Greetings, and welcome to Flotek Industries Fourth Quarter 2020 Earnings Conference Call. [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 begin.

Thank you, and good afternoon, 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 concerning our business and the results for the quarter and full year 2020. Following that, we will answer any questions you may have. This morning, we released our openings announcement for the fourth quarter and full year 2020, 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 earnings filings with the SEC. Also, please refer to the reconciliation provided in our earnings press release as management may discuss non-GAAP metrics on this call. With that, I will turn it over to John.

Thank you, Danielle, and good afternoon to everyone. Before we dive into the quarter in the year, I wanted to provide a quick operational update following last month's severe weather storm. The vast majority of our employees based in Texas, Oklahoma, Louisiana, were impacted by the strong, many without electricity and water for days, including myself. And it was truly a miserable experience for everyone that was impacted. We did sustain damage to several of our facilities, and we were unable to access the headquarters nearly a week due to damage for our fire suppression systems, which has subsequently been repaired. In addition, we've been impacted by the broad declarations of force majeure across the [indiscernible] chemical supply chain, the first time we have seen such widespread impact of this nature. As a result, there is a rising price environment and limited supplies of certain raw materials. We are fortunate to have trusted supplier relationships and a strong supply chain source of strategy, which will help us to continue to provide uninvested service to our important customers, and we are hopeful supply will begin to result in a normal state in the coming weeks. This is kind of a somber moment here before really discussing our results, I would like to give you an update on the board. I'm deeply saddened to report that Kevin Brown, our Director, who joined our Board in June 2020, following the acquisition of JP3 passed away unexpectedly in January, Kevin was a strong contributor to our Board and to the Audit Committee, and I valued his council and his insights, and he is missed. We express our deep condolences to Kevin's family and friends, and we mourn his loss together. Harsha Agadi was appointed to the Audit Committee who replaced Kevin and additionally, we…

Thank you, John. In the past quarter, we remained focused on executing against our business strategy in the data analytics segment. We continue to demonstrate the value we bring to our customers to meaningfully transform their businesses through real-time data and analysis. As a result of our assets, we are pleased to deliver a 91.8% increase in revenue sequentially, which was driven by new sales in North America and maintenance and support services. In Q4, we also made progress on advancing our international market entry plan. As we discussed last quarter, we recently hired an executive based in the Middle East who is leading our international business development efforts. We are encouraged by the meaningful engagement and positive responses we are receiving in the Middle East, Africa and Asia. Notably, we are pleased to announce that we have secured our first international pilot. We are a leading oil and gas company in the Middle East, which we have begun planning for deployment. Simultaneously, we are rating our products and systems to meet the expectations and requirements for international deployments. We are making significant progress against key milestones. While international fields require longer lead times, penetration in this market is an important component to our growth strategy. We are pleased with the achievement of an important milestone and optimistic about our opportunities over the mid to long term. During the quarter, we made software development enhancements by accelerating our artificial intelligence and machine learning capabilities. One of the first applications that we're planning to launch in Q2 is the use of machine learning algorithms to better improve on the time it takes the cut batches and hence, further reduce the transmix. Transmix, by the way, is the natural mixing between adjacent batches of different fuels being shipped in a common pipeline.…

Thank you, Koid. In discussing our Chemistry Technologies segment's performance, I'll first provide highlights on our Energy Chemistry Technologies followed by highlights on our professional chemistries, which includes our newly launched EPA and FDA registered cleaning, disinfecting and sanitizing product lines. 2020 has been a transformative year for our Energy Chemistry business as we effectively drove down operational costs, renegotiated logistics and supplier contracts and accelerated efficiencies in our business processes. As a result, we have built a leaner business that can meet the needs of the oil and gas market of today and the future. During the fourth quarter, we began to reintroduce Flotek to the market to elevate visibility of our enhanced value proposition that focuses our efforts on becoming the chemistry partner of choice and delivering operational cost efficiencies and improved well production. We're refining our sales strategy to complement a range of domestic and international customers that include both E&P operators as well as oilfield service companies. Domestically, we are targeting a customer base with a sustainable activity in operational programs, particularly in unconditional sale markets, through strategic objectives aligned with Flotek's proven performance and value proposition of cost-effective chemistry solutions that it can prove production at lower cost per barrel produced. In a recent example, Flotek provided an independent operator, a customized solution to boost traditional asset simulation results for wells being brought back online in Andrews County, Texas, using its proprietary reservoir centric chemistry. In this remediation application, a 20% increase in production was achieved utilizing our customized chemistry with acid treatment versus just the acid treatment alone. Additionally, the 20% increase in production has been sustained through time when comparing it to the control case of sole acids. Execution of our value proposition proves to be not only economically by having a positive…

