Chris Edmonds - Senior Director, Corporate Finance and Strategy John Chisholm - Chairman, President and Chief Executive Officer Rob Schmitz - Chief Financial Officer Josh Snively - President, Florida Chemical

George Venturatos - Johnson Rice Matt Marietta - Stephens Sean Milligan - Coker and Palmer Mark Brown - Seaport Global Securities

Good morning and welcome to the Flotek Industries Incorporated Second Quarter 2016 Earnings Conference Call. [Operator Instructions] This conference is being recorded. At this time, I would like to turn the conference over to Mr. Chris Edmonds, Senior Director of Corporate Finance and Strategy for Flotek Industries. Mr. Edmonds, you may begin.

Lizy 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 releases as well as our quarterly report with the U.S. Securities and Exchange Commission were filed and distributed last evening and are also available on Flotek’s website. Before we begin our formal remarks, I wish to remind everyone participating in this call listening to the replay or reading a transcript 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 and other applicable statutes reflecting Flotek’s view about future events and their potential impact on performance. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions 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 U.S. Securities and Exchange Commission. Now, I would like to introduce Mr. John Chisholm, Flotek’s Chairman of the Board, President and Chief Executive Officer. John, good morning.

Chris, thank you. I would also like to welcome each of you to Flotek’s second quarter 2016 conference call. We are glad you are here. I would like to apologize in advance for my voice. I have been traveling extensively and I have caught something but we will get through. With me today are Rob Schmitz, Flotek’s Chief Financial Officer; Steve Reeves, our Executive Vice President of Operations; Josh Snively, President of our Florida Chemical subsidiary, as well as our Executive Vice President of Research and Innovation; and Rich Walton, Flotek’s Chief Financial Officer, Emeritus. Last evening, we filed our quarterly report with the U.S. Securities and Exchange Commission. While we won’t take your valuable time to regurgitate those filings, we will provide a summary of the 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. However, before doing so, I would like to take a couple of moments to talk about our announcements this morning. First, we announced our intent to acquire International Polymerics, Inc a specialty polymer chemistry company based in Dalton, Georgia with a distribution facility in Monahans, Texas. The company is focused on processing natural polymers such as guar as well as synthetic polymers primarily for the oil and gas and textile industries. The company was founded by Donald Bramlett in 2004. Donald who remain with Flotek is considered by many as one of the leading guar gurus in North America. His focus on continuously improving guar hydration and consistency has made IPI one of the noted high-quality guar providers to the energy industry. The acquisition of IPI will be another key step in Flotek’s focus on developing broad scope for its prescriptive chemistry management program. Flotek’s ability to provide not only customized precision chemistry such as our CnF completion fluids and our pressure reducing fluids or PRF but also delivery systems with natural polymers is key to developing customized fluid systems for clients both domestic and around the globe. In addition, we believe there is an opportunity to grow IPI’s core business within the Flotek family. With no salesforce, IPI was able to grow into a leading provider of guar to the oil and gas industry. With Flotek’s focused salesforce combined with our stable, broad specialty chemical applications, we believe there is opportunity for both revenue and margin growth as the cycle begins to stabilize and to re-energize. Finally, IPI’s Monahans, Texas facility has strategic value for Flotek. With 11 acres in the heart of the Permian basin, we believe that this strategic asset conserve as a logistic hub for Flotek’s chemistry activity over time providing a more efficient and responsive way to service our West Texas clients. We look forward to welcoming Donald and his team to the Flotek family to introducing him to all of our stakeholders and to integrating IPI into your company. We also look forward to discussing our progress with you in the quarters to come. In addition to the acquisition, Flotek announced a $30 million private placement of Flotek equity. Flotek has entered into a subscription agreements with accredited investors to sell an aggregate of 2,455,839 shares of common stock at a price of $12.52 per share, a modest 5% discount from yesterday’s close. We intend to use the proceeds of the private placement to fund the acquisition of IPI to reduce the balance on our revolving line of credit and to fund new growth initiatives in the future. Since 2009 when I labor to restructure Flotek’s balance sheet and refocus the company on profitable growth, I have pledged to make sure Flotek’s balance sheet remains simple and under levered. This opportunistic equity placement provided an opportunity not only to fund the IPI transaction but also to provide additional capital to create a significant level of financial flexibility for Flotek’s growth initiatives into the future. We thank many of our long-term shareholders for their interest and belief in our company to further strengthen the future of Flotek. Finally, we also released the final independent reports of MHA Petroleum Consultants on the efficacy of CnF in the Permian basin and the Eagle Ford Shale play. The reports can be found on our website today. While the reports note the challenge of interpreting some Texas data, they also portray the benefit of CnF especially for oil focus projects. We encourage you to review the reports and look forward to continuing the dialogue about the efficacy of CnF and all of our specialty oilfield technologies. As you can see, it’s been a busy week at Flotek