Flotek Industries, Inc.

Greetings and welcome to Flowtech Industries first 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. To ask a question please press star then 1. If anyone should require operator assistance during the conference please press star 0 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. Joining me today and participating on the call are John Gibson, Chairman, CEO, and President, Michael Borden, Chief Financial Officer, Teng Vang Khoid, President of Global Business, and Ryan Uzell, President of Chemistry Technologies. On today's call, we will first provide prepared remarks around 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 first quarter 2021, which is available on our website. Today's call is being webcast, and a replay will also be available on our website. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings of the SEC. Also, please refer to our reconciliations provided on our earnings press release, as management may discuss non-GAAP metrics on our call. Now, I will turn it over to John.

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

Tang Bang, I know you're excited, so I'm going to turn it over to you. Thank you, John. I am. Well, in Q1, we remain very focused on executing our strategy, making significant progress on all fronts. We are pleased to see continuous financial performance improvements in our data analytics segments. Revenue has experienced double-digit growth sequentially for the past two quarters. Operating margins improved significantly, too. In this past quarter, we added several new customers, and we have repeat buying from existing customers, including a super major oil company. In fact, one of the major midstream companies that became a customer in Q4 came back and purchased multiple systems last quarter. Repeat purchases are testament to the value we bring to our customers, through the application of our game-changing technology. We also made progress on the international front. Our VARECS analyzer for the international market is going through a very extensive certification process. While this process takes time, as it involves multiple certifications, we are making good progress and the project is progressing according to plan. Meanwhile, we also made progress in our international business development efforts. During the first quarter, We completed a site survey for our first international pilot. We are leading oil and gas companies in the Middle East. We are also in the midst of organizing another site survey for a second pilot, also in the Middle East. We are encouraged by these key milestones, despite the challenges of not being able to travel to meet these customers during the pandemic. On the technology development front, we continue to invest in Indian resources and efforts. We released our first application using machine learning algorithms in the area of batch interface detection for pipelines. This new application, called Advanced Interface Detection Algorithms, or in short, IDA, was successfully installed in two locations. IDA will enable customers to make batch cut decisions faster, enhance reduced batch interfaces, and increase profitability. This new application does not need any samples. i.e. samplers. We are also working on several mid- to long-term technology development projects. On the ESG front, as John mentioned, our technology offerings have helped companies reduce their carbon footprint, reduce energy consumption, and reduce emissions. For example, many of our systems are used in condensates and crude stabilizers. Our technology used in this stabilization unit provides real-time data that help customers produce more liquids and less gas while meeting the specifications required for storage and transportation, which reduces both emissions and energy consumption. JP3 is making an impact on improving the environment, helping customers improve their ESG performance. In summary, we have made significant progress in the execution of our strategy on all fronts. Our game-changing technology, providing real-time data and analytics, helps customers transform their businesses. Our customers are benefiting from exceptional value we bring to the table. Our future is very bright. With that, I'm going to pass the call to Ryan, who will discuss our chemistry technology segment. Thank you, Coy.

Today, I will discuss our chemistry technology segment performance. First, I'll provide highlights on our energy chemistry technologies.

