Flotek Industries Inc (FTK) 2021 Q2 法說會逐字稿

Greetings, and welcome to Flotek Industries' Second Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Nick Bigney, Senior Vice President, General Counsel and Chief Compliance Officer for Flotek. Thank you. You may begin.

Thank you, and good morning, everyone. Joining me today and participating on the call are John Gibson, Chairman, CEO and President; Michael Borton, Chief Financial Officer; TengBeng Koid, President of Global Business; and Ryan Ezell, President of Chemistry Technologies.

On today's call, we will first provide prepared remarks around our business and the results for the quarter. Following that, we will answer any questions you may have. Yesterday, we released our earnings announcement for the second quarter of 2021, which is available on our website. Today's call is being webcast, and a replay will also be available on our website.

Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Also, please refer to our reconciliations provided in our earnings press release as we may discuss non-GAAP metrics on this call.

And with that, I will now turn it over to John.

Well, thank you, Nick, and good morning to everyone. First, let me address our second quarter performance, which was meaningfully impacted by market consolidation in the Permian Basin. As we discussed at our Annual General Meeting in early June, 2 of our most significant customers changed ownership in the quarter on accelerated time lines, resulting in a disruption in committed inventory and anticipated revenue.

Having observed many consolidation events, such as these, in my career, it's very common for pauses and services or changes in vendors to occur as companies integrate. We are in talks with both customers about becoming their green chemistry supplier. And with one, we should be back to work shortly.

Flotek has historically had a high customer concentration in our Energy Chemistry business and diversifying our customer mix has been a personal mission since I joined the company last year. Unfortunately, with the downturn, been challenging to reduce our customer concentration, but we have been making steady progress against our diversification goals as the industry has begun to recover.

Because the industry is recovering, we have chosen to accelerate our sales strategy to diversify our customer base. We have diversified our revenue by increasing the number of both E&P operators and oilfield services companies we sell to today versus a year ago and expect the revenue to grow with our new customers during the coming year. To boost revenue growth, we've also reduced nonrevenue generating costs in order to add sales and marketing resources.

We have focused our expertise and passion on the delivery of green chemistry and data solutions to reduce the environmental impact of energy production on air, water, land and people. We have catalyzed our shift to ESG, and we've engaged with the industry to demonstrate the strategic benefits of our sustainable chemistry and data solutions in support of our customers' ESGs and operational goals.

Building upon our decade-plus track record of supplying our bio-based high-performance chemistries, today, we are actively partnering with energy customers to maximize the convergence of asset performance, environmental protection, economic value and safety of the community. Fundamentally, we intend to assist our customers in their efforts to sustain the social license to operate in every geography.

We are invigorated by the response we're receiving as we increase awareness of the benefits of our green chemistry and real-time data solutions. In support of those efforts, we are actively engaging with one of the most influential accounting standards agencies to impact the industry's ESG chemistry reporting standards. I'm excited about the potential outcomes associated with this engagement because I'm a firm believer in what gets measured gets improved.

In that vein, as we have expanded our C-suite engagements, we are beginning to see some competitive bids include ESG components as they evaluate chemistry partners. The emergence of ESG components and tenders works in our favor.

Finally, we've partnered with an important customer to conduct an analysis of their chemistry usage to support their ESG reporting and performance. We envision this scorecard to be the prototype for future engagement with the industry.

And while these are all very encouraging steps, we still have to work to do more broadly, to drive awareness and action to replace toxic chemicals such as those formulated with xylene with safer, renewable and sustainable alternatives. Ryan will provide more depth -- in-depth commentary on that when he speaks.

To eliminate delay in the implementation of critical ESG solutions, there must be stronger connectivity throughout our customers' organizations to move from ESG intent to purchasing behavior at the well site. This transition has begun, but needs to become an imperative. We are ready to support this change with our customers.

Now let's move on to touch a few of the quarterly highlights. While there's no question, the loss of revenue associated with the change in ownership of 2 customers just discussed was a setback for our Energy Chemistry business, it is important to note that if we were to exclude those events, our sales and adjusted EBITDA were both above our expectations, further validating that our focus on green chemistry is gaining momentum.

During the quarter, we marked the 1-year anniversary of the acquisition of JP3, and I am pleased that our second quarter was the best-performing period for JP3 since the acquisition. We continue to make progress around our international market entry, and I am thrilled that we have received our first international purchase order, and you're going to hear a lot more about that from TengBeng Koid momentarily.