headquarters and last but not least we reported earnings as well. As we noted last night, Flotek reported revenue for the period ended June 30, 2016 of $72.3 million a slight increase compared to the first quarter of 2016. As we noted in our release yesterday, the current oilfield environment remains one of the most difficult markets I’ve seen in my entire career. The accelerated decline in overall activity from drilling to completions and even production enhancement has created overwhelming challenges for many industry participants. We feel very fortunate that our focus on high-end value-added technology especially in our Energy Chemistry segment has provided some insulation from the storm. In fact, we are proud of the fact that while most of our brethren continue to experience sequential challenges Flotek specialty chemistry performance held its own against first-quarter comparisons. While we are not immune to continued market deterioration, growing opportunities in our hallmark suite of completion chemistries provides us with some shelter from the otherwise tsunami like declines in overall oilfield activity. Our ability remain on par with first-quarter performance is even more encouraging given that the second quarter is typically everyone’s most challenging quarter in any environment due to the seasonal breakup in Canada. We were fortunate this year that we continue to grain international traction especially in the Middle East. In addition, we worked hard to maintain momentum with our leading edge customized precision chemistry in North America and we turned a sense of stability to our downhole and production technologies businesses both here and abroad. Additionally after a challenging April, Flotek’s chemistry business experienced consistent and noticeable improvement through the balance of the second quarter. As we noted last quarter, we continue to considerate wide range of options that we believe are aimed at improving value for all of our business units. While such strategic opportunities take time and are more difficult to navigate in a challenging market, we believe there are real opportunities to showcase the value of our businesses to our stakeholders and others. While there is no assurance that any of the potential options will be successful, we made progress during the quarter and are acutely focused on executing our strategy to focus on our core competencies while seeking alternatives for other ventures that may be more valuable to others than they are to Flotek. Assessing existing and future business potential and sizing the business appropriately is an important step in that process. Finally, we are very excited that our state-of-the-art global research and innovation center is just weeks from its grand opening. Not only did our research capabilities play a role in our new YPF relationship, it has made a difference in a number of other business development opportunities both here and abroad including the continued growth in CnF validations for customers here and around the globe. We believe the validation process should accelerate even faster when our new research innovations facility is available to our clients. In addition to our Houston facility with global reach, we’ve recently opened a regional research hub in Calgary to serve our Canadian clients. A market, we believe will return to normalcy over time. As noted, last night, we do believe that the market is beginning to find its footing and that the light may even be at the end of the tunnel and we don’t believe it’s a freight train barreling towards us. However, even as we begin to see a glimmer of light at the end of the proverbial tunnel, I know a plethora of challenges both known and undoubtedly remain for Flotek in the industry in the coming months. However, as I said just 90 days ago, I do sleep well at night knowing Flotek has built one of the best teams in our industry, from our corporate leadership and support team in Houston to our technicians and customer service folks from Williston to Waller and Denver now to Dalton, Georgia. As we come out of the native and begin to see opportunities, we must balance our enthusiasm with realism turning challenges into those opportunities. We remain focused on ensuring the appropriate balance between caution and opportunity making certain that our business is appropriately sized to a more constrained and volatile opportunity set yet not lacking the resources to seize what we believe will be an abundance of business opportunities as we navigate through the current cyclical toehold. As I said last night, our goal in this environment is to balance short-term liquidity with long-term opportunity that is precisely why we took this opportunity to put some dry powder on our balance sheet, a move we believe was both proactive and prudent. As I have said on each call since I took the helm now six 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. Today, once again, we are focused as ever on our vision to restore growth to the company and continue to be enthused at through the efforts of our people, the future will once again present opportunities to create value for our stakeholders. As I conclude these remarks, I ask you to remember as I remind myself nearly every day what Flotek is all about. Flotek is at its core an oilfield technology company with a focus on innovative chemistries and other products and services that make a difference in the productivity of a well at every point in its lifecycle from the spudding of a well to the last barrels of production. And our objective is to make a positive difference for our customers, so we can in turn create positive opportunities for our employees, the communities in which they live and most importantly, you, our shareholders. While we may not always get everything right, we will strive even in the most difficult of environments to do the right thing for all of our stakeholders. With that, I would like to turn the call over to Rob Schmitz to review our second-quarter financial highlights and provide some additional color on certain financial issues. Rob?

