UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A10-K
(Mark One)
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20122014
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-30746
FRONTIER OILFIELD SERVICES INC.
(Formerly TBX Resources, Inc.)
(Exact name of registrant as specified in its charter)
Texas | 75-2592165 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 76431 | |
| ||
(Address of Principal Executive Offices) | Zip Code |
Registrant’s telephone number, including Area Code: (972) 243-2610
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Each Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨☐
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x☒ Yes ¨☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website , if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the presiding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨☐ Yes ¨☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ||||
☐ | ||||||
Non-accelerated filer | ☐ | Smaller reporting company |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): ¨ ☐ Yes x☒ No
The Issuer’s revenues for the most recent fiscal year were $21,706,435.
On March 27, 2013,June 30, 2014, the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was $26,352,722.approximately $1,408,118. This amount was calculated by reducing the total number of shares of the registrant’s common stock outstanding by the total number of shares of common stock held by officers and directors, and stockholders owning in excess of 5% of the registrant’s common stock, and multiplying the remainder by the average of the bid and asked price for the registrant’s common stock on March 27, 2013June 30, 2014 as reported on the Over-The-Counter Pink Sheet Market. As of March 27, 2013,23, 2015, the Company had 20,169,3835,457,486 issued and outstanding shares of common stock.
Documents Incorporated by Reference:
None
Explanatory Note
The purpose of this Amendment No. 1 to the Frontier Oilfield Services, Inc. Annual Report on 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 1, 2013 is soley to correct a typographical error on page F-1 and to add an addition Statement of Cash Flows as page F-6 that was inadvertently left out in our original filing. Except as described above, this Amendment does not amend or update any other information contained in the original filing and we have not updated any other disclosures contained therein to reflect any events which occurred at any date subsequent to the original filing.
FRONTIER OILFIELD SERVICES, INC.
INDEX
Forward Looking Statements
This annual report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which can be identified by the use of forward-looking terminology such as “may,” “can,” “believe,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “estimate,” “will,” or “continue” or the negative thereof or other variations thereon or comparable terminology. All statements other than statements of historical fact included in this annual report on Form 10-K, including without limitation, the statements under “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding the financial position and liquidity of the Company (defined below) are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from the Company’s expectations (“Cautionary Statements”), are disclosed in this annual report on Form 10-K, including, without limitation, in conjunction with the forward-looking statements and under the caption “Risk Factors.” In addition, important factors that could cause actual results to differ materially from those in the forward-looking statements included herein include, but are not limited to, limited working capital, limited access to capital, changes from anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with customers, access to capital, difficulties in developing and marketing new products, marketing existing products, customer acceptance of existing and new products, validity of patents, technological change, dependence on key personnel, availability of key component parts, dependence on third party manufacturers, vendors, contractors, product liability, casualty to or other disruption of the production facilities, delays and disruptions in the shipment of the Company’s products, and the ability of the Company to meet its stated business goals. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. We do not undertake to update any forward-looking statements.
We do not have an operative web site upon which our periodic reports, proxy statements and Reports on 8KForm 8-K appear. Our reports are available on the SEC’s EDGAR system and may be viewed at http://www.sec.gov.
As used herein, references to the “Company” are to Frontier Oilfield Services, Inc. a Texas corporation and its subsidiaries (“Frontier”).
The Company and Its
Our Business
Frontier Oilfield Services, Inc. (formerly TBX Resources, Inc.) a Texas corporation (and collectively with its subsidiaries, “we”, “our”, “Frontier”, “FOSI”, or the “Company”), was organized on March 24, 1995. The accompanying consolidated financial statements include the accounts of the Company and as well as:
Frontier acquired 51% of FIG in a step acquisition and effective September 30, 2012 Frontier acquired the remaining 49% of FIG).
The Company’s current business, through its operating subsidiaries, isoperates in the oil field servicesoilfield service industry and is primarily involved in the transportation and disposal of saltwater and other oilfield fluids in Texas. Frontier owns and operates eleven disposal wells in Texas. Six of these disposal wells are located in the Barnett Shale region in north central Texas and five of these wells are located in east Texas near the Louisiana border.
The Barnett Shale region is a highly productive shale formation with a concentration of successful oil and gas wells. These wells have been completed using hydraulic fracturing and directional drilling techniques. In east Texas, the producing oil and gas wells have typically been in place for many decades. Production stimulation techniques such as salt water flood projects are used whereby salt water is injected into a producing formation to accelerate the migration of hydrocarbons to the well bore. The oil and gas wells in the Barnett Shale and in east Texas produce commercially viable volumes of hydrocarbons in the form of crude oil and natural gas. In addition these wells produce significant volumes of salt water and other oil field fluids as a by-product of the production of hydrocarbons. The salt water and fluids must be routinely removed from the well site on a daily, semiweekly or weekly basis depending on the flow rate of the wells.
Frontier owns, operates and maintains a fleet of trucks and vacuum trailers in Texas and Oklahoma. The Company currentlyits CTT subsidiary. Frontier also owns and operates thirteen (13) permittedover thirty trucks, 50 trailers with capacities ranging from 130 barrel (“Bbl.”) up to 150 Bbl., and six 120 Bbl. capacity tank trucks. Frontier employs approximately sixty full time drivers for these transport assets and typically operates the fleet 24 hours a day up to 7 days a week depending on the volume of work available. These transport assets are used to transport and dispose salt water and other oilfield fluids in Frontier’s disposal wells and in other third-party disposal wells in Texas. the Company’s operating regions.
The Company’ssignificant quantity of wells in the Barnett Shale and east Texas regions combined with the presence of salt water and other fluids in the production process creates significant demand for transport and disposal services such as those services provided by Frontier.
Our disposal wells represent a significant competitive advantage over our competitors that do not own their disposal wells. Our customer base includes national, integrated, and independent oil and gas exploration companies operating in the Barnett Shale region and in east Texas.
We have one customer that represents approximately 53% and 52% of our revenue for the years ended December 31, 2014 and December 31, 2013, respectively. We have a Master Services Agreement (“MSA”) with nothis customer accountingthat expires on March 31, 2015. The customer has recently conducted a competitive bidding process to qualify all current vendors providing saltwater transport and disposal services for more than ten percent (10%)the customer. On March 25, 2014 we were notified by the customer that we were unsuccessful in retaining our business with the customer. Our MSA with the customer will not be renewed and will expire on March 31, 2015. Management is in the process of preparing for the implications of the Company’s gross revenues. In addition,loss of this business volume, which will be significantly lower revenues and cash flows beginning in April of 2015.
Recent Developments
On April 11, 2014, our line of credit and term loan held by Capital One Bank, N.A was purchased by an accredited investor, who is also a stockholder of the Company has a minor overriding interest in two (2) producing gas wells in Wise County, Texas and seven (7) producing gas wells in Denton County, Texas. Prior to engagingCompany. The terms of the loan now held by the stockholder are the same as outlined in the oilfield services industry Frontier was incredit agreement with Capital One Bank, N.A.
On June 10, 2014, an accredited investor who is also a stockholder purchased our note payable to Asher Enterprises, Inc. (the “Asher Note”). The accredited investor assumed the business of acquiringterms and developing oil and gas properties, providing contract services to an affiliate and sponsoring and managing joint venture oil and gas development partnerships.
Recent Developments
As of December 31, 2012, the Company was in technical default of its term loans with two financial institutions resulting from its inability to maintain two required financial ratiosconditions of the respective loanAsher Note agreement debt covenants and accordingly classified the year end note balances as a current liability. The Company is working to cure the financial ratio deficiencies and expects to be compliant by the end of the second quarter of 2013.without alteration.
On September 2, 2011 Frontier, under its former name, TBX Resources, Inc. entered into30, 2014, Jimmy D. Coffman resigned from his position as an Investment Agreement with LoneStar Incomeexecutive of CTT and Growth, LLC, a Texas limited liability company, an unrelated third party. The Investment Agreement provided that LoneStar would acquire up to 2,750,000surrendered 437,500 shares of Frontier’s 2011our common stock. The surrendered shares of common stock were cancelled on October 30, 2014.
On December 27, 2014, an affiliate of an accredited investor who is also a stockholder purchased the note payable to ICON Investments (the “ICON Note”). The accredited investor assumed the terms and conditions of the ICON Note agreement without alteration.
On December 29, 2014, our Board of Directors unanimously approved the issuance of 1,125,000 shares of 2014 Series A 8%7% Convertible Preferred Stock (the “Stock”) for the sum of $5,500,000 contingent upon the Company using the proceeds of the Stock to acquire a majority 51% membership interest in FIG which through its wholly owned subsidiaries; Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC transports and disposes salt water and other oilfield fluids. The attributes of the Stock allowed the holder to convert the preferred share into two shares of Frontier’s common stock and a warrant for an additional share at an exercise price of $3.50 per share. LoneStar completed the purchase of $5,500,000 of the Stock and Frontier completed the acquisition of 51% of FIG in June 2012 (see below). Effective July 12, 2012 LoneStar elected to convert the Stock into 5,500,000 shares of the common stock and 5,500,000 warrants.
On June 4, 2012, the Company completed the 51% step acquisition of FIG. The Company acquired approximately 124 membership units of FIG which brought the total membership units owned by the Company to 1,168 andan accredited investor, who is also a 51% majority interest. The fair value consideration paid by the Company for the 1,168 units was $3,877,000. More recently the Company engagedstockholder in an exchange offering under Reg. D Rule 506 to acquire the remaining 1,122 membership interests in FIG. As of September 28, 2012 the Company successfully obtained all of the remaining membership interests and issued a total of 1,869,999 shares of its common stock valued at $5,610,000 to the individual members of FIG, none of which are holders of more than five percent (5%) or more of the Company’s common stock.
On July 31, 2012, the Company through a wholly owned subsidiary, Frontier Acquisition I, Inc. completed the acquisition of Chico Coffman Tank Trucks, Inc. by acquiring all of the issued and outstanding stock of Chico Coffman Tank Trucks, Inc. (“CTT”) inclusive of its wholly owned subsidiary, Coffman Disposal, LLC, for the sum of $16,986,939, subject to possible future adjustments for earnings and share prices. The acquisition was facilitated by credit facilities loaned to the Company, in the aggregate amount of approximately $12,000,000 provided by Capital One Leverage Finance (“Capital One”) and ICON Investments (“ICON”). In this regard, the Company and its subsidiaries entered into loan agreements effective July 23, 2012 with Capital One and ICON. Pursuant to the terms of the Credit Agreement with Capital One, the lender has made available a $15 million loan commitment consisting of a revolving loan commitment of $9 million and a term loan of $6 million subject to the terms of the Credit Agreement. The Company and its subsidiaries also entered into a Term Loan, Guaranty and Security Agreement with ICONexchange for the amountextinguishment of $5 million. The Loan Agreement provides$450,000 in unsecured debt, including $191,000 for monthly interest only payments with repayment of the principal and accrued but unpaid interest owed on the Asher Note and $259,000 of unsecured payables owed to the accredited investor. This series of preferred stock was created by the filing of a certificate of designation on February 1, 2018. In addition15, 2015.