We have taken multiple actions to strengthen our balance sheet. First, we recently announced that we've completed a long-term lease agreement for our Waller, Texas facility with Resolute Oil, which will generate other income, while offsetting our cost. Resolute is a global leader in high-quality white mineral oil, and we are excited to explore opportunities to leverage our respective green chemistries to adjacent markets we serve. We are also in negotiation on a lease for our Monahans facility, which will make it income-generating as well.

Additionally, in the quarter, we secured full forgiveness for the JP3 Paycheck Protection Program, or PPP loan, and we have filed for forgiveness of Flotek's PPP loan, and hope to have an update for you next quarter.

And finally, we're pleased that we have signed a term sheet for an asset-based line of credit, and we'll keep you informed as the details of this agreement are finalized.

In terms of cost initiatives, as referenced earlier in my comments, we have realigned our structure to ensure we are built to seize the ESG opportunities ahead of us. With the keen awareness, now is the time to grow our market share given our unique position and offerings. As a result, we eliminated roles that were not directly generating revenue and are reinvesting to expand our sales team. The net annualized cost savings is more than $1 million, including the reinvestment.

We're also pleased with our inclusion in the Russell Microcap Index in June, which represents an opportunity to improve our visibility within the investor community and to help us expand our shareholder base.

Now before I pass this call over to TengBeng and Ryan, let me just give you some commentary on some new key partners that have joined us.

First, I'd like to formally welcome Lisa Mayr, our Board of Directors and Audit Committee. She's really -- it gives us strength in governance. She has over 25 years of financial accounting experience and is the current CFO of Internap Holding, a digital infrastructure provider. Lisa is a strong addition, and I know that she will immediately have positive contributions to make to our Board and our company.

I'm also happy to welcome KPMG as our new audit partner. We just began our relationship in July, and the team and I are very impressed with their professionalism. I look forward to a collaborative partnership. And I'm amazed that KPMG and our team, in just 5 weeks, managed to get the Q out on time. So congratulations to both of you.

We are pleased to have expanded our coverage to include NOBLE Capital Markets, and we welcome research analysts, Michael Heim to our call, and we look forward to hearing his questions this morning, along with Daniel Burke, our esteemed analyst for quite some time from Johnson Rice.

Now I'd like to turn the call over to TengBeng for further discussion on our Data Analytics segment. TengBeng?

Thank you, John, and good morning, everyone. In the Data Analytics segment, we are pleased to see continued financial performance improvements in revenue and gross margin. Revenue was up slightly in the quarter, improving sequentially over the past 3 quarters and the best quarter since the acquisition of JP3.

Sales were driven by the addition of a number of new customers, particularly in Canada and existing customers here in the U.S., continuing to make additional purchases. These new orders and repeat customer purchases are testament to our game-changing digital transformation technology that provide real-time data and analytics to our customers.

The second quarter marks 2 major milestones for Data Analytics. First, we have completed the specifications and manufacturing of our Verax analyzer prototype for international markets, and we are in the final process of undergoing extensive certifications and hope to attain the certificates for international deployment soon.

Secondly, we have received our first international purchase order. This sale will support a major international oil company, representing 2 exciting firsts for JP3. This system will be installed in an offshore platform in Southeast Asia, expanding both our geographical footprint and application use cases, i.e., in an offshore environment.

Although our focus continues to be on onshore, upstream, midstream and downstream applications, the lockup of a competitive bid in support of offshore operations validates the value of our real-time data solutions across the energy sector and represents an exciting new frontier with vast market opportunities.

At JP3, we continue to focus on executing our strategy, especially in technology development where we have a very robust technology development road map that includes many new capabilities that will become available in the near future.

With that, I will turn the call to Ryan Ezell to discuss our Chemistry Technologies segment. Ryan.

Thank you, Koid. Today, I will discuss our Chemistry Technology segment performance, first, highlighting our Energy Chemistry Technologies and then moving on to professional chemistries.

As John mentioned earlier, Energy Chemistry Technologies was impacted by the unplanned acceleration of M&A activity affecting 2 domestic customers in the quarter. And excluding the loss of this revenue, we were on target to exceed quarterly growth projections and deliver strong results.

And to provide a bit more color around the impact of the revenue loss associated with the market consolidation, the business would have been up by 22%, if we were to include the expected revenue recognition from these 2 customers. And despite these consolidation setbacks, we are confident that the execution of our strategy to be the collaborative partner of choice for sustainable chemistry is gaining traction, and we are keenly focused on building our market share to include domestic and international E&P operators, as well as, service companies, thus diversifying our revenue stack and minimizing future risk from customer concentration.

