Flotek Industries, Inc.

Good morning and welcome to the Flow Tech Industries third quarter 2020 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Danielle Allen, Senior Vice President, Chief of Staff for Flowtech. Thank you. You may begin.

Thank you, and good morning, everyone. We appreciate your participation. Joining me today and participating on the call are John Gibson, Chairman, CEO, and President, Michael Borden, Chief Financial Officer, Tang Beng Khoid, President of Global Business, and Ryan Udell, President of Chemistry Technologies. On today's call, we will first provide prepared remarks concerning our business and the 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. 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 SEC. Also, please refer to our reconciliations provided in our earnings press release as management may discuss non-GAAP metrics on this call. With that, I will now turn it over to John.

Thanks, Danielle, and thank you to our employees, our shareholders, our customers, and to our board of directors. I'm extremely grateful for the strong support that Flowtech has received. Additionally, I'm truly inspired by our employees. They've remained focused and committed to executing our vision every day while juggling dynamic demands at home and work. A patchwork of return to school procedures and evolving challenges related to the pandemic. My gratitude for their dedication cannot be overstated, and it's a great honor to work alongside them. Now, before we dive deeper into the quarter, I wanted to welcome Mike Fucci to Flowtech's Board of Directors. As the former chairman of Deloitte US, Mike is an incredibly respected and influential leader who has spent his career contributing to the strategic vision of one of the world's most respected professional services and accounting firms. Additionally, over the course of his career, Mike has become a thought leader on human capital, diversity and inclusion, and business transformation. We are very fortunate to have Mike join us. Thank you, Mike, for joining Flowtech's board. I really look forward to working with you. Now let's turn to the third quarter. Now, overall, our quarterly performance showed some positive signals. We are by no means satisfied with our results, and we have more work to do. As I said last quarter, navigating through this global market disruption caused by COVID and demand destruction has been the most challenging environment that I've had experienced in my career, and even so, I remain very optimistic about the future of Flowtech. We're doing everything possible to position ourselves to be a stronger company in 2021. That means having the discipline to make some hard decisions today. Last quarter, you met Mike Borden, our new CFO, on his third day at Flowtech, and every day since then, he has been diligently identifying areas where we can improve our business performance, strengthen our processes, introduce efficiencies, and implement cost reductions. I continue to be impressed with Mike's attention to detail and commitment to high standards, and I'm very glad he's here. Together with the leadership team, Mike has driven several important initiatives that, while difficult today, mean we emerge stronger for the future as the market recovers. Among those are an impairment, inventory write-downs, and workforce reductions. This is a period of transition for us, We believe we have the right leadership team in place to help us accelerate the transformation of the company and are making the necessary adjustments to our business model. We're building a culture that drives value creation for all of our shareholders, an entrepreneurial culture with chemistry as the common platform, underpinned by a passion for customer success and shareholder returns. Glowtech has a clear path forward for growth and profitability, and our team is focused on results. Now, with regard to the macro environment, let's address that first, as it's been the inescapable force impacting our business performance. Although the world started to slowly emerge after COVID lockdowns in the third quarter, the fundamentals of the oil and gas market remain severely challenged. A drastic slowdown in the oil and gas activity across the spectrum significantly limited customer capex activities from the wellhead to the gas pump, many of which have been put on hold while some sites were completely shut down. Additionally, midstream budgets in gathering and processing have decreased 60% year-over-year, while U.S. drivers reduced their road mileage by approximately 34%, with a corresponding drop in the consumption of refined fuels. That said, we're still seeing some positive indicators. Crude pricing has begun to show signs of improvement from last quarter, although still at low levels. Refinery throughput has improved significantly. although margins have remained compressed and customer demand has not moved in tandem. Some of the customers have resumed modest levels of completion activity in the Permian, and we saw increased demand for our speciality chemicals, stimulation chemicals in particular, in select international markets, primarily in the Middle East. In summary, we saw some improvement in the market, but not nearly enough to get excited that the market is recovering. As a result, it was a difficult quarter with mixed results. The drop in economic activity and weak demand is weighing on sales across our business segments. Last quarter, we closed our acquisition of JP3, a data and analytics technology company serving the oil and gas industry. With our first full quarter of JP3 results included in our financials, performance fell way short of expectations as JP3 sales were impacted by dramatic reductions in capital budgets by midstream and downstream customers. As a result of these conditions, we took a hard look at what we could achieve in the near term. In light of anticipated ongoing market disruption and the necessary resources needed to transition to a recurring revenue model, and after this analysis, we concluded that we should take an impairment charge across several categories for JP3. And we also completed our quantitative and qualitative analysis of inventory following the acquisition to assess market values and align it to anticipated customer demand. In tandem, we're lowering operating expenses to be commensurate with the revenue decline we anticipate from moving to a recurring subscription model and reduce demand in a difficult market. These cost reductions include a headcount reduction of 35% within the segment, as well as a decrease in other operational costs that are not directly tied to near-term revenue generation. These actions were not taken lightly, but were necessary as we manage our business so that we minimize the impact on our liquidity in 2021 and beyond as we transition to subscription-based revenues. Additionally, I'm also pleased to announce that Tang Bang Coid has assumed the duties of president of JP3. We recruited Coid to Flowtech last quarter, following more than 30 years of experience in the oil and gas industry. He is a proven leader building enterprise-wide software solutions for energy companies across the full hydrocarbon stream, and he's demonstrated a very strong track record expanding businesses to international markets. I have full confidence in Coyd and our team at JP3 to build a very strong future. In the long term, the business has considerable growth opportunities, and we remain confident about the compelling strategic financial benefits as JP3 diversifies Flowtech's business across all segments of the hydrocarbon value chain. and its technologies are helping customers accelerate digital transformation by providing the real-time data necessary to manage crude oil and natural gas processing. We also have the opportunity to address potentially greenhouse gases with JP3, and so emerging markets are a real opportunity for us as well. CORD will address the migration to a subscription-based data model and also highlight our growth strategy to expand our market penetration both domestically and abroad. Transitioning to chemistry technologies and our newly launched sanitizer and disinfectant business that we'll often refer to as Jansan business, through the quarter we experienced pricing pressure as suppliers with lower quality products offered steep discounts to liquidate inventory ahead of the anticipated tightening of regulatory standards, which we believe will drive those products off the market. We trust these disruptions will be temporary in nature, Even with the recent announcements about the anticipated COVID vaccines, we still believe there will be a long-term change in consumer and business behavior. It will take some time for vaccines to be proven, manufactured, delivered, and administered widely. And there are still large unknowns about the number of Americans who will take the vaccine without data related to long-term effectiveness and side effects. Most importantly, I'd like to emphasize that we're building out a product portfolio in Janssen. It extends beyond sanitizer to address a broader set of needs in the janitorial and sanitizer market and transcends the current pandemic. Overall, our chemistry technology segment experienced sequential improvement as we've seen an uptick in energy chemistry activity both domestically and internationally. As a result, we are pleased to see a 52% increase in overall segment revenue in the third quarter versus the second quarter. Now, let's move to liquidity and cost measures. We continue to take decisive actions guided by our strategic pillars to best position Flowtech for the future. Our balance sheet remains healthy, and we are focused on bolstering our financial flexibility. As a reminder, earlier this year, in order to preserve our liquidity, we reduced headcount, lowered salaries of our executive team, curtailed discretionary spending, and decreased compensation for our board of directors. Throughout the quarter, we continued to work with our suppliers to negotiate costs on raw materials, negotiated reductions in our leases, and reduced our freight costs. Now, I'm going to turn it over to Coyd for further discussion of JP3 efforts to drive revenue, and then we'll turn it over to Ryan Azell, who will give an update on the trends at the chemistry technology segment, including the process of our new Janssen operations.