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

Thank you, Ryan. As John mentioned previously, our first quarter was slightly below our expectation, is a challenging start to the quarter as we face lower global demand and major disruptions caused by this winter storm year. However, we are pleased that March represented a solid momentum that has continued into this quarter. During the first quarter, consolidated revenue was $11.8 million, down 2.8% from $12.1 million in the fourth quarter, and below the $19.4 million of revenue during the same period last year. By segment, we saw a 5 percent decline in revenue sequentially within the chemistry technology segment to 10.3 million. The decline was driven by two factors. First, as a result of the termination of our supply group, ABM, we transitioned away from selling raw, immature terpenes in the quarter. With CLUI, the terpene cells, the segment demonstrated improvement up 7.1 percent sequentially overall. Drilling further into energy chemistries, we saw a novel strength in our domestic energy business sequentially growing 56% despite the winter storms in February, with a strong finish to the quarter. This growth was offset by international sales, which were impacted by overall declines in the market activity, weather, and supply constraints within the quarter. Delaying the sales to future quarters, finally, chemistries had a slow start to the year, but built momentum entering the second quarter. The daily analytics segment saw a 16.7% percent increase in sales sequentially driven primarily by the increase in new product sales in North America. This is the second consecutive quarter increase in sales and the highest performing quarter since full-text acquisition of JP3. Consolidated operating expenses were $13.8 million in the first quarter of 2021 with 43.4 percent decline sequentially and decreased 39.6 percent from last year's level of $22.8 million in the first quarter. The decline from Q1 2020 was driven by a reduction in cost of sales due to the lower revenue as well as lower operating expenses driven by numerous actions taken that reduced the company's expenses. Corporate G&A declined 2.9% to $4.4 million versus $4.5 million in the first quarter last year due to personnel costs and severance that occurred in the first quarter last year and a reduction in occupancy costs. As the company moved out of its corporate headquarters, and consolidated into its Global Research and Innovation Center. Corporate G&A increased from the fourth quarter of 2020 by nearly 700,000, associated with higher one-off legal fees, and audit fees associated with the 10K fine, higher seasonal tax rates, offset by lower compensation expenses. Research and development costs were 1.5 million in the first quarter, generally in line with the fourth quarter, and down 1 million from last year. You're pulling a loss from operations of 8.3 million or a 12 cent loss per deleted share in the fourth quarter of 2021. It's a significant improvement over the loss of 64 million or a $1.07 loss per deleted share last year. Our adjusted APR for the first quarter was a loss of 6.6 million, and despite including one-time legal and higher audit fees, an improvement over the last quarter's loss of 6.8 million and was slightly above last year's loss of $6.3 million on $7.7 million lower revenue. As we manage our business, our focus remains relentless on maximizing cost efficiencies, growing our top line as the market continues to recover, and generating cash with which to drive growth. Moving to the balance sheet performance, we remain focused on preserving our liquidity. At the end of the first quarter, we had cash in our quarters of $33.9 million, versus $39.3 million in the fourth quarter. Given by our disciplined approach, our cash use rates sharply declined in the first quarter as compared to the prior three periods. Our cash position was impacted by operating losses and prior severance agreements, which was partially offset by improved working capital. We have a combined $5.7 million of loans outstanding pursuant to the Paycheck Protection Program related to the CARES Act. Zontech will be filing for forgiveness on the loans over the next couple of weeks as well as filing for the employee retention credit. Further, we are monetizing non-core assets, including our Monahans facility, which is currently for sale. In addition, we're having fairly positive discussions with various funding sources around asset baseline. Our balance sheet in the Q1 included an accrued liability of $9.4 million, made in the fourth quarter, associated with the company's respective usage of terpene and the supply cream of ADM. Given the litigation against ADM was filed just days before the NBQ-1, there was no adjustments made to the balance sheet liabilities during the quarter. However, moving forward, we will continue to review and evaluate the $9.4 million balance based on accounting guidance. That said, I would like to reiterate that we do not intend to buy Terpene for at least a year. Before closing, I want to welcome Sheehan Carson to Flowtech as Director of Internal Audit. We will manage our improved internal control process and accelerate the mediation of private material weaknesses. We are excited to have such an experienced leader join our team, and we look forward to her driving further improvements. At this point, I will pass back the call to John for his final remarks.

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

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Daniel Burke with Johnson Rice. Please go ahead.

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

Well, let's see. I always love those questions, Daniel, that ask me to opine on the future, but I think I can say this safely. I do anticipate Q2 being better than Q1. Now, how much is a matter of getting everything closed and going forward, but there's nothing that we're doing right now that doesn't look like it'll improve sequentially.

Okay, got it. So the full impact, and I get that it wasn't additive to the bottom line, but the full impact of ceasing the reselling of terpene, that won't be a sequential headwind of scale then?

Well, it's the dilemma of selling something that you lose money on every time you sell it. So we had a take-or-pay contract where we were buying well in excess of what was required. And then the only way to get the cash back was to sell it at market. And so we were selling it as quickly as we could to maintain our cash so that we didn't just have inventory that became excess or obsolete. So the whole of the cancellation of that, I was a little surprised that they would breach, but we won't comment too much on that next year. But it did give us an opportunity to cancel that contract, which There's no question that was in the best interest of the company. And then we, as a result of not being able to audit, it made us question whether or not we should go back and try to recover amounts already paid, and that's the purpose of the lawsuit.

