and merger and divestiture activity among oil and natural gas producers. The volatility of the oil and natural gas industryprices and the consequentconsequential effect on exploration and production activity could adversely affectimpact the level of activity engaged in by the Company’s customers. One indicator of drilling and production activity by some of our customers. One indication of drilling and production activity and spending is rig count which the company actively monitors to gauge market conditions. A reduction in drilling mayactivity could cause a decline in the demand for, or adverselynegatively affect the price of, ourthe Company’s products and services. Reduced discovery rates of new oil and gas reserves in our market areas could also have a negative long-term impact on our business, even in an environment of stronger oil and gas prices. In addition, domesticDomestic demand for oil and natural gas maycould also be uniquely affected by public attitudesattitude regarding drilling in environmentally sensitive areas, vehicle emissions and other environmental standards, alternative fuels, taxation of oil and gas, andperception of “excess profits” of oil and gas companies, and the potential changesanticipated change in governmental regulationregulations and policy that may result from such public attitudes.policy.

FLOTEK INDUSTRIES, INC. – We may not be ableForm 10-K – 5

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

On several occasions we have failed to meet, or have projected that we would in the future fail to meet, the financial covenant requirements in our bank credit facility. We have been required on these occasions to seek waivers of such covenant violations and amendments to our bank credit facility to modify these covenants. Most recently, we were not in compliance with certain of the financial covenants in our bank credit agreement as of December 31, 2009.

Our ability to generate sufficient cash flows from operations to make scheduled payments or mandatory prepayments on our current debt obligations and other future debt obligations we may incur will depend on our future financial performance, which may be affected by a range of economic, competitive, regulatory and

industry factors, many of which are beyond our control. If as a result of our financial performance or other events we violate the financial covenants in our debt agreements or are unable to generate sufficient cash flows or otherwise obtain the funds required to make principal and interest payments on our indebtedness, we may have to seek waivers of these covenants from our lenders or undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital expenditures or seeking to raise additional capital through the issuance of debt securities or other securities. We cannot assure you that we will be able to obtain any required waivers from our lenders or that we will be able to accomplish any necessary refinancing, sale of assets or issuance of securities on terms that are acceptable. Our inability to obtain any required waivers, to generate sufficient cash flows to satisfy such obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.Contents

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

Our debt agreements also contain representations, warranties, fees, affirmative and negative covenants, and default provisions. A breach of any of these covenants could result in a default under these agreements. Upon the occurrence of an event of default under our debt agreements, the lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If the lenders accelerate the repayment of borrowings, we may not have sufficient assets to repay our indebtedness. Also, should there be an event of default, or should we need to obtain waivers following an event of default, we may be subject to higher borrowing costs and/or more restrictive covenants in future periods. Acceleration of any obligation under any of our material debt instruments will permit the holders of our other material debt to accelerate their obligations.

On March 31, 2010, we entered into an Amended and Restated Credit Agreement with new lenders which refinanced our existing bank credit facility. The new credit agreement restricts the payment of dividends and does not contain a revolving line of credit facility, however, it does not contain quarterly or annual covenants. See “Item 8. Financial Statements and Supplementary Data,” Note 19 of our consolidated financial statements for a description of our new senior credit facility.

Our new senior credit facility contains certain covenants that could limit ourthe Company’s flexibility and prevent usthe Company from taking certain actions, which could adversely affect ourthe ability to execute ourinitiate certain business strategy.strategies.

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

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These covenants may restrict ourthe Company’s operating and financial flexibility andas well as limit ourthe Company’s ability to respondreact in a timely manner to changes in our business or competitive activities. If we fail to comply with these covenants, wecircumstances. Covenant noncompliance could beresult in default and our newof the senior credit facility. Upon such default, the Company’s senior credit facility lenderlenders could elect to declare all the amounts borrowed and due to them, together with

inclusive of all accrued and unpaid interest, to be due and payable. In addition, weAs a result, the Company or one or more of ourits subsidiaries could be forced into liquidation or bankruptcy. Any of the foregoing consequencescircumstances could restrict ourthe Company’s ability to execute ourstrategic business strategy. In addition, suchinitiatives. Any default andor acceleration of our newthe Company’s senior credit facility could lead toresult in a default under ourof the Company’s convertible senior notes.

OurThe Company’s future success and profitability may be adversely affected if wethe Company or ourthe Company’s suppliers fail to develop andand/or introduce new and innovative products and services that appeal to our customers.services.

The oil and natural gas drilling industry is characterized by continual technological developmentsadvancements that have historically resulted in, and will likely will continue to result in, substantial improvements in the scope and quality of oilfield chemicals, drilling and artificial lift products and services and product function and performance. As a result, ourConsequently, the Company’s future success depends,is dependent, in part, upon ourthe Company’s and ourthe Company’s suppliers’ continued ability to timely develop and introduce new and innovative products and services beyond our patented micro-emulsion surfactant lineservices. Increasingly sophisticated customer needs and the ability to address the increasingly sophisticated needs of our customers andtimely anticipate and respond to technological and industryindustrial advances in the oil and natural gas drilling industry in a timely manner.is critical. If wethe Company or ourthe Company’s suppliers fail to successfully develop and introduce new and innovative products and services that appeal to our customers, or if new market entrants or our competitors offer suchdevelop superior products and services, ourthe Company’s revenue and profitability maycould suffer.

We intendThe Company intends to pursue strategic acquisitions, which could have an adverse impact on ourthe Company’s business.

Our business strategy includes growing our businessThe Company remains committed to growth through strategic acquisitions ofand alliances with complementary businesses as our capital structure permits. Acquisitions that we have made or that we may make in the future may entail a number ofbusinesses. The Company’s historical and potential acquisitions involve risks that could adversely affect ourthe Company’s business climate and results of operations. The processNegotiations of negotiating potential acquisitions or integratingintegration of newly acquired businesses into our business could divert our management’s attention from other business concerns and couldas well as be expensivecost prohibitive and time consuming. Acquisitions could also expose our businessthe Company to unforeseen liabilities or risks associated with entering new markets or businesses. Consequently, we might not be successful in integrating ourUnforeseen operational difficulties related to acquisitions into our existing operations, which maycould result in unforeseen operational difficulties or diminished financial performance or require a disproportionate amount of ourthe Company’s management’s attention and resources. Even if we are successful in integrating ourAdditional acquisitions into our existing operations, we may not derive the benefits, such as operational or administrative synergies, that we expect from such acquisitions, which maycould result in the commitment of capital resources without the realization of anticipated returns on such capital. In addition, we may not be ablereturns. The Company’s current credit agreement limits the Company’s ability to continue to identify attractive acquisition opportunities or successfully acquire identified targets. Competition for acquisition opportunities may escalate, increasing our cost of making further acquisitions or causing us to refrain from makingaccess additional acquisitions. We also must meet certain financial covenants in order to borrow moneyborrowings under our newthe senior credit facility to fund future acquisitions and to borrow forfrom other purposes which, if not met, could prevent us from making future acquisitions.sources.

If we dothe Company does not manage the potential difficulties associated with expansion successfully, ourthe Company’s operating results could be adversely affected.

We haveThe Company has grown over the last several years through internal growth, strategic business/asset acquisitions and strategic acquisitions of other businesses and assets. We believe ouralliances. The Company believes future success depends,will depend, in part, on ourthe Company’s ability to adapt to market opportunities and changes and to successfully integrate the operations of businesses the businesses we acquire.Company acquires. The following factors could presentgenerate business difficulties to our business going forward:

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If we do notthe Company fails to manage these potential difficulties successfully, ourincluding increased costs associated with growth, the Company’s operating results could be adversely affected. In addition, we may have difficulties managing the increased costs associated with growth, which could adversely affect our operating margins.

OurThe Company’s ability to grow and compete in the future willcould be adversely affected if adequate capital is not available.

The ability of our businessthe Company to grow and compete dependsis reliant on the availability of adequate capital. Access to capital which in turn dependsis dependent, in large part, on ourthe Company’s cash flowflows from operations and the availability of equity and debt financing. WeThe Company cannot assure you that ourguarantee cash flowflows from operations will be sufficient, or that wethe Company will continue to be able to obtain equity or debt financing on acceptable terms, or at all, in order to implement ourrealize growth strategy. For example, our newstrategies. The Company’s senior credit facility restricts ourthe Company’s ability to incur additional indebtedness, including borrowings to fund future acquisitions, a key component of our growth strategy.strategies. As a result, wethe Company cannot assure you that adequate capital will be available to finance our currentstrategic growth plans, to take advantage of business opportunities or to respond to competitive pressures, any of which could harm ourthe Company’s business.

OurThe Company’s current insurance policies may not be adequate toadequately protect ourthe Company’s business from all potential risks.