Thank you, John. As John mentioned, Flotek filed its Form 10-Q for the period ended June 30, 2016 with the US Securities and Exchange Commission yesterday afternoon. We reported that revenue for the quarter ended June 30 was $72.3 million a decrease of 16.9% compared to the same period of 2015. Revenue increased slightly compared to the first quarter of 2016. We reported a loss from operations of $2.7 million for the quarter ended June 30, 2016 compared to income from operations of $1.8 million for the second quarter of 2015 adjusted for the 2015 impairment. Sequentially, we showed an improvement in loss from operations of $2.9 million compared to the impairment adjusted loss from operations in the first quarter of 2016. This improvement was due to lower SG&A expense resulting from lower incentive compensation expense, cost structure improvements in the drilling segment and lower legal and professional fees. We recorded an income tax benefit of $1.2 million for an effective tax rate of 34.3% for the three months ended June 30, 2016. For the quarter, we recorded a net loss of $2.3 million or a loss of $0.04 per common share fully diluted compared to a net income excluding impairment charges of $1.1 million or $0.02 per common share fully diluted for the quarter ended June 30, 2015. And an impairment adjusted net loss of $4.6 million or a loss of $0.08 per share in the first quarter of 2016. Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA for the three months ended June 30, 2016 was $0.5 million compared to $6.5 million for the three months ended June 30, 2015 and adjusted EBITDA loss of $1.4 million in the first quarter of 2016. Accounts receivable net of allowance for doubtful accounts at June 30, 2016 was $45.5 million compared to $49.2 million on December 31, 2015. As John mentioned earlier, Flotek entered into a private placement with a credit investor to purchase approximately $30 million in Flotek common equity. After adjusting for cash used in the acquisition of IPI, Flotek should have approximately $36.5 million of availability under its revolving line of credit facility, a significant improvement from the $15.3 million available prior to the placement. Thank you, now I would like to turn the call back over John Chisholm for some closing remarks.

Rob, thank you. Before we take your questions, I would like to add a few concluding thoughts. Earlier this week, we announced a five-year joint technology development agreement with a technology arm of YPF, the Argentinian national oil company. The agreement calls for collaboration with YPF to develop complete fluid systems for Argentina shale play. The second largest shale play in the world. In addition, we will work together on a number of other ventures over the course of the five years. YPF’s commitment to research is not dissimilar from ours. In fact they are opening a spectacular new research center this fall that I was able to visit with their executives just two months ago, that is very similar to Flotek’s efforts. We believe there is a real opportunity to become a meaningful player in this important hydrocarbon region of the world. Not only are agreements like this being signed with large international clients, Flotek is also having success at home. Recently, Flotek signed a similar collaboration agreement with two major independent exploration companies in North America to develop complete fluid systems for their exploration efforts. All of these successes are part of Flotek’s prescriptive chemistry management program where our focus is on providing chemistry into the well that will enable and protect our client’s reservoirs. While the economic impact of this initiative may not be seen immediately the long-term value creation from building the preeminent oilfield chemistry concern should become apparent in the coming quarters. In addition to exciting opportunities in Argentina, our international business continues to grow under the leadership of Nicholas Lopez. We’ve made significant strides in the Middle East and believe there are opportunities in Mexico as well as Central and South America. While developing those opportunities takes time especially in the current market environment, we’ve been pleased with recent successes that we believe will lead to long-term commercial opportunities in 2017 if not before. While still in its nascent stages Flotek’s PRF pressure reducing fluid is gaining traction in commercial validations. The commercialization of this new chemistry which will contain at least 25% less polyacrylamide and require up to 50% less volume than traditional friction reducers is underway with over a dozen opportunities across multiple operating basins. In short, while our enthusiasm is measured as a result of current fundamentals, we strongly believe we will continue our chemistry success as we focus on one fundamental question, what chemistry technologies can Flotek design, create, and innovate to give the reservoir a better opportunity to produce hydrocarbons? Not only does PRF allow us to expand our chemistry offerings, it should combined with CnF and other chemistries allow us to further leverage our direct distribution efforts and fits precisely into our prescriptive chemistry management efforts. Away from the energy sector, Flotek’s Consumer and Industrial Chemistry Technologies segment posted solid results with your over sales – year-over-year sales growing of over 33.7% and sequential sales up over 8% in large part a result of improved pricing and market share. These are record results for Florida Chemicals since Flotek acquired the company in 2013. Unlike crude oil, citrus oil market prices remain very firm and well above historic levels. However, we are well-positioned on inventory and forward purchases to meet market and internal needs as well as take advantage of market opportunities as they arise. Florida Chemical continues to experience strong demand for its flavor compounds providing unique growth opportunities for the next several years. Before we take your questions, a couple of concluding thoughts. As I indicated earlier, the last 18 months have been challenging on a number of levels. The greatest of which is knowing that regardless of how hard we labor there is nothing that the Flotek team can do to change the deceleration of the cycle and the daily decline in oilfield activity that continually shrinks our opportunity set. Yet, each and every day, my colleagues on the Flotek team have come to play looking for opportunities even when it seems about as probable as winning the lottery and every now and then they come back with what seems like a winning lottery ticket. In short, this is a team that has no quit that strives to be better each day and believes that they can make a difference no matter the size of the challenge or the length of the odds. Most importantly, they face the challenges with enthusiasm, perseverance and they do things the right way. They also make a difference not only for their clients and their colleagues but also for the communities in which they live. This quarter, Flotek is involved with the Texas Independent Producer & Royalty Organization or TIPRO and its 4,500 members and will donate a portion of our September CnF sales to fight hunger for at risk youth. In America, every day 3.5 million children under the age of five go to bed at night wondering if they are going to have a meal much less a nutritional meal. Our mission in making a difference is to create awareness to this issue and where we can help financially and it combines with our efforts whether its reefs for veterans or working with fatherless boys, Flotek really does want to make a difference. You can go to the website, our website www.makingadifference.com for more information and how you can participate if you choose. We understand the challenges as we face an extraordinary level of uncertainty in our industry. That said, we remain acutely focused on what we can control, our cost structure and resulting financial position. Our level of service which we will strive to take to an even higher level, our marketing efforts that focus on how Flotek products and services can make better wells and as a result provide better returns for our clients. Crafting creative business structures that create mutually rewarding results for both Flotek and our clients and remaining true to our goal of maximizing value for our shareholders throughout the economic cycle. Regardless of the challenges ahead, what I pledged to you today as I did on my first call now six years ago is that my team and I will come to work each and every day knowing that you have placed your confidence and trust in us as stewards of your capital. We will take that responsibility very seriously and work hard each day to earn that trust. Let me be crystal clear. The success of Flotek is the result of the hard work and untiring efforts of a group of people who believe they can shape the future. As a leadership team, it’s incumbent on us to communicate our vision, challenge the spirit and ensure our team has the tools to exceed even their wildest expectations. Thank you for your interest in Flotek. I’m glad to be here and we look forward to sharing our mission both challenges and successes with you in the coming months. Operator, we will now open the call to questions.

