Greetings and welcome to Flotek Industries’ First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's prepared remarks. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Danielle Allen, Senior Vice President, Chief of Staff for Flotek. Thank you. You may now begin.

Thank you and good morning everyone. We appreciate your participation. Joining me today are John Gibson, Chairman, Chief Executive Officer and President; Matt Thomas, President of JP3; and Elizabeth Wilkinson, our Chief Financial Officer. On today's call, we will first provide prepared remarks concerning our business and results for the quarter. Following that, we will answer any questions you have. Yesterday, we released our earnings announcement for the first quarter, which is available on our Web site. Today's call is being webcast and a replay will also be available on our Web site. In addition, we have an investor presentation when acquisition announced that will supplement the earnings call. 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 events to differ materially from our current expectations. 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 on our earnings press release as management may discuss non-GAAP metrics on this call. So, with that, I'm happy to turn it over to John.

Thanks, Danielle. Hope everyone is healthy and safe and I just wanted to thank all of our employees, the Flotekers for their hard work and commitment to our organization during this challenging time. The start of this year has been simply unreal, the oil and gas industry experienced an oversupply of oil and under supply of storage and the decimation of demand by the global reaction to COVID-19. COVID-19 has forced us to transition to distance leadership, where Teams and Zoom usurped most of my days and all of the employees days as well. Amazingly, what has emerged is less dependence on real estate and face-to-face engagement and a complete and utter focus on our mission. This market has created such chaos that numerous growth opportunities, both organic and inorganic have emerged. We've been disciplined in vetting those opportunities with a desire to reduce our dependence on rig count, reduce our dependence on U.S. unconventional market and establish an offering in the digital transformation market in particular chemistry in the cloud. As part of this assessment, we're excited to share the news of our acquisition of JP3, a high growth data and analytics technology company, which diversifies our company's business mix and helps us transform our company for the next stage of profitable growth. And our call today, I'd like to first address today's acquisition announcement. We've uploaded a presentation that we will be referencing this morning, we're pleased to have Matt Thomas, President of JP3 join our call and share his thoughts on the deal as well. Next, we'll address ongoing cost measures related to the near-term challenges and our long-term goals to right size our cost structure, and then briefly discuss our Q1 financial performance. Let me begin by providing you with an overview and a rationale around…

Thank you, John. It's a pleasure to be here. We're truly excited to be a part of the Flotek's family and see many ways in which JP3 is now well positioned for accelerated growth. Given Flotek's strong liquidity position, and their reach in the global marketplace, JP3 will be able to build on our track record of double-digit growth and fast track the ongoing transition to recurring revenue in a DaaS model. We will continue to drive increased profitability for our clients by maximizing the value of their hydrocarbons using the data created with our real-time optical analyzer systems. JP3 is the leading analyzer and data delivery platform in the oil and gas market. And we were excited for our technologies to be recognized as the benchmark in the industry earlier this year with the adoption of the Midstream Industry Association’s GPA 2119 Standard. We originally launched our line of advanced Verax analyzers in 2012, providing our clients with real-time composition and physical properties of their liquid and natural gas hydrocarbon streams from the wellhead to fuel terminal, while cost effectively overcoming the limitations of traditional technologies. In conjunction with our Viper cloud analytics platform, illustrated on Slide 5 of the accompanying deck we now delivered data to everyone from small independent producers to midstream MLPs to major refineries across North America. Even in the midst of the industry's current state of disruption JP3's proprietary data platform is enabling our clients to generate increased revenues and higher profits on their existing product streams. Now with Flotek's capital behind us, we will be able to expand our DaaS sales and marketing efforts, accelerate the development of next generation technologies and create international sales opportunities through Flotek's global reach. As you can see on Slide 6, JP3's data products enhance value across…

