Flotek Industries Inc/Cn/ Q2 FY2021 Earnings Call

Greetings, and welcome to Flotek Industries' Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management’s prepared remarks. As a reminder, this conference is being recorded. It is now my pleasure to introduce Nick Bigney, Senior Vice President, General Counsel and Chief Compliance Officer for Flotek. Thank you. You may begin.

Thank you and good morning, everyone. Joining me today and participating on the call 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 second quarter of 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, and 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 in our earnings press release, as we may discuss non-GAAP metrics on this call. And with that, I will now turn it over to John.

Well, thank you Nick, and good morning to everyone. First, let me address our second quarter performance, which was meaningfully impacted by market consolidation in the Permian Basin. As we discussed at our Annual General Meeting in early June, two of our most significant customers changed ownership in the quarter on accelerated timelines resulting in a disruption in committed inventory and anticipated revenue. Having observed many consolidation events such as these in my career, it is very common for pauses in services or changes in vendors to occur as companies integrate. We are in talks with both customers about becoming their green chemistry supplier. With one, we should be back to work shortly. Flotek has historically had a high customer concentration in our energy chemistry business, and diversifying our customer mix has been a personal mission since I joined the company last year. Unfortunately, with the downturn it has been challenging to reduce our customer concentration, but we have been making steady progress against our diversification goals as the industry has begun to recover. Because the industry is recovering, we have chosen to accelerate our sales strategy to diversify our customer base. We have diversified our revenue by increasing the number of both Exploration & Production operators and oilfield services companies we sell to today versus a year ago and expect the revenue to grow with our new customers during the coming year. To boost revenue growth, we've also reduced non-revenue generating costs in order to add sales and marketing resources. We have focused our expertise and passion on the delivery of green chemistry and data solutions to reduce the environmental impact of energy production on air, water, land, and people. We have catalyzed our shift to ESG and we've engaged with the industry to demonstrate the strategic benefits of our sustainable chemistry and data solutions in support of our customers' ESGs and operational goals. Building upon our decade-plus track record of supplying our bio-based high-performance chemistries, today we are actively partnering with energy customers to maximize the convergence of asset performance, environmental protection, economic value, and safety of the community. Fundamentally, we intend to assist our customers in their efforts to sustain the social license to operate in every geography. We are invigorated by the response we're receiving as we increase awareness of the benefits of our green chemistry and real-time data solutions. In support of those efforts, we are actively engaging with one of the most influential accounting standards agencies to impact the industry's ESG chemistry reporting standards. I am excited about the potential outcomes associated with this engagement because I am a firm believer in what gets measured gets improved. In that vein as we have expanded our C-suite engagements, we are beginning to see some competitive bids include ESG components as they evaluate chemistry partners. The emergence of ESG components and tenders works in our favor. Finally, we partnered with an important customer to conduct an analysis of their chemistry usage to support their ESG reporting and performance. We envision this scorecard to be the prototype for future engagement with the industry. While these are all very encouraging steps, we still have more work to do to broadly drive awareness and action to replace toxic chemicals such as those formulated with xylene with safer, renewable, and sustainable alternatives. Ryan will provide more in-depth commentary on that when he speaks. To eliminate delay in the implementation of critical ESG solutions, there must be stronger connectivity throughout our customers' organizations to move from ESG intent to purchasing behavior at the well site. This transition has begun but needs to become an imperative. We are ready to support this change with our customers. Now let's move on to touch a few of the quarterly highlights. While there's no question the loss of revenue associated with the change in ownership of customers just discussed was a setback for our energy chemistry business, it is important to note that if we were to exclude those events, our sales and adjusted EBITDA were both above our expectations further validating that our focus on green chemistry is gaining momentum. During the quarter, we marked the one-year anniversary of the acquisition of JP3, and I am pleased that our second quarter was the best-performing period for JP3 since the acquisition. We continue to make progress around our international market entry, and I am thrilled that we have received our first international purchase order and you're going to hear a lot more about that from TengBeng Koid, momentarily. We have taken multiple actions to strengthen our balance sheet. First, we recently announced that we've completed a long-term lease agreement for our Waller Texas facility with Resolute Oil, which will generate income while offsetting our costs. Resolute is a global leader in high-quality white mineral oil, and we are excited to explore opportunities to leverage our respective green chemistries into adjacent markets we serve. We are also in negotiation for a lease for our Monahans facility, which will make it income-generating as well. Additionally, in the quarter, we secured full forgiveness for the JP3 Paycheck Protection Program loan and we have filed for forgiveness of Flotek's PPP loan and hope to have an update for you next quarter. Finally, we're pleased that we've signed a term sheet for an asset-based line of credit and we'll keep you informed as the details of this agreement are finalized. In terms of cost initiatives, as referenced earlier in my comments, we have realigned our structure to ensure we are built to seize the ESG opportunities ahead of us. There is keen awareness that now is the time to grow our market share, given our unique position and offerings. As a result, we eliminated roles that were not directly generating revenue and are reinvesting to expand our sales team. The net annualized cost savings is more than $1 million including the reinvestment. We're also pleased with our inclusion in the Russell Microcap Index in June, which represents an opportunity to improve our visibility within the investor community and to help us expand our shareholder base. Now, before I pass this call over to TengBeng and Ryan, let me just give you some commentary on some new key partners that have joined us. First, I'd like to formally welcome Lisa Mayr, our Board of Directors and Audit Committee. She brings tremendous strength in governance. With over 25 years of financial accounting experience, she is the current CFO of Internap Holding, a digital infrastructure provider. Lisa is a strong addition, and I know that she will immediately have positive contributions to make to our Board and our company. I'm also happy to welcome KPMG as our new audit partner. We just began our relationship in July and the team and I are very impressed with their professionalism. I look forward to a collaborative partnership. We are pleased to have expanded our coverage to include Noble Capital Markets and we welcome research analysts Michael Heim and Daniel Burke to our call and we look forward to hearing their questions this morning.

