UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2013
Or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from: to
Commission File Number:0-30746
FRONTIER OILFIELD SERVICES, 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 Number) |
| 3030 LBJ Freeway, Suite 1320 | 75234 |
| (Address of principal executive offices) | (Zip Code) |
(972) 234-2610
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required 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 o☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x☒ Yes o ☐
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 |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o☐ Yes x☒ No
As of November 14, 2013June 4, 2014 there were 21,987,2965,894,986 shares of common stock, par value $0.01 per share, outstanding.
FRONTIER OILFIELD SERVICES, INC.
Index
| Pg. No. | ||
| F-1 & F-2 | ||
| F-3 | ||
| F-4 & F-5 | ||
| F-6 | ||
| 3 | ||
| 7 | ||
| 7 | ||
| 8 | ||
| 8 | ||
| 8 | ||
| 8 | ||
| 8 | ||
| 9 |
| |
FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
(UNAUDITED)
| September 30, 2013 | December 31, 2012 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | — | $ | 60,568 | ||||
| Certificate of deposit | 77,614 | 77,614 | ||||||
| Accounts receivable | 1,441,300 | 2,892,481 | ||||||
| Inventory, primarily parts | 274,024 | 299,384 | ||||||
| Prepaid expenses, primarily insurance | 1,918,588 | 1,269,347 | ||||||
| Current assets of discontinued operations | 181,808 | 1,190,631 | ||||||
| Deferred loan origination fees, current portion | 300,970 | 336,297 | ||||||
| Total current assets | 4,194,304 | 6,126,322 | ||||||
| Property and equipment: | ||||||||
| Property and equipment, at cost | 16,473,931 | 16,350,008 | ||||||
| Less accumulated depreciation | (2,212,291 | ) | (684,503 | ) | ||||
| Total property and equipment | 14,261,640 | 15,665,505 | ||||||
| Other assets: | ||||||||
| Intangibles, net | 3,593,164 | 3,898,245 | ||||||
| Assets held for sale (Note 11) | 5,604,142 | 6,596,110 | ||||||
| Restricted cash | — | 619,922 | ||||||
| Other assets of discontinued operations | 10,620 | 25,960 | ||||||
| Deferred loan fees, net of current portion | 693,178 | 913,539 | ||||||
| Deposits | 13,417 | 14,892 | ||||||
| Total other assets | 9,914,521 | 12,068,668 | ||||||
| Total Assets | $ | 28,370,465 | $ | 33,860,495 | ||||
| March 31, 2014 | December 31, 2013 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | — | $ | 52,120 | ||||
| Certificate of deposit | 77,614 | 77,614 | ||||||
| Accounts receivable, net of allowance of doubtful accounts of $33,321 | 1,503,347 | 1,536,084 | ||||||
| Other receivable | 287,076 | 287,076 | ||||||
| Inventory, primarily parts | 164,905 | 214,969 | ||||||
| Prepaid expenses, primarily insurance | 921,003 | 1,364,303 | ||||||
| Current assets of discontinued operations | 73,792 | 126,059 | ||||||
| Deferred loan origination fees, current portion | 289,194 | 289,194 | ||||||
| Total current assets | 3,316,931 | 3,947,419 | ||||||
| Property and equipment: | ||||||||
| Property and equipment, at cost | 16,332,181 | 16,624,281 | ||||||
| Less accumulated depreciation | (3,980,115 | ) | (3,434,197 | ) | ||||
| Total property and equipment | 12,352,066 | 13,190,084 | ||||||
| Other assets: | ||||||||
| Intangibles, net | 3,389,778 | 3,491,472 | ||||||
| Assets held for sale | 1,704,965 | 1,946,743 | ||||||
| Other assets of discontinued operations | 10,493 | 10,620 | ||||||
| Deferred loan fees, net of current portion | 548,582 | 625,296 | ||||||
| Deposits | 13,417 | 13,417 | ||||||
| Total other assets | 5,667,235 | 6,087,548 | ||||||
| Total Assets | $ | 21,336,232 | $ | 23,225,051 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2013 | December 31, 2012 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Current portion of long-term debt | $ | 10,266,567 | $ | 12,643,199 | ||||
| Bank overdraft | 290,091 | — | ||||||
| Accounts payable | 3,893,562 | 3,629,236 | ||||||
| Accrued liabilities | 748,442 | 944,014 | ||||||
| Financed insurance premiums payable | 1,785,599 | 820,499 | ||||||
| Current liabilities of discontinued operations | 1,834,528 | 1,240,723 | ||||||
| Escrow liability | — | 619,922 | ||||||
