Flotek Industries Inc/Cn/ Q3 FY2021 Earnings Call

Thank you and good morning, everyone. We appreciate your participation with us today. Joining me today and participating on the call are John Gibson, Chairman, Chief Executive Officer and President; Michael Borton, Chief Financial Officer; TengBeng Koid, President of Data Analytics and Ryan Ezell, President of Chemistry Technologies. On today's call, we will first provide prepared remarks concerning 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 third quarter, which is available on our website. Today's call is being webcast and a replay will also be available on our website. Before we begin, 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 and which can cause actual results to differ materially from our current expectations, and accordingly we advise listeners to review our earnings releases and the risk factors discussed in our filings with the SEC. Also, please refer to our reconciliations provided in our earnings release, as we may discuss non-GAAP metrics on this call. And with that I will now turn it over to John.

Thank you, Nick, and good morning everybody. Our third quarter performance reflects the execution of our strategy to accelerate sales performance for chemistry technology and data analytics and focus on resolving our remaining legacy issues. I'll talk about all this. We've been working very hard through third quarter to grow revenues. I'm pleased to report that our revenues for the third quarter are up approximately 11% compared to the second quarter. When we review revenue growth from some of the larger oilfield service companies, we see modest gains versus the second quarter. We believe our quarter-over-quarter results compared favorably against our peers. Mike Borton is going to walk you through the financial numbers in more detail a little later in the call. Our execution of our sales strategy has been a priority for us as we emerge from COVID. And we've already seen a positive impact. During our second quarter call, I communicated that we had trimmed costs in certain areas to reinvest in our sales team. We've executed on that decision and I can report that we brought on board 11 new sales professionals to date, eight new members supporting the chemistry business and three new people for data analytics. These folks are all highly experienced professionals with proven track records and substantial sales quotas in their previous roles and hopefully in the role here as well. Their industry relationships will help us execute our go-to-market strategy. We continue to reinvigorate our sales efforts with ECT and the impact has been demonstrable growth and diversity of revenues for that segment. We were also fortunate in the third quarter as Hurricane Ida passed almost directly over a rail spur in Louisiana. We suffered minimal damage there and we were able to continue service, which was a benefit to the industry and in particular our customers. We believe that our operational continuity presents us with upside for that facility and we expect to see strong performance over the next few quarters in ratio. In addition to the new sales professionals that I mentioned, our ProChem business has also signed four strategic agreements with manufacturing representation companies. Ultimately, these agreements give us immediate access to a sizable sales force and a broad geography. These alliances are key to our strategy of utilizing an indirect sales channel to increase targeting opportunities. We certainly didn't invent this approach. There are several well-established companies like Clorox, Gojo, and 3M that leverage the model successfully and we are looking to do the same. We believe this particular strategy has a lot to offer us in terms of minimizing our cost to execute versus potential returns. Ryan is going to give you more detail around the sales and revenue transfer ECT as well as some additional highlights into ProChem’s milestones this past quarter. ECT and ProChem had certainly a lot of activity over the third quarter not to be outdone, JP3 issued two significant press releases on product deployment and new patent-pending technology. The first announcement was for the launch of the AIDA application, which we're very excited about, a machine learning AI-based application. The later release concerned international certification for our online analyzers, which we've all been anticipating. I will let Koid give you more color around those releases. We believe that those two deployments will help us gain ground on our stated goals of increasing international sales, and overall profitable revenue growth. Now we continue to see a decent pace of consolidations in M&A activity interspace, examples include next year's acquisition of Alamo Pressure Pumping, ProFrac’s acquisition of FTSI, and recently Wilks merger with Dawson Geophysical. We are actively evaluating the M&A market and looking for opportunities that fit within our criteria for success. There are three main criteria; we would consider only deals that are quickly accretive, with deals that involve cash requirements that will be supported by the market and shareholders. And finally, the deal has to have the potential to enhance our sustainability objectives. The successful execution of this sustainability objective is a critical path to our success as I believe we're now on a path to widespread adoption in our industry of an environmental culture across the whole of the industry. Today, strong safety culture and the demonstrable metrics have become table stakes in our industry without them, you're not considered a bidder. Similarly, ESG performance will become another factor that defines what desirable business partners look like. There is no doubt that the ESG footprint influences a company's access to capital. We see strong adoption and philosophical alignment at the board and C-suite levels. But there is still some amount of latency in translation to buying habits at the operational levels. The industry's adoption of ESG principles and the establishment and emergence of an environmental culture is likely to occur at a rapid pace in 2022. Flotek is well positioned to be the partner of choice for effective responsible chemistry and data solutions. These changes that we made around our sales strategy capacity, as well as the groundwork relating to JP3 will be key to differentiating ourselves in the marketplace for the evolving environmental cultures of our customers. Supply chain uncertainty is a topic that has also received considerable media attention of late, we continue to watch developments concerning the possibility of sanctions against China. If prolonged sanctions could change the drilling industry demand dramatically, China currently produces and exports considerable quantities of polyacrylamide and barium sulfate, both widely used in the OFS industry and by operators. Additionally, inflationary pressures and transportation constraints have the potential to impact our customers pushing prices up and contributing to sourcing delays. These factors increased complexity, they also present opportunities for us to work with customers and structure mutually advantageous outcomes. We've implemented processes that are designed to help us monitor and adapt to many of these macro environmental factors. We've made investments in strengthening our own supply chain and logistics function. We've implemented systems designed to more seamlessly communicate sales forecasts with supply and we have a team that is experienced in international agreements. Now, most of my comments so far really highlighted accomplishments of what we've done in the quarter around our business and what we see as the path forward. However, I want to take just a moment to discuss one of our legacy matters. As you know, when I started in 2020, I inherited a type of terpene contract with Florida Chemical company that was well in excess of our need. At the end of 2020, we booked a $9.4 million accrued liability for losses we expected to incur as a result of that contract. Earlier this year, we became involved in litigation with Florida Chemical and ADM, its parent company and as a result of that contract and our request for an audit, we pursued the litigation. In the course of the litigation, we were able to find a commercial counterpart at IBM and we were successful in bringing the matter to a close and we settled the litigation last month. As a part of the settlement, we agreed to pay Florida Chemical $1.75 million and the terpene contract has been confirmed terminated and with it the obligation to purchase an additional 10.5 million pounds of terpene. This allows us to release the $9.4 million accrued liability as well, which Mike will tell you more about in his comments. We're grateful to IBM for their willingness to engage with us in a business negotiation. And we're happy to put this legacy matter behind us.