On February 12, 2015, we executed a settlement agreement in litigation which had been asserted against certain of our officers of the Company and for which we were obligated to indemnify such officers. The effect of the settlement agreement was the cancellation of two subordinated promissory notes originally totaling $3,665,263. The settlement resulted in the reduction of our indebtedness by $2,082,407. These promissory notes were owed to the preceding referenced notes the Company also assumed two notes payable in connection with theformer owners of CTT and related to our acquisition of CTT. The notes relate to CTT’s purchase of common stock shares from two former stockholders. The primary note payable in the original amount of $3,445,708 dated June 1, 2007 bears interest at 4.79% and is payable in monthly installments of $33,003 including interest, maturing December 1, 2018. The Company’s secondary note payable in the original amount of $219,555 dated June 1, 2007 bears interest at 4.79% and is payable in monthly installments of $2,488 including interest, maturing December 1, 2018. Both notes are subordinated to the Capital One and ICON notes.
Oil and Gas Wells Held By the Company
As further described in the description of properties section below we have a minor overriding interest in two producing wells in Wise County and seven producing gas wells in Denton County, Texas.
Development and Operating Activities
Economic factors prevailingconditions in the oil and gas industry change from timeare subject to time.volatility. The uncertain nature and trend of these economic conditions combined with federal and energy policystate regulatory uncertainty in the oilenergy industry requires operators to be flexible and gas business generally make flexibility of operating policies important in achieving desiredadept at adjusting operations and strategy to achieve profitability. We intend to constantly evaluate continuously all conditions and risks affecting our potentialoperating activities and to reactrespond to those conditions as we deem appropriate from time to time by engagingemploying resources in businessesareas we believe will beto have the most profitablepotential for us.
The Company’s business requires capital to fund operations and growth. Management intends to conduct operations to generate sufficient capital to be used for growth of the existing operation and for reduction in debt. In addition, in order to finance future development andadequately fund operating activities, reduce current liabilities and debt, and pay interest costs, we may need to secure additional capital through business alliances withfrom third parties or other debt/debt or equity financing arrangements. However, potential investors should note that while we currently have in place two definite financing arrangement theresources. There can be no assurance that we will be able to enter into additional financing arrangements oron terms that if we are able to enter into such arrangements,acceptable. There are also no assurances that we will be able to achieve any profitability as a result of our operations.operations in the current market environment.
2 |
General Regulations
Both state and federal authorities regulate i) the transportation and disposal of salt water, produced fluids and drilling fluids and ii) the extraction, production, transportation, and sale of oil, gas, and minerals.fluids. The executive and legislative branches of government at both the state and federal levels have periodically proposed and considered proposals forthe establishment of controls on salt water disposal, alternative fuels, energy conservation, environmental protection, taxation of crude oil imports, limitation of crude oil imports, as well as various other related programs. If any proposals relating toprograms impacting the above subjects were to be enacted, we cannot predict what effect, if any, implementation of such proposals would have upon our operations. A listing of the more significant current state and federal statutory authority for regulation of our current operations and business are provided below.
Federal Regulatory Controls
The Company and its operations are affected by a number of federal regulations. These regulations directly affect our small amount of production activities but indirectly affect our primary activity, salt water disposal as they have an impact on our customers who are oil and gas producers and who generatebusiness. If any further legislation is promulgated related to the transport or disposal of salt water, we transport and dispose of.
Historically, the transportation and sale of natural gas in interstate commerce have been regulated by the Natural Gas Act of 1938 (the (“NGA”), the Natural Gas Policy Act of 1978 (the “NGPA”) and associated regulations by the Federal Energy Regulatory Commission (“FERC”). The Natural Gas Wellhead Decontrol Act (the “Decontrol Act”) removed, as of January 1, 1993, all remaining federal price controls from natural gas sold in “first sales.” The FERC’s jurisdiction over natural gas transportation was unaffected by the Decontrol Act.
In 1992, the FERC issued regulations requiring interstate pipelines to provide transportation, separateproduced fluids or “unbundled,” from the pipelines’ sales of gas (Order 636). This regulation fostered increased competition within all phases of the natural gas industry. In December 1992, the FERC issued Order 547, governing the issuance of blanket market sales certificates to all natural gas sellers other than interstate pipelines, and applying to non-first sales that remain subject to the FERC’s NGA jurisdiction. These orders have fostered a competitive market for natural gas by giving natural gas purchasers access to multiple supply sources at market-driven prices. Order No. 547 increased competition in markets in which we sell our natural gas.
The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach pursued by the FERC and Congress will continue.
Currently pending in the United States Congress is a comprehensive energy bill which among other things calls for the reduction or elimination of certain tax incentives currently in place for domestic oil companies including the tax deductions permitted for intangible costs and depletion allowances. In the eventdrilling fluids, such legislation became law the loss of these tax benefits would likelycould have a negative material effect on our operations.
Our costs of regulatory compliance are approximately $125,000 per year. In addition we are required to maintain performance bonds and certain letters of credit in favor of regulatory agencies such as the financesTexas Railroad Commission. We currently maintain approximately $100,000 in security in the form of performance bonds and letters or credit for the company. benefit of certain regulatory agencies.
Federal Regulatory Actions
Federal legislation has also been introduced which may have an affecteffect on the use of fracinghydraulic fracturing to increase oil and gas production, primarily in shales,shale formations, due to concerns primarily withrelated to potential contamination of drinking water supply contamination.supplies.
The EPAU.S. Environmental Protection Agency (“EPA”) has asserted federal regulatory authority pursuant to the federal Safe Drinking Water Act or SDWA,(“SDWA”) over certain hydraulic fracturing activities involving the use of diesel. In addition, from time to time, Congress has considered legislation to provide for federal regulation generally of hydraulic fracturing in the United States under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process.
State Regulatory Controls
In each stateThe Company’s operations are located in areas where we conduct or contemplatehydraulic fracturing is employed as the primary method of establishing and developing oil and gas activities,producing wells. These areas are also where the majority of the Company’s revenues are generated as these activities are subject to various regulations. The regulations relate to the extraction, production, transportation and sale of oil and natural gas, the issuance of drilling permits, the methods of developing new production, the spacing and operation ofproducing wells the conservation of oil and natural gas reservoirsalso generate salt water and other similar aspectsfluids as by-products of the oil and gas producing process. Any regulation inhibiting or prohibiting the use of hydraulic fracturing may have a material adverse effect on our operations. In particular, the
State Regulatory Controls
The State of Texas (where we have conductedoperate) regulates the majorityoperation and permitting associated with the transport and disposal of our salt water disposal activities and oil and gas operations to date) regulates the rate of daily production allowable from both oil and gas wells on a market demand or conservation basis. At the present time, no significant portion of our production has been curtailed due to reduced allowables. Ourother produced fluids. Because are primarily engaged in salt water, produced fluids and drilling fluid disposal activities, our operations are subject to inspection and permitting by state authorities.authorities of the State of Texas. There have been recent regulatory and legislative proposals duerelated to concerns primarily with potential water supply contamination due to claims that such contamination could potentially be caused by fracinghydraulic fracturing operations.
We know of no proposed regulation or legislation that will materially impede our operations.
Environmental Regulations
Our salt water and other fluids disposal operations are subject to environmental protection regulations established by federal, state, and local agencies. To the best of our knowledge, weWe believe that we are in compliance with the applicable environmental regulations established by thethese agencies with jurisdiction over our operations. We are acutely aware that the applicableCertain environmental regulations currently in effect could have a material detrimentaladverse effect uponon our earnings capital expenditures, or prospects for profitability. Our competitorsprofitability if we received a determination from one of these agencies that our operations are subject to the same regulations and therefore, the existence of such regulations does not appear to have any material effect upon our position with respect to our competitors.in compliance. The Texas Legislature has mandated a regulatory program for the management of hazardous wastes generated during crude oil and natural gas exploration and production, gas processing, oil and gas waste reclamation, salt water disposal and transportation operations. The disposal of these wastes, as governed by the Railroad Commission of Texas, is becoming an increasing burden onsubject to the industry.supervision of state of Texas authorities. Our disposal operations are also subject to inspection and regulation by state and federal environmental authorities.
Employees
Currently, we employ 11 full timehave 83 full-time employees, with two full-time employees at our corporate office and 81 full-time employees in our corporate headquarters and 351 full time employees in our field operations for a total of 362 employees. We currently do not have any part time employees.operations.
Business Risks
Our business volume has declined and our operations have lost a significant amount of money during the last two fiscal years.
Due to reductions in the volume of business combined with significant debt, the Company’s operations have not been profitable. We have made substantial changes in our operations including significant reductions in operating expenses and employees, the closing of our salt water disposal operations in east Texas, and sales of certain non-productive assets to raise cash to pay interest expenses and reduce debt. There can be no assurance we will be successful in returning to profitability. If we are unable to return to profitability we may be required to seek the protection of the United States Bankruptcy Court and liquidate or reorganize.
Our independent auditors have issued a report which raises the question about our ability to continue as a going concern. This report may impair our ability to raise additional financing and adversely affect the price of our common stock.
The report of our independent auditors contained in our financial statements for the year ended December 31, 2014 includes a paragraph that explains that we have been experiencing financial and liquidity concerns. Per the report, these conditions raise substantial doubt about our ability to continue as a going concern. Reports of independent auditors questioning a company’s ability to continue as a going concern are generally viewed unfavorably by analysts and investors. This report, along with our recent financial results, may make it difficult for us to raise additional debt or equity financing necessary to conduct our operations.
3 |
We have a significant amount of debt and our operational losses may prevent the payment of our debt when due.
We currently have a significant amount of debt outstanding which requires us to meet certain operating and financial covenants and on which we are required to pay interest and repay principal. We have failed to meet the operational or financial covenants and have failed to pay interest and principal on our debt in a timely matter and are therefore in breach of certain of our loan agreements. Our secured creditors could foreclose on their collateral which constitutes all of our assets. Due to our reduced business volume and operating losses, we have been dependent upon two of our significant shareholders who have purchased our equity and provided funds to make our debt payments. If we are unable to increase business volumes or otherwise return to profitability and we are unable to raise additional debt or equity capital, we may default on our debt and our creditors could foreclose on our assets. We would then cease operating as a going concern and you could potentially lose all of your investment in the Company.
Our future success depends upon our ability to adapt to changes in the oil services industry and successfully implement our new business strategy.
Due to thelower market prices for crude oil and other changes occurring in the oil industry, wemany of our customers are seeking to reducing their costs and to reduce their operations. We have adopted and implementedbegun implementing a revised business plan which caused the Company to change its primary focus from oil production activities to acquiring businesses and assets that are involved in the oil field services industry with an emphasis on increasing the volumes of salt water, disposal.produced fluids and drilling fluids we transport and dispose of. The Companyplanned increase in business volume may require that we reduce prices for the services we perform for our customers due to the current economic environment in the oil and gas industry. We currently has veryhave limited financial resources and there can be no assurance that we will be successful in locatinggaining additional salt water disposal businesses or assetsbusiness from new and if we are successful in locating themexisting customers at prices and terms that we will be ablewould allow us to successfully acquire them.make a profit.
Federal legislation and state legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays as well as adversely affect our services.
