Q3 2020 Flotek Industries Inc Earnings Call
Good morning.
From.
For the Flotek industries third quarter 2020 earnings conference call.
At this time all participants are in the west from a limit.
A question and answer session for Pollo management's prepared remarks.
No one should require operator systems, starting the call.
Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It's now my pleasure to introduce Daniel Island.
Senior Vice President and Chief of staff for Flotek. Thank you you may begin.
Thank you and good morning, everyone. We appreciate your participation joining me today and participating on the call or John Gibson, Chairman, CEO and President Michael Jordan.
Chief Financial Officer Qingming quite.
President Global business and write it down president of chemistry technology.
On today's call I will first provide prepared remarks concerning our business and the results for the quarter. Following that we will answer any questions you may have.
Yesterday, we released our earnings announcement for the third quarter, which is available on our website.
Today's call is being webcast and a replay will also be available on our website.
Please note that any comments, we make on today's call regarding projections or 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.
Listeners to review our earnings release, and the risk factors discussed in our filings for the FCC.
Also please refer to our reconciliations provided in our earnings press release as management made us GAAP non-GAAP metrics on this call without.
With that I will now turn it over to John.
Thanks, Danielle I'd like you to our employees.
Sure holders our customers have to our board of directors I'm extremely grateful for the strong support for Flotek has received additionally, I'm truly inspired by our employees. They for my focused and committed to executing our vision every day, well juggling dynamic demands at home at work.
Patchwork of returns for scope procedures on evolving challenges related to the pandemic my gratitude for their dedication cannot be overstated and it's a great honor for worked alongside them.
For dive deeper into the quarter wanted to welcome Mike Fujita Flotek Board of directors has the former chairman of Deloitte a U.S. Mike is an incredibly respected them intellectual leader. They spent his career contributing to the strategic vision of one of the world's most respected professional services an accounting for additionally over the course of his career.
Sure Mike has become a thought leader all human capital diversity and inclusion and business transformation. We are very fortunate to have might join us. Thank you Mike for joining Floteks Board I really look for to working with you.
Let's turn to the third quarter net overall for our quarterly performance showed some positive signals. We are by no means satisfied with our results and we have more work to do as I said last quarter navigating through this global market disruption caused by cold weather and demand destruction, there's been the most challenging environment and I had to eat.
Most of my career and even so I remain very optimistic about future Flotek, we're doing everything possible to position ourselves to be a stronger company and 2021 that means having the discipline to make some hard decisions today last quarter, you met my board and our new CFO polished third day at Flotek and every day sets for.
Dan it's been diligently identifying areas, where we can improve our business performance.
And our processes introduce efficiencies and implement cost reductions I continue to be impressed from much attention to detail and commitment to high standard I'm very glad he's here together with the leadership team Mike is driven several important initiatives while difficult a day I mean, we emerged stronger for the future as the market recovers.
Those are net Paramount inventory write downs and work force reduction. This is a period of transition for US. We believe we have the right leadership team in place to help us accelerate the transformation of the company and are making the necessary adjustments to our business model.
Other than a culture that drives value creation for all of our shareholders, an entrepreneurial culture with chemistry as the common platform underpinned by a passion for customer success and shareholder returns.
Jack has a clear path for for growth and profitability and our team is focused on results.
With regard to the macro environment lets address that first as a spend the inescapable force impacting our business performed much although the world started to slowly emerge after cobot locked down from the third quarter the fundamentals for the oil and gas market remains severely challenged a drastic slowdown in the oil and gas activity across the spectrum significantly limited.
Adjusted for Capex activities from the wellhead to the gas pump many of which have been put on hold while some sites were completely shut down.
Additionally, midstream budgets from gathering a processing have decreased 60% year over year, while U.S. drivers for reduce their road mileage by approximately 34% with a corresponding drop in the consumption over five fuel.
That said, we're still seeing some positive indicators crude pricing has begun to show signs of improvement from last quarter, although still at low levels.
Battery throughput has improved although margins have remained compressed from customer demand has not moved in tandem.
Some other customers are so modest levels of completion activity in the Permian.
And we saw increased demand for our specialty chemical stimulation chemicals in particular in select international markets, primarily in the middle East.
In summary, we saw from improvement in the market, but not nearly enough to get excited that the market is recovering.