Thanks very much, Matt. Well, let's move to the second item here, which is really addressing the market conditions and cost and given the difficult market conditions that we've been facing. We've developed several cost measures to help mitigate the risk across the business and increase efficiency and effectiveness. We remain disciplined in our expense controls in order to enhance our financial flexibility. And in recent near-term actions include lowering the salaries of the executive team, decreasing fees for the Board of Directors, as well as reducing the size of the Board from seven to five, reducing headcount and cutting back discretionary spending across the entire organization. These actions have not been taken lightly, but are necessary in today's market environment. As we look forward, our priority is focus on derisking our business as the oil and gas industry fundamentals have significantly changed. We've been busy identifying additional opportunities for cost reduction so that we can regain profitability over the mid term. Last quarter, we discussed our priority to right size and reprice our relationship with Florida Chemical Company. In February, we worked with FCC to amend our terpene supply agreement, which will enable us to materially improve our cost and cash flow through the term of the contract can help us better manage our inventory. Given these changes, we're now in a position to be more competitive in the market with regard to our procurement in specialized chemistry portfolios. This also opens up opportunities to pursue new channels to market, such as utilizing proprietary technology for data analysis to the full hydrocarbon stream from our acquisition of JP3. For these new opportunities, we will be able to reduce operating costs and maximize our profitability. As Q1 2020 unfolded reveal substantial disruption in our operating environment. We recorded an impairment charge of 57.5 million in the first quarter related to the impairment of property, plant and equipment, right to use assets and intangibles. We also have taken various actions to improve the financial strength of our company as we align our workforce and operations with the level of activity that we are seeing in today's environment and which will enable us to operate more effectively in a totally different world. Additionally, Elizabeth will fill in on the consolidation of our office spaces. Lastly, we also want to quickly highlight our team's effort and giving back to the community and our customers. I'm extremely proud to see how Flotek came together to utilize our excess capacity from our manufacturing facilities and competence in chemistry to produce alcohol based hand sanitizer. As a result, we were able to produce about 12,000 gallons of hand sanitizer to donate to first responders, hospitals, schools, homeless shelters and senior residential communities in the communities where we serve. With that, I'm going to turn it over to Elizabeth to discuss our financial results in more detail. Elizabeth?

Thanks, John. As we mentioned in prior calls, the financial tables in our press release present the operations of our CICT segment as a discontinued operation for all periods. I will focus my discussion today on quarterly results for our continuing operations which include Energy Chemistry business, which we will refer to as ECT, as well as our supporting research and innovation and corporate functions. As we review our financial results, revenue for the first quarter was $19.4 million compared to $43.3 million for the same period last year, but generally in line on a sequential basis, with the 19.5 million from the prior quarter. ECT operating expenses were 22.8 million in the first quarter of 2020 versus 44 million in Q1 of last year, reflecting a 48% reduction year-over-year included in the first quarter of 2020 was a $2.3 million charge, reflecting a loss on terpene purchase commitments and an incremental reserve against terpene inventory on hand. As a result of the work done in 2019 to improve supply chain and operational efficiencies, coupled with our negotiation of the amendment to our terpene contract in February, we will be able to dynamically manage our inventory to lower levels going forward. Corporate G&A decreased to 4.5 million in the first quarter of 2020 versus 7.3 million in the first quarter of last year, due to a reduction in headcount and other costs, as well as incurring a lower severance charge of 0.5 million in the current quarter versus 1.6 million a year earlier. We reported a loss from continuing operations of $64 million, or a $1.07 loss per diluted share for the first quarter of 2020, compared to a loss of 15.2 million, or $0.26 loss per diluted share for the first quarter of the prior year. The loss of…

[Operator Instructions] Our first question is from Daniel Burke from Johnson Rice. Go ahead.

John, first of all, congrats on the deal. Do have a couple questions on JP3, but maybe one on the existing business first, the pace of this decline in the oilfield and particularly on the completion side has been pretty precipitous. What insight if any, can you give us on, on how Q2 and Q3 look internally and just the ability to manage towards a cash neutral position over that period of time? I mean, liquidity is a scarce resource right now.