Hydraulic fracturing is an important and commonly used process for the completion of oil and natural gas wells in formations with low permeability, such as shale formations, andformations. Hydraulic fracturing involves the pressurized injection of water, sand and chemicals into rock formations to stimulate production. Due to concerns raised concerningsurrounding the potential impacts of hydraulic fracturing activities on groundwater quality, certain legislative and regulatory efforts at the federal level and in some statesproposals have been initiated in the United States to rendermake permitting, public disclosure and construction and operational compliance requirements more stringent for hydraulic fracturing. While hydraulic fracturing typically is regulated in the United States by state oil and natural gas commissions, there have been developments indicating that more federal regulatory involvement may occur.
The EPA has asserted federal regulatory authority pursuant to the federal Safe Drinking Water Act, or SDWA, over certain hydraulic fracturing activities involving the use of diesel. In addition, from time to time,the United States Congress has considered legislation to provide for federal regulation of hydraulic fracturing in the United States under the SDWA and to require disclosure of the chemicals used in the hydraulic fracturing process. At the state level, several states have adopted or are considering adopting legal requirements that could impose more stringent requirements on hydraulic fracturing activities. In the event that new or more stringent federal or state legal restrictions relating to use of the hydraulic fracturing process in the United States are adopted in areas where our oil and natural gas exploration and production customers operate, those customers could incur potentially significant added costs to comply with requirements relating to permitting, construction, financial assurance, monitoring, recordkeeping, and/or plugging and abandonment, as well as could experience delays or curtailment in the pursuit of production or development activities, which could reduce demand for our produced and non-produced water disposal services.
In addition, certain domestic governmental reviews are either underway or being proposed that focus on environmental aspects of hydraulic fracturing practices. The White House Council on Environmental Quality is coordinating an administration-wide review of hydraulic fracturing practices, and a committee of the United States House of Representatives has conducted an investigation of hydraulic fracturing practices. The EPA has commenced a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater, with initial results expected to be available by late 2012 and final results by 2014. Moreover, the EPA is planning to develop effluent limitations for the treatment and discharge of wastewater resulting from hydraulic fracturing activities by 2014.activities.
Other governmental agencies, including the U.S. Department of Energy and the U.S. Department of the Interior, are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies, depending on their degree of pursuit and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the SDWA or other regulatory mechanisms, which events could delay or curtail production of oil and natural gas by exploration and production operations, some of which are our customers, and thus reduce or eliminate demand for our services.
We are subject to extensive and costly environmental laws and regulations that may require us to take actions that willcould adversely affect our results of operations.
All of our current and proposedOur operations are significantly affected by stringent and complex foreign, federal, provincial, state and local laws and regulations governing the discharge of substances into the environment or otherwise relating to environmental protection. We could be exposed to liability for cleanup costs, natural resource damages and other damages as a result of our conductoperating activities that waswere lawful at the time it occurred or the conduct of, or conditions caused by, prior operators or other third parties.
Environmental laws and regulations are subject to change in the future, possibly resulting in more stringent requirements. If existing regulatory requirements or enforcement policies change or are more stringently enforced, we may be required to make significant unanticipated capital and operating expenditures.
Any failure by us to comply with applicable environmental laws and regulations may result in governmental authorities taking actions against our business that could adversely impact our operations and financial condition, including the:
There are risks inherent in reworking, completing and operating disposal wells.
Reworking and completing saltwater disposal wells involves a degree of risk, and sometimes results in unsuccessful efforts, for a variety of reasons. The CompanyWe cannot control the outcome of operations entirely, and there can be no assurance that any operation will be successful. The results of any well operations cannot be determined in advance. Even though a disposal well is permitted to accept a certain amount of water, there is no assurance that the disposal well or any specific zone in the well will be capable in fact of absorbing any specific amount of water. A wellDisposal wells may also be ruined or rendered unusable during operations
due to technical or mechanical difficulties. Should a well be successfully completed or perforated, there is still no assurance that the zone in which the well is completed or perforated will be able to absorb saltwater at a rate that will support profitable operations. Disposal wells can encounter problems that render the well unusable, even after a period of successful operation. There can be no assurance that the Companywe will be able to successfully rework, complete or operate any specific well, or will be able to operate sufficient wells to achieve a consistent positive cash flow or to achieve profitability.
Our company success will likely depend uponon the continuing availability of certain disposal siteswells.
We believe that there will be available to the Company a number of existing disposal wells and sources of locations for the drilling of new wells necessary to provide the Companyus with sufficient disposal capacity at a reasonable cost. However, there can be no assurance that disposal wells or disposal well locations will always be available or available at a reasonable cost. There can be no assurance that the Companywe will have the resources to drill and/or complete additional wells. If we are not able to obtain disposal wells or disposal well drilling locations or the wells or locations are available but their cost is no longer reasonable, the Company’sour finances would be directly impacted and itwe might not have the ability to continue as a going concern.
The CompanyWe may not be sufficiently insured or insured in sufficient amounts or against all potential liabilities.
The CompanyWe could incur substantial liabilities to third parties in connection with reworking or operating disposal wells. The CompanyWe may not be able to insure against all such liabilities, may carry insurance in amounts not sufficient to cover all such liabilities or may elect not to insureself-insure against such liabilities due to the premium costs involved or other reasons.due to lack of available insurance coverage. Other parties with whom the Company contractswe contract for operations may carry liability insurance, but there is no assurance that the insured risks or the level of insurance coverage obtained by such parties will be sufficient to cover all potential liability incurred bywe or such parties or the Company.incur. Further, there may be occurrences resulting in expenses or liabilities to third parties that are of a nature that cannot now or may not in the future be insured. Uninsured liabilities to third parties could reduce the funds available to the Company,us, could exceed the value of theour assets, of the Company, and could result in the complete loss of property owned by the Company.we own.
The Company isWe are dependent upon our trucking operation and isare subject to potential liability from trucking.
The Company’sOur primary method of collecting and transporting salt water and other fluids from its disposalour customers is by truck. Consequently, the Company haswe have a number of trucks operating on the roads and highways where potential accidents and liability may occur. While the Company insures itself fromwe insure against certain risks, there is no assurance that the Companywe will be able to obtain such insurance in the future or if available that the insurance will be adequate to cover all of any potential liability or judgment rendered which might be rendered against the Company.us. Should the Companywe not be insured or if the amount of itsour insurance beis ultimately inadequate to cover any finding of liability against the Company then it is likely that the Companywe would not be able to continue as a going concern.
We may not be able obtain the necessary permitspermits..
We are required to obtain certain permits, approvals or licenses in connection with our proposeddisposal well and trucking operations. We may not be able to obtain new or transferred permits, approvals or licenses on a timely basis or at all, which would result in material adverse consequences to our business and financial condition.
Our salt water disposal operations may be subject to liability or claims of environmental damages.
We have acquiredoperate existing salt water disposal wells and locations which have received the necessary governmental permits for drilling a disposal well. However, althoughAlthough the disposal wells have received certain governmental regulatory licenses, permits or approvals this does not shield the Companyus from potential claims from third parties claiming contamination of their water supply or other environmental damages. Remediation of environmental contamination or damages can be extremely costly and such costs, if the Company iswe are found liable, could be of such a magnitude as to cause the Companyus to cease operating as a going concern.
5 |
Our business may fail.
There is limited operating history upon which to base an assumption that we will be able to achieve our revised business plans. Our salt water disposal operations are subject to all of the risks inherent in the establishment of a new business enterprise, including the lack of significant operating history and potential undercapitalization. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including our ability to acquire suitable assets and to maintain our existing customer base and attract new customers. There can be no assurance that we will achieve our
projected goals or accomplish our business plans; and such failure could have a material adverse effect on the Companyour operations and itsour stockholders. If we are not able to achieve and maintain operating revenues, the Companywe could fail and you could lose your entire investment.
We will require additional funding to implement our business plan.
Our estimate of the amounts required to fund our acquisitions and future operations is based upon assumptions that may not prove accurate. If we do not have adequate funds to cover operating expenses and working capital requirements, we will require debt and/or equity financing sources for additional working capital. We may further leverage our assets and may use the assets as collateral to secure financing. There is no assurance that the Companywe will be able to obtain additional debt or equity funding if necessary.
Our business depends on domestic spending by the oil and gas industry.
Industry conditions are influenced by numerous factors over which we have no control, such as the supply of and demand for oil and gas, domestic and worldwide economic conditions, political instability in oil and gas producing countries and merger and divestiture activity among oil and gas producers. The volatility of the oil and gas industry and the consequent impact on exploration and production activity could adversely impact the level of drilling and workover activity. This reduction may cause a decline in the demand for our services or adversely affect the price of our services. In addition, reduced discovery rates of new oil and gas reserves in our market areas also may have a negative long-term impact on our business, even in an environment of stronger oil and gas prices, to the extent existing production is not replaced and the number of producing wells for us to service declines.
Competition may adversely affect us.
The salt water and production fluids disposal services industry is highly competitive and fragmented and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can.
Our operations are subject to inherent risks, some of which are beyond our control.control.
Our operations are subject to hazards inherent in the oil and gas industry, such as,including, but not limited to, accidents, blowouts, explosions, craterings, fires and oil spills. These conditions can cause:
·personal injury or loss of life;
·damage to or destruction of property and equipment and the environment; and
·suspension of operations.
The occurrence of a significant event or adverse claim in excess of any insurance coverage that we maintain or that is not covered by insurance could have a material adverse effect on our financial condition and results of operations. Litigation arising from a catastrophic occurrence at a location where our equipment or services are being used may result in our being named as a defendant in lawsuits asserting largesubstantial claims.
We may be exposed to certain regulatory and financial risks related to climate change.
Climate change is receiving increasing attention from scientists and legislators alike. The debate is ongoing as to the extent to which our climate is changing, the potential causes of this change and its potential impacts. Some attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. A significant focus is being made on companies that are active producers of depleting natural resources.
There are a number of legislative and regulatory proposals to address greenhouse gas emissions, which are in various phases of discussion or implementation. The outcome of foreign, U.S. federal, regional, provincial and state actions to address global climate change could result in a variety of regulatory programs including potential new regulations, additional charges to fund energy efficiency activities, or other regulatory actions. These actions could:
·result in increased costs associated with our operations and our customers’ operations;
·increase other costs to our business;
·adversely impact overall drilling activity in the areas in which we plan to operate;
·reduce the demand for carbon-based fuels; and
·reduce the demand for our services.
Any adoption of these or similar proposals by foreign, U.S. federal, regional or state governments mandating a substantial reduction in greenhouse gas emissions and implementation of the Kyoto Protocol (the Copenhagen Accord,) or other foreign, U.S. federal, regional or state requirements or other efforts to regulate greenhouse gas emissions, could have far-reaching and significant impacts on the energy industry. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions would impact our business, any such future laws and regulations could result in increased compliance costs or additional operating restrictions, and could have a material adverse effect on our business or demand for our services.
Currently proposed legislative changes, including changes to tax laws and regulations, could materially, negatively impact the Company,our operations and financial results, increase the costs of doing business and decrease the demand for our products.
