Flotek Industries Inc (FTK) 2011 Q2 法說會逐字稿

Good morning and welcome to the Flotek Industries second quarter 2011 earnings conference call. (Operator Instructions). At this time, I will now turn the conference over to Glenn Neslony, Vice President and Treasurer for Flotek Industries. You may begin.

Thank you and good morning. Today's call is being webcast and a replay will be available on Flotek's website. Our earnings and operational update press release, as well as our quarterly report with the United States Securities and Exchange Commission were filed and distributed last evening and are also available on the Flotek website.

Before I turn the call over to Flotek's Chairman and President, John Chisholm. I wish to remind everybody participating in this call listening to the replay or reading a script of this call of the following. Some of the comments made during this teleconference may constitute forward-looking statements within the meaning of section 27A of the securities act of 1933 and section 21E of the securities exchange act of 1934 reflecting Flotek's views about future events and their potential impact on performance. Words such an expect, anticipates, intends, plans, believes, seeks, estimates and similar expresses, or variations of such words, are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements on this call.

These matters involve risks and uncertainties that could impact operations and the financial results and cause our actual results to differ from such forward-looking statements. These risks are discussed in Flotek's filings with the United States Securities and Exchange Commission. Now I'd like to introduce Mr. John Chisholm, Flotek's Chairman of the Board and President.

Glenn, thank you. I would also like to welcome each of you to Flotek's second quarter conference call. With me today are Johnna Kokenge, Flotek's Chief Accounting Officer; Jempy Neyman, Flotek's Executive Vice President of Finance; Steve Reeves, our Executive Vice President of Operations and Glenn Neslony, Vice President and Treasurer.

Last evening we filed our quarterly report with US Securities and Exchange Commission. While we won't take your valuable time to regurgitate those filings, we'll provide a summary of results, attempt to add some color regarding current operations, as well as a sense of our future, and then be happy to answer your questions.

August 2011 is a hallmark month for Flotek. For those of you new to the story, a little history will provide some perspective. In August 2009, Flotek's market capitalization was approximately $40 million. As a result of the culmination of a number of events, including a deep cyclical decline in oil field activity, Flotek's then hostile lenders initiated a series of demands that pushed Flotek to the brink of the financial abyss.

The result was the issuance of $16 million of convertible preferred stock. The ultimate termination of our lending relationship, and the establishment of a new relationship with two parties willing to bet that Flotek's new management team could right the ship. I'm proud to say that almost exactly two years from the initial date of reckoning, Flotek is as solid as it has ever been both financially and operationally with a market cap nearly ten times what it was in those dark days of 2009 and 2010, a much stronger balance sheet; Flotek is well positioned to take advantage of new growth opportunities and continue our quest to become one of the world's premier specialty oil field technology companies.

That said, it has been said and proven many times that those who ignore history are bound to repeat it. As Flotek's Chief Executive I pledge Flotek will never intentionally find itself in a financial position experienced in 2009. Not only is our discipline such that unacceptably high levels of leverage are no longer in Flotek's DNA, but no member of this team is willing to relive the pain and challenges of 2009, nor are we willing to subject our stake holders to such uncertainty and displeasure. As long as I'm your President, we will remember the lessons learned over the last two years and work tirelessly to ensure they're continuously used to improve your company.

As we celebrate the two-year anniversary of the beginning of the new Flotek, we're grateful for all the support and encouragement we receive from a wide range of Flotek stake holders. The willingness to bet on a new management team by our substitute lenders, Whitebox Advisors and Gates Capital, likely saved Flotek from a near certain formal restructuring. In addition, a number of shareholders have stood by our side through good times and bad for which we are forever grateful.

The professional services of advisers like Casey Dougherty, our outside counsel, Mark Young of Andrews Kurth, our securities counsel and the financial strategy provided by [Chris Edmonds of Intercamp Partners] are all key components of Flotek's success. Today our advisory team includes our new independent accountants at Hine and Associates, which have returned a level of trust and maturity to our audit relationship.

