Flotek Industries Inc/Cn/ Q1 FY2021 Earnings Call

Greetings and welcome to Flotek Industries' First Quarter 2021 Earnings Conference Call. As a reminder, this call is being recorded. It is now my pleasure to introduce Danielle Allen, Senior Vice President, Chief of Staff for Flotek. Thank you. You may begin.

Thank you and good morning, everyone. Joining me today are John Gibson, Chairman, CEO and President, Michael Borton, Chief Financial Officer; TengBeng Koid, President of Global Business; and Ryan Ezell, President of Chemistry Technologies. On today's call, we will first provide prepared remarks around our business and results for the quarter. Following that, we will answer any questions you may have. Yesterday, we released our earnings announcement for the first quarter 2021, which is available on our website. Today's call is being webcast and a replay will also be available on our website. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Also, please refer to our reconciliations provided on our earnings press release, as management may discuss non-GAAP metrics on our call. Now, I will turn it over to John.

Well, thank you, Danielle, and good morning everyone. We are pleased with the progress that we are seeing in our business despite the challenges of the past year. Our first quarter sales and earnings were slightly below our expectations due to a slow start to the year, followed by major disruption in February from Winter Storm Uri impacting the entire supply chain. Then in March, happily, we began to see demand significantly increase across both segments. Our employees remain optimistic about Flotek's future, and our organization has become more elevated and results-oriented as we focus on achieving profitable growth. As the energy industry increases its focus on environmental, social, and governance performance or ESG, amid evolving regulatory frameworks to reduce greenhouse gas emissions by half by 2030, we are using our passion and knowledge for chemistry and data solutions to reduce the environmental impact of hydrocarbon production on our air, water, land, and people. Over the last quarter, I've personally been meeting with the CEOs and C-suite leaders at E&P's to understand their ESG strategy and discuss how our chemistry and data solutions can help them achieve their ESG goals. What I've learned through those conversations is that the energy industry has big EFC ambitions, and the most ambitious organizations have ESG plugged in at the C-Suite and into their operations and supply chain decision-making. Furthermore, at this stage, green chemistry is not yet widely seen as a strategic lever in the ESG toolkit, as operators evolve their approach to lower the total cost of ownership across the full lifecycle of their programs, chemistry is going to become more important than ever. This is precisely where we partner collaboratively to provide value and reduce liability. Flotek has long been known for differentiated green chemistry which the EPA defines as reducing the use of hazardous substances, utilizing less toxic biodegradable chemistries, minimizing spills and pollution, deploying real-time measurements, and driving operational efficiencies. When you consider the large volumes of chemicals that must be transported, handled, and pumped at the well site, the green impact, both financial and environmental, is meaningful. From a digital transportation perspective, our real-time monitoring and data solutions measure the composition of crude with brand products every 15 seconds while flowing without having to take a physical sample, which eliminates the risk of future diffusion. It also enables the automation of large-scale processes, helps in the minimization of waste, and improves the reprocessing or eliminates the inefficiencies in reprocessing. Today, our customers are using this technology to reduce their carbon footprint, reduce energy consumption, and reduce emissions and in the future our customers will be able to use our varied system to measure greenhouse gases in real-time in the pipe. We offer greener solutions across our enterprise and that is why we are partnering with leading in-base to recommend opportunities to reduce the total financial and environmental cost of ownership through our green chemistry and real-time monitoring. I'm encouraged by our conversations, and we have a lot of room to collaborate to improve our industry's sustainability. Transitioning through our first quarter performance, I would like to address our pending litigation related to our terpene supply agreement with Florida Chemical Company. As we announced on March 29 in an 8-K, we terminated our terpene supply agreement with Florida Chemical following their refusal to allow Flotek to exercise our contractual rights to audit their books and records—a pretty standard term in a contract in our industry and the supply chain. We have filed the lawsuit seeking recovery of amounts already paid, in particular last year's payment of $50 million to ADM, and we filed a lawsuit against ADM and subsequently they have filed a counteraction in Delaware. While we cannot discuss ongoing litigation or speculate on the outcome, we feel very confident in our position. Despite the termination of the supply agreement, we have sufficient terpene inventory and ultimate terpene supply sources to meet our requirements for the foreseeable future. Furthermore, we do not expect the termination of the supply agreement or related litigation will have any material impact on our operations or our ability to meet customer needs. Moving forward, our supply chain management strategy will align our terpene purchases with our demand. Hence, we will no longer have to sell excess terpene at a loss. While our top line may be marginally impacted in the short term as a result of our strategy, we will see a very positive impact on our cash usage and margins. Next, I'd like to discuss several highlights of our first quarter. Our adjusted EBITDA improved sequentially driven primarily by strength in our data analytics. As we look forward, we are excited about the growth opportunities in our Data Analytics segment, and I am pleased that our first quarter was the best performing period for JP3 since our acquisition in May of last year. Top line is improving and our losses are narrowing. We continue to make progress around our international market entry and TengBeng will address further in his upcoming comments how we're doing there and his excitement for the business. Moving onto our chemistry technologies. Stripping out the terpene purchases that were reflected in prior quarters, our Chemistry Technology segment improved quarter-to-quarter with strong improvement domestically during the first quarter from energy chemistry. Additionally, I'm pleased to announce we've added two talented leaders to our Chemistry Technology segment, Nathan Snoke, who joins us as Vice President of Energy Chemistry, and Matthew Sullivan, who joins us as Vice President of Professional Chemistry. Ryan will share more about their experience and background; however, I know both will be instrumental in taking our Chemistry Technology business to the next level. I'm also encouraged by the number of people who are now seeking employment with Flotek. It's great to see people calling in and wanting to be a part of the team. But let's transition over to cost measures and liquidity. One of our most important priorities is to protect our balance sheet, and we are actively evaluating numerous actions such as the sale of non-core real estate properties, sale-leaseback transactions, and consideration of an asset-based loan, among other options to improve our financial flexibility and provide the working capital we think we will need as the market continues to improve and we grow. I want to assure all of our shareholders that we are focused on improving financial flexibility and we intend to do so without diluting value for shareholders. Finally, it's also worth highlighting that as a result of Winter Storm Uri, as reported in last quarter's call, we were impacted by the widespread historic declarations of force majeure across the entire petrochemical supply chain. As a result, we have seen a rise in price environment along with limited supplies of certain raw materials. Our plan continues to leverage our supply chain relationships, managing cost within this inflationary environment. For additional details on the quarter, I'm going to turn it over to TengBeng for further discussions on our Data Analytics segment and then to Ryan, who will give an update on our Chemistry Technology segment, and lastly Mike, who will provide a more in-depth discussion of our financial results. TengBeng, I know you're excited, so I'm going to turn it over to you.