The current U.S. administration and Congress have proposed several new articles of legislation or legislative and administration changes, including changes to tax laws and regulations, which could have a material negative effect on our Company.operations and financial results. Some of the proposed changes that could negatively impact us are:
· | cap and trade system for emissions; |
· | increase environmental limits on exploration and production activities; |
· | repeal of expensing of intangible drilling costs; |
· | increase of the amortization period for geological and geophysical costs to seven years; |
· | repeal of percentage depletion; |
· | limits on hydraulic fracturing or disposal of hydraulic fracturing fluids; |
· | repeal of the domestic manufacturing deduction for oil and natural gas production; |
· | repeal of the passive loss exception for working interests in oil and natural gas properties; |
· | repeal of the credits for enhanced oil recovery projects and production from marginal wells; |
· | repeal of the deduction for tertiary injectants; |
· | changes to the foreign tax credit limitation calculation; and |
· | changes to healthcare rules and regulations. |
cap and trade system for emissions;
increase environmental limits on exploration and production activities;
repeal of expensing of intangible drilling costs;
increase of the amortization period for geological and geophysical costs to seven years;
repeal of percentage depletion;
limits on hydraulic fracturing or disposal of hydraulic fracturing fluids;
repeal of the domestic manufacturing deduction for oil and natural gas production;
repeal of the passive loss exception for working interests in oil and natural gas properties;
repeal of the credits for enhanced oil recovery projects and production from marginal wells;
repeal of the deduction for tertiary injectants;
changes to the foreign tax credit limitation calculation; and
changes to healthcare rules and regulations.
We are subject to litigation risks that may not be covered by insurance.
In the ordinary course of business, we become the subject of various claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, employees and other matters, including potential claims from individuals due to accidents or other mishaps involving our proposed trucking operations. We maintain insurance to cover many of our potential losses, and we are subject to various self-retentions and deductibles under our insurance policies. It is possible, however, that a judgment could be rendered against us in cases in which we could be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for such matters.
Our concentration of customers in a single industry may impact our overall exposure to credit risk.
All of our salt water disposal customers operate in the energy industry. This concentration of operations and customers in a single industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions.
The loss of a significant customer could adversely affect our financial results.
For 2013 and 2014, a single customer accounted for approximately 52% and 53% of our revenues. We have a Master Services Agreement with this customer that expires on March 31, 2015. Although we are engaged in renewal negotiations with this customer, to date no decision has been made. If we are not able to retain this customer’s business, our financial results could be significantly and negatively impacted and we would need to devote substantial organizational resources to replacing this business. In addition, even if we retain this business, it may not be on identical terms to those in place in prior years and our financial results could be impacted by any change in terms.
Oil prices are volatile. A substantial decrease in oil prices could adversely affect our financial results.
Our future financial condition is significantlymay be impacted by resultsthe level of our skim oil operations which depend upon the prices we receive for our oil processing.and natural gas market prices. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given world geopolitical conditions. OurIn addition, our cash flow from operations is somewhat dependent on the prices that we receive for skim oil. Thisoil sold from our disposal operations. The price volatility in the oil and natural gas market also affects the amountcash flow and operations of our cash flow available for capital expenditurescustomers and ourtheir ability to borrow money or raise additional capital.purchase our services. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:
the level of consumer demand for oil;
· | the level of consumer demand for oil and natural gas; |
· | the domestic and foreign supply of oil and natural gas; |
· | the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil and natural gas price and production controls; |
· | the price of foreign oil and natural gas; |
· | domestic governmental regulations and taxes; and |
· | the price and availability of alternative fuel sources. |
the domestic and foreign supply of oil;
the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
the price of foreign oil;
domestic governmental regulations and taxes;
the price and availability of alternative fuel sources;
These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty. Declines in oil and natural gas prices would reduce revenue and, as a result, could have a material adverse effect upon our financial condition, results of operations, and the carrying values of our properties. If the oil industry experiences significant price declines, we may, among other things, be unable to meet our financial obligations or make planned expenditures.
Since the end of 1998, oil prices have gone from near historic low prices to historic highs. At the end of 1998, NYMEX oil prices were at historic lows of approximately $11.00 per Bbl, but have generally increased since that time, albeit with fluctuations. Forfluctuations.For 2011, NYMEX oil prices fluctuated but averaged $97.00 per Bbl. ForBbl and for 2012 oil prices also fluctuated but averaged approximately $94.00 per Bbl. While we attemptIn 2013 NYMEX oil prices averaged $97.91 per Bbl. Current market prices for crude oil have declined over 45% since the summer of 2014 and have recently ranged from $45 to obtain the best price for our skim oil in our marketing efforts, we cannot control these market price swings and are subject to the market volatility for this type of oil.$55 per Bbl. These price differentials relative to NYMEX prices can have as much of an impact on our profitability as does the volatility in the NYMEX oil prices.profitability.
Loss of executive officers or other key employees and sponsors could adversely affect our business.
Our success is dependent upon the continued services and skills of our current executive management.key employees and certain large stockholders. The loss of services or participation of any of these key personnelindividuals could have a negative impact on our business because of such personnel’stheir skills and industry experience and the difficulty of promptly finding qualified replacement personnel.replacements.
Acquisition of entire businesses is a component of our growth strategy; our failure to complete future acquisitions successfully could reduce the earnings and slow our growth.
Potential risks involved in the acquisition of such businesses include the inability to continue to identify business entities for acquisition or the inability to make acquisitions on terms that we consider economically acceptable. Furthermore, there is intense competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. Our strategy of completing acquisitions would be dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Our ability to pursue our growth strategy may be hindered if we are not able to obtain financing or regulatory approvals. Our ability to grow through acquisitions and manage growth would require us to continue to invest in operational, financial and management information systems and to attract, retain, motivate and effectively manage our employees. The inability to effectively manage the integration of acquisitions could reduce our focus on subsequent acquisitions and current operations, which, in turn, could negatively impact our earnings and growth. Our financial position and results of operation may fluctuate significantly from period to period, based on whether or not significant acquisitions are completed in particular periods.
Risks Related to Our Common Stock
Our common stock is thinly traded which is likely to result in volatile swings in our stock price.
Our stock is thinly traded as much of our issued and outstanding stock is held by our officers and a small number of stockholders. Consequently until our common stock is more widely held and actively traded small sales or purchases will likely cause the price of our common stock to fluctuate dramatically up or down without regard to our financial health, net worth or business prospects.
We may issue additional shares of Preferred Stock.preferred stock.
Pursuant to our certificate of incorporation, our board of directors has the authority to issue additional series of preferred stock and to determine the rights and restrictions of shares of those series without the approval of our stockholders. The rights of the holders of the current series of common stock may be junior to the rights of preferredcommon stock that may be issued in the future. In addition, any future series of preferred stock could be convertible into shares of our common stock, which could result in dilution to your investment.
There may be future dilution of our Common Stock.common stock.
We are committed tomay pursue an aggressive acquisition strategy which is likely to require the issuance of common shares as a component of the purchase price for the acquisitions. Any such issuance maywill result in dilution of our common stock. In addition, to the extent options to purchase common stock under employee and director stock option plans are exercised, holders of our common stock will be diluted. If available funds and cash generated from our operations are insufficient to satisfy our needs, we may be compelled to sell additional equity or convertible debt securities. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders.
Our management controls a significant percentage of our outstanding common stock and their interests may conflict with those of our stockholders.
Our executive officers and their affiliates beneficially own a substantial percentage of our outstanding common stock. This concentration of ownership could have the effect of delaying or preventing a change in control of the Company, or otherwise discouraging a potential acquirer from attempting to obtain control of the Company. This could have a material adverse effect on the market price of the common stock or prevent our stockholders from realizing a premium over the then prevailing market prices for their shares of common stock.
Sales of substantial amounts of our common stock may adversely affect our stock price and make future offerings to raise more capital difficult.
Sales of a large number of shares of our common stock in the market or the perception that sales may occur could adversely affect the trading price of our common stock. We may issue restricted securities or register additional shares of common stock in the future for our use in connection with future acquisitions. Except for volume limitations and certain other regulatory requirements applicable to affiliates, such shares may be freely tradable unless we contractually restrict their resale. The availability for sale, or sale, of the shares of common stock eligible for future sale could adversely affect the market price of our common stock.
Item 1B. Unresolved Staff Comments.
There are no unresolved comments from the staff of the Securities and Exchange Commission.
Item 2. Description of Properties.
Our principal executive offices are located in an office building at 503 W. Sherman St., Chico, Texas 76431.
We maintain our corporate offices at 3030 LBJ Freeway, Suite 1320, Dallas, Texas 75234. The Company’s operating lease agreement as amended was extended for thirty-nine months through May 31, 2014 and currently pays a monthly base rental of $7,440.49. The Company’s continuing obligation under the base lease is approximately $129,332.
The Company owns ten (10) acres of vacant land in Johnson County andalso own 7.055 acres inat the above address Chico, Texas on which it has five (5) buildings usedwe have 3 buildings. These facilities serve as our executive and administrative offices and headquarters for CTT operations including repair & maintenance facilities for its transportation fleet and salt water disposal operations in that area. The Companyservices business. CTT has three operating wells near Chico, Texas. Two of these well locations have small buildings for well monitoring and operations. We also ownsown 7.49 acres in Harrison County, Texas on which three (3) of itsour disposal wells are located, along with a small manufactureoffice and repair shop. In addition,shop for the Company isoperation of these wells.
We are obligated under long-term leases for the use of land where sevensix of itsour disposal wells are located. Three of the leases are for extended periods of time. The first lease expires on February 7, 2023 (with two options to renew for an additional 10 years each). The second lease expires on December 1, 2034 with no option to renew and the third lease expires on May 31, 20222018 with no option to renew. The monthly lease paymentpayments for the disposal well leases is $10,300.total $10,800.
Following is information concerning production
Disposal Wells. We currently own and operate eleven disposal wells which are licensed by the State of Texas for the disposal of salt water and certain drilling fluids. We receive fees from the use of our wells from our oilown operations or by third parties who contract for the use of our disposal wells. Our disposal wells and gas wells, productive well counts and both producing and undeveloped acreage. We currently have a minor overriding interest in seven (7) Barnett Shale gas wells in Denton County, Texas and two (2) Barnett Shale gas wells in Wise County, Texas.
Reserves Reported To Other Agencies. Wetheir locations are not required and do not file any estimates of total, proved net oil or gas reserves with reports to any federal authority or agency.