I also want to thank my leadership team. Steve Reeves has been instrumental in establishing a new tone with the Flotek operations and marketing team, something that has been a key to our increased field presence and financial success. Jempy Neyman continues to use his decades of work in corporate finance to shepherd our pending new lending relationship, and Johnna Kokenge has transformed the accounting group into a team that provides accurate and timely information to many internal and external stake holders allowing us to better understand our business, react to emerging trends and best position Flotek for the future. Johnna has also been integral in our ongoing process of converting to a new management information system which will further enhance our ability to react to real-time data and provide actionable intelligence to our stake holders in an even more timely fashion in the coming months.

Finally, and most importantly, I want to thank you the entire Flotek team. In August of 2009 to 2010, it would have been very easy to simply give up. However, the level of pride and determination amongst every member of this organization is precisely what led me to believe we had the opportunity to transform a company on the precipice of irrelevance to a world class oil field technology company. To all of my colleagues, thank you, congratulations and I look forward to continuing the journey ahead with you.

And, indeed, the journey is just beginning. While we've made great progress in the past two years, we are not satisfied with where we are. While we must continue to pursue opportunities to grow, we must also sharpen our focus to ensure that growth creates long-term opportunities to increase profit. As we continue to grow our balance sheet, we must do so with a keen focus on ways to add shareholder value, and our focus on positioning Flotek as a leader in advanced oil field technologies must come with an understanding that leadership will require new ways of thinking about the balance between productivity and the environment and our customers and our communities.

These are not new concepts to Flotek. We have consistently been leaders in environmental stewardship, applying for our first environmental patent before concerns over environmental impacts of drilling were in the news. However, every day we must recommit ourselves to these principles as they are the foundation upon which Flotek's success is based.

Before Johnna, Jempy and Steve walk through the specific financial and operational highlights, I'd like to provide some high level highlights of the past quarter. Flotek reported near record quarterly revenue in the second quarter of $55.9 million, an increase of $24.7 million or 79% compared to $31.2 million for the second quarter of 2010. Moreover, the Company reported net income of $2.1 million compared to a net loss of $7.4 million for the same period in 2010. As we continue to improve and simplify Flotek's balance sheet and capital structure, a number of noncash, nonrecurring items had an impact on quarterly results which Johnna will touch on shortly.

That said, Flotek posted income from operations of $7.9 million inthe second quarter compared to a net operating loss of approximately $3.4 million in the year ago quarter.

As I've said on each call since I took the helm now two years ago, it continues to be my privilege to serve as President of your company. I remain immensely proud and humbled by the commitment and support of members of the Flotek team that believed, as a group, they could make a difference in the future of Flotek, and believed in our vision to restore stability and growth to the Company, and continue to be enthused through the efforts of our people.

The future is filled with opportunities to create value for our stake holders. With, that I'd like to turn the call over to Johnna Kokenge, Flotek's Chief Accounting Officer, to review our second quarter financial highlights and provide some additional color on certain financial issues. Johnna.

John, thank you. As John mentioned, Flotek filed its form 10-Q quarterly report for the period ending June 30, 2011 with the US Securities and Exchange Commission yesterday afternoon.

In that report, the Company reported revenues for the three months ended June 30, 2011 at $55.9 million and accrued at $24.7 million or 39.4% compared to $31.2 million for the same period in 2010. Revenue increased period over period across the Company's chief primary operating segments due to improved pricing, increased drilling activity, increased market share and renewed industry demand for specialty oil field products.

For the three months ended June 30, 2011 the Company reported net income attributable to common stockholders of $2.1 million or $0.05 per common share compared to a net loss of $7.4 million or $0.28 loss for common share for the same period 2010.

Included in the second quarter 2011 results is $3.3 million of noncash income related to the change in the fair value of the warrant liability attributable to the warrant issued in the Company's August 2009 preferred stock offering. In a comparative quarter of 2010, the Company recorded noncash income that related to the fair value of the warrant liability of only $0.5 million.

Also included in 2011 second quarter results is $3.2 million of noncash expense related to the early extinguishment of the Company's senior credit facility debt and the exchange of $4.5 million of senior convertible notes for shares of the Company's common stock. In addition, during the second quarter of 2011, the Company recognized approximately $2.4 million of noncash expense related to incentive stock compensation.