Thank you, John. Good morning, everyone. In the Data Analytics segment, we continue to make significant progress on the international front as part of our growth strategy. As John mentioned, we did a press release recently on the new line of Verax analysis for international markets, called Verax ISX/IMX, a single-channel and multi-channel system. We obtained industry certifications for use in hazardous locations globally. These analyzers are designed to operate at extreme operating conditions, including ambient temperatures of 55 degrees Celsius, or 131 degrees Fahrenheit. And pollution is common to some harsh environments, including dust from sandstorms. Our prospects with this line of certified analyzers are solid as it opens up the international markets for us, which we expect to ship these new analyzers in 2022. Advanced data analytics is another pillar of growth for us. We did a press release, as John mentioned recently on the launch of this new application using advanced machine learning algorithms. This revolutionary application enables pipeline operators to differentiate between two patches, or refined fields moving through a pipeline. This patent-pending application called AIDA, or Advanced Interface Detection Algorithm, provides real-time protection of the pipeline interfaces without the need for additional sampling or chemometric modeling. Pipeline operators will know that a new batch has arrived with certainty and speed. The value created through this application is significant, and we plan to launch more AI machine learning applications in the future. While sequential revenue decreased due to seasonality as the third quarter has historically been the lowest quarter for the year, revenue grew 23% when compared to the third quarter of last year. Also for some applications, we are encouraging customers to move towards a subscription model rather than a capital purchase. And this push towards subscription model extended field size growth significantly. Having said that our annual recurring revenue is growing and we expect the trend to continue. John mentioned that we added three new sales professionals as well and we expect that this will push further our growth in 2022. With that, I'll hand over to Ryan to discuss the chemistry technology segment.