The following information pertains to our properties as of December 31, 2012:
Gross | Net | |||||||
Producing | Producing | |||||||
Name of Field or Well | Well Count | Well Count | ||||||
Newark East, Override Interest | 9 | 0.036 |
Productive Wells and Acreage
Geographic Area | Total Gross Oil Wells | Net Productive Oil Wells | Total Gross Gas Wells | Net Productive Gas Wells | Total Gross Developed Acres | Total Net Developed Acres | ||||||||||||||||||
Wise County | — | — | 2 | 0.0360 | 224 | 8.06 | ||||||||||||||||||
Denton County | — | — | 7 | 0.0360 | 566 | 20.38 |
Notes:follows:
Name | Permit # | Location | State | Own/ Lease | Lease Term Exp. | Lease Terms | |
Coffman Disposal, LLC | |||||||
Trull Disposal Well, LLC | Trull 1 | 11954 | Trull Lease, Well No. 1, Seventy Day (Congl) Field, Wise County, RRC District 09 | TX | Lease | 12/1/2034 | $1,500 per month |
Trull Well #2, LLC | Trull 2 | 12180 | Trull Lease, (19617), Well No. 2, Seventy Day (Congl) Field, Wise County, RRC District 09 | TX | Lease | 12/1/2034 | Included in above |
Trull Well #3 LLC (in process) | Trull 3 | 13300 | Trull (000000) Lease Boonsville Field, Wise County RRC District 09 | TX | Lease | not completed | $1,500 per month |
CSWU Well, LLC | CSWU | 11891 | Caughlin Strawn West Unit Lease, (30288), Well No. 1202U, Caughlin (Strawn) Field, Wise County, | TX | Lease | 5/31/2018 | $1,800 per month |
Brunson Well, LLC | Brunson 1 | 11779 | Brunson Kenneth Lease (30152) Lease, Well | TX | Lease | 6/7/2032 | $4,000 per month |
Brunson Well, LLC | Brunson 2 | 12533 | Brunson Kenneth Lease (30152), Well No. 2 | TX | Lease | 6/7/2032 | Included in above |
Trinity Disposal Wells, | |||||||
Trinity Disposal Wells, LLC | Barker - Hope | 17034 | Barker-Hope Lease, (016675), Well No. 4, Scottsville, | TX | Lease | 5 year renewals | $1,000 per month |
Trinity Disposal Wells, LLC | Riley | 16157 | 756 Akin Road, Waskom TX 75692; (Riley Lease, | TX | Own | n/a | n/a |
Trinity Disposal Wells, LLC | Shaw | 16705 | Shaw, Jim Lease, (029412), Well No. 1, Bethany (Pettit) Field, Harrison County RRC District 06 | TX | Lease | 5 year renewals | $1,000 per month |
Trinity Disposal Wells, LLC | Dorsett | 11388 | Well No. 1 Blocker (Cotton Valley) Field Harrison County, RRC District 06 | TX | Own | n/a | n/a |
Trinity Disposal Wells, LLC | Newt | F1619 | Newt Lease, Well No. 1 Blocker (Page) Field, Harrison County, Texas, District 06 | TX | Own | n/a | n/a |
Forfeiture of Oil and Gas Interests
During the first quarter of the last fiscal year, we were notified the Company had forfeited its interestWe are currently attempting to sell our disposal wells in the Johnson #1-H and Johnson #2-H Joint Ventures effective September 7, 2010 for not paying a Special Assessment of $43,008 for estimated workover expenses. If we had known of the Special Assessment cash call we would have declined to participate because there was no assurance that the rework would be successful in increasing production to recoup the Special Assessment amount and extend the life of the wells. In addition, we are no longer obligated to pay the plug and abandonment costs for these wells.east Texas.
As a result of the forfeiture, in 2011 the Company wrote-off the book value of the wells, asset retirement obligations, receivables and payables which resulted in a loss of $16,089.
On November 3, 2014, ICON Investments filed suit in Dallas County District Court, Cause No. DC-14-12819, against us and each of our subsidiaries seeking the sum of $4.3 million plus costs and attorney’s fees. ICON claimed we were in breach of the ICON Note agreement. On December 27, 2014 an affiliate of an accredited investor who is also a stockholder purchased the ICON Note from ICON Investments and the litigation with ICON Investments was terminated by agreement. The Company isaccredited investor assumed the terms and conditions of the ICON Note agreement.
In addition, although we were not currently the subjectnamed as a party, certain of orour current and former officers were involved in any material litigation.litigation filed against them and, as a result, we were obligated to indemnify these officers. Jimmy Coffman and Elaine Coffman v. Tim P. Burroughs and Dick O’Donnell CAUSE NO. CV14-02-115 was filed in the 271st Judicial District Wise County, Texas wherein the Coffmans sought to obtain the sum of $2.1 million which they alleged was owed to them on a promissory note as a result of our purchase of CTT and its subsidiary, Coffman Disposal, LLC. The lawsuit was defended through our Directors and Officers insurance carrier, Chubb Insurance. On February 12, 2015 we executed a settlement agreement in the litigation with the Coffmans whereby the Coffmans received a cash payment from Chubb in exchange for the termination of the litigation and the cancellation of the two subordinated promissory notes with face amounts totaling $3.7 million. The settlement resulted in the reduction of our debt by $2.1 million. We paid approximately $150,000 in defense costs, which represented the amount of our deductible under our Directors and Officers insurance policy.
We are also a named defendant, along with the previous named officers, in certain litigation styled Dynamic Technical Solutions Corp. and Ola Investments, LLC, V. Frontier Oilfield Services, Inc., Timothy Burroughs and Bernard R. “Dick” O’Donnell; CAUSE NO. CV14-04-234 in the 271st Judicial District Wise County, Texas. The plaintiffs in this matter allege they have been damaged by our failure to complete a disposal well in a joint venture between the parties. We are vigorously defending this lawsuit and believe the lawsuit is without merit.
PART II
Item 5. Market For Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.
Prices for our common stock are currently quoted in the over-the-counter Pink Sheets maintained by the National Quotation Bureau (NQB) owned Pink Sheet OTC Market, Inc. and our ticker symbol is FOSI.PK (Formerly TBXC). Prices for our stock were approved for quotation on the over-the-counter on January 27, 2001.FOSI.PK. The following table shows the high and low bid information for our common stock for each quarter during which prices for our common stock have been quoted.the indicated periods.
QUARTER EXCEPT JUNE | LOW BID | HIGH BID | ||||||
Quarter ending February 28, 2012 | $ | 0.50 | $ | 1.05 | ||||
Quarter ending May 31, 2012 | $ | 0.70 | $ | 1.30 | ||||
Month ending June 30, 2012 | $ | 0.80 | $ | 1.25 | ||||
Quarter ending September 30, 2012 | $ | 0.80 | $ | 4.50 | ||||
Quarter ending December 31, 2012 | $ | 1.50 | $ | 2.50 |
QUARTER | LOW BID | HIGH BID | ||||||
Quarter ending March 31, 2014 | $ | 0.11 | $ | 2.96 | ||||
Quarter ending June 30, 2014 | $ | 0.18 | $ | 0.65 | ||||
Quarter ending September 30, 2014 | $ | 0.15 | $ | 0.60 | ||||
Quarter ending December 31, 2014 | $ | 0.60 | $ | 0.60 | ||||
QUARTER | LOW BID | HIGH BID | ||||||
Quarter ending March 31, 2013 | $ | 2.25 | $ | 2.25 | ||||
Quarter ending June 30, 2013 | $ | 1.00 | $ | 1.00 | ||||
Quarter ending September 30, 2013 | $ | 0.26 | $ | 0.48 | ||||
Quarter ending December 31, 2013 | $ | 2.96 | $ | 2.96 |
QUARTER Quarter ending February 28, 2011 Quarter ending May 31, 2011 Quarter ending August 31, 2011 Quarter ending November 30, 2011 LOW BID HIGH BID $ 0.01 $ 0.06 $ 0.01 $ 0.09 $ 0.01 $ 0.07 $ 0.07 $ 1.55
The above information was obtained from the Pink Sheet OTC Market, Inc. web site. Because these are over-the-counter market quotations, these quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions. transactions.We have 976 shareholders1,639shareholders of record for our common stock as of December 31, 2012.2014.
On December 29, 2014, the Board of Directors approved the issuance of 1,125,000 shares of cumulative convertible preferred stock in exchange for the cancellation of certain unsecured debt totaling $450,000 held by one of our significant stockholders. The newly issued preferred stock features a 7% cumulative dividend, payable quarterly, with payment at the option of the Company to be made in kind or in shares of common stock based on a per share valuation set at a 25% discount to the five day average closing bid price of the market price. The preferred shares were issued in January 2015 in an exempt transaction to the significant stockholder of the Company under Section 4(5) of the Securities Act of 1933, as amended.
Item 6. Selected Financial Data
Not applicable as we are a smaller reporting company.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Twelve Months Ended December 31, 20122014 and November 30, 2011.2013.
Cautionary Statement
Statements in this report which are not purely historical facts, including statements regarding the company’s anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Act of 1934, as amended. All forward-looking statements in this report are based upon information available to us on the date of the report. Any forward-looking statements involve risks and uncertainties that could cause actual results or events to differ materially from events or results described in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.
Recent Financial Developments
AsOn April 11, 2014, our line of December 31, 2012, the Companycredit and term loan held by Capital One Bank, N.A was in technical default of its term loans with two financial institutions resulting from its inability to maintain two financial ratiospurchased by an accredited investor, who is also a stockholder of the debt covenants and accordingly classifiedCompany. The terms of the year end note balances as a current liability. The Company is working to cure the financial ratio deficiencies and expects to be compliantloan now held by the endstockholder are the same as outlined in the credit agreement with Capital One Bank, N.A.
On June 10, 2014, an accredited investor who is also a stockholder purchased our note payable to Asher Enterprises, Inc. (the “Asher Note”). The accredited investor assumed the terms and conditions of the second quarter of 2013.Asher Note agreement without alteration.
On September 2, 201130, 2014, Jimmy D. Coffman resigned from his position as an executive of CTT and surrendered 437,500 shares of our common stock. The surrendered shares of common stock were cancelled on October 30, 2014.
On December 27, 2014, an affiliate of an accredited investor who is also a stockholder purchased the note payable to ICON Investments (the “ICON Note”). The accredited investor assumed the terms and conditions of the ICON Note agreement without alteration.
On December 29, 2014, our Board of Directors unanimously approved the issuance of 1,125,000 shares of 2014 Series A 7% Convertible Preferred Stock of the Company to an accredited investor, who is also a stockholder in the Company, in exchange for the extinguishment of $450,000 in unsecured debt, including $191,000 for the principal and accrued interest owed on the Asher Note and $259,000 of unsecured payables owed to the accredited investor. This series of preferred stock was created by the filing of a certificate of designation on February 15, 2015.
On February 12, 2015, we executed a settlement agreement in litigation which had been asserted against certain of our officers of the Company and for which we were obligated to indemnify such officers. The effect of the settlement agreement was the cancellation of two subordinated promissory notes originally totaling $3,665,263. The settlement resulted in the reduction of our indebtedness by $2,082,407. These promissory notes were owed to the former owners of CTT and related to our acquisition of CTT.
Results of Operations
For the year ended December 31, 2014 we reported a net loss from continuing operations of $5.1 million as compared to a net loss from continuing operations of $8.7 million for the year ended December 31, 2013.
11 |
Revenue. Total revenue decreased by $18.9 million or 54% from $34.9 million for the year ended December 31, 2013 to $16.1 million for the year ended December 31, 2014.
The decrease in net revenue for the year ended December 31, 2014 is attributable to a reduced volume of saltwater and other fluids transported and disposed. During the year ended December 31, 2014 we transported and disposed approximately 11 million Bbl. of salt water and other fluids compared to approximately 19.3 million Bbl. during the year ended December 31, 2013. Reduced volumes of transported and disposed fluids also had the effect of reducing the volume and related proceeds from the sale of oil that was collected at our disposal wells.
