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Executives

Mark Williamson - Interim CEO

James Hill - CEO

Lori McLeod-Hill - CFO

Jason Munro - President

Analysts

Robert Miller - Boulevard Trust

Larry Chlebina - Chlebina Capital

John Rosenberg - Loughlin Water Partners

Aaron Sherlock - TD Securities

Jon Hilley - Berylian Capital

Jeremy Hellman - Avenue T Fund

GASFRAC Energy Services, Inc. (OTC:GSFVF) Q2 2014 Earnings Conference Call August 8, 2014 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the GASFRAC Second Quarter 2014 Results Conference Call. I would now like to turn the meeting over to Mr. Mark Williamson. Please go ahead, Mr. Williamson.

Mark Williamson

Thank you, operator, and good morning, ladies and gentlemen. I am very pleased to be here with you today in my role as Executive Chairman and Interim CEO of GASFRAC. I look forward to talking with many of you over the coming months. I am joined today by Jim Hill; Lori McLeod, our CFO; and Jason Munro, our President.

For you reference, our earnings announcement was released this morning. A copy of the press release and disclosure materials are available on our Web site. Before we begin, I would like to remind listeners that certain statements or comments made during today’s call maybe forward-looking, such statements or comments represent management’s best judgment and expectation as of today’s date and are subject to certain risks, uncertainties and assumptions, which are described in our earnings material.

Before Lori gives an overview of the financial results for the quarter, I would like to review the significant changes that have occurred since the new Board was elected at the Annual Meeting in May. The new Board consists of individuals that have significant industry and capital markets experience. Their agreement to serve as shareholders is based on a unified belief that GASFRAC has a real opportunity to be a competitive provider of distinct oilfield services with a full range of fluid systems.

On a side note, Mr. Pierre Jungels a man of significant global oil services experience and a person I respect was originally elected to this Board; however, Baker Hughes, where he is a director decided post-invent that it presented a conflict to them. It shows that the industry has an eye on this company. The hurdle for this company has been that it tried to compete directly with entrenched technologies in saturated markets like you the Board is not satisfied with the current results, nor the financial state of the company.

There is no doubt however from the field activity we have seen GASFRAC can deliver superior results in a wide variety of reservoirs and is beginning to do so in a cost competitive manner. The focus needed is on specific regions, areas of water scarcity, and the productivity of partnerships. We will fully utilize idle equipment in an active market through offering traditional fracturing services to customers that need it. We will take advantage of every opportunity to add to the top-line.

As such, the Board has initiated a broad review of the business. This will be an intense process to reset GASFRAC’s commercial platform, marketing efforts and cost structures. We will do everything we can to bring about positive change. We have the accountant stress test the balance sheet and determine that it was prudent to make the write-downs in the quarter which equates to approximately 50% of the overall loss per share.

For example we are in an advanced discussion in order to terminate a long-term proppant contract. This is the type of top down bottom up analysis we are undertaking to shake this company. I would like to also stress that the current value of the assets under management are undervalued based on the share value with firsthand knowledge of the quality of the equipment is an important to recognize the true value of the assets.

The equipment is in impeccable condition with low hours and very well maintained. The equipment was designed to focus on an expanding range of fracturing fluids available for its customers and beyond just propane. With the successful refinancing of the Company’s senior debt, we have also strengthened our balance sheet and we’re comfortable with our liquidity as we undertake the strategic review.

I would like personally thank, Jim Hill, for his service to GASFRAC. He will remain with the Company as a consultant and until our search for a permanent CEO is completed, that is expected to occur before the end of the year. GASFRAC has valuable assets hardworking and talented employees and tremendous potential. The Board is confident that the Company can significantly increase shareholder value. We will remain focused on a top to bottom strategic review of the business to reposition the Company for immediate growth and future success. We look forward to updating you on our progress.

With that, let me turn to our President, Mr. Jason Munro. Jason?

Jason Munro

Thanks Mark. The second quarter signifies the necessity to expand GASFRAC’s client base and product offering. The three wells completed for a major Canadian client in Q2 were commercially successful and GASFRACT was able to save the client significant cost by capturing treatment propane at their plant for reuse. We understand their intent to use this process going forward starting in the beginning of next year. The Company continues to work diligently to expand our client base with the goal of minimizing future revenue volatility.

Looking to Q3 in the U.S., BlackBrush commences operations next week utilizing GASFRAC’s fluid technology which enables GASFRAC to pump high rig vapor pressure fluids and contract negotiations are in progress for a three year extension. GASFRAC has generated a backlog of upcoming trials ranging from the Eagle Ford, Marcellus and Utica formations with large-to mid-sized clients utilizing our hybrid and Vantage technology, now when I talk about hybrid that refers to water and oil, so think of hybrid think fluid that just refers to propane.