Thank you, John, I am. While in Q1, we remained very focused on executing our strategy, making significant progress on all fronts. We are pleased to see continuous financial performance improvements in our Data Analytics segment. Revenues experienced double-digit growth sequentially for the past two quarters. Operating margin improved significantly too. In this past quarter, we added several new customers and we have repeat buying from existing customers, including a super major oil company. In fact, one of the major midstream companies that became a customer in Q4, came back and purchased multiple systems last quarter. Repeated cases are a testament to the value we bring to our customers through the application of our game-changing technology. We also made progress on the international front. Our direct analysis for the international market is going through a very extensive certification process. While this process takes time as it involves multiple certifications, we are making good progress and the project is progressing according to plan. Meanwhile, we also made progress in our international business development efforts. During the first quarter, we completed a site survey for our first international pilot with a leading oil and gas company in the Middle East. We are also in the midst of organizing another site survey for a second pilot also in the Middle East. We are encouraged by this key milestone despite the challenges from not being able to travel to meet these customers during the pandemic. On the technology development front, we continue to invest significant resources and efforts. We released our first application using machine-learning algorithms in the area of batch interface detections for pipelines. This new application called advanced interface detection algorithms or AIDA was successfully installed in two locations. AIDA will enable customers to make batch cost decisions faster and hence reduce the batch interfaces and increase profitability. This new application does not need any sample, i.e., samplers. We are also looking at several mid to long-term technology development projects. On the ESG front, as John mentioned, our technology offerings have helped companies reduce their carbon footprint, reduce energy consumption, and reduce emissions. For example, many of our systems are used in condensate and crude stabilizers. Our technology used in this stabilization unit provides real-time data that helps customers produce more liquid and less gas, while meeting the specifications required for storage and transportation. JP3 is making an impact on improving the environment, helping customers improve their ESG performance. In summary, we have made significant progress in the execution of our strategy in all fronts. Our game-changing technology, providing real-time data and analytics, helps customers transform their businesses. Our customers are benefiting from the exceptional value we bring to the table. Our future is very bright. With that, I'm going to pass the call to Ryan, who will discuss our Chemistry Technology segment.