Thank you, John and good morning, everyone. In the data analytics segment, we are pleased to see continued financial performance improvements in revenue and gross margin. Revenue was up slightly in the quarter, improving sequentially over the past three quarters and is the best quarter since the acquisition of JP3. Sales were driven by the addition of a number of new customers, particularly in Canada, and existing customers here in the US continuing to make additional purchases. These new orders and repeat customer purchases are a testament to our game-changing digital transformation technology that provide real-time data and analytics to our customers. The second quarter marks two major milestones for data analytics. First, we have completed the specifications and manufacturing of our Verax analyzer prototype for international markets, and we are in the final process of undergoing extensive certifications and hope to attain the certificates for international deployment soon. Secondly, we have received our first international purchase order. This sale will support a major international oil company representing exciting opportunities for JP3. This system will be installed on an offshore platform in Southeast Asia, expanding both our geographical footprint and application use cases, particularly in an offshore environment. Although our focus continues to be on onshore upstream, midstream, and downstream applications, the lockdown of a competitive bid in support of offshore operations validates the value of our real-time data solutions across the energy sector and represents an exciting new frontier with vast market opportunities. At JP3, we continue to focus on executing our strategy, especially in technology development, where we have a very robust technology development roadmap that includes many new capabilities that will become available in the near future. With that, I will turn the call to Ryan Ezell to discuss our Chemistry Technologies segment.