In Canada, GASFRAC has completed a series of poly CO2 slip water and vantage treatments in the third quarter. In addition, the Company has commenced work in New Brunswick with Corridor Resources. GASFRAC has increased their new customer base heading into the third and fourth quarters with scheduled work. Propane is evolving for use in conjunction with several fluids from water to hydrocarbons. This evolution represents a significant opportunity for clients stitched with flaring costs and plant restrictions associated with using nitrogen. By growing our services to include water-based fluid systems, GASFRAC is now exposed to a larger market. The Company is encouraged by the response from our clients who are eager to try our services.

I will not turn the call back to Mark.

Mark Williamson

Great, thank you Jason. Lori will now take us through with the financials. Lori?

Lori McLeod-Hill

Thanks, Mark, and good morning. Revenue for the second quarter decreased 76% to 7.3 million from 30.6 million in the second quarter of 2013. This decrease was primarily due to postponements or cancelations of projects with our major customers as well as some of our Canadian customers supplying their own propane.

During the quarter, the Company earned revenues from four customers with the top three customers representing 99% of the total revenue. During the second quarter of 2013, the Company earned revenues from six customers with the top three customers representing 97% of the total revenue.

Second quarter revenue from the Canadian operations decreased 69% to $6.9 million from 22.3 million in the second quarter of 2013. The Canadian operations performed 19 revenue days in the second quarter of 2014 with average daily revenue of 366,000 compared to 43 revenue days in the second quarter of 2013 with average daily revenue of 519,000.

The decrease in average daily revenue is due to the procurement of LPG. In the second quarter of 2014, our customers supplied their own LPG with GASFRAC instead charging a pumping charge on the fluid pumped. This resulted in a decrease in revenue per revenue day of approximately 140,000 with an offsetting decrease to Cost of Sales.

During the second quarter of 2013, revenue includes pad fracturing for two customers that the Company was able to execute during spring break up. During the second quarter of 2014, revenue was generated from one major customer. The Company expects that revenue from this major customer will be limited for the rest of 2014 as the customer has reallocated its capital budget to different areas for the balance of 2014.

Second quarter revenue from the U.S. operations decreased 95% to 0.4 million from 8.2 million in the second quarter of 2013. The U.S. operations performed 3 revenue days in the second quarter of 2014 with average daily revenue of 126,000 compared to 16 revenue days in the second quarter of 2013 with average daily revenue of 514,000.

One major customer contributed 92.5% of revenue in the second quarter 2013. The same customer did not contribute any revenue in second quarter 2014 but is expected to be active in third quarter 2014. The major customer was recapitalized in the transaction that was completed in mid-June 2014. During the quarter, the Company continued to negotiate the renewal of our contract with our major U.S. customer. The decrease in average daily revenue is attributed to the Company executing smaller fracturing treatments.

During the quarter, the Company’s operating expenses decreased 56% to 10.5 million from 23.7 million or 77% of revenue. In the second quarter of 2013 this is primarily due to the decrease in the company’s activity. As a percentage of revenue cost of sales decrease to 45% of revenue 3.3 million from 50% or 15.4 million of revenue in the second quarter of 2013, the decrease in cost of sales as a percentage of revenue was largely attributable to customers supplying their own frac fluid and GASFRAC charging a pumping charge. This has the effect of lowering both the revenue and the cost of sales. This was partially offset by GASFRAC lowering the price of its services in order to attract new customers.

As a percentage of revenue, variable operating expenses increased to 30% of revenue or $2.2 million from 10.4% of revenue to $3.2 million in the second quarter of 2013. The percentage increase in variable operating expenses is due to cost such as maintenance and repairs having both a variable and fixed component. Fixed operating cost decreased 3.8% to $5 million in the second quarter of 2014 as compared to $5.2 million in the second quarter of 2013. Fixed operating costs include operational salaries, facility leases and maintenance, and safety programs.

SG&A expenses for the second quarter of 2014 decreased 22% to 4 million from 5.1 million in the second quarter of 2013. The decrease is primarily due to bad debt expense incurred in the second quarter of 2013 of 0.5 million as well as decreased salaries and benefits and consultants dollars. During the quarter an impairment loss of 16.6 million was recorded. The loss is composed of a 6.8 million write-down of inventory to net realizable value, a 5.4 million write-down of a long-term deposit and 4.4 million on specific assets classified as field equipment.

During the quarter, 6.8 million in ceramic proppants inventory was written down from its carrying amount to its net realizable value. The write down was a result of an industry decrease in price for specific types of ceramic proppant and excess supply of the ceramic proppant. Following the write down of ceramic proppant the decision was made to terminate one of two proppant contracts which resulted in the write-off of a long-term deposit of 5.4 million. The write-off of 5.4 million was the company’s estimate of cost associated with terminating the contract. The write down of specific fixed assets resulted from the company reviewing the carrying value of specific field equipment. The assets were valued at estimated proceeds. For the second quarter of 2014, adjusted EBITDA decrease to a loss of 7.2 million from 1.7 million in the second quarter of 2013, the decrease in Adjusted EBITDA was primarily the result of a 76% decrease in revenue as well as an increase in the cost of sales.