In the second quarter, we also reassessed our organizational structure to accelerate these efforts. As a result, we made a number of structural changes and reallocated resources to expand our sales and marketing efforts. And accordingly, we plan to double our sales force to focus on broader adoption of our green chemistry solutions across the energy life cycle, while generating more than $1 million in annualized salary savings.

Our expanded sales force will help us build upon important fundamental progress that we saw in the second quarter, which includes, first, and as is discussed last quarter, our green chemistries are being utilized in an important field trial in the Permian Basin. And based upon the initial success, we are excited that the pilot has been expanded not only in scope to include new technology applications in the Permian, but also into new unconventional basins in North America.

Secondly, during the quarter, we secured multiple new remediation treatment applications utilizing our complex nano-Fluid technologies. The bio-based high-performance chemistry built upon nontoxic plant-based solvents is enabling Flotek's customers to cost effectively replace the use of benzene, toluene, ethylbenzene and xylene, also referred to BTEX and other harmful solvents, thus reducing the environmental risk of their remediation and production programs.

And additionally, we're also pleased to announce we are partnering with a very important customer to provide an ESG scorecard assessment of their full well cycle chemistry utilization to identify opportunities to support their ESG reporting goals and operational efficiencies.

Furthermore, we have made notable progress in rebuilding our indirect channels to market with our service company revenue side. We saw our indirect customer base increased by 58% and domestic indirect channel revenue grew by 68% sequentially.

Expanded -- we also expanded our operational safety record in the field to exceed more than 2,000 days without an OSHA recordable or lost time incident.

And finally, we entered into a multiyear agreement with Resolute Oil, a leader in high-quality white mineral oil that services consumer and industrial customers. Resolute Oil will utilize our chemical blending facility in Waller, Texas, to manufacture USP and NF-grade white mineral oil that will be distributed globally. And our facility is customized for production of green chemistries, and our consumers are taking notice of how they can leverage our capabilities and facilities to drive growth in adjacent green markets.

Now turning to professional chemistry business. During the second quarter, we saw overall volume improvement sequentially, driven by strength in janitorial, disinfectants and cleaning products. And we are pleased to see that we are building momentum for these categories, contributing to our improved quarterly performance with revenue up more than 30% sequentially.

In the quarter, we made positive progress to build important foundational relationships that will amplify upon our internal sales team, led by Jan-San veteran Matt Sullivan. These milestones include the securing of contracts with national and leading large-scale distributors and redistributors.

Now I will turn over the call to Mike to discuss our financial results.

Thank you, Ryan. Building on the earlier comments, I will expand on the quarterly financial performance. During the quarter, consolidated revenue was $9.2 million, up more than 3% from the $8.9 million in the second quarter of 2020, but below the $11.8 million of revenue for the first quarter of 2021.

By segment, in the second quarter, Chemistry Technologies segment saw a 3% decline in revenue year-over-year to $7.7 million and a 25% decline sequentially from Q1 2021. Decline for Q1, '21 was primarily driven by the loss of sales from the 2 domestic energy customers discussed earlier on the call.

As we further analyze our Chemistry Technologies segment, Energy Chemistry saw a decline in revenue sequentially with the loss of the 2 clients. Year-over-year, revenue in Energy Chemistry, excluding raw terpene inventory, sales increased 87% despite the loss of sales from those previously discussed clients.

Professional chemistries saw an improvement sequentially driven by strength in degreasers and disinfectants, but sales were down significantly year-over-year given the peak COVID pricing and demand levels a year ago.

Turning to Data Analytics. As a reminder, we acquired JP3 in May of 2020, and thus, we do not have a full quarterly year-over-year comparison for the segment. Sequential revenue was slightly better for the quarter.

Consolidated operating expenses were $12.1 million in the second quarter of 2021, a 12% decline sequentially, but increased 4% from last year's level of $11.6 million in the second quarter.

The operating expense increase over the last year was impacted by having only a half quarter of JP3 expenses in Q2 2020 versus a full quarter of expenses in Q2 2021.

Corporate G&A decreased 34% from the first quarter of 2021, primarily due to the receipt of a $1.9 million employee retention credit, which includes both the Q1 and Q2 credit and also a reduction in contractor spend, which were partially offset by an accrual for severance expenses associated with the personnel changes discussed by John and Ryan earlier today.