OurThe Company’s operations are subject to hazardsrisks inherent in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions, fires, severe weather, oil and chemical spills and other hazards. These conditions can causeresult in personal injury or loss of life, damage to property, equipment and the environment, andas well as suspension of customer’s oil and gas operations of our customers.operations. Litigation arising from aany catastrophic occurrence at a location where ourthe Company’s equipment, products or services are being used maycould result in ourthe Company being named as a defendant in lawsuits asserting large claims. We maintainThe Company maintains insurance coverage that we believeit believes is customary to be customary in the industry againstto mitigate liabilities associated with these hazards. However, we doThe Company does not, however, have insurance against all foreseeable risks, either because insurance is not available or because of high premium costs. In addition, weis cost prohibitive. Further, the Company may not be ablehave the financial wherewithal to maintain adequate insurance coverage in the future at rates we consider reasonable. As a result,future. Consequently, losses and liabilities arising from uninsured or underinsured events could have a material adverse effect on ourthe Company’s business, financial condition and results of operations.

We areThe Company is subject to complex foreign, federal, state and local environmental, health and safety laws and regulations, which expose usthe Company to costs and liabilities that could have a material adverse effect on ourthe Company’s business, financial condition and results of operations.

OurThe Company’s operations are subject to foreign, federal, state and local laws and regulations relating to, among other things, the protection of natural resources, and the environment,injury, health and safety considerations, waste management and transportation of waste and other hazardous materials. Our operations, including ourThe Company’s Chemicals and Logistics segment which involves chemical manufacturing, packaging, handling and delivery operations, poseexposes the company to risks of environmental liability that could result in fines, and penalties, expenditures for remediation, and liability for property damage and personal injuries.injury liability. In order to conduct our operations in complianceremain compliant with these laws and regulations, we must obtain and maintainthe Company maintains permits, approvalsauthorizations and certificates as required from various foreign, federal, state and local governmentalregulatory authorities. Sanctions for noncompliance with such laws and regulations maycould include assessment of administrative, civil and criminal penalties, revocation of permits and issuance of corrective action orders. We may

The Company could incur substantial costs in order to maintainensure compliance with these existing laws and regulations. Laws protecting the environment have generally have become more stringent over time and are expected to continue to do so, which could lead toresult in material increases in costs forexpenses associated with future environmental compliance and remediation. In addition, ourThe Company’s costs of compliance maycould also increase if existing laws and regulations are amended or reinterpreted. Such amendments or reinterpretations of existing laws or regulations or the adoption of new laws or regulations could curtail exploratory or developmental drilling for and production of oil and natural gas which, in turn, could limit demand for ourthe Company’s products and services. Some environmental laws and regulations may also impose joint and strict liability, which meansmeaning that in somecertain situations wethe Company could be exposed to liability as a result of ourCompany conduct that was lawful at the time it occurred or conduct of, or conditions caused by, prior operators or other third parties. Clean-up costsRemediation expense and other damages arising as a result of such laws and regulations could be substantial and have a material adverse effect on ourthe Company’s financial condition and results of operations.

Material levels of ourthe Company’s revenue are derived from customers that engageengaged in hydraulic fracturing services, a process that creates fractures extending from the well bore through the rock formation to enable natural gas or oil to moveflow more easily through the rock pores to a production well. Bills pending in the United StatesUS House and Senate have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation wouldcould require the reporting and public disclosure of chemicalscurrently proprietary chemical formulas used in the fracturing process. This legislation,Legislation, if adopted, could establish an additional level of regulation at the federal level that could lead toresult in operational delays and increased operating costs. The adoption of any future federal or state laws or implementingthe implementation of regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process could make it more difficult to completeincrease the difficulty of natural gas and oil wellswell production and could have an adverse impact on ourthe Company’s future results of operations, liquidity and financial condition.

Regulation of greenhouse gases and climate change could have a negative impact on ourthe Company’s business.

SomeCertain scientific studies have suggested that emissions of certain gases, commonly referred to as greenhouse gases and“greenhouse gases”, including carbon dioxide and methane, may be contributingcontributory to the warming of the Earth’s atmosphere and other climatic changes. In response to such studies, the issue of climate change and the effect of greenhouse gas emissions, in particular emissions from fossil fuels, is attracting increasing attention worldwide.worldwide attention. Legislative and regulatory measures to address concerns thatgreenhouse gas emissions of greenhouse gases are contributing to climate change are in various phases of discussions or implementation at the international, national, regional and state levels.

In 2005, the Kyoto Protocol (the “Protocol”) to the 1992 United Nations Framework Convention on Climate Change, which establishes a binding set ofestablished emission targets for greenhouse gases, became binding on thethose countries that had ratified it.the Protocol. In the United States,US, federal legislation imposing restrictions on greenhouse gases is currently under consideration. Proposed legislation has been introduced that would establish an economy-wide cap on emissions of greenhouse gases and would require most sources of greenhouse gas emissions to obtain greenhouse gas emission “allowances” corresponding to their annual emissions. In addition, the Environmental Protection Agency (the “EPA”) is taking steps that would result in the regulation of greenhouse gases as pollutants under the Clean Air Act. To date, the EPA has issued (i) a “Mandatory Reporting of Greenhouse Gases” final rule, effective December 29, 2009, which establishes a new comprehensive scheme requiringrequires operators of stationary sources in the United StatesUS emitting more than established annual thresholds of carbon dioxide-equivalent greenhouse gases to inventory and report their greenhouse gas emissions annually; and (ii) an “Endangerment Finding” final rule, effective January 14, 2010, which states that current and projected concentrations of six keyidentified greenhouse gases in the atmosphere, as well as emissions from new motor vehicles and new motor vehicle engines threaten public health and welfare, allowing the EPA to finalize motor vehiclewelfare. Final greenhouse gas standards (the effect of which could reduce the demand for motor fuels refined from crude oil). Finally, accordingoil. According to the EPA, the final motor vehicle greenhouse gas standards will trigger construction and operating permit requirements for large stationary sources. As a result, the EPA has proposed to tailor these programs such that only large stationary sources will be required to have air permits that authorize greenhouse gas emissions.

Existing or future laws, regulations, treaties or international agreements related to greenhouse gases and climate change, including incentives to conserve energy conservation or use alternative energy sources,incentives, could have a negative impact on ourthe Company’s operations if, such laws, regulations, treaties or international agreements reduce theas a result, there is a reduction in worldwide demand for oil and natural gas or otherwise result in reducedglobal economic activity generally. In addition, such laws, regulations, treaties or international agreementsactivity. Other results could result inbe increased compliance costs orand additional operating restrictions, each of which maywould have a negative impact on ourthe Company’s operations. In addition to potential impacts on ourLastly, the Company’s operations directly or indirectly resulting from climate-change legislation or regulations, our operations also could be negatively affectedimpacted by climate-change related physical changes or changes in weather patterns.

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If we arethe Company is unable to adequately protect ourits intellectual property rights or areis found to infringe upon the intellectual property rights of others ourthe Company’s business is likely to be adversely affected.

We relyThe Company relies on a combination of patents, trademarks, non-disclosure agreements and other security measures to establish and protect ourthe Company’s intellectual property rights. Although we believethe Company believes that thoseexisting measures are reasonably adequate to protect our intellectual property and provide for the continued operation of our business,rights there can be

is no assurance that the measures we have taken or may take in the future, will prevent misappropriation of our proprietary information, or provide usthe Company with a competitive advantage, or thatdissuade others will not independently developfrom independent development of similar products or services, design around our proprietary or patented technology or duplicate our products or services. Moreover, there can beis no assurance that these protectionsthe Company will be available in all cases or will be adequateable to prevent our competitors from copying, reverse engineering or otherwise obtaining and using ourthe Company’s technology, proprietary rights or products. We haveThe Company has not sought foreign protection corresponding to all of our US intellectual property rights. Consequently, wethe Company may not be able to enforce all of our intellectual property rights outside of the United States.US. Furthermore, the laws of certain countries in which ourthe Company’s products are manufactured or marketed may not protect ourthe Company’s proprietary rights to the same extent as the laws of the United States. ThirdUS. Finally, parties may seek to challenge, invalidate or circumvent ourthe Company’s patents, trademarks, copyrights and trade secrets. In each case, ourthe Company’s ability to compete could be significantly impaired.

In addition, someA portion of ourthe Company’s products are not protected by issued patents.without patent protection. The issuance of a patent does not guarantee that it is validvalidity or enforceable, so even if we obtainenforceability, accordingly, Company patents they may not be valid or enforceable against third parties. The issuance of a patent does not guarantee that we havethe Company has the right to practiceuse the patented invention. Third parties may have blocking patents that could be used to prevent usthe Company from marketing ourthe Company’s own patented productproducts and practicing our ownutilizing the patented technology.