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

Well, it's a great question, and Matt Sullivan's actually sitting here in a room with us, and And I'm not going to put him on his spot on the first days on the job, but we do have a great portfolio of products. We're in a marketplace that has a near double-digit kegger that's expected and not entirely dependent upon COVID. Those kinds of keggers existed before COVID and are just continuing to go forward as people put a lot of emphasis on health. and cleanliness and disinfecting. And so our product lines, I appreciate the way you asked the question because we're not in the sanitizer business. We have a complete portfolio of products that includes degreasers, disinfectants, wipes. And I believe, Matt, what we'll do on our next call is have him come on and tell you how the market's developing and where we see opportunities. But it'll be most likely for portfolios of products. People don't tend to buy individual products They're looking for that portfolio, and we now have a very robust offering that we can explain. And I think Ryan might have said it, but April, May, I mean, we had, you want to comment, Ryan? Yeah, we've seen, like I said, our run rates are continuing to improve. We kind of did that crossover function to where in the pricing pressure we were seeing the volumes were growing and our revenue kind of met down. Now we're seeing both revenue and volume grow. A unique aspect is because of the diversification of the portfolio, As John mentioned, we're not leveraged just in sanitizers. Our cleaners, degreasers, one-step cleaners and stuff is really based on a lot of the core chemistry we do around our surfactant and utilization of our green biodegradable chemicals with the terpenes and everything are a strong foothold in the market that we're starting to see evolve and develop well. And I think with Matt's experience in our channels to market and the portfolio diversification will only help us accelerate this growth even faster. Still really optimistic about this, Daniel, for another interesting reason. When I looked at COVID, what it really did was make everything difficult to estimate because people stockpile things early on. And so you didn't see them come back to the market for purchases. And so it created lumpiness and lack of predictability. The great part about where we are now is we've got a great line of products. We've got the talent here to really go out and reach to the customers that buy that suite of products. And the market's normalizing where people are using up the inventories that they purchased too much of in March of last year. And I think we'll see a normalized growth in that market, and it'll be very accretive to our overall chemistry business.

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

Go ahead. Thanks, Danielle. We are continuing to transition. Obviously, our focus in the future is increasing the ARR, annual recurring revenue. So we're working towards that right now.

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

Okay. Makes sense. I'll leave it there. Thanks for the time, guys.

No problem. Thank you.

As a reminder, if you have a question, please press star then 1 to be joined into the queue. Our next question comes from John Bear with Ascend Wells Advisors. Please go ahead.

Good morning. Thank you for putting me in here. I've got a couple of questions. What other markets or industries outside of the traditional oil and gas in E&P markets, could your green specialty chemical products be suitable for?

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

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

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

No, so let me ask this, and it sounds as if then the majors, the bigger organizations, may turn to flow tech for product as opposed to a total package of the service and the materials? Am I interpreting this in that manner? Is that correct?

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

Are those biodegradables cost-effective relative to the to the toluenes in a traditional chemical mix? Well, this is like, you're doing well on these questions here.