Thank you, Koid. Today, I will discuss our Chemistry Technology segment performance. First, I'll provide highlights on our energy chemistry technologies and then share commentary on our professional chemistries, which includes our recently launched Flotek Protekol brand of EPA and FDA registered cleaning, disinfecting, and sanitizing product lines. In the fourth quarter of 2020, we reintroduced Flotek to the markets to enhance the visibility of our goal to become the chemistry partner of choice to deliver ESG-focused operational cost efficiencies and improve well production to our customer base. The integration of our ESG initiatives is part of our value proposition to deliver cost-effective, environmentally-friendly, safer chemistry solutions that will help operators increase production at a lower cost per barrel. In addition, we refined our sales strategy that complements a range of domestic and international customers that include both E&P operators as well as oilfield service companies. To date, the market has been receptive to our value proposition and we are pleased with the rate of increased conversions from interest to the execution of sales. Now, domestically, we saw a 56% sequential improvement at revenue quarter versus quarter, as we diversified our customer concentration between E&P operators in oilfield service companies. And despite the impact of the winter storm, we were able to mobilize and execute key field trial applications of our green reservoir-centric technologies to major independent operators. We are optimistic that our strategy to target customers with sustainable activity and operational programs, particularly those in unconventional shale markets, will continue to be effective as we gain positive reception to our value proposition of cost-effective chemistry solutions that can improve production at an overall ESG impact. And on the international front, diversification and expansion continue to be a key area of focus for our Energy Chemistry business. We are well-positioned to leverage significant growth opportunities despite slight headwinds in the market conditions in the Middle East and Asia Pacific regions. And we gained traction in March with the quarter-to-date outpacing Q1, with the deployment of custom chemistry solutions to major NRC's and service companies in Middle East, Africa, and Europe. Last year we took advantage of the activity reduction to internally focus on the transformation of our Chemistry Technology segment. We reduced the operational costs and accelerated efficiencies in our business processes and established defined metrics to measure continuous improvement. Moving forward in 2021, our focus has shifted to the execution of our transformed business. As the completion of the first quarter, we observe solid gains on the operational front as a result of our leaner business. We're able to reduce inventory while improving revenue; we reduced cost across operations with additional reductions in freight charges and equipment rentals as a percentage of revenue, and we continue to right-size our footprint for in-basin delivery by improvements in strategic sourcing, thus allowing the closure of an underutilized facility that was not core to our service delivery or value proposition. The execution of these initiatives has enabled us to further streamline our operations with the goal of driving us to positive EBITDA and cash flow. And finally, I'm pleased to welcome Nathan Snoke to our team as Vice President of Energy Chemistry. Nathan is an experienced global leader in differentiated oilfield services with roles spanning over the last two decades ranging from field operations to senior-level management across multiple continents. Nathan joins us from Halliburton, where he's most recently the Senior Region Manager of Europe, Eurasia, and Sub-Sahara Africa based out of London. We're excited to have him join our team and look forward to him contributing to our growth strategy execution. Now moving to our professional chemistries business. During the first quarter, we saw overall volume improvement sequentially with revenue slightly down, a result of pricing pressure within a highly competitive market. Despite a slow start in January due to the reemergence from the holiday season, we are pleased with the continued momentum in sales during the quarter, with notable strength in March that has continued to date with Q2 revenues outperforming Q1. Yesterday, we announced the hiring of Matt Sullivan as Vice President of Professional Chemistries, a 30-year veteran of the janitorial and sanitizing industry. Matt is an experienced leader, joining us from Georgia-Pacific where he held a variety of leadership roles, most recently serving as Director of Sales for the Northeast Market for GP Pro. Matt has also had sales and marketing roles at Kimberly Clark, Scott Worldwide, and Clorox Professional, as well as helping to build up Technical Concepts, the world leader in restroom automation systems. We're excited for Matt to leverage the experience and relationships to drive growth in this segment, as we continue to build our business for the long term. Over the past year, we've been able to ramp up production, our branding and marketing and built a dedicated sales function with market expertise to leverage our specialty chemistry capabilities and diversify our corporate revenue stream. We are pleased with the progress we made in an accelerated timeline, and we are in a good position to maintain the strong momentum and growth. And I'll turn it over to Mike Borton to discuss our financial results.

Thank you, Ryan. As John mentioned previously, our first quarter was slightly below our expectations, with a challenging start to the quarter as we faced all the COVID demand and maintenance disruptions caused by Winter Storm Uri. However, we are pleased that March represented solid momentum and has continued into this quarter. During the first quarter, consolidated revenue was $11.8 million, down 2.8% from $12.1 million in the fourth quarter and below the $19.4 million of revenue during the same period last year. By segment, we saw a 5% decline in revenue sequentially within the Chemistry Technology segment, to $10.3 million. The decline was driven by two factors. First, as a result of the termination of our supply agreement with ADM, the transition away from selling raw inventory terpene in the quarter. Excluding the terpene sales, the segment demonstrated improvement, up 7.1% sequentially overall. Drilling further into energy chemistries, we saw enormous strength in our domestic energy business, sequentially growing 56% despite the winter storms in February, with a strong finish to the quarter. This growth was also met with international sales, which were impacted by overall declines in market activity, whether from supply constraints within the quarter. The strategic quarters finally drove chemistries as they started the year to build momentum in the second quarter. The Data Analytics segment saw a 16.7% increase in sales sequentially, driven primarily by the increase in new product sales in North America. This is the second consecutive quarter increase in sales and the highest performing quarter since the project's acquisition of JP3. Consolidated operating expenses were $13.8 million in the first quarter of 2021, a 43.4% decline sequentially and a decrease of 89.6% from last year's level of $22.8 million in the first quarter. The declines in Q1 2020 were driven by a reduction in costs associated with lower revenue as well as lower operating expenses driven by numerous actions taken that reduced the company's expenses. Corporate G&A declined 2.9% to $4.4 million versus $4.5 million in the first quarter last year due to personnel costs and severance that occurred in the first quarter last year and a reduction in occupancy costs as the company moved out of its corporate headquarters and consolidated into its Global Research and Innovation Center. Corporate G&A increased from the fourth quarter of 2020 by nearly $7,000 associated with higher one-off legal fees and all of these associated with 10-K by higher seasonal tax rates, also offset by lower compensation expenses. Research and development costs were $1.5 million in the first quarter, generally in line with the fourth quarter and down $1 million from last year. We reported a loss from operations of $8.3 million or $0.12 per diluted share in the fourth quarter of 2021. It's significant improvement over the loss of $64 million or $1.07 loss per share in the last year. Our adjusted EBITDA for the first quarter was a loss of $6.6 million and despite including one-time legal and higher audit fees improved over the last quarter's loss of $6.8 million and was slightly above last year's loss of $6.3 million on $7.7 million lower revenue. As we manage our business, our focus remains relentless on maximizing cost efficiencies, growing our top line as the market continues to recover and generating cash, which we need to drive growth. Moving to the balance sheet performance. We remain focused on preserving our liquidity. At the end of the first quarter, the cash inflows were $33.9 million versus $39.3 million in the fourth quarter. Driven by our disciplined approach, our cash position sharp decline in the first quarter as compared to the prior three periods. Our cash position was impacted by operating losses and prior severance agreements, which was partially offset by improved working capital. We have a combined $5.7 million of loans outstanding pursuant to the Paycheck Protection Program related to the CARES Act. Subsequently, we're following the figures on the loans for the next several weeks as well as following for the employee retention credit. Further, we are monetizing non-core assets, including our Monahans facility, which is currently for sale. We also have very positive discussions with various funding sources around our asset baseline. Our balance sheet during Q1 included crude liability of $9.4 million made in the fourth quarter associated with the company's expected usage of terpene and the supply agreement of ADM. Even though litigation against ADM was filed just days before the end of Q1, there are no adjustments made to the balance sheet liabilities during the quarter. However, moving forward, we will continue to review and evaluate the $9.4 million balance based on accounting guidance. That said, I would like to reiterate, that we do not intend to buy terpene for at least a year. Before closing, I want to welcome our new team member, who will manage our improved internal control process and solve remediation of material weaknesses. We are excited to have such an experienced leader join our team, and we look forward to driving this program forward. At this point, I will pass back the call to John for his final remarks.