As a result, it was a difficult quarter with mixed results the drop in economic activity and weak demand, it's weighing on sales across our business segments.
Last quarter, we closed our acquisition of JP, three a data and analytics technology company, serving the oil and gas industry.
With our first full quarter of JP three results included in our financials.
For much fell way short of expectations as JP three sales were impacted by a dramatic reduction for the capital budgets by midstream and downstream customers. As a result for these conditions. We took a hard look at what we could achieve in the near term in light of anticipated ongoing market disruption and the necessary resources needed.
The transition to a recurring revenue model.
And and after this analysis, we concluded that we should take an impairment charge across several categories for JP three.
And we we also completed our quantitative and qualitative analysis from inventory following the acquisition to assess market values and Atlanta anticipated customer demand.
Tandem, we're lowering operating expense just to be commensurate with the revenue decline, we anticipate from moving to a recurring subscription model and reduced demand in a difficult market. These cost reductions include a headcount reduction of 35% within the segment as well as a decrease from other operational costs that are not directly tied.
The near term revenue generation.
These actions were not taken lightly when necessary as we manage our business. So that we minimize the impact on our liquidity and 2021 and beyond as we transition to subscription based revenues. Additionally, I'm also pleased to announce it paying bank coin as assumed the duties are present other JP three.
Recruited Kuwait to Flotek last quarter following more than 30 years of experience and they want to guess industry. He is a proven leader building enterprise wide software solutions for energy companies across the whole hydrocarbon strain. He's demonstrated a very strong track record expanding businesses to international markets I will call for that Shouldnt coordinator.
The team at JP Threed to build a very strong future in the long term the business has considerable growth opportunities for we remain confident about the compelling strategic financial benefits with JP three diversified flotek business across all segments of the hydrocarbon value chain and these technologies for helping customers excel.
Great digital transformation by providing the real time data necessary for manage crude oil and natural gas processing. We also have the opportunity to address perpetually greenhouse gases with JP three and so emerging markets are a real opportunity for us as well Gordon will address the migration to a subscription based day to model.
And also highlight highlight our growth strategy to expand our market penetration, both domestically and abroad transitioning to chemistry technology and our newly launched sanitizing disinfecting business that will often referred to as Jan San business through the quarter, we experienced pricing pressure as suppliers.
With lower quality products offered steep discounts to liquidate inventory ahead of the anticipated tightening of regulatory standards, which we believe will drive those products.
The market will.
We trust these disruptions will be temporary in nature, even with the recent announcements about the anticipated cobot vaccines. We still believe there will be a long term change in consumer and business behavior. It will take some time for vaccines to be proven manufactured delivered and administered widely and they're still large unknowns about the number of Americans.
To take the vaccine without day, there related to long term effectiveness and side effects.
Most importantly, I'd like to emphasize that we're building out a product portfolio and Jay have Sam it extends beyond sanitizer to address a broader set of needs in the janitorial sanitizer market transcends the current pandemic overall.
Overall, our chemistry technology segment experienced sequential improvement as we've seen an uptick in energy chemistry active activity, both domestically and internationally. As a result, we are pleased to see a 52% increase in overall segment revenue in the third quarter versus the second quarter.
Now, let's move to liquidity and cost measures. We continue to take decisive actions guided by our strategic pillars to best position Flotek for the future are.
Our balance sheet remains healthy and we are focused on bolstering our financial flexibility as a reminder, earlier this year in order to preserve our liquidity we reduced headcount.
Lowered salaries of our executive team for tail discretionary spending and decreased compensation for our board of directors throughout the quarter. We continued to work with our suppliers to negotiate cost from raw materials negotiated reductions in our leases and reduced our freight costs.
Going to turn it over to coin for further discussion of JP three efforts to drive revenue and then we'll turn it over to Rod Israel will give an update on the transit the chemistry technology segment, including the process of our new Jan <unk> operations Kuwait.
Thank you John as John mentioned, while we faced challenging market condition, we have utilized it's fine to accelerate our strategy to penetrate international markets.
I see you know business model and focus on targeted applications of our game changing technology.
International from JP three into boss only stuff the North American market in September we hired a seasoned business development leader in the Middle East to help us drive Gbpthree penetration in the Middle East Africa and Asia.
Since then we have had many meaningful engagements.
And we have received very favorable feedback from potential customers and not responding to many requests for proposals.