Coyd? Thank you, John. As John mentioned, while we face challenging market conditions, we've utilized this time to accelerate our strategy to penetrate the international market, transition our business model, and focus on targeted applications of our game-changing technology. On the international front, JP3 in the past only served the North American market. In September, we hired a seasoned business development leader in the Middle East to help us drive JP3 penetration in the Middle East, Africa, and Asia. Since then, we have had many meaningful engagements and we have received very favorable feedback from potential customers and are responding to many requests for proposals. While international sales require longer lead times, we are optimistic about our opportunities over the mid to long term and we are preparing for deployment of our technology to this market. This is very exciting. Secondly, we are transitioning and fast-tracking our business from traditional equipment sales to a subscription-based model. This will provide the greatest value for JP3's customers and our shareholders in the long term. While we will maintain some level of equipment-based contracts to accommodate customer needs, we are aggressively shifting to subscription-based contracts, which will accelerate our recurring revenue. Additionally, we continue to maintain strong relationships with existing customers and are building new relationships to expand our customer base. For example, in working closely with Phillips 66, we signed a collaborative agreement with them in the second quarter. As part of this agreement, we will provide a data services offering that will optimize transmix, which is the natural mixing between adjacent batches of different fuels being shipped in a common pipeline. This offering provides real-time data, which enables faster decision-making that will help reduce transmix and increase profitability for refined fuel producers, transporters, and terminal operators. We are encouraged to see very positive feedback from the value of this partnership, and it validates the strength and value of our customers are seeing using our unique technology. We look forward to expanding adoption of this application in the market. With that, I'm going to pass along the call to Ryan Ezell to discuss our chemistry technology segment.