Well, thank you, Mike. As you've heard, we have established momentum and are optimistic about the opportunities we see in the second half of the year and into 2022 for all of our business lines. So let me just summarize with a few highlights; our green chemistry and data analytic suite of solutions is meaningful to the industry. Our long history and sustainable chemistries have been built upon the environmental benefits of our products, and today, we have added significant horsepower to those green benefits by helping to drive operational efficiencies that reduce pollution, waste, emissions, and the total cost of ownership. Our engagement with our customers is accelerating market opportunities for us, and we are excited to partner to improve ESG performance across the industry as we all seek the transition to a world with cleaner energy, cleaner water, and cleaner air. Our research and innovation team led by Dr. Silas has been central to our environmental track record, and they will continue to drive our company forward with our great strategy. Our mission is to clearly communicate the impact of the chemistry lifecycle on our customers' goals, particularly their ESG goals, and we plan to unveil a new website in the coming months that more closely represents how the company is becoming green today. We are pleased to deliver steady progress in our data analytic segment and continued sequential growth and narrowing losses, coupled with the international opportunities on the horizon. We are really optimistic about the growth of JP3. Our Chemistry Technology segment remains heavily driven by energy chemistries, and we are thrilled by the 56% sequential increase in revenue domestically, as well as the future opportunities we see in the Middle East. For professional chemistries, we've added high-potential talent with decades of experience with the addition of Matt Sullivan. We intend to become a long-term meaningful supplier for the JanSan market, which has a near double-digit CAGR anticipated for the year to come. Finally, we remain responsible stewards of our balance sheet. We are driving ongoing cost reduction, monetizing non-core assets, and evaluating prudent lines of credit, so that we will have the working capital we see necessary for both domestic and international growth. And with that, I appreciate you being on the call. We will open it up for questions. Danielle?

Our first question comes from Daniel Burke with Johnson Rice.

John, I guess it's encouraging to hear that activity levels have tilted higher as you exited Q1. I don't suppose you'd be willing to give any indication of what top-line could look like for Q2, maybe even if it were just based on say April run rate?

I think I can say this safely, I do anticipate Q2 being better than Q1. Now, how much is a matter of getting everything closed and going forward, but there is nothing that we're doing right now that doesn't look like it will improve sequentially.

So the full impact—and I get that—is additive to the bottom line, but the full impact of ceasing the reselling of terpene, that won't be a sequential headwind of scale?

Well, it is the dilemma of selling something that you lose money on every time you sell it. And so we have a take-or-pay contract where we were buying well in excess of what was required, and then the only way to get the cash back was to sell it at market. So we were selling it as quickly as we could to maintain our cash, so that we didn't just have inventory that became excess or obsolete. So the whole of the cancellation of that contract was a little surprising, but we won't comment too much on that right here, but it did give us an opportunity to cash-let contract which was in the best interest of the company. As a result of not being able to audit it, it made us question whether or not we should go back and try to recover amounts already paid, and that's the purpose of the lawsuit.