Expenses.The components of our costs and expenses for the years ended December 31, 2014 and 2013 are as follows:
% | ||||||||||||
Increase | ||||||||||||
2014 | 2013 | (Decrease) | ||||||||||
Costs and expenses: | ||||||||||||
Direct costs | $ | 11,311,850 | $ | 26,485,768 | -57 | % | ||||||
Indirect costs | 3,767,346 | 6,191,878 | -40 | % | ||||||||
General and administrative | 925,961 | 6,333,781 | -85 | % | ||||||||
Depreciation and amortization | 2,712,440 | 3,591,997 | -24 | % | ||||||||
Total costs and expenses | $ | 18,717,597 | $ | 42,603,424 | -56 | % |
The decrease in the volumes of saltwater and other fluids transported and disposed of necessitated a decrease in operating expenses for the year ended December 31, 2014. The decrease in direct costs is primarily attributable to the overall reduction in salaries, wages, benefits, fuel, repairs and maintenance for the truck fleet and the cost of the use of third party disposal wells.
The decrease in indirect costs for the year ended December 31, 2014 is the result of an overall reduction of administrative salaries and benefits, insurance costs and utilities resulting from tighter expense controls associated with the reduced volumes transported.
The decrease in general and administrative costs for the year ended December 31, 2014 was related to reduced professional fees, property taxes, communications costs and computer expenses. Management reduced professional fees by $1.6 million to $0.4 million for the year ended December 31, 2014 compared to professional fees expense of $2.0 million for the year ended December 31, 2013. Stock compensation was reduced to $74,000 for the year ended December 31, 2014 compared to $2.4 million for the year ended December 31, 2013. General and administrative personnel and salaries were substantially reduced during the year ended December 31, 2014.
Other (Income) Expense.Other (income) expenses for the year ended December 31, 2014 included $1.8 million of interest expense compared to $1.8 million of interest expense for the year ended December 31, 2013. In addition, other (income) expense for the year ended December 31, 2014 included a loss on the sale of non- productive assets of $0.8 million compared to a gain of approximately $0.4 million for the year ended December 31, 2013. Other (income) expense for the year ended December 31, 2013 included a gain of $2.3 million for the write-off of the contingent consideration payable associated with the acquisition of CTT and an impairment loss of property and equipment of $1.8 million related to FIG activity.
We have not recorded federal income tax expense for the years ended December 31, 2014 and 2013 because of our net losses. Also, since there is continued uncertainty as to the realization of a deferred tax asset, we have not recorded any deferred tax benefits.
Discontinued operations -On July 24, 2013, management and our Board of Directors elected to discontinue the operations and sell the fixed assets of Frontier under its former name, TBX Resources, Inc. entered into an Investment Agreement with LoneStar Income and Growth, LLC a Texas limited liability company, an unrelated third party. The Investment Agreement provided that LoneStar would acquire up to 2,750,000 shares of the Stock for the sum of $5,500,000 contingent upon the Company using the proceeds of the Stock to acquire a majority 51% membership interest in FIG which through(FIG) and its wholly owned subsidiaries;subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC transports and disposes salt water and other oilfield fluids.LLC. The attributeseffective date of the Stock allowed the holder to convert the preferred share into two sharesdiscontinuation of Frontier’s common stock and two warrants for an additional share at an exercise price of $3.50 per share. LoneStar completed the purchase of $5,500,000 of the Stock and Frontier completed the acquisition of 51% of FIG in June 2012 (see below). Effective July 12, 2012 LoneStar elected to convert the Stock into 5,500,000 shares of the common stock and 5,500,000 warrants.
On June 4, 2012, the Company completed the 51% step acquisition of FIG. The Company acquired approximately 124 units of FIG which brought the total units owned by the Company to 1,168 and a 51% majority interest. The cash price paidoperations was $5,080,000 less $1,203,000 borrowed from FIG that resulted in the fair value consideration for the 1,168 units of $3,877,000. More recently the Company engaged in an exchange offering under Reg. D Rule 506 to acquire the remaining 1,122 membership interests in FIG. As of September 28, 2012 the Company successfully obtained all of the remaining membership interests and issued a total of 1,869,999 shares of its common stock valued at $5,610,000 to the individual members of FIG, none of which hold 5% or more of the Company’s common stock.
The Company through a wholly owned subsidiary, Frontier Acquisition I, Inc. completed the acquisition of CTT on July 31, 2012 by acquiring all of the issued and outstanding stock of CTT inclusive of its wholly owned subsidiary, Coffman Disposal, LLC for the sum of $16,986,939. The acquisition was facilitated by credit facilities loaned to the Company in the aggregate amount of approximately $12,000,000 provided by Capital One and ICON. In this regard, the Company and its subsidiaries entered into loan agreements effective July 23, 2012 with Capital One and ICON. Pursuant to the terms of the Credit Agreement with Capital One, the lender has made available a $15 million loan commitment consisting of a revolving loan commitment of $9 million and a term loan of $6 million subject to the terms of the Credit Agreement. The Company and its subsidiaries also entered into a Term Loan, Guaranty and Security Agreement with ICON for the amount of $5 million. The Loan Agreement provides for 14% monthly interest only payments with repayment of the principal and accrued but unpaid interest on February 1, 2018. In addition to the preceding referenced notes the Company also assumed two notes payable in connection with the acquisition of CTT. The notes relate to the CTT’s purchase of common stock shares from two former stockholders. The primary note payable in the original amount of $3,445,708 dated June 1, 2007 bears interest at 4.79% and is payable in monthly installments of $33,003 including interest, maturing December 1, 2018. The Company’s secondary note payable in2013. In the original amount of $219,555 dated June 1, 2007 bears interest at 4.79% and is payable in monthly installments of $2,488 including interest, maturing December 1, 2018. Both notes are subordinated to the Capital One and ICON notes.
Effective November 30, 2010, Gulftex Operating forgave $433,232 in loans and advances to Frontier because we had insufficient working capital to repay them. However, during the fiscal year ended November 30, 2011 circumstances changed and the Company repaid $122,511 of the amount previously written-off. During the year ended December 31, 2012 Frontier repaid the remaining balance of $310,721 with an offset to paid-in capital.
Other Developments
On September 1, 2011, we entered into a services agreement with FIG. Under the agreement the Company charged FIG for a portion of administrative services and rent. For the three months ended November 30, 2011 the Company billed $31,748 for these services. For the five months ended May 31, 2012 the Company billed $70,079, at which time the agreement was terminated.
On December 1, 2010, we entered into a services agreement with Gulftex Oil & Gas, LLC. Under the agreement the Company charged Gulftex for a portion of administrative services and rent. For the nine months ended August 31, 2011, the Company billed $24,695 for these services at which time the agreement was terminated.
Our officers resumed drawing salaries in October of the previous fiscal year. Due to the financial condition of the Company in 2010, Tim Burroughs and Sherri Cecotti agreed, effective February 16, 2010, to draw no salary until such time as the Company had sufficient cash to sustain the operations including the payment of their salaries. The forbearance of the above officer’s salary was a complete forbearance and not a deferral. The salaries were resumed in fourth quarter of 2011. During fiscal years 2009 and 2010 one of2014, however, management elected to continue to operate these wells. Based on this decision, our officers, Bernard “Dick” O’Donnell received no cash compensation but was given 200,000 common shares in lieu of salary in 2011.financial statements have been restated to reflect the discontinued operations as continuing operations.
Results of Operations
12 |
We recorded a net loss of $6,052,149 for the year ended December 31, 2012 as compared to a net loss of $485,031 for fiscal year ended November 30, 2011. The increase in our loss of $5,567,118 or 1,247.8% is discussed below.
Net Revenues - Total net revenues increased $21,699,562, from $6,873 for the twelve months ended November 30, 2011 to $21,706,435 for the twelve months ended December 31, 2012. The increase in net revenues is attributable to the recent acquisitions of CTT and FIG.
Costs and Expenses - Total costs and expenses increased $26,194,818 (7,575.6%), from $345,777 for the twelve months ended November 30, 2011 to $26,540,595 for the twelve months ended December 31, 2012.
Direct costs for the twelve months ended December 31, 2012 were $16,550,368. The direct costs are attributable to our recent acquisitions of CTT and FIG.
Indirect costs increased $4,198,663 for the twelve months ended December 31, 2012, from $4,741 for the twelve months ended November 30, 2011 to $4,203,404 for the twelve months ended December 31, 2012. The increase in operating expenses is attributable to our recent acquisitions of CTT and FIG.
General and administrative expenses increased $3,303,375 (1,016.8%), from $324,888 for the twelve months ended November 30, 2011 to $3,628,263 for the twelve months ended December 31, 2012. The increase is due to higher legal and professional fees of $1,082,487, salaries and benefits of $660,432, stock compensation expense of $1,387,363 and $173,093 in other general and administrative expense categories.
Acquisition expense of $426,943 for the twelve months ended December 31, 2012 related to the acquisition of CTT. There were no comparable expenses in 2011.
Depreciation increased $1,731,558 from $59 for the twelve months ended November 30, 2011 to $1,731,617 for the twelve months ended December 31, 2012. The increase in depreciation expense is attributable to our recent acquisitions of CTT and FIG.
The Company forfeited its interest in Johnson #1-H and Johnson and #2-H Joint Ventures and wrote-off the book value of the wells, asset retirement obligations, receivables and payables which resulted in a loss of $16,089 in the 2011 fiscal year. There were no such losses in the current fiscal year.
Interest expense totaling $944,163 for the twelve months ended December 31, 2012 primarily related to the acquisition notes, line of credit note and LoneStar agreement to pay 8% interest on invested funds through June of 2012. There were no comparable expenses in 2011.
The Company sold property and equipment during the year ended December 31, 2012 for $131,821 and wrote-off the fully depreciated values of the related assets. The gain on the transactions was $64,631. The Company also sold property and equipment during the fiscal year ended November 30, 2011for $2,220 and wrote-off the fully depreciated values of the related assets.
The Company’s loss on its equity interest in FIG through May 31, 2012 was $169,794. FIG’s results since May 31, 2012 are reflected in the Company’s consolidated statement of operations. With the purchase of 100% of FIG in September of 2012, the Company wrote-off the value of its net profits interest totaling $284,900. The Company’s unrealized loss on its equity investment in FIG for the fiscal year ended November 30, 2011 was $148,347.
The loss attributable to the noncontrolling interest for the twelve months ended December 31, 2012 was $156,635. There was no comparable amount in 2011.
Provision For Income Taxes - No tax benefits were recorded for the twelve months ended December 31, 2012 and November 30, 2011 and the one month ended December 31, 2011 due to the losses we have experienced and a valuation allowance for 100% of the deferred tax assets was established because of the continued uncertainty as to the realization of this asset.
