Flotek Industries Inc (FTK) 2009 Q1 法說會逐字稿

Good morning, and welcome to the Flotek first quarter 2009 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation and an operator will give you instructions at that time. (Operator Instructions). Please note, this conference is being recorded.

At this time, I would like to turn the conference over to Jerry Dumas, CEO. Mr. Dumas, you may go ahead.

Good morning. This is Brian Shannon with Investor Relations. I want to take care of a couple of announcements before Mr. Dumas begins.

Welcome everybody to our first quarter 2009 conference call. It is being recorded and a replay will be available through May 15. The press release announcing our first quarter results is also available in Flotek website. And before turning the call over to Chairman, CEO and President, Jerry Dumas, I'd like to remind everyone that some of today's comments may include forward-looking statements, reflecting Flotek's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in Flotek's filings with the SEC.

And now, I'll turn the call over to Jerry Dumas.

Thank you, Brian, and welcome to all of you. I appreciate all of you joining us today in this call. Joining me today here at our headquarters in Houston are Steve Reeves, our Executive Vice President and Chief Operating Officer; Jempy Neyman, our Senior VP and Chief Financial Officer; and I'd like to welcome Scott Stanton who is our Vice President of Finance and Chief Accounting Officer. Scott came to us in January from his own organization. He had been with Office Depot in a senior accounting position. We had him come and transition with us as we began the task of knowing one another. Mr. Stanton found our Company to his liking, we found Mr. Stanton to our liking and we welcome to our Company and we believe he will be a significant addition to Mr. Neyman's financial staff.

What I'd like to talk about a little bit today is the market that we're working in. And as all of you are aware, Flotek's primary activity was in the North American market, even though we had begun to establish very many initiatives in the international market. We, like a lot of other companies, have seen a precipitous decline, in fact, in my history in this industry I've never seen a more rapid decline. We had a 17% decline in drilling rig activity in the fourth quarter of '08, but the level of rigs in the first quarter dropped an additional approximately 30% in this first quarter. More telling to Flotek was the decline in gas drilling activity, which represented 78% of the overall drop in active rigs.

To give more color to our universe of market opportunities and the impact of price cutting was significant and the gross margins fell 25% compared to the first quarter of 2008. As a result, our revenue declined 12.5% year-over-year. Especially hard hit was the revenue of our Chemical segment due to the aforementioned decline in gas wells being drilled. Drilling Products revenue were affected similarly, as the rig count by the end of the first quarter of '09 was off 50% from the peak. Artificial Lift products and services rose 44% year-over-year, due primarily to a backlog of completions, as well as success in gaining market share in the Powder River Basin in Wyoming, and in addition to that, we had opened up a new facility that was gaining some traction in the San Juan Basin of Farmington, New Mexico.

While we did not see the efforts of cost containment in SG&A in the first quarter, the sizing of our firm to meet this deteriorating market should result in noticeable improvement going forward. Costs related to IT expenses for communication, infrastructure, consulting and professional fees, severance costs and fees associated with the Teledrift acquisition represent approximately $2.5 million to $3 million and we should not repeat those. We realize that liquidity has been an issue that has been a concern of many of our investors, if not all of them. We are not unaware of the liquidity concerns. Progress was made in the first quarter to reduce our current debt. I'm going to have Mr. Neyman, our CFO, discuss this more in detail.

Another issue that has come up in a number of our calls is the issue of my ownership in Flotek. My confidence in the fundamental value of Flotek is strong because of our technology, which is leading in all of our products that we offer to the industry, our people and the customer loyalty. The question of my ownership is going to be answered with respect to the fact that I have been unable to acquire stock due to the quiet period and the fact that I was in a blackout period. However, after this call, I will be free to purchase stock and I will be doing so and for those of you who are interested, you will be able to look at the filings, and this will bring my ownership to something over 1 million shares, which certainly indicates my confidence in this Company.

So, with this, I would like to turn the discussion over to Steve Reeves.

Thank you, Jerry. In our Chemical and Logistics segment, first quarter revenue decreased 27.1% to $17.2 million for the quarter. Sales of our biodegradable green and micro-emulsion chemicals declined 21.6% to $12.3 million. With the North American drilling activity declining approximately 30% in the first quarter (inaudible) our revenue decline in line with current activity levels. Our pressure pumping customers are also seeing a higher percentage of wells not being fraced and combining this with continued pricing pressures also contributes to the decrease.