We reported a net loss of $6.5 million or $0.09 loss per diluted share in the second quarter of 2021, a significant improvement over the net loss of $9.6 million or $0.14 loss per diluted share last year.

Our adjusted EBITDA for the second quarter was a loss of $6.7 million, slightly higher than last year's loss of $6.5 million and flat with last year's loss of $6.7 million.

Now let's move on to the balance sheet, where our focus remains on preserving liquidity. At the end of the second quarter, we had cash equivalents of $28 million, approximately $0.40 per diluted share versus $33.9 million in the first quarter. Our cash position was impacted by the operating losses and prior severance agreements, which were partially offset by the employee retention credits and improved working capital changes.

We are pleased to report, during the second quarter, JP3 received full forgiveness of its $881,000 Paycheck Protection Program, PPP loan from the SBA, which was recorded as other income during the quarter. Flotek also filed in June for forgiveness of a significant portion of the remaining $4.8 million in PPP loans remaining on the balance sheet. Additionally, we recently signed a term sheet for an asset baseline, which we will use for funding future working capital growth as the business expands.

Lastly, as John and Ryan discussed, we completed a long-term lease agreement for our Waller facility, and we are in negotiations to run our Monahan facility.

Our balance sheet at the end of Q2 still included the accrued liability of $9.4 million associated with the company's previous supply agreement with ADM, recorded last year in the fourth quarter. The $9.4 million represents the expected losses from the sales of excess terpene beyond our product usage for our clients. We will continue to monitor this accrual quarterly. The balance sheet also includes a receivable for $1.1 million for the remainder of the employee retention credit, cash benefit. Our tax net operating loss of $115 million, roughly [$1] diluted share continues to grow quarterly.

Now I'll turn the call back to John.

Well, thank you, Mike. Thank you, Mike. I'll turn my mic back on. Before we take any questions, I thought I'd make a few summarizing comments. First, no doubt you'd like to hear how the third quarter is tracking now the July is behind us.

While we will not provide any guidance for the quarter, I would like to share that our July revenue number is higher than any individual month in Q2 2021. This is certainly a positive indicator that we're on a solid path. We made significant progress to deliver against our stated commitments, demonstrating we're steadily converting aspiration to action, because it all comes down to our ability to execute on our strategy.

For many months, we've been working to take steps to further solidify our liquidity, and we delivered on several fronts this quarter, and there is more to come. I'm very proud of the leasing situation that we have that converts liabilities into income.

Since our acquisition of JP3, TengBeng and the team have been working diligently to internationalize our Verax system. In this quarter, we secured our first purchase order as well as completed our international prototype. We have made steady progress toward diversifying our customer base in our Energy Chemistry business, and I'm optimistic about the future under Ryan's leadership.

Finally, I'd encourage you to take a look at our new investor presentation on our website. It encapsulates Flotek today and our unique value proposition to advance ESG solutions for our customers. We will be attending the EnerCom Oil & Gas Conference next week, and I'll be presenting on Tuesday afternoon, and we'd welcome you to tune into that as well.

Now with that, operator, we'd like to open up the floor for questions.

(Operator Instructions) Our first question today will come from Daniel Burke with Johnson Rice.

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

I'm happy to do that. I'll turn it over to TengBeng. Firstly, though, really exciting to have a sale in the Far East and offshore. So you combine those 2 things, first offshore sale. And even that was impacted by COVID as the country made it -- made it difficult for us to actually deploy the equipment yet as a result of COVID being on the platform potentially offshore. So it continues to be a problem, and it's a country-by-country problem.

With that, TengBeng.

Yes. So John, to your point, the international market is still affected by COVID restrictions. And first, we thought it was getting better, but obviously, with the recent strain, prevented us from sending people to install a system in Middle East and also in Far East. So what we're working through is getting those people there. So we had a few Saudis over at our facilities. They can come over here. It's difficult for us to go over there. So now we've got them train up, and hopefully, we'll get that going on the international front. So despite the COVID restrictions and all the issues, we managed to get the sale international and also progressing very well in the pilot. There were a few other areas, other countries that we expected some orders. And with the -- some of it, I think we can see some of this coming to fruition probably in the next couple of quarters.

Domestically, Daniel, to your question, we're seeing the midstream companies' budget starting to open up. So we're seeing progress in that area. And especially towards year-end, we'll see more budgets opening up and seeing progress in that area. On the partnership with Phillips 66, we are continuing to make progress. There are a number of customers, rather our potential customers that we've been working closely with Phillips 66. In fact, last week -- last Friday, we had our joint collaboration partnership meeting again with them and making -- I would say, we're making progress despite the COVID situation.