While international sales require longer lead times, we are optimistic about all watching these over the mid to long term and we are preparing for deployment of our technology to this market. This is a very exciting.
Secondly, we are transitioning and bought striking a business from traditional equipment sales the subscription based model. This.
This will provide the greatest value for GP treat customers and I'll share holders in the long term.
While we will maintain some level of equipment based contracts to accommodate customer needs.
We are aggressively shifting to subscription based contracts, which will accelerate our recurring revenue.
Additionally, we continue to maintain strong relationships with existing customers and not building new relationships to expand our customer base.
Well in working closely with Phillips 66, we signed a collaborative agreement with them in the second quarter sales.
Of this agreement we will provide a data services offering that will optimize transmix, which is the natural mixing between that Jason batches of different deals being shipped in a common pipeline.
This offering provides real time data, which enables faster decision, making that will help reduce transmix and increase profitability for refined fuel produces transporters and done we know operators. We are encouraged to see very positive feedback from the value of this partnership.
And it validates the strength and value of our customers are seeing using our unique technology.
We look forward to expanding adoption of this application in the market.
With that I'm going to pass along the call to ride this out to discuss chemistry technology segment.
Thank you for core.
As a reminder, our chemistry technology segment includes both our energy chemistry technologies as well as our emerging janitorial sanitizer businesses and I'm deeply proud of our teams who are executing successfully.
I'll first provide an update on our janitorial supply business, which is referred to as Jan said.
Last quarter, we launched Floteks line of Ft, equality hand, sanitizers for industrial and consumer applications. Our initial efforts from cultivated as a result of community outreach I began the first quarter. When we started producing in donating hand sanitizer to local communities first responders hospitals schools homeless shelters as for.
The new residential communities subsequently, we recognize the opportunity to diversify our corporate revenue stream and share rejuvenated high growth potential market. There was a natural extension of our specialty chemistry experience.
By leveraging our technical or chemical production capabilities and ISO certified facilities, we applied our world class R&D footprint to deliver an expanding line of high quality F.D.A. and EPA registered products. Today, we are actively selling ft, and EPA registered janitorial and sanitizer products into <unk>.
Multiple markets.
Including hospitals and medical facilities travel and hospitality industry food services.
E Commerce, and retail sports and entertainment and other industrial and consumer markets.
The inclusion of disinfectants surface cleaners to our existing hand, sanitizer line establishes a full product offering for the Jan San community, particularly those in commercial and industrial applications for.
Following a strong second quarter growth, we saw some pressure in the third quarter in our hand, sanitizer business with a high demand for hand, sanitizer products the market experienced a flood of new interest often with low quality or even contaminated raw materials more recently in anticipation of the FDA reverting back to its original.
Higher quality standards opportunistic producers of sub standard hand, sanitizer have been dumping inventory into the market as they exit the industry, which has disrupted the supply demand balance as John said, we believe this day disruption is temporary.
More importantly buyers are becoming further educated today and recognize the need for regulatory compliance to deliver high quality products for Flotek offers.
As a result, we're starting to see repeat buyers upper hand, sanitizer products and a higher focus on product quality metrics by commercial and institutional buyers. The treehouse purchases, we observed in the second quarter, a reducing back to normal procurement processes, and we believe that exit low quality inventory should began to dissolve from the market.
Flotek is now selling at a 25 states and have increased our distribution customer base by 28% and end use customer base by 49% quarter over quarter. Additionally, we are selling our products direct to consumers on Amazon.
The customer feedback is positive and consistent floteks products are among the highest quality technologies in the Jan San industry with proven supply chain and logistics capabilities that differentiate us in the marketplace.
We're building out our channels to market for a long term sustainable business and we have expanded our Jan San product portfolio to include disinfecting wipes and sprays surface cleaners and degrees or is it manufacturing partnerships with emerging technologies in the Jan San industry.
I'm also happy to report that with the recent addition of our new packaging line, we further enhanced our capabilities reduce costs and accelerated our order fulfillment process.
We see many opportunities ahead, particularly those in Jan San and are optimistic about these in the long term as we continued to build out our capabilities, we will invest in marketing resources and talent with strong distribution and sales experience to further develop our relationships in the Jan San market.
Our Jan San initiative exemplifies how we are adapting and reallocating resources to high gross businesses that would drive positive returns and we look forward to providing additional updates as we progress in this exciting market.