I will now turn the call back over to Mark.

Mark Williamson

Thank you very much Lori. Operator, please open the line for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) The first question is from the Robert Miller from Boulevard Trust. Please go ahead. Your line is open.

Robert Miller - Boulevard Trust

Thank you, gentlemen, we’ve been investing in GASFRAC for probably well over four years and we originally attracted by the work done with Zeke and BlackBrush, what initiatives have you tried in Colorado or in California to get citizens friendly to waterless frac situation which is causing problems in dry areas in another parts of the states?

Mark Williamson

Robert it is Mark Williamson. Thank you very much for that question. I can a talk a little bit about that I’ll probably refer that to Jason as well to add to what he’d like to say. Obviously there is lots of public information with regards to using I guess our drinking water for industrial fracturing purposes. So which we think is obviously I think it is an excellent market for GASFRAC to capitalize on that issue. We do have some clients that are expressing interest because they have had a reduction on the use of local water and I think one that comes to mind is California and I’ll let Jason talk about that because he is involved with a certain client there, Jason?

Jason Munro

We’ve been in discussions for some time with respect to Monroe which is just other locations east of Bakersfield. We expect to have real color on that by the end of September. The customer that we’re talking about is winning on government feedback on a go-forward path for fracing with one of our fluids. So we should have more color here in a month or so for you.

Robert Miller - Boulevard Trust

Okay. What have you been doing for the last two years? Because Pennsylvania has a same problem and Magnum Hunter barging frac water down to Mississippi to the Gulf of Mexico and it is like 400 trailer loads per well, it looks like we have a real advantage there, but we don’t seem to be getting that out to the public?

Jason Munro

It is interesting how this business works. When you look at water fracturing, what we’re starting to see in Canada is there’s a cost per cubicle on a $100. And that’s just really a recent realization by I think operators. So it’s really starting to gain momentum in terms of the real cost of water and the fact that our clients have to start looking elsewhere for new alternatives. So we are really starting to gain momentum on that water front and the restrictions are coming. And I can’t comment on the last two years other than the fact that we’re seeing momentum in that space.

Robert Miller - Boulevard Trust

Okay. And just a real quick any initiatives with Saudi Arabia, since they have absolutely no water, where there oil and gas is?

Jason Munro

We are at their issue and we’ve had some calls from them but we’re just in discussions at this phase.

Operator

Thank you. The next question is from Larry Chlebina from Chlebina Capital. Please go ahead.

Larry Chlebina - Chlebina Capital

Hey, Mark. I may have missed this but what’s the status of the HRVP system?

Mark Williamson

Larry thanks for the call Larry. And I am going to let, I’ll let Jason talk about that. He’s involved in that on a, certainly on a daily basis. So Jason, thank you.

Jason Munro

So, on the last conference call we talked about this. And we actually did a test well for EUG in the states and the hood operated as it should and the first well that we will be doing for BlackBrush commencing in the next week will be utilizing them in as well. So we’re going to go at the 2.5 PSI and get a real significant second test, so we’re really encouraged by what we saw.

Larry Chlebina - Chlebina Capital

Can you just kind of layout the benefits of that in terms of what that gets you in terms both on cost and maybe even the environmental benefits being that everything pulls loop. And then more importantly how -- what you’re seeing in terms of potential on the marketing side assuming that it works as we all hope?

Jason Munro

Well, I am overstating this, but I think it’s huge relative to using the clients own oil and not having to dilute it to get to a frac oil, it’s a huge cost benefit for our clients. So when you pull oil out of the ground with the high reid vapor pressure, you have to dilute it down to frac oil and what we’re doing is mitigating that expense. We’re mitigating the expense of bringing in non-HRVP oil to mix in with the oil coming from the low head. So literally we can take higher VP oil from the well reuse it to frac with and if you think about the value proposition of that, it is big.

Larry Chlebina - Chlebina Capital

Are you getting, are you waiting to see that you have the system to fully develop before you marketed or are you going to, I’m just kind of curious how you are going to handle the roll out of it, assuming it’s going to work, what kind of thoughts you have on that?

Jason Munro

It’s rolled out and it’s working. What we’re going to do are several press releases to talk about the results and we’ve got a bunch of other things to talk about with our new fluid system. So I see some color on that in about a month or so Larry and so looking at DOB we’re going to talk to the Nicholas J-Pt they are doing an interview next week and that I’ll certainly be there.

Larry Chlebina - Chlebina Capital

Any update on the status of the sales team, I know you’re part of it, the upgrade there [indiscernible] and Canada?