As of June 30 the Company's cash balance was approximately $15.1 million as compared to $5.3 million at June 30 a year ago and approximately $19 million at March 31, 2011. Compared to the second quarter 2010, the Company's cash balance trended favorably primarily due to upgrades and improvement in operational pricing combined with increasingly diligent expense management and exercise of warrants issued in conjunction with the August 2009 preferred stock offering.

The 2011 quarter over quarter sequential decline in the Company's cash balance is attributable to cash used to retire the Company's senior credit facility and the timing of certain receivable collections. As of August 9, the Company's cash balance decreased approximately $20 million and the Company anticipates the cash levels will continue to positively trend in the second half of 2011.

Of note, receivables outstanding at June 30 totaled $38.4 million as compared to $20 million at June 30, 2010. Further, at August 8 receivables outstanding climbed to $40.5 million without any significant increase in day sales outstanding, metric or collection activity.

During the second quarter of 2011, the Company raised approximately $28 million for the product placement of Flotek's common stock that was used in combination with existing cash on hand to repay the $29.25 million senior credit facility bond that's outstanding. This early senior [credit] debt provided annual interest savings to the Company of approximately $3.3 million.

As discussed in our first quarter call, our financial team remains committed to the identification and implementation of policies and procedures designed to increase the efficiency and effectiveness of the Company's processes and reporting capabilities while at the same time providing increased support for the Company's operating division. In particular, the goal in creating a more efficient and effective accounting reporting environment was influential in managements' decision to implement a new accounting, record keeping and asset check system anticipated to be functional by year-end. This new ERP or enterprise resource planning system is Oracle platform based and will provide real-time operational information accessibility as well as improved analytic capabilities that until now have been either unavailable or generally time insensitive in responding to corporate and operational personnel needs.

The new system constitutes a major investment for Flotek. As such the system is anticipated to fundamentally impact the way we do business and dramatically improve process efficiencies while at the same time providing increased support and responsiveness to the Company's anticipated growth and ongoing strategic initiative.

We are currently on target with our planned implementation schedule. In fact, initial system testing begins this month. We remain confident that once in place, this new system will enhance the Company's operational tools and promote Companywide efficiencies that will enable management and front line team members to make the most informed economically beneficial decisions for the Company based on real-time information.

Like John, I'm pleased with our progress in the second quarter and most excited about Flotek's future opportunities and growth potential. I will now turn the call over to Jempy Neyman, our Executive Vice President of Finance, to discuss the Company's current financial initiatives. Jempy.

Thanks, Johnna. As John mentioned, the past two years have been a challenging yet exciting time for Flotek. Within any challenge, one can find opportunity, and while firmly believing that Flotek's transformation to profitable growth is in the early innings, there are a number of financial initiatives I would like to share with you today.

First, since retiring our senior credit facility last quarter, Flotek's been in the process of identifying the right opportunity to establish a more traditional line of credit to provide working capital and cash management flexibility. After interviewing and receiving term sheets from a number of leading financial institutions, Flotek is in the process of completing the documentation for a new senior credit facility. We expect the facility to be completed in the third quarter and will provide details upon execution. Today's interest rate environment provides an opportunity for Flotek to establish a new lending relationship under terms that are very advantageous.

Flotek continues to consider strategic options regarding its convertible notes. The Company currently has a total of $106.5 million of convertible notes outstanding that can be put to the Company in February 2013. The Company also has a right to call the notes at the same time.

As noted earlier, we exchanged $4.5 million in notes for common stock during the quarter. With continued improvement in the Company's operations, balance sheet, and cash flows, Flotek believes it has a number of options available now tied to our schedule and timing to continue to opportunistically improve our balance sheet.

As we continue to focus on cost, the Company has also undertaken a comprehensive review of other obligations, especially those related to leased real property and other durable expense. We expect the review to result in the identification of cost savings over time through potential repositioning and other procurement efficiencies throughout the Flotek system.

In addition, we continue to review our vendor relationships. By better coordinating and stream lining our vendors, we're looking for additional ways to rationalize cost and improve our overall margins. This process has already resulted in improved efficiencies in the Company's overall insurance profile. I would like now to turn the call over to Steve Reeves to discuss our business operations. Steve?