Operating income was $4.4 million in the first quarter, a 46.3% decrease. Although we continue to receive price concessions on raw materials from our vendors, the lower revenues caused operating income, as a percentage of revenue, to decline to 25.6%. We've implemented many pricing initiatives to maintain our market share with our customers. We also continue to invest heavily in our R&D efforts in order to remain in the forefront with new products. With these efforts and our continued efforts in the international arena, we continue to be confident that our Chemical division will rebound strongly at the very first uptick in any activity.

Our Drilling Products revenue was $18.4 million in the first quarter, a decrease of only 4.6%. With this segment being tied so closely to the rig count, lower drilling activity and competitive pricing pressure led to this decline. The decline was helped by having three months of Teledrift revenue in Q1 2009 as opposed to two months in 2008. We are experiencing success in packaging our shock subs and drilling jars as we've talked about with our motors to maintain market share in this highly competitive market. In Q1, we introduced approximately 100 shock subs and 35 drilling jars into the operation replacing sub-rentals as we previously discussed several times. We expect to add 100 more shock subs and 65 more drilling jars in Q2. We have also tested the MWD TelePulse successfully and are looking forward to beginning a revenue stream in late Q2 or early Q3. Even in these depressed times, we've opened two new locations in Pennsylvania to service the Marcellus Shale and are very satisfied with early results.

Income from operations decreased 125% for a loss of $0.7 million for first quarter 2009. Income from operations, as a percentage of revenue, decreased to a loss of 3.8% in the first quarter of 2009. This decrease in operating profit can be attributed to a declining sales base, increased pricing pressure and a very large loss, a very profitable revenue from our drilling motor line in Colorado and Wyoming due to the lower drilling activity. Wyoming, Colorado, the Barnett Shale, the Permian Basin are all locations that have been hardest hit for the Downhole Tool Group. These are key areas for our Downhole Tool Group and while we have made many adjustments to these locations in these areas, they are strategic to them -- to us and we will continue to support them.

A bright spot, Artificial Lift. Sales were $5.1 million for the first quarter of 2009. That's an increase of 41.7% over first quarter of 2008. The increase is primarily due to finishing off strong for our year-end and an increase in our market share in the Powder River. Moving forward, the second quarter will be impacted by this normal slowdown and the [bird's dance] that we fully expect to be on plan in Artificial Lift in the second quarter. Income from operations increased 300% to $0.8 million in the first quarter for Artificial Lift. This increase is mainly due to increased sales volume related to our increased market share. Income from operations, as a percentage of revenue, increased to 15.9% for first quarter.

In all three segments of our business, we continue to take actions to meet this decreasing demand. Between November and to date, we have reduced personnel by over 30%. We have shut down and combined multiple facilities. We've stopped all discretionary travel. Capital spend has been minimized to cover only maintenance-type assets or direct revenue-producing efforts. In short, we've taken the lessons learned through many downturns over the last 35 years and are using these skills to help manage our business. We fully believe the fundamentals of all three product lines are strong and we look forward to many years of growth and prosperity when we work through this downturn.

With those comments, I'll turn this over to Jempy for financials.

Thanks, Steve. I'd like to talk briefly about our capital resources and liquidity, which I know is of great interest to everyone. Our ongoing capital requirements in today's environment rise primarily from our need to service our debt, to acquire and maintain equipment, and to fund our working capital. We funded our capital requirements with operating cash flow and debt borrowings. We had cash and cash equivalents of $600,000 at March 31, 2009 as compared to $200,000 at year-end '08. And total availability under our credit facility as of March 31, 2009 was $9.4 million.

As we discussed during our 2008 year-end earnings call, we entered into two amendments with our lending group for our credit facility. The first was executed on February 25, 2009 and the second on March 13, 2009 and I'd like to briefly recap the salient changes in those two amendments. First, we got a permanent waiver to the breach of the minimum network covenant at 12/31/08, which resulted from the $67.7 million goodwill impairment charge and we also reset the minimum network covenant on a go-forward basis. We received a consent from the lending group to convert up to $40 million face value of our convertible bonds to common equity at our discretion. The revolving line of credit committee -- commitment was reduced from $25 million to $15 million.