I'm going to let Bob jump in too, but Wow, that's a great question. Two things have happened. One is we've found that in lower concentrations that these products have great efficacy now. So first off, we've brought down the cost of using them by using the lower concentrations. But the second thing, which I'll let Ryan address, is The market itself for the other products, because of supply chain disruptions, et cetera, those product prices have gone up. Is that fair, Rob? Yeah. And I would say, I mean, when you look at direct correlation to a BTEX, right, you're comparing an extremely toxic environmental product versus the biodegradable. When you look at some of the other mutual solvents that you've seen in there, some of the monobile ethers and some of the different ones, Due to the damage on some of the plants from the storm that's ongoing and supply chain disruption, believe it or not, our dipentines and the biodegradable solvents that we have have actually moved to a more cost-effective solution at this point in time. And when you compare the total cost of ownership versus BTEX in terms of the additional handling the safety aspect and whichever it was, it's still a better TCO or total cost of ownership for the entire service delivery model. And so that's the big point that I think when John's talking about the collaboration that we're driving around these discussions to evaluate that full value chain is going to be the difference because it's sometimes hard to, when you look at something, oh, well, it's, you know, X cents per pound versus, distance per pound, but that's not the true total cost of ownership because of the additional touches or the waste remediation that goes on after the usage or the cleaning of the tanks and the totes and all the other components and disposals. And so, you know, not only from the ESG impact, but the total cost of ownership is significantly better on some of these biodegradable solvents in their applications, whether it be for remediation, reservoir citric treatment, or even displacements in the drilling side. I always sort of measure things by what's the easiest or the fastest path to revenue. And when you're trying to sell improvements in production and improvements in recovery, that's actually a much more difficult, detailed sale. And so you have to really go through the multivariate analysis of how the mechanical aspects of the well impacted, how skin damage impacts it, how perforation design impacts it, the number of stages and clusters. You have to do quite a lot of work. And then we have customers where they've done that and we are having great impact on their effectiveness. But for the majority of customers, the 85%, when you can go in and talk about reduction in liability, ESG performance, and you're cost competitive and they can be greener and meet their sustainability goals, that is significantly easier to talk about than trying to go in and do a technical assessment of how you're going in a world of many variables, how you're going to improve production. For sophisticated customers, we're very successful at that. For the ones that are most impacted by efficiency and cost reductions, we now have a story so that that's not an excluded market to us.

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

Yeah. So we have the outstanding PPP loan in the next two weeks. We're going to submit for the allowable forgiveness given our reporting. and I'll be done in the next two weeks.

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

We are going to submit based on what we're allowed to. I'm probably not ready to give that number out, but we're going to submit to what we're the maximum allowable amount that we can submit for.

Okay, fair enough.

And we're also going to apply for the employee retention credit, which will be a significant number for us in Q1 and Q2 of 2021. We're going to be eligible. So we're also applying for the employee retention credit, and we actually are starting to see the benefits of that in Q2.

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

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

You have such great questions. I would encourage you to give us a shout and follow up. We'd be happy to talk to you while the window's open here. So we probably need to jump to our next question here.

Okay, yeah, I'll get out of here and offline now. Thank you very much. That'd be great. Just give us a shout. Okay, very good. Thank you.

Our next question comes from Eric Swirgold from Firestorm Capital. Please go ahead.

Hi, guys. I got two questions for you this morning. You hear me okay? You bet. First question is for TBK. How full is your dance card now in terms of getting... Sales appointments you mentioned you're making some progress in the Middle East When do you think you'll actually be able to see customers there face-to-face? And then second question is for you John. Can you remind us on the compensation program? About I can't remember whether a separate dollars a share where if you hit that target for a certain period of time You guys finally make some money for yourselves. Thanks.

I Will do that Thanks, Eric. For us here, we're starting to be able to see customers. In fact, some customers allow us to be at their office already, not many. So most of the time, the meetings will be outside, lunches and coffee and so on. Otherwise, the meeting could be through Teams or Zoom calls. The international meetings are all through Teams. and Zoom as well, because travel is not allowed. Not for us here, but even for our guys in the Middle East, they're not able to see customers face-to-face, so travel is really restricted to getting on Zoom calls or Teams calls. So obviously nothing beats being face-to-face, but still I think we've been working through that despite the challenges of not being able to see faces-to-faces. And I think it's coming on pretty well. And we've got a lot of conversations, repeat conversations with same customer. And that tells you that the interest is pretty high in the international front across Asia and also Middle East as well. And recently as well, we've got inbound inquiries from even Africa, for example, West Africa. So those are coming on pretty well.