Jempy, thank you. In general, North American drilling activity continues to provide constructive back drop for Flotek's portfolio of oil field technologies. While natural gas prices remain challenged, strengths in liquid prices continues to provide new opportunities for growth. Our continued focus on developing a more balanced portfolio of oil field technologies that positively impact both liquids, as well as natural gas projects, continues to yield positive results.

As discussed on our last call, while pricing improvement typically lags in the early stages of recovery, we are experiencing incremental pricing power across our business segment and are cautiously optimistic that opportunities for stronger prices will continue. As noted in our release yesterday, we increased pricing across our chemical division by approximately 10% in June. We continue to focus on both pricing and margin improvement in all of our business lines.

In the Company's Chemical and Logistics segment revenue for the three months ended June 30, 2011 totaled $29.1 million, an increase of $15.1 million or 107.9% as compared to $14 million for the same period of 2010. Increased oil directed and liquid rich natural gas drilling activity was driven by period over period increases in global oil prices and solid pricing on liquid rich natural gas.

Flotek's strategic decision to extend the application of its patented complex nano fluid products to oil in conjunction with increased industry demand and growth, particularly in the Niobrara plays, contributed to period over period increased revenue and mitigated the impacts of depressed natural gas drilling activity. In addition, an increase in industry recognition of production and environmental mental set of Flotek's new and existing suite of complex nano fluid products has resulted in increased product demand from both new and existing customers as well as within international markets.

Chemical and Logistics segment income from operations for the second quarter of 2011 was $8.3 million, an increase of $8.43 million or 107.5% from the second quarter of 2010.

Raw material costs continue to place pressure on gross margins in the Chemical and Logistics segment. Gross margins is a percentage of revenue with 37.8% down from 45.7% in the second quarter of 2010 and compared to 42% in the first quarter of 2011. The gross margin decline in the percentage of revenue is a result of increased raw material costs and a shift in product mix from higher margin products to lower margin newly developed products tailored to meet specific customer requirements.

Although new product gross margins as a percentage of revenue are slightly less robust than traditional products, the favorable increase in product sales volume and product demand are important contributors to Flotek's revenue and profit growth. Increased transportation charges due to rising fuel costs and increased international facility fees resulting from growing international demand further impacted gross margins.

As noted earlier, we implemented a price increase in June which should help mitigate higher [inflow] costs. In addition, Flotek is aggressively looking for ways to improve margins through both process efficiencies and cost reductions resulting from scale and alternative input suppliers.

On the operational front, activities continue to increase in the Company's key basins in North America. Flotek's work in the Marcellus Shale continues to accelerate and new warehousing operations in Pennsylvania are strategically positioned to support the growth. In addition, major players in the Niobrara are specifying the use of Flotek fracture additives in Niobrara completion where we expect solid growth throughout 2011.

We also continue to gain ground in the Eagle Ford Shale play where we are a relatively new player. We believe our relationships and successes in other plays with key oil field service and exploration and production companies have helped us gain entry in the Eagle circle. We expect continued growth in the second half of the year.

Flotek's efforts to work more directly with exploration and production companies explaining the economic benefits of Flotek's suite of complex nano fluids are beginning to pay dividends. We continue to gain traction with new clients and continue to gain prospects in plays such as the Niobrara and Eagle Ford as well as in the Fort Worth Basin. In addition to traditional applications of our suite of complex nano fluids, our direct marketing efforts have identified other potential product applications which could result in meaningful future opportunities for Flotek.

As discussed in the past, interest in the application for CNS in enhanced oil recovery is growing. The volume of surfactants used in enhanced oil recovery dwarfs most other applications, making it a priority market for Flotek. While still in the early stages of development, our complex nano fluids appear right for effective use in EOR. In addition, we are in the process of designing a trial for a major independent that holds potential to provide additional applications for our core chemistries.

Our product lines also continue to expand. We continue to respond to demand for diverse products. Friction reducers, [deseemeenee] additives for new and existing products. As noted earlier, while margins on some of these products are incrementally lower than other specialty chemicals, we believe the expansion of our product offerings will ultimately support higher margin, providing opportunities to build broader [flat] relationships.

Drilling Products segment for the three months ended June 30, 2011, was $24.5 million, an increase of $9.6 million or 64.6% compared to $14.9 million for the three months ended June 30, 2011. Continued growth in overall drilling activity, combined with Flotek's ability to capture additional market share in key regions contributed to the growth.