Yes another question, Daniel.

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

No, I don't want to over extrapolate either. I didn't enjoy having to come out at the AGM last time and say that we lost customer. So not anticipating anything. I mean we're actually in much better shape. As Ryan discussed, we've got -- we've really diversified customers already as a result. So I'm not concerned about that. My 2 biggest concerns would be COVID, again, and government reaction to that would be #1, and customer reaction to it. And then the second one is sort of, we'll call it operational fatigue happening in fourth quarter. And so when do they stop? Do they stop on Thanksgiving? Or do they stop on Christmas in terms of spending for the year. And so as I look out for the second half, it's more of where the budget is going to go. And this COVID rear its ugly head again. Otherwise, we're really seeing some solid gains in the green chemistry side that I can get round to comment on maybe a little bit. And it's -- I'm optimistic, but I'm not going to give guidance.

And maybe just a final one from me. Can you wrap up, John, comments on green chemistry in the energy markets. You talked about a number of discussions and sort of fruitful initial -- I don't want to even call them initial, but efforts that you're seeing out there in the fields marketing. Can you give us a sense of just how broad those discussions are? Does that make sense rather than sort of individual efforts?

No, that will be fine. I think if, I could, I'll get Ryan to comment on sort of how remediation jobs are increasing and what else he sees on the green adoption side. Ryan.

Yes, sure, John. It's quite -- we're really excited about what we're seeing is. We're seeing -- if I look at an overall kind of macro scale of it, we're starting to see the conversations that we were having at the C-suite level around green chemistry now transcending across into the multiple basin operations and also in some of the impacts we're seeing internationally.

When we look at the type of business, the core, what is a differentiator for Flotek is around the over 170 patents we have around green chemistry utilization of these natural bio-based solvents and things that can replace BTEX. And what we've really done is we've continued to grow in our simulation market. And with our customer base up, we're selling to the oilfield service companies and the direct [NUCMP] operator. We're seeing improvements in uptake in that.

But what I'm really excited about is now we're starting to diversify into these various verticals a little further down the line on the remediation treatment. And we've seen substantial application improvement of the green-based chemistry on the remediation side where traditionally xylene has been used or other BTEX related solvents or other, our considerably nongross related solvents. And we're going to see that grow, and we're really excited about the future on where that's going around the vertical side.

And we're also seeing that also translate to operations on the well construction side. And when I talk about well construction, I talk about drilling fluids and cementing products where we've seen substantial improvement with the oilfield service companies in there, and that's led to some of the things that we're looking at on diversifying our customer base, because we're using similar treatments to do mud flushes and displacement treatments for improved cement bond logs, et cetera. So a lot of applications on the green side that are continuing to evolve. And the most notable thing, though, is when you're out in the basins now, these conversations are making their way into the field operation discussions. And so that's a transitional trend that we're seeing that may not have been seen in the past, it was typically just a C-suite sustainability messaging. So that's a really positive step.

But I think it's fair, Ryan, to say, in Q1-Q2, we did 7 remediation jobs, eliminating xylene, and we're anticipating as many as 40 in Q4...

BY Q4, yes.

And so -- and the potential there continues to grow as we have the conversation. So sort of going from -- and these are not as big a jobs as stimulation jobs. So I don't want to overstate here, but I'd rather have higher margin, smaller revenue opportunities than -- in terms of per well than I would less margin, big opportunities. So I think we got a really big opportunity here in the remediation space.

Our next question comes from Mike Heim with NOBLE Financial.

Looking for a little bit more color on the loss of 2 customers and your comments that you might be able to get some of the green business back on one of them. So specifically, why do you feel that's the case, how soon could it come about? Would we be talking about similar numbers, similar sales to what you're doing before, maybe even larger? And what's the status of the second customer?

So it's a good question. I don't -- I'm not going to be too case here. But the 2 customers, they were sort of customer A, customer B, if you take a look in with regard to our business. One of the losses, which was really important to us went to a customer that does not use Flotek at this time. And they already have relationships, they have methodologies, and we are definitely talking to them at the C-suite level, and we're engaged with them throughout our organization. But I'd say our ability to come back there is more limited than the second customer. And so -- but we continue to engage with them all the time. And I do look forward to doing business with them again in the future.