Thank you, Koid. Today, I will discuss our Chemistry Technology segment performance, first highlighting our energy chemistry technologies, and then moving on to professional chemistries. As John mentioned earlier, energy chemistry technologies were impacted by the unplanned acceleration of M&A activity affecting two domestic customers in the quarter. Excluding the loss of this revenue, we were on target to exceed quarterly growth projections and deliver strong results. To provide a bit more color around the impact of the revenue loss associated with the market consolidation, the business would have been up by 22%, if we were to include the expected revenue recognition from these two customers. Despite these consolidation setbacks, we are confident that the execution of our strategy to be the collaborative partner of choice for sustainable chemistry is gaining traction, and we are keenly focused on building our market share to include domestic and international E&P operators, as well as service companies, thus diversifying our revenue stack and minimizing future risk from customer concentration. In the second quarter, we also reassessed our organizational structure to accelerate these efforts. As a result, we made a number of structural changes and reallocated resources to expand our sales and marketing efforts. Accordingly, we plan to double our sales force to focus on broader adoption of our green chemistry solutions across the energy life cycle while generating more than $1 million in annualized salary savings. Our expanded sales force will help us build upon important fundamental progress that we saw in the second quarter, which includes first and as discussed last quarter our green chemistries being utilized in an important field trial in the Permian Basin. Based on the initial success, we are excited that the pilot has been expanded, not only in scope to include new technology applications in the Permian but also into new unconventional basins in North America. We also secured multiple new remediation treatment applications utilizing our complex nano-fluid technologies. The bio-based high-performance chemistry built upon nontoxic plant-based solvents is enabling Flotek's customers to cost-effectively replace the use of benzene, toluene, ethylbenzene, and xylene, also referred to as BTEX, and other harmful solvents thus reducing the environmental risk of their remediation and production programs. Additionally, we are pleased to announce that we are partnering with a very important customer to provide an ESG scorecard assessment as a four-well cycle chemistry utilization to identify opportunities supporting their ESG reporting goals and operational efficiencies. Furthermore, we have made notable progress in rebuilding our indirect channels to market, with our service company revenue side. We saw our indirect customer base increase by 58%, and domestic indirect channel revenue grew by 68% sequentially. We also expanded our operational safety record in the field to exceed more than 2,000 days without an OSHA recordable or lost time incident. Finally, we entered into a multi-year agreement with Resolute Oil, a leader in high-quality white mineral oil, that services consumer and industrial customers. Resolute Oil will utilize our chemical blending facility in Waller, Texas to manufacture USP and NF grade white mineral oil that will be distributed globally. Our facility is customized for the production of green chemistries, and our consumers are noticing how they can leverage our capabilities and facilities to drive growth in adjacent green markets. Now turning to the professional chemistry business. During the second quarter, we saw overall volume improvement sequentially driven by strength in janitorial disinfectants and cleaning products. We are pleased to see that we are building momentum for these categories contributing to our improved quarterly performance with revenue up more than 30% sequentially. In the quarter, we made positive progress in building important foundational relationships that will amplify our internal sales team led by Jan-San veteran Matt Sullivan. These milestones include the securing of contracts with national and leading large-scale distributors and redistributors. Now, I will turn over the call to Mike to discuss our financial results.

Thank you, Ryan. Building on the earlier comments, I will expand on the quarterly financial performance. During the quarter, consolidated revenue was $9.2 million, up more than 3% from the $8.9 million in the second quarter of 2020, but below the $11.8 million of revenue for the first quarter of 2021. By segment, in the second quarter, the Chemistry Technologies segment saw a 3% decline in revenue year-over-year to $7.7 million and a 25% decline sequentially from Q1 2021. The decline for Q1 2021 was primarily driven by the loss of sales from the two domestic energy customers discussed earlier on the call. As we further analyze, our Chemistry Technology segment – Energy Chemistry saw a decline in revenue sequentially with the loss of the two clients. Year-over-year revenue in Energy Chemistry excluding raw terpene inventory sales increased 87% despite the loss of sales from those clients. Professional Chemistries saw an improvement sequentially driven by strength in degreasers and disinfectants, but sales were down significantly year-over-year given the peak COVID pricing and demand levels a year ago. Turning to Data Analytics. As a reminder, we acquired JP3 in May of 2020 and thus we do not have a full quarterly year-over-year comparison for the segment. Sequential revenue was slightly better for the quarter. Consolidated operating expenses were $12.1 million in the second quarter of 2021, a 12% decline sequentially but increased 4% from last year's level of $11.6 million in the second quarter. The operating expense increase over the last year was impacted by having only half a quarter of JP3 expenses in Q2 2020 versus a full quarter of expenses in Q2 2021. Corporate G&A decreased 34% from the first quarter of 2021, primarily due to the receipt of a $1.9 million employee retention credit, which includes both the Q1 and Q2 credit and also a reduction in contractor spend, which was partially offset by an accrual for severance expenses associated with the personnel changes discussed by John and Ryan earlier today. We reported a net loss of $6.5 million or $0.09 loss per diluted share in the second quarter of 2021, a significant improvement over the net loss of $9.6 million or $0.14 loss per diluted share last year. Our adjusted EBITDA for the second quarter was a loss of $6.7 million, slightly higher than last year's loss of $6.5 million and flat with last year's loss of $6.7 million. Now, let's move on to the balance sheet where our focus remains on preserving liquidity. At the end of the second quarter, we had cash and equivalents of $27.8 million or approximately $0.40 per diluted share versus $33.9 million in the first quarter. Our cash position was impacted by the operating losses and prior severance agreements, which were partially offset by the employee retention credits and improved working capital changes. We are pleased to report that during the second quarter, JP3 received full forgiveness of its $881,000 Paycheck Protection Program loan from the SBA, which was recorded as other income during the quarter. Flotek also filed in June for forgiveness of a significant portion of the remaining $4.8 million in PPP loans remaining on the balance sheet. Additionally, we recently signed a term sheet for an asset baseline which we will use for funding future working capital growth as the business expands. Lastly, as John and Ryan discussed, we completed a long-term lease agreement for our Waller facility, and we are in negotiations to run our Monahans facility. Our balance sheet at the end of Q2 also included the accrued liability of $9.4 million associated with the company's previous supply agreement with ADM, recorded last year in the fourth quarter. The $9.4 million represents the expected losses from the sales of excess terpene beyond our product usage for our clients. We will continue to monitor this accrual quarterly. The balance sheet also includes a receivable for $1.1 million for the remainder of the employee retention credit cash benefit. Our tax net operating loss of $115 million, roughly $1 per diluted share continues to grow quarterly. Now, I'll turn the call back to John.