Liquidity and Capital Resources
Cash Flows and Liquidity
As of December 31, 2012,2014 we had total current assets of $33,623,294 of which property, equipment and provisional goodwill amounted to $25,922,659 or 77.1% of the total. As of November 30, 2011, we had$1.6 million. Our total assets of $3,161,688 of which investments in unconsolidated affiliated company amounted to $3,136,553 or 99.2% of the total. Our revenues for the current year totaled $21,706,435 while the revenues for the previous fiscal year totaled $6,873. Our accumulated lossesliabilities as of December 31, 2012 and November 30, 2011 totaled $18,127,139 and $11,890,719, respectively. At December 31, 2012, we2014 were $14.6 million, with $10.4 million of the current portion consisting of long term debt. We had $67,824 in cash as compared to $13,871 for November 30, 2011. Asa working capital deficit of $13.1 millionas of December 31, 2012 the ratio of current assets to current liabilities was .30:1 as2014 compared to .04:1 for November 30, 2011. Long-term debt totaled $2,225,570 at December 31, 2012. We had no long-term debt at November 30, 2011. Asa working capital deficit of $13.4 million as of December 31, 2012,2013.
Management is focused on working closely with our shareholders’ equity was $4,491,785. As of November 30, 2011 our shareholders’ equity was $2,756,452.
current lenders to fund operations through current cash flows, and pay interest costs when excess cash becomes available. We have funded operations from cash generated from the sale of common and preferred stock and revenue from oilfield water disposal services. Our cash used in operations totaled $849,017 for the twelve months ended December 31, 2012 while our cash used for operations totaled $298,244 for the twelve months ended November 30, 2011. This represents an increase of $550,773 in cash used for operating activities. Our net capital investments totaled $1,887,759 for the current year while our net capital investments for the previous fiscal year totaled $2,611,055. Net cash provided by financing activities totaled $2,799,550 for the twelve months ended December 31, 2012 while net cash net provided by financing activities totaled
$2,922,505 for the twelve months ended November 30, 2011. We expect that the principal source of funds in the near future will be from the sale of common stock, operations and bank financing. We are currently evaluating the operations of the companies we recently acquiredplan to determine if there are opportunities to generate additional efficiencies and synergies among acquired entities which could translate into additional revenues and reduction in operating costs.
In the past we have primarily acquired producing oil and gas properties with opportunities for future development and contracted well operations to contractors. Currently, our primary focus is to secureseek additional capital through business alliances with third parties or other debt/debt or equity financing arrangements to acquire water disposal companies and/or assets. Any suchstabilize and improve our financial condition. Management also plans to work with our current lenders and debt holders to lower our cost of borrowing by renegotiating the terms of our existing debt and potentially offering debt holders an opportunity to exchange their debt for equity in the Company. Management will seek additional funding will be done on an “as needed” basis and will only be donefinancing in those instances in which we believe such additional expendituresfinancings will increaseassist in accomplishing our profitability. However, actual results may differ fromgoals. There can be no assurance that management’s plan and the amount may be material.will succeed.
Our ability to secureobtain access to additional capital through business alliances with third parties or other debt/debt or equity financing arrangements to acquire companies and/or assets which will allow the Company to further operate in the water disposal segment of the oilfield services industry is strictly contingent upon our ability to locate adequate financing or equity to pay for these additional companies and/or assets.investments on commercially reasonable terms. There can be no assurance that we will be able to obtain such financing on acceptable terms.
The following table summarizes our sources and uses of cash for the opportunityyears ended December 31, 2014 and 2013:
For the Years Ended | ||||||||
December 31, 2014 | December 31, 2013 | |||||||
Net cash used in operating activities | $ | (1,242,926 | ) | $ | (8,385 | ) | ||
Net cash provided by investing activities | 704,923 | (444,983 | ) | |||||
Net cash provided by (used in) financing activities | 544,341 | 493,904 | ||||||
Net increase (decrease) in cash | $ | 6,338 | $ | 40,536 |
As of December 31, 2014, we had $115,000 in cash and cash equivalents, an increase of $6,000 from December 31, 2013. The increase was due to buy companies and/or assets that are suitablecash sources from investing activities related to the $0.7 million proceeds from the sale of non-productive assets. During the year ended December 31, 2014, the Company disposed of property and equipment with a cost of $2.8 million and accumulated depreciation of$1.0 million. The Company received total proceeds of $1.0 million and recognized a loss of $0.8 million. During the year ended December 31, 2013, the Company disposed of property and equipment with a cost of $3.7 million and accumulated depreciation of $1.4 million. The Company received total proceeds of $2.7 million and recognized a gain of $0.4 million.Cash provided by financing activities for the year ended December 31, 2014 was $0.9 million, which primarily related to our investment or that we may be ablesale of preferred stock for $0.7 million. The cash provided by investing and financing activities of $1.6 million was offset by cash used by operations of $1.6 million.
Net cash used in operating activities was approximately $1.2 million for the year ended December 31, 2014. Net cash used in operating activities was approximately $8,000 for the year ended December 31, 2013. The increase is cash used from operating activities during the year ended December 31, 2014 of $1.2 million is principally due to obtain financing or equitythe $1.4 million increase in cash used to pay accounts payable and accrued liabilities during 2014.
Net cash provided by investing activities was $0.7 million for the costsyear ended December 31, 2014, which primarily related to proceeds for sales of these additional companies and/or assets at terms that are acceptablenon-productive assets. Net cash used in investing activities was $0.4 million for the year ended December 31, 2013 which consisted of $0.6 million related to us. Additionally, if economic conditions justify the same, we may hire additional employees although we do not currently have any definite plans to make additional hires.
The oil and gas industry is subject to various trends including the availability of capital for drilling new wells, prices received for crude oil and natural gas, sources of crude oil outside our area of operations, interest rates, and the overall healthrelease of the economy. We are not aware of any specific trends that are unusual to our company, as comparedescrow funds related to the restCTT acquisition, and $0.4 million used for capital expenditures and $0.6 million related to proceeds for sales of non-productive assets.
Net cash provided by financing activities was $0.5 million for the oilyear ended December 31, 2014, which consisted of $1.3 million cash received from borrowings, $1.0 million in debt repayments and gas industry.$0.2 million in proceeds from preferred stock subscriptions. Net cash used in financing activities was $0.5 million for the year ended December 31, 2013, which consisted of $1.1 million of cash received from common and preferred stock sales, $0.6 million of escrow funds released related to the CTT acquisition, $1.5 million cash proceeds from borrowings and $2.7 million in debt repayments.
13 |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to complete this item.
14 |
Item 8. CONSOLIDATED FINANCIAL STATEMENTS.
FRONTIER OILFIELD SERVICES, INC.
(Formerly TBX Resources, Inc.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
The Board of Directors and Stockholders Frontier Oilfield Services, Inc. and its subsidiaries
We have audited the accompanying consolidated balance sheets of Frontier Oilfield Services, Inc. and its subsidiaries (the “Company”), as of December 31, We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations since inception and has a working capital deficiency both of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Turner, Stone & Company,
Dallas, Texas March
FRONTIER OILFIELD SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS ACTIVITIES: Frontier Oilfield Services, Inc.
Frontier operates its business
The Company’s financial statements are prepared using U.S. generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of the date of this report, the Company has generated losses from operations, has an accumulated deficit and a In order to continue as a going concern and The accompanying financial statements do not include any adjustments that might be necessary if the Company
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from previously estimated amounts. Revenue Recognition The Company recognizes revenues Cash For purposes of the consolidated statements of cash flows, cash includes demand deposits, time deposits, certificates of deposit and short-term liquid investments with original maturities of three months or less when purchased. Restricted Cash Restricted cash represents certificates of deposit used as collateral for letters of credit issued in favor of the Texas Railroad Commission as required pursuant to the Texas Railroad Commission’s regulations. The letters of credit provide evidence of financial responsibility for the operation of the disposal wells owned by the Company. Restricted cash is not generally available to the Company until the respective letters of credit are cancelled or terminated undrawn.
Accounts Receivable The Company performs periodic credit evaluations of its customers’ financial condition and extends credit to virtually all of its customers on an uncollateralized basis. Credit losses to date have been insignificant and within management’s expectations. The Company provides an allowance for doubtful accounts that is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal accounts receivable are due 30 to 45 days after the issuance of the invoice. Receivables past due more than 60 days are considered delinquent. Delinquent receivables are evaluated for collectability based on individual credit evaluation and specific circumstances of the customer. As of December 31, At December 31,
Parts Inventory Parts inventory consists of replacement parts for the Company’s vehicles and transports and is stated at the lower of cost or market. Cost is determined using Property and Equipment The Company’s property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Maintenance and repair costs are expensed when incurred, while major improvements are capitalized. The cost of assets sold or abandoned and the related accumulated depreciation are eliminated from the accounts and any gains or losses are charged or credited to income in the respective period. The estimated useful lives are as follows:
During the
Long-Lived Assets The Company periodically reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be realizable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.
Asset retirement obligations ASC Topic 410,Asset Retirement and Environmental Obligations, requires companies to recognize a liability for an asset retirement obligation (ARO) at fair value in the period in which the obligation is incurred, if a reasonable estimate of fair value can be made. This obligation relates to the future costs of plugging and abandoning the Company’s The Company has not recorded an ARO for the future estimated reclamation costs associated with the operation of the Company’s Equity Instruments Issued for Goods and Services The Company measures the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized in the consolidated financial statements over the period during which the employee is required to provide services in exchange for the award with a corresponding increase in additional paid-in capital. Fair Value Measurements The ASC Topic 820,Fair Value Measurements and Disclosures,defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
Fair Value of Financial Instruments In accordance with the reporting requirements of ASC Topic 825,Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted taxrates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income tax expense is the tax payable for the year plus or minus the change during the period in deferred tax assets and liabilities. Earnings Per Share (EPS) Basic earnings per common share are calculated by dividing net income or loss by the weighted average number of shares outstanding during the year. Diluted earnings per common share are calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock
On November 1, 2013 the Company affected a four-to-one reverse stock split. All information in this Annual Report on Form 10-K relating to the number of shares, price per share and per share amounts gives retroactive effect to the four-to-one reverse stock split of our capital stock. 4. RECENT ACCOUNTING PRONOUNCEMENTS: During the
In
The
6. LONG-TERM DEBT: Long-term debt as of December 31, 2014 and 2013 were as follows:
In connection with the acquisition of CTT, the Company and its subsidiaries entered into loan agreements effective July 23, 2012 with Capital One On April 11, 2014 an accredited investor, who is also a significant stockholder in the Company, purchased the Senior Loan Facility from Capital One and assumed all the existing terms and conditions of the Credit Agreement and Forbearance Agreements. As of December 31, 2014, certain principal and accrued interest balances on the Senior Loan Facility are past due and the lenders had not exercised their rights under these agreements.
Future maturities of long-term debt as of December 31,
7.