I guess maybe another question then just on the professional chemistry side; encouraging to see you guys are continuing to build out the team there. You can produce at this point a fair number of different products, a lot of different packaging. I guess it was certainly addressed in the preface comments here on the call, but I'd be curious just if you could highlight again, maybe some of the opportunities you see at this point in professional chemistry and some products or areas of focus that will be key over the next 6 months, 12 months.

It's a great question, and Matt Sullivan is actually sitting here in the room with us, and I'm not going to put him on the spot on his first day on the job, but we do have a great portfolio of products. We're in a marketplace that has a near-double-digit CAGR that's expected and not entirely dependent upon COVID; those kinds of CAGRs existed before COVID and are just continuing to go forward as people put a lot of emphasis on health, cleanliness, and disinfecting. And so our product lines—I appreciate the way you asked the question because we're not in the sanitizer business. We have a complete portfolio of products, including degreasers and disinfectants. I believe that what we'll do on our next call is have him come on and tell you how the market's developing and where we see opportunities, but it will be for the most likely portfolios of products. People tend to buy individual products; they are looking for that portfolio, and we now have a very robust offering that we can explain. And I think Ryan might have said it, but April, May—we have—do you want to comment, Ryan?

Yes, we've seen our run rates continue to improve. We kind of did that crossover function where in the pricing pressure we were seeing the volumes grow, and our revenue kind of went down. Now we're seeing both revenue and volume growth, and a unique aspect is because of the diversification of the portfolio. As John mentioned, we're not leveraged just in sanitizers; our cleaners, degreasers, and the like are based on a lot of core chemistry we do around our surfactant utilization with our green biodegradable chemicals made from terpene. They have strong footholds in the market that we're starting to see evolve and develop well. I think with Matt's experience in our channels to market and the portfolio diversification, it will only help us accelerate this growth even faster.

Still really optimistic about this, Daniel, for another interesting reason. When I look at COVID, what it really did was make everything difficult; people stockpiled things early on, so you didn't see it come back to the market for purchases. And so it created lumpiness and a lack of predictability. The great part about where we are now is we've got a great line of products, we've got the talent here to really go out and reach to the customers that buy those—a suite of products; and the market is normalizing, where people are using up the inventories that they purchased 2 months ago in March of last year. I think we'll see normalized growth in that market, and it will be very accretive to our overall chemistry business.

So let me ask maybe one last question, and I'll ask it about JP3. I think you credited, if I heard correctly, one of the reasons for the sequential improvement in revenue to sort of product sales in the U.S., and I guess I just wanted to revisit how the transition towards more of the service model is coming along.

Go ahead.

Thanks, Daniel. We are continuing to transition. Obviously, our focus in the future is to increase the ARR and all recurring revenue, so we're working towards that right now.

It's also an interesting business when you look at it, Daniel. We've had several inquiries likely from large consulting organizations and service organizations that are interested in putting together workflows to take advantage of our measurement and analytics. I'm beginning to understand that not unlike—and this is a bit of a stretch, so don't shoot me for hyperbole here—but if you took a look 20 years ago when SAP came out, the real revenue came in from the Deloitte's, Accenture's, and KPMG's; the implementers of SAP. I think that to really accelerate the growth here, Koid and I have several meetings coming up associated with getting those high-level workflows and the companies to take full advantage of this measurement system. I think that will also help us drive more annually recurring revenue if we're able to get those workflows deployed, and I'm pretty excited about the conversations that are going on there.

Our next question comes from John Bair with Ascend Wealth Advisors.

Got a couple of questions. What other markets or industries outside of the traditional oil and gas E&P markets could your green specialty chemical products be suitable for?

It's interesting. If we can get the traction, we may get back to profitability by remaining laser-focused. There are a lot of opportunities for our chemistry outside of oil and gas. I see—we've had agricultural opportunities in the past. I mean, getting the efficacy of herbicides, pesticides, insecticides that result from being able to get an even distribution of those chemicals on the leaves and stems; we have the scientific capability to do that. We've actually had a couple of conversations around creating coatings for different forms of glass that might be used in other industries, and we have the chemical ability to do that. But I think our real strength now is that green aspect, and the fact that we're using biodegradable chemicals that would also be biodegradable in the agricultural industry as well. There are a lot of opportunities, but I won't restrict us there. I will restrict us to staying focused until we're profitable rather than going after every square and spending money when you know that it's going to take a year or more to develop entries into those markets. And right now, I don't think that would be the most prudent thing for us to do.

And then, can you kind of share—you kind of touched on this in the comments—but your approach on talking to E&P companies as well as oilfield service companies. What kind of balance would you say you have in approaching the big guys versus the service providers and so forth? And what's kind of your focus there? Who are you really targeting and think has the most might embrace your efforts more and offerings more quickly?