Jason Munro

Yes. We were able to hire two senior technical sales reps they both have 20 years experience and that’s in Canada and of course we have got our two reps in the U.S. The plan is to augment the team in Canada with similar type technical people. And we’re looking at perhaps one other rep in the U.S. The people that we did bring on in Canada are paying immediate dividends and if you look at the clients base that is coming through the door with their reputations it’s been paying dividends Larry.

Larry Chlebina - Chlebina Capital

And finally, has there been any, I guess at least looking into the recompletion potential of this process, it seems to me that anomaly could be your future, we kind of talked about calling it the teeter-totter recompletion process but would you -- do you have anything to add to that at this point?

Jason Munro

Yes. You bet especially with the gas prices going up, we’re seeing a lot of vertical applications that we can go in and re-frac with the networks, while at their 32 ton vantage blend and we’re seeing some of those opportunities coming to door earlier. So we’re focused on that specifically with recompletes.

Operator

Thank you. The next question is from Jeff Ironsi, Private Investor, please go ahead.

Unidentified Analyst

Yes, I just had a look at the fixed operating expenses as the company has stayed basically the same at 1.6 million for the second quarter and the first quarter and that includes the operational salaries and et cetera but it doesn’t include bonuses. I’d just like to maybe have your opinion regarding bonuses I hope that wouldn’t be for the cost management and can you maybe discuss that?

Mark Williamson

Thanks Jeff, I’ll let Lori, she can address that for you.

Lori McLeod-Hill

So, first of all in terms of what I refer to the performance management type bonuses with management no there haven’t been those. What you’re the reference to bonuses our guys in the field get what we call a job bonus and so when they actually wrote and filled completing a frac then they get a daily bonus for that and that cost goes into our cost to sales line.

Unidentified Analyst

Okay, fine Lori, thank you. Okay, so that’s basically the work who which is why, thank you.

Mark Williamson

Thanks Jeff.

Operator

Thank you. The next question is from John Rosenberg from Loughlin Water Partners, please go ahead.

Mark Williamson

Good morning John.

John Rosenberg - Loughlin Water Partners

Good morning, thanks for taking my questions. First of all I’d like to actually thank Jim for his service to the company, I have been involved with you guys for a while and I know that Jim spent several quarters putting out a lot of fires and for that I’m very appreciative. I have a couple of questions one real housekeeping question quickly, I noticed particularly in Canada, well in both Canada and U.S. your revenue per day went down if you explain that but in the first quarter I take it of this year do you guys were still selling, you’re still booking LPG though on the top line or I’m just trying to get an idea of what the variance is quarter-to-quarter not year-over-year.

Mark Williamson

I will let Lori address that.

Lori McLeod-Hill

Okay, so you’re correct, during first quarter the customers that we serviced we did provide the propane so that cost is in the reference through that service is in the revenue add in the expense line and there is approximately the same because what we do is do a mark component. In the second quarter we did not supply the propane and so basically for the jobs that we did approximately 140,000 revenue per day would have not been in the top line and it would not have been in the cost to sales line.

John Rosenberg - Loughlin Water Partners

Thank you, I was just a bit confused I mean you guys have been talking about that for a while I just looking certain of the transition to one that would occur and it looks like it’s sort of occurred and have a just looking at the top line alone that have kind of a cliff like effect but that’s good to know. Couple of things, prior firstly on the call mentioned California and Colorado which I quite agree with, lot of shareholders, we’ve been talking about this on your calls now for a quite a while, is that and I’m just sort of have a question hypothetically I don’t know how to market people in this space but you guys have to make sales. So, what about going to some of the governments in California or Colorado or water stressed areas and trying to get some pull through from the E&P people by getting the governments to be more amenable to your technology, I understand that in the E&P world these people, they are just programmed to cut cost at all cost, they don’t, they’re not thinking about return on capital and they want to do things the way they’ve been doing things. It’s just part of their purchasing decision but why not try to get at them from another angle that’s my best question.

Mark Williamson

Thank you, John it is Mark Williamson. I’ll address some of that and that is an excellent question. Myself I have been a previous shareholder GASFRAC and really see the potential in this technology. The sales function of GASFRAC I mean as a great product discovery, great technology and that’s certainly is a strategic mandate is to really get the company in a very strong sales oriented environment and included in that sales world that we have to be thinking about is the publications, the education, the information of this technology to both the client but also to certain government bodies the EPA and specific local regions, state and province and I think that’s a huge initiative for us and it’s been done on a limited basis before obviously time constraints in and the quality of the individuals talking but I recognized that is definitely a process of -- we’re taking that initiative on.

John Rosenberg - Loughlin Water Partners

Okay. I just not to express any undo frustration but I mean this is something your shareholders have been talking about for several quarters. And why not breakout of this tradition service mold because you guys obviously are having the hard time in differentiating yourselves or competing at the company level. So why not try to go around them a little bit. Again I’m not a marketing professional but it just seems, it seem so obvious to try to hold the demand from the government level when lot of municipalities are banning the use of water there is lot of concern about both water and pollution from fracing I don’t understand why talking to a couple of obvious in Sacramento or Denver doesn’t seem all that expensive.