Well, thank you, Mike. Before we take any questions, I thought I’d make a few summarizing comments. First, no doubt, you’d like to hear how the third quarter is tracking now that July is behind us. While we will not provide any guidance for the quarter, I would like to share that our July revenue number is higher than any individual month in Q2 2021. This is a positive indicator that we're on a solid path. We made significant progress to deliver against our stated commitments, demonstrating we're steadily converting aspiration to action, because it all comes down to our ability to execute on our strategy. For many months we've been working to take steps to further solidify our liquidity and we delivered on several fronts this quarter, and there is more to come. I'm very proud of the leasing situation that we have that converts liabilities into income. Since our acquisition of JP3, TengBeng and the team have been working diligently to internationalize our Verax system. In this quarter, we secured our first purchase order, as well as completed our international prototype. We have made steady progress toward diversifying our customer base in our energy chemistry business, and I'm optimistic about the future under Ryan's leadership. Finally, I’d encourage you to take a look at our new investor presentation on our website. It encapsulates Flotek today and our unique value proposition to advance ESG solutions for our customers. We will be attending the EnerCom Oil and Gas conference next week and I’ll be presenting on Tuesday afternoon and we'd welcome you to tune into that as well. Now, with that, operator, we’d like to open up the floor for questions.

We will now begin the question-and-answer session. Our first question today will come from Daniel Burke with Johnson Rice.

Hey, guys. Hey, John. Good morning.

Good morning, Daniel.

Let me actually start with one on JP3. COVID was pretty disruptive last year, encouraging to hear the progress on some of the international efforts there. Could you step back and maybe talk about the efforts as well to rebuild JP3, sort of, midstream-downstream domestic business and where you are with Phillips 66?

I'm happy to do that. Then I'll turn it over to TengBeng. I'll first say, though, it is really exciting to have a sale in the Far East and offshore. You combine those two things, first offshore sale. Even that was impacted by COVID, as the country made it difficult for us to actually deploy the equipment yet, as a result of COVID, being on the platform potentially offshore. So it continues to be a problem and it's a country-by-country issue. With that, TengBeng.

Yes. So, John, to your point, the international market is still affected by COVID restrictions. We thought it was getting better, but obviously with the recent strain preventing us from sending people to install a system in the Middle East and also in the Far East. We are working through that, getting those people there. We had a few Saudis over at our facilities. They can come over here. It's difficult for us to go over there. We’ve got them trained up and hopefully we'll get that going on the international front. Despite the COVID restrictions and all the issues, we managed to get the sale international and are progressing very well in the pilot. There were a few other areas, other countries that we expected some orders from, and with this, I think we can see some of this coming to fruition probably in the next couple of quarters. Domestically, to Daniel's question, we're seeing the midstream company's budgets starting to open up. We're seeing progress in that area, especially towards year-end when we'll see more budgets opening up.