Now switching to a few comments on our energy chemistry business, which first of all let me say it is improving and I would like to provide a few highlights in this regard.
Although market experts have commented on declines the chemistry usage negatively impacted contracting opportunities due to M&A activity. There are macro factors that are helping to drive energy chemistry as demand began to exceed production at the end of the third quarter completion, and fracking activity slowly moved upward and we've seen select customers increased usage.
Each of our specialty chemistries as their completion activities resumed given the production improvement and return on invested capital our products deliver in fact, a recent visit one of our largest customers flotek receive high praise due to the strong partnerships. We created together with an unwavering focus on consistent delivery of our chemistries setting.
It will support services and well site implementation.
Furthermore, I'm pleased with our international opportunities, which are driving upside in our energy chemistry business in the Middle East we have been named the chemical partner of choice to provide a broad range of coal tubing stimulation additive to a major endosee through partnership with end market in international service companies.
This opportunity and others will drive our growth in the middle East as we look out over time net.
In addition, as Mike will discuss in greater detail. We have continued our focus on cost reductions and supply chain improvements, which include inventory management and rationalization of our finished goods count, resulting in greater efficiencies in our business.
In closing I would like to emphasize that our energy chemistry business up today is truly a transformed business over the past year, we have driven down our operational cost renegotiated logistics supplier contracts and accelerated efficiencies in our business processes, we built and leaner business that can meet the needs of the oil and.
Yes, Mark it up today, and the future and we all for something unique and valuable in the marketplace, which is one delivering cost effective chemistry solutions to designing and implementing optimize chemistry and three helping operators increased production at lower costs per barrel produced.
As we look out ahead into 2021, we are focused on re introducing flotek to the market and building stronger relationships with our active and successful customers to expand our global market share and with that I'll turn over the call to Mike Barton to discuss our financial results.
Thank you Ryan and good morning, everyone.
Since joining flotek in early August I've been extremely focused on evaluating the quality the books, including the balance sheet cutting price is spending prioritization expense CMM as other cash management, putting our banking relationships I also spending time with our new auditors.
During the first three months of Flotek I've started implementing several strategic priorities that will help us create a stronger organization.
Additionally, based on my prior experiences with multiple technology companies, where we were able to successfully transition to a recurring revenue model, we have reset the financial framework and the underlying assumptions going forward for JBT free.
We must ensure JV three is optimized structure to minimize the cash needed as we transition to a new model, where we recognize the revenue monthly over a number of years for that at the time of installation. This means the company will have cash outlays for the inventory up Brian require more cash one time product so Jamie.
Good day impact on both revenue and cash that said JP theory has enough inventory on hand to mitigate the actual cash outlays in the near term.
I want to pause here to emphasize the benefit of transitioning to a subscription based revenue mile.
Is that it leads to a longer term higher margin recurring revenue stream.
And associated higher multiples given is predictability in short as John noted, we are making and will continue to make the necessary business decisions to minimize our use of cash.
First let me address the impairment we reported this quarter for JP three.
As a result for the extended impact to COVID-19, and the continued decline in oil and gas demand and spending budgets, especially in the refinery in mid and downstream markets recorded goodwill impairment charge of $11.7 million intangibles asset impairment charge of $12.5 million.
These adjustments for a complete in conjunction with the independent valuation company and the auditors.
Secondly.
We also took the opportunity to evaluate our inventory across the company.
Over the past several months I've been working with our new and very talented VP of supply chain seem wise as.
As a result of that initiative, we have adopted new policies and rationalize a large portion of our inventory by reducing hundreds of underperforming price skews.
Consequently during the third quarter, we have taken in excess of obsolete reserve of 9.6 million. The charge is made of two parts first as a reserve of 5.7 million late to the chemistry technology segment, and 3.9 million for JP Dthree.
In addition, during our inventory assessment volume JP three acquisition, becoming identified measurement period adjustments totaling 2.3 million that were made to the initial purchase price accounting.
I would like to emphasize that these adjustments are all one time in nature and resolve these actions, we can better manage our inventory position and profitability moving forward.
Next as for the purchase agreement terms for the JP three acquisition and the earn out conditions associated with Apotex stock performance. The company recorded a liability of $2.5 million in third quarter.
The payment was transferred to the escrow account early October for the acquisition terms.