The other customer, we think, will be back by Q4. And so we've engaged with the new owner, and it's a property that we know well. And in both cases, the performance of these properties were better than offset operators. And I would say that we contributed to that. Obviously, we're not 100% of the reason. That's the case. But our chemistry really contributed to their enhanced production and the premiums they receive for these companies. And so I'm hoping that we'll be able to get out and tell that story and help other companies improve their production to where they receive premiums as well as they go forward. So one is gone. The other one back in Q4 and the one that's gone for a while, we are steady working on.

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

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

Yes. We look at quite a few things across the board. These have transcended from cost of goods realignment, service delivery realignment on where we're sourcing chemicals in basin, which is then impacted on blending costs and logistical costs and operational support needs. And more importantly, we did in alignment with our value proposition and the strategy that we are, we looked at every role across the board and the organization to say, are we creating value or not? And we needed to realign the structure for full 100% directional approach around growing our revenue and reinvesting in the growth of sales force focused on our green chemistry applications, and that's what we've been able to do.

The majority of our operational structural changes, we look to be able to maintain with significant growth. And I would say, potentially, all revenue focused on would be potential improvement on how many additional sales force that we add for coverage, because we are looking at basin specific customer representation, et cetera, for that going forward. So I look for a lot of our structural changes to be maintained. These weren't just holding payments, et cetera.

Then talking about the sales force restructuring, before you've talked about it being maybe a 3 to 6 month kind of process. Is that still kind of a good number to use? And where do you see yourself in terms of how far along we are. Did that question come through?

It seems we may be having some technical difficulties with our speaker line, so please give us a moment here while we figure that out.

(technical difficulty)

We have rejoined our speaker line. Mike, you can go ahead with your question one more time, and we will resume the call.

Sure. Well, it really was my last question. So I almost apologize for dragging on the call. But I was just asking about the sales force restructuring, which in the past, I've heard you say it's kind of maybe a 3 to 6 process to get up and running. So I was just kind of wanting to get a sense where we are in that process and when you think things will kind of be completed?

That's a great question. I apologize for the pause in there. I was a radio disc jockey when I was young, and I'd have gotten fired for having that long a pause. So I'm pretty sensitive to dead air. When it comes to the sales force, we have taken a slightly different approach. We're hiring mainly people we know that are experienced and understand this field and know the customers so that we think that we will minimize any of the delay between the time they hit the door here and the time that they're able to generate revenue. Ryan, you got any comment?

Yes. I wanted to say, John, we're looking definitely towards experience, mid-career and further advanced hires that have the connections and alignment with our value proposition and pursuits in basin. So it's a pretty extensive hiring and interview process that we've had that's being very aggressive at this point. We've onboarded multiple individuals already, and we expect that to be completed in the coming weeks and have everybody hitting the ground. And we're seeing those -- that uptake working very well for us at this point.

The other one, too that I'm excited a4bout is, I like people that are hungry, and Ryan has converted compensation model here to where it is lower fixed and more at risk, and we're getting really good people that believe that they can make money here by taking advantage of the at-risk base. So I think it's a great move for us. It lowers our costs and improves the aggressive nature of our sales force.

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

Our next question comes from Eric Swergold with Firestorm Capital.

You touched on xylene already and had some details on it. But what would it take for xylene to get legislated out of use where -- in cases where groundwater contamination is possible.

Ryan?

Yes. That's a discussion that we've gone about quite a bit. I would say that talking about it in terms of company awareness versus legislation out long. And when you look at it on the well construction side, it's pretty much been removed in its entirety. When you look at drilling fluids, cementing and those other applications where it's been used for mud breakers and cleaning and dissolution. I would say that the headwind that you see a lot of times on the initial application on, whether it being on production or remediation is, oftentimes, the operators never consider that a closed system, and they're not getting this annular disruption issue. When in reality, we all know that happens.

And so I would say still in the forefront, even in a closed system, our awareness is we're talking to customers around the risk of moving it and utilizing it in human contact. And just overall potential spills in the environment is making headway on the awareness, on the application of xylene, particularly in environmentally sensitive areas like the North Slope and some of these upper basins in the mountain regions and things that we see.

And so in terms of what it looks like on the legislation part, I think that's a longer road and there's some discussions that are ongoing around that. But I definitely think the uptake from the operators -- and even with our service companies -- service companies are often aware of that because of what goes on in the well construction side of the business.

It will happen. We've already got one division of the industry that has eliminated it. And so as we move forward, I think you'll see it in the beginning with the states that are more aggressive on environmental regulations. So anticipate a state like Colorado, Alaska, those will be first movers in this and New England as well. But it's definitely going to happen. And what's happening for us is we've got customers who are saying, okay, it's time for us to move on and improve our green scorecard, improve our ESG score.