| Deferred consideration payable for acquisition of CTT | 2,300,000 | 2,300,000 | ||||||
| Total current liabilities | 21,118,789 | 22,197,593 | ||||||
| Long-term debt, less current maturities (Note 8) | 2,216,714 | 2,055,096 | ||||||
| Non-current liabilities of discontinued operations | 124,567 | 170,474 | ||||||
| Deferred consideration payable for acquisition of CTT | — | 4,708,348 | ||||||
| Total Liabilities | 23,460,070 | 29,131,511 | ||||||
| Commitments and Contingencies (Note 9) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock- $.01 par value; authorized 10,000,000; 1,750,000 issued and outstanding at September 30, 2013 | 17,500 | — | ||||||
| Common stock- $.01 par value; authorized 100,000,000 shares; | ||||||||
| 21,587,296 shares issued and outstanding at September 30, 2013 | ||||||||
| 18,116,357 shares issued and outstanding at December 31, 2012 | 215,873 | 181,163 | ||||||
| Additional paid-in capital | 30,929,519 | 22,986,615 | ||||||
| Prepaid stock compensation | (161,000 | ) | — | |||||
| Accumulated deficit | (26,091,497 | ) | (18,438,794 | ) | ||||
| Total stockholders’ equity | 4,910,395 | 4,728,984 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 28,370,465 | $ | 33,860,495 | ||||
| March 31, 2014 | December 31, 2013 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Current portion of long-term debt | $ | 7,778,256 | $ | 8,756,472 | ||||
| Bank overdraft | 262,132 | — | ||||||
| Accounts payable | 3,015,072 | 3,397,230 | ||||||
| Accrued liabilities | 1,222,413 | 1,036,836 | ||||||
| Financed insurance premiums payable | 641,429 | 1,119,213 | ||||||
| Current portion of loans from shareholder | — | 1,596,000 | ||||||
| Current liabilities of discontinued operations | 1,383,263 | 1,475,743 | ||||||
| Total current liabilities | 14,302,565 | 17,381,494 | ||||||
| Loans from shareholder, less current maturities | 2,793,000 | — | ||||||
| Long-term debt, less current maturities | 1,432,235 | 1,656,231 | ||||||
| Total Liabilities | 18,527,800 | 19,037,725 | ||||||
| Commitments and Contingencies (Note 9) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock- $.01 par value; authorized 10,000,000; 1,750,000 issued or outstanding | 17,500 | 17,500 | ||||||
| Common stock- $.01 par value; authorized 100,000,000 shares; 5,894,986 shares issued and outstanding at March 31, 2014 5,553,157 shares issued and outstanding at December 31, 2013 | 58,950 | 55,531 | ||||||
| Additional paid-in capital | 31,709,342 | 31,659,261 | ||||||
| Prepaid stock compensation | (37,000 | ) | (74,000 | ) | ||||
| Accumulated deficit | (28,940,360 | ) | (27,470,966 | ) | ||||
| Total stockholders’ equity | 2,808,432 | 4,187,326 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 21,336,232 | $ | 23,225,051 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||
| Revenues, net of discounts | $ | 6,523,784 | $ | 7,202,034 | $ | 23,986,732 | $ | 7,203,943 | ||||||||
| Costs and expenses: | ||||||||||||||||
| Direct operating costs | 5,424,491 | 5,614,228 | 18,072,026 | 5,615,929 | ||||||||||||
| Indirect operating costs | 815,685 | 1,518,845 | 3,712,667 | 1,518,845 | ||||||||||||
| General and administrative | 1,348,828 | 1,173,407 | 5,048,561 | 2,501,249 | ||||||||||||
| Depreciation and amortization | 685,242 | 382,768 | 2,050,120 | 384,521 | ||||||||||||
| Total costs and expenses | 8,274,246 | 8,689,248 | 28,883,374 | 10,020,544 | ||||||||||||
| Operating loss | (1,750,462 | ) | (1,487,214 | ) | (4,896,642 | ) | (2,816,601 | ) | ||||||||
| Other (income) expense: | ||||||||||||||||
| Interest expense | 417,784 | 358,163 | 1,262,851 | 358,163 | ||||||||||||
| Gain on disposal of property and equipment | (648 | ) | — | (56,504 | ) | — | ||||||||||
| Equity in loss of unconsolidated affiliated company | — | — | — | 169,794 | ||||||||||||
| Impairment loss on net profits interest in affiliate | — | 284,900 | 284,900 | |||||||||||||
| Loss before provision for income taxes | (2,167,598 | ) | (2,130,277 | ) | (6,102,989 | ) | (3,629,458 | ) | ||||||||
| Provision for state income taxes | — | — | — | 6,735 | ||||||||||||
| Loss from continuing operations | (2,167,598 | ) | (2,130,277 | ) | (6,102,989 | ) | (3,636,193 | ) | ||||||||
