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

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto, which have been prepared in accordance with U.S. GAAP, included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. As a result of many risks and uncertainties, including those factors set forth in Item 1A -Risk Factors of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. For more information, see “Forward-Looking Statements.” These forward-looking statements are made as of the date of this report, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by applicable law. All dollar amounts stated herein are in U.S. dollars unless specified otherwise.

Executive Summary

Flotek creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial and commercial markets improve their environmental performance. The Company serves specialty chemistry needs for both domestic and international energy markets.

The Company has two operating segments, CT and DA, which are both supported by the Company’s continuing Research and Innovation advanced laboratory capabilities.

The Company’s CT segment develops, manufactures, packages, distributes, delivers, and markets green, specialty chemicals that help their customers meet their ESG and operational goals, and aim to enhance the profitability of hydrocarbon producers.

The Company’s DA segment enables users to maximize the value of their hydrocarbon associated processes by providing real-time data and analytics associated with the streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing, and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.

During 2022 the Company entered into the ProFrac Agreement, (see Note 10, “Debt and Convertible Notes Payable” and Note 18, “Related Party Transactions”) which has resulted in a significant increase in revenue for the year ended December 31, 2022.

Company Overview

Chemistry Technologies

We believe that the Company’s CT segment provides sustainable, optimized chemistry solutions that maximize our customer’s value by elevating their ESG performance, lowering operational costs, and delivering improved return on invested capital. The Company’s proprietary green chemistries, specialty chemistries, logistics, and technology services enable its customers to pursue improved efficiencies and performance throughout the life cycle of its desired chemical applications program. The Company designs, develops, manufactures, packages, distributes and markets optimized chemistry solutions that accelerate existing sustainability practices to reduce the environmental impact of energy on the air, water, land and people.

Customers of the CT segment include those of energy related markets, such as our related party ProFrac Services, LLC, as well as consumer and industrial applications. Major integrated oil and gas companies, oilfield services companies, independent oil and gas companies, national and state-owned oil companies, geothermal energy companies, solar energy companies and advanced alternative energy companies benefit from our best-in-class technology, field operations, and continuous improvement exercises that go beyond existing sustainability practices.

Data Analytics

The DA segment delivers real-time information and insights to our customers to enable optimization of operations and reduction of emissions and their carbon intensity. Real-time composition and physical properties are delivered simultaneously on their refined fuels, natural gas liquids (“NGLs”), natural gas, crude oil, and condensates using the industry’s only field-

deployable, in-line optical near-infra-red spectrometer that generates no emissions. The instrument's response is processed with advanced chemometrics modeling, artificial intelligence, and machine learning algorithms to deliver these valuable insights every 15 seconds.

We believe customers using this technology have obtained significant benefits including additional profits by enhancing operations in crude/condensates stabilization, blending operations, reduction of transmix, increasing efficiencies and optimization of gas plants, and ensuring product quality while reducing giveaways i.e., providing higher value products at the lower value products prices. More efficient operations have the benefit of reducing their carbon footprint e.g., less flaring and reduction in energy expenditure for compression and re-processing. Our customers in North America include the supermajors, some of the largest midstream companies and large gas processing plants. We have developed a line of VeraxTM analyzers for deployment internationally which was certified for compliance in hazardous locations and harsh weather conditions.

Research & Innovation

R&I supports the acceleration of ESG solutions for both segments through green chemistry formulation, specialty chemical formulations, EPA regulatory guidance, technical support, basin and reservoir studies, data analytics and new technology projects. The purpose of R&I is to supply the Company’s segments with enhanced products and services that generate current and future revenues, while advising Company management on opportunities concerning technology, environmental and industry trends. The R&I facilities support advances in chemistry performance, detection, optimization and manufacturing.

Consolidated Results of Operations (in thousands)

Years ended December 31,

Revenue

Gross profit (loss) % (4.9) % 7.5 %

Selling, general and administrative % 19.9 % 46.6 %

Gain on disposal of property and equipment (2,916) (94)

Gain on lease termination (584) —

Gain in fair value of contract consideration convertible notes payable (75) —

Impairment of goodwill — 8,092

Operating margin % (26.0) % (72.7) %

Paycheck protection plan loan forgiveness — 881

Interest expense and other income, net (6,906) 9

Income tax benefit 22 40

Consolidated revenue for the year ended December 31, 2022, increased $92.8 million, or 215% versus the same period of 2021. The significant increase in revenue during the year ended December 31, 2022 is driven primarily by activity under the ProFrac Agreement which commenced in the second quarter of 2022 and continued increased activity with new and existing customers both domestic and international, particularly in the CT segment.

Consolidated cost of sales for the year ended December 31, 2022, increased $102.8 million, or 257% versus the same period of 2021 .The increase is primarily driven by the activity with ProFrac Services, LLC and higher freight and equipment rental costs due to the increased volume of business. Cost of sales in 2021 was positively impacted by the release of accrued costs of $7.6 million subsequent to the agreement of a settlement with ADM, see Note 13, “Commitments and Contingencies”.

Selling general and administrative (“SG&A”) expenses are not directly attributable to products sold or services provided. SG&A expenses for the year ended December 31, 2022, increased $7.0 million, or 35%, versus the same period of 2021. The increase in SG&A expenses is driven primarily by higher personnel costs to facilitate the increase in operational activity, and professional fees. For the year ended December 31, 2021, personnel costs were lower due to the receipt of a $2.9 million payroll tax credit from the Employee Retention Credit, (“ERC”) a provision set up to assist employers during the pandemic. The increase in professional fees of $1.8 million is attributable mainly to fees incurred in assessing alternative strategies to raise capital, partially offset by lower legal fees.

Depreciation expense decreased $0.3 million, or 27% for the year ended December 31, 2022, versus the same period of 2021 partially driven by the assets held for sale that were ultimately sold during the year ended December 31, 2022 and also by assets becoming fully depreciated.

Research and development (“R&D”) costs decreased $1.1 million, or 20% for the year ended December 31, 2022, versus the same period of 2021 driven by lower personnel costs as a result of headcount reductions from 2021 to 2022.

Loss from operations increased by $4.0 million, or 13% for the year ended December 31, 2022, versus the same period in 2021. Loss from operations for the year ended December 31, 2021 was positively impacted by the release of accrued costs of $7.6 million subsequent to the agreement of a settlement with ADM, see Note 13, “Commitments and Contingencies”. Excluding the ADM credit, loss from operations decreased $3.6 million, or 9% year on year. The improvement is driven by increased revenue and gross margin, the gain on disposal of property and equipment from the sale of the Waller, Texas and Monahans, Texas facilities and the gain on lease termination partially offset by increased SG&A expenses.

Loss before income taxes for the year ended December 31, 2022, was impacted by interest charges of $7.1 million compared to $0.1 million for the same period in 2021. The increased interest cost is driven by paid-in-kind interest on the Convertible Notes Payable issued in connection with the PIPE transaction conducted in February 2022 and the Contract Consideration Convertible Notes Payable. Loss before income taxes for the year ended December 31, 2021was positively impacted by a $0.9 million gain from the forgiveness of the JP3 Paycheck Protection Program (“PPP”) loan.