And just to add to that. The one place we have seen that happen now is on the international side on offshore applications. They've completely banned that utilization and people are switching where they've had xylene for different flushes and whatever else there is, they've moved to -- any area where there's zero discharge environment applications, the xylene is being eradicated. So it is turning and going in that direction.

And my next question is a value creation question rather than a business operations question. Given the significant value that's locked up in your NOLs currently and seeing a number of new ESG oriented stocks haven't been formed that have yet to put any money to work at all. If the company were to receive a large cash infusion from a SPAC, what would the top 3 priorities for you being in terms of putting that cash to work to grow the business?

Another one of those great forward-thinking questions. Eric, yes, there's no question that we'd continue to expand the sales force to start out. We've got a lot of opportunity, and I just wish I had more people to chase it. The international expansion with the sales force would be a critical area, because as Ryan mentioned, we've never worked offshore since I've been here. And I don't think they've had a big offshore business ever. But when we look offshore, the 0 discharge requirements that exist throughout Western Africa, North Sea, Asia, those really give us a great opportunity to eliminate xylene. So it's the sales force and the stretch into those markets would be important.

With JP3 we got a lot of opportunity to add sensors or add measurement capability there so that we can expand beyond just the composition of hydrocarbons to include the identification and quantification of volumes of greenhouse gases or other molecules of interest, including water. And so I think that would be an area we could immediately invest and grow our opportunities with JP3.

And finally, I mean, on the third one, Ryan, go ahead, please.

Now I would say from that side, 100% agreement on where we are with the expense of our sales force for the opportunities. I also think there will be potential as we've aligned our operational structure component. There will be potentials for us to invest in certain operational components that would drive even better cost efficiency for us, where we've been -- at some of these entry points we've had in the basins for different lease programs. We can move to issuance of capital.

And then final part, I would say we've been out running very lean as we've aligned our value proposition in our green chemistry part. I think supporting around some of the additional marketing and sales communications for us would be the final piece we look at investment parts on the Chemistry Technologies proponent.

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

Well, we are very much aligned to the share price, Eric. And basically, it takes a $3 trigger for a lot of the vesting to occur, particularly for myself. And I look at this year, and my wife encouraged me not to say that I wouldn't take a bonus in a conference call, because she knows I'll honor it. But unless we see improving share price and improving revenue performance, I'd do the same thing again this year. I would say, not worthy of an award if we haven't gotten turned around. But my confidence is increasing that bonuses are in my future. And so I'm working on that. And everyone here is aligned to share price accretion in order to be able to get any of their awards.

We did move to a scorecard system this year in working with our New Comp Chair, Harsha Agadi. And so every one of those is associated with -- on the scorecard are primarily associated with the revenue growth for the company as well, and those scorecards are clear about that. And they still maintain the importance of safety and the environment. As Ryan pointed out, we've had 2,000 days -- more than 2,000 days without an OSHA incident. That is a great number, and good management teams do well on safety, so important to us as well. But we are absolutely aligned. If share price doesn't go up, none of us are going to be excited about our own target earnings. So we're there with you.

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

I got a couple of questions. Kind of I want to cycle back and touch again on those -- the 2 customers. I'm glad that personally you got that out of the way -- the mergers, accelerate and so forth. I just wanted to clarify, are you saying that customer #1 is essentially out of the picture for the foreseeable future? Am I hearing that right?

Pretty much. I mean I don't want to be optimistic about it. We're in discussions with them. But in some cases, they have contracts with other chemistry providers that we have to wait until that expires. And so they would absorb the acquisition into their company and then leverage the volume, discounts that they might have with another chemistry supplier, which means you have to wait until the tender comes again. It's not uncommon for them to have 2-year tenders. In this case, we're likely a year out from the time that it occurred before we can really get the door open. But that doesn't mean we can't get in and get on new work. And we do have differentiated offerings that allow that to happen. And so we have never let off the gas pedal with these guys, going we can help you, we can make you better. And it's a good company. It's just that we didn't have a relationship there prior to the acquisition, and so we're having to build one there post acquisition. The other company, great relationship on both sides. And so I think we're back in there. It's just a matter of when they start actively working again.

And so on that second customer then, would be reasonable to think that you may be able to get additional business from the combination that might help to offset those pause, if you will, on that first customer?