The two for 2.5 million transfer to escrow replaces the previously escrow 3 million shares those shares were distributed JP three shareholders in the fourth quarter.
I'd like to note that there are non provision and the change in the fair value elsewhere or not consider an acquisition purchase price adjustment and does Flotek reported 3.2 million share.
George is that impacted operating income during the third quarter.
We also want to remind you that in the second quarter, we changed our reporting ticket technology methodology. As a result of JP three acquisition and are presenting our results in two new reportable segments chemistry technologies and data analytics.
The chemistry technology segment was previously referred to the energy Chemistry Technology segment, but now includes our recently launched janitorial and sanitizer operations. There Ryan just described.
Data analytics business was credit in conjunction with the acquisition of JP three.
Also please note our third quarter results are the.
All first quarter day included business operations and expenses for JP three.
Prior to discussing our financial performance in more detail as John previously mentioned, we faced a challenging third quarter driven by continued lower global demand and industry pressures impacting both our segments.
Moving onto the income statement.
For the third quarter consolidated revenue was 12.7 million up 43.5% from an 8.9 million second quarter below the $21.9 million during the same period last year.
The sequential improvement was primarily driven by an uptick in energy chemistry activity as demand picked up both domestically and international markets from the second quarter debt.
The sharp decline in revenue year over year is largely a result continued volatility the macro environment for.
Thank you for drilling and completion activity impacted by political and economic events in foreign markets. In addition, COVID-19 impact our productivity as a result reduced customer demand for our services and products with the exception for sanitizer operations, which is really ramped up during the second quarter of 2020.
Consolidated operating expenses were 29.5 million in the third quarter of 2020 increased 24.4 0.7.
For sent from last year's level of 23.6 million in the third quarter. Excluding these one time adjustments up 9.7 up inventory and $3.2 million.
Acquisition related expenses, we were pleased to report that expenses declined nearly 30% year over year.
Corporate DNA declined 3 million to 2.7 million versus 5.7 million last year due to a reduction in overall compensation spending lower discretionary spending including professional fees, partially offset by one time severance charges.
Our depreciation and amortization expenses declined 1.5 day to 500.
For a thousand in third quarter versus $2.1 million last year.
Research and development costs were at $1.5 million in the third quarter slightly below second quarter's level of 1.6 million down from 2.3 million last year.
We reported a loss from continuing operations of $45.2 million or 66 cents loss per diluted share in the third quarter of 2020 compared to a loss of 11.2 million or 19 cents loss per diluted share last year.
EPS included negative impact of the JP three impairment of 36 cents per se.
Personalization of inventory of 14 cents and JP three contingent consideration of five per se.
These.
Three one time items represent a vast enjoyed the total recorded loss per diluted share.
Our adjusted EBITDA for the third quarter was a loss of 6.5 million, which no from a loss of 8.2 million last year. The improvement adjusted EBITDA is probably due to a lower expenses as previously discussed.
Now moving onto the balance sheet performance as John mentioned previously our cash from his position remains healthy we are focused on preserving our liquidity.
As of the end of the third quarter, we had cash flow close to $49.1 million versus $59.9 million in second quarter as previously disclosed the company JV three combined at $5.7 million of loans outstanding pursuant to that Paycheck protection program.
As mentioned previously we are absolutely focused on managing our inventory position during the quarter within the chemistry technologies Division.
Juice, our skews by 35% as we focus on manage our inventory in an efficient manner. We estimate the SKU reduction will result in annual savings of more than 1.3 million inventory carrying costs.
Let me pass over the call back to John for some final remarks.
Hi.
Thank you, Mike I'd like to take a moment to share a few few closing remarks, when I joined Flotek January have laid out a few strategic objectives for growth, including reducing our dependence on rig count expanding new product lives that create a greater amount of backlog and or annually recurring revenue.
And further differentiating our offering from competitors, while enhancing our capability to provide digital transformation of chemistry, and strengthening our market share for our current product launch.
At the time of course, none of us knew how dramatically the market would be disrupted.
For we've adapted our business, while focusing on executing against our strategy, which still holds even in this market and while nowhere near satisfactory to me in terms of progress to date, we are making progress in laying a strong foundation for 2021 and beyond.
First we are committed to preserving our liquidity and maintaining a healthy balance sheet for.