Thank you, Kois. As a reminder, our chemistry technology segment includes both our energy chemistry technologies as well as our emerging janitorial and sanitizer businesses, and I'm deeply proud of our teams who are executing successfully. I'll first provide an update on our janitorial and supply business, which is referred to as Jansan. Last quarter, we launched Flowtech's line of FDA-quality hand sanitizers for industrial and consumer applications. Our initial efforts were cultivated as a result of community outreach that began the first quarter when we started producing and donating hand sanitizer to local communities, first responders, hospitals, schools, homeless shelters, and senior residential communities. Subsequently, we recognized the opportunity to diversify our corporate revenue stream into a rejuvenated, high-growth potential market that was a natural extension of our specialty chemistry experience. By leveraging our chemical production capabilities and ISO certified facilities, we applied our world-class R&D footprint to deliver an expanding line of high quality FDA and EPA registered products. Today, we're actively selling FDA and EPA registered janitorial and sanitizer products into multiple markets, including hospitals and medical facilities, the travel and hospitality industry, food services, e-commerce and retail, sports and entertainment, and other industrial and consumer markets. The inclusion of disinfectants and surface cleaners to our existing hand sanitizer line establishes a full product offering for the Jansan community, particularly those in commercial and industrial applications. Following a strong second quarter of growth, we saw some pressure in the third quarter in our hand sanitizer business. With a high demand for hand sanitizing products, the market experienced a flood of new interest, often with low quality, or even contaminated raw materials. More recently, in anticipation of the FDA reverting back to its original higher quality standards, opportunistic producers of substandard hand sanitizer have been dumping inventory into the market as they exit the industry, which has disrupted the supply and demand balance. As John said, we believe this disruption is temporary. More importantly, Buyers are becoming further educated today and recognize the need for regulatory compliance to deliver high-quality product that Flowtech offers. As a result, we're starting to see repeat buyers of our hand sanitizer products and a higher focus on product quality metrics by commercial and institutional buyers. The triage purchases we observed in the second quarter are reducing back to normal procurement processes, and we believe that excess low-quality inventory should begin to dissolve from the market. Flowtech is now selling into 25 states and have increased our distribution customer base by 28% and end-use customer base by 49% quarter over quarter. Additionally, we are selling our products direct to consumers on Amazon. The customer feedback is positive and consistent. Flowtech's products are among the highest quality technologies in the JanSan industry, with proven supply chain and logistics capabilities that differentiate us in the marketplace. We're building out our channels to market for a long-term and sustainable business, and we have expanded our Jansan product portfolio to include disinfectant wipes and sprays, surface cleaners and degreasers, and manufacturing partnerships with emerging technologies in the Jansan industry. I'm also happy to report that with the recent addition of our new packaging line, we further enhanced our capabilities, reduced costs, and accelerated our order fulfillment process. We see many opportunities ahead, particularly those in Jansan, and are optimistic about these in the long term. As we can continue to build out our capabilities, we will invest in marketing resources and talent with strong distribution and sales experience to further develop our relationships in the Jansan market. Our Jansan initiative exemplifies how we are adapting and reallocating resources to high-growth businesses that will drive positive returns, and we look forward to providing additional updates as we progress in this exciting market. Now switching to a few comments on our energy chemistry business, which first of all, let me say it is improving, and I would like to provide a few highlights in this regard. Although market experts have commented on declines in chemistry usage and negatively impacted contracting opportunities due to M&A activity, there are macro factors that are helping to drive energy chemistry. As demand began to exceed production at the end of the third quarter, completion and fracking activity slowly moved upward, and we've seen select customers increase usage of our specialty chemistries as their completion activities resumed given the production improvement and return on invested capital our products deliver. In fact, in a recent visit with one of our largest customers, Flowtech received high praise due to the strong partnerships we've created together with an unwavering focus on consistent delivery of our chemistries, technical support services, and well site implementation. Furthermore, I'm pleased with our international opportunities, which are driving upside in our energy chemistry business. In the Middle East, we've been named the chemical partner of choice to provide a broad range of coal tubing stimulation additives to a major NOC through partnership with in-market and international service companies. This opportunity and others will drive our growth in the Middle East as we look out over time. In addition, as Mike will discuss in greater detail, We have continued our focus on cost reductions and supply chain improvements, which include inventory management and rationalization of our finished goods count, resulting in greater efficiencies in our business. In closing, I would like to emphasize that our energy chemistry business of today is truly a transformed business. Over the past year, we've driven down our operational costs, renegotiated logistics and supplier contracts, and accelerated efficiencies in our business processes. We built a leaner business that can meet the needs of the oil and gas market of today and the future. And we offer something unique and valuable in the marketplace, which is one, delivering cost-effective chemistry solutions. Two, designing and implementing optimized chemistry. And three, helping operators increase production at lower cost per barrel produced. As we look out ahead into 2021, we are focused on reintroducing Flowtech to the market and building stronger relationships with our active and successful customers to expand our global market share. And with that, I'll turn over the call to Mike Borton to discuss our financial results.