Thank you. [Operator Instructions] Our first question is coming from the line of George Venturatos with Johnson Rice. Please proceed with your question.

Hi good morning, guys.

Good morning, George.

Wanted to hit first on the operational side of the business, certainly you mentioned things got better after a tough April. Just wanted to see if you could give us little more detail on the progression and then also what we are seeing potentially early parts of this quarter given the recent upticks in recount activity levels?

Sure, great question. Because of our direct channel now the Flotek store, we’ve got much greater visibility with the end-user. For example, we are completing a well this week in the Permian basin and there are next two wells, wells that on inventory will be completed in November and we’ve never had that level of visibility before. So we’re comfortable that the third quarter will be an increase over the second quarter. I think that everybody understands on this call that pricing lags behind drilling activity always has but even in that context, in that environment, we believe the third quarter will be an increase over the second quarter.

Okay great and then you seemed to touch on it there John but any update in terms of what we are seeing from customer response on the volumetric increase side, I know we had a primary customer that was in testing phase that we discussed last quarter. Any update on what you are hearing in terms of feedback and where that may trend?

Sure, I will be glad to share that we believe from the information because some of it doesn’t all directly go through the Flotek store. I think the average person that uses CnF which I think is what your question is designed around is now the average overall is about 1.2 to 1.3 gallons per thousand. There’s some that are running at 1.5 gallons and there are some that are running at 2 gallons. So that number continues to move up because they see the benefit that they equate the total benefit to the cost associated with it and I think that pretty well lays out what we felt would happen. Does that answer your question for you?

Yes, that’s helpful, John. Wanted obviously touch on the MHA results that were released this morning. Wanted to, one, get your thoughts on kind of what you saw in terms of one, you know, you saw the Permian was supported positively, certainly the Eagle Ford was inconclusive based on the results but we did see the further trend of oil prone areas outperforming. So one, wanted to get your general thoughts on the results that you got from MHA and then two, will this be the last basin set that will receive and then also, you know, how does this help going forward with the SEC inquiry level in terms of providing them this data and hopefully moving beyond that essentially that overhang that’s been sitting on us for the last couple of quarters?

Sure, great series of questions. First, the – regarding MHA and just a little bit of history, so allow me to give kind of an extended answer to your question. I didn’t even know who MHA was when our technical committee that was made up of folks inside Flotek and outside Flotek selected them as a pretty well industry recognized global reached reservoir analytical company. And they’ve done incredibly thorough job in what’s an incredibly difficult challenge when they know their name was going to be put on the reports that were going to have a spotlight on them probably greater than any report they’ve put out. And I still haven’t met anybody with MHA as we wanted to make sure that that was a true independent effort. As nearly everyone knows, the normalization of data and selecting those filters is very subjective by the individual who is doing it. And MHA wanted to look at over a year’s production, which is great. But in Texas, when you get into this allocation effort, they even created additional filters which were involving leases as to whether there was one well or multiple wells, do they have CnF on them or not?. And wells that didn’t. But the Permian analysis is very consistent with under independent analysis, public reports, I don’t know what folks had a chance to see a couple of weeks ago where Halliburton talked about a client, J. Cleo Thompson that uses CnF at a 40% uplift. The most active operator there talks about their wells being 30% greater on EUR than what they had originally expected. So it’s very consistent I think with what other people have seen and certainly consistent with what our clients tell us on a well-by-well basis. And again to make that very independent none of that information was provided to MHA. Regarding the Eagle Ford, the data set and the view of MHA is just not sufficient enough to drive a conclusion and you know we are comfortable with that. There’s been about 250 wells that have used CnF in over 10,000 wells that have been fraced there. And they were able to narrow it down again through these filters to get I think to 45 wells. And so you know their conclusion I think is what anybody would have made with that small dataset, there’s just not enough there that they could see to make a definitive opinion and we are comfortable with that. I can tell the folks on the call that not a single one of our clients has said we are not going to run CnF till we see the next MHA report. And our Eagle Ford activity with about seven or eight clients continues and we expect it to continue. So I hope that gives everyone you know or at least my view of the report, they have done a very thorough job, we appreciate that. I think anybody would have to draw the conclusion that through their normalization process, the efficacy of CnF bears out to what other independent folks have said. And yes, this is part of the SEC inquiry and you know that’s the federal government and I can’t really opine on that except to say it’s in the process and the time of that is never really determined. But that report, all of the reports DJ Basin and all that are part of what’s been provided to them. Is that, I hope help.