Thank you, Koid and good morning to everyone. Today, I'll discuss our chemistry technology segment performance, first highlighting our energy chemistry technologies and then moving on to professional chemistries, which includes both industrial and consumer chemistry solutions. At the completion of the third quarter, I'm pleased to report that our energy chemistry technology strategy to be the collaborative partner of choice for delivering sustainable, optimized chemistry solutions is being fully executed and gaining momentum. Flotek’s differentiated solutions focused on maximizing our customers' value by elevating their ESG performance, lowering operational costs and delivering improved return on invested capital. We are continuing to see growth with both domestic and international E&P operators as well as service companies, thus delivering on our second quarter commitment to diversify our revenue stack and minimize the risk of customer concentration. Now in the third quarter, we concluded the implementation of our accelerator structural changes by doubling the size of our sales force and adding over 150 years of industry experience in multiple disciplines across the entire energy lifecycle in the process. Additionally, we completed the digitization of our customer relationship management system, online demand planning and real-time geographical costing modules to drive efficiency and velocity in customer pursuits. As a result, we're pleased to report the following highlights for the third quarter; first revenue for energy chemistry technologies is approaching a 30% improvement quarter-over-quarter, significantly outpacing the market and indicating market share growth. Secondly, revenue generated from new or non-core accounts grew 34%, while the total number of customers grew by 22% quarter-on-quarter demonstrating the continued emphasis on lowering customer concentration and improving revenue diversification. We continue to make notable progress in rebuilding our indirect channels to market with service companies. We have solidified a partnership with a major international service company to deliver a four-wheel trial of Flotek’s proprietary slick water hydraulic fracturing fluid system to a major NOC operator in Saudi Arabia. Additionally, we've executed a five-year service contract extension at our materials and trend logistics facility in Raceland, Louisiana, with one of the world's top oilfield services providers while expanding that business through the impact of Hurricane Ida. Furthermore, the segment accomplished the successful entry into an adjacent energy market with revenue generation in geothermal drilling and cementing operations. Now also in the spirit of minimizing risk, we proactively entered into early negotiations with key suppliers to secure future purchase prices and material allocation volumes with our top product as for 2022 as we are focused on continued growth. Finally, we are pleased to announce the commercialization of Flotek’s ESG scorecard assessment, which analyzes the full well cycle chemical utilization and identifies opportunities to support customers' ESG reporting goals, operational efficiencies and enterprise risk management. Now turning to our professional chemistries business. During the third quarter, we saw significant progress in transitioning the product line into a long-term success. Our synergistic approach with chemistry at the core allows the organization to utilize the same assets, supply chain, logistics and technical teams to leverage uniquely adjacent buyers and markets. With the flexibility to deploy to the most attractive opportunities. We are pleased to see diversification and the building of momentum for these categories, which will contribute to our growth as a collaborative partner of choice for sustainable chemistry solutions that maximize our customers' value. Since our last update, we have executed the following milestones in our professional chemistry segment. First, we signed three contract manufacturing and toll blending agreements with U.S.-based suppliers. We also gained sales force expansion with manufacturing representations via four agencies, which now provide nationwide coverage in 48 states with over 150 sales representatives. It's very important to note that our professional chemistries product line leverages this commission-based indirect model to gain faster access to a broader market with a significantly reduced capital outlay. We are also able to extend our product line with 18 private label auctions for distribution and redistribution groups. Finally, we were able to add revenue from an agricultural adjacent market with our green solvents and adjuvant applications. I must admit, we are very excited about the continued opportunities for our chemistry technology segment and we look forward to the future as we continue to empower our customers' social license to operate with our enhanced chemistry solutions. Now I'll turn the call over to Mike to discuss our financial results.