I'll put a little pressure on TagBank now. All the improvement that you're seeing in JP three is a result of domestic sales because we haven't finished the internationalization and we have a really significant pipeline internationally to include India and make this, you know, it would be right to assume that in India, things came to a halt as a result of the COVID crisis that exists there now. So we, they're in our thoughts and prayers, uh, in India. But we have tremendous opportunity there, as well as the Middle East and Africa, et cetera. But we haven't had any international revenue. So what COID's done is really got it back on track domestically, and we're really seeing the growth coming there. We are working hard on the internationalization of that product and making great progress. and the pipeline and the business development and the pilots are all assuring that we're not wasting any wall clock time on that. By the time we have the international product ready, we'll be able to deploy it to sales immediately. So I think one of the questions we need to update you on each time is where are we on the internationalization of BARAX, and COID can do that. And so the activity level is extremely high, uh... internationally i've got no court work bikes early morning so when you're talking to the middle east that usually starts around eight or nine o'clock at night and go to a late so he said our pain there are very connected up to the question you asked about our our compensation as is the old saying goes from uh... your lips to god's ears uh... seven dollars a share i'd make some money here at the end of that uh... i would have hoped I could have gotten there in a shorter period of time. But it looks like COVID did sort of slow things down. We also had to refocus the company to where now we've gotten the relationships back with the indirect channel. We have a really good strategy on how to be how to sell to the whole of the market, not just to people on enhanced oil recovery or EUR. We now can improve their efficiency, their sustainability, their ESG goals. So, you know, I'm still here for $7. That's what I came for, and I'm focused on it. We do have hurdles that occur in the $3 range and the $5 range and the $7 range, and I plan on getting over those hurdles in the next 12 months. So as we go forward, I'd like to see us jump at least one of them here before the end of the year. And so we're focused on getting things turned around and getting access to working capital that's needed for us to really take advantage of the growth opportunities that we see in front of us.

Okay, thank you. Keep punching.

The next question comes from Joseph Bonmeister with Indoor Markets. Please go ahead.

Hey, John, how are you? Doing well, Joseph. Good to hear from you. So good call. And, you know, I guess we're a little bit concerned about the cash burn, which continues. I'm sure you are, too. What is the revenue dollar that gets you to break even? And I have two follow-ups after that.

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

Oh, sorry. I said, what revenue will it take to break even? Oh, what revenue will it take to break even?

Okay. On the EBITDA line. It is a great question, and one we debate because it depends a lot on mix, as well as what we're having to pay for raw products now in the supply chain, as we've seen some inflation there and our ability to pass that pricing on impact that's So it clearly is going to be somewhere above $100 million that's going to be necessary, and we continue to work on our cost structure so that I can move that number down. And so we'll continue to work to try to get it down to where that's doable at lower numbers. And so I'll sort of say when you start getting close to $100 million, you're going to start getting closer to break-even. We'll be within striking distance.

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

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

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

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

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

You talking about Q2, Q1? I'll just talk about international generally for you.

The one that you just reported.

Okay. Mike, international revenue, Q1?

Yeah, clearly it was down, right, because we saw, you know, the chemistry business was up. We talked about the domestic being up 56%. So nationally, international was down, right? You know, it was down significant, right? It was down by a good amount because if we were up 7%, I mean, you're thinking six percent domestically, internationally down.

None of it lost, though, Joseph. It's mostly moved into future quarters. Things did slow down. I mean, things that you have to factor into the Middle East are with the COVID issue in India, many of the workers in the field that are traveling back and forth in the Middle East are Indian, Pakistanis, and others. And so the ability to conduct business there goes down, with COVID increasing In nearby countries, you'll see activity levels back up.

And weather, too. There's weather.

Yeah, weather as well. So, I mean, but we didn't lose any business. I don't feel like there was anything that was lost. Everything just sort of moved forward a bit. They are right now where the U.S. was, you know, three, four, six months ago. Let's say they've got the equivalent to URI there in the Middle East. It looks strong for Q2 right now. As long as things don't slip, we're seeing a pretty good month here during Q2. So no reason to think that it won't be a significant contributor this year, but just didn't do as much as Q1. And in particular, as we get the VARAC system internationalized, I think we'll see big uplifts.

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

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

John, I really appreciate the color. Thanks and great job. Keep going.

Oh, I appreciate that. Look forward to talking to you. Do follow up with us later, Joseph, if you have any more questions. And Daniel, that's probably the last one we ought to take.

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

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

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