Your question sounds like you're the Director here at Flotek. It's a really good one. First off, we have done a substantial amount of work in recovering and having great conversations with oil field service companies, who at one point were the biggest channel for Flotek, and the company decided to go to a direct channel and stopped working through indirect channels. We've got really good conversations going on with the service industry, and I think that will continue to pick up as we go forward. The next is talking to customers; another really good question. I've talked to CEOs that are managing companies that range from $0.5 billion to $100 billion in market cap or more, and here are the variations where we can have the biggest immediate impact or in the smaller companies that don't have the sufficient staff to really conduct a green scorecard on their chemistry. We're able to look at what their chemistries are today and tell them how to migrate from those to greener chemistry, so they can improve their sustainability. This is a conversation that almost any CEO will have with you right now. The larger levels have departments that will go and ask that question, so outsourcing that to someone like us is less likely, but there is that middle tier where there are really good conversations going on, and we're having a tremendous impact there, and we've got pretty good traction. I had one CEO—won't name him—his entire conversation when I talked to him about ESG was how focused they are on the reduction of waste. All he wanted to discuss was how much waste could you take out of the equation. Now as you move to greater chemicals, there's less waste start with because of the biodegradable nature of it. You're not as concerned with recovery. But in everything that you use in totality, one of the things Ryan is bringing is that holistic view of how do we reduce the total volume of chemical you use, reduce the toxicity of the chemicals that you use, increase the biodegradability of the chemicals that you use, reduce the greenhouse gases associated with the transport of them to location from location. It's why you see people moving to drive far for us; you're not having to transport huge volumes of water to the location; you can use on-site water. Everything has to be about the totality of the reduction of CO2 and methane at the well site, and our solutions around chemistry we think are going to make a big difference for our customers there, where it's measurable enough that it will be a part of their ESG programs as we go forward.

So let me ask this, and it sounds as if then the majors, the bigger organizations, may turn to Flotek for product as opposed to a total package of the service and the materials. Is that correct?

No, it's the right way to ask the question. With the super majors and the NOCs, they're going to have the ability to assess their chemistry ESG on their own, but they all want the end result as a result of the assessment on the products that we're selling. Other people we can help them with both the assessment and the products. You've got two different sales there; you've got one where you're meeting their ESG demand by helping them understand that they need to make chemistry a part of their ESG and sustainability program. Today when you call people, I'd say 80% plus haven't really put chemistry into their ESG plan; they understand fugitive emissions and valves. You can go look that up; they're putting a lot of money into the improvement of valves to eliminate methane emissions and fugitive emissions. They're doing a lot with water because water production, water injection, and induced seismicity—everything to do with water base; we need to minimize the water that we produce and inject, and where we inject it. As they are evolving, they are very ambitious about this. We want hydrocarbons to be a clean-enough energy that can be sustainable in the long term. Consequently, we have to be accountable for and develop better solutions for everyone I talk to. They will continue to evolve chemistry as the next step. It looks like now that we've tackled water and air; we also have to tackle water by addressing what might contaminate them first, what might harm our employees when we use it in the field—one that we've talked about before, xylene, is not the right chemical to be using in the field and we have chemistry that can replace that. We're excited about the elimination of xylene. We think that is a big spot for us to go and aggressively sell because we can eliminate the impact on employees, impact on the environment, potential contamination of aquifers—all of those can be eliminated by using a biodegradable product derived from terpene.

Are those biodegradable cost-effective relative to the tailings in the traditional chemical mix?

Two things have happened. One is, we've found that within lower concentrations with these products have great efficacy. First off, we brought down the cost of using them by using lower concentrations. But the second thing, which I'll let Ryan address is the market itself for the other products because of supply chain disruptions, etcetera, those product prices have gone up. Is that fair, Ryan?

Yes. I would say, when you look at direct correlation to a BTX, you're comparing an extremely toxic environmental product versus a biodegradable one. When you look at some of the other mucous solids that you're seeing, there is some of the monobutyl ether to some of the rewards; due to the damage of some of the plants from the storm are ongoing and supply chain disruption, believe it or not, our DB paint and the biodegradable solvents that we have, have actually moved to a more cost-effective solution at this point in time. When you compare the total cost of ownership versus BTX in terms of the additional handling, safety aspects, etcetera, it's still a better total cost of ownership for the entire service delivery model. That's the big point that we're talking about; the collaboration that we're driving around these discussions to evaluate that full value chain is going to make a difference because it's hard to look at some old X's per payout versus this is per payout. But that's not the true total cost of ownership due to the additional touches or the ways for mediation that goes on after usage or the cleaning of tanks in the totes and all the other components and disposals. Not only for me is the impact, but the total cost of ownership is significantly better on some of these biodegradable solvents and their applications, whether for remediation, reservoir-centric treatment, or even displacements on the drilling side.

It's actually always sort of measure to think about what's the easiest or the fastest path to revenue. When you're trying to sell improvements in production and improvements in recovery, that's a much more difficult detailed sale. You really have to go through the multi-variant analysis of how the mechanical aspects of the well impact it, how skin beverage impacts it, how perforation design impacts it, the number of stages, and clusters. You have to do quite a lot of work. We have customers where they've done that and we are having great impact on their effectiveness. But for the majority of customers, the 85%, when you can go and talk about reduction in liability, ESG performance, and you're cost competitive and making green, meet their sustainability goals, that is significantly easier to talk about than trying to do a tactical assessment of how you're going to improve production. For sophisticated customers, we're very successful at that. For the ones that are most impacted by efficiency and cost reductions, we now have a story, so that won't be an excluded market to us.