Results by Segment (in thousands):

Chemistry Technologies Results of Operations:

Years ended December 31,

CT revenue from external customers for the year ended December 31, 2022, increased $13.7 million, or 39%, compared to 2021 due to increased domestic and international sales with both new and existing customers. Revenue from related parties increased $78.0 million, or 2,142% driven by the ProFrac Agreement which commenced in the second quarter of 2022.

Loss from operations for the CT segment for the year ended December 31, 2022 increased $9.3 million, or 169%, compared to 2021. The decline is driven by the low gross margin due to amortization of the contract asset, early payment discounts given to customers, start up costs relating to the ProFrac Agreement and a one time inventory write down of $1.0 million relating to the decision to cease the manufacture and sale of hand sanitizers. Cost of sales for the year ended December 31, 2021 benefited

from the release of accrued costs relating to the ADM settlement of $7.6 million, see Note 13, “Commitments and Contingencies”.

Data Analytics Results of Operations:

Years ended December 31,

Revenue from external customers $ 5,384 $ 4,339

Revenue from related party 130 —

DA revenue for the year ended December 31, 2022, increased $1.0 million, or 24%, compared to revenue for 2021. The increase is driven by significant revenues with three new customers and several existing customers. Related party revenue has increased by $0.1 million compared to 2021 relating to services provided to ProFrac Services, LLC.

Loss from operations for the DA segment for the year ended December 31, 2022 decreased $9.3 million, or 76%, compared to 2021. The improvement is primarily due to 2021 being impacted by a goodwill impairment charge of $8.1 million and the increase in revenue and gross margin for the year ended December 31, 2022.

Corporate and Other Results of Operations:

Years ended December 31,

Loss from operations for the year ended December 31, 2022 increased by $4.0 million, or 29% compared to 2021 attributable to an increase in personnel costs and professional fees. Personnel costs in 2021 included a $2.9 million payroll tax credit from the ERC provision. Increased professional fees were driven by fees incurred in assessing alternative strategies to raise capital, partially offset by lower legal fees.

Capital Resources and Liquidity

Overview

The Company’s ongoing capital requirements relate to the acquisition and maintenance of equipment and to the funding of working capital requirements. During 2022, the Company funded working capital requirements with net cash proceeds from the issuance of Convertible Notes Payable for $20.1 million, prefunded warrants issued for $19.5 million, and cash on hand.

As of December 31, 2022, the Company had unrestricted cash and cash equivalents of $12.3 million, as compared to $11.5 million at December 31, 2021. During the year ended December 31, 2022, the Company had an operating loss of $35.4 million, $44.6 million of cash used in operating activities, $5.3 million of cash provided by investing activities and $38.3 million of cash provided by financing activities.

Going Concern

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.

certain that the Company’s cash and other current assets and our forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

The Company is evaluating strategies to obtain additional funding for future operations. These strategies may include, but are not limited to, obtaining equity financing, issuing debt or entering into other financing arrangements, obtaining higher prices for its products and services, increasing the percentage of its sales from higher margin products, monetizing non-core assets, and reducing expenses. However, the Company may be unable to access further equity or debt financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all.

The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

Cash Flows

Consolidated cash flows by type of activity are noted below (in thousands):

Years ended December 31,

Net cash used in operating activities $ (44,632) $ (25,840)

Net cash provided by investing activities 5,331 112

Net cash provided by (used in) financing activities 38,267 (372)

Effect of changes in exchange rates on cash and cash equivalents 100 100

Net change in cash, cash equivalents and restricted cash $ (934) $ (26,000)

Operating Activities

Net cash used in operating activities was $44.6 million and $25.8 million during the year ended December 31, 2022 and 2021, respectively. Consolidated net loss for the year ended December 31, 2022 and 2021, were $42.3 million and $30.5 million, respectively.

During the year ended December 31, 2022, non-cash positive adjustments to net loss totaled $12.8 million as compared to $4.2 million for the same period of 2021.

•For the year ended December 31, 2022, non-cash positive adjustments included paid-in-kind interest on the Convertible Notes Payable and Contract Consideration Convertible Notes Payable of $6.0 million, amortization of contract assets and convertible note issuance costs of $3.4 million and $1.0 million, respectively and stock compensation expense of $3.3 million. The non-cash adjustment for the provision for excess and obsolete inventory was $1.7 million and depreciation was $0.7 million. These were offset by adjustments for the gain on sale of property and and equipment of $2.9 million, attributable to the facility sales and the gain on lease termination of $0.6 million relating to the early termination of a lease on a Canadian facility.

•For the year ended December 31, 2021, non-cash adjustments included a $7.6 million benefit related to the ADM settlement and $8.1 million of impairment charges. The non-cash adjustment for the provision of excess and obsolete inventory was $0.6 million and depreciation was $1.0 million. Other non-cash adjustments included stock based compensation of $3.8 million, JP3 PPP loan forgiveness of $0.9 million and $0.8 million related to the change in fair value of contingent consideration.

During the year ended December 31, 2022, changes in working capital used $15.2 million of cash as compared to providing $0.5 million for the same period of 2021.

•For the year ended December 31, 2022, changes in working capital resulted primarily from increases in accounts receivable including related party and inventories of $28.7 million and $7.9 million, respectively, due to the significant increase in revenues. Contract assets increased $3.6 million related to transaction fees paid, associated with Contract

Consideration Notes Payable. This is partially offset by an increase of accounts payable of $25.8 million, attributable to the increase in activity.

•For the year ended December 31, 2021, changes in working capital resulted primarily from increases in accounts receivable and other current assets of $2.0 million and accounts payable of $1.8 million. This has been offset by decreases in inventories and income taxes receivable of $2.1 million and accrued liabilities of $1.4 million.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2022 was $5.3 million primarily from the sale of the facilities in Waller, Texas and Monahans, Texas which closed on April 18, 2022 and December 22, 2022, respectively, resulting in cash proceeds of $5.8 million, partially offset by capital additions. Net cash provided by investing activities for the year ended December 31, 2021 was immaterial.

Financing Activities

Net cash provided by financing activities was $38.3 million for the year ended December 31, 2022, primarily from the proceeds of the issuance of convertible notes of $21.2 million and prefunded warrants of $19.5 million, partially offset by issuance costs of $2.3 million. Net cash used in financing activities was $0.4 million for the year ended December 31, 2021, primarily for purchases of common stock related to tax withholding requirements.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported. Significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in Part II, Item 8 — “Financial Statements and Supplementary Data,” of this Annual Report. The Company believes the following accounting policies are critical due to the significant subjective and complex judgments and estimates required when preparing the consolidated financial statements. The Company regularly reviews judgments, assumptions and estimates related to the critical accounting policies.