Market share growth in both sales and rentals in regions such as the Permian Basin and the Eagle Ford Shale play continue to benefit Flotek. For example, Teledrift continues to accept vertical applications such as the Permian Basin. In addition, significant Teledrift growth in both Oklahoma and South Texas is a direct result of last year's decision to recharge our Teledrift marketing efforts using the Flotek sales team rather than agents.

In addition, growth in the Permian Basin, Eagle Ford and Niobrara continues to be fueled by motor rental and sales as well as other products and services. We expect this growth to continue through the balance of the year well into 2012.

Activity in the Company's Galleon mining tools division has also increased. Our results have increased copper and gold prices. As noted, the evolution of Flotek's marketing efforts, including improved collaboration cross selling from Flotek's marketing team has expanded both Flotek's customer base as well as the depth of relationships with Flotek customers.

Drilling Products segment income from operations totaled $5.9 million in the second quarter of 2011, an improvement of $6.1 million or 2,645.3% as compared to a $200,000 loss in the same period of 2010.

Segment gross margin in the second quarter were 44.2% compared to 28.4% in the second quarter of 2010, and 39.5% in the first quarter of 2011.

Artificial Lift segment revenue for the three months ended June 30, 2011, totaled $2.3 million, relatively flat compared to $2.3 million from the three months ended June 30, 2010. Despite the unfavorable period over period conditions, the Company's ongoing development and retention of key customer relationships coupled with increased prices mitigated the negative impact of the decline in natural gas drilling activity.

On an operating income basis the Artificial Lift segment broke even in the second quarter of 2011 compared to income from operations of $400,000 in the second quarter of 2010. The majority of Artificial Lift revenue is associated with coke fed methane drilling in the Powder River Basin.

While we continue to be a leading provider of Lift services in the Powder, it is unlikely this business segment will post significant growth until such time as Rockies natural gas prices shows new signs of life. That said, the segment is a relatively small consumer of capital, requires little corporate oversight and produces reasonable cash returns.

While Flotek's business remains weighted to North American drilling markets, we continue to make significant progress in key international arenas and believe that international opportunities will be a key component of Flotek's growth in the coming year. While small in the scope of Flotek's overall profile, revenues attributable to international activity in the first six months of 2011 were approximately $12.9 million, an increase of $4.3 million or 50% compared to $8.6 million in revenue generated from international activity in the first six months of 2010. While results will remain somewhat lumpy as we establish new international beachheads, we believe dynamic growth is possible in the coming quarter.

As noted in our first quarter call earlier this year, we announced a relationship with Basin Supply Corporation to jointly market Flotek chemicals and its Teledrift products into countries in the Middle East, North Africa, Latin America and the former Soviet Union. Flotek continues to make progress with Basin. Specifically during the quarter we made significant headway towards commercialization of Flotek products in Russia.

Meetings with key Russian oil field companies in Moscow and subsequent dialogues suggest Flotek will deliver its first trial products to Russia in the coming weeks. While the commercial opportunities in Russia are significant, conducting international commerce is complex and time consuming. As such, it is difficult to predict precise timing of commercial growth. That said, the initial interest and acceptance of Flotek's technologies has been very encouraging.

In addition, the existing Flotek relationships combined with Basin's assistance has presented additional opportunities in South America, such as Columbia, and the Middle East and North Africa for both the Company's chemical business, as well as Teledrift and other drilling products. Flotek continues to believe that international commerce will continue to grow as a percent of overall business throughout 2011 and beyond. We are excited about the opportunities in front of us for the balance of 2011.

While we will remain vigilant in our careful watch of commodity prices and drilling activity, we believe we are well positioned to gain market share while at the same time improved margins through pricing power and better operating efficiency. In addition, we will continue to focus on smart international growth that should provide even better margins. With, that I'd like to turn the call back to John Chisholm.

Steve, thank you very much. As we mentioned in the press release last evening, while we are pleased with our second quarter results, they mean little unless we continue to build on our success. As an early glimpse into the third quarter, we expect July revenues to be in excess of $22 million. Moreover, given our early look at August, we expect August revenues to build on July.