Thank you, Ryan. Good morning, everyone. Now I will recap the quarterly financial performance. During the quarter, consolidated revenue was $10.2 million, up 11% from the second quarter, and well over $12.7 million of revenue in the third quarter of 2020. By segment in the third quarter, chemistry technologies had revenues of $9.4 million, an increase of 20% from Q2, with a decline of 22% from Q3 2020. The declining chemistry from Q3 2020 was primarily driven by the reduced sales activity attributed to our second quarter loss of a large customer. We also saw a significant drop in sanitizer sales from a year ago. These drops were partially offset by several new and returning customers in the third quarter. Turning to the data analytics segment, revenue was up 23% from the third quarter of 2020, although below the $1.5 million of revenue in the second quarter. The third quarter is historically the lower quarter for data analytics. Consolidated operating expenses were $5.4 million in the third quarter, a 55% decrease sequentially and an 82% decline from the prior year's level of $29.5 million in the third quarter. Operating expenses were down since the second quarter primarily due to the net impact of the $9.4 million release of ADM access terpene loss reserves, offset by the $1.75 million pending payment. The reduction in operating expenses was partially offset by the higher material costs associated with the higher revenue in the quarter. Q3 2020 expenses were clearly higher due to $9.6 million of reserves associated with last year's product rationalization and $3.2 million associated with the JP3 earnout provision. Third quarter corporate G&A was $2.7 million, which is a 7% reduction versus the prior quarter. The decline is primarily due to the release of the 2020 bonus accruals and the prior quarter severance accrual. Also, the employee retention credit period higher in the second quarter contains catch-up credits for Q1. G&A also includes an accrual for all the remaining ADM legal fees associated with the settlement. We report a profit from continuing operations of $509,000 or $0.01 profit per diluted share in the third quarter. This compares to a $0.09 loss per diluted share in the second quarter. The current quarter results are a significant improvement over the loss of $45.2 million or a $0.66 loss per diluted share in the third quarter of 2020. The ADM settlement impacted current earnings per diluted share by roughly $0.11, whereas Q3 2020 EPS included the negative impact of the JP3 impairment of $0.36, rationalization of inventory of $0.14, and JP3 earnout provision of $0.05. Our adjusted EBITDA for the third quarter was a loss of $6.3 million, lower than last quarter's loss of $6.7 million and last year's loss of $6.5 million. Now let's move on to the balance sheet, where our focus remains on preserving and improving liquidity at the end of the third quarter, with cash equivalents of $20.5 million versus $27.8 million in the second quarter. Our cash position was impacted by the operating losses and customers extending payment terms primarily outside the U.S. Our cash position was positively impacted by a 23% reduction in net inventory levels. On the payment side, we are seeing some prioritizing customers who are agreeing to better payment terms for some of our products. In late September, Flotek submitted our application to the SBA for forgiveness of nearly all of the remaining $4.8 million in PPP loans on the balance sheet. In addition, in late October, we received approval to pay back any unforgiven PPP loan balances over a term of five years instead of two. Furthermore, we continued to be in due diligence on an asset baseline, which we will use to fund working capital growth as the business expands. Lastly, we completed long-term lease agreements with both our Waller and Monahan facilities. We have also engaged with a national real estate firm to market several of our facilities for sale and to assist in subleasing or renegotiating one of our facility leases. The balance sheet includes the settlement payments to ADM, payables and associated outside legal fees that will be settled over the next two quarters. The balance sheet also includes a $1.9 million balance associated with the employee retention credit that will be applied to reduce future cash outlays to employee payroll taxes. Finally, I would like to give you an update on our remediation efforts concerning our previously reported 2020 material weaknesses. We have made very good progress throughout the year in executing the remediation plan. To begin with, we exerted more control over the program by bringing internal audit management in-house. The accounting and finance team also implemented certain new controls in work to improve operating effectiveness of our key controls into the areas of material weaknesses. Our testing program is ongoing and will continue into the fourth quarter. We expect to be fully remediated by December 31.

Thank you, Mike, Ryan, and TengBeng. Last year during the Q3 2020 call, most people would essentially go home for Thanksgiving and not come back until the second week of January. I took a lot of criticism for those remarks. But I think my remarks held out to be true. Unlike last year, we're seeing crude prices increase faster than many of us would have anticipated. In fact, we've seen the price continue to increase through most of the third quarter and they still look strong. We saw WTI prices climbed to $85 a barrel in October, which is the first time it's reached that level since 2014. Today, I feel much more confident about activity levels remaining consistent, increasing and continuing right up to the Christmas holidays and maybe even through. We're excited about all the positive developments and steady economic improvement we're seeing. We're confident that Flotek is well positioned to continue to provide our value-added products and services, as activity continues to accelerate and that the adoption of an environmental culture is going to provide a firm foundation for our growth going forward. There's one elephant in the room, I'll try to address our next call when you hear from us on the year-end Q4 is going to primarily focus on our execution of the current strategy to secure the cash that we need going forward. That'll make up the principal element of our next call as we define what we've done and what we're doing so that we remain a going concern. We're excited about what we've got available to us in order to execute that. In closing, let me thank our team members, our customers, and particularly our shareholders for all their continued support. With that, we're going to open it up to questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Eric Swergold with Firestorm Capital.

I will ask one big question and then I'll get back in queue because I know a number of people have questions. But can you give us some color on the number and size of companies that are either evaluating or in test for your chemistry or CNF from E&P players, global integrated, and state-owned oil companies? I think that would be helpful to have some idea of what targets you're shooting at. Thank you.