Mark Williamson

I understand your frustration, your concern there. Obviously dealing with the politics of certain bodies, it has to be handled very careful and we have to intention to be many sort of political inspection

John Rosenberg - Loughlin Water Partners

I understand, I do understand I acknowledge that, you don’t want to do this too aggressively it could alienate a lot of your clients. I understand that it has to be handled properly and I’m certainly not the person to talk about that but I think having us an idea and at this point you got to try some ideas just regarding the sales.

Mark Williamson

I agree with your idea and it is an initiative to educate and to lot of this education process and process to make the industry and make the public aware. There is an option of not using drinking water for industrial purposes and GASFRAC has got a tremendous opportunity.

John Rosenberg - Loughlin Water Partners

Okay, thank you. Lastly I’ll take only one more take your time for only one more question. Jason mentioned test with EOG in his commentary and answer to another question, could we then assume that they’re potentially in the mix as customer or as a potential or target right now?

Mark Williamson

Yes, that’s correct John.

John Rosenberg - Loughlin Water Partners

Okay, alright. Okay, good luck. Thank you very much I wish you all the best.

Mark Williamson

Thank you, John.

Operator

Thank you. The next question is from Aaron Sherlock from TD Securities. Please go ahead.

Aaron Sherlock - TD Securities

Good morning guys. I just have a couple of quick questions here. With regards to Canada and Husky slowing down its operations and redirecting its capital towards the East and BlackBrush picking up activity here coming into the second half of the year. I know you maybe haven’t the time giving any sort of guidance but do you think you guys maybe into approach breakeven EBITDA figures for the second half of the year beating Q3 or Q4?

Lori McLeod-Hill

You’re right we typically do not give our guidance. We are expecting Q3 and Q4 to be improved certainly from the margin perspective over our Q1 and Q2.

Aaron Sherlock - TD Securities

Okay. I guess a follow-on question which may help flush out the details next would be obviously activities picked up substantially in Canada over the past quarter here. With the increase in water based fracs are you seeing that equipment being soaked up from your competitors driving potentially more inroads for LPG treatments or do you see more incremental activity in water base fractures?

Mark Williamson

You hit the nail on the head so as horsepower gets sucked in to Montney and Duverney we’re going to start seeing some gaps in other resources plays. We’re already getting phone calls for availability on conventional frac I call conventional water, that will create some gaps certainly for managements propane and hydrocarbon in the water.

Aaron Sherlock - TD Securities

So would you say that there is individual who having used before which are now becoming interested and potentially new clients that a technology.

Jason Munro

They’re more open to given the equipment constraints that we’re facing after

Aaron Sherlock - TD Securities

Okay. And how much spare horsepower I guess what you have to pick up that incremental work.

Jason Munro

Well, we’re going to roughly over 122,000 horsepower and really it’s a function of being able to staff the actual horsepower that we have so we will just have to monitor that on an ongoing basis it’s going to be tricky because we think lot of worse coming out as just going to be able to capture the revenue this time.

Aaron Sherlock - TD Securities

The same bottleneck is trained employees.

Jason Munro

Absolutely, everyone is facing the same issue.

Mark Williamson

Aaron it is Mark here. We actually have hired a processer in the last month or so new employees and going through some training and we’re going to work through that process, there is obviously an initiative for us to make sure we get qualified individuals and understand the man power that we need.

Aaron Sherlock - TD Securities

Alright, excellent, that answers all the questions I have. Thank you very much and good luck guys.

Mark Williamson

Thank you, Aaron.

Jason Munro

Thank you. The next question is from Jon Hilley from Berylian Capital. Please go ahead.

Jon Hilley - Berylian Capital

First one is on the cuts to equipment asset value, if I recall it was 4.4 million decrease, is that right?

Lori McLeod-Hill

Yes, that is correct.

Jon Hilley - Berylian Capital

Okay why is there a cut when every single piece of equipment that has been sold including away in March was about book value?

Lori McLeod-Hill

Okay so there were assets that are revenue generating currently. The asset that were built very early in GASFRAC’s history and some of them are just not utilized since the process that we’re doing now so they are very minor in terms of our overall fleets and our overall revenue generating equipment.

Jon Hilley - Berylian Capital

Got it, so you had $0.08 to $0.085 today depending on the configuration, is that correct?

Mark Williamson

Yes, we’ve got three active sets that, that are staffed appropriate now.

Jon Hilley - Berylian Capital

And five idle?

Mark Williamson

Pardon me.

Jon Hilley - Berylian Capital

And five that are idle.

Mark Williamson

Yes, correct.

Jon Hilley - Berylian Capital

Got it, okay, and what’s the asset value that you guys described in total to the equipment sets?

Lori McLeod-Hill

About 170 million I would say.