The leverage of the capital expenditure ceilings for 2009 were set at $8 million and for 2010 at $11 million and there were new covenants established for leverage ratios and fixed charge coverage ratios. And as of March 31, 2009, we were in compliance with all of our covenants. In the three months that ended March 31, '09, we generated $2.8 million in cash from our operating activities. The net loss for the same period was $2 million and non-cash additions to net income during the three-month period ended March 31 consisted of $3.5 million of depreciation and amortization, $500,000 of compensation expense related to options in restricted stock awards, and $1.2 million related to the accretion of the debt discount related to our notes, which is also known as bifurcation.

During the three-month period, working capital decreased our operating cash flow by $700,000, due mainly to collections of accounts receivable offset by payments of accounts payable and accrued liabilities. Capital expenditures for the three-month period totaled approximately $3.9 million. The most significant of these expenditures related to the expansion of our Teledrift MWD tool fleet, CAVO mud motor fleet, and the addition of rental tools to expand our rental base.

Management believes that the Company has adequate resources through a combination of cash on hand, operating cash flows and available credit to meet its current obligations in repayment requirements. We did make the required amortization payment of $2 million on March 31, as well as the mandatory prepayment requirement April 15 of approximately $4.8 million. We are working diligently to lower our working capital needs and we focused on cash collections of our accounts receivable. Management is reviewing additional financing alternatives that would increase our liquidity should that need arise, as well as continuing to resize the business through aggressive cost-cutting measures to accommodate the current market environment.

I'd like to update you on another topic and that's the status of our activities with the New York Stock Exchange. On March 24 of 2009, we were notified by the NYSE that we had fallen below one of the Exchange's continued listing standards, because our average market cap was less than $75 million over a 30-day trading period and the last reported stockholders' equity was less than $75 million. We do intend to submit a plan that demonstrates our ability to achieve compliance with the NYSE listing rules within an 18-month cure period. If the Exchange accepts our plan, then our stock will continue to be listed during the cure period, subject to quarterly monitoring of our compliance with the plan and our compliance with other listing requirements. If we don't submit the plan on a timely basis or if the Exchange doesn't accept our plan or we don't achieve compliance within the 18-month cure period, then our stock could be delisted. We've retained the services of a consultant to help us prepare our plan and we will submit that in a timeframe agreed to with the New York Stock Exchange.

Another issue that I would like to speak to was that in May 2008 there was an [Accounting Standards Board Statement 141], which in essence is what we speak to as bifurcation. What that pronouncement does is, it clarifies that convertible debt instruments that maybe settled in cash upon conversion should be separately accounted for or we should separately account for the liability and equity components in a manner that will reflect the entity's non-convertible debt borrowing rate. The resulting debt discount would be amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. This [FASB 141] is effective for financial statements issued for fiscal years beginning after December 15 and interim periods within those fiscal years. FASB 141 doesn't permit any early application, but does require retrospective application to all periods presented in the financial statements with a cumulative effect of the change reported in retained earnings as of the beginning of the first period it presented.

So what that all means is that our 5.25% convertible senior notes are affected by that standard and upon adopting the provision, we retroactively applied its provisions and we restated our condensed consolidated financial statements for the prior periods. What this resulted in was a $28 million of carrying value of our convertible senior notes being reclassified to equity as of February 2008, the issuance date. This amount represents the equity component of the proceeds from the notes and it was calculated assuming an 11.5% non-convertible borrowing rate at the time of issuance of the bond. This discount will be accreted to interest expense -- non-cash interest expense over the expected term of five years and that term is based on the put/call option, which is available to the bondholders in February of 2013. So, accordingly, $1.2 million and $300,000 of additional non-cash interest expense was recorded in the condensed income statement for the first quarter of '09 and '08.

So with that, I'll turn the call back over to Jerry.

Thank you, Jempy. With regard to (inaudible) finished our report, we'd like to turn the call back over to any of our listeners for questions.

Thank you. (Operator Instructions). And our first question comes from Mark Brown of Pritchard Capital.