That’s helpful, John. And just to clarify, will this – is this the completion of the third-party study or will there be further basins?

Right, sorry for not remembering that part of your question. This concludes the effort with MHA.

Okay great. I have got a couple of more, but I will jump back in the queue. Thank you.

Okay, we will wait to hear back from you.

Thank you. Our next question is coming from the line of Matt Marietta with Stephens. Please proceed with your question.

Thanks and congrats John and everyone, the Flotek team. You know truly, pretty remarkable accomplishment here in the quarter, the worst quarter of the downturn yet you know to be able to put out a sequential.

Thank you, Matt.

Yes, the top line growth and profitability growth, I don’t cover any other companies I can say that. But I really wanted to touch on or follow on here with MHA study, you know, that chapter looks like it’s being close with respect to kind of the misplaced concerns on the credibility deal with FracMax but you know positive results in the Permian. What I really wanted to focus on however was kind of the complexities within the data set that MHA recognized. Can you elaborate more on the data complexities specifically with the Texas reporting issues that MHA also ran into and if you brought Tim from MHA maybe allow him to explain. But if not, maybe take us back to the issues that FracMax had with the same data complexities and how this report, you know really in essence validates your initial conclusion that there was just simple data errors within the Texas reporting structure?

Well sure. I think, if there has been a positive on this journey of this particular topic, I think it put a bright light on the allocation issues inside Texas. And for those that are still not familiar with that Texas reports production by lease and that could be one well, that could be 10 wells, that could be 100 wells and it becomes very difficult to derive what the individual production is of those wells unless you have the exact metered production from that client. And therein lies the challenge for not only MHA but for the other companies, public companies out there that try to derive individual production. And we’ve always felt that this was a statistical event that you needed to have just a significant amount of data to be able to get to the proper representation of whether it was CnF or any other type of additive or whether it was pounds of propane [ph] or whether you looked at volumes of fluid. Does fluid make a difference in certain areas? You know it wasn’t just limited to CnF but it was the entire completion effort. You needed to look at it holistically on a very wide statistical basis. So as I started out in answering George’s question, the normalization of data in this industry is always a challenge and it’s very subjective by the people who do it, in the factors that they pick to try to determine how well a well is doing, whether it’s the lateral length, whether it’s the amount of sand, whatever it may be. And I think that this chapter should be closed because for whatever reason this particular technology is in my career has been the most scrutinized technology in the industry whether it’s been from MHA whether it’s been from analysts like yourself and others, whether it’s been from our clients whether it’s been from service companies. And at the end of the day, as a rule, you’ll get better production from wells that use Complex nano-Fluid. We’ve never said it works on every well, we’ve never said that it’s going to have an X amount of increase on every well. But what we have said is that you will get an increase in production and it’s up to you to determine is that total benefit worth the cost of the CnF? And is evidenced by our quarter that you talked about to continue the revenue that we have, the people that do the individual well analysis, their clients believe that. That’s the ultimate validation is the revenue, and you know, I have to a bit careful because of the SEC inquiry and other things to talk any more about that. But hopefully, in a broad brush that gives you and other people listening in our view on that. Is that hopefully, okay for you?

Yes, I think that’s very fair. And you know it’s nice to kind of have this in the rear view mirror as it relates to kind of this FracMax overhang. But moving on, I am looking forward. I wanted to talk you know a little about the drilling tools, you updated the language in the press release regarding the strategic alternatives. It looks like there’s been some progress as that has developed over the course of kind of the last couple of quarters when you started to talk about that. But, you know, you included that there is a range of options here for Flotek to execute potentially something there. You know, can you maybe elaborate on this range of options to kind of give us an idea of the opportunities and I understand you can’t get into too much detail. But just so we kind of understand the thought process behind the drilling tool segment as you look to further expand on the chemistry technology offerings?