Well, I really haven't changed the goal of getting to breakeven which I stated last quarter. And so we're working hard on the cost side of that. Cost of goods sold does come down when your activity levels drop as precipitously as they have. And then we really are managing the other cost as tightly as we can. Our Q2, Q3 -- Q2, I mean, we're basically up to our elbow in that at the moment and I don't really see an increase in market activity in Q2, nor do I see any of our competitors talking about an increase. We are seeing some stabilization in our customer, Daniel, in terms of -- because the price has come back from a ridiculously low level to something that's at least tolerable and they'll continue to produce whereas we were beginning to think that shutting in was going to be a predominant activity. I think the shut-ins will be declined some and we're going to see people continue to produce and the storage capacity didn't get to a point where it was critical. So we've got a reasonable market. We don't have a good market. So we'll manage our cost to doing that. We'll continue to work on reducing that. Q3, I don't have a crystal ball here. So I'm having a hard time forecasting COVID-19 and its impact and also in Q4, because it's hard for us to ascertain exactly how rapidly the virus will ramp back up as we go into the fall. And we think that's going to be a bigger driver on activity than oil and gas price. I think that's where we're going to see some difficulty in getting back to work. But I think, as you can see from our numbers, we took out a lot of cost. And I think we're down 47.5% in our costs year-over-year and that includes cost of goods sold, but it shows a real focus on that and we're going to continue to do that as we go forward. Happy to take another question. Daniel, I rambled too long on that one.

No, no, that's helpful, John. Let me pivot to JP3 then, certainly interesting deal. And let me ask one or more maybe immediate question. I mean, given JP3 is sort of midstream, downstream orientation, I would imagine the impacts to their business this year have been modest, but just can you give us any footing or perspective on how their business has fared over the last few months?

I mean, obviously, it slowed down a little bit as a result of COVID, but still strong and a lot of opportunity as part of diligence, I've talked to a number of their customers that are committed not only to what they're doing today, but to have use cases that would allow us to expand the company, which is the reason that we're so excited about it. I don't see them being impacted in the same way through the rest of the year that drill bits are impacted. And so one of the important parts of this was moving ourselves from being rig count oriented and drill bit oriented into having availability, the totality of the market, we think the midstream, the downstream and the distribution systems continue to stay strong and have less volatility. And so we're very excited to sort of derisk where we think the company's going over the next few years by picking up JP3.

Okay. And then when we think about JP3, maybe just over this initial timeframe from inception here through sort of end of this year it seems like it should be a pretty capital light business, but you guys want to invest in the business, you want to foster its growth. I mean, is this business a consumer of capital over the remainder of the year or is it a generator of cash over the remainder of this year?

I don't think of it as a generator of cash or earnings really, Daniel, it's an investment opportunity, small company with huge growth rate opportunity that can throw-off substantial gross margin as we go forward. So but the investments you point out are the right way to look at it. It's not capital intensive business. But it's a business that has been shorted on the sale side and I hope we can add some sales resource that will continue that acceleration or even catalyze it. And we also think that there's a couple of other things that we can do that will bring use cases into our business at Flotek as well, so that we can -- the simplest terms, we want to know how efficient and effective we are on treating reservoirs. So if we pump 1000 gallons in and we get none back, we should have pumped more. If we pump in 1000 gallons, when we get 500 gallons of it back, we pumped in 100% too much. And so how do we really know that we're doing the right treatment? We think that this is going to actually build some use cases for us on the reservoir chemistry side as well. So we're hoping they'll pull our business through and differentiate us from competitors also. But cash light? Yes. Investment opportunity here is about rapid growth. And that's where we're going to put our focus is, they've had 58% growth year-over-year. We're going to see if we can make the right move to accelerate that through enhancing our international sales effort as well as our domestic sales effort as well.

[Operator Instructions] Our next question is from Brian Bode from Excelsior Capital Partners. Go ahead.

Just wondering if you could discuss the other alternatives for capital allocation at the corporate level relative to stock buybacks versus growth opportunities like JP3.

In truth, Brian probably won't make everybody happy. But I'm not focused on stock buybacks. I'm really focused on stock appreciation. We were talking this morning as management team here about really focusing on the growth of our company and the growth in our equity value, so that we can do more of these acquisitions. I look at this -- in this way. There are some great high growth, high margin companies available out there that are in that space where there's not an IPO market for them today. And they're very much in line with chemistry and we can basically provide a platform for them to be public. And so the use of our equity value to sort of transition those companies into our space almost like you think of us back. We want to bring those companies in and so I'm focused on growth in the share value and the ability to really build a platform of high growth companies and high growth activities going forward.

Okay. That's good color. How did you guys find JP3 or how did they find you and maybe with that in mind, could you speak to kind of current pipeline or current opportunities that are under evaluation?