Yes, another question, Daniel.

Yes, sure John. I appreciate the comment on July and that's encouraging. But still, I guess any reason that July could prove to be non-representative of what the quarter might look like as a whole? Just want to make sure we don't over-extrapolate.

No, I don't want to over-extrapolate either. I didn’t enjoy having to come out at the AGM last time and say that we’ve lost customers. So not anticipating anything, I mean, we're actually in much better shape. As Ryan discussed, we've really diversified customers already as a result. My two biggest concerns would be COVID again and government reaction to it, and the second one is operational fatigue happening in the fourth quarter. So, when do they stop? Do they stop on Thanksgiving, or do they stop on Christmas in terms of spending for the year? As I look out for the second half, it's about where the budget is going to go and will this COVID rear its ugly head again. Otherwise, we're really seeing some solid gains in the green chemistry side that I can comment on. I'm optimistic, but I'm not going to guide.

Understood. That’s helpful. And maybe just a final one from me. Can you wrap-up John comments on green chemistry in the energy markets? You talked about a number of discussions and fruitful initial efforts that you’re seeing out there in the field marketing. Can you give us a sense of how broad those discussions are? Does that make sense rather than individual efforts?

That will be fine. I think if I could, I’ll get Ryan to comment on how remediation jobs are increasing and what else he sees on the green adoption side. Ryan?

Yes, sure, John. It's quite exciting for us. If I look at an overall macro scale, what we're seeing is we're starting to see the conversations that we were having at the C-suite level around green chemistry now transcending across into the multiple basin operations and also in some of the impacts we’re seeing internationally. The core differentiator for Flotek is around the over 170 patents we have around green chemistry utilization of these natural bio-based solvents to replace BTEX. We have continued to grow in our simulation market, and with our customer base up, we're selling to the oilfield service companies and the direct Exploration and Production operator. We're seeing improvements in uptake. What I'm really excited about is we are starting to diversify into various verticals a little further down the line on the remediation treatment. We've seen substantial application improvement of the green-based chemistry where traditionally xylene has been used or other BTEX-related solvents. We're going to see that grow and we're excited about the future on where that's going around the vertical side. We're also seeing that translate into operations on the well construction side. I talk about drilling fluids and cementing products where we've seen substantial improvement with the oilfield service companies leading to some things we’re looking at on diversifying our customer base. A lot of applications on the green side continue to evolve, and the most notable thing is when you're out in the basins, these conversations are making their way into the field operation discussions. That’s a really positive step.

It's fair to say that in Q1 and Q2 we did seven remediation jobs eliminating xylene, and we're anticipating as many as 40 in Q4. The potential continues to grow as we have the conversation. These are not as big jobs as stimulation jobs, so I don't want to overstate here but I'd rather have higher-margin, smaller revenue opportunities than less margin, big opportunities. We got a really big opportunity in the remediation space.

Got it. Okay. All right, guys, I will leave it there. Thank you for the comments this morning.

I appreciate it.

Our next question comes from Mike Heim with Noble Financial.

Thanks for taking my question. Looking for a little bit more color on the loss of two customers and your comments that you might be able to get some of the green business back on one of them. Specifically, why do you feel that's the case? How soon could it come about? Would we be talking about similar numbers, similar sales to what you're doing before, maybe even larger? And what's the status of the second customer?

It's a good question. I don't want to be too case-specific here, but the two customers were sort of customer A and customer B if you take a look with regard to our business. One of the losses, which was really important to us, went to a customer that does not use Flotek at this time. They already have relationships and methodologies in place. We are definitely talking to them at the C-suite level and are engaged throughout our organization, but our ability to come back there is more limited than the second customer. We continue to engage with them and I do look forward to doing business with them again in the future. The other customer, we think will be back by Q4, and we're engaging with the new owner. It is a property we know well. In both cases, performance of these properties was better than offset operators. I would say that our chemistry really contributed to their enhanced production and the premiums they receive for these companies. I hope that we will be able to get out and tell that story and help other companies improve their production to receive premiums as they go forward. One is gone, the other I expect back in Q4, and we are steadily working on the lost customer.