Thank you, Ryan, and good morning, everyone. Since joining Flowtech in early August, I have been extremely focused on evaluating the quality of the books, including the balance sheet, accounting processes, spending prioritization, expense commitments, and our cash management, including our banking relationships, by also spending time with our new auditors. During the first three months at Flowtech, I've started implementing several strategic priorities that will help us to create a stronger organization. Additionally, based on my prior experiences with multiple technology companies where we were able to successfully transition to a recurring revenue model, we have reset the financial framework and underlying assumptions going forward for JP3. We must ensure JP3 is optimized structure to minimize the cash needed as we transition to a new model where we recognize the revenue monthly over a number of years THAN AT THE TIME OF INSTALLATION. THIS MEANS THE COMPANY WILL HAVE CASH OUTLAYS FOR THE INVENTORY UP FRONT TO REQUIRE MORE CASH THAN A ONE-TIME PRODUCT SALE. IT WILL IMPACT ON BOTH REVENUE AND CASH. THAT SAID, JP3 HAS ENOUGH INVENTORY ON HAND TO MITIGATE THE ACTUAL CASH OUTLAYS IN THE NEAR TERM. I WANT TO PAUSE HERE TO EMPHASIZE THE BENEFIT OF TRANSITIONING TO A SUSCRIPTION-BASED REVENUE MODEL IS THAT IT LEADS TO A LONGER TERM, HIGHER MARGIN RECURRING REVENUE STREAM with an associated higher multiples given its predictability. In short, as John noted, we are making and will continue to make the necessary business decisions to minimize our use of cash. First, let me address the impairment we reported this quarter for JP3. As a result of the extended impact of COVID-19 and the continued decline in oil and gas demand and spending budgets, especially in the refinery and mid and downstream markets, we recorded a goodwill impairment charge of $11.7 million and intangibles asset impairment charge of $12.5 million. These adjustments were completed in conjunction with an independent valuation company and the auditors. Secondly, we also took the opportunity to evaluate our inventory across the company. Over the past several months, I've been working with our new and very talented VP of supply chain, Shane Weiss. As a result of that initiative, we have adopted new policies and rationalized a large portion of our inventory by reducing hundreds of underperforming product SKUs. Consequently, during the third quarter, we have taken an excess obsolete reserve of $9.6 million. The charge is made up of two parts. First is a reserve of $5.7 million related to the chemistry technology segment and $3.9 million for JP3. In addition, during our inventory assessment following the JP3 acquisition, the company identified measurement period adjustments to $2.3 million that were made to the initial purchase price accounting. I would like to emphasize that these adjustments are all one-time in nature. And as a result of these actions, we can better manage our inventory position and profitability moving forward. Next, as part of the purchase agreement terms for the JP3 acquisition and the earn-out conditions associated with the Flo-Tex stock performance, the company recorded a liability of $2.5 million in the third quarter. The payment was transferred to the escrow account in early October for the acquisition terms. The $2.5 million transfer to escrow replaces the previously escrowed $3 million shares. Those shares were distributed to the JP3 shareholders in the fourth quarter. I'd like to note that the earn-out provisions and the change in the fair value estimate are not considered an acquisition purchase price adjustment, and thus, Voltech recorded $3.2 million charges that impacted operating income during the third quarter. We also want to remind you that in the second quarter, we changed our reporting technology methodology as a result of the JP3 acquisition and are presenting our results in two new reportable segments, chemistry technologies and data analytics. The chemistry technology segment was previously referred to the energy chemistry technology segment, but now includes our recently launched janitorial and sanitizer operations that Ryan just described. The data analytics business was created in conjunction with the acquisition of JP3. Also, please note, our third quarter results are the whole first quarter that included business operations and expenses for JP3. Prior to discussing our financial performances in more detail, as John previously mentioned, we faced a challenging third quarter driven by continued lower global demand and industry pressures impacting both our segments. Moving on to the income statement, During the third quarter, consolidated revenue was $12.7 million, up 43.5% from an $8.9 million in the second quarter, and below the $21.9 million during the same period last year. The sequential improvement was primarily driven by an uptick in energy chemistry activity as demand picked up both domestically and internationally markets from the second quarter dip. The sharp decline in revenue year over year is largely a result of continued volatility in the macro environment for onshore drilling and completion activity impacted by political and economic events in foreign markets. In addition, COVID-19 impacted our productivity as a result of reduced customer demand for our services and products, with the exception of our sanitizer operations, which just recently ramped up during the second quarter of 2020. Consolidated operating expenses were $29.5 million in the third quarter of 2020, an increase of 24.47% from last YEARS LEVEL OF 23.6 MILLION IN THE THIRD QUARTER. EXCLUDING THESE ONE-TIME ADJUSTMENTS OF 9.7 OF INVENTORY AND 3.2 MILLION OF ACQUISITION-RELATED EXPENSES, WE WERE PLEASED TO REPORT THAT EXPENSES DECLINED NEARLY 30% YEAR OVER YEAR. CORPORATE G&A DECLINED 3 MILLION TO 2.7 MILLION VERSUS 5.7 MILLION LAST YEAR DUE TO A REDUCTION IN OVERALL COMPENSATION SPENDING, LOWER DISCRETIONARY SPENDING, INCLUDING PROFESSIONAL FEES, partially offset by one-time severance charges. Our depreciation and amortization expenses declined $1.5 million to $500,000 in the third quarter versus $2.1 million last year. Research and development costs were at $1.5 million in the third quarter, slightly below second quarter's level of $1.6 million and down from $2.3 million last year. We reported a loss from continuing operations of $45.2 million or a $0.66 loss per diluted share in the third quarter of 2020 compared to a loss of $11.2 million or $0.19 loss per diluted share last year. EPS included negative impact of the JP3 impairment of $0.36, rationalization of inventory of $0.14, and JP3 continued consideration of 5%. Three one-time items represent a vast majority of the total recorded loss per diluted share. Our adjusted EBITDA for the third quarter was a loss of $6.5 million, which narrowed from a loss of $8.2 million last year. The improvement in adjusted EBITDA is probably due to lower expenses, as previously discussed. Now, moving on to the balance sheet performance, as John mentioned previously, our cash position remains healthy, and we are focused on preserving our liquidity. As of the end of the third quarter, we had cash on close to $49.1 million versus $59.9 million in the second quarter. As proof of this goes, the company and JP3 combined have $5.7 million of loans outstanding pursuant to the Paycheck Protection Program. As mentioned previously, we are absolutely focused on managing our inventory position. During the quarter, within the Chemistry Technologies Division, we reduced our SKUs by 35%, as we focus on managing our inventory in an efficient manner. We estimate that the SKU reduction will result in annual savings of more than $1.3 million in inventory carrying costs. Let me pass over the call back to John for some final remarks.