Thank you, Ryan. As John mentioned previously, our fourth quarter was generally in line with our expectations despite difficult market environment in the third quarter. In Q4, we faced challenges of a global demand and industry pressures impacting both segments. Still, our loss is [indiscernible] last year as we manage our business more efficiently and focus on new ways to create, diversify and build profitable revenue streams. First of all, I'd like to address the fourth quarter impairment in the Chemistry Technology segment. We reported a loss of $9.4 million for the amended [indiscernible] agreement due to adjustments in the company's expected usage of [indiscernible]. The [indiscernible] purchase is related to a take-or-pay contract as part of 2019 [indiscernible] reported chemical company into ADM. The earnings per share impact associated with [indiscernible] entries is a loss of $0.16 per diluted share on a total loss of $0. 30 per diluted share . Now let's go through the income statement in more detail. During the fourth quarter, consolidated revenue was $12.1 million, down 5% to $12.7 million in the third quarter and below the $19.5 million of revenue from the same period last year. The decline that we saw in the fourth quarter is primarily driven by the volatility of the macro environment for U.S. onshore loan and completion activity, which is impacted by political and economic events in foreign markets as well as product mix in the Chemical Technologies segment. By segment, we saw a 10% decline in revenue supply chain in the Chemistry Technology segment which was $10.8 million, which was [$19.5 million] of revenue in the fourth quarter of last year. Decline was largely due to the typical fourth quarter seasonality on lower activity levels year-over-year as a result of ongoing marketplace. The data analytics segment saw a…

Thank you, Mike. Around this time last year, I shared with you that I would only take the bonus in 2020 if the company achieved breakeven or better. We did not. While I certainly could not have fathomed the events that would lie ahead when I made that commitment, it did not change our ambitions or the goal. As a result, I declined a bonus in keeping with my promise. Make no mistake, while we didn't achieve the outcome we set our sights on to 2020, I'm very pleased with the 2020 accomplishments and the year-over-year improvement in adjusted EBITDA in spite of lower revenue levels. And I'm very grateful to have the support of our Board and our management team and our employees and then particularly the Board who recognized my leadership and our achievements in the face of this most challenging circumstances I've ever experienced in my career. On January 6, I celebrated my 1-year anniversary with Flotek. And while I'm optimistic by nature, I will admit that there were times where my optimism wavered. But it was fleeting because no sooner did a challenge arise for an opportunity presented itself. I cannot tell you how grateful I am for our customers who have entrusted us to support them through this unprecedented year as well as my deep appreciation for the support I received from our shareholders, many of whom have opened doors in resources for us as we've begun our business transformation. And it was our employees who inspire me daily with their courage, ingenuity and skill. Most importantly, I will always charge the calls and e-mails of encouragement that came in at just the right moment. Thank you, guys. With that, I'd like to open it up for questions.

[Operator Instructions] Our first question today will come from Daniel Burke with Johnson Rice.

Let's see. John, maybe start with a kind of open-ended one here. And I think you all sort of addressed it. But how are you thinking about cash burn rate in 2021 and ways to mitigate it? And maybe if you can reach that crossover point to just sort of positive cash generation as the year advances?