Okay. And then let me ask a question about the cost reductions that you had this year. I know you've talked about the sales force being reduced by $1 million, but you did a really good job lowering costs in the other areas. I'm just trying to get a sense if these are permanent reductions or if these are delays in expenditures that you made in reaction to the drop in revenue?

Ryan, why don't you talk about the reductions you made in order to hire more sales staff?

Yes. We looked at quite a few things across the board. These transcended from cost of goods realignment, service delivery realignment on where we're sourcing chemicals in-basin, which impacted blending costs and logistical costs, and operational support needs. More importantly, we aligned our value proposition with our strategy. We looked at every role to determine if we were creating value or not. We needed to realign the structure for full directional approach around growing our revenue and reinvesting in the growth of our sales force focused on our green chemistry applications, that's what we've been able to do. The majority of our operational structural changes should be maintained with significant growth. Any revenue focused potential improvement will be on the number of additional sales force we add for coverage going forward.

Then talking about the sales force restructuring, in the past, you've said it might be a three to six month process to get up and running. Is that still a good number to use? And where do you see yourself in terms of how far along we are?

Awesome, a great question. I apologize for the pause there. When it comes to the sales force, we have taken a slightly different approach. We're hiring mainly experienced people who understand this field and know the customers to minimize any of the delay between the time they hit the door and when they start generating revenue. Ryan, you got any comments?

Yes. We are looking at experienced mid-career and further advanced hires that have connections in alignment with our value proposition and the pursuits in basin. This is an extensive hiring and interview process that we've had being very aggressive at this point. We’ve onboarded multiple individuals already and expect that to be completed in the coming weeks, with everyone hitting the ground. We're seeing that uptake working well for us.

I’m excited about this because we like people who are hungry. Ryan has converted the compensation model here to lower fixed and more at-risk base. We are getting a lot of good people that believe they can make money here by taking advantage of that at-risk base. It’s a great move for us and improves the aggressive nature of our sales force.

I was just about to ask how you're able to grow the sales force and lower costs at the same time. I think you've addressed that with your last question. So I'll sign off, that's really all the questions I have.

I appreciate it.

Our next question comes from Eric Swergold with Firestorm Capital.

Good morning, guys. Can you hear me okay?

We can. How is my favorite shareholder?

I’m doing well, thank you. A little earlier, you touched on xylene already and had some details on it. But what would it take for xylene to get legislated out of use where groundwater contamination is possible?

Ryan?

That's a discussion we've gone about quite a bit. Talking about it in terms of company awareness versus long-term legislation. When you look at it on the well construction side, it's been removed in its entirety. The headwind that you see is on the initial application where operators never considered that a closed system. In reality, we know that happens. The awareness we’re gaining is helping customers around the risk of moving it in human contact and just overall potential spills in the environment. It’s making headway on the application of xylene particularly in environmentally sensitive areas like the North Slope. In terms of legislation, that’s a long road and there's ongoing discussions around that. The uptake from the operators, even with our service companies, is also noticeable due to well construction.

It will happen. We've already got one division of the industry that has eliminated it. As we move forward, I think you'll see it starting in states with more aggressive environmental regulations. Anticipate states like Colorado, Alaska, those will be first movers in this and New England as well. It’s definitely going to happen. We have customers who are saying, it’s time for us to move on and improve our green scorecard, improve our ESG pool.

The one place we have seen that happen is on the international side with offshore applications. They've completely banned that utilization. People are switching to alternatives where they've used xylene for different flushes. So it is starting to turn in that direction.

Okay. Thanks. And my next question is a value creation question rather than a business operations question. Given the significant value that's locked up in your net operating losses currently, and seeing a number of new ESG-oriented stocks form that have yet to put any money to work at all. If the company received a large cash infusion from a SPAC, what would the top three priorities be for you in terms of putting that cash to work to grow the business?

That’s a great forward-looking question, Eric. The sales force expansion would be first. We've got a lot of opportunity and I just wish I had more people to chase it. The international expansion with the sales force would be critical as we have never worked offshore. The zero discharge requirements we see throughout Western Africa, North Sea, Asia offer great opportunities for us to eliminate xylene. Second would be with JP3. We have a lot of opportunity to add sensors or measurement capability there to expand beyond just the composition of hydrocarbons to include the identification and quantification of volumes of greenhouse gases or other molecules of interest including water. Finally, we could potentially invest in certain operational components to drive better cost efficiency.