Thank you, Mike. I'd like to take a moment to share a few closing remarks. When I joined Flowtech January, I laid out a few strategic objectives for growth, including reducing our dependence on rig count, expanding new product lines that create a greater amount of backlog and or annually recurring revenue, and further differentiating our offering from competitors while enhancing our capability to provide digital transformation of chemistry and strengthening our market share for our current product lines. At the time, of course, none of us knew how dramatically the market would be disrupted. However, we've adapted our business while focusing on executing against our strategy, which still holds even in this market. And while nowhere near satisfactory to me in terms of progress today, we are making progress and laying a strong foundation for 2021 and beyond. First, we're committed to preserving our liquidity and maintaining a healthy balance sheet. We're fortunate to have Mike at the company to support retention of our capital and and to help drive a culture with a commitment to the leanest cost structure while delivering superior customer service. We are building a more diverse income stream. Through the acquisition of JP3, we are diversifying our business and offering downstream, midstream, and upstream customers access to unique digital transformation products and services. We also have the potential to take this offering into the greenhouse gas and ESG segments, and we're investigating that. while at the same time looking at all of this digital transformation to build us a recurring revenue model. Additionally, with the launch of our janitorial and sanitizing products and logistics services, we further diversified our business beyond hydrocarbon markets to include industrial and consumer markets. From an operational standpoint, we have available, unsold manufacturing capacity in the chemistry technology business for both energy and JanSan products, with the capability to deploy to the most attractive market opportunities. Without adding very much additional cost, we've created additional products that can really help us on the revenue side in Flowtech. We also see a notable international opportunity set for all of our businesses in the oil and gas-focused products to include both JP3 and the energy chemical technologies. where we believe we're going to see much less volatility in the days ahead versus domestic markets. And so we're very pleased that we've expanded into the international segment already. In closing, chemistry is our core competency. We have developed three strong business lines centered around creating value from chemistry. While it's difficult to determine when the world returns to normal, we're putting in place the right measures and investments to emerge in 2021 and beyond as a stronger company prepared for the future with optionality. We still have a lot of work to do, and we're committed, and I'll turn it back to you now for some questions. Thanks so much.