It's a great question, and liquidity is probably the front of mind for all of us here in the company. So I'm talking to Mike, one thing to look at from last year is what are the nonrecurring spend that occurred? And if you tally that all up, it's going to be in that a $28 million, $30 million range of things that we believe won't be reoccurring this year. So if you subtract that from the approximate $60 million that we spent means that we anticipate spending about somewhere around $30 million this year as well, if we had a similar year to last year. And so we have sufficient cash to make it through 2021. And as we consider this to be a recovery year, it's a little hard to anticipate exactly when the market is going to pick up. But we think that we won't have any unusual cash expenses in 2021. And we have several initiatives underway to actually reduce the $30 million that we spent additional this year by being a little tighter on some of the spend we have on supply chain, et cetera. So I anticipate getting out of the year in good shape. We've got more than sufficient cash to meet all of our obligations this year.

Okay. And maybe just to stay on the topic of sort of cash. With regard to terpene, you all took a charge in Q4. I think your commitment to purchase terpene increases in '21 versus '20. Can you reassure us that, I guess, after this Q4 charge, you're appropriately reserved for the level of terpene sales that are likely to be achieved in 2021.

Yes, I certainly believe we're appropriately reserved. And we are working through strategies to reduce the purchases that are required of terpene going forward. And I'll have to tell you more about that as we go forward. But we -- there's some things that really impact that. Or we have done quite a lot of research, and we've made our products more price competitive and better performance even with the reduction in the use of terpene that's required to supply those products. So that brings our cost of goods down and improves our margins. And at the same time, we're seeing very good performance by these chemicals, actually better than the higher cost [indiscernible] terpene from the past. That reduces the demand for terpene. So if you can assume that it's an imperative for us to reduce the amount of terpene that we purchased, so that we're not purchasing in excess of our supply, and we are working on a solution for that problem.

Okay. I'll ask a couple more. Maybe one on the JP3 side. I know this has been a transitional period for JP3 as you sort of refashion the sales model. But the business in '18/'19 was running at a $3 million, $4 million quarterly revenue run rate. I mean can you give us any thoughts on the viability of getting back to that level of revenue as you look to maybe the second half of '21?

I'm pretty excited about it. Probably the best answer will come from Koid. Koid, if you could jump in.

Thank you, John. Thank you, Daniel. We are working both international as well as domestic. On the international front, I think there's a lot of potential that we're working on and that will help us drive the business and grow the business significantly in the future. Domestically as well, it's in a pickup. Domestically, we are also seeing a pickup in inflection as well. So we're seeing a lot of customer meetings and inflection. In fact, last week was the first time in a year that I get to go to a customer's office, in the past it was meeting for lunch, dinners, [indiscernible] and so on. And last year -- just last week, we were at one of our major customer's locations. So you can see this inflection picking up as we move towards throughout this year.

And then there's another interesting. We had breakfast at [indiscernible] with one of the major employments. And here's a quote from him. "This is the second meeting I've had in person in 13 months." And so that gives you some idea of the challenges that the company and the whole sector faces on being able to get their sales ramped up. And so it's how quickly they begin to start having that. With JP3, we're beginning to see people take meetings now. Koid has been on the road. Koid's, I guess, it's probably a violation of some HR rule, but Koid's had 2 shot. I've had one shot. We're working towards getting that shot up so that we can all get out there and visit with customers. And so I'm excited about getting my second shot next week so that we could hit the road. And we are all committed to getting out and having those separate meetings and personal meeting with customers as soon as they open their offices and let us in.

I agree. That sounds -- it will be good to get back to normal. Okay. Maybe just a final one. Just giving through the K here. Just I did notice a few instances of material weaknesses identified. Can you maybe address what's going on there, how you'll address those?

I appreciate that, Daniel. Yes. I mean there are material weaknesses there, and a lot of it has to do with internal controls. And I inherited those controls from a game here in 2020, and we've undertaken a lot of initiatives to improve our ability to implement controls that are meaningful. We did change directors. We changed the Audit Committee chair. This year, we intend to bring the internal audit function in-house because we think that, that will give us a lot more oversight over that as we go forward. And all the material weaknesses that are noted are things that we can remediate immediately and test those and be complete within 2021. And so -- and in some cases, it's a little frustrating. Because in aggregate, we have controls that would have really taken and provided the necessary control, but we didn't have a specific control named what was necessary. And so we've got to go through and take a look at our controls and make sure that we have specific main controls that meet the requirements that seem to be emerging today.