Hi. I wanted to check on the covenants just, Jempy, maybe you could just clarify. You might have said it and I apologize, but what is your total debt at the end of the quarter and what was the leverage ratio that was used in the covenant calculation?

The total debt with the bifurcation was $131 million. Without the bifurcation it was about $154 million. And what I'd like to point out is that under the bank agreement in calculating the covenant and the ratio of the covenant, we do it on a non-bifurcation basis. And the leverage ratio at the end of the quarter was 3.35 and that's what we achieved.

Okay, great. And in terms of the listing requirements, non-compliance letter that you talked about, is the -- will you be putting out any guidance in concert with a plan to get back in compliance? Will there be any earnings guidance or revenue guidance associated with that?

Mark, this is Jerry. We are very confident to plan that we are going to present within the prescribed time will be accepted, because we're in constant conversation with NYSE. I realize that Mr. Neyman's comments were covered up with a lot of [black crate], which is exactly the way he should have done it. But, we feel very confident that we will have our plan accepted and that, if you will, note that we only have to get into compliance either on the capitalization or on the net worth. Our net worth was reduced by the fact that we had that $67 million plus of goodwill impairment. On the other hand, we feel very confident that we will meet those obligations over the period of time and we don't feel that we have any problem whatsoever being -- continuing to be listed. But I do appreciate Mr. Neyman's detailed and candid discussion of that particular subject.

Mark, and as far as the guidance, no, we won't be issuing any guidance in conjunction with filing that plan with the Exchange.

With regard to the question of guidance, Mark, with regard to that, at this point while we are beginning to see some light with respect to the reduction in the number of rigs, Mr. Reeves has made some progress in international initiatives, which will mitigate some of the North American issues that we have. There is still so much uncertainty in this industry that we would be foolhardy to try to make any kind of guidance at this point.

No, understood. In terms of the international initiatives, do you have a target for percentage of your revenues that you want to see perhaps this year or next year coming outside of North America?

Yes, we do. We had about 7.5%, maybe 8% in 2008. We believe that we will hit 10% as a minimum and one or two other things that we're working on occur in '09, we could be as high as 15%. Obviously, our goal at some point is to be more in equilibrium on North American and the international. But 10% and 15% is what we're looking at this year, 10% pretty much certain, 15% if a couple of initiatives we're working on get completed.

Okay. I just want my last question before I get back in queue is, in terms -- you mentioned reviewing financial alternatives should the need arise. I don't know if you can provide any more color on what those alternatives might be?

No, we can't obviously, but I can tell you this. We have every intention of doing what is best for our shareholders with respect to the overriding concern of everybody about liquidity.

Okay. Great, thank you very much.

Thank you. And the next question comes from Sarah Hunt with Alpine.

Sarah, how are you this morning?

Good morning, gentlemen. I'm doing okay. As regards to, because I know this is just the biggest question for everybody. Are you looking at these ratios of a trailing 12 because Q1 was weak, and if we look through the year and I don't -- I mean I don't know what you guys are anticipating, but it doesn't look like the rig count is going to come roaring back any time soon. How quickly do you have to be concerned about the new set of covenants that have gone into this in terms of what a trailing 12 number might look like as you progress through the year?

Sarah, this is Jempy. I guess the answer to your question is that we watch that very closely and that relates to Mark's question about what other initiatives we might be looking at. I think the underlying dynamic is still the uncertainty that we all face. Where's the bottom? How long are we going to be there and when will the recovery start and how steep will it be? So, we have a number of scenarios that we are looking at and what we are attempting to do is forecast our EBITDA numbers and liquidity numbers, cash requirement numbers and adjust accordingly. So, we are very sensitive to that, but I think we also are very proactive in looking at how we are going to react to whatever of the myriad scenarios actually occur.

Did you have to --

One of the things that --

Yes, go ahead.

One of the things -- one of the important partners that we've had in our operations in our business has been our bank, Wells Fargo. They've been the only bank we've had and they have stepped up and then very accommodating and very supportive and very involved with us, and they continue to support us significantly and Jempy can certainly confirm that.

Did you have to draw down on the revolver to pay that $4.5 million in April?

Partly, if we use both cash and partly in the revolver. So, we did not pay all of it without drawing down, but we're very comfortable that we were able to pay down on the revolver, which was at $6.8 million all total.