We have from timeThe Company is exposed to time received, and may in the future receive, communications alleging possible infringementallegations of patentspatent and other intellectual property rights of others.infringement. Furthermore, we have in the past, and may in the future,Company could become involved in costly litigation or proceedings brought against us regarding patents or other intellectual property rights. If any such claims are asserted against us, we maythe Company, the Company could seek to obtain a license under the third party’s intellectual property rights. We cannot assure you that we will be ablerights in order to obtain all of the necessary licenses on satisfactory terms, if at all.mitigate exposure. In the event that wethe Company cannot obtain a license, theseaffected parties maycould file lawsuits against usthe Company seeking damages (potentially including(including treble damages), or an injunction against the sale of ourthe Company’s products that incorporate allegedly incorporating infringed intellectual property or against the operation of ourthe Company’s business as presentlycertain conducted which couldwould result in ourthe Company having to stopcease the sale of some of our products, increase the costscost of selling some of our products, or causeresult in damage to ourthe Company’s reputation. The award of damages, including material royalty payments, or the entry of an injunction order against the manufacture and sale of some or allany of ourthe Company’s products, could have a material adverse effect on ourthe Company’s results of operations and ability to compete.

WeThe Company and ourthe Company’s customers are subject to risks associated with doing business outside of the United States which may expose us toUS including political risk, foreign exchange risk and other uncertainties.

Revenue from the sale of products to customers outside the United States exceeds 5%US exceeded 13% of ourthe Company’s total 2010 annual revenue. WeThe Company and ourits customers are subject to certain risks inherent in doing business outside of the United States,US, including:

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Collections and recovery of rental tools from international customers and agents may also prove more difficult due to theinherent uncertainties of foreign law and judicial procedure. We may thereforeThe Company could experience significant difficulty resulting fromwith collections or recovery due to the political or judicial climate in foreign countries in which we operateit operates or in which ourthe Company’s products are used.

OurThe Company’s international operations must also complybe compliant with the Foreign Corrupt Practices Act (the “FCPA”) and other applicable United StatesUS laws, and wethe Company could bebecome liable under these laws for actions taken by our employees or agents. In addition, from time to time, the United States has passedCompliance with international laws and imposedregulations could become more complex and expensive thereby creating increased risk as the Company’s international business portfolio grows. Further, the US periodically enacts laws and imposes regulations prohibiting or restricting trade with certain nations, and the United Statesnations. The US government could also change these laws or enact new laws that could restrict or prohibit usthe Company from doing business in certainidentified foreign countries.

Although most of ourthe Company’s international revenue is derived from transactions denominated in United StatesUS dollars, we havethe Company has conducted, and likely will continue to conduct, some business in currencies other than the United StatesUS dollar. WeThe Company currently dodoes not hedge against foreign currency fluctuations. Accordingly, ourthe Company’s profitability could be affected by fluctuations in foreign exchange rates. We haveThe Company has no assurancecontrol over and can provide no assurances that future laws and regulations will not materially adversely affect ourimpact the Company’s ability to conduct international business.

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The loss of certain key customers could have a material adverse effect on ourthe Company’s results of operations and could result in a decline in ourthe Company’s revenue.

We areThe Company is dependent on severala few key customers. During each of the three previous years ended December 31, 2010, 2009 and 2008, over 20%18%, 22% and 26%, respectively, of ourthe Company’s consolidated revenues camerevenue was derived from three of our customers. OurThe Company’s customer relationships are typicallyhistorically governed by purchase orders or other short-term contracts rather than long-term contracts. The loss of one or more of ourthese key customers could have a material adverse effect on ourthe Company’s results of operations and could result in a decline in ourthe Company’s revenue.

The loss of certain key suppliers, ourthe Company’s inability to secure raw materials on a timely basis, or ourthe Company’s inability to pass commodity price increases on to our customers could have a material adverse effect on ourthe Company’s ability to service our customer’s needs and could result in a loss of customers.

We believe that materials and componentsMaterials used in our servicing and manufacturing operations andas well as those purchased for sale are generally available on the open market and from multiple sources. Acquisition and transportation of these raw materials to ourthe Company’s facilities however, can be adversely affectedimpacted by extreme weather conditions. However, certainCertain raw materials used by the Chemical and LogisticsChemicals segment in the manufacture of our patented micro-emulsion chemical sales are only available from limited sources and any disruptions to ourthese suppliers could materially impact ourthe Company’s sales. The prices we paythe Company pays for our raw materials maycould be affected by, among other things, energy, steel and other commodity prices; tariffs and duties on imported materials; foreign currency exchange rates; phases of the general business cycle and global demand.

The Drilling Products and Artificial Lift segments purchase their principalcritical raw materials and steel on the open market and, where we can, we useable, from multiple suppliers, both domesticdomestically and international, for our key raw materials purchases.internationally.

We also keepThe Company maintains a three-three to six-monthsix month supply of keycritical mud-motor inventory parts that we sourcethe Company sources from China. This inventory stock position approximates the lead time required to secure these parts thus potentially avoidingin order to avoid disruption of service to ourthe Company’s customers. OurThe Company’s inability to secure these key componentsreasonably priced critical inventory parts in a timely manner at reasonable prices could adversely affect ourthe Company’s ability to service our customers. We sourceThe Company sources the vast majority of our motor parts from a single supplier. As part of ourthe 2011 business plan, we are diligentlythe Company is actively working to identify and develop relationships with backupback-up parts suppliers. If we are unsuccessful in developing these relationships, we mayidentifying and engaging back-up suppliers, the Company could be exposed to a disruption of key suppliessuppliers that could result in a loss of revenuesrevenue or key customers. Additionally, if ourthe customers were to seek or develop alternative approachesalternatives for the products or services we offer, wethe Company offers, the Company could suffer a decline in revenue and loss of key customers.

WeThe Company currently dodoes not hedge our commodity prices. WeThe Company may not be ableunable to pass along price increases to ourits customers, which could result in a decline in revenue or operating profit.

OurThe Company’s inability to develop new products or differentiate ourexisting products could have a material adverse effect on ourthe ability to service ourbe responsive to customer’s needs and could result in a loss of customers.

OurThe Company’s ability to compete inwithin the oilfield services marketbusiness is dependent on ourupon the ability to differentiate our products and services, provide superior quality and service, and maintain a competitive cost structure. Activity levels in our three segmentsthe Company’s operations are driven primarily by current and expectedforecast commodity prices, drilling rig count, oil and natural gas production levels, and customer capital spending allocated for drilling and production. The regions in which we operatethe Company operates are highly competitive. Additionally, the continued depressed economy has resulted in the market for our services and that of our competitors to remain contracted. ManyThe Company is also smaller than many other oil and natural gas service companies areand has fewer resources as compared to these competitors. The larger than we are and have greater resources than we have. These competitors are better ablepositioned to withstand industry downturns, compete on the basis of price and acquire new equipment and technologies, all of which could affect ourthe Company’s revenue and profitability. These competitors compete with usThe Company competes for both for customers and for acquisitions of other businesses. This competition may result in pressureacquisition opportunities. Competition could adversely affect on ourthe Company’s operating profit. We believeThe Company believes that competition for our products and services will continue to be intense in the foreseeable future.

If we losethe Company loses the services of key members of our management, wethe Company may not be able to manage our operations and implement our growth strategy effectively.strategies.

We dependThe Company depends on the continued service of our Interimthe President, ourthe Executive Vice President of Finance and Strategic Planning, and ourthe Executive Vice President of Operations, Business Development and Special Projects and the Chief Accounting Officer, who possess significant expertise and knowledge of ourthe Company’s business and industry. We doFurther, the President serves as Chairman of the Board of Directors. The Company does not carry key man life insurance on any of these executives. Additionally, we have in placeexecutives at December 31, 2010. The Company has entered into employment agreements with our Interimthe President, and ourthe Executive Vice President of Finance and Strategic Planning.Planning, the Executive Vice President of Operations, Business Development and Special Projects and the Chief Accounting Officer. Any loss or interruption of the services of these or other key members of ourthe Company’s management could significantly reduce ourthe Company’s ability to manage our operations effectively and implement ourstrategic business plan and strategy, and we cannot assure youinitiatives. The Company can provide no assurance that we would be able to find appropriate replacements for key positions could be found should the need arise.

Failure to maintain effective disclosure controls and procedures and internal controls over financial reporting could have an adverse effect on ourthe Company’s operations and the trading price of ourthe Company’s common stock.

Effective internal controls are necessary for usthe Company to provide reliable financial reports, effectively prevent fraud and operate successfully as a public company. If wethe Company cannot provide reliable financial reports or effectively prevent fraud, ourthe Company’s reputation and operating results could be harmed. If we arethe Company is unable to maintain effective disclosure controls and procedures and internal controls over financial reporting, wethe Company may not be able to provide reliable financial reports or prevent fraud, which, in turn could harm ouraffect the operating results or cause usthe Company to fail to meet ourCompany’s reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negativenegatively effect on the trading price of ourthe Company’s common stock, limit ourthe ability to access the capital markets in the future and require us to incurthe incurrence of additional costs to improve our internal control systems and procedures.