Contract Assets

The Company’s contract assets represent consideration issued in the form of convertible notes (Contract Consideration Convertible Notes Payable as discussed in Note 10, “Debt and Convertible Notes Payable”) and other incremental costs related to obtaining the ProFrac Agreement. The contract assets are amortized over the term of the ProFrac Agreement (10 years) based on forecasted revenues. As goods are transferred to ProFrac Services, LLC, the amortization is presented as a reduction of the transaction price included in related party revenue in the consolidated statements of operations. The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the contract less the direct costs that relate to providing those goods in the future. Significant or unanticipated changes to our forecast could impact the recoverability of the contract assets.

Reserve for Excess and Obsolete Inventory

Inventories consist of raw materials and finished goods and are stated at the lower of cost, or market determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead.

The Company reviews inventories on hand and current market conditions to determine if the cost of raw materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of sales.

At December 31, 2022 and 2021, the reserve for excess and obsolete inventory was $8.2 million and $10.1 million, or 34.3% and 51.8% of inventory, respectively. Significant or unanticipated changes to our estimates and forecasts could impact the amount and timing of any additional provisions for excess and obsolete inventory.

Fair Value of Contract Consideration Convertible Notes Payable

The Company accounts for the Contract Consideration Convertible Notes Payable as discussed in Note 10, “Debt and Convertible Notes Payable” issued related to obtaining the ProFrac Agreement, as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation”. Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date with the change in fair value included in the consolidated statements of operations. The Company estimates the fair value of the Contract Consideration Convertible Notes Payable by means of a Monte Carlo simulation which utilizes key inputs such as the risk-free interest rate, stock price, expected volatility and term until liquidation. Significant changes to the key inputs such as the Company’s stock price and volatility would impact the estimated fair value.

Recent Accounting Pronouncements

Recent accounting pronouncements which may impact the Company are described in Note 2, “Summary of Significant Accounting Policies - Recent Accounting Pronouncements,” in Part II, Item 8 — “Financial Statements” of this Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is primarily exposed to market risk from changes in raw material prices, freight costs, and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates, commodity prices or foreign currency exchange rates over the next year. The Company manages exposure to market risks at the corporate level. The portfolio of interest-sensitive assets and liabilities is monitored and adjusted to provide liquidity necessary to satisfy anticipated short-term needs. The Company’s risk management policies allow the use of specified financial instruments for hedging purposes only. Speculation on interest rates or foreign currency rates is not permitted. The Company does not consider any of these risk management activities to be material.

Foreign Currency Exchange Risk

The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and has limited exposure to foreign currency risk in its international operations. During 2022, approximately 0.74% of revenue was denominated in non-U.S. dollar currencies and substantially all assets and liabilities of the Company are denominated in U.S. dollars. However, as the Company expands its international operations, non-U.S. denominated activity is likely to increase. The Company has not historically used swaps or foreign currency hedges, however, the Company may utilize swaps or foreign currency hedges in the future.

Commodity Risk

The Company, and the CT segment in particular, primarily relies upon supply relationships to meet many of its raw material needs. Price increases are passed along to the Company’s customers, where applicable or possible. The Company presently does not utilize commodity derivative instruments but may consider utilizing forms of hedging to mitigate the effects of rising commodity prices on its supplies, in the future.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors Flotek Industries, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, cash flows, and stockholders’ equity for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring operating losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for convertible instruments as of January 1, 2022 due to the adoption of ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or

disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Recoverability of contract assets

As described in Note 2 to the Company’s consolidated financial statements, the Company’s contract assets represent consideration issued in the form of convertible notes and other incremental costs related to obtaining a contract with ProFrac Services, LLC, a related party customer. The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of revenue the Company expects to receive in the future for the transfer of goods under the long-term supply agreement and the amendment to that agreement (collectively, the ProFrac Agreement) less the direct costs that relate to providing those goods in the future. As described in Note 4, the Company had recorded contract assets, net of $79.7 million as of December 31, 2022.

We identified the evaluation of the recoverability of contract assets as a critical audit matter. There was subjective auditor judgement in evaluating the key assumptions used in the Company’s contract asset recoverability assessment, specifically the forecasted product revenue and related forecasted costs to provide products over the term of the ProFrac Agreement.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal controls related to the Company’s contract assets recoverability assessment, including controls over the development of forecasted revenue and costs over the term of the ProFrac Agreement. To assess the Company’s ability to forecast revenue and costs, we compared revenue and cost forecasts for the current year to actual results. We performed sensitivity analyses over the Company’s contract asset recoverability assessment by evaluating the effect of changes in the forecasted revenue and costs over the term of the ProFrac Agreement. We assessed the reasonableness of forecasted revenue and costs by considering whether such amounts were consistent with evidence obtained in other areas of the audit.

/s/ KPMG LLP

We have served as the Company’s auditor since 2021.

Houston, Texas

March 22, 2023

FLOTEK INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

December 31,

ASSETS

Current assets:

Accounts receivable, related party 22,683 1,300

Current contract assets 7,113 —

Assets held for sale — 2,762

Long-term contract assets 72,576 —

Operating lease right-of-use assets 5,900 2,041

Deferred tax assets, net 404 279

Other long-term assets 17 29

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Income taxes payable 97 4

Current portion of operating lease liabilities 3,328 602

Current portion of finance lease liabilities 36 41

Current portion of long-term debt 2,052 1,436

Convertible notes payable 19,799 —

Contract consideration convertible notes payable 83,570 —

Deferred revenue, long-term 44 91

Long-term operating lease liabilities 8,044 7,779

Long-term finance lease liabilities 19 53

Stockholders’ equity:

Accumulated other comprehensive income 181 81

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 164,810 $ 50,244

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Years ended December 31,

Revenue:

Operating costs and expenses:

Gain on disposal of property and equipment (2,916) (94)

Gain on lease termination (584) —

Gain on fair value of contract consideration convertible notes payable (75) —

Impairment of goodwill — 8,092

Other income (expense):

Paycheck protection plan loan forgiveness — 881

Total other income (expense) (6,906) 890

Income tax benefit 22 40

Loss per common share:

Weighted average common shares:

The accompanying Notes are an integral part of these Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

Years ended December 31,

Other comprehensive income:

Foreign currency translation adjustment 100 100

The accompanying Notes are an integral part of these Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years ended December 31,

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Change in fair value of contingent consideration (25) (808)

Change in fair value of contract consideration convertible notes payable (75) —

Amortization of convertible note issuance cost 1,002 —

Paid-in-kind interest expense 5,956 —

Amortization of contract assets 3,371 —

Provision for doubtful accounts, net of recoveries 203 (127)

Inventory purchase commitment settlement — (7,633)

Provision for excess and obsolete inventory 1,734 623

Impairment of goodwill — 8,092

Gain on sale of property and equipment (2,916) (94)

Gain on lease termination (584) —

Deferred income tax benefit (125) (56)

Paycheck protection plan loan forgiveness — (881)

Changes in current assets and liabilities:

Accounts receivable, related party (21,383) (1,300)

Income taxes receivable 14 381

Contract assets (3,600) —

Accrued liabilities (34) (860)

Operating lease liabilities (507) (603)

Income taxes payable 93 (17)

Interest payable 48 48

Net cash used in operating activities (44,632) (25,840)

Cash flows from investing activities:

Capital expenditures (421) (39)

Proceeds from sale of assets 5,752 151

Net cash provided by investing activities 5,331 112

Cash flows from financing activities:

Proceeds from issuance of convertible notes 21,150 —

Payment of issuance costs of convertible notes (1,084) —

Proceeds from issuance of warrants 19,500 —

Payment of issuance costs of stock warrants (1,170) —

Payments to tax authorities for shares withheld from employees (224) (390)

Proceeds from issuance of stock 133 80

Payments for finance leases (38) (62)

Net cash provided by (used in) financing activities 38,267 (372)

Effect of changes in exchange rates on cash and cash equivalents 100 100

Net change in cash, cash equivalents and restricted cash (934) (26,000)

Cash and cash equivalents at the beginning of period 11,534 38,660

Restricted cash at the beginning of period 1,790 664

Cash and cash equivalents at end of period 12,290 11,534

Restricted cash at the end of period 100 1,790

Cash, cash equivalents and restricted cash at end of period $ 12,390 $ 13,324

The accompanying Notes are an integral part of these Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2022 and 2021

(In thousands of U.S. dollars and shares)

SharesIssued ParValue Shares Cost

Foreign currency translation adjustment — — — — — 100 — 100

Stock issued under employee stock purchase plan — — (40) — 140 — — 140

Restricted stock granted 1,533 — — — — — — —

Restricted stock forfeited (3) — 30 — — — — —

Restricted stock units vested 144 — — — (31) — — (31)

Stock compensation expense — — — — 3,325 — — 3,325

Issuance of stock warrants, net of transaction fee — — — — 9,930 — — 9,930

Equity contribution — — — — 8,400 — — 8,400

Conversion of notes to common stock 2,793 — — — 3,038 — — 3,038

SharesIssued ParValue Shares Cost

Foreign currency translation adjustment — — — — — 100 — 100

Stock issued under employee stock purchase plan — — (136) — 80 — — 80

Restricted stock granted 1,702 — — — — — — —

Restricted stock forfeited (284) — 422 — — — — —

Restricted units vested 86 — — — — — — —

Stock compensation expense — — — — 3,757 — — 3,757

(1) See Note 14, “Stockholders’ Equity” for further discussion.

The accompanying Notes are an integral part of these Consolidated Financial Statements.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Nature of Operations

General

Flotek Industries, Inc. (“Flotek” or the “Company”) creates unique solutions to reduce the environmental impact of energy on air, water, land and people. A technology-driven, specialty green chemistry and data company, Flotek helps customers across industrial and commercial markets improve their environmental performance.

The Company’s Chemistry Technologies (“CT”) segment develops, manufactures, packages, distributes, delivers, and markets green specialty chemicals that aim to enhance the profitability of hydrocarbon producers.

The Company’s Data Analytics (“DA”) segment aims to enable users to maximize the value of their hydrocarbon associated processes by providing analytics associated with their hydrocarbon streams in seconds rather than minutes or days. The real-time access to information prevents waste, reduces reprocessing and allows users to pursue automation of their hydrocarbon streams to maximize their profitability.

The Company’s two operating segments, CT and DA, are both supported by its Research & Innovation advanced laboratory capabilities. For further discussion of our operations and segments, see Note 19, “Business Segment, Geographic and Major Customer Information.”

Going Concern

The Company currently funds its operations from cash on hand and other current assets. The Company has a history of losses and negative cash flows from operations and expects to utilize a significant amount of cash within one year after the date of filing the consolidated financial statements. The availability of capital is dependent on the Company’s operating cash flow currently expected to be principally derived from the ProFrac Agreement (see Note 18, “Related Party Transactions”). It is not certain that the Company’s cash and other current assets and our forecasted operating cash flows currently expected to be generated from the ongoing execution of the ProFrac Agreement will provide the Company with sufficient financial resources to fund operations and meet our capital requirements and anticipated obligations as they become due in the next twelve months. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The Company’s consolidated financial statements have been prepared in accordance with U.S. GAAP.The consolidated financial statements include the accounts of Flotek Industries, Inc. and subsidiaries it controls.

All significant intercompany accounts and transactions have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash Equivalents

Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase.

Restricted Cash

The Company’s restricted cash is $0.1 million and $1.8 million as of December 31, 2022 and December 31, 2021, respectively. The Company’s restricted cash as of December 31, 2022 consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its credit card program with a financial institution. The restricted cash balance as of December 31, 2021 included cash maintained in accordance with the credit card program and cash held in escrow of $1.75 million for amounts due under the terms of the legal settlement discussed in Note 13, “Commitments and Contingencies”.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable and Accounts receivable, related party, arise from product sales and services and are stated at estimated net realizable value. This value incorporates an allowance for doubtful accounts to reflect any loss anticipated on accounts receivable balances. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate allowance for doubtful accounts as a charge to operating expenses. The allowance for doubtful accounts is based on a combination of the age of the receivables, individual customer circumstances, credit conditions, and historical write-offs and collections. The Company writes off specific accounts receivable when they are determined to be uncollectible. The recovery of accounts receivable previously written off is recorded as a reduction to the allowance for doubtful accounts charged to operating expense.

The majority of the Company’s customers are engaged in the energy industry. The cyclical nature of the energy industry may affect customers’ operating performance and cash flows, which directly impact the Company’s ability to collect on outstanding obligations. Additionally, certain customers are located in international areas that are inherently subject to risks of economic, political, and civil instability, which can impact the collectability of receivables.

Changes in the allowance for doubtful accounts are as follows (in thousands):

Years ended December 31,

Balance, beginning of year $ 659 $ 1,316

Charges to provision for doubtful accounts, net of recoveries 203 (127)

Balance, end of year $ 623 $ 659

As of December 31, 2022 and 2021 the Company has not recorded an allowance for doubtful accounts for the related party accounts receivable, including ProFrac Services, LLC.

Contract Assets

The contract assets are tested for recoverability on a recurring basis and the Company will recognize an impairment loss to the extent that the carrying amount of the contract assets exceeds the amount of consideration the Company expects to receive in the future for the transfer of goods under the ProFrac Agreement less the direct costs that relate to providing those goods in the future. Based on our tests of recoverability, we did not identify an impairment of the contract assets during the year ended December 31, 2022.

Inventories

Inventories consist of raw materials and finished goods and are stated at the lower of cost determined using the weighted-average cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

materials and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. Write-downs or write-offs of inventory are charged to cost of sales.

Property and equipment

Property and equipment are stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, including operating lease right-of-use assets (“ROU”), is calculated using the straight-line method over the shorter of the lease term or the asset’s estimated useful life as follows:

Buildings and leasehold improvements 2-30 years

Machinery and equipment 7-10 years

Furniture and fixtures 3 years

Land improvements 20 years

Transportation equipment 2-5 years

Computer equipment and software 3-7 years

Property and equipment, including ROU assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable, the Company first compares the carrying amount of an asset or asset group to the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset. If the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposal of the asset, the Company will determine the fair value of the asset or asset group. The amount of impairment loss recognized is the excess of the asset or asset group’s carrying amount over its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. There were no impairments of property and equipment and ROU assets during the years ended December 31, 2022 and 2021.