No, the [cash slip] was $4.8 million.

$4.8 million and then we paid down $2 million in March.

By March.

Okay. So, we reduced the term loan by $6.8 million, part of it was -- had to come from -- because of the timing from the line of credit, from the revolver and part of it came from our cash flow.

Okay. And if I look at the recent numbers on the cost side of the business for the Chemical side, it looks like the costs have not -- on the cost of product, it doesn't look like the costs have been coming down as quickly as the revenues. Is that because there were some sort of longer contracts in there? Do you anticipate those costs coming down on the input side?

There's two things. This is Steve Reeves, Sarah. Those two things that hit you there, one, we had lots of inventory, you got to work that off, but the cost [average] is higher. Number two, your revenues are decreased significantly because of the discounting, the pricing concessions [you're happened] to give. So even though the revenue may post, it's actually less revenue and while you're getting cost of goods falling and we are getting cost of goods from all of our vendors are helping us out and we work with them. It's hard to hold the ratio exactly the same. The discounting is pretty tough.

Is the high cost inventory on its way out or is that still something we should expect to see in Q2?

Of course. We turned most of it. We turned pretty good inventory turns in Chemical even in slow turn.

Okay.

Now, we will see a bright, but I do not know if we will get ahead of the game, simply because of the discounting is not easing up today. I mean we have to see a bottom -- usually the industry until you hit a bottom your discounting will stay on your throat. Then you will level off till you get into that trough of a bottom and then you can start making it -- really laying your baseline to gain.

Okay. And what is the general feel at this point? Is April looking any better than March or are we still -- I mean I know the natural gas price is so weak. I could just take my assumptions off of where gas prices are. And even though we had a nice couple of days they're still ridiculously weak compared to where they've been. So, I'm assuming that people are still being very wary about activity?

Of course they are. They're being very wary about it. April, we continued to see things in that, we think that we bottomed in a negative position in April. I met with the President of Chemical yesterday afternoon. He expects to see a pickup in May over April from what he is hearing.

Okay.

I expect to see that in our Downhole Tool Group that we are nearing. Now, if we take a 50, 60 rig count hit [ready], I think we're all going to be pretty surprised.

Okay. Well, good luck and through it all. I know it's tough down there.

It is, if we can just -- you have to bottom before you start laying a baseline and we're hoping to see that bottom in May.

Okay. And you're comfortable that you can get through this year working with Wells Fargo and everything else, that you are not going to be put up against a wall?

Every day is a wall, one way or another, Sarah.

Yes.

I'll let Jempy answer that one.

Yes, it's going to be challenging to say the least and I'll just reiterate my comment of the uncertainty. I think what we will do is we're gone to have to be very diligent and we're gone to have to make sure that we anticipate any of the turbulence that we're going to be faced with. I think at this juncture we are confident that with the cost-cutting measures and some of the other activities that we've laid out that we can weather the storm. It's going to be difficult at times, but I think we're confident we can do that.

Okay. Thank you.

Thank you. And the next question comes from [Ralph Wagner], Wagner Investment Management.

Hello? Hello?

Yes, Ralph, go ahead.

Yes, yes. Let me put this off the speaker. Can you hear me?

Yes, we can now.

Okay.

Hello?

Mr. Wagner, again, we seem to have [dropped -- lost him] from the queue. (Operator Instructions).

He dropped off.

Okay, yes, so he has reconnected.

Okay. Hello? Can you hear me now? Can you hear me now?

Go ahead, Ralph.

Okay, good. There are two or three very quick questions. I have been following your Company for many, many years and been a shareholder. First of all, maintenance requirement for CapEx?

Maintenance requirement for CapEx?

Yes, maintenance. Yes, maintenance requirement, kind of minimum.

Yes, sir. In the first quarter we [stepped] for maintenance owned CapEx just less than $2 million for Q1.

Okay. Is that -- go ahead.

We had another portion that we capitalized our first drilling jars and shock subs [we have] that were the expansion of revenue production.