Yes. I'll go ahead and step in with that. So when I look at it now from the size-wise, I'll talk first about the international markets and the campaigns that we have ongoing there. As I mentioned, we're looking at a full fluids development with the major NOC players in Saudi Arabia. And then also, we've had a complex nanofluid application in trial with major NOCs in Kuwait, as well as the United Arab Emirates. Those are continuing to add success and data improvement for, or hoping to move to full field applications. We've also continued the growth and pursuits with some of the major players actually being independent in the Permian Basin, the Anadarko basin, as well as in the DJ. We've had great performance in those trial tests so far. We've mentioned a couple of them in prior quarters. Again, for us, we're looking for these full field deployments that are going to help move the needle for us in growth, and we're seeing solid improvements there. Finally, the last thing that I'll mention is along with the line utilization of our complex nanofluids, we've also seen the expansion into the remediation and water flooding markets. We're seeing some of those in Canada, as well as California and also strong remediation applications in the Permian Basin. Those are continuing to grow in double-digit percentages quarter-on-quarter. So quite a few things. I hope this kind of gives a unique blend of major independent and large NOCs in the Middle East that are really going to help us move that needle with magnitude in 2022.

Let's see. I guess just two questions on the energy chemistry side. Can you update us on the two larger customers, experienced disruptions due to M&A? I think there was an expectation or hope that that would kind of be backed by year-end. Was wondering if we could get an update on that if possible. And then, I also know you guys have been working to rebuild or understand you've been working to rebuild your sort of channel sales via other service companies into the oil field. Update on how the reestablishment of those connections is going?

So in terms of, I'll start with let me talk about the indirect channel markets right now. We're seeing great movement in indirect channels and we look at if you were to compare say Q3 of last year in 2020, in Q3 of 2021, we've seen a 47% improvement in the service company applications that we're seeing through the indirect channel. We continue to see that even the growth versus Q2. And when we look at that there's quite a few aspects and avenues that we're going down for that some are, what we consider to be full prescriptive chemistry maintaining all chemistry profiles, some of our own engineering components that we're doing in the data analytics part for chemistry applications, as part of that service, it also laboratory testing. We're really happy about where that's moving. That's putting us in a strong position to follow up even with our E&P operators to those indirect channels. Now, the comments around that the two major customers, when we look at that, I would say that out of the two, we are now kind of reengaging with one of them for the future in 2022. For the other one, it's just an ongoing process right now. It's just in discussions because there's minimal activity right there at this point.

Daniel, we are actually excellent in that. I don't think we have the relationship issues that we had three quarters ago. We are a business and we just need to provide a great solution and they're willing to buy from us. There's no impediments to them purchasing at this point. So I think we've made tremendous relationship progress over the last 12 months, to put us in a good position going forward.

Okay. Let me pivot then, and ask one on the JP3 side, the harsher environment analyzer. I mean, does that unlock anything in the, I guess, practically speaking, the near term? I mean, is the outlook discernibly stronger in Q4, as you come back from some of the seasonal impacts in Q3 on the data side?

Thanks, Daniel. I think, obviously, with this new analyzer, one of the biggest challenges that we had before that is that our analyzer was certified for North America and not international. So we had to build a new one that is certified for international markets; International goes through two different bodies, one is known as ATEX, and the other one is IECEx. We have some countries that require ATEX certification, some require IECEx, so that opens up a market for us in international that we did not have before. Secondly, obviously, we wanted an analyzer that can handle all conditions, including the extreme temperature, for example, in the Middle East, as well as pollution. We made sure that we are able to get certified for that. With that, we can cover the rest of the countries in Asia, Africa, Europe, as well. So suddenly, it opens up a new market for us. We expect that we'll probably ship some of this newer line in 2022. So yes.

That's a good question, Daniel. If you look at sort of the sale cycle that Koid's leading, we had numerous pilots that we needed to get started, but we couldn't actually deploy the equipment to the pilots until we had the certified equipment. Now that we have the equipment certified, we go into the pilot stage, and then the pilots will convert into sales. We've got a great pipeline there. But without the certified VOCs for the environments, we were working in sales cycles; you don't know how to put an end on it. Now we have the beginning on it. The pilots are initiating, and it's exciting to see that the opportunity that exists for JP3 in the international market. This is the most exciting part of a conversation when you go in and talk about digital transformation.