While it's too early to project margins, our June chemical price increase and continuing pricing power in our tool segment should begin to provide incremental benefits in the quarter. Quite simply, while understanding one month isn't necessarily predictive of the quarter, we are encouraged by the early returns.

That said, we understand that the world we live in is increasingly uncertain and recent domestic and international financial events have created volatility that if sustained could lead to a slowdown in global economic activity, reduce demand for energy, and as a result, lower commodity prices and a slowdown in oil field activity. While our crystal ball is no clearer than yours, we believe a prolonged decline in hydro carbon prices is unlikely. Growth from developing nations continues to drive demand, and while short-term incremental changes in demand are possible, we believe longer term demand and in fact demand growth will remain firm.

On a personal note and regardless of your politics, I'm more concerned and frankly alarmed by the growing callous disregard of the United States government, from Congress to the Executive Branch, of their responsibility to govern; and more importantly make difficult decisions as our leaders. To an outsider from Texas what happens in Washington appears to be more daytime drama than thoughtful deliberative governance and an attempt to capture a sound byte rather than reasonable constructive discourse and dialogue.

While Washington antics are somewhat humorous they become all too serious when it impacts our business and the well-being of all of our stake holders. It is time for our leaders in Washington to once again take their responsibilities seriously and focus on the collective good for our great nation.

Just like Flotek had to do two years ago, it's time the Congress and the President got their fiscal house in order. And while likely wishful thinking, maybe they could consider a comprehensive long-term energy policy as well.

We believe that the second half of 2011 will provide a plethora of exciting opportunities for Flotek. From initiative in primary and enhanced liquids recovery to international growth as well as initiatives to innovate new products to address environmental concerns; pressing needs for the oil field plays to Flotek's strengths. Combined with our continued initiatives to improve efficiencies, we believe Flotek has an opportunity to continue to post meaningful top and bottom line growth through the balance of 2011.

Again, thank you for your interest in Flotek. We are pleased with our quarter, excited about the future and energized by the opportunities in front of us. While there's plenty of serious work ahead of us that will require the commitment of our entire team, we're ready and willing to face the challenge and create new opportunities to create value for our shareholders. We appreciate your ongoing support.

Operator, we will now open the call for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Josh Silverstein, [EnergyCap] Partners. Please go ahead with your question.

Hey, good morning guys.

Hey, Josh

Hey, good morning. You guys had a pretty nice sequential jump in the Drilling Products gross margin. I'm wondering if you could talk about the drivers behind that. Was it price increases, higher utilization, better product margins on the Teledrift? If you could just talk a little bit more about that.

Yes, Josh, thanks for the question. And you hit pretty much a combination of all of it. We have improved our pricing in our motor division significantly that has helped from the beginning of the year.

We have on our overall tools that we run, our [Galleon] tools, from stabilizers on we have had price increases regularly on those as the year has gone on. That's not the market that you could just go out and throw a 10%, 15% price increase on and push it through. You have to follow the flow of the marketplace and we've been able to do that and probably move that pricing in the 10%, 12% in the last four months.

The other one is, of course, Teledrift continues to make nice margins and with their expansion of revenues, that's an improvement.

Got it. That's helpful. And then on the chemical margins, you talked about those being lower sequentially. Can you just talk about the drivers between those -- sorry -- but between the product mix and the raw material costs? I know you talked a little bit about both there.

Yes. Let me give everyone just a little bit of history. Three or four years ago in the chemical part of Flotek, it was a primary one chemical with a high margin being sold to one primary client. We made a conscious decision that for the long-term benefit of the Flotek shareholders, we needed to expand not only the product mix, but also the clients that we would sell those products to.

We've been able to maintain that margin in the complex nano fluid. But in an effort to, as I mentioned, extend the reach of Flotek, we've commercialized new products out of research at a less of a margin to introduce them to further illustrate the capability and performance of Flotek. We expect over time those margins to improve. But Steve may add some additional color to that approach.

Yes. As John was saying, if you go back to -- and I use 2008 as a comparative year in a lot of cases because with [red] cap and some of the things that are going out -- 2008 our chemical division was very overly dependent on our micro amount emulsion CNF technologies. When you start looking at the width of the product line that we're offering now to satisfy our customers, we have now introduced main friction reducers that we do, we sell more biocides, we sell more of the [sea main] chemicals. And our belief is as we introduce these and we grow our marketplace top line dollar amount, while our micro emulsion and CNF margins stays the same, very good, the others will eventually net out more bottom line dollars for us on our [grill]. We still have a strategy, good, keeping us in front of a wider array of customers.