Assets to be disposed of are reported as assets held for sale at the lower of the carrying amount or the asset’s fair value less cost to sell and depreciation is ceased. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying amount of the asset and the net proceeds received.

Leases

The Company leases certain facilities, land, vehicles, and equipment. The Company determines if an arrangement is classified as a lease at inception of the arrangement.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the related lease. Finance leases are under the current and non-current liabilities and the underlying assets are included in property and equipment on the consolidated balance sheet.

As most of the Company’s leases do not provide an implicit rate of return, on a quarterly basis, the Company’s incremental borrowing rate is used, together with the lease term information available at commencement date of the lease, in determining the present value of lease payments. Operating lease liabilities include related options to extend or terminate lease terms that are reasonably certain of being exercised.

Leases with an initial term of 12 months or less (“short term leases”) are not recorded on the balance sheet; and the lease expense on short-term leases is recognized on a straight-line basis over the lease term.

Convertible Notes Payable and Liability Classified Contract Consideration Convertible Notes Payable

The Company accounts for the Convertible Notes Payable at amortized cost pursuant to Financial Accounting Standards Board (“FASB”) ASC Topic 470, Debt.

The Company accounts for the Contract Consideration Convertible Notes Payable issued as consideration related to a related party contract (see Note 10, “Debt and Convertible Notes Payable”), as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

measured at fair value at the grant date and at each reporting date (see Note 11, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.

Fair Value Measurements

The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 11, “Fair Value Measurements.”

Revenue Recognition

The Company only has revenue from customers. The Company recognizes revenue when it satisfies performance obligations under the terms of the contract with a customer, and control of the promised goods are transferred to the customer or services are performed, in an amount that reflects the consideration the Company expects to be entitled in exchange for those goods or services.

The Company recognizes revenue based on a five-step model when all of the following criteria have been met: (i) a contract with a customer exists, (ii) performance obligations have been identified, (iii) the price to the customer has been determined, (iv) the price to the customer has been allocated to the performance obligations, and (v) performance obligations are satisfied.

Products and services are sold with fixed or determinable prices. Certain sales include right of return provisions, which are considered when recognizing revenue and deferred accordingly, and discounts offered to customers for prompt payment. The Company does not act as an agent in any of its revenue arrangements.

In recognizing revenue for products and services, the Company determines the transaction price of contracts with customers, which may consist of fixed and variable consideration. Determining the transaction price may require judgment by management, which includes identifying performance obligations, estimating variable consideration to include in the transaction price, and determining whether promised goods or services can be distinguished in the context of the contract.

The majority of the CT segment revenue is chemical products that are sold at a point in time based on when control transfers to the customer determined by agreed upon delivery terms. Contracts with customers for the sale of products generally state the terms of the sale, including the quantity and price of each product purchased. Additionally, the CT segment offers various services associated to products sold which includes field services, installation, maintenance, and other functions. These services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation when the Company has a right to invoice the customer.

The DA segment recognizes revenue for sales of equipment at the time of sale based on when control transfers to the customer based on agreed upon delivery terms. Additionally, the Company offers various services associated to products sold which includes field services, installation, maintenance, and other functions. Services are recognized upon completion of commissioning and installation due to the short-term nature of the performance obligation. There may be additional performance obligations related to providing ongoing or reoccurring maintenance. Revenue for these types of arrangements is recognized ratably over time throughout the contract period. Additionally, the Company may provide subscription-type arrangements with customers in which monthly reoccurring revenue is recognized ratably over time in accordance with agreed upon terms and conditions. Customers may be invoiced for such maintenance and subscription-type arrangements and revenue not yet recognizable is reported under accrued liabilities and deferred revenue on the consolidated balance sheets. Subscription-type arrangements were not a material revenue stream in the years ended December 31, 2022 and 2021.

Payment terms for both the CT and DA segments are customarily 30-60 days for domestic and 90-120 days for international from invoice receipt. Under revenue contracts for both products and services, customers are invoiced once the performance obligations have been satisfied, at which point payment is unconditional. Contract assets associated with incomplete performance obligations are not material.

The Company applies several practical expedients including:

•Sales commissions are expensed as selling, general and administrative expenses when incurred because the amortization period is generally one year or less.

•The Company’s payment terms are short-term in nature with settlements of one year or less. As a result, the Company does not adjust the promised amount of consideration for the effects of a significant financing component.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

•In most service contracts, the Company has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance obligations completed to date and as such the Company recognizes revenue in the amount to which it has a right to invoice.

•The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer. Such taxes are included in accrued liabilities on our consolidated balance sheet until remitted to the governmental agency.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our consolidated statement of operations.

Foreign Currency Translation

The Company’s functional currency is primarily the U.S. dollar. The Company operates principally in the United States and substantially all assets and liabilities of the Company are denominated in U.S. dollars. Financial statements of foreign subsidiaries that are not U.S. dollar functional currency are prepared using the currency of the primary economic environment of the foreign subsidiaries as the functional currency. Assets and liabilities of those foreign subsidiaries are translated into U.S. dollars at exchange rates in effect as of the end of identified reporting periods. Revenue and expense transactions are translated using the average monthly exchange rate for the reporting period. Resultant translation adjustments are recognized as other comprehensive income (loss) within stockholders’ equity.

Comprehensive Loss

Comprehensive loss encompasses all changes in stockholders’ equity, except those arising from investments and distributions to stockholders. The Company’s comprehensive loss includes consolidated net loss and foreign currency translation adjustments.

Research and Development Costs

Expenditures for research activities relating to product development and improvement are charged to expense as incurred.

Income Taxes

Deferred tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts and the tax bases of assets and liabilities and are measured using the tax rates expected to be in effect when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date.

A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The establishment of a valuation allowance requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company’s policy is to record interest and penalties related to uncertain tax positions as income tax expense.

Stock-Based Compensation

Stock-based compensation expense, related to stock options, restricted stock awards and restricted stock units, is recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.

Stock Warrants

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluated the Prefunded Warrants issued in June 2022 (see Note 14, “Stockholders’ Equity) in accordance with ASC 815-40, “Contracts in Entity’s Own Equity” and determined that the warrants meet the criteria to be classified within stockholders’ equity and recorded the proceeds received for the Prefunded Warrants within additional paid in capital in the consolidated balance sheets.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Actual results could differ from these estimates.

Significant items subject to estimates and assumptions include the useful lives of property and equipment; long lived asset impairment assessments; stock-based compensation expense; valuation allowances for accounts receivable, inventories, and deferred tax assets; recoverability and timing of the realization of contract assets; and fair value of liability classified Contract Consideration Convertible Notes Payable and equity classified stock warrants.

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the FASB. We evaluate the applicability and impact of all authoritative guidance issued by the FASB. Guidance not listed below was assessed and determined to be either not applicable, clarifications of items listed below, immaterial or already adopted by the Company.