I mean we -- our budget is our budget with or without those customers for our bonuses. And so you can assume that if we get up every morning to go, we're going to fill in for them. We've got to go get additional business. And so for us to make any money from bonuses as a management team, it's in our best interest to go out and replace them. It's just unfortunate that both of them happen to be customer A and B. But hopefully, that's a testament to the value we help create with our customers, particularly these private equity health customers or individual health customers.

What I'm getting at, I mean, bonuses aside, okay, I'm just trying to get an idea that the combination of customer B, it sounds like should be acquired company...

Should give us upside...

Was the one -- the acquired company was the one that was your primary customer that you can pull additional revenue from the acquiring company. That's what I was trying to get at.

Yes. No, absolutely. On the second customer, there should be upside opportunity. Another thing -- we have a customer that hasn't been with us in 2 years that came back, that I suspect will be greater revenue than our -- the customer that we lost as we go forward with them. We're having great results with them. They're a great partner. They're pulling us into additional basins, and they're expanding our offering. And so we've got a lot of reasons to be confident that it's just the nature of acquisitions and integration that caused us to miss. And that's -- it's a good -- great point, John. We didn't lose these contracts due to bad performance. We didn't lose these contracts due to pricing. We didn't lose these contracts to a competitor. What we lost these contracts to were acquisitions where existing agreements were in place, and they're honoring those, and we've got to get in and sell again. So there's fundamentally no problem with Flotek and the loss of these customers. It's simply a transactional issue that occurs in M&A.

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

Certainly, there are opportunities. I think JP3, when JP3 started, the focus was really onshore, which is the right thing to do -- onshore, both upstream, especially midstream as well as downstream. So now that the -- and this is sort of fortuitous time right where -- it was somebody else that they were looking at to purchase that. And then they heard about us, and we shared with them our capabilities. They were so impressed, they decided to go with us instead of traditionally what they were buying from. And then now we realized that actually, that opens out a market, which we never considered in the past at all because we are very much focused on onshore here in North America. So it opens up the Gulf of Mexico, but also offshore elsewhere in the world.

Brazil? Yes. Okay. Well, that's interesting. So do you have direct focus on trying to develop that now? I mean some of your sales force now focusing specifically on Gulf of Mexico, offshore Brazil, Africa?

Well, so for here in North America, we actually hired somebody recently who's focus was really on the upstream side. So our focus, yes, will be on the Gulf of Mexico.

It's a great question. So I want to frame it a little differently. What they really want to do offshore, particularly in the Gulf of Mexico, as it begins to come back, and it has been a very depressed market offshore. But as it reemerges, what they'd like to do is fingerprint their oil so that they can get a premium for it as a result of the lower CO2 emissions associated with it. So imagine that the way that we work with JP3, we can tell you which oil has what CO2 content associated with it, and they're working through how to get premiums based upon lower CO2 emissions associated with certain production. And so we're working through how do we support the goal of fingerprinting hydrocarbons for premiums?

Cost competitiveness of green chemistry assets last time versus traditional hydrocarbon based fluids and so forth. Have you seen any narrowing of that given the rise in raw material costs, and so forth? What's the situation there? I know you haven't any issues with production supply chains to produce your green chemicals.

I think for us, what we have seen is the -- where we are positioned with our renewable and plant resource natural solvents are -- that our pricing gap differentiation has now -- we've almost got that relatively closed on the advanced formulations that we have and the applications there. And we have seen, in reality, an impact on more of the, I would say, traditional chemistries, whether they'd be in the monobutyl ether, the glycols, other products that have gone into other -- less environmentally friendly solvents, they've actually come up. So it puts us in a very viable and respectable price range to go after these.

And traditionally, we've done quite a bit advancement in the resources we got in our research and innovation group to reformulate and have some very cost-effective options to definitely go head-to-head with the traditional BTEX solvents as well as some of these other mutual solvents. So that's been great for us.

On the supply side, we're seeing similar disruptions across the board, but nothing that impacts our green chemistry. It's more on the other hydrocarbon-related solvents.

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

Well, I appreciate everybody being on the call today. And I appreciate the support from shareholders and the candid conversations that we have. And we're all focused on making money for you here. That's what we're here for, and that's what our mission is. We appreciate the opportunity to work for you and look forward to being on the next call. And I'm looking forward to finally being able to give some good results here one day. So I think all the things we're executing give us the opportunity to improve, and we just need to stay focused and execute here as we go forward. Market is improving, and we're going to do our best. We thank you, and we'll talk soon.

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