Fortunate to have Mike at the company to support retention of our capital and to help drive a culture with a commitment to the leanest cost structure, while delivering superior customer service.
We are building a more diverse income strength through the acquisition of JP. Three we are diversifying our business and offering downstream midstream and upstream customers access to unique digital transformation products and services.
We also have the potential to take this offering into the greenhouse gas at E.S.G.
Second much and we're investigating that for.
While at the same time looking at all of this digital transformation to build us a recurring revenue model.
Additionally, with the launch of our janitorial sanitizing products and logistic services, we further diversified our business beyond hydrocarbon markets to include industrial and consumer markets.
From an operational standpoint, we have available on so manufacturing capacity in the chemistry technology business for both energy and Jan San products with the capability to deploy to the most attractive market opportunities without adding very much additional cost we've created additional price.
Products that can really help us on the revenue side and Flotek. We say, we also see a notable international opportunity set for all of our businesses in the oil and gas focused products to include both J C and the energy chemical technologies, where we believe we're going to see much less volatile.
Will it be in the days ahead versus domestic markets and so we're very pleased that we've expanded into the international segment already in closing Chemistries. Our core competency. We have developed three strong business slash centered around creating value from chemistry, while it's difficult to determine when the world returns to normal we're per.
Putting in place the right measures and invest much to emerge and 2021 and beyond as a stronger company prepared for the future with Optionality, we still have a lot of work to do and we're committed and I'll turn it back to you now for some questions. Thanks, so much.
We will now begin the question and answer session.
Ask your question Press Star then one on your Touchtone phone here.
We are using a speakerphone please pick up your handset for pets.
Keith.
Draw. Your question. Please press Star then too.
At this time, we will pause momentarily to assemble for us.
Our first question today comes from John.
Mr Gross and our market place.
Hi, guys.
Hey, John.
Hi, Joe.
Okay can you.
Hello for hand Sanitizers sales.
Were in the third quarter and.
And where you'd like to see that business for a year from now.
So.
Start out we're not breaking it out because we were really try to maintain from.
Competitive advantage with the.
In the marketplace with associated with competitors, but I will say that it was depressingly lower than what I would've expected and we didnt see growth quarter to quarter and.
Mainly because of what price stated earlier, we saw a lot of people that dumped sanitizer and at the time at the beginning of the quarter, we were principally looking at sanitizer, but over the last three months, we've diversified that product line, where we can be a real Jan San player because people want to buy a portfolio of products in that segment. They are not interested in.
Single product sales right.
Jump in there no I mean, I think you're correct into reemphasize that John I think when we first you know.
On our philanthropic efforts is where our first commercial sales and the Jan San business came from and quickly after being there for a few weeks we become the realize as we were looking at long term sustainable business, we needed to address the full portfolio that not only talked about the hand sanitizers the various disposable options, but we then we start talking about the full.
Service market around that on the Jan San business, which is substantially larger as a whole than just hand, sanitizer and so thats. When we moved into a lot of the areas of the surface disinfectants. The sprays the wife's the degrees or is the cleaners. All those things that are core compensate chemistry related to flotek and non calls any burden on us to me.
Moving that transition is since then we've lost I'm at launch the substantial line in that area and seeing good movement and what we're starting to see now is building blocks of recurring customers of all longer term contracts with fixed orders on a monthly basis, which is the target of what we want to be in the sustainability side of the market.
And then on.
John J.P., three I know that the.
Hi, good morning, guys.
And refinery guys have been under a lot of pressure but.
What's the outlook for the Phillips 66 JV.
Business opportunities related to that.
Got it all right. Thank.
Thank you for the question, we relate that to date for this expect sponsorship so with its fixed through the.
Introduction.
Presented to quite a number of potential customers.
Many of them have progressed, but on in fact, one of them is even progress through proposal. So I think the value that is that the deriving from applying that technology for that transmix, it's huge so.
Sponsor has been Boston for them, we are looking forward to some.
For the results net anthem.
The other part that I like about the.
Well, we all JP three encodes leadership as we see a pretty extensive set of opportunities on the international market.
However, we're we're being a bit.
Cautious and predicting when we'll be able to get to those because we're still getting all of the certifications registration for required for the international market you can't just ship, there and and violate any of the U.S. law. So we're being very particular and there are losses associated with shipping fiber and fiber different lakes and and encryption assessed.