At December 31, 2009, we reported that we identified control deficiencies that constituted a material weakness in connection with preparation of our financial statements. We

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The Company did not maintain an effective control environment during 2009. We have implemented remediation efforts to address2009 and consequently identified control deficiencies that constituted material deficiencies in connection with preparation of the Company’s 2009 financial statements. The Company has concluded that while certain previously identified material weaknessdeficiencies related to internal controls have been remediated as of December 31, 2010 the material deficiencies still exist within the Company’s control environment, disclosure controls and procedures remain ineffective.

The Company has implemented on-going remediation and internal control improvement initiatives order to identify material weaknesses and to enhance ourthe overall financial control environment. We cannot assure youThe Company’s management continues to be actively committed to and engaged in the implementation and execution of remediation efforts to identify and resolve any material weaknesses. The executive management team is committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity. There can, however, be no assurance that ourthe Company’s remediation efforts will be successful.

WeFailure to timely file accurate reports with the SEC could have an adverse effect on the trading price of the Company’s common stock and the ability to raise capital in the capital markets.

The Company did not file ourthe March 31, 2010 Quarterly ReportsReport on Form 10-Q for the quarters ended June 30 and September 30, 2009 in a timely manner. WeThe Company filed requestsa request for an extension of time to file these reports and subsequently filed ourthe referenced Form 10-Qs10-Q within the extension period. A failure to timely file ourSEC reports timely with the SEC willcould result in ourthe Company’s inability to file registration statements using any registration form other than Form S-1, which is more time consuming and costly to prepare, for a period of time. This limitation, if realized, mayprepare. Filing limitations could also hamper ourthe Company’s ability to raise capital in the financial markets. Additionally, the late filing of reports with the SEC wouldcould result in a technical default of ourthe Company’s various debt obligations.

Risks Related to Ourthe Company’s Industry

The extension

Uncertainty regarding the pace of recovery from the worldwiderecent recession could continue to have an adverse effect on exploration and production activity and result in lower demand for our servicesthe Company’s products and products.services.

The currentRecent worldwide financial and credit crisis uncertainty has reduced the availability of liquidity and credit markets to fund the continuation and expansion of industrial business operations worldwide. The shortage of liquidity and credit combined with continued losses and/or depressed conditions in thepressure on worldwide equity markets could continue to extendimpact the worldwide economic recession. Sluggish economic activity caused byclimate. Unrest in the current sustained recession continues to maintain worldwideMiddle East may also impact demand for energy at depressed levels resulting in low oilthe Company’s products and natural gas prices. Forecasted crude oil prices for 2010 have not improved significantly. services both domestically and internationally.

Demand for ourthe Company’s products and services and products dependsis dependent on oil and natural gas industry activity and expenditure levels that are directly affected by trends in oil and natural gas prices. Demand for ourthe Company’s products and services and products is particularly sensitive to the levellevels of exploration, development, and production activity of, and the corresponding capital spending by, oil and natural gas companies, including national oil companies. One indication of drilling and production activity and spending is rig count, which we monitorthe Company monitors to gauge market conditions. Any prolonged reduction in oil and natural gas prices or drop in rig count willcould depress the immediatecurrent levels of exploration, development, and production activity. Perceptions of longer-term lower oil and natural gas prices by oil and natural gas companies cancould similarly reduce or defer major expenditures given the long-term nature of many large-scale development projects. Lower levels of activity could result in a corresponding decline in the demand for ourthe Company’s oil and natural gas well servicesproducts and products,services, which could have a material adverse effect on ourthe Company’s revenue and profitability.

Continuation of the global credit crisis could have an adverse impact on ourthe Company’s customers and on ourthe Company’s dealings with lenders, insurers and financial institutions.

Events in the global credit markets over the past several years have significantly impacted the availability of credit and associated financing costs for many of ourthe Company’s customers. ManyA significant portion of ourthe Company’s customers finance their drilling and production programs through third-party lenders. The reduced availability andLack of available credit or increased costs of borrowing could cause our customers to reduce their spending on drilling programs, thereby reducing demand and potentially resulting in lower prices for ourthe Company’s products and services. Also, the current credit and economic environment could significantly impact the financial condition of some customers over a prolonged period, of time, leading to business disruptions and restricting theirrestricted ability to pay us for services performed, which could negatively impact our results of operationsthe Company’s products and cash flows. In addition, an increasing number of financial institutions and insurance companies have reported significant deterioration in their financial condition. Ourservices. The Company’s forward-looking statements assume that ourthe Company’s lenders, insurers and other financial institutions will be able to fulfill their obligations under our various credit agreements, insurance policies and contracts. If any of ourthe Company’s significant financial institutions werelenders, insurers and others are unable to perform under such agreements, and if we werethe Company was unable to find suitable replacements at a reasonable cost, ourthe Company’s results of operations, liquidity and cash flows could be adversely impacted.

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A prolonged period of prolonged depressed oil and natural gas prices maycould result in reduced demand for ourthe Company’s products and services which mayand adversely affect ourthe Company’s business, financial condition and results of operations.

The markets for oil and natural gas have historically been extremely volatile. Such volatility in oil and natural gas prices, or the perception by ourthe Company’s customers of unpredictability in oil and natural gas prices, could adversely affects theaffect spending patterns in our industry. In some circumstances this volatility may continue to prolong depressed oil and gas prices. We anticipatewithin targeted industries. The Company anticipates that our current markets will continue to be volatile in the future and may continue to prolong depressed oil and gas prices.future. The demand for ourthe Company’s products and services is, in large part, driven by current and anticipated oil and natural gas prices and the related general levels of production spending and drilling activity. In particular, depressed oil and natural gas prices maycould cause a decline in exploration and drilling activities. This, in turn, could result in lower demand for ourthe Company’s products and services and may causecould result in lower prices for ourthe Company’s products and services. As a result, aA prolonged decline in oil or natural gas prices maycould adversely affect ourthe Company’s business, financial condition and results of operations.

Competition from newNew and existing competitors within ourthe Company’s industry could have an adverse effect on our results of operations.

The oil and natural gas industry is highly competitive and fragmented. OurThe Company’s principal competitors include numerous small companies capable of competing effectively in ourthe Company’s markets on a local basis, as well as a number of large companies that possess substantially greater financial and other resources than we do. Our largerdoes the Company. Larger competitors may be able to devote greater resources to developing, promoting and selling their products and services. WeThe Company may also face increased competition due to the entry of new competitors including current suppliers that decide to sell their products and services directly to ourthe Company’s customers. As a result of this competition, we maythe Company could experience lower sales or greater operating costs, which maycould have an adverse effect on ourthe Company’s margins and results of operations.

OurThe Company’s industry has experienced a high rate of employee turnover. Any difficulty we experienceDifficulty attracting or retaining personnel or agents could adversely affect ourthe Company’s business.

We operateThe Company operates in an industry that has historically been highly competitive in securing qualified personnel with the required technical skills and experience. OurThe Company’s services require skilled personnel who canable to perform physically demanding work. Due to industry volatility and the demanding nature of the work, workers maycould choose to pursue employment in fieldsopportunities that offer a more desirable work environment at wages that are competitive with ours.the Company’s. As a result, wethe Company may not be able to find enoughqualified labor, to meet our needs, which could limit our growth.the Company’s growth ability. In addition, the cost of attracting and retaining qualified personnel has increased over the past several years due to competition, and we expect itcompetitive pressures. The Company expects labor costs will continue to increase in the foreseeable future. In order to attract and retain qualified personnel wethe Company may be required to offer increased wages and benefits. If we are not ablethe Company is unable to increase the prices of our products and services to compensate for increases in compensation, or if we areis unable to attract and retain qualified personnel, our operating results could be adversely affected.

Severe weather could have a material adverse impact on ourthe Company’s business.

OurThe Company’s business could be materially and adversely affected by severe weather.weather conditions. Hurricanes, tropical storms, blizzards, and cold weather and other severe weather hazards may cause theconditions could result in curtailment of services, damagesdamage to our equipment and facilities, interruptionsinterruption in the transportation of our products and materials in accordance with contract schedules and loss of productivity. If ourthe Company’s customers are unable to operate or are required to reduce their operations due to severe weather conditions, and as a result curtail the purchases of ourthe Company’s products and services, ourthe Company’s business could be materially adversely affected.

A terrorist attack or armed conflict could harm ourthe Company’s business.