Mr. Wagner, the thing that you need to recognize about the capital expenditures in the first quarter, because Mr. Reeves made the comment or somewhere it was made that we added to the Downhole Tool inventory. What we are doing is, we are replacing sub-rentals with our own equipment, so that's what -- which will give us a significant improved gross profit margin where we are furnishing our own tool as opposed to having to sub-rent and getting a minor commission. So that's where those dollars were spent.

Okay, okay. The other question on Haynesville, lot of activity remain, you are very strong in the Haynesville area, to what extent are you down there?

We're strong, we're really satisfied in the Haynesville. From about six months ago in our Downhole Tool Group, when we opened up, we had a small shop in the Haynesville that we were just a drop station. Currently that is, it ranks right up there in the top echelon of our performers and it's growing, if not every month, every other month. We are very satisfied with our Haynesville production and what's happening there.

Okay.

And it is also for a piece of -- a point that I put in there, the Marcellus, we've had opened in two locations in the Marcellus in the last two months and we have doubled our revenues for two months in there. And we expect good things coming in the Marcellus.

Yes. That's great to hear. The other question, you have the option to convert some of these convertibles and the question I have is really why not approach these people, maybe you have done that already, to make some kind of a deal to convert some of these converts. I know it's dilutive, but I'd rather take the dilutions and have more comfort in the share price and in the companies dealing with the banks because the banks I don't [find]?

As I mentioned earlier, in response to several other questions, how we might weather the year depending on how things play out. That's certainly an option that we have open to us and that was one of the reasons we ask for the consent of the lending group to allow us to do that. Whether we're ever to follow through on that or not, it's really going to be dictated by a circumstance at any given time, but that's certainly one of the options available to us.

Okay. From my side, having been in the finance business a long time, I mean I would say, take advantage if you can do it, because what happened with other organizations, dilutions get tremendously worse as things get to -- towards the end. One last final question, that's for Jerry. Jerry, the two of the announcements, which came out concerning the Board, one of the Board members resigning is always very bothersome, anything you can add or want to comment or don't want to comment?

I have no comment. We've already made public filings.

Yes.

Mr. Ziegler decided to leave the Board and that's been publicly --

I know. I know it's a difficult question, but I think it's just the shareholders and the public, [reflex] of the share price I think. Anyway, thank you.

We have an extremely strong Board that's working together as a team. As a matter of fact, we had a Board meeting yesterday and that was an extremely positive and cooperative and productive meeting. So, frankly, I'm extremely pleased with our Board, as it currently exists. We have five different disciplines on the Board that gives us the range of financial to operational to marketing to auditing. So we have a very strong Board. A Company of the size of Flotek has a Board that quite frankly is in many respects superior to a lot of companies of our size.

Okay. Well, thank you. I mean, from my side, my recommendation is, the Company can provide us much -- with all these rules and regulation, information between quarters about the Company would be -- really be appreciated because I think the share price where it is, it's just outrageously [unappropriate]. Thank you.

Thank you for your interest, sir.

Thank you. And the next question comes from Jeffrey Kerr from Kerr Financial Group.

Good morning.

Good morning. Clarification, you've mentioned in the SG&A cost a $2.5 million reduction. Is that one time? How should we view that?

Well, what I'm telling you is that, there were $2.5 million to $3 million worth of SG&A costs that existed last year and I enumerated the areas where they existed. And those costs will not come back, because we've been -- and the reductions will be spread over the balance of this year. Those will come from those areas that I mentioned. We've already made significant progress. The first quarter, the progress and the agreements were made, you will begin to see the results of that in the ensuing quarters.

Is there any target that you would like to share with us that, what the percentage of the SG&A, what the goal is?

The goal of what, sir?

The percentage of what SG&A is, percentage cost. Where are you going to do --

I can't give you a definitive answer on that for a number of reasons. Number one, it will play out as these stocks do go down. Number two, when you talk about percentages, it depends on the revenue base, and we certainly have been suffering a reduction in revenue. So that affects the percentages growing on an upside basis. If in fact we see any improvement in the operational activity of our Company, with regard to an improvement in the overall activity in North America and the success of some of our international initiatives, obviously those SG&A costs will go down as a percentage.