One last quick question—actually just a quick question, because the—my line either wasn't very clear or the discussion about the PPP loan, I caught that. I think you're going to apply for forgiveness on that. Could you reiterate what you said on that again, please?

Yes. So we have the outstanding PPP loan in the next two weeks. We're going to meet for the allowable forgiveness given our reporting, and I'll be there in the next two weeks.

So is it a 100%—is it a partial or a full forgiveness application then?

We are going to request the maximum allowable amount that we can submit for. We're also going to apply for the employee retention credit, which will be a significant number for us in Q1 and Q2 of 2021 who are eligible, so we are applying for employee retention credit and we're starting to see the benefit of that in Q2.

And do you have to include both the main Flotek PPP loan? In other words, can you combine the Flotek with the JP3 or do they have to be two separate applications?

We are doing two separate applications. We are submitting the one for JP3 separate from the Flotek one.

You have such great questions. I would encourage you to give us a shout for follow-up; we would be happy to talk to you while the window is open here. So probably I think we'll jump to our next question here.

I'll get out of here and offline.

Our next question comes from Eric Swergold from Firestorm Capital.

I got two questions for you this morning. You hear me okay?

You bet.

First question is for TBK; how full is your dance card now in terms of getting sales appointments? You mentioned you're making some progress in the Middle East. When do you think you'll actually be able to see customers face-to-face? And then, second question is for you, John; can you remind us on the compensation program about, I can't remember whether $7, $8 of share where if you hit that target for a certain period of time, you guys find to make some money for yourselves? Thanks.

Koid?

Eric for U.S. or Southern, you'll be able to see customers. In fact, some customers allow us to be at their office already—not many—so most of the time the meeting will be outside, lunches and coffee and so on. Otherwise, the meeting could be through Teams or Zoom calls. The international meetings are all through Teams and Zoom as well, so because travel is not allowed—not for us here, but even for our guys in the Middle East; they are not able to see customers face-to-face, so travel is really restricted to getting on some Zoom calls and Teams calls. So there—obviously nothing is being face-to-face, but still I think we've been working through that despite the challenges of not being able to see face-to-face. We've got a lot of conversations, repeat conversations with customers, which tells you that the interest is pretty high in the international front across Asia and also the Middle East. Recently as well, we've gotten inbound inquiries from even Africa, for example, West Africa. So those are coming on pretty well.

I'll put a little pressure on TengBeng now, all the improvement that you're seeing in JP3 is a result of domestic sales because we haven't finished the internationalization. We have a really significant pipeline internationally, which includes India. It would be right to assume that in India, things came to a halt as a result of the COVID crisis that exists there now. So they are in our thoughts and prayers in India. But we have tremendous opportunities there, as well as in the Middle East and Africa, etcetera, but we haven't had any international revenue. What Koid's done is really get it back on track domestically and we're really seeing the growth coming there.

We are working hard on the internationalization of that product and making great progress, and the pipeline and the business development and the pilots are assuring that we're not wasting any wall clock time on that. By the time we have the international product ready, we'll be able to deploy it to sales immediately. So one of the questions we need up on each time is, where are we on the internationalization of Verax and Koid can do that.

The activity level is extremely high internationally. I know Koid works nights and early mornings, so when you talk to the Middle East, that usually starts around either 8:00 or 9:00 PM at night and goes to late. Thus, our team is very connected. To the question you asked about our compensation, as the old saying goes from your lips to God's ears, $7 a share, I'd make some money, Eric, and I hope that can get there in a shorter period of time. It looks like COVID did slow things down. We also had to refocus the company to where now we've gotten back the relationships with the indirect channel. We have a strategy in place on how to sell to the whole market, not just on enhanced oil recovery—they now can improve their efficiency, sustainability, and ESG goals as well. I'm here for $7 and I'm focused on it. We do have hurdles that occur in the $3 range, in the $5 range, in the $7 range, and I plan on getting over those hurdles in the next 12 months. I would like to say jump at least one of them here before the end of the year and so we are focused on turning around and getting access to working capital that we see necessary to take advantage of the growth opportunities that we see in front of us.

The next question comes from Joe Von Meister with Intermarket.

So a good call, and I guess we're a little bit concerned about the cash burn which continues. I'm sure you are too. What is the revenue dollar that gets you to EBITDA breakeven? And I have two follow-ups after that.

Okay, I have a little bit of trouble. Can you repeat that for me, Daniel?

I said what revenue will it take to breakeven?

Well, what revenue will take breakeven is a great question and one we debate because, it depends a lot on mix and what we're having to pay for all products down in the supply chain as we've seen some inflation there in our ability to pass that pricing on impact that. So it clearly is going to be somewhere above $100 million that will be necessary, and we continue to work on our cost structure so that I can move that number down. As we get closer to that $100 million, you're going to start getting close to breakeven. We will be within striking distance.

Can we get there this year or is it too early to tell? I think it's a fair question, because you now have three products instead of one. One product used to do something like $45 million or $50 million a quarter in revenue and now it's—I don't even know what it's doing because you don't break it out. So it's not an unfair question given you've got more than one cylinder to look to, more than one business silo to look to.