Terrorist activities, anti-terrorist efforts and other armed conflictconflicts involving the United States mayUS could adversely affect the United StatesUS and global economies and could prevent usthe Company from meeting our financial and other obligations. We mayThe Company could experience loss of business, delays or defaults in payments from payers,payors, or disruptions of fuel supplies and markets if pipelines, production facilities, processing plants andor refineries are direct targets or indirect casualties of an act of terror or war. In addition, suchSuch activities could reduce the overall demand for oil and natural gas which, in turn, could also reduce the demand for ourthe Company’s products and services. We haveThe Company has implemented certain security measures in response to the threat of terrorist activities. Terrorist activities and the threat of potential terrorist activities and any resulting economic downturn could adversely affect ourthe Company’s results of operations, impair ourthe ability to raise capital or otherwise adversely impact ourthe Company’s ability to execute ourrealize certain business strategy.strategies.

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Risks Related to Ourthe Company’s Securities

The market price of ourthe Company’s common stock has been and may continue to be volatile.

The market price of ourthe Company’s common stock has historically been subject to significant fluctuations. The following factors, among others, could cause the price of ourthe Company’s common stock in the public market to fluctuate significantly:

•

•

•

•

•

•

•

The stock market has experienced extremeunusual price and volume fluctuations in recent years that have significantly affected the pricesprice of the common stock of many companies including companies in ourwithin the oil and natural gas industry. TheFurther changes can occur without regard to specific operating performance. The price of ourthe Company’s common stock could continue to fluctuate based upon factors that have little to do with our company,the Company’s operational performance, and these fluctuations could materially reduce ourthe Company’s stock price. Class action lawsuits have frequentlyhistorically been brought against companies following periods of volatility in thecommon stock market price of their common stock. Currently, we have beenvolatility. The Company could be named in a legal case of this type, which could be expensive and divert management’s attention and company resources, andas well as have a material adverse effect on ourthe Company’s business, financial condition and results of operations.

An active market for ourthe Company’s common stock may not continue to exist or may not continue to exist at current trading levels.

Trading volume for ourthe Company’s common stock has historically been low when compared to companies with larger market capitalizations. WeThe Company cannot assure youpresume that an active trading market for ourthe Company’s common stock will developcontinue or be sustained. Sales of significant amounts of shares of ourthe Company’s common stock in the public market could lower the market price of ourthe Company’s stock.

If we dothe Company does not meet the New York Stock exchangeExchange continued listing requirements, ourthe Company’s common stock may be delisted, which could have an adverse impact on the liquidity and market price of ourthe Company’s common stock.

OurThe Company’s common stock is currently listed on the New York Stock Exchange (“NYSE”). UnderNYSE. In accordance with the NYSE’s continued listing standards, a company is considered to be below compliance standards if, among other things, (i) both itsa Company’s average global market capitalization is less than $50 million over a 30 trading-day period and itsa company’s stockholders’ equity is less than $50 million; (ii) itsa company’s average global market capitalization is less than $15 million over a 30 trading-day period, which willwould result in immediate initiation of suspension procedures; or (iii) thea company’s average closing price of a listed security is less than $1.00 over a consecutive 30 trading-day period. We haveThe Company previously received notification from the NYSE that we areit was not in compliance with the NYSE’s continued listing requirements because both ourthe 30 trading-day average global market capitalization and our last reportedthe Company’s stockholders’ equity were below the respective $50 million requirements.

When a listed company’s stock falls below the market capitalization and stockholders’ equity standard, a company is considered “below criteria,” andhowever, the company is permitted to submit a business plan demonstrating its ability to return to compliance with these continued listing standards within 18 months of receipt of the NYSE notification. We haveThe Company submitted a plan of action to the NYSE in March 2010, which we believethe Company believes will allow usprovide the ability to, once again, achieve compliance with the minimum listing requirements of the NYSEby no later than June 28, 2011.2011 with the minimum listing requirements. During the plan implementation process, ourthe Company’s common stock will continuecontinues to be listed on the NYSE, subject to ourthe Company’s compliance with other NYSE continued listing requirements. On March 29, 2010, the NYSE agreed to accept ourthe Company’s plan of action.

If ourthe Company’s shares of common stock are delisted from the NYSE and we arethe Company is unable to list our shares of common stock on another U.S.US national or regional securities exchange or have our shares of common stock quoted on an established over-the-counter trading market in the United StatesUS within 30 days we willof being delisted, the Company could be required to make an offer to repurchase all of ourthe Company’s outstanding convertible notes at a price ofequal to 100% of the principal amount thereof plus any accrued and unpaid interest. We may not have sufficient fundsWere this to payoccur the purchase price forCompany could lack the financial wherewithal to fund the repurchase of any convertible notes that are tendered to us if we are required to make this offer to repurchase.

A delistingDelisting of ourthe Company’s common stock could also negatively impact usthe Company by: (i) reducing the liquidity and market price of ourthe Company’s common stock; (ii) reducing the number of investors willing to hold or acquire ourthe Company’s common stock, which could negativelyand correspondingly impact ourthe Company’s ability to raise equity financing; and (iii) decreasing the amount of news and analyst coverage for us.the Company. In addition, we maythe Company could experience other adverse effects, including, without limitation, the loss of confidence in usthe Company by current and prospective suppliers, customers, employees and others with whom we havethe Company has or may seek to initiate business relationships, and ourthe Company’s ability to attract and retain personnel by means of equity compensation could be impaired.compensation.

We haveThe Company has no plans to pay dividends on ourthe Company’s common stock, and, therefore, investors will have to look to stock appreciation for return on their investments.

We doThe Company does not anticipate paying any cash dividends on ourthe Company’s common stock in the foreseeable future. WeThe Company currently intendintends to retain all future earnings to fund the development and growth of our business.the Company’s business and to meet current debt obligations. Any payment of future dividends will be at the discretion of ourthe Company’s board of directors and will depend on, among other things, ourthe Company’s earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations thatdeemed relevant by the board of directors deems relevant.directors. Certain covenants of our newthe Company’s senior credit facility restrict the payment of dividends without the prior written consent of the lender.lenders. Investors must rely on sales of their common stock held after price appreciation, which may never occur, in order to realize a return on their investment.

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Certain anti-takeover provisions of ourthe Company’s charter documents and underapplicable Delaware law could discourage or prevent others from acquiring our company,the Company, which may adversely affect the market price of ourthe Company’s common stock.

OurThe Company’s certificate of incorporation and bylaws contain provisions that:

•

•

•

•

•

In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more than 15% of ourthe Company’s stock that have not been approved bywithout the approval of the board of directors. TheseAforementioned provisions and other similar provisions make it more difficult for a third party to acquire us withoutthe Company exclusive of negotiation. OurThe Company’s board of directors could choose not to negotiate with an acquirer that it diddeemed not feel was in ourbeneficial to or synergistic with the Company’s strategic interest.outlook. If thean acquirer were discouraged from offering to acquire usthe Company or prevented from successfully completing a hostile acquisition by thereferenced anti-takeover measures, youshareholders could lose the opportunity to sell yourowned shares at a favorable price.

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

WeThe Company may, in the future, issue our previously authorized and unissued shares of common stock, resultingwhich would result in the dilution of thecurrent stockholders ownership interests of our current stockholders. We areinterests. The Company is currently authorized to issue 80,000,000 shares of common stock, of which 24,168,29244,417,382 were issued as of December 31, 2009.March 7, 2011. Additional shares are subject to future issuance through the exercise of options previously granted under ourvarious equity compensation plans or through the exercise of options that are still available for future grant.equity grants. The potential

issuance of such additional shares of common stock, whether directly or pursuant to any conversion right of our

associated with the convertible senior notes or convertible preferred stock or other convertible securities including our convertible preferred stock, we may issue inof the future,Company, or through exercise of outstanding warrants may create downward pressure on the trading price of ourthe Company’s common stock. WeThe Company may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock for raisingin order to raise capital or effectuate other business purposes. Future sales of substantial amounts of common stock, or the perception that sales could occur, could have a material adverse effect on the price of ourthe Company’s common stock.

On March 31, 2010, in connection with the Amended and Restated Credit Agreement related to our new senior credit facility, we issued 3,431,133 shares of common stock to pay a portion of the commitment fee due at closing. On March 31, 2010, in connection with the Exchange Agreement involving our senior convertible notes, we expect to issue up to 1,568,867 shares of common stock to satisfy the common stock component of the exchange.

WeThe Company may issue additional shares of preferred stock or debt securities with greater rights than our common stock.

In August 2009, we sold convertible preferred stock with warrants to purchase additional shares of our common stock. Holders of the convertible preferred stock may convert their preferred shares into shares of our common stock at any time, and we may automatically convert the preferred shares into our common shares if certain conditions relating to the closing price of our common stock are met after February 12, 2010. All warrants are exercisable as of December 31, 2009. The convertible preferred stock and warrants have the right to acquire a total of 17,436,512 shares of ourCompany’s common stock.