We will now begin the question and answer session. To ask your question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Joseph von Meister with Intermarket. Please go ahead.

Hi, guys. Hey, John. Hello, Joe. Can you tell us what hand sanitizer sales are? were in the third quarter and where you'd like to see that business in a year from now?

We're not breaking it out because we're really trying to maintain some competitive advantage in the marketplace associated with competitors. But I will say that it was depressingly lower than what I would have expected and we didn't see growth quarter to quarter. And mainly because of what Ryan stated earlier, we saw a lot of people that dumped sanitizer. And at the time, at the beginning of the quarter, we were principally looking at sanitizer. But over the last three months, we've diversified that product line where we can be a real JanSan player because people want to buy a portfolio of products in that segment. They're not interested in a single product sale. Ryan, jump in there.

No, I mean, I think you're correct and to reemphasize that, John. I think when we first, you know, On our philanthropic efforts is where our first commercial sales in the J&S business came from. And quickly after being in there for a few weeks, we've come to realize as we were looking at long-term sustainable business, we needed to address the full portfolio that not only talked about the hand sanitizers, the various dispensable options, but then we started talking about the full service business. uh market around that on the janssen business which is substantially larger as a whole than just hand sanitizer and so that's when we moved into a lot of the areas of the surface disinfectants the sprays the wipes the degreasers the cleaners all those things that are core composite chemistry related to flow tech and don't cause any burden on us to move in that transition and since then we've lost i mean launched a substantial line in that area and seen good movement and what we're starting to see now is building blocks of reoccurring customers on longer-term contracts with fixed orders on a monthly basis, which is the target of what we want to be in the sustainability side of the market.

And then on JP3, I know that the pipeline guys and refinery guys have been under a lot of pressure, but what's the outlook for the Phillips 66JV and business opportunities related to that.

Go ahead. Thank you for the question. We are related to the Phillips 66 partnership. So with Phillips 66, through their introduction, we have presented to quite a number of potential customers. Many of them have progressed further on. In fact, one of them has even progressed to a proposal. So I think the value that they see deriving from applying the technology for that transmix is huge. So the response has been positive, and we are looking forward to some positive results in the near term.

The other part that I like about where we are on JP3 and college leadership is we see a pretty extensive set of opportunities in the international market. However, we're being a bit cautious in predicting when we'll be able to get to those because we're still getting all of the certifications and registrations required for the international market. You can't just ship there and violate any of the U.S. law. So we're being very particular, and there are laws associated with shipping fiber and fiber of different lengths and encryption associated with any of the models we might put on the chip. So we're being careful. We see a way forward, and it's clear. So I'm expecting that we'll be able to report back on that.