| Loss from discontinued operations, net of income taxes | (552,863 | ) | (238,443 | ) | (1,544,172 | ) | (343,783 | ) | ||||||||
| Net loss | (2,720,461 | ) | (2,368,720 | ) | (7,647,161 | ) | (3,979,976 | ) | ||||||||
| Less: loss attributable to noncontrolling interest | — | 105,018 | — | 156,635 | ||||||||||||
| Net loss attributable to Frontier Oilfield Services, Inc. | $ | (2,720,461 | ) | $ | (2,263,702 | ) | $ | (7,647,161 | ) | $ | (3,823,341 | ) | ||||
| Net loss per common share - basic and diluted: | ||||||||||||||||
| Continuing operations | $ | (0.10 | ) | $ | (0.15 | ) | $ | (0.30 | ) | $ | (0.33 | ) | ||||
| Discontinued operations | (0.03 | ) | (0.01 | ) | (0.07 | ) | (0.02 | ) | ||||||||
| Total | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.37 | ) | $ | (0.35 | ) | ||||
| Weighted Average Common Shares Outstanding: | ||||||||||||||||
| Basic and Diluted | 21,424,253 | 14,401,495 | 20,674,599 | 11,026,591 | ||||||||||||
| For the Three Months Ended | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
| Revenues, net of discounts | $ | 4,869,012 | $ | 9,099,919 | ||||
| Costs and expenses: | ||||||||
| Direct operating costs | 3,977,597 | 6,567,270 | ||||||
| Indirect operating costs | 836,682 | 1,471,171 | ||||||
| General and administrative | 513,244 | 1,871,168 | ||||||
| Depreciation and amortization | 711,614 | 717,459 | ||||||
| Total costs and expenses | 6,039,137 | 10,627,068 | ||||||
| Operating loss | (1,170,125 | ) | (1,527,149 | ) | ||||
| Other (income) expense: | ||||||||
| Interest expense | 205,385 | 351,524 | ||||||
| (Gain) loss on disposal of property and equipment | (48,499 | ) | 8,660 | |||||
| Loss on extinguishment of debt | 4,453 | — | ||||||
| Loss before provision for income taxes | (1,331,464 | ) | (1,887,333 | ) | ||||
| Provision for state income taxes | 46,564 | — | ||||||
| Loss from continuing operations | (1,378,028 | ) | (1,887,333 | ) | ||||
| Loss from discontinued operations, net of income taxes | (91,366 | ) | (594,452 | ) | ||||
| Net loss attributable to Frontier Oilfield Services, Inc. | $ | (1,469,394 | ) | $ | (2,481,785 | ) | ||
| Net loss per common share - basic and diluted: | ||||||||
| Continuing operations | $ | (0.25 | ) | $ | (0.37 | ) | ||
| Discontinued operations | (0.01 | ) | (0.12 | ) | ||||
| Total | $ | (0.26 | ) | $ | (0.49 | ) | ||
| Weighted Average Common Shares Outstanding: | ||||||||
| Basic and Diluted | 5,608,303 | 5,042,035 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, 2013 | September 30, 2012 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (7,647,161 | ) | $ | (3,979,976 | ) | ||
| Less: Loss from discontinued operations, net of taxes | (1,544,172 | ) | (343,783 | ) | ||||
| Loss from continuing operations, net of taxes | (6,102,989 | ) | (3,636,193 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 2,050,120 | 384,521 | ||||||
| Issuance of common stock for services | 1,953,138 | 955,813 | ||||||
| Impairment loss on net profits interest in subsidiary | — | 284,900 | ||||||
| Equity loss of unconsolidated affiliated company | — | 169,794 | ||||||
| Gain on sale of property and equipment | (56,504 | ) | (2,750 | ) | ||||
| Amortization of deferred loan fees | 255,688 | 52,307 | ||||||
| Changes in operating assets and liabilities other than advances from affiliates: | ||||||||
| Decrease (increase) in operating assets: | ||||||||
| Accounts receivable | 1,451,181 | (135,782 | ) | |||||
| Inventory, primarily parts | 25,360 | 27,074 | ||||||
| Prepaid expenses, primarily insurance | (649,241 | ) | 419,454 | |||||
| Deposits | 1,475 | (2,996 | ) | |||||
| Increase in operating liabilities: | ||||||||
| Accounts payable and accrued liabilities | 63,212 | 994,176 | ||||||
| Financed insurance premiums payable | 965,100 | — | ||||||
| Net cash used in operating activities of continuing operations | (43,460 | ) | (489,682 | ) | ||||
| Net cash provided by operating activities of discontinued operations | 1,077,613 | 387,905 | ||||||
| Net cash provided by (used in) operating activities | 1,034,153 | (101,777 | ) | |||||
| Cash Flows From Investing Activities: | ||||||||
| Cash used for acquisition of subsidiaries net of cash received | — | (1,900,402 | ) | |||||