Subject to the rules of the New York Stock Exchange, ourNYSE, the Company’s certificate of incorporation authorizes ourthe board of directors to issue one or more additional series of preferred stock and to set the terms of the preferred stockissuance without seeking any further approval from holders of our common stock. Currently, there are 100,000 preferred shares authorized, withof which 16,000 shares issued.were originally issued, of which no shares remain outstanding at March 7, 2011. Any preferred stock that is issued may rank senior to our common stock in terms of dividends, priority and liquidation premiums, and may have greater voting rights than holders of ourcommon stock. All outstanding warrants are exercisable as of December 31, 2010.

The Company’s ability to use net operating loss carryforwards and tax attribute carryforwards to offset future taxable income may be limited as a result of transactions involving the Company’s common stock.

Also, holdersUnder section 382 of our convertible senior notes are preferred in rightthe Internal Revenue Code of payment1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on the holders of our preferredCompany’s ability to utilize pre-change net operating losses (“NOLs”), and common stock.

On March 31, 2010, in connection with the Exchange Agreement, we expectcertain other tax attributes to exchange $40 million of convertible senior notes foroffset future taxable income. In general, an ownership change occurs if the aggregate considerationstock ownership of $36 millioncertain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). An ownership change could limit the Company’s ability to utilize NOLs and tax attribute carryforwards for taxable years including or following an identified “ownership change.” Transactions involving the Company’s common stock, even those outside the Company’s control, such as purchases or sales by investors, within the testing period, could result in new convertible senior secured notesan “ownership change”. Limitations imposed on the ability to use NOLs and $2 milliontax credits to offset future taxable income could require the Company to pay US federal income taxes in sharesexcess of our common stock.that which would otherwise be required if such limitations were not in effect. NOLs and tax attributes could expire unused, in each instance reducing or eliminating the benefit of the NOLs and tax attributes. Similar rules and limitations may apply for state income tax purposes.

Disclaimer of Obligation to Update

Except as required by applicable law or regulation, we assumethe Company assumes no obligation (and specifically disclaimdisclaims any such obligation) to update these Risk Factors or any other forward-looking statementsstatement contained in this Annual Report to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.

Not applicable.

Item 2.

Properties.

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ITEM 1B  Unresolved Staff Comments

None.

ITEM 2  Properties

As of February 28, 2010, we operated 392011, the Company operates 34 manufacturing and warehouse facilities in nine U.S.seven states. We own 13The Company owns 12 of these facilities. The remaining facilities with the remainder beingare leased with initial lease terms that expireexpiring at various yearsdates through 2032. In addition, ourThe Company’s corporate office is a leased facility located in Houston, Texas. The following table sets forth thefacility locations of these facilities:

:

We consider ourThe Company considers all facilities to be in good condition and suitable forto the safe conduct of our business.

FLOTEK INDUSTRIES, INC. – Form 10-K – 14

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Class Action LitigationITEM 3  Legal Proceedings

On August 7, 2009, a class action suit was commenced in the United States District Court for the Southern District of Texas on behalf of purchasers of our common stock between May 8, 2007 and January 23, 2008, inclusive, seeking to pursue remedies under the Securities Exchange Act of 1934. Litigation

The complaint alleges that, throughout the time period indicated, we failed to disclose material adverse facts about our true financial condition, business and prospects. Specifically, the complaint alleges that as a result of the failure to disclose the adverse facts, our positive statements concerning guidance and prospects were lacking in a reasonable basis at all relevant times. The plaintiffs filed an amended complaint on February 4, 2010 alleging misleading statements and material omissions in connection with our earnings guidance for 2007 and the fourth quarter of 2007. The amended complaint does not quantify the alleged actual damages.

Since August 7, 2009, several other class action suits have been commenced by others concerning the foregoing matters.

We intend to mount a vigorous defense to these claims. Discovery has not yet commenced. At this time, we are unable to reasonably estimate the outcome of this litigation.

Other Litigation

We areCompany is subject to routine litigation and other claims that arise in the normal course of business. We areManagement is not aware of any pending or threatened lawsuits or proceedings which would have a material effect on ourthe Company’s financial position, results of operations or liquidity.

ITEM 4  (Removed and Reserved)

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PART II

OurITEM 5  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is listedbegan trading on the New York Stock Exchange (“NYSE”)NYSE on December 27, 2007 under the stock ticker symbol “FTK.” As of the close of business on March 16, 2010,7, 2011, there were 24,215,28343,034,446 shares of common stock outstanding held by approximately 10,0006,000 holders of record. The last reported salesales price of the common stock on the NYSE on March 16, 20107, 2011 was $1.43.$6.30.

As of December 27, 2007, our common stock began trading on the NYSE under the stock ticker symbol “FTK.” The following table sets forth, on a per share basis for the periods indicated, the high and low closing sales prices of our common stock as reported by the NYSE. These prices do not include retail mark-ups, mark-downs or commissions.

We haveThe Company has never declared or paid cash dividends on our common stock. While wethe Company regularly assess ourassesses the dividend policy, we havethe Company has no current plans to declare a dividenddividends on common stock, and we intendintends to continue to use our earnings and other cash in the maintenance and expansion of ourthe business. In addition, our newFurther, the Company’s senior credit facility contains provisions that limit ourthe Company’s ability to pay cash dividends on our common stock.

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Stock Performance Graph

The performance graph below illustrates a five year comparison of cumulative total returns based on an initial investment of $100 in ourthe Company’s common stock, as compared with the Russell 2000 Index and the Philadelphia Oil ServicesService Index for the period 2005annual 2006 through 2009.2010 periods. The performance graph assumes $100 invested on December 31, 20042005 in each of ourthe Company’s common stock, the Russell 2000 Index and the Philadelphia Oil Service Index, and that any and all dividends were reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Assumes Initial Investment of $100

The foregoing graph shallshould not be deemed to be filed as part of this Form 10-K andAnnual Report, does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, as amended, except to the extent that wethe Company specifically incorporateincorporates the graph by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes information regarding ourthe Company’s equity securities that are authorized for issuance under the Company’s individual stock option compensation agreements:

Equity Compensation Plan InformationEQUITY COMPENSATION PLAN INFORMATION

FLOTEK INDUSTRIES, INC. – Form 10-K – 17

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Recent Sales of EquityUnregistered Securities

During the fourth quarterthree months ended December 31, 2010 the Company had no sales of 2009, we purchased 22,491 shares of our common stock attributable to withholding to satisfy the payment of tax obligations related to the vesting of restricted shares.unregistered securities that have not been previously reported.

Item 6.

Selected Financial Data.

ITEM 6  Selected Financial Data

The following table sets forth certain selected historical financial data and should be read in conjunction with “Item 7. Management’sItem 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. FinancialItem 8 “Financial Statements and Supplementary Data,” which are included elsewhere herein. The selected operating and financial position data as of andpresented for each of the five years ended December 31, 2009 havehas been derived from ourthe Company’s audited consolidated financial statements, some of which appear elsewhere in this Annual Report on Form 10-K.Report. During the annual periods 20052006 through 2008, we effectedthe Company completed a number of business combinations and other transactions that materially affectaffected the comparability of the information set forthprovided below.

The Company incurred significant non-recurring charges during the years 2007 through 2010. During 2010, the Company recorded a fixed asset and other intangible impairment charge of $9.3 million. During 2009 and 2008, wethe Company recorded goodwill impairment charges for goodwill and other intangible assets of $18.5 million and $67.7 million, respectively. Additionally, onrespectively (see Note 9 to the Notes of the Consolidated Financial Statements). On July 11, 2007, the Company effected a two-for-one stock split in the form of a 100% stock dividend to the stockholders of record on July 3, 2007. All share and per share information has been retroactively adjusted to reflect the 2007 stock split.

2009 and 2008 amounts were restated in accordance with Accounting Standards Update (“ASU”) No. 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.”

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The table above reflects the results of equity and asset acquisitions from the following acquisitionsrespective date of companies or their assets from their respective dates of acquisitions inacquisition for the following years:

•

2008 –

Teledrift,–Teledrift, Inc.;

•

2007 –

Triumph Drilling Tools, Inc., CAVO Drilling Motors Ltd Co., and Sooner Energy Service, Inc.; and

•

2006 –

Can-Ok Oil Field Services, Inc., Total Well Solutions, LLC, and LifTech, LLC; andLLC.

2005 –

Phoenix E&P Technology, LLC, Spidle Sales and Services, Inc., Harmon’s Machine Works, Inc. and Precision-LOR, Ltd.

Item 7.

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

ITEM 7  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with ourthe Company’s consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results maycould differ from those expressed or implied by the forward-looking statements. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.10-K for further clarification.