Thanks, guys. Great job in the tough quarter, really.

Thanks, Joseph.

Our next question will come from Daniel Burke with Johnson Rice. Please go ahead.

Let's see, John, I have a question for you on another one on JP3. In terms of the performance of the business in Q3, maybe not quite up to your initial expectations. I guess I was just trying to better understand if that's a consequence of maybe underappreciating just the intensity of the COVID-related impacts that that business has seen in terms of its end markets, or if it's really more about the pivot to a subscription-based model and that taking longer to affect or being a little trickier to affect than maybe previously anticipated. Can you help me understand that?

Well, now, Daniel, you win an award for an insightful question. I was hugely optimistic about JP3 when we acquired it and thought COVID would abate much sooner than it has. And so we did fail on what we thought would be the projections for the remainder of the year, but primarily due to the fact we did not have access to customers, we did not have access to sites. Even recently in trying to do an installation for a sale, we had an employee that had a COVID-related exposure that prevented us from doing the install immediately. So it just was the operational difficulties of these times. Now, so COVID, I would say that's 80% of the shortfall. The other part of the shortfall is transitioning the sales force to move from selling hardware to selling subscriptions and That's been more challenging. Coyd's doing quite a good job there. We've got a new salesperson here in the U.S. This was her entire background is delivering subscription-based models, and she has bought in 100%, and I'd rather talk to her than to almost anybody because of her enthusiasm for what we'll be able to do. But we have another international salesperson that Coyd's brought in, very similar in that they have a subscription-based experience set, and they understand how to position that and how to sell it. We also need to transition the customers that had bought hardware into subscription models, and that process is underway as well. And so I would say it was more difficult than we thought to go back, but I think mostly because of COVID, but partly because there is a with some customers the desire to just own hardware. And sort of the final remark on this would be, we're not entirely sure, so even on our go-forward forecast that impacted the impairment, how to explain the mix to you, because there may be some countries that require us to sell hardware and then maintenance agreements, which we'll have to try to explain how to explain it to you from a subscription perspective, because there'll be regulations associated with whether or not they can use cloud services Not all countries are in the same place there. So we've got a bit of understanding to go on, but I'm excited about it. James Silas is here with us. We were talking earlier about I'm excited about as we move forward the greenhouse gas measurements and how do we add sensors. James, if you give a comment on that.

Sure, John. We are exploring our options right now on new detection mechanisms, and we want to be able to leverage the capability of the existing JP3 system. And with new sensors and modeling techniques, we're excited about the possibilities of being able to meet those emerging needs in the market.

And another question, Daniel?

Yeah, yeah, I'm still with you guys. That's very helpful, John. I guess the other one I had, maybe a little more straightforward. Could you talk about maybe either the timeline or, if it's easier, maybe the revenue top line that you see at this point after the cost reductions you've affected this year, your latest thoughts on where that top line needs to be to kind of get closer to an EBITDA break-even type of level. Thanks.

Well, one of the reasons we have Mike is he keeps reducing our costs so the top line's coming down, and we're still focused on that, and we've got to be relentless because, unfortunately, I can't answer your question, and the reason I can't answer it is because there's still so much uncertainty that if I go out beyond Q4, I begin to lose my clarity on how the market's recovering. I would have said that I would have thought COVID would have abated, did not. In fact, surging in the northern hemisphere. And so that's impacting us again. We see vaccines, and we have no enthusiasm yet around vaccines from this management team, primarily because there's still a lot of uncertainty in when it will be available, how many will be available, how it will be distributed. And so our predictions, I'm just going to say, We're going to really work hard, but I can't forecast with the accuracy that I'd like. So the thing that I can do is manage cost with a vengeance, and that's where we're going to have to focus in the near term.

Fair enough. Okay. All right, guys, I'll leave it there. Thank you for the time.

Thanks, Daniel. Our next question will come from Eric Sweargold with Firestorm Capital. Please go ahead.

Good morning, guys. Good morning, Eric. I've got three questions for you, all unrelated to each other. The first one is, are we going to have NOLs from the charges you took this quarter to protect earnings going forward? And can you quantify that?

Better turn that over to Mike. So, some of it's going to be timing. As you probably know, we had roughly about 50 million of NOLs coming into 2020. that had a 20-year carryback and 100% use. 2020, the good news is tax losses in 2020 will go out forever, but it will only be able to be used at 80%. Now, let's talk about the inventory write-downs. Until we actually dispose of that inventory, we can't take the tax benefit of it. But our goal is to get rid of that inventory quickly because we'd like the cash if we can get it for whatever values we can get based on the write-downs, and that would be a tax benefit at that time.