That's helpful understanding that a little bit better. Looking at Russia, you had talked about potentially, or you are putting some equipment out in the field and doing some testing there. Can you talk about the time line there, how long the trials may take potentially when a commercialization contract may come? Is that something that's a three month or a six month process that could potentially turn to revenues for 2012?

Well, as we talked about the international business in particular with Flotek, it's a process. For a little bit more clarity, we're shipping Flotek's specialty chemicals over there now to be tested. They have to have compatibility with the fluids, the completion fluids, the cementing fluids, those type of things in Russia, and that in itself is a process.

So we're not going to get ahead of our ski tips here for you, Josh, and give you a date certain of when we think a commercial arrangement is possible. We will tell you that we're encouraged by all the dialogue with the people we've met in Moscow. That there is a need for a company with the client-driven focus of Flotek to have a presence in the former Soviet Union, and we're going to do everything we can to fill that need.

Great. And one last one from me. Just wanted to get a little bit more clarity on the South American opportunities. I know Argentina's been pretty good for Teledrift. You had mentioned Columbia, as well.

Right. That's kind after two-phased attack. We're talking about Teledrift and chemicals down there. Again, chemicals have been shipped down there to be laboratory testified and compatibility tested with the type of fluids that are being used down there. We've had an initial Teledrift marketing trip down there, meeting with several of the oil companies operating and it would be nice for before the end of the year that we have Teledrift activity. We're continuing to refine that opportunity now.

There's also opportunity in Peru that we're looking at. And so, again -- and I know this is not in any way I'm not trying to answer the question directly. This is a process. And we're asking folks to have the confidence in us as we've demonstrated over the last two years that we're going about this international commercialization in a very deliberative thoughtful manner because you really do have one chance to get it right to make a first impression. Our expectation as we can provide (audio difficulty -- four second silence) you more color on that on the third quarter call in November.

Okay. That's helpful.

I would like to point out also, Josh, in the Argentina arena we have our own Teledrift agent which we've had for quite a while and we are very successful and very happy with that international operation. They are coming up within the next month. They are presenting us an opportunity, as most are aware, [YKF] and others are really picking their drilling up in the up coming months down there. They've won at least two more contracts and the opportunity for us to expand our motor business more so than it is right now. We're going to meet with them in September and see about addressing that. So the opportunities are out there being presented to us.

Thanks, guys.

And our next question comes from the line of Clay Mahaffey with NEAA Venture Research. Please go ahead with your question.

Hi. A specific question on the share count. On March 31 you had 44.4 million and then you issued some with the placement and the note exchange as 48.7 million. And then in your Q you note on August 5 you have 1.1 million additional, 49.8 million. Where were the 1.1 million shares from?

That would be the warrant. We had some warrant exercises early in the quarter and additional grants, equity grants to executives within the quarter

A significant component of that is related to employee incentive stock compensation that was not primarily attributable to the prior year, which was not recognizable in the second quarter when the grants were finalized.

Okay. Over the longer term, how do you see the ability of Flotek to grow in excess of the North American drilling rate?

We're confident. Excuse me. Go ahead.

If you can grow faster than the general oil and gas drilling rate, how would you do that?

Well, this last year has demonstrated we're growing at a faster rate than the domestic drilling rate cap. We intend to continue to do that with our focus on direct sales relationships with the ultimate end users, the oil and gas operators, and expanding the breadth of products that we're providing to the service companies who service those oil and gas operations.

Okay. In addition to international expansion?

That's correct.

Are you concerned with the talk of regulating fracking in various parts of the country?

That's not a material concern in our business plan. I think most of the folks that listen to this call listen to Schlumberger, Halliburton prior to us and they haven't, I believe, expressed any concern in that area, as well.

We work very closely with the regulatory folks. We work very closely with the service companies in terms of providing not only the descriptions of the ingredients of our chemical additives, but as we mentioned in our prepared remarks, Flotek was the first specialty chemical company to patent an environmentally sensitive additive over six years ago. So we're comfortable with our position of providing products in that environment.