All I can tell you is, is that that is an area that we feel is extremely important for us to spend much time on reducing those if we can and we've been in great -- we've made significant progress in dealing with our organizations that represent consulting cost to IT and those results have been positive and will be reflected in the ensuing quarters. And I can tell you, it is not something that we are comfortable with, it's something that we are uncomfortable with in a sense that we don't like to price the costs and that is an area that we're giving tremendous attention to. And it's extremely important from my personal perspective.

I understand what you are saying in terms of revenues declining and like that, but isn't there a way of measuring, trying to downsize the business, so the cost side of the business better match a smaller revenue base?

Well, the answer to that is yes and the answer is no. And the reason, I would say that, the gentleman just prior to you was talking about the requirements of a public company to respond to the SEC, the NYSE, all of the governmental agencies, which are clearly a demand on our time, a demand on our finances. And frankly, we have no alternative to -- we cannot evade those in order to be a Company that has met diligently all of those requirements. It takes a certain core capability in our SG&A group.

One of the SG&A costs that we've eliminated has been part of our cost containment, where we eliminated the 401(k) match to our employees. We went to them in trying to reduce costs without tearing up the core of our organization. We were able to knock that off and over a period of one year, that is about $1 million. We were able to employ that or institute that by April the 5. So, you will see that was -- a prorated amount of those kind of SG&A costs will come out of our overall. So, we're looking at every place that we can cut SG&A at all levels of our Company and the employees are contributing their efforts to help us in that regard.

I can't emphasize anymore to you, the fact that SG&A is a thorn in my side personally and that we are employing every effort we can to continue to being responsive to the regulatory authorities and yet reduce it. And one of the things that we've been able to do is concurrently staff capability and replace consultants. I will not give you a particular instance, but we have one consultant that cost us $1.1 million last year and internally it's going to cost us about $500,000. So we got about $600,000 reduction and we'll get the same result, we'll be able to respond to the regulatory authorities for $600,000 less than it cost us last year.

One of the things that I would like to emphasize to all of our investors, Flotek is a very young Company. This is the first loss this Company has reported since 2003 and before that we were a Canadian corporation and only in 2004 did we become -- 2003 did we become an operating Company, a full force in the -- as a Delaware corporation. So when you see this Company operating, that went from $2 million in revenue or $2.5 million to $225 million last year and then we run into a perfect storm of the industry, which frankly, if you look at the number of rigs that are down, sir, and you look at the average discount of 30% on all of our goods and processes, we're actually seeing about a 75% reduction in the universal market that we're dealing with. In other words, there were $4 that we did chase, now we are chasing $1. So, the percentages certainly gets few. I probably have spent more time on this than you wanted to hear, but --

No, that's very helpful. And I understand and appreciate the environment that the Company is working within. I'm just trying to gauge as to what this -- as a smaller revenue base what type of expenses can be handled and managed to return to profitability if this downturn continues.

Well, sir, and with respect to SG&A, we're going to have a certain amount of cost that is required to meet the regulatory requirements. We can reduce those, because as a young Company, we are now able to bring in staff internally and eliminate consultants who are extremely expensive. That's one thing we are doing. You said if the downturn continues, I don't know that, I don't know whether the downturn has bottomed out. I don't know how long the downturn is going to occur. I have my convictions and those convictions are being shared throughout our organization, which means that we are making moves to reduce cost as rapidly as we can. But in some instances, it's like chasing an anchor to the bottom. The revenues were falling faster than [we can].

But in the second quarter, we will probably have the greatest representation of cost cuts than we did in the first quarter and hopefully in the third quarter even more so. But I certainly appreciate your question. I certainly recognize your question as being valid. All I'm asking all of our investors to know, is that management is working diligently to approach all of those issues and being hopeful that we are seeing this market begin to bottom just as all of our colleagues and other companies with whom I talk a lot and if you look at the reports of a lot of our other companies, that are primarily North American domiciled, they're running into the same -- they have run into the same difficulty that we have. And if I have my wishes, I'll just wish this downturn had been one month or rather one year later in returning because we've had a whole lot better situation than we've had to deal with this year.

Very good. Thank you very much.

Yes, sir.

(Operator Instructions). All right. There does not appear to be anything more at the present time. Do you have any closing remarks?

No. We have nothing more. We thank you very much.

Thank you. That does conclude today's teleconference. You may now disconnect your phone lines.