[Operator Instructions] Our next question coming from Poe Fratt with NOBLE Capital Markets.

Actually, it's a question on the professional chemistry side. When you look at the initiatives that you have, I guess, I'm most interested in the product launch with Protekol. And what -- can you sort of quantify the timing and revenue potential of that new product line?

I'll take a stab at it. Ryan's here with me. So we do have a full-time consultant with us that's working named Matt Laszlo that came over from Clorox, and he would say that we have really done an outstanding job in building some revenue in the professional chemistry lines. But he's a consultant, and we have we've got the manufacturer. We got the registration down, both FDA and EPA. We've modified our facility so that we meet all of the requirements prepared for inspection. We flamed the foundation for really being strong in this business going forward. And the one thing that we saved for last, that we didn't want to start selling before we had product, is the creation of the sales force. And so Ryan has been aggressively pursuing sales talent. A little more challenging than I might have thought, and it's primarily because if you're sitting at one of the giant [indiscernible] chem companies this year, COVID-19 starts to just breakthrough on your budget. So you sit there waiting on your bonus before you take the risk and join another company. And so we've had a bit of a delay in bringing people on board. But I think that we are -- we have got multiple candidates. Ryan, why don't would jump in.

No, I mean, it's [indiscernible], John. I think it's a part of the business that we're really bullish about in terms of what we have for an accretive revenue stream. We're strong in our FDA and EPA regulatory body functions. And for us, we're continuing to see the evolution of our product sales and diversification of the channels that we're using in the majority of our customer base, what we saw at the start as kind of these triage type [indiscernible] that now become repeat customers and continue to grow and evolve in that aspect. And we're really excited about the growth potential of this. And we do feel that the establishment of the Protekol brand is starting to translate into the true belief that we're going to be a continued long-term player in this market, and it's drawing a lot of attention to us for the growth aspect, and we're excited about that.

And I won't talk too much about this, but one of the things I find fascinating about it is there were so many unreliable, [indiscernible] nights that got in this, that one of the things that we have to do in order to win in a contract is we have to actually have proof of inventory. So we have go in the warehouse with the camera to show we actually have products on hand in order to be able to ship it, they want verification because they've ordered and then not received. And that's an area that's going to be -- I think you'll see litigation throughout this year and the next associated with companies that made promises that couldn't deliver on, and that's something we've avoided.

Great. And then, Mike, you mentioned that you had 2 PPP loans outstanding. One at the acquired company and then one at Corporate. Can you highlight your process on applying for loan forgiveness within the CARES program? Has that happened? Is there an expectation of when you might get a decision on that if you have applied for loan forgiveness?

That's just right now of filling out the forms to apply. It's probably going to be sometime in the next month that we'll be applying and submitting our information back to the SBA.

Our next question will come from Eric Swergold with Firestorm Capital.

I've got 2 questions. The first one is for Mike. Could you reiterate for me what the total NOLs are as of year-end? And then for TengBeng, obviously, you didn't sit on your hands, even though you weren't able to travel. Can you talk a little bit about what your prospect looks like now for the data business versus what it looked like 9 months ago? Obviously, you've had a lot of time to do research on who the prospective customers are for that line of work for you now.

So we have roughly about $95 million, we call it, of NOLs. About half of those are under the old loss carryforward methodology, so we had to carry some of those forward, definitely at 80%, and that's about half of them and the other half defer and they expire around 2032, 2035. So about 50-50 of that $95 million. Some carry on forever and some will expire between 2032 and 2035. Thanks.

And for us, the -- domestically in Canada, I guess, U.S. and Canada, we're seeing repeat customers coming back in fourth quarter as well as this quarter. So that's coming on nicely. Internationally, we have been doing a lot of business development efforts in Asia, Southeast Asia, India, all across Middle East as well. And many of the discussions has led on to a number of proposals so we're -- what we're optimistic about international, although it will still take a little bit of time, not being able to travel and have face-to-face meetings, but it's suddenly very positive responses all across.