Executive Summary

We are

The Company is a diversified global technology-driven growth company servingto the oil, gas, and mining industries by providing oilfield products, services and equipment. We operateThe Company operates in select domestic and international markets, including the Gulf Coast, the Southwest, and the Rocky Mountains, the Northeastern and Mid-Continental United States,US, Canada, Mexico, Central America, South America, Europe, Africa and Asia. We market ourAsia and markets products domestically and internationally in over 20 countries. The Company’s customers for our products and services include the major integrated oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies, state-owned oil companies and state-owned national oilinternational service supply chain management companies. OurThe Company’s ability to compete in the oilfield services market is dependent on ourthe Company’s ability to differentiate our products and services, provide superior quality and service, and maintain a competitive cost structure. OurCompany operations are driven primarilyimpacted by natural gas and to a lesser extent oil well drilling activity, the depth and drilling conditions of such wells, the number of well completions and the level of work-over activity in North America. Drilling activity, in turn, is largely dependent on the pricevolatility of natural gas and crude oil and the volatilityprices and expectations of future natural gas and oil prices. OurThe Company’s results of operations also depend heavily on the pricing we receive from ourupon sustainable prices charged customers, which depends onare impacted by drilling activity levels, availability of equipment and other resources, and competitive pressures. These combined market factors oftencan lead to volatility in ourboth revenue and profitability.

Historical market conditions are reflected in the table below:

Source: Rig count: Baker Hughes, Inc. (www.bakerhughes.com); West Texas Intermediate Crude and Natural Gas Prices: Department of Energy, Energy Information Administration (www.eia.doe.gov).

Demand

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Global economic growth and increased demand for our services in the United Statesoil and Canada is driven primarily by natural gas are the primary drivers of customer expenditures to develop and to a lesser extent oil drilling activity, which tends to be extremely volatile, depending on the current and anticipated prices of crudeproduce oil and natural gas. DuringThe recovery within the last ten years, the lowest average annual U.S. rig count was 830global economy began in 20022010 and

the highest average annual U.S. rig count was 1,879 is anticipated to continue in 2008. With the decline2011. Increased economic activity, particularly in emerging Asia and volatilityMiddle East economies, and market predictions for continued economic growth supports expectations of increasing demand for oil and natural gas. Spending by oil and natural gas exploration and production companies, which is dependent upon forecasts of the expected future supply and future demand for oil pricesand natural gas products and associated estimates of costs to find, develop, and produce reserves, increased in 2009, tightening2010 as compared to 2009. Changes in oil and uncertaintynatural gas exploration and production spending resulted in increased demand for the Company’s products and services.

In North America, customer expenditures increased for both oil and natural gas projects resulting in a 45% increase in the credit markets and the global economic slowdown, drilling rig activity in North America declined significantly. The average active North American rig count declined 42.0% in 20092010 as compared to 2008.

The weakening economic conditions that began to significantly weigh upon the energy markets in early October 2008 continued throughout 2009. The slowdownincrease in oil-directed drilling is a direct reflection of the global price of oil, which is currently trading at a premium, on a Btu basis, relative to natural gas in North America. The increase in gas-directed drilling was driven by activity in unconventional shale gas plays due to the favorable prices of wet gas, despite relatively low prices for natural gas. Spending on gas-directed projects in 2010 was supported by (1) hedges on production made in prior periods when futures prices were higher, (2) the need to drill and produce natural gas to hold leases acquired in earlier periods, (3) the influx of equity from companies interested in developing a position in the economy, particularly the industrial sector, coupled with the successfulshale resource plays and (4) associated production results in the unconventional shale and tight sands plays in the U.S. led to aof natural gas oversupply situation, which negatively impacted natural gas price forecasts. Thisliquids in turn reduced the return potential of drilling projects causing less drilling activity as exploration and production (“E&P”) companies slashed their 2009 capital budgets. Oil prices showed some resilience toward the end of 2009; however our business is more dependent on the North American gas markets than oil markets. Therefore, the recovery of oil prices toward the end of 2009 did little to support a significant improvement in our business performance. In total, this translated into lower demand and weaker prices for oilfield services throughout North America. Late in the fourth quarter of 2008, we began to take actions to scale our business to cope with these factors by implementing various cost containment actions such as deferring employee salaries, reducing travel levels, suspending the 401(k) match, and eliminating any non-essential discretionary expenditures. Early in 2009, we took actions to size the workforce to our expected near-term work load, resulting in headcount reductions, including contract employees and full and part time employees. In conjunction with the market downturn, we decreased inventory levels and took advantage of declining raw material prices to meet our customers demand for competitive pricing. Our Drilling Products segment is tied closely to rig count, especially vertical rigs, and the significant reductions in rig count had an adverse effect on our business. Despite these pressures we were able to maintain our market share through service quality, product innovation, and competitive bundling of product offerings.certain basins.

The sharp drop in natural gas and oil prices in the latter part of 2008 resulted in lower drilling activity, higher inventories, and further market erosion in 2009 asAs a result of a worldwide economic slowdown which ledstreamlining operational costs in 2009 and proactive management of operational costs during 2010, the Company was favorably positioned to a rapidrespond to increased activity and substantial reductionproduct demand in exploration2010. Further, innovative sales initiatives and production expenditures. In addition, margins were under significant pressurestrategic international efforts enabled the Company to increase revenues by 30.6% in 2010 as customers sought lower prices for oilfield services and we, in turn sought price reductions from our suppliers.compared to 2009.

Forecasting the depth and length ofCompany’s position in the current recovery cycle is challenging, as it is differentdiffers from past cycles due to the overlay of continued worldwide uncertainties, including significant political unrest and radical regime and governmental changes in significant oil producing countries. Changes in product demand to liquid rich natural gas and oil products from natural gas products affected the worldwide financial crisistype of industry drilling activity and increased petroleum pricing. Despite recent favorable activity the Company expects continued uncertainty in combination with broad demand weakness. During the fourth quarter of 2009, U.S. drilling rig count averaged 1,108, as compared to 970 in the third quarter, an increase of 14.2%. While we expect to see continued increases in U.S. drilling activity in 2010, the timing and magnitude of the increase remains uncertain. The acceleration of drilling activity is influenced by2011 due to a number of factors including commodity prices, global demand for oil and natural gas, supply and depletion rates of oil and natural gas reserves, as well as broader variables such asincluding government monetaryfiscal policies and fiscal policy.current and potential political unrest in key petroleum producing countries.

The oil field services sector seems to have experienced itsa cyclical low point early in the third quarter of 2009. OurStabilization of the business stabilized and the cost containment measures that we implementedtaken by the Company beginning in late 2008 and early 2009 began to take effect. Rig activity in North America began to improve toward the latter part of 2009 as gas price forecasts improved as the supply overages began to shrink as a result of some improvement in the economy and colder than normal temperature forecasts. We expect that thesewere still being realized throughout 2010. The Company expects improved economic conditions will continue throughout 2010.2011 despite drilling activity uncertainty. As E&Pexploration and production companies’ outlooks improve with these higher expectedexpectations of forecast liquid-rich natural gas and oil prices, we expect this will lead to increasedthe Company remains optimistic capital budgets for drilling and completion activities. Oil prices have currently stabilized and this should continue to addactivities will strengthen. The Company expects rig count in the oil basins, which should help improve ourhave contributed to Drilling Products revenue andwith increased Teledrift business in the Permian Basin, to lead to margin relief on pricing.

We expect theThe Company expects that North American gas market activity will continue to see increasesremain stable in the unconventional plays such as the Barnett, Haynesville, Marcellus and other basins where ourwhich utilize the Company’s drilling tools are utilized. Ourtools. In addition, the Company expects chemical additives enhancewill continue realizes to enhanced performance, when added to fracturing fluids utilized in this type drilling. Ourdrilling further supporting the stability of product demand of the Company’s Chemicals and Logistics segment which is also tiedclosely aligned to rig counts, especially horizontal drilling rigs. We also expectcount activity. The Company plans to see additionalpursue identified international opportunities in 2011.

The Company expects 2011 drilling and completion activity to remain relatively stable compared to 2010 particularlylevels. Market conditions are forecast to improve slightly and pricing is expected to remain competitive throughout 2011. The Company intends to continue the strategic initiative to add drilling jars and shock subs to the company’s fleet and to reduce the Company’s sub-rental usage. The Company also intends to continue to pursue international market opportunities with the Teledrift line of MWD products during 2011.

With research efforts focused on the Chemicals segment, the Company has been able to timely respond to the increased demand for growth in our Chemicalunconventional liquid rich and MWD business units.

Capital expenditures in the Drilling segment were $4.7 million in 2010 compared to $6.2 million in 2009. Capital expenditures were significantly curtailed in 2010 in response to decreased demand. Management has forecast Drilling capital expenditures of $7.9 million in 2011; however, this amount may fluctuate dependent upon market demand and realized results of operations. The Company intends to sharpen the focus of capital expenditures within the Drilling segment to further increase the Company’s international presence.

OurThe Company’s business is comprised of three reportable segments: Chemicals, and Logistics, Drilling Products and Artificial Lift. WeThe Company’s focus is on serving the drilling-related needs of oil and gas companies primarily through ourthe Chemicals and Logistics and Drilling Products segments, and the production-relatedproduction related needs of oil and gas companies through ourthe Artificial Lift and Chemicals and Logistics segments. We believe that ourThe Company believes product offerings and geographical presence throughout theseall three business segments provides usthe Company with diverse sources of cash flow. EachAlthough each segment has its ownunique technical expertise, andall segments share a common commitment to provide its customers with quality, competitively priced quality equipment and services.