Adjusted with any other models, we might put on the chip. So we're being careful we see a way forward and its clear so I'm expecting that we'll be able to report back from that.
Thanks, guys.
Great job for the tough quarter really.
Thanks, John.
Our next question will come from Daniel Burke with Johnson Rice.
Please go ahead.
Okay.
Let's see John maybe a question for you on another one on JP three.
Yes in terms of the performance of the business in Q3, maybe maybe not quite up to your initial expectations. I guess I was just trying to better understand if that's a consequence of maybe under appreciating just the intensity of.
Kobin related impacts that that business is seen in terms of its end markets or if it's really more about the pivot to a subscription based model and net taking longer to affect or.
For being a little trickier to affect that debt maybe previously anticipated can you help me understand that.
Well non Daniel you win an award for insightful question.
Our hugely optimistic about JP three we acquired at co bid would abate much sooner than it has and so we did fail on what we thought we would be the other projections for the remainder of the year, but primarily due to the fact, we did not have access to customers. We did not have access to sites.
Even recently and trying to do and installation for sale.
We had a net.
An employee that had a cold related exposure that prevented us from doing managed vol. Immediately so.
Thank you Jeff was the operational difficulties of these times.
Now so.
So Tobey I would say Thats 80 per say out of the shortfall. The other part of the shortfall is transitioning the sales force the move from selling hardware to selling subscriptions and.
That's been more challenging college doing quite a good job there we've got a new sales person here in new assets.
This was her entire background is delivering subscription based models and she is bought in 100 per se and I'd, rather talk turns into almost any body because of her enthusiasm for what we will be able to do but we have another international sales person that caught you brought in very similar and that they have a subscription based.
Experienced share and they understand how to position that and how to sell it we.
We also need to transition the customers that had bought hardware into subscription models and that process is underway as well and so I would just I would say it was more difficult than we thought to go back, but I think mostly because the cobot, but partly because there is and with some.
Customers for the desire to just on hardware and sort of the final remark from this would be.
We're not entirely sure so even on our go forward forecast that impacted the impairment how to explain the mix to you because there may be some countries that require us to sell hardware and then maintenance agreements, which will we'll have to try to explain how to explain it to you from a subscription perspective, because there'll be regulations.
Associated with whether or not they can use cloud services not not all countries are in the same place. There. So we've got a bit of understanding to go all but I'm excited about it James.
Thanks, Allison share with US we were talking earlier about I am excited about as we move forward the greenhouse gas measure much and how do we add sensors James for if you give.
Give comment on that.
John.
We are exploring our options right now on new detection mechanisms and we want to be able to leverage the capability of the existing JV three system and would do sensors and modeling techniques. We're excited about the possibilities of being able to meet those emerging needs in the market.
And my other question, Dan Daniel I mean.
Yes. So what you guys had said that's very helpful. John I guess, the other one I had maybe a little more straightforward.
Could you talk about maybe the timeline or if it's easier maybe that the revenue top line that you see at this point after after the cost reductions you've affected this year your latest thoughts on where that topline needs to be to kind of get closer to an EBITDA breakeven type level. Thanks.
Well one of the reasons, we have Mike, yes, he keeps reducing our costs. So the top line coming down.
And we're still focused on that and that's got to we've got to be relentless because unfortunately I can't answer your question and the reason I can't answer which is because there's still so much uncertainty that if I go out beyond Q4, I began to lose my clarity on how the markets for covering I would have said that I would have thought.
EBIT would have.
David did not its facts surging in the northern hemisphere, and so thats impacting us again.
We see vaccines and we have no enthusiasm yet around vaccines from this management team primarily because there are still a lot of uncertainty and when it will be available how many will be available how will be distributed and so our predictions I am just kind of say, we're going to really work hard but.
I can't forecast with with the accuracy that I've like so the thing that I can do is managed cost with.
For the vengeance, and that's where we're going to have to focus in the near term.
Fair enough, Okay, alright, guys I'll leave it there. Thank you for the time.
Thanks, Dan.
Our next question will come from Aerex, where gold.
For storm capital. Please go ahead.
Morning, guys.
Hi, Good morning, Eric I got three questions for you all unrelated to each other the first one is.
Are we going to have any wells from the charges you took this quarter.
To protect earnings going forward from can you quantify that better from that.