Sure, we will give you as much as we can talk about. But I think again the people that are familiar with this industry that are on the call are aware that there is certain private equity efforts not only in drilling downhole tools but also other segments in this industry that are looking at rollups, putting different things together as they believe this industry is coming out of its trough and will come up to the next upturn. So that’s one avenue that we’ve looked at. The other avenue is a company already well-established in this segment as to whether some of our strategic technology make sense. And so, you know really what I’m saying is, what folks on this call are probably concluding themselves are kind of the range of opportunities and what we’ve said consistently is that in this market, what’s amazing is that we in the downhole tool segment have continued to gain market share and that is a little credit to the people that fight this fight every day. Many companies, smaller companies than us have quite frankly gone out of business and we’ve kept the platform nationwide and international whether it’s in the Middle East or Argentina for downhole tool intact because we always felt that that platform was one of the key advantages of the Flotek downhole tool segment. But the challenge for a company and you always, you will never want to be in this segment, this position that Flotek is in, where you are almost too big to be small and too small to be big is a difficult one to be in, and although our market penetration has gained in this downturn, it’s still a very difficult market. And so, we’re looking at every option that would make sense for that segment for us. And again, I am sorry just can’t be more specific but you probably wouldn’t expect us to be at this point but it’s clearly focused on what we’re doing.

Understand and thanks looking forward to the update there when that materializes. You know, moving on, I want to focus a little bit on gel fracs and kind of highlight the acquisition. We have actually spent some time with guar suppliers and it’s clear that guar availability use is down as slickwater has taken market share. But you know obviously what this has resulted and it is more demand for fiction reducers that’s the PRF. But you know, I really wanted to give you guys the opportunity to highlight a few things here and specific, how does IPI’s integration into the fold kind of diversify the footprint as gel fracs for a lot of E&Ps used to be best practices, how can Flotek CnF and really the – all of the chemistry technology offerings combined with with IPI’s competency here. And also secondarily, how does the Flotek store and Flotek’s existing footprint help improve ISI’s [ph] profitability from the get-go as you integrate that into the fold?

Okay, thanks for the opportunity to give little more context on the acquisition because we do want to take a little bit of time. And again, we will make sure there is plenty of time for those that are in line for questions to give a more broad answer to that question. There may be some folks that think this acquisition may have been predicated incorrectly that we’re seeing the horizon out there with the sun setting on CnF and that is absolutely not the case. This is an acquisition that broadens our reach to our existing clients, who believe in the chemistry technology of Flotek. And IPI as has got the only polymer facility in the United States that actually creates the polymer powder out of the guar bean in the United States. And we believe technically there is an advantage to that as do some of the clients that IPI currently sells to, and you can assume that our research folks have for the last year or so started to look at is there a way to take what’s been regarded a commodity and guar has been regarded a commodity and make it more specialized. No different than it took us two years to be able to take a commodity like friction reducer with polyacrylamide be able to get two patents on that technology and be able to reduce the amount of chemical and the amount of volume to be able to lessen the damage in the reservoir with the friction reducer. So what we intend to do is have CnF as the hub of this chemistry offering of which you can access PRF or polymer guar when necessary and be able to have a complete holistic prescriptive customized chemistry offering. More and more of our clients are asking for that. We felt that was a whole in our ability to represent ourselves as a complete chemistry completion company. We looked at a couple of different options, we felt that having just a preferred relationship with IPI would not accomplish what we wanted to, we felt we needed to have control of it just like in 2013, we felt having Florida Chemical inside Flotek Would significantly improve the ability to expand CnF and it has and so we looked at IPI and what really swayed the deal there and I will get back to the market in just a second is Don Bramlett’s experience in this industry of being recognized as you know just really a leader in advancing technology with fast hydrating guar which is very important to have consistency and his whole understanding of the –of the marketplace of guar. That was really the deal, that factor is what swayed us plus the fact, it is the only commercial guar polymer blending facility that creates the powder here. The added benefit not to be diminished is the Monahans facility situated right in the Permian basin where 50% of our chemistry revenue is performed will create a better logistic footprint for us in that area. Now with respect to the market, the way the market has evolved is you know I think attribute to this industry that when guar back in 2012 and 2013 became this unbelievable price, it went from about $0.90 a pound to $10 a pound if you can imagine. People said, well we got to look at alternatives because this is just not sustainable. And so they started to look at okay, do we kind of compromise the same carrying ability and go more with a slickwater or a friction reducing fluid as a way to reduce costs. And so the guar usage dropped dramatically. It’s our intelligence that tells us that guar is used in some form on about 40% to 50% of the wells that are fraced in North America today. Some wells use it in a cross link form, some use it just as a slick guar fluid form, some use it in the hybrid where they pump friction reducer and guar. But it’s on about 40% of the well. So it now gives us the ability to work with our clients as they’ve reached out to us more and more to either design their chemistry or at a minimum to confirm what they already have designed as the optimum fluid to give the reservoir the best opportunity to produce. And so, we believe that now with this capability it will accurately represent us as a complete chemistry solution provider in the industry. Now with respect to the margins, and I think this is important for everyone out there. This entity is going to report up through Josh Snively and Josh has decades of experience of managing how you inventory and how you purchase raw materials like citrus oil. Don Bramlett has a deep background on that. We’ve hired certain individuals from other polymer companies, Brian Robertson is one who heads this effort up to make sure that our inventory is purpose fit inventory, and what that means is, we have no intention of extending ourselves on the polymer inventory that trap so many people in the past few years of getting hung up with a guar price that they just then could not sell into the industry. So we think we’ve got a unique skill set with the people inside Flotek that for our investors and stakeholders should give them a level of comfort as to the way we intend to inventory this. And yes, we do think when people avail themselves of the Flotek store will be able to create a higher operating margin for the polymer than what IPI has currently had as there one way of selling their products has been directly through the traditional form of to the service company. So, long answer, sorry. But hopefully that covers the topics you are interested in.