Jon Hilley - Berylian Capital

170 million, okay, and the second line of questioning has to do with the big grill in the room which is -- this was like a sale like of here in the last quarter you’ve said mid stage to -- we were in mid stage discussions with the dozen companies in the U.S. and that quote you guys were seeing momentum, actually the word momentum mentioned on this call and many previous calls I don’t see it so can you tell me where you are at in the sale cycle with the dozen companies from last quarter? And just talk a little bit more generally about what your conversion rate sales right now and what’s going on there?

Mark Williamson

It’s a great question and I understand your frustration. Well, sales cycles typically takes 6 to 12 months then particularly when you’re talking about Vantage and Propane on large capital projects, so that’s horizontals with capital big capital input. These clients tend to take their time and really evaluate the technology, so it’s typically quite longer than you’d see in conventional slip water that’s the value we have created in being able to pump slip water certainly in Canada is that it can be typically a phone call and you are on the job in two or three days. So that’s the dichotomy between conventional fracing which we’re now involved with and or a hybrid or Vantage based propane fracing. So I hope I provided you some color there.

Jon Hilley - Berylian Capital

Not really, I mean, what’s the mid stage discussion mean that would imply sort of in the middle of the 6 to 12 months sales process?

Mark Williamson

Well that part means that we’re educating the customer about our technology, so we’re in meetings. We will have first an introductory meeting on our technology and then we’ll follow up with secondary technical meeting where there is a state program and then we’ll our program to have a treatment for that well and then there is pricing discussions that happen and then there is a well that’s given for treatment. So that can take anywhere from 6 to 8 months or from a week to two, it just depends what we’re doing.

Jon Hilley - Berylian Capital

Got it, so the customers that have fraced for in trial runs?

Mark Williamson

Yes.

Jon Hilley - Berylian Capital

How many of those are still evaluating results last going through the final part of the sale process?

Mark Williamson

When we reach out and focus specifically on the state a lot of them still go, yes, we are flowing the well back or evaluating this and we get back to you with supplemental programs, so I would say six come to mind that I can I think of that we frac for in the two years where they said okay, we’ve got some wells coming for again and we like what we saw and we inch in the technology. And that’s the combination of that that we’re just propane and we’re getting a lot of interest on the hydride side which is hydrocarbon and propane. And when I say interest is like okay, get in here, we want a meeting right now and we got wells allocated.

Jon Hilley - Berylian Capital

Okay, six trials done last quarter all in Canada, did you mention how many were done this quarter?

Mark Williamson

In Q2?

Jon Hilley - Berylian Capital

Yes.

Mark Williamson

No, I don’t think we did mention that. We basically work possibly in the quarter.

Jon Hilley - Berylian Capital

Okay so there was zero trial in Q2?

Mark Williamson

Yes, that’s correct.

Jon Hilley - Berylian Capital

Okay so of the six that were done last quarter have any of them dropout this client or its potential client?

Mark Williamson

Dropped out.

Jon Hilley - Berylian Capital

I mean just say I was asking?

Mark Williamson

Well, certainly, can you repeat the question I just want to frame it differently?

Jon Hilley - Berylian Capital

Sure, the six trials that were done in the first quarter of the year, how many of those prospects have said no thanks?

Mark Williamson

One comes to mind and they didn’t say no thanks we did a bit into the hybrid job in Q1 and that’s the only one I can think of that, that we’d say no thanks but they basically set your second call and they thought the results were fantastic but they had another service provide and they want to try different system so I would say one sort of on the fence and they’ve been crazy about the results with some place there it’s good.

Jon Hilley - Berylian Capital

So that would imply five or still prospects evaluating picture?

Mark Williamson

Yes, absolutely. And what’s happening when people go back will typically okay, it’s a vantage frac so they want to monetize it by doing a conventional frac with slip water and then they go with the expense desirable propane. When they look at the full cycle cost like a month or two later then they go okay we will capture propane we’ve realized the value in that hydrocarbon by the way our water is costing us more than we think. So, there is time to evaluate that and it often takes a couple of months to get their heads around it so working through that process.

Jon Hilley - Berylian Capital

So, by the end this current quarter, by the end of 3Q certainly by the end of the year we should have a very clear idea of these prospects have converted or not. Is that accurate?

Mark Williamson

Yes, absolutely.

Jon Hilley - Berylian Capital

Okay, can you give me some confidence level that half of them could convert?

Mark Williamson

I’m more encouraged by the new customers we’re going to see in Q3. Certainly we’re going to help people from Q1 that we worked for but I’ve been looking for the additions that we’re going to make in our client base.

Jon Hilley - Berylian Capital

Understood. Thank you very much.

Mark Williamson

Thank you, John.

Operator

Thank you, the next question is from Jeremy Hellman from Avenue T Fund, please go ahead.

Jeremy Hellman - Avenue T Fund

Hi, good morning everybody.

Mark Williamson

Good morning.