New Accounting Standards Issued and Adopted as of January 1, 2022

The FASB issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This standard changes the accounting for convertible instruments by reducing the number of accounting models, amends the requirements for a conversion option to be classified in equity and amends diluted earnings per share calculations for certain convertible debt instruments. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, with early adoption allowed for fiscal years beginning after December 15, 2020. The Company adopted this standard as of January 1, 2022, and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.

The FASB issued ASU No. 2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance.” This standard provides guidance on disclosures for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The pronouncement is effective for fiscal years beginning after December 15, 2021.The Company adopted this standard as of January 1, 2022 and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.

New Accounting Standards Issued But Not Adopted as of December 31, 2022

The FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects estimates of expected credit losses over their contractual life that are recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The pronouncement is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company regularly evaluates its accounts receivable to estimate amounts that will not be collected and records the appropriate allowance for doubtful accounts as a charge to operating expenses therefore the Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements and related disclosures.

Note 3 — Revenue from Contracts with Customers

Disaggregation of Revenue

The Company differentiates revenue based on whether the source of revenue is attributable to product sales or service revenue.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total revenue disaggregated by revenue source is as follows (in thousands):

Years ended December 31,

Revenue:

(1) Product revenues include sales to related parties as described in Note 18, “Related Party Transactions.”

Disaggregation of Cost of Sales

The Company differentiates cost of sales based on whether the cost is attributable to tangible goods sold, cost of services sold or other costs which cannot be directly attributable to either tangible goods or services.

Total cost of sales disaggregated is as follows (in thousands):

Years ended December 31,

Cost of sales:

Other cost of sales represent costs directly associated with the generation of revenue but which cannot be attributed directly to tangible goods sold or services. Examples of other costs of sales are certain personnel costs and equipment rental and insurance costs. Cost of sales for the year ended December 31, 2021 included a one time credit of $7.6 million (shown in Other and below in cost of sales for external customers), related to the release of accrued costs subsequent to the ADM settlement (see Note 13, “Commitments and Contingencies”).

Cost of sales split between external and related party sales is as follows (in thousands):

Years ended December 31,

Cost of sales:

Cost of sales for external customers $ 56,844 $ 36,646

Cost of sales for related parties 85,948 3,366

Note 4 - Contract Assets

Contract assets are as follows (in thousands):

December 31,

Contract assets $ 83,060 $ —

Less accumulated amortization (3,371) —

Contract assets, net 79,689 —

Less current contract assets (7,113) —

Contract assets, long term $ 72,576 $ —

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In connection with entering into the ProFrac Agreement on February 2, 2022 and May 17, 2022 as discussed in Note 10, “Debt and Convertible Notes Payable” and Note 18, “Related Party Transactions”, the Company recognized contract assets of $10.0 million and $69.5 million, respectively, and associated fees of $3.6 million. As of December 31, 2022, $72.6 million of the contract assets are classified as long term based upon our estimate of the forecasted revenues from the ProFrac Agreement which will not be realized within the next twelve months of the ProFrac Agreement.

During the year ended December 31, 2022 the Company recognized $3.4 million of contract assets amortization which is recorded as a reduction of the transaction price included in the related party revenue in the consolidated statement of operations. The below table reflects our estimated amortization per year (in thousands) based on the Company’s current forecasted revenues from the ProFrac Agreement.

Years ending December 31, Amortization

Total contract assets $ 79,689

Note 5 — Inventories

Inventories are as follows (in thousands):

December 31,

Less reserve for excess and obsolete inventory (8,210) (10,141)

Changes in the reserve for excess and obsolete inventory are as follows (in thousands):

Years ended December 31,

Deductions for sales and disposals (3,665) (1,540)

The provisions recorded in the year ended December 31, 2022 were $1.6 million for the CT segment and $0.1 million for the DA segment. The CT segment provision includes $1.0 million for the exit of the hand sanitizers business line. The provisions recorded in the year ended December 31, 2021 were $0.6 million for the CT segment and nil for the DA segment.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Property and Equipment

Property and equipment are as follows (in thousands):

December 31,

Buildings and leasehold improvements 5,356 5,473

Transportation equipment 784 878

Computer equipment and software 1,425 1,176

Property and equipment, net $ 4,826 $ 5,296

Depreciation expense totaled $0.7 million and $1.0 million for the years ended December 31, 2022 and 2021, respectively.

During 2022, the Company sold its two facilities that were classified as held for sale as of December 31, 2021 for proceeds of $5.8 million resulting in a net gain of $2.9 million.

Note 7 — Leases

Rental income recognized from leasing manufacturing facilities was $375 thousand and $197 thousand for the years ended December 31, 2022 and December 31, 2021, respectively, and is included in other income in the consolidated statement of operations. As discussed in Note 6, “Property and Equipment” these facilities were sold in 2022 and the lease agreements between the tenants and the Company terminated.

The components of lease expense and supplemental cash flow information are as follows (in thousands):

Years ended December 31,

Operating lease expense $ 2,393 $ 797

Finance lease expense:

Amortization of assets 15 15

Interest on lease liabilities 12 12

Total finance lease expense 27 27

Short-term lease expense 341 267

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases $ 2,934 $ 1,107

Operating cash flows from finance leases 39 62

Financing cash flows from finance leases 6 8

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities of lease liabilities as of December 31, 2022 are as follows (in thousands):

Years ending December 31, Operating Leases Finance Leases

Less: Interest (3,055) (4)

Present value of lease liabilities $ 11,372 $ 55

Supplemental balance sheet information related to leases is as follows (in thousands):

Operating Leases

Operating lease right-of-use assets $ 5,900 $ 2,041

Current portion of operating lease liabilities $ 3,328 $ 602

Long-term operating lease liabilities 8,044 7,779

Total operating lease liabilities $ 11,372 $ 8,381

Finance Leases

Property and equipment $ 147 $ 147

Accumulated depreciation (55) (33)

Property and equipment, net $ 92 $ 114

Current portion of finance lease liabilities $ 36 $ 41

Long-term finance lease liabilities 19 53

Total finance lease liabilities $ 55 $ 94

Weighted Average Remaining Lease Term

Operating leases 5.3 years 9.1 years

Finance leases 1.6 years 2.9 years

Weighted Average Discount Rate

Operating leases 9.3 % 8.9 %

Finance leases 8.9 % 8.9 %

Note 8 - Goodwill

Based upon the results of our annual quantitative impairment test for the year ended December 31, 2021, the Company concluded that the carrying value of the DA reporting unit exceeded its estimated fair value as of the testing date, which resulted in goodwill impairment charges of $8.1 million and reduced the goodwill balance to $0 as of December 31, 2021. The goodwill impairment was calculated as the amount that the carrying value of the DA reporting unit, including any goodwill, exceeded its fair value.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Accrued Liabilities

Current accrued liabilities are as follows (in thousands):

December 31,

Severance costs (see Note 13, “Commitments and Contingencies”) $ 2,617 $ 2,581

Loss on purchase commitments (Note 13, “Commitments and Contingencies”) — 1,750

Contingent liability for earn-out provision 583 608

Deferred revenue, current 655 528

Taxes other than income taxes 1,884 241

Total current accrued liabilities $ 8,984 $ 8,996

Note 10 — Debt and Convertible Notes Payable

Long Term Debt

Paycheck Protection Program Loans

In April 2020, the Company received a $4.8 million loan (the “Flotek PPP loan”) under the Paycheck Protection Program (“PPP”), which was created through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). In October 2021, the Flotek PPP loan maturity date was extended from April 15, 2022 to April 15, 2025. On January 5, 2023 the Company received notice from the SBA that $4.4 million of the $4.8 million principal amount and accrued interest to this date of $0.1 million, was forgiven. The remaining principal amount of $0.4 million and accrued interest, will be repaid over the remaining term of the loan through April 15, 2025 beginning on March 15, 2023. The forgiveness of the Flotek PPP loan will be accounted for as an extinguishment of the debt and will result in the Company recording a $4.5 million gain in the first quarter of 2023 comprising the principal amount forgiven of $4.4 million and accrued interest of $0.1 million.

