# FROM THE CEO

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-equipment-services/NYSE_FTK_2018/NYSE_FTK_2018.mmd` · pages 3-9_

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FROM THE CEO
Letter to Shareholders

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John Chisholm, CEO

Dear fellow shareholders,

Over the past several years, the North American oil and gas industry has seen one of the most disruptive periods in recent history as E&P companies seek to better capitalize on the dynamic conditions of the market, including the burgeoning opportunities offered through exploitation of unconventional shale. Given this environment, in 2017, Flotek initiated and completed a significant transformation that included divestment of non-core businesses and aggressive cost reduction. Through these wide-ranging initiatives, we exited 2017 as an asset-light, specialty chemistry technology company primarily focused on working directly with the end-users of our products in the energy, consumer & industrial and flavor & fragrance industries.
Entering 2018, we saw the potential for improvements in oil and gas fundamentals despite the continued dynamic backdrop of the industry. Now more than ever before, oil and gas operators are squarely focused on generating cash and delivering returns to shareholders through a combination of capital efficiency and investment in value-added technologies that optimize production. Custom chemistry prescribed for unique reservoir characteristics provides an important solution as it results in greater production, mitigates the negative effects of parent-child well communication and promotes continuous production through enhanced waterflooding programs, to name a few key benefits.

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Operators' ongoing demand for improved well economics and pricing transparency is driving a paradigm shift in the business model to decouple the completion process. This move to self-sourcing consumables first began with diesel, moved heavily to proppants in 2018 and is gaining momentum in chemistry as operators, regardless of size, are expanding and accelerating their efforts to source chemistries directly. As a result, during 2018 we continued to align more closely with our clients — both operators and service companies — to best position the Company for long-term success through expansion of our unique portfolio of proprietary products and enhancement of our understanding of fluid system design and applications.

## INNOVATING FOR THE FUTURE

At its core, Flotek is driven by innovation. For more than a decade, we have developed leading-edge technologies and products designed to meet the complex needs of our clients. Leveraging our best-in-class, in-house technical capabilities offered through our Global Research & Innovation Center, at the end of 2018, Flotek had 123 granted or pending patents. This included 22 patents granted in 2018, which was the largest number granted in a single year in the Company's history, and another clear indicator of Flotek's continued excellence in the innovation of new chemical solutions. Of the patents granted in 2018, 20 were associated with our Complex nano-Fluid® (CnF®) flagship line of technologies, which are tailored to the unique characteristics of the reservoir to increase fluid mobility by modifying capillary pressures, contact angle and interfacial tension. CnF® chemistries are based on naturally sustainable and non-toxic citrus oils that improve well performance and productivity, thereby increasing operators' return on investment.

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During 2018, the Company celebrated the 10-year anniversary of the first patent granted for CnF \( ^{®} \) . Over the past decade, we have developed more than 50 CnF \( ^{®} \)  formulations that have helped Flotek's clients address challenges in the lifecycle of the reservoir and field — from drilling to cementing to completion and stimulation activity designed to maximize recovery in both new and mature fields. Over the past year, we released numerous performance analyses of CnF \( ^{®} \) , demonstrating the effectiveness of our chemistries across a variety of basins and reservoirs and applications including completions, remediation, frac hits and enhanced waterflooding.

Flotek's heritage has been built upon CnF \( ^{®} \) , which is a premium technology underpinned by extensive Research & Innovation (R&I)

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that drives performance-enhancing results. Recognizing the evolving needs of our clients and the marketplace, in 2018, we also introduced MicroSolv™ — a new line of stimulation chemistries designed to deliver enhanced cost-effective performance over conventional surfactants by a significant margin. The product lowers interfacial tension, mitigates water blockages, reduces surface tension, aids flowback of water-based frac fluids, improves clean-up and reduces formation damage created by phase trapping. The introduction of MicroSolv™ expanded the Company's patented and conventional chemistry solutions we prescribe and deliver directly to clients.

## PRESCRIPTIVE FLUID SYSTEMS: DELIVERED DIRECTLY TO THE WELLSITE

Most operators today optimize their completion designs on a region-by-region basis, which is why we have deepened our in-basin technical knowledge base, fluid applications expertise and logistics capabilities. In 2018, we transitioned the majority of our business from delivering to centralized in-basin locations to a full-service provider of reservoir-centric fluid systems delivered directly to our clients at the wellsite. This holistic approach, which is the basis of our Prescriptive Chemistry Management \( ^{®} \)  (PCM \( ^{®} \) ) platform, allows Flotek to work hand-in-hand with clients to achieve the full value of our chemistry offerings. This includes CnF \( ^{®} \)  and other products that address a wide range of reservoir and geologic challenges and price points. This close partnership with clients also allows Flotek the opportunity to accelerate the development of optimal designs and applications of our fluid systems, while delivering full chemistry experience to our clients.

Client adoption has been strong as PCM \( ^{®} \) -related revenue was the majority of our domestic revenue in 2018 as compared to less than 25% in 2017. In addition, we have seen increased pull-through of our proprietary value-added chemistries via our PCM \( ^{®} \)  platform, as well as growth in revenue per client. While the transition to a full-service delivery model impacted our operating margins in 2018, we expect to benefit from increased efficiencies in logistics and other aspects of our operations during the second half of 2019 as a result of strategic changes we are implementing in the first half of the year.

## A DISCIPLINED APPROACH TO GROWTH & PROFITABILITY

Concurrent with our strategic initiatives designed to augment our value-added technology offerings and evolve our business model to one that is better positioned to thrive in a dynamic and increasingly fragmented environment, this past year we took further steps to significantly adjust our cost structure. I am pleased to report that during 2018 we reduced collective spending on G&A and research and innovation by 13 million, or 23%, from full-year 2017 levels. During the first half of 2019, we are executing on a number of identified opportunities to further reduce costs and ensure our long-term success.

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Aggressively Reducing
Fixed Cost Structure

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In 2018, we also enhanced our corporate governance on multiple fronts, adding two new strategic and independent directors to Flotek's Board of Directors (Board) following the departure of three long-standing directors, as well as appointing new chairpersons for each of the Board's committees. Additionally, we restructured and enhanced our executive leadership team, including the addition of a highly-experienced Chief Financial Officer at the end of 2018. Since the beginning of 2019, we have taken further steps in our commitment to strong corporate governance. This includes separating the role of Chairman and Chief Executive Officer effective as of the 2019 Annual Meeting. The Board and the executive team will continue to work closely together as we focus on further leveraging our core strengths in an environment of enhanced financial discipline.

## UNLOCKING SHAREHOLDER VALUE

In the fourth quarter of 2018, considerable effort was focused on the negotiation and due diligence that led to the sale of Florida Chemical to Archer Daniels Midland Company (ADM) for $175 million in the first quarter of 2019. With the closing of the transaction, Flotek established itself as a pure play and leading provider of high-performance chemistry solutions to the upstream oil and gas industry.

Over the past few years, we felt the combined value of our Consumer and Industrial Chemistry Technologies and Energy Chemistry Technologies segments had not been broadly appreciated outside Flotek. To substantiate our internal view, in the middle of 2018, we began a process to discover and potentially unlock the value of the consumer and industrial part of our business. Around the same time, we began discussions with ADM concerning organic business opportunities. Through those discussions, it became clear that the future value of Florida Chemical's industry-leading capabilities and growing presence might be best realized in the hands of ADM.

ADM is a highly regarded Fortune 50 corporation recognized for its global leading presence in transforming crops into agricultural and food products, and Florida Chemical's business aligns extremely well with their expanding nutrition and flavor and fragrance offerings. And, while the fit between ADM and Florida Chemical was convincing, it was also important to both parties that Flotek's relationship with

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Florida Chemical would continue going forward. As such, we entered into long-term reciprocal supply agreements with ADM that allow Flotek to secure critical supply of d-limonene for our ongoing operations.

The transaction also provides the potential for important new opportunities for growth in Flotek's ongoing business, and we look forward to working closely with ADM to jointly explore and develop next-generation chemistry technologies for the oil and gas and agricultural industries. We will focus on high-value bio-based chemistries that align with our current technology portfolio.

## Importantly, we significantly increased our financial flexibility as a result of the transaction.

Importantly, we significantly increased our financial flexibility as a result of the transaction. After transaction fees and working capital adjustments, as well as paying off all of our outstanding debt and associated accrued interest, net proceeds from the transaction were approximately $111 million. We have formed a committee comprised of key members of the Board and executive management to thoroughly evaluate and make recommendations to the Board on how to best deploy the net proceeds of the transaction. These options could include returning capital to shareholders, executing share buybacks, funding organic growth projects, making additional investments in the business that increase long-term shareholder value and exploring other alternatives.

## LEADING IN PERFORMANCE CHEMISTRY

Moving forward, we expect continued oil price volatility and are focused on managing our business in an approximate $50 per West Texas Intermediate (WTI) barrel price environment. Operators are facing diminishing returns as mechanical variables have reached, and in some cases exceeded, both their economic and technical limits in well completion designs and subsequent performance, which became increasingly clear throughout 2018. In this context, many operators are turning their attention progressively to utilizing custom chemistry as a means to optimizing exploitation of hydrocarbons from the reservoir and capital efficiency.

We believe Flotek is ideally positioned for long-term success given our truly differentiated approach to fluid design and best-in-class innovation capabilities, and we will continue with renewed focus on effectively illustrating that value proposition to our clients and the industry as a whole. Critical to our future success is a deep base of technical expertise and fluid designs across multiple basins and we have responded by further integrating our team of technical experts — ranging from chemists

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# We believe Flotek is ideally positioned for long-term success given our truly differentiated approach to fluid design and best-in-class innovation capabilities, and we will continue with renewed focus on effectively illustrating that value proposition to our clients and the industry as a whole.

to reservoir engineers to geoscientists — into our sales processes. Our clients appreciate the deep understanding of the performance of our advanced chemistries, which have now been applied over thousands of wells across a wide variety of basins and reservoirs, and we will continue to expand upon our broad base of experience and portfolio of innovative solutions.

In closing, we believe Flotek is solidly positioned in an anticipated ongoing dynamic environment and we will leverage our best-in-class chemistry technologies and optimized cost position to best ensure our long-term success. I want to acknowledge the continued hard work and dedication of all of our employees and strategic guidance provided by our Board. We likewise appreciate the continued support of our shareholders, and look forward to keeping you apprised of our progress.

Sincerely,

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John W. Chisholm
Chairman, President & CEO
Flotek Industries