Well, this is sort of a disclosure moment here for me, I guess as you know, before joining Flotek, I was in investment banking at TPH doing their emerging technologies -- energy technologies group, and we identified JP3 then. And I can honestly say that I thought it was a great company when I was at the bank. When I got to Flotek out of the whole portfolio, it really matched Flotek the best in diversification, which does bring me to the fact that I had to make sure that everyone knew that I'm not conflicted in this. I chose to take -- I didn't choose to take, I should never take, but I chose to take no bonus from this deal from TPH. And so there'll be no remuneration there. And it was really making sure that I didn't have any conflicts, but I've known about this company for at least a year. And in fact, several of the customers we talked to our customers, I introduced JP3 to, so I've been on their sales staff already for about 12 months and understand the technology so it wasn't something that just came about in the last few months, it’s something I've had familiarity with for probably a year.

Our next question is from Peter Rabover from Artko Capital. Go ahead.

I guess grabbed some deal. I guess, I just want to echo the previous question a little bit more. I mean, John, you've said you're focused on high growth opportunities. And I guess I'm just wondering, is there any growth in the business? And what gives you the confidence that, like the growth will be there, given how disarray the oil and gas market is and how it might take years for it to shake out?

It's a great question. So I said in the opening comments that we're trying to diversify our way from being rig count driven, or drill bit driven. I do think that the core properties in the Permian and the Boston and others will come back because those can be produced profitably even at lower price points, but maybe not all of the acreage comes back in the same way. So I'm expecting a softening in what we think obviously high conventional market. And as a result, we think it's still a good market. It's going to be a smaller market and we wanted to make sure that we brought on things that had no constraint on growth. And so we still believe there's going to be huge demand for energy, we think that the operators will continue to produce and solutions that improve profitability of the midstream, like the transmix solution that we're working on with Phillips 66. How you handle powers at refineries, all of these are going to be markets that just continue to grow. And so we wanted to move over into a high growth market. And great point about this is, I'll go back to Daniel's question. On the capital question, we did not buy a company that requires research and development in order to deliver a product, they have a commercial product. And so we're excited that this is something that simply needs aggressive sales. It's not something where I'm in the R&D business, I'm trying to put capital into a business to make it work. It works today and we're going to deliver it today and that's the reason that we did the acquisition. So we think that's a real high growth component of the market for us. And we want to just make sure the other side that we're capital discipline that we're cost disciplined so that we can make that part of the business profitable as well.

[Operator Instructions] Our next question is Peter Rabover from Artko Capital again.

Hey, sorry, guys. I think it went on mute, and I put it on mute and then it got disconnected. But I just wanted to follow up on the question about the acquisitions and given how much cash you had and what a massacre was last few months, I assume you probably have hundreds of calls from guys like JP3. And I guess I'm just curious, what made them so special relative to everybody else were they head and shoulders above everybody else? And how many more opportunities like that you see? And then, maybe I had one more on the financial aspect of it so. A - John Gibson Peter Rabover Happy to answer that one. Interestingly, we [vetted] [ph] a number of companies, one of them very similar in this space that had a different approach to measuring chemistry in real-time. Because we believe that you can't make, if you want to make money, you cannot manage what you cannot measure. So we took a look at a couple of different companies. I hear some feedback about. So we've looked at several companies. And this I was just saying a moment ago, what the very first one we looked at really a large company. Great technology, great people, we felt like it would be anywhere from $10 million to $15 million in investment in order to get the product commercial. It wasn't ready for the market. And so after looking at that, and we gathered together as a management team and we're not here to try to invest in venture capital, we're here to invest in growth markets where you have a product. And so we passed on it even though if you're a technical person, you have to go boy, this is great. But it was great, but didn't have that immediate sales opportunity that we had with JP3. So you are absolutely correct. My telephone rings constantly. There are a lot of people in heavy debt situations that need out. So they look at our capital and they'd like for us to basically pay off their debt and merge with the company. We've had opportunities to do other technologies but the truth be known we called JP3; JP3 did not call us. And so, Matt, I mean, I'm sure you've had other people call as well after I have been out of the bank for a while, but we really approached JP3 because we knew it was such a perfect fit. Matt, is that?