| Purchase of property and equipment | (381,199 | ) | (287,783 | ) | ||||
| Proceeds from sale property and equipment | 96,529 | 4,500 | ||||||
| Escrow liability | (619,922 | ) | — | |||||
| Purchase of certificate of deposit | — | (77,614 | ) | |||||
| Payments to related party | — | (288,790 | ) | |||||
| Net cash used in investing activities of continuing operations | (904,592 | ) | (2,550,089 | ) | ||||
| Net cash provided by investing activities of discontinued operations | 5,306 | — | ||||||
| Net cash used in investing activities | (899,286 | ) | (2,550,089 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from preferred stock subscriptions | 700,000 | 2,353,000 | ||||||
| Net change in line of credit | (1,102,414 | ) | — | |||||
| Proceeds from notes payable | 803,500 | 2,308,509 | ||||||
| Payments on notes payable | (1,843,865 | ) | (226,102 | ) | ||||
| Payments from restricted cash account | 619,922 | — | ||||||
| Common stock sales | 400,393 | 90,000 | ||||||
| Deferred loan origination fees | — | (1,455,042 | ) | |||||
| Increase in bank overdraft | 290,091 | — | ||||||
| Net cash provided by (used in) financing activities of continuing operations | (132,373 | ) | 3,070,365 | |||||
| Net cash used in financing activities of discontinued operations | (63,062 | ) | (7,306 | ) | ||||
| Net cash provided by (used in) financing activities | (195,435 | ) | 3,063,059 | |||||
| Net increase (decrease) in cash | (60,568 | ) | 411,193 | |||||
| Cash at beginning of period | 60,568 | 5,050 | ||||||
| Cash at end of period | $ | — | $ | 416,243 | ||||
| For the Three Months Ended | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (1,469,394 | ) | $ | (2,481,785 | ) | ||
| Less: Loss from discontinued operations, net of income taxes | (91,366 | ) | (594,452 | ) | ||||
| Loss from continuing operations, net of taxes | (1,378,028 | ) | (1,887,333 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 711,614 | 717,459 | ||||||
| Issuance of common stock for services | 37,000 | 1,049,136 | ||||||
| Loss on extinguishment of debt | 4,453 | — | ||||||
| Allocated and direct expenses to affiliates | — | — | ||||||
| (Gain) loss on disposal of property and equipment | (48,499 | ) | 8,660 | |||||
| Amortization of deferred loan fees | 76,714 | 88,491 | ||||||
| Changes in operating assets and liabilities other than advances from affiliates: | ||||||||
| Decrease (increase) in operating assets: | ||||||||
| Accounts receivable | 32,737 | 403,206 | ||||||
| Deposits & other | — | (5,000 | ) | |||||
| Inventory, primarily parts | 50,064 | 8,219 | ||||||
| Prepaid expenses, primarily insurance | 443,300 | 386,530 | ||||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable and accrued liabilities | (196,581 | ) | 484,946 | |||||
| Financed insurance premiums payable | (477,784 | ) | (474,546 | ) | ||||
| Net cash provided by (used in) operating activities of continuing operations | (745,010 | ) | 779,768 | |||||
| Net cash used in operating activities of discontinued operations | (43,649 | ) | (162,277 | ) | ||||
| Net cash provided by (used in) operating activities | (788,659 | ) | 617,491 | |||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of property and equipment | — | (571,048 | ) | |||||
| Proceeds from sale property and equipment | 164,473 | 47,673 | ||||||
| Escrow liability | — | (378,272 | ) | |||||
| Net cash provided by (used in) investing activities of continuing operations | 164,473 | (901,647 | ) | |||||
| Net cash used in investing activities of discontinued operations | — | (31,721 | ) | |||||
| Net cash provided by (used in) investing activities | 164,473 | (933,368 | ) | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, 2013 | September 30, 2012 | |||||||
| Supplemental Cash Flow Disclosures | ||||||||
| Interest paid | $ | 1,007,163 | $ | 334,672 | ||||
| Supplemental Schedule of Non-Cash Investing and Financing Activities | ||||||||
| Issuance of common stock and debt for acquisitions | $ | — | $ | 25,361,102 | ||||
| Term notes payable issued for property and equipment | $ | — | $ | 570,035 | ||||
| Preferred stock issued for investment in affiliate | $ | — | $ | 147,000 | ||||
| Reduction of deferred loan origination fees against notes payable | $ | — | $ | 45,