Jeremy Hellman - Avenue T Fund

Just around the prior calls questions which I thought were great, are any of those perspective customers in a position where you would expect that you would be embargoed from announcing sign contract?

Mark Williamson

Absolutely.

Jeremy Hellman - Avenue T Fund

So, you could hypothetically close off five but wouldn’t be able to announce any of them?

Mark Williamson

A lot will typically happens when we do well, they don’t want to announce results and they won’t necessarily share that information with us. So, it’s dynamic in that respect, which is pretty well industry standard of all the service providers signal to that scenario.

Jeremy Hellman - Avenue T Fund

Right, yes they’re always looking at from a shareholders perspective you may well have closed and business found success with these trials but we won’t hear about it until the next quarter’s earnings call effectively, if I am understanding you right?

Mark Williamson

Yes, it’s an ongoing program for sure you’ll hear the one offs you tend not really find color on but the ongoing trials we can certainly provide color as it comes.

Jeremy Hellman - Avenue T Fund

Okay, fair enough. Shifting gears a little bit and I understand we’re positioning in terms of guidance but I want to think more qualitatively in terms of timeline considering the other management overhaul that we went through here picking more around, when do you expect to have your strategic review completed, what other markers can we look for maybe 90 days, 180 days, 260 days to see that you’re meeting with some success.

Mark Williamson

Jeremy, it is Mark here. Yes, we want to proceed with this and in fact we’ve started obviously this is a priority for us it’s go through and just understand some of the potential issues, potential areas that maybe need addressing, I feel that obviously in the next 30 to 60 days I think we’ve got a very good opportunity to get a good handle on it, just to know of what I seen and with the new board that we’ve seen I mean there is a tremendous skill set within GASFRAC where they’re replicates to ground the functionality of the equipment, the execution of job the safety program is impeccable it got a tremendous asset that I’m very excited about, I still at the back of the mind and the board of active mind we still want to look at specifics to go through and understand is there any areas that maybe get more attention, area that we’re very pleased with adjacent with new sales personalities, new sales peoples coming into the company is really produced environment that I see is very positive.

Jeremy Hellman - Avenue T Fund

Okay, thanks for that Mark, and kind of along that thread, your point to sale as a point of positivity and I appreciate that you are still in this strategic review process, can you point out any other specific areas that and I’m not trying to go point a finger that prior management unduly but can you point to any specific areas that you really thought needed that you identified already that needed aggressive remedy and what would those be and how do you expect to remedy those efficiencies going forward?

Mark Williamson

I think until I actually, get involved in and do that go through that on a day-by-day basis it’s pretty hard to comment right now on anything I do not see any specifics on my radar so I mean I think that’s a very positive in terms of what I see but I just want to spend a little time to understand little more of the detail but I don’t have nothing at this point.

Jeremy Hellman - Avenue T Fund

Okay. So maybe you’re looking ahead to this call three months end, do you think that will be in a position to get some maybe detailed ball pointed feedback from -- strategic review has indentified these three priorities and then what the game plan is to tackle those and that sort of things.

Mark Williamson

Yes, that is correct, yes.

Jeremy Hellman - Avenue T Fund

Okay. And then one last one from me just more of a generalized question here, prior caller you referenced you have five idle sets right now what just out of curiosity and someone previously had mentioned Saudi Arabia for example what would be the cost to get a rig over there and what demo for them just a dollar?

Mark Williamson

I can go through that Jeremy because my background has been involved in the international world extensively so I do have knowledge on moving equipment overseas is going to a process and it is a process that doesn’t happen overnight, it takes time but just the cost alone of moving equipment and it’s substantial the range of could be a $50,000 per piece of equipment but a lot of that is the minor cost associated with moving equipment overseas you got to work obviously on specific government rules and you get your equipment back again you got to look at facts you got to look at how support that equipments from the lots of things to need to consider. Keep in mind that overseas business is certainly very attractive for the technology of GASFRAC and GASFRAC has tremendous opportunities to work on overseas projects where we’re careful to make sure that the timing is right for the company to enter into any overseas attraction arrangements but we certainly are intrigued by what’s going on overseas.

Jeremy Hellman - Avenue T Fund

Yes, I’d imagine your prime consideration is although site might be idle right now you have to consider the time involve and if you feel like it would be of the field in extra amount of time in North America versus wide amount of time overseas moving all across the water that’s the decision we have to make as management of course.

Mark Williamson

That’s correct.

Jeremy Hellman - Avenue T Fund

Okay. Thanks a lot guys I appreciate that.

Mark Williamson

Thank you.

Operator

The next question is from Robert Miller from Boulevard Trust. Please go ahead.