Got it. Okay. Let's see for now, I'll leave it there, guys. We'll stay tuned, John, as you promised, for some color in the future on the liquidity side. But thank you for the time.

Our next question comes from Jeff Robertson with Water Tower Research.

Thanks for taking my question. I think TengBeng mentioned moving to a subscription model on some of the data analytic services. I'm wondering if that will enhance the ability or I guess I'm wondering how you expect that to enhance your revenue model, either through more customer adoption or subscriptions, or longer-term relationships?

So really the whole idea is to get to a longer-term, annual recurring revenue that is predictable in the future. So that's the plan. Now we are obviously still selling capital purchases. We're selectively moving some applications to that. Obviously, when you move from a capital purchase to a subscription, you'll see a revenue drop. But in the long-term, that will pick up.

It's an interesting situation right now, Jeff. If I had to summarize it, we have three sales models in play: the preferred model is annual recurring revenue, the second is a hybrid model, and the third involves equipment sales. Since we're selling to customers who have previously purchased a few items and still have the chance to deploy more of our technology, we're working on converting them from their historical equipment purchases to either a hybrid model or ARR. Some customers prefer buying equipment due to the limited revenue and cash flow. Koid and I often discuss the best business approach—whether to simply accept the hardware purchase, encourage a shift to hybrid, or push for ARR. We aim not to delay the sales process too much. While customers are not leaving us, the push for ARR can extend the sales cycle if they prefer to buy equipment instead. We're navigating through this transition.

John, does that model increase the number of potential customers you have for data analytics?

It depends. It’s interesting. Like, Koid addresses too, some countries don't like ARR, they just want to buy equipment. They're designed for purchasing capital equipment, deploying it, and they don't want to have a subscription base like in the software business. They're not designed to pay maintenance. So they want to buy a license and then just use it. When they need to update it, they just buy again, would be their preference. So yes, we have to be adaptable to the markets that we're selling in. But the good part about ARR is it's sticky. After they're in there, you're in there, and it's like SAP or any other ERP system; it's something that just works. They depend on it, it's a part of their business DNA. Our goal is to get there, where it's not just the equipment that they may turn off or you change out of an operator, and they don't see the value in the measurement because it's not integrated into their process. We're working on that.

Thank you.

You're welcome. Anything else, Jeff?

I guess one other extension to that, obviously, there's a lot of talk about carbon capture and storage. Do you all have anything either through chemistry or data analytics that you're working on that you're evaluating those types of potential new opportunities?

CCS, carbon capture sequestration, has actually turned into CCUS. Most people are interested in utilization now instead of just sequestration. We are looking at that. The injectability of CO2 can be enhanced by our chemistry. We’re looking at solutions to help in the injection rates and the preparation of a reservoir for acceptance of CO2. Then, understanding what chemistries are the best for that environment. It's an opportunity that we're exploring, and we think it's going to expand. We're very fortunate that we're having this discussion in the Texas Gulf Coast area because the Bureau of Economic Geology at Texas identified close to a year’s worth of sequestration reservoirs in the near offshore of Miocene in the state of Texas. I think it would be something like 35 gigatons that could be put into depleted fields offshore that we know could hold it because they held natural gas for hundreds of years, for thousands of years. I think as that infrastructure evolves, the Texas Gulf Coast will be a big part of that. The second place will be injecting into saltwater brine, and I don't think we'd have enough work to really comment on that at this point. The real problem here is in CO2 Capture as opposed to the injection in the subsurface. It will be part of that solution. I think the bigger trigger that needs to be addressed is how we're going to capture it more efficiently.

Our next question is a follow-up from Eric Swergold with Firestorm Capital.

Thanks. I have two more questions. Following up on the CO2 side, what can you tell us about what you're doing in methane, because that seems to be a big focus with some of the new environmental regulations?

We have done some experiments here in the laboratory on how we're going to measure other gases or other molecules using the JP3 analyzers. That work continues to go on. We did work with a particular customer to see the feasibility of it, and it looked quite good. It does mean that we would have to expand our analyzers because the spectrum we're sweeping down probably is not the best for measuring CO2 or methane. However, it is an excellent opportunity for not very much money to add monitors inside of our box to measure the additional molecules or increase the sweet frequency in a future generation of the equipment. All of those things are being worked on, Eric. I think the environmental nature of that and the regulatory environments are going to support us expanding what we measure. We have active efforts going on in that area, though I'm not close enough to give you an estimate on the quarter. But we continue to look at it—it's an important part of the future.