Let's turn it over to Mike.
So someone is going to be timing as you probably know we had roughly about 50 million of INO assets coming into 2020 that had a 20 year care carry back and 100% use.
20.
The good news is tax losses in 2020, we'll go out forever, but only be able to be used at 80% now let's talk about the inventory write downs until we actually dispose of that inventory, we can't take the tax benefit of it but our goal is to get rid of that inventory quickly can you talk to cash if we can get it whoever values.
I can get it based on the write downs and that would be a tax benefit that time.
Okay.
Second question is on the Janssen side Im a little unclear is your Janssen product line, something that's going to be flotek branded or private label or both.
Well I'll start out let Ron finish it for Eric.
He asked for that is yes.
We look at our ability to produce chemicals, whether they be for energy chemistry, such as the cnf products or for disinfectants sanitizer surface cleaners, and we go for us that capacity and we intend to try to get that to maximum use of our capacity to blend in sand chemicals and.
So whether were doing it for the energy side or from the Jan San side. It turns out that we have the same labor we have the same facilities, we have the same equipment.
Our assets for roughly the same we did modify small portion so that we could get FDA registration and we are so efficient that anything that we do on the Jan San side is very accretive to our overall chemistries.
Revenues from profitability, but we plan to do whatever makes for profit for our share held right.
Just to be low add on a little bit more details on that John is that what we're looking at is we've done a significant inver.
Investment into a high velocity study all where are the best options for Flotek in terms of the commercial markets, which we include industrial institutional buyers versus the retail side and some cost effectiveness on how we go about approaching both of those and basically what we're seeing is our advancement into the commercial side.
God, where there would be an institutional or industrial plays into our strong suit around our ability to deliver logistically our cost structure, how we can leverage our supply and cost advantage and get out there and for that that's a blend of what we would consider to be private manufacturing, a white labeling and establishing the flotek brand because.
Institutional buyers are driven by EPA and EBITDA compliance, which is a strong suit for US now as we establish ourself in that market, we feel debt through our E. Commerce business is kind of a a training sandbox for that and brand development that will start to be able to establish a stronger for low tech brand inside potential.
Retail business, but those are all weighted against the fact of the significant investment. It takes on the marketing side to go straight out and address a retail market. So those are some of the strong points in that we're looking at a while we like the commercial markets better on this initial outgo and net balance of private contracting and establishing flow.
Tech brand inside institutional buyers.
Great. Thank you and the third unrelated question, there's been a super informative call. So far but there was there was a recent industry conference for Flotek presented.
Some new data on a new and improved product line that was resulting in I don't remember the percentage extra lift it was getting beyond your prior product, but do you have any early indications of consumer response to the new and improved product.
The upshot Alice.
As well.
Again this is for part of our reservoir based chemistry knowledge and experience coming to play.
Great. Thanks, very much you'll get them guys.
Thank you.
Again, if you'd like to ask a question that has started then one star.
Started then one to ask the question.
Alright.
Okay.
Bye for now.
Probably.
Okay, Yeah, let me, let me sum up here sort of where we are.
I wouldn't normally do you have any guidance, but I've gotta give a bit of queue for macro environment guidance at the moment.
We've seen a lot of consolidation in the U S. Domestic place one other reasons I'm excited about the expansion internationally.
Nfc's don't tend to combine and less volatility in those markets and so our commitment to being international support it to us, but that is go and potentially slowed down some of the potential sales that we have in queue for just because while consolidating people tend to take their eye off their operational ball.
The second one is for coming up on holidays and so.
Covid as as an excuse to go home.
Early and not spend anything for your capital budget. So we do have customers that may take off Thanksgiving through January 7th.
And then finally, Covid resurging and so while we are still in here plugging away every day I'd say queue for is going to be more the result of of industry activities and.
I'm not really excited about it and yet I'm not depressed about it we've got the right things going on we're talking to the right customers leave in just a few days to go on a trip throughout the Oklahoma and Texas to visit with customers that that we're excited to talk to an explain what we do but how quickly that turns into revenue.
I'm concerned about Covid I'm concerned about the holidays and I'm concerned about consolidation because it's involving some of our our better customers.
With that thank you very much we really appreciate your gas and.
Our focus entirely is I'll get some return for shareholders and so we'll stay at it have a good holiday and.
Talk show.
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