Yes. And I just want to add -- thanks for the question, Peter. And to build on what John was saying, from our perspective, we looked at this as a really great fit for a few reasons. First of all, certainly the strong liquidity position that Flotek brings to the table can accelerate our growth. The access to the international markets that we don't have today, I think is very attractive for us. But also, this is a very strong management team with an impressive track record. As you probably know, John has a successful history of acquisitions, I think something between 25 and 30 acquisitions in his career and we looked at that and said, this is the next step in the growth of JP3 that we've been looking for. And so it really made for an attractive fit for us.

Okay. Thank you. And I guess. I know you guys have not disclosed financials et cetera but I guess I'm just more curious on how you see your cash position shaking out with this investment and I don't know, is it a loss making investment, cash flow? How much cash do you think you'll need to invest in sales staff and any color you can give us out, really appreciate?

Obviously, we spent 25 million so you're going to expect the 25 million to come out of our cash position. On the investment side, we're going to work hard towards trying to stay within our cost. With the goal again, still have a goal I want to get us to breakeven this year. I have not backed off on that even though the market is terrible. I will tell you that I saw the hurdle go up significantly over the last couple of months, when I said this in Q1, I had no idea that I was going to have to do a 7.5 foot high jump as opposed to a 2.5 foot high jump. But, we're focused on it, we will find the money to enhance their sales. Part of its training some of our sales staff, but part of it's bringing in their salespeople, which is a different market. And they have a team already at JP3 and we're already interviewing some senior people that we think would make a big difference in catalyzing this and reached out to them early on in the process to see whether or not they too, agreed with what we saw as a market. So it's a bit of validation to see experienced salespeople in the DaaS market look at this and consider joining because they see this as a huge growth platform and opportunity for them as well.

Our next question is from Vishal Mishra from Mishra Capital. Go ahead.

Hi, John and Matt, congratulations on the deal. You have the comment in your 10-K, as well as John, you said on the Q1 call that if you were to see a tremendous reduction in the drilling, it should not impact your ability to go out and make a difference on the wells that have been completed. And I know, that was a different time that was like, almost declining, but still 40s and 20s and early 30s. And, CapEx budgets have been cut. So it's a different world now. But I'm wondering, what does it take or sort of for you to sort of maybe you will reinstate the comment which is that it should not impact your ability to go out and make a difference on the wells which have been completed or may just too darn difficult question to answer given COVID. But any color on your ability to gain market share in the well, which have been drilled? That would be great.

Vishal, you were breaking up a bit. So it sounded like how are we going to grow market share growth in our core business. And so being nimble and small is really important. And James Silas is here with us as well, I don't know, Mark's on the telephone around our sales and we had a meeting where we went, you've got to be flexible in a market like this. And what else can our chemistry do other than enhance production on initial production, [indiscernible] rates. And the other piece that we think we can add in a lot of value to is an enhanced oil recovery. Now in these reservoirs, where the wells already exist and the infrastructure to produce is in place and that is some capital, there is a tremendous opportunity to use chemicals to do enhanced oil recovery or enhanced product recovery from these reservoirs. And so we're focusing our efforts there in order to really make sure that we're doing what we believe customers are going to need in the coming months, in this. If they don't drill, they'll still produce and they'd like to produce more. You're looking at recovery factors of between 4% and 8% or unconventional reservoirs in the initial production, if we can do not unlike the North Sea, but double that recovery from 48% to 8% to 16% as an industry, that is a huge uptick for the unconventional players. And so we are studying how chemicals impact AUR. And we think that's going to really enhance our core business as we go forward as well and the shut-in opportunities. But shut-in is what you do when you think the markets not going to come back AUR activities where we're taking a look at what you do when you think that the market will come back and surge again.

This concludes our question-and-answer session. I would now like to turn the conference back over to John Gibson, Chairman of the Board, CEO and President.

Well, I just want to say thanks to everybody for joining us today. We're excited about the acquisition of JP3. And we do believe it'll accelerate our growth and it's going to be complimentary to Flotek's chemistry applications. And it's going to enable the strength of our underlying liquidity and market access is going to leverage that as we go forward. We believe that we're positioning our company for a successful and bright future. And we surely appreciate the support of our shareholders. And hopefully, through the acquisition, you see, we've been listening to you, if you shared with me where you think the future is. And we'll continue to update everyone on our continued efforts as we move forward with our next stage of growth. I hope you hear from me before next quarter. You guys have a good day.

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

Thank you.