Okay. Second question is on the Janssen side. I'm a little unclear. Is your Janssen product line something that's going to be Flowtech branded or private labeled or both?

I'll start out and let Ryan finish up here, Eric. The answer to that is yes. We look at our ability to produce chemicals, whether they be for energy chemistry such as the CNF products or for disinfectants, sanitizer, surface cleaners, and we go, for us, that's capacity. And we intend to try to get the maximum use of our capacity to blend and sand chemicals. And so whether we're doing it for the energy side or for the Jansan side, it turns out that we have the same labor, we have the same facilities, we have the same equipment. Our assets are roughly the same. We did modify a small portion so that we could get FDA registration. And it's so efficient that anything that we do on the Janssen side is very accretive to our overall chemistry's revenues and profitability. But we plan to do whatever makes a profit for our shareholder.

Ryan? Just to add on a little bit more details on that, John, is that what we're looking at is we've done a significant – investment into a high-velocity study on where are the best options for flow tech in terms of the commercial markets, which we include industrial and institutional buyers versus the retail side, and some cost-effectiveness on how we go about approaching both of those. And basically what we're seeing is our advancement into the commercial side, whether it be an institutional or industrial market, plays into our strong suit around our ability to deliver logistically our cost structure, how we can leverage our supply and cost advantage and get out there. And for that, that's a blend of what we would consider to be private manufacturing or white labeling and establishing the Flowtech brand because these institutional buyers are driven by EPA and FDA compliance, which is a strong suit for us. Now, as we establish ourselves in that market, we feel that through our e-commerce business as kind of a training sandbox for that and brand development, that we'll start to be able to establish a stronger flow tech brand inside potential retail business. But those are all weighted against the fact of the significant investment it takes on the marketing side to go straight out and address a retail market. So those are some of the you know, strong points that we're looking at and why we like the commercial markets better on this initial outgo and that balance of private contracting and establishing Flowtech brand inside institutional buyers.

Great. Thank you. And the third unrelated question, this has been a super informative call so far, but there was a recent industry conference where Flowtech presented some new data on a new and improved CNF product line that was resulting in, I don't remember the percentage extra lift it was getting beyond your prior product, but do you have any early indications of consumer response to the new and improved product?

Dr. Salas. Sure, I'd be happy to comment on that. That was in particular with a couple of clients that we were exploring within the Midland Basin based upon our expertise. and experience in the area. We recommended some slight changes and some modifications along the CNF product line. We're very happy with what we're seeing with those. We think we have a satisfied customer using that particular product, and we're excited about being able to introduce that to more customers in the area as well. Again, this is part of our reservoir-based chemistry knowledge and experience coming to play.

Great. Thanks very much. Go get them, guys.

Thank you.

Again, if you'd like to ask your question, it is star then one, star then one to ask the question.

I think that probably. OK, let me let me sum up here sort of where we are. I wouldn't normally give any guidance, but I'm going to give a bit of Q4 macro environment guidance at the moment. We've seen a lot of consolidation in the U.S. domestically. It's one of the reasons I'm excited about the expansion internationally. NOCs don't tend to combine and less volatility in those markets. And so our commitment to being international is important to us. But that is going to potentially slow down some of the potential sales that we have in Q4, just because while consolidating, people tend to take their eye off their operational ball. The second one is we're coming up on holidays. And so the COVID is an excuse to go home early and not spend any more of your capital budget. And so we do have customers that may take off Thanksgiving through January 7th. And then finally, COVID resurging. And so while we are still in here plugging away every day, I'd say Q4 is going to be more the result of industry activities and I'm not really excited about it, and yet I'm not depressed about it. We've got the right things going on. We're talking to the right customers. I leave in just a few days to go on a trip throughout Oklahoma and Texas to visit with customers that we're excited to talk to and explain what we do. But how quickly that turns into revenue, I'm concerned about COVID, I'm concerned about the holidays, and I'm concerned about consolidation because it's involving some of our better customers. With that, thank you very much. We really appreciate you guys, and our focus entirely is on getting some returns for shareholders, so we'll stay at it. Have a good holiday, and we'll talk soon.

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