Okay. Good. On the $106 million convertible notes, what is the best possible outcome from your view?

Well, again, as we mentioned, as Jempy mentioned a little bit, this whole dynamic has changed. And it's changed because of the performance of Flotek. We now have numerous more options on how to deal with that convertible bond that just were not available a year ago. And Jempy, you can add some color to that.

Yes for example, Yes. Well, I think in looking at the possible outcomes -- I think you have, as John said -- I think you can infer an operational environment that we're in and the performance that we posted, there are a number of opportunities to deal with that bond. Whether it's one sweeping move such as some sort of a financing to just pay the bonds off or to do a multitude of things. And I think that could range from anywhere from debt to equity exchanges, debt replacement, some paydown of portions of that debt.

I think it's important to note that the cash balances that we have in the anticipated growth this those balances coupled with the new senior credit facility really is going to give us a liquidity position that I think gives us even more leverage in dealing with those bonds. So I think we are reviewing all of those options, and I think any one or all of them are available to us.

And there's nothing happening until February 13, as far as any other conditions on that?

Yes. Again, the message we want to convey is we are not impatient, we are not in a hurry and we believe that if the Company continues to post the type of progress we have in the first six months of the year going forward it will create options that can't be mentioned that are in the best interests of the Flotek shareholders.

Very good. Thank you.

Sure. Thank you for the questions.

(Operator Instructions). And our next question comes from the line of Richard Dearnly with Longport Partners. Please go ahead with your questions.

Good morning. I'm intrigued by your comment that you're making early progress in Niobrara which is also in its early stages. Do you have a unique either additive or formulation there and you've said in new areas you've got one chance to get it right. What did you get right? And then not only in the Niobrara, but in all your areas, how important is the environmental the food grade additive component to acceptance in your overall product line?

Sure. As most folks know, but some may not, Flotek has a research facility in the Woodlands that through the downturn of the industry and actually the financial issues with Flotek we made a conscious decision to keep intact with the quality people that are there. We were able to get core samples, cuttings from Niobrara wells, fluid samples that previously that type of research just was not available to Flotek to be able to customize the micro emulsion complex nano fluid additive for specifically the Niobrara formation. We believe that customization and the research associated with it has gone a long way for the clients that operate in the Niobrara to use the Flotek specialty chemicals. But, Steve, do you want to add some additional color?

I think that John has pretty well summarized it. In 2008, the opportunity hadn't come up in the Niobrara would have caught us -- our chemicals would have been from the dry gas fluid.

Over the past couple of years, we have customized so that we can go after the liquids rich and the oil type of the Niobrara and we have customized in. So that's why we feel like in both the Niobrara and the Eagle Ford are going to be very advantageous to us in the upcoming months as they have been in the past couple of months.

And as follow-up, you mentioned a little bit there about food grade quality. The way to reflect Flotek's specialty chemicals is they're biodegradable, environmentally friendly, as a lot of people know that have followed the Flotek story, the main specialty chemical is a by-product of actually orange peels. It's a derivative of that.

And so, again, we are very confident on environmental score carding that occurs on a regular basis in this industry of where Flotek grades out across the industry. Are we satisfied with that? No. We're going to continue to try to improve that environmental score carding, but we're pleased with our report card to date.

Good. Does the environmental compliance issue specifically win you business?

We believe it does.

And is that in the Niobrara, or more in places like the Marcellus which are more environmentally sensitive?

No. We would say that's overall. Some may be more than others. But we would say overall, I think folks are becoming more environmentally aware across the country whether it's the Marcellus or Eagle Ford or the Barnett or Niobrara or the Bakken for that matter.

Right. Then you said that your additives were being specified in the Niobrara. Is that by the service companies or by the E&P companies?

Actually, by both.

Okay. Thank you.

Thanks for the questions.

And Mr. Chisholm, I will now turn the call back over to you. We have no further questions. You may continue with your presentation or closing remarks.

Again, thank you for your support of Flotek. We look forward to speaking to you again in November and perhaps seeing many of you when we present at the IPAA Investor Conference on September 26 in San Francisco. Thank you all again.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.