Thanks, it does. And it sounds like a pretty exciting foundation to further enhance the growth trajectory. And before I hop back in queue, real quick, can you maybe tell us who IPI’s largest customer is, just so we have an understanding of how that will roll in?

Sure, although they are private in an effort to be transparent to everyone, their largest customer is Halliburton. Halliburton has recognized in certain basins that fast hydrating guar is important for their clients and IPI has got that technology figured out like no one else does.

Thank a lot. I will get back in line.

Sure.

Thank you. Our next question is coming from the line of Sean Milligan with Coker and Palmer. Please proceed with your questions.

Good morning, guys.

Hi there.

Real quick, just on Canadian seasonality. Can you outline for us what your exposure is within energy chemicals to Canada?

Well, certainly our activity is down as everyone else’s is. I don’t think that was very good language there, sorry about that. But there has been a couple of new developments where some of these wells and its not been widespread. I don’t want anyone to jump off and think that re-completions has really gained a foothold in Canada. But what we call Rezstim [ph] which is re-energizing older wells with CnF in the Duvernay formation up there seems to have shown some real benefit. So that has kind of offset the lack of new well completion that we typically experienced. But I think for the remainder of this year, Canada is going to be a very difficult environment and you know I think just to probably give some context a year ago at this time Canada was about 10% of our chemistry revenues. It’s now about 5% but it has been offset as we mentioned with other international uplifts to kind of counterbalance that. Does that help you?

Yes, perfect. Thanks. And then second question, looking through the queue on a customer A and customer B trends, it look like customer A was down a little bit sequentially. And I think customer A’s spudded well count was down about 15%. But I was just, it seem like the revenue impact you outpace that. So I was wondering if could provide some color about customer A, you know their usage of CnF and if there was any push into 3Q with kind of their order flow?

No, great question. Glad you picked up on that. Others maybe thinking the same thing, it’s all directly related to of course you got to start with the rig count but then you got to look at the completion activity. And sometimes customer A gets caught up with their activity and there is like a two week wall and you know depending on when that wall falls that can affect how the whole quarter looks. But there is no decrease in that particular customer’s interest level of using CnF and the benefits they derive from it. Kind of a quick footnote for the folks listening, customer B is in probably in the traditional sense a customer but in the way we look at it not only an important customer but a distributor and that customer B distribute CnF to at least 16 different clients on a monthly or quarterly basis. And it’s just the way you know I think that the accounting or finance is not kept up with kind of the new business model that it would be a mistake to say that all of that business ends up with customer B it gets distributed out to multiple clients and multiple areas around the country. Hopefully, that helps.

Yes, it’s helpful. And then one of your major customers has a slide deck out about they are changing completion design and part of that completion design is testing higher fluid per lateral foot in conjunction with frac sand. I thought we would have seen more of that pull through in 2Q? My question would be are you seeing that in the order flow to that customer and if not, do you expect some type of inflection point related to that in the future?

Yes, I think, this has been a gradual increase. It’s not been like a step change and we are seeing it for sure. But I don’t think it’s anything that you knows is dramatic in nature. I think that has to do with the flow of the completions and the rig activity and all that. But certainly when people increase fluid, we’ve not seen any client that says, well I am going to cutback and only run CnF and 80% of my fluid because I have increased it by 20%. So it seems to be more of a gradual thing as opposed to a step change.

Okay, thanks. But you are seeing that they are running as they increase their fluid pump per lateral foot, they are also running CnF at higher rates even if they are maintaining constant concentrations, would that be fair?

That’s fair.

Okay and I know people asked a lot of questions so I am going to keep going too.

Okay.

If you look at – you raised $30 million in equity, you talked about what you are going to put to pay down the credit facility. I guess the last covenant that would matter is the minimum adjusted EBITDA covenant on a trailing six-month basis for September 30. Does that matter? Does it matter if you have an occurrence on the credit facility, you know, could you maybe just address that? It would seem to me that you would need to generate about $2 million in positive EBITDA, pre add back on the G&A line for the stock comp. So if you could just address your outlook for that covenant I appreciate it?

Sure. I will let Rob Schmitz, our CFO answer that for you.

Yes, looking forward into the third quarter, we are comfortable that we will meet at covenant fairly comfortably. So we are not concerned about that covenant right now.

Okay, I will ask it in another way. G&A was down pretty significantly, sequentially in 2Q, will there be additional carry through related to that in 3Q?

You are probably going to see the SG&A step up a little bit from there. We took an adjustment to our incentive comp in the second quarter and that lowered – it was a little bit of an extra benefit in the second quarter. So you are probably going to see between 23, 23.5 to 24 on our SG&A rate going forward.