I agree with John on investing in sales force opportunities. There will be potentials to invest in operational components that would drive cost efficiency where we've been running lean. Finally, marketing and sales communications would be the last piece we would look at for investment.

Okay. Thanks, guys. My third question would be something for people who are new to the story. You've done quite a bit to align management with shareholders. If you could review for us where stock rewards sit at this time and the objectives that have to be achieved in order for you guys to make real money for yourselves?

We are very much aligned to the share price, Eric. It takes a $3 trigger for a lot of the vesting to occur, particularly for myself. My wife encourages me not to say that I wouldn't take a bonus in a conference call, but unless we see improving share price and revenue performance, I’d do the same thing again this year. I would say no, I’m not worthy of an award, if we haven’t gotten turned around. My confidence is increasing that bonuses are in the future.

Thank you. Thanks for the added color on all three questions today.

Thank you.

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

Thank you. Good morning folks. Can you hear me all right?

Bonjour. Yeah. We can hear you fine.

All right, very good. I got a couple of questions. I want to cycle back and touch again on the two customers. I'm glad personally you got that out of the way. The mergers accelerate and so forth. I just wanted to clarify are you saying that customer number one is essentially out of the picture for the foreseeable future?

Pretty much, I mean I don't want to be overly optimistic about it. We're in discussions with them, but they have contracts with other chemistry providers that we have to wait until those expire. They are absorbing the acquisition into their company to leverage the volume discounts with another supplier. We likely have to wait a year before we can get through that tender process. That doesn't mean we can't get in and get some new work done. We have differentiated offerings for this. We've never let off the gas pedal with these guys. We can help you, we can improve your operations.

So, on that second customer then, would it be reasonable to think that you may be able to get additional business from the combination that might help to offset those losses?

Absolutely. Our budget is our budget regardless of those customers for our bonuses, so you can assume that we get up every morning to fill in for them and go get additional business. It's unfortunate that both of them happened to be customer A and B, but that’s a testament to the value we create with our customers, particularly those in private equity.

Okay. So let's move on to another question. You mentioned that JP3, your offshore in Asia-Pacific was the first work in an offshore situation. So what has held you up as far or held JP3 up, let's say, in the Gulf of Mexico, United States? Besides the fact that the operations there, activity there has been pretty muted overall. But what's your opportunity there then as well?

Hi, John, yes, good question. Certainly, there are opportunities. I think JP3 when started focused primarily onshore, which was the right thing to do. It’s a fortuitous time right now. They were looking at a different provider, and after hearing from us and our capabilities, they decided to go with us instead of traditionally what they were buying from. We realized this opens a market we never considered in the past at all. We are indeed focused on the Gulf of Mexico but also offshore elsewhere in the world, such as in Brazil.

We’ve hired someone whose focus is on the upstream side. Our focus will also be on the Gulf of Mexico. It’s a great question. What they want to do offshore particularly in the Gulf of Mexico as it emerges is fingerprint their oil so that they can get a premium for it based on lower CO2 emissions. We can tell you which oil has what CO2 content associated with it to help them gain premiums.

Next question? Cost competitiveness of green chemistry assets last time versus traditional hydrocarbon-based fluids and so forth. Have you seen any narrowing of that given the rise in raw material costs? What's the situation there? And are you having any issues with production supply chains to produce your green chemicals?

That’s a great question. What we have seen is the pricing gap differentiation has nearly closed on the advanced formulations we have. We have seen an impact on traditional chemistries, particularly on more environmentally-friendly solvents. That puts us in a competitive, respectable price range. We've done a lot of advancement in our research innovation group to reformulate and offer cost-effective options to go head-to-head with traditional BTEX solvents. On the supply side, we see similar disruptions but nothing that impacts our green chemistry.

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

I appreciate everybody being on the call today. I appreciate the support from shareholders in the candid conversations we've had. We’re focused on making money for you here. That’s what we're here for. We appreciate the opportunity to work for you and look forward to being on the next call. I’m looking forward to delivering good results here one day. All the steps we're executing give us the opportunity to improve. We need to stay focused and execute as we move forward. The market's improving, and we’ll do our best. We thank you and we'll talk soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.