In connection with the acquisition of JP3 in May 2020, the Company assumed a PPP loan of $0.9 million obtained by JP3 (the “JP3 PPP loan”) in April 2020 prior to its acquisition by Flotek. In June 2021, the Company received notice from the SBA that the JP3 PPP loan and accrued interest were fully forgiven. Accordingly, during the year ended December 31, 2021, the Company recorded $0.9 million for the amount of principal and accrued interest forgiven associated with the JP3 PPP loan in other income on the consolidated statements of operations.

Long-term debt, including current portion, is as follows (in thousands):

December 31,

Total long-term debt, net of current portion $ 2,736 $ 3,352

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Convertible Notes Payable

On February 2, 2022, Flotek entered into a Private Investment in Public Equity transaction (the “PIPE transaction”) with a consortium of investors to secure growth capital for the Company. Pursuant to the PIPE Transaction, Flotek issued $21.2 million in aggregate initial principal amount of Convertible Notes Payable for net cash proceeds of approximately $20.1 million. The investors are ProFrac Holdings, LLC, Burlington Ventures Ltd., entities associated with North Sound Management, certain funds associated with one of Flotek's directors including the D3 Family Fund and the D3 Bulldog Fund, and Firestorm Capital LLC. The Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum, have a maturity of one year, and are converted into common stock of Flotek or pre-funded warrants to purchase common stock of Flotek, (a) at the holder's option at any time prior to maturity, at a price of $1.088125 per share, (b) at Flotek's option, if the volume-weighted average trading price of Flotek's common stock equals or exceeds $2.50 for 20 trading days during a 30 consecutive trading day period, or (c) at maturity, at a price of $0.8705. The issuance cost of $1.1 million is amortized on a straight line basis over the term of the Convertible Notes Payable and the amortization is included in interest expense in the consolidated statements of operations.

On March 21, 2022, $3.0 million of the Convertible Notes Payable, plus accrued paid-in-kind interest thereon, were converted at the holder’s option into approximately 2.8 million shares of common stock resulting in a 3.0 million credit to additional paid-in-capital in stockholders’ equity.

As of December 31, 2022, the remaining Convertible Notes Payable are recorded at carrying value of $19.8 million, including accrued paid-in-kind interest of $1.8 million, and net of unamortized issuance costs of $0.1 million. The estimated fair value of the Convertible Notes Payable at December 31, 2022 was $25.8 million.

Interest expense for the year ended December 31, 2022 includes $1.8 million of accrued paid-in-kind interest and $1.0 million of issuance cost amortization related to these Convertible Notes Payable. Interest expense relating to the Convertible Notes Payable held by ProFrac Holdings, LLC (related party) is $1.0 million for the year ended December 31, 2022.

Initial ProFrac Agreement Contract Consideration Convertible Notes Payable

On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Initial ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE Transaction described above, including the paid-in-kind interest at a rate of 10% per annum and conversion features.

The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments and were initially recorded at fair value of $10.0 million on the issuance date with a corresponding contract asset. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to fair value of $14.2 million as of December 31, 2022 which includes paid-in-kind interest of $1.0 million. The fair value adjustment increased the carrying amount of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable by $3.3 million during the year ended December 31, 2022 and is recognized in gain on fair value of contract consideration convertible notes payable, net on our consolidated statements of operations. See Note 11, “Fair Value Measurements”.

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable

On May 17, 2022, the Company entered into an amendment to the Initial ProFrac Agreement (the “Amended ProFrac Agreement” and collectively the “ProFrac Agreement”) upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Amended ProFrac Agreement Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable accrue paid-in-kind interest at a rate of 10% per annum and may be converted at any time prior to the maturity date, which is one year from the date of issuance under the same conversion terms as the Convertible Notes Payable issued in the PIPE Transaction described above.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable are accounted for as liability classified convertible instruments and were initially recorded at fair value of $69.5 million on the issuance date with a corresponding contract asset. The Amended ProFrac Agreement Contract Consideration Convertible Notes Payable were remeasured to fair value of $69.4 million as of December 31, 2022 which includes paid-in-kind interest of $3.2 million The fair value adjustment resulted in a $3.3 million decrease during the year ended December 31, 2022 and is recognized in gain on fair value of contract consideration convertible notes payable, net on our consolidated statement of operations. See Note 11, “Fair Value Measurements”.

Note 11 — Fair Value Measurements

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes financial assets and liabilities into the three levels of the fair value hierarchy. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value and bases categorization within the hierarchy on the lowest level of input that is available and significant to the fair value measurement.

•Level 1 — Quoted prices in active markets for identical assets or liabilities;

•Level 2 — Observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•Level 3 — Significant unobservable inputs that are supported by little or no market activity or that are based on the reporting entity’s assumptions about the inputs.

Fair Value of Other Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accrued liabilities and accounts payable approximate fair value due to the short-term nature of these accounts.

Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s liabilities that are measured at fair value on a recurring basis and the level within the fair value hierarchy (in thousands):

December 31, December 31,

Contingent earnout consideration $ — $ — $ 583 $ 583 $ — $ — $ 608 $ 608

Contingent Earnout Consideration Key Inputs

The estimated fair value of the remaining stock performance earn-out provision, with respect to the JP3 transaction, is included in accrued liabilities as of December 31, 2022 and 2021. The estimated fair value of the earn-out provision at the end of each period was valued using a Monte Carlo model analyzing 20,000 simulations performed using Geometric Brownian Motion with inputs such as risk-neutral expected growth and volatility.

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,

Risk-free interest rate 4.34% 1.02%

Term until liquidation (years) 2.38 3.38

Initial ProFrac Agreement Contract Consideration Notes Payable Key Inputs

The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were measured at fair value at issuance and on a recurring basis. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable had an initial fair value of $10.0 million on February 2, 2022. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were classified as Level 2 at the initial measurement upon issuance due to the use of a quoted price for a similar liability at that date (the PIPE transaction), and subsequently classified as Level 3 due to the use of unobservable inputs. The estimated value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable as of December 31, 2022 was valued using a Monte Carlo simulation.