Okay, so it's a great question because you’re asking me for a forward-looking statement and I’d be disappointed in you if you didn’t try to get as much out of our major good, I’d be disappointed in me if I answered. Let me see what I can do to come close. I did speculate on breakeven when I first joined and that cost me both partially, as well because I made the statement I wouldn’t take any remuneration until we got to breakeven. My wife has encouraged me not to make that promise again. One of the reasons we won’t have a forward-looking statement when I will break even and then I won’t take the bonus still as I learned a good lesson; I can’t control everything. I think you have to ask for normalcy regarding COVID and the recovery of the market, recovery of demand. But what I'm excited about is the things that we can't control. I think we've got a really good grip on our costs and will continue to focus on that. We have a great understanding of what are non-core assets and what we will be divesting in order to fund our working capital needs and to affect the best in the near-term. So when it’s breakeven as soon as possible would be the right answer. I'm asking people to do it this year, but I would love to have it done this year, but when am I going to predict it? I would say, I’m going to pass. I’ll try to answer that.

So, PPP, do you expect to recover 100% of the loan?

Well, I'll answer from—at this time. Our intent is there is our formulas for determining what’s recoverable and we are going to ask for the maximum that we can recover. What they allow for public companies versus private companies is still a TBD, but we’re going to put in for the maximum. I am fairly confident that we will get a significant portion of it forgiven would be our goal, and for our attendees, we will report to you as soon as we have an idea of how much that's going to be. I wish we had done some borrowings so that we can explain to people how we were inside our covenants right now. We actually have a lot of cash still. If you take a look at our numbers for the quarter, we used less cash in Q1 than we used in prior periods, and our goal is to use less cash next quarter than we did this quarter and less cash quarter after that. I think we're on the path towards breakeven at this point and have good product strategies to support that, which is the best place we've been in probably 12 months.

I got two more, John. Number one, what did the international revenue look like this quarter, if any?

So you talking about Q2, Q1? Yeah, let me just talk about it generally for you.

The one that you had just reported.

Okay. Mike, the international revenue, Q1?

Yes, clearly it's down, right, because we saw the chemistry business is up; in fact, the domestic being up 56%, so naturally international was down, right? It was down to navigate; it was down by a good amount because if we were up 7% and we grew typically 6% domestically, international is down.

None of the loss though, Joseph mostly moved into future quarters. Things did slow down; I mean things that you have to factor into the Middle East are—COVID issues in India; many of the workers in the field that are traveling back and forth to the Middle East are Indian, Pakistani, and others. The ability to conduct business there goes down with COVID increasing in nearby countries; you will see activity levels back up.

And it's weather, too.

Yes, but we didn’t lose any business. I don’t feel like there was anything that was lost; everything just sort of moved forward a bit. They are right now where the U.S. was 3 or 6 months ago, let's say I've got the equivalent to Uri there in the Middle East. It looks strong for Q2 right now as long as things don’t slip; we’re seeing a pretty good month here during Q2. No reason to think that it won’t be a significant contributor this year, but it just didn’t do as much Q1. I think the Verax system internationalized, I think we’ll see big uplift.

So last question. My experience has been that fighting with the big guy can be painful; ADM in this case would be the big guy. Why should I not be—how should I think about that risk to you guys, right? Because they can see you until the cows come home, and so it's just—is this something that keeps you up at night?

Well, it depends on how you want to look at it, Joseph. I’ve never seen a simpler situation: breach of contract, breach of contract in any court you go to—they breached. Therefore, we terminated the contract; not buying curve paying, we don’t need it. It's beneficial for the company, no question about that. That is a good outcome for us. The recovery of amounts already spent is upside to the company, and we have a disagreement, and we need to go in and review that with them in the right places in the court, so we’ve made that approach to them, and we’re working through that. But I don't—I’m pretty big guy; I think of us as big guys that get big gas, particularly it’s based upon the facts and the merits of the contract, not on the size. I think that we have the facts and the contractual merits on our side, and we’re going to go in and see if we can resolve this well.

This concludes our question-and-answer session. I would like to turn the conference back over to John Gibson for any closing remarks.

Well, I can't tell you how thankful I am for you guys as shareholders and your interest in the company, and I think it's been worth the wait. I believe we're about to see continuous improvement. We've got strength on the bench, we've got strength in our discussions with our customers; we are re-establishing those links to the indirect channel, to the oilfield service companies. It just feels like a lot of things are on our side. Q2 still have a—we're going to improve sequentially; how much is still a question for me, but the second half of this year looks really strong in terms of the market and how we're telling our story. More importantly, even if you think flat into 2022, we've got a lot of opportunities to take market share from people that don't have a green story, that don't have an ESG solution, so we don't need a great uplift for us to beat our numbers, and we're going to be about the business of delivering value to you guys—that’s what we're all focused on. Thanks so much and we look forward to talking to you again next quarter.

This concludes our conference. Thank you for attending today's presentation. You may now disconnect.