Okay, perfect. And then on the consumer side, you know, the first half has been very strong from you all from a topline basis. I know you still hold some inventory in the second quarter but just kind of interested in any commentary on what you think the second-half run rate might look like for consumer on a topline basis?

Sure, thanks for calling that out because I am sure other people are interested. We will let Josh Snively answer that for you.

Good morning, Sean. If you look at going forward, if you look at Q1, Q2 average those two numbers together, it’s probably what you are going to see in Q3. Q4 might come off to that just a little bit. We did have a little bit of inventory increase that hit our margin in Q2. We expect that to a one time issue in Q3 and we expect those margins to normalize a little bit more in Q3 and Q4 as well. So we feel very good about our third and fourth quarter opportunities, the demand for our flavor compounds remains very strong. And the availability of citrus oils continues to be limited. Therefore, the trading business activity should remain strong as well. That answer your question?

No, that’s perfect, thank you. And then just real quick on the MHA study. It’s a little bit confusing in the wording but was that study on horizontal wells on in vertical wells?

Horizontal wells

Okay and then Argentina, you signed the JV. It look like in the first quarter if I go back to the commentary there, you were on a very limited number of wells, you know for YPF in Argentina relative to what they completed in total in the first quarter. Just be interested in how the JV might impact your kind of market penetration with you know YPF’s overall well count in Argentina going forward?

Sure, great question. We will give you little bit of context so folks understand Argentina maybe a little bit better than they do now. YPF has a 100 rigs running in Argentina. They have a joint venture with BT, with that’s called Pan-American, it’s another 30 rigs. The wells there are smaller than what we’re used to in the United States, the average length horizontally is about 4,500 feet. The average fluid is about 3,000,000 gallons versus 10 here. The average amount of sand is about 3,000,000 pounds versus 10 or greater here. One of the gating items there is the lack of readily available sand, so that kind of puts a self-imposed restriction on the size of the completions. But that will hopefully give folks an idea of the size of the wells which are essentially at the end of the day about a third of the size of what people are familiar with say in the Wolfcamp. There is not a calendar date certain of increasing activity with YPF. When they have a commitment and we do to come up with the best fluid that gives their wells the best chance, you know, we can either do it quick or do it right and we will with them do it right. The revenue will come. So you know, I would expect somewhere in the fourth quarter activity should pick up. They want to get to where they are completing 30 wells a month, that’s very dependent on the infrastructure of the two main service companies Halliburton and Schlumberger down there. We have no control over that but we would start to look at things in the fourth quarter to pick up when the middle of our second validation in a different area there right now. And we’ll will keep folks more tuned in as year progresses for sure.

Alright, perfect. Thanks guys and that’s all the questions I had. So appreciate it.

No, thanks for the questions, appreciate it.

Thank you. Our last question is coming from the line of Mark Brown with Seaport Global Securities. Please proceed with your question.

Hi guys, I know this call is getting long, so I will just be quick. On ECT, it’s, curious what your non-CnF portion of the revenues in the quarter and what what kind of growth rate you saw and if there is any comments you could make about how we should think about that going forward?

That segment of ECT will continue to grow as PRF gets adopted, as the polymer portion becomes more visible inside Flotek. That will continue to grow. So there will be – you know, we are blessed that we haven’t had any type of price deterioration through this old downturn. But you know quite frankly some of these chemicals carry less margin than you know the crown jewel CnF. But certainly the ability to create meaningfully more revenue as this momentum goes with a slightly less margin we think is the best return as it spreads out the offering for Flotek for our shareholders. So expect that to continue to grow.

Good, good. And I guess just finally, you guys every quarter seem to outperform the rig count and people’s expectations in the chemistry side. And this one you certainly did the same with sort of a 13% decline in CnF volumes relative to rig count decline of much more than that. I was curious, how should we think about Q3 and Q4, commentary in the press release very optimistic. Look like there is some deferred completion opportunities that were moved from Q2 to Q3. From a modeling perspective, how should we think about the next couple of quarters from your energy chemistry side?

Well I think as everyone is familiar who follows Flotek, we are very conservative on the guidance we give. As I started out, I think the first call was George. We anticipate the third quarter to be up in that as a relationship when Schlumberger gave their earnings call for North America, they expected the third-quarter to be flat. And the reason we expect it to be up is several of our clients that may not reach category A or B are increasing their rig count and increasing their activity and we’ve got visibility with them like I said greater than we did 15 months ago. So we feel positive about the third quarter, is it going to be wildly up? No. But is it going to be up? Yes we believe that and we anticipate the same thing in the fourth quarter.

Thank you, thank you, very helpful. I will turn it back.

Thanks.

Thank you. Mr. Chisholm, I will now turn the call back to you. Please continue with your closing remarks.

Again, thank you for your support of Flotek. We know it was bit of a long call, but obviously there’s a lot of things happening in the last bit of time. And we certainly appreciate your interest and are pleased, you took the time to join us today. Have a great Wednesday.

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