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

A couple of questions. As you try to transition or embark upon developing greener chemistry alternatives for well stimulation and so forth, can you kind of give us an idea of what the timeline is from sort of romancing a prospective client to them trying the product and testing it. I'm assuming that they want to do some trials before you might actually get a steady decent booking of orders on that?

Well, John, that's a great question. It turns out the history of this company was it was founded on green chemistry. And probably when people were mostly giving it lift service and weren't taking it seriously. But with that same major independent this morning, we covered ESG, where the the E is really big, and they would define it as clean air and clean water. And so that's really an important thing to remember. Less and less in this industry, people are going to talk a about climate change, but they are going to focus on the environmental aspects of clean air, clean water, which means reduced flaring and the elimination of toxic chemicals in any aspect, whether it be production chemicals or completion chemicals, et cetera. So what about us? Well, we've already have those product lines. And in fact, we made a sale of clean, green chemistry in California here. Wasn't too big, but it's indicative of the fact that we can deliver that chemistry now. I think one of the challenges we have is we really need to get more aggressive on the marketing of that and talking to customers about it even this morning with the customer we were meeting with, one of the things that they told us, which I think is fascinating, is that they have created a clean air, clean water fund and so if the cost of implementing that technology exceeds what it is to use the less desirable, more toxic chemicals. And I've got to give an example like xylene which is significantly more carcinogenic, then we can move in with terpene based solutions or other solutions, replace that, and they'll actually subsidize that in order to get their own operations people to begin to deploy greener chemistry. And so, I'm excited about the fact that our customers are taking it seriously. And it's no longer a lip service. This is an industry that I think is aggressively moving forward, not in marketing, but in actual dedication to being more environmentally better environmental stewards, and that's happening. And so I think that's going to bode well for us. We have to market and the chemistry we have is there. It's just a matter of us talking to customers, blending and sending.

So are those efforts involve both the green chemistry as well as monitoring and sensors that you have? I mean I've listened to some of your presentations here recently. So trying to bone up on what you all are up to. But so is that kind of -- is it kind of a package deal like that? Or is it strictly the chemical products that are being injected into the wells?

Yes. So we're not as well bundled and productized for this as we really probably should be. And so we've got some work to do here. It's something I think will be really beneficial to the company and for our customers. And so the question is perfect. And it is what's driving a lot of our conversations. When we sit down now, with our customers, one of the first things they'll ask, even -- whether it be a zoom or in person, they'll say, how are we going to address the ESG requirements of our company? Another example it's now incorporated into the compensation. So it's no longer something that is esoteric. It's actually designed directly into their compensation. And so our ability to improve their ability to get their bonus, I think, becomes a great selling opportunity for Flotek.

And shifting gears a little bit here. I know you've said that the 2 facilities you have, you're running a one 8-hour shift, so you have capacity to expand if demand dictates that. So I'm kind of wondering now that you've got these FDA certifications, EPA certifications and so forth. Are you seeing any kind of meaningful uptick in inquiries or as far as product sales go to where you might have to look at the wonderful possibility of adding another shift?

I wish, right now, we were sitting around talking about adding another shift. But it's interesting, we sort of get in orders and spikes. So there's times when we're already working some overtime in order to get things out. And then there's times that we do have downtime. Do we need a second shift right now? The answer is no. And I think that's something that the moment I started to add a second shift, I would immediately want to report out to you guys, I would tell you that we're really beginning to build momentum in the marketplace.

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

Well, as always, thanks for joining the call, and we really appreciate the support of all of our shareholders. And we've had some really loyal customers through this. And I just want to make sure you know how important you are to us. And most importantly, we've had some great royalty out of employees. So we've managed to get through a tough year. And then thinking we were emerging with the vaccine, we managed to get through some severe weather. And so I just appreciate the steadfastness and the commitment and the loyalty that all of our employees have shown to the company. And it's just been fantastic to work here. And look forward to talking to you guys at the end of Q1. Take care.

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