Under the terms of the Company’s employment agreement with Mr. O’Donnell, Mr. O’Donnell receives a grant of 6,250 shares of the Company’s common stock per quarter and a grant of 1 share of the Company’s common stock times the number of years of completed service issued annually. In addition, Mr. O’Donnell receives options to purchase up to 15,000 of the Company’s common stock per calendar quarter at an exercise price equal to the ending bid price of the last market day prior to the date of the option award. The option exercise period for the option is up to two years from its date of issuance, at which time the option expires. Two officers who joined the Company in the first quarter of 2013 received a grant of certain restricted common stock shares as a sign-on bonus. The granted shares were vested proportionally each quarter for the calendar year ended December 31, 2013. Additionally, each Director, except for Mr. O’Donnell, is awarded 6,250 shares of the Company’s common stock per calendar quarter (issued at the beginning of each quarter). During the year ended December 31, 2014 the Company suspended all further stock grants to officers and directors due to the Company’s poor economic performance. Summary Stock Compensation Table The following table sets forth the Company’s paid or accrued stock compensation expense to its officers, directors and employees.
A summary of the status of the Company’s option grants as of
The weighted average fair value at the grant date
Risk-free interest rates for the options were taken from the Daily Federal Yield Curve Rates on the grant dates for the expected life of the options as published by the Federal Reserve. The expected volatility was based upon historical data and other relevant factors such as In calculating the expected life of stock options, the Company determines the amount of time from grant date to contractual term date for vested options. In developing the expected life assumption, all amounts of time are weighted by the number of underlying options. A summary of the status of the Company’s vested and
9 EMPLOYEE BENEFIT CTT sponsors a 401(k) defined contribution plan covering substantially all employees. CTT 10. COMMITMENTS AND CONTINGENCIES:
11. INCOME TAXES:
The Company computes income taxes using the asset and liability approach. The Company currently has no issue that creates timing differences that would mandate deferred tax expense. Due to the uncertainty as to the utilization of net operating loss carryforwards,
The following table reconciles income tax expense and rate base on the statutory rate to the Company’s income tax expense.
Deferred Income Taxes Deferred income taxes primarily represent the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of our deferred taxes are as follows:
At December 31, 12. SUBSEQUENT EVENTS On February 12, 2015 the Company executed a settlement agreement in the litigation with the Coffmans whereby the Coffmans received a cash payment from Chubb in exchange for the termination of the litigation and the cancellation of two subordinated promissory notes with face amounts originally totaling $ 3.7 million. The settlement resulted in the reduction of the Company’s debt by $2.1 million. The Company paid $150,000 in defense costs which represented the amount of the Company’s deductible under its Directors and Officers insurance policy. On March 25, 2015 the Company was notified by its largest customer that the Company was unsuccessful in a competitive bidding process conducted by the
Item 9. Changes In and Disagreements with Accountants and Financial Disclosure.
NONE Item 9A. Controls and Procedures.
Our management
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by
This
Our management, including the CEO, does not expect that
Scope of the The CEO evaluation of Among other matters, the company sought in its evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in our internal controls, or whether we had identified any acts of fraud involving personnel who have a significant role in the our internal controls. Item 9B. Other
On May 23, 2014, the Company issued 1,100,000 shares of cumulative convertible preferred stock and 2,200,000 warrants to purchase shares of the Company’s common stock, for $440,000. On June 30, 2014, Kenneth K. Conte, the Company’s Chief Financial Officer, resigned from his position as Chief Financial Officer and terminated his employment with the Company effective immediately. PART III Item 10.Directors, Executive Officers and Corporate Governance. Our current executive officers and directors, their ages and present positions with Frontier are identified below. Our directors hold office until the next annual meeting of the shareholders following their election or appointment and until their successors have been duly elected and qualified. Our officers are elected by and serve at the pleasure of our Board of Directors.
DONALD RAY LAWHORNE is
BERNARD R. O’DONNELL is the Executive Vice President for our Company. Mr. O’Donnell began with the Company in April 2005. From April 2005 to December 31, 2010 Mr. O’Donnell was also the President and managing principal for Euro American Capital Corporation, a FINRA licensed broker dealer. He has over 36 years of diversified experience in financial sales, investment banking and brokerage operations. He has held series 7, 24, 63, and 66 securities licenses. Mr. O’Donnell has an MBA and a BS degree in Business and Industrial Management from San Jose State University. John L. Stimpson is currently the President and owner in a number of enterprises including Gulf Trading, LLC an importer and exporter of forest products from 1998 to present and Point Logistics, LLC an asset based carrier and brokerage firm from 2005 to present. He is also currently a partner in Stimpson Properties, LLC a residential and commercial real estate management company, a position he began in 1998 and from 1996 to present he is owner/president of Pan American Mayal S.A. a real estate investment and development company located in Costa Rica. Mr. Stimpson has a Bachelor of Arts Degree from the University of Alabama. We have adopted a code of ethics and conduct entitled Frontier Oilfield Services, Inc. Code of Business Conduct and Ethics for Employees, Executive Officers and Directors. The code of ethics and conduct was revised and updated on April 30, 2014. The code of ethics and conduct applies to all of our employees including our principal executive officer, our principal financial officer and our principal accounting officer or any other employees performing a similar service to the Company.
Item 11. Executive Compensation. Compensation Discussion and Analysis Our executive compensation program is designed to create strong financial incentive for our officers to increase revenues, profits, operating efficiency and returns, which we expect to lead to an increase in shareholder value. Our Board of Directors conduct periodic reviews of the compensation and benefits programs to ensure that they are properly designed to meet corporate objectives, overseeing of the administration of the cash incentive and equity-based plans and developing the compensation program for the executive officers. Our executive compensation program includes four primary elements. Three of the elements are performance oriented and taken together; all constitute a flexible and balanced method of establishing total compensation for our executive officers. Our executive compensation program is intended to be simple and clear, and consists of the following elements (depending on individual performance):
The following objectives guide the Board of Directors in its deliberations regarding executive compensation matters:
We believe that the overall compensation of executives should be competitive with the market in which we compete for executive talent. This market consists of both the oil and gas exploration industry and oil and gas service-based industries in which we compete for executive talent. In determining the proper amount for each compensation element, we review publicly available compensation data, as well as the compensation targets for comparable positions at similar corporations within these industries. We also consider the need to maintain levels of compensation that are fair among our executive officers given differences in their respective responsibilities, levels of accountability and decision authority. Compensation Committee We have a compensation committee of our Board of Directors that is Compensation Committee Interlocks and Insider Participation The compensation committee of our Board of Directors consists of the Role of Management in Determining Compensation Decisions At the request of our Board of Directors, our management makes recommendations to our Board of Directors relating to executive compensation program design, specific compensation amounts, equity compensation levels and other executive compensation related matters for each of our executive officers, including our Chief Executive Officer. Our Board of Directors maintains decision-making authority with respect to these executive compensation matters. Our Board of Directors reviews the recommendations of our management with respect to total executive compensation and each element of compensation when making pay decisions. The objectives and details of why each element of compensation is paid are described below. Base Salary.Our objective for paying base salaries to executives is to reward them for performing the core responsibilities of their positions and to provide a level of security with respect to a portion of their compensation. We consider a number of factors when setting base salaries for executives, including:
Stock-Based Compensation. The executive officers stock-based compensation is derived from their employment Agreements.
Bernard (“Dick”) O’Donnell, Executive Vice President. The Company executed 1. Shares. The Executive will be entitled to the issuance of certain common stock of Frontier for services rendered. Upon execution of this Agreement, 100,000 shares of the Company’s common stock will be set aside for distribution to the Executive on a per annual basis (25,000 shares per quarter) beginning 90 days after Executive begins this employment agreement. (25,000 Frontier common shares to be issued each quarter). 2. Stock Grant and Options. The Executive will receive,
a) Grant: Executive shall annually receive 5,000 common shares of the Company’s common stock times his number of years completed service to the Corporation to a maximum of 100,000 shares. b) Option: Executive shall receive the right to purchase up to 15,000 shares of the Company’s common stock per calendar quarter at an exercise price equal to the ending bid price of the last market day prior to the date of the option award. The option exercise period for each option will be up to two years from its date of issuance, at which time the option will expire. In the event of a change in ownership, all unexercised options will be accelerated to the current monthly period.
Our Board elected to suspend all stock based compensation
Benefits. The Company offers life, disability, medical and dental benefits to its employees. In addition, CTT sponsors a 401(k) defined contribution plan covering substantially all of its employees. CTT is required and generally matches contributions up to a maximum of 4% of the participant’s contributions. Summary Compensation Table The following table sets forth the annual and log-term compensation with respect to the year ended December 31,
Option Grants
Aggregated Option Exercises in This Year and Year-End Option Values The following table sets forth the option exercises and year-end option values for the named executive officers.
(1) Based on the closing price of our common stock on December 31, 2014 of $0.60 per share less the exercise price payable for those shares. Employment Agreements
Bernard (“Dick”) O’Donnell, Executive Vice President.
Termination of Employment and Change of Control Arrangement If There is no compensatory plan or arrangement with respect to any individual named above which results or will result from a change in our control. There are no agreements or understandings, whether written or unwritten, concerning any type of compensation, whether present, deferred or contingent, that is based on or otherwise relates to an acquisition, merger, consolidation, sale or other disposition of all or substantially all assets of the Company. Compensation of Directors
Compensation Committee Report Our Board of Directors reviewed and discussed the Compensation Discussion and Analysis with management and, based on such discussion, included the Compensation Discussion and Analysis in this Annual Report on Form 10-K.
As of TITLE OF CLASS OF OWNER Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock All Directors and Officers as a Group and Shareholders Owning More Than 5% of the Common Stock.
Item 13. Certain Relationships and Related Transactions and Director Independence. John Stimpson is the only independent board member. Don Lawhorne is our Chief Executive Officer and one of the board members. Bernard O’Donnell is an Executive Vice President and one of our board members. On During the year ended December 31, 2014, the Board of
Item 14. Principal Accounting Fees and Services. Audit Fees The aggregate fees billed by our independent auditors, for professional services rendered for the audit of our annual consolidated financial statements on Form 10-K and the reviews of the financial reports included in our Quarterly Reports on Form 10-Q for the years ended December 31, Tax Fees Fees billed by our auditors for professional services in connection with tax compliance, tax advice or tax planning for the year ended December 31, All Other Fees No fees were billed by our auditors for products and services other than those described above under “Audit Fees” and “Tax Fees” for the year ended December 31, Board of Directors Pre-Approval Policies and Procedures In December 2003, the Board of Directors adopted policies and procedures for pre-approving all audit and non-audit services provided by our independent auditors prior to the engagement of the independent auditors with respect to such services. Under the policy, our independent auditors are prohibited from performing certain non-audit services and are pre-approved to perform certain other non-audit and tax related services provided that the aggregate fees for such pre-approved non-audit and tax related services do not exceed a pre-set minimum. Item 15. Exhibits, Financial Statement Schedules.
Financial Statement Schedules The following have been made part of this report and appear in Item 8 above. Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets – December 31, Consolidated Statements of Operations- For The Years Ended December 31, Consolidated Statements of Cash Flows- For The Years Ended December 31, Consolidated Statements of Changes For The Years Ended December 31, Notes to Consolidated Financial Statements Exhibits
* Filed herewith 101 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Schema 101.CAL XBRL Taxonomy Calculation Linkbase 101.LAB XBRL Taxonomy Label Linkbase 101.PRE XBRL Taxonomy Presentation Linkbase 101.DEF XBRL Taxonomy Definition Linkbase In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the FRONTIER OILFIELD SERVICES, INC.
In accordance with the Exchange Act, this
|