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FLOTEK INDUSTRIES, INC. – Form 10-K – 20

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Over the past threeseveral years, we havethe Company has grown both organically and through strategic acquisitions, organic growth and other investments in complementary or competing businesses in an effort to expand our product offeringofferings and geographic presence in keywithin targeted markets. We strive to mitigateThe Company mitigates oilfield service cyclical risk in the oilfield service sector by balancing our operations between drilling versus production; rental tools versus service; domestic versus international; and natural gas versus crude oil.oil operations.

The acquisitions weAcquisitions completed by the Company in the preceding three years include:

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Non-Cash Impairment2008.

We test goodwill for impairment at the reporting unit level in the fourth quarter of every 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. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. Testing of goodwill requires an assessment of the current business environment, future economic market indicators, expectations surrounding our future performance, the cost of working capital, projected revenue and operating margins, assessment of market and industry risk rates, and recognition of changes in these variables which may indicate the potential existence of goodwill impairment losses to be recognized, if any.

During the quarter ended June 30, 2009, we identified certain triggering events resulting from the continued downturn in the then current business environment. This assessment impacted and lowered forecasted earning potential of our reporting units from that previously estimated at December 31, 2008. Accordingly, we recorded a goodwill pre-tax impairment charge of $18.5 million relating to our Teledrift reporting unit during the six-months ended June 30, 2009.

As our current economic climate continues to be weak, we incorporated into our 2009 annual impairment assessment, and our 2010 full year forecast, a measure of the recessionary environment of the second half of 2009. We anticipate a continued challenging environment for the first half of 2010, followed by a slight recovery in the latter half of 2010. We anticipate benefits from a re-leveraging of sales in the second half of 2010 and early 2011. The continued unfavorable business environment, volatile economic downturn continuing during the latter half of 2009, low rig count projections, and uncertainty as to the recovery of the global economy, have contributed to conservative projected cash flows and higher risk-adjusted discount rates used in our current annual 2009 assessment as compared to those used in our interim 2009 and annual 2008 assessments.

We believe cost containment actions taken in late 2008 and throughout 2009 were successful. These included closing certain operating locations, curtailing capital expenditures, reducing costs through reductions in personnel levels, discontinuing our 401(k) matching, and focusing on our cost margin management. We emphasized collection of customer receivables and inventory management. This helped ensure preservation of the economic value of our businesses. Through our analyses, we determined that the fair value of reporting units exceeded the goodwill carrying value. Accordingly, we determined no further impairment charges were necessary as part of our 2009 annual goodwill impairment assessment.

We utilize a combination of a market approach and a present value discounted cash flow valuation technique to measure the fair value of the goodwill of our reporting units. The fair value of a reporting unit refers to the price that would be received from selling the unit as a whole in an orderly transaction between market participants at the measurement date. Quoted market prices in active markets are the best evidence of fair value and are used as the basis for the measurement, if available. The market approach is dependent upon market data of comparable public entities with operations and metrics similar to those of our operating segments. If quoted market prices or market indicators are not available, we include a fair value estimate in our assessment which incorporates valuation techniques based on a weighted average cost of capital and multiple of after-tax cash flows attributed to the reporting unit. The cash flows are discounted to a present value using risk adjusted discount rates over a period of expected future returns. This income approach valuation technique is consistent with the objective of fair value measurements and is consistent with the methodology applied in our previous assessments. The income approach is dependent on our weighted average cost of capital and our forecasted operating results and future cash flows. Therefore, we consider available and relevant market multiple measures along with the estimated and expected future cash flows of our reporting units to determine fair value.

Results of Operations (in thousands):

Results for 2010 compared to 2009—Consolidated

Revenue for the year ended December 31, 2010 was $147.0 million, an increase of $34.4 million, or 30.6%, compared to $112.6 million for the same period in 2009. Revenue increased across all of the company’s segments due to improved pricing, increased drilling activity, and slight recovery of industry demand for products.

Consolidated gross margin increased by $23.6 million, or 80.3%, to $53.0 million in 2010 from $29.4 million in 2009. Gross margin as a percentage of sales increased to 36.0% for 2010 from 26.1% for 2009. This favorable variance resulted from increased product sales ($21.5 million or 29.7%) and rental revenue ($13.5 million or 47.3%) combined with direct operational expense savings offset by a 13.0% increase in cost of revenue. Increased cost of revenue was due to increased costs of materials, rentals and freight proportionate to increased activity. Gross margin is calculated as revenue less associated cost of revenue, inclusive of personnel, occupancy, depreciation and other expenses directly associated with the generation of revenue.

Selling, general and administrative costs, (“SG&A”) are not directly attributable to products sold or services rendered. SG&A costs for the year ended December 31, 2010 were $41.9 million, an increase of 13.3%, compared to $36.9 million in 2009. The comparative period over period increase resulted from increased incentive stock compensation expense of $4.0 million and professional fees of $2.1 million. Non-cash incentive stock compensation expense increased due to recognition of $3.0 million of non-cash compensation expense during the second quarter of 2010 related to prior equity grants to the Company’s former President and CEO, which vested at the time of his retirement from the Company on June 30, 2010 and vesting of other outstanding existing equity grants. The increase in professional fees related to the Company’s March 31, 2010 financing, defense of class action lawsuits and use of third party technical consultants (e.g., information technology; investment; and valuation advisors).

Depreciation and amortization costs were $4.5 million for the year ended December 31, 2010, a decrease of approximately 8.1% compared to the same period in 2009.

FLOTEK INDUSTRIES, INC. – Form 10-K – 21

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Research and development (“R&D”) expenses were $1.4 million for the year ended December 31, 2010, a decrease of 33.3%, compared to $2.1 million during the same period in 2009. The reduction in R&D expense is attributable to more realigned spending objectives on key initiatives driven by the economic recession and management cost containment objectives. The Company anticipates 2011 R&D spending levels to remain consistent with 2010. R&D is charged to expense as incurred.

Costs associated with impairments totaled $8.9 million and $0.4 million, related to long-lived asset and other intangibles, for the year ended December 31, 2010, a decrease of $9.2 million or 49.8% compared to $18.5 million in 2009. The impairment valuation recognized during 2010 primarily related to long-lived assets within the Drilling segment. During the fourth quarter of 2010 revenue generation trends of certain identified rental assets were not performing as anticipated by management in the Company’s 2010 forecast. Upon review, management determined the recoverability of the carrying value of certain assets to be less than the expected revenue generation capacity of the assets. The $18.5 million recognized in 2009 was attributable to the Teledrift division.

Revenue within the Drilling segment increased $15.0 million, or 29.6% in 2010 due to increased demand for products resulting from a shift in the type of drilling activity as well as fluctuations in oil and natural gas commodity prices. Management believes the current cost structure is appropriate for 2011 forecast levels of activity and does not foresee significant future adjustments. Changes in market demand or forecast assumptions could cause management to pursue additional cost containment efforts.

During the year ended December 31, 2010, the warrant liability increased by $21.5 million to $26.2 million. The increase has been recognized in the statement of operations as a noncash expense. This liability will not be settled in cash. Future fluctuations in the warrant liability will be recognized as noncash income or expense.

Interest expense was $19.4 million for the year ended December 31, 2010, an increase of $3.9 million or 25.0% compared with $15.5 million in 2009. The increase was the result of an increase in the interest rate associated with the refinancing of the Company’s senior credit facility from 8.5% to 12.5% combined with the amortization of related issuance costs of $2.0 million incurred during the year (See “Capital Resources and Liquidity”), commitment fee payments of $7.3 million.

An income tax benefit of $5.5 million was recorded for the year ended December 31, 2010, reflecting an effective tax rate of (11.3)%, compared to a tax provision of $2.0 million for the year ended December 31, 2009, reflecting an effective tax rate of (4.2%). The change in the Company’s effective tax rate is primarily due to a $4.2 million increase in the valuation allowance recorded in 2010 against the deferred tax asset of one of our filing jurisdictions and a $7.5 million increase to tax expense recorded in 2010 for the nondeductible expense related to the warrant liability.

Results for 2009 compared to 2008—Consolidated

Revenue for the year ended December 31, 2009 was $112.6 million, a decrease of $113.5 million, or 50.2%, compared to $226.1 million for the same period in 2008. Revenue decreased inacross all three of ourthe Company’s segments as decreases indepressed petroleum and natural gas prices drove down rig countscount and related drilling activity, negatively affectingimpacting activity volume in all segments. In addition, pricing2009. Pricing pressures drove down revenueswere also a factor in the decline of revenue as customers movedswitched to less expensive products where possible.