Okay. And then circling back to ADM. I'm not sure if we can discuss this or not. But is there a margin improvement potential and having gotten out of that unfavorable ADM contract in terms of your cost of goods sold going forward? Should your CNF business be able to achieve a better margin now that you've kind of put that old contract behind you?

That's a good question. I'm sitting here looking at my General Counsel, making sure I don't violate any of the settlement agreements. But we did have an uplift and cost associated with a terpene we were buying no matter what the price in the market was. There was a fixed fee that we had to pay above that; that's certainly going to come back to us because we'll be buying it at the market without that uplift. And that is material, I mean, so it should give us some impact. Now, of course, we are blending that with other chemicals. So the actual margin impact gets diluted somewhat, and much like it gets diluted in the blend. We are using less of it in our blends than we were in the past. Therefore, we’re not passing as much through. That's one of the reasons we needed to get out of the contract. But it should give us some margin improvement, and it certainly gets us back to open market pricing, which I think is going to be a tremendous opportunity for us.

And then, my last question is with respect to ESG in general. Last quarter, you did a major upgrade to your corporate presentation in terms of getting the word out on ESG. Can you update us in terms of where that ESG effort stands in terms of investor relations? I know you mentioned at the beginning of the call pushing into corporate boardrooms—that change isn't necessarily immediate, but they're looking at ESG.

ESG, I'm going to let Ryan jump in here. I haven't gotten that update on the deck yet for investors, but we're going to work that out later today. There are some things that are happening that are pretty exciting to me. One is we have been selling to suppliers that work in the geothermal industry. That's very much an ESG area, and you know that you can't drill a geothermal and declare yourself a green power supplier if you in any way violate the principles of ESG during the preparation of the wells for circulating the fluids from the subsurface. I think that's going to be a great area for us. We've got numerous conversations going on over the next several months, talking to geothermal drillers or geothermal startups. That's an area where there's a lot of money flowing around. Also, on the ESG front, I think one of the reasons people are really talking to us at the C-suite level is just how ingrained in our DNA we have become with ESG. With that, I will turn it over to Ryan and James to tell you where we are on the scorecard.

I would say just to add some granularity on how we are targeting our customer base and future customer bases that in the last two quarters we’ve had in excess of 25 meetings with various asset owners in terms of C-suite, engineering and chemistry technical groups around the application of the chemistry scorecard, ESG scorecard. What we've done is really looked at it—we've gone to our top customers and done assessments for them, we've gone to what we consider to be industry leaders in responsible drilling and production of oil and gas, worked with them. Then we've also approached some companies that aren't just in the oil and gas or the energy business, just looking at industrial chemicals, and had discussions around how the scorecard works, what kind of impact it plays, because this thing has evolved from annual sustainability reporting into more about the evolution of how that also impacts operational efficiency and overall risk management. James's team has led the spearheading of taking what we're seeing with our customers and future potential customer base and transitioned them into the reporting bodies. You talk about SASB and equitable origin; we are working together to give a true analytical response. This transcends this way into investment opportunities with banks, in terms of looking at enterprise risk management for overall assets. I think it's been a great interaction, and we're learning and evolving on it and seeing value being created through the application of the scorecard. So it's not just a number for an annual sustainability report—it's a true assessment and analysis for the overall chemical utilization for life cycle.

I do think that you bring up a good question. I will report back next quarter on the number of pitches we've made to green investment groups, Eric, and we'll set that out to make it a done by objective rather than by access.

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

A lot of exciting things are happening in the industry, particularly on the service side; we're seeing consolidation, as I mentioned, and people that are big movers in this space that have great track records for growing companies and being successful. We intend to do the same. We're excited about our future. We're appreciative of all our shareholders, and I'm particularly appreciative of our finance team. We seem to keep moving legacy issues and other things around. I'm grateful for the reliability of our financials and our ability to clear material weaknesses and the very close work we have with our auditors. We've got a great company; we've got a hill to climb here though. I think our next call will be one where we really get into the details on the cash and the go-forward with regard to liquidity and what we've executed and what we are executing. Again, I really appreciate you guys staying with us. It's been an interesting quarter. I think Q4 is really going to set the stage for what we should expect in 2022. Much like all other CEOs in this space, I'm excited about the year ahead at this point and look forward to the next call. Thanks so much.

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