Robert Miller - Boulevard Trust

This is -- We haven’t had any announcement from GASFRAC as I can remember I check it every day since May 10th that’s two month almost three months now you’ve got to get some general news out to the investing public, even if you say we caught another client, a new client either this week you have to say something because the general investing public knows nothing about GASFRAC but the company is violent, we don’t hear anything. So we think that people are just playing [indiscernible] in the office I hope that’s not the case but is that getting some news out just to let everybody know that you’re still lot of in cooking, okay. That’s my suggesting I’m watching everyday four years were not and I was very excited about the process. I’m shocked that we have made more progress than we have and I’m quite disappointed as my investors because I keep talking with them both in Latin America and then Middle East and then Russia. But give me some more ammunition to keep everybody interested. Okay, that’s my comment. Good luck to you and all of you.

Mark Williamson

Thanks Robert. We fully understand your concern and that is our initiative. But we appreciate your feedback.

Robert Miller - Boulevard Trust

Okay. Good conference call.

Mark Williamson

Thank you.

Operator

(Operator Instructions) The next question is Jon Hilley from Berylian Capital. Please go ahead.

Jon Hilley - Berylian Capital

Lori hi again this is Jon, one quick follow up, you said asset value equipment was 170 million, is it correct?

Lori McLeod-Hill

Yes, that’s the booked value of the equipment.

Jon Hilley - Berylian Capital

Okay. There was an appraisal done by independent third-party in May and the fair market value that appraisal was $206 million and the net quarterly liquidation value was $162 million, can you explain the difference this year?

Mark Williamson

John it’s Mark Williamson and I’ll start up, obviously talking about that I’ve got a pretty good handle on the equipment as the previous, we’ve actually, we’ve manufactured a majority of the equipment and certainly we back to Lori here to help me on if there is any specifics on there but just to understand the quality, the replacement value the technology of the equipment, it is superior equipment and what’s the market in the state of it is where its’ getting busier, the equipment I feel and we feel is very undervalued and it’s much more than where it got the states on there. So I think we have to certainly appreciate that, Lori you want comment on that?

Lori McLeod-Hill

Yes. So essentially and you know this the equipment season about to see the book value unless you have to do a write-down which gave the value you turned not this to high. In our case we definitely had appraisal than we had an appraisal at year end, where is appraisal done in May and in both situation and you right they give different value which is the fair market value OLB et cetera. Certainly the reports that we got back absolutely support the value of the equipments in book and more than that.

Jon Hilley - Berylian Capital

Okay. So let’s review in numbers. Fair market value is going to be a little over $200 million

Lori McLeod-Hill

Yes, that’s right.

Jon Hilley - Berylian Capital

Booked value $170 million.

Lori McLeod-Hill

Okay, yes.

Jon Hilley - Berylian Capital

And orderly liquidation value is going to be what? 150 so that’s all in conservative?

Lori McLeod-Hill

I think what we have to understand the appraisals I mean their range is right and they in estimate.

Jon Hilley - Berylian Capital

What’s the range?

Lori McLeod-Hill

I think you’ve stated the range.

Jon Hilley - Berylian Capital

Okay. So in any we have to range from $160 million to $200 million so midpoint of $180 million.

Lori McLeod-Hill

Okay, yes.

Jon Hilley - Berylian Capital

I haven’t got chance to look at the balance sheet, but what’s the net debt?

Lori McLeod-Hill

The net debt would be including the convertible debentures it would be little over probably around 60 million.

Jon Hilley - Berylian Capital

60?

Lori McLeod-Hill

Yes.

Jon Hilley - Berylian Capital

Got it, okay. So equity value and asset value with no valuation of -- property should be a $120 million.

Lori McLeod-Hill

No, I think you’re going to your process and you’re calculating your numbers, but I’m not going to really comment on how the valuation, you’re talking about the valuation and I’m not going to go into that.

Jon Hilley - Berylian Capital

Well, all I’m doing is suggesting the value of your assets minus your net debt with that reflect -- holders, right?

Lori McLeod-Hill

Yes.

Jon Hilley - Berylian Capital

You don’t need to confirm it, I mean that’s just math.

Lori McLeod-Hill

No, I mean conceptually those are the numbers, that’s right.

Jon Hilley - Berylian Capital

Got it, okay. And so the math the shareholders have to do is, how much value is going to be added or destroyed to the $120 million equity value that should be less today?

Lori McLeod-Hill

I think we’re adding value to the business through the use in utilization and building the business.

Jon Hilley - Berylian Capital

So then the minimum appreciation for this company is 50% from where it staying toay.

Lori McLeod-Hill

I would say yes.

Jon Hilley - Berylian Capital

Okay. All right, thank you very much. I appreciate it.

Lori McLeod-Hill

Thank you.

Operator

There are no further questions registered at this time. I’d like to turn it back to Mr. Williamson.

Mark Williamson

Thank you very much. At this time we will conclude the conference call. Thank you again for your support and help. Thanks.

Operator

Thank you. The conference is now ended. Please disconnect your lines at this time. And we thank you for your participation.

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Source: GASFRAC Energy Services (GSFVF) Q2 2014 Results - Earnings Call Transcript
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