The key inputs into the Monte Carlo simulation used to estimate the fair value of the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable maturing February 2, 2023, as of December 31, 2022 were as follows:

Risk-free interest rate 4.12%

Expected volatility 100.0%

Term until liquidation (years) 0.09

Stock price $1.12

Discount rate 4.12%

Amended ProFrac Agreement Contract Consideration Convertible Notes Payable Key Inputs

On May 17, 2022, the Company measured the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable classified as Level 3 using a Monte Carlo simulation at an estimated fair value of $69.5 million. The Company reduced the discount rate assumed due to the reduced likelihood of occurrence of any of the default events in the shorter term remaining on the notes. The estimated value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable as at December 31, 2022 was valued using a Monte Carlo simulation.

The key inputs into the Monte Carlo simulation used to estimate the fair value of the Amended ProFrac Agreement Contract Consideration Convertible Notes Payable, on the issuance date of May 17, 2022, and as of December 31, 2022 were as follows:

Risk-free interest rate 2.16% 4.59%

Term until liquidation (years) 1.00 0.38

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets, including property and equipment and operating lease ROU assets, are measured at fair value on a non-recurring basis and are subject to adjustment to their fair value in certain circumstances. Impairment of goodwill of $8.1 million was recorded during the year ended December 31, 2021. See Note 8, “Goodwill”.

Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the changes in balances of liabilities for the years ended December 31, 2022 and 2021 classified as Level 3 balances (in thousands):

Years ended December 31,

Balance - beginning of period $ 608 $ 1,416

Change in fair value of contingent earnout consideration (25) (808)

Note 12 — Income Taxes

Components of the income tax benefit are as follows (in thousands):

Years ended December 31,

Current:

Federal $ 101 $ —

Foreign — —

Total current expense 103 16

Deferred:

Federal — —

Foreign — —

Total deferred benefit (125) (56)

Income tax benefit $ (22) $ (40)

The components of loss before income taxes are as follows (in thousands):

Years ended December 31,

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The income tax benefit differed from the amounts computed by applying the U.S. federal income tax rate of 21% respectively, to loss before income tax for the reasons set forth below:

Years ended December 31,

U.S. federal statutory tax rate 21.0 % 21.0 %

State income taxes, net of federal benefit 0.2 0.1

Non-U.S. income taxed at different rates (0.1) 0.5

Increase in tax benefit related to stock-based awards (0.4) 0.1

Increase in valuation allowance (21.8) (24.9)

Permanent differences related to CARES Act — 2.6

Effective income tax rate 0.1 % 0.1 %

Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the value reported for income tax purposes, at the enacted tax rates expected to be in effect when the differences reverse. The movement in the temporary differences for the year ended December 31, 2022 does not affect the estimated annual effective tax rate as it is offset by a corresponding change in the valuation allowance. The component of deferred tax assets and liabilities are as follows (in thousands):

December 31,

Deferred tax assets:

Allowance for doubtful accounts 1,180 1,184

Total deferred tax assets, net 2,174 1,003

Deferred tax liabilities:

Prepaid insurance and other (393) (271)

Total gross deferred tax liabilities (1,770) (724)

Net deferred tax assets $ 404 $ 279

As of December 31, 2022, the Company had U.S. net operating loss carryforwards of $176 million, including $46.4 million expiring in various amounts from 2029 through 2037 which can offset 100% of taxable income and $129.6 million that has an indefinite carryforward period which can offset 80% of taxable income per year. The ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo a change in control as defined for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. The Company performed a study in which it determined that no ownership change has occurred as of December 31, 2022. However, the Company anticipates that a change in control will occur in the near term when certain convertible notes are converted during the year ended 2023. Although the

FLOTEK INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

change in control will significantly limit the ability of the Company to utilize the pre-change net operating losses and credits, the Company does not expect a significant impact to their financial statements given the valuation allowance that is recorded to estimate the realizability of the deferred tax assets.

The Company’s cumulative recent losses (before permanent items) of $215.5 million in the recent thirty-six months are negative evidence that it will not likely generate sufficient future income to utilize its deferred tax assets. Therefore, the Company believes that it is not more likely than not that it will realize its deferred tax assets in all taxing jurisdictions with the exception of a portion of Louisiana and Texas. Therefore, the Company recorded a valuation allowance for the years ended December 31, 2022 and December 31, 2021 to reflect the estimated amount of deferred tax asset realizability.

The Company intends to reinvest the unremitted earnings of its non-U.S. subsidiaries. As of December 31, 2022 and 2021, the Company had approximately $7.4 million and $8.5 million, respectively, in unremitted earnings from its foreign jurisdictions. As a result of the 2017 Tax Act these earnings have been previously taxed in the U.S. although they have not been repatriated. However, certain withholding taxes may need to be paid upon repatriation depending on the US treaty with the applicable country. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.

The Company has performed an analysis of its tax positions for the year ended December 31, 2022, concluding all tax positions taken were highly certain.

Note 13 — Commitments and Contingencies

Litigation

The Company is subject to routine litigation and other claims that arise in the normal course of business. Except as disclosed below, management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on the Company’s financial position, results of operations or liquidity.

Former CEO (J Chisholm) Matter

During the year ended December 31, 2021, Flotek commenced an internal investigation into the activities of John Chisholm (a previous CEO of Flotek) due to irregularities in expenses and transactions during the years from 2014 to 2018. The investigation revealed evidence of related party transactions/self-dealing, inappropriate personal expenses, and general corporate waste. Flotek’s Board engaged a third party to review the findings of the investigation. After the third-party review, Flotek concluded that its current and historical financial statements can be relied upon, that proper action had been taken, and that no members of current management were implicated in any way.

Beginning in December 2021, Flotek sent demand letters to, and subsequently filed arbitration and other legal proceedings against, John Chisholm, Casey Doherty/Doherty & Doherty LLP (Flotek’s former outside general counsel) and Moss Adams LLP (Flotek’s former independent public audit firm) to recover damages. John Chisholm subsequently filed a counterclaim against Flotek in the arbitration proceeding for his remaining severance (currently accrued by the Company, but payment for which was suspended). Although Flotek believes its claims are supported by the available evidence, the timing and amount of any outcome cannot reasonably be predicted.

Terpene Supply Agreement

On October 29, 2021, the Company reached agreement (“the ADM Settlement) with Archer-Daniels-Midland Company (“ADM”), Florida Chemical Company (“FCC”) and other parties to pay $1.75 million and resolve all claims between the parties in relation to lawsuit claiming damages relating to the terpene supply agreement between Flotek Chemistry, LCC (“Flotek Chemistry”), a wholly owned subsidiary of the Company and FCC. The one-time payment of $1.75 million from Flotek to ADM was paid on January 3, 2022 and was included as restricted cash on the consolidated balance sheet as of December 31, 2021. A credit of $7.6 million was recorded in cost of sales in the consolidated statements operations for the year ended December 31, 2021 relating to the release of excess costs accrued for this matter.

FTK US Equity

FTK · 10-K · period ended 2022-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

FTK US Equity☆

FTK · 10-K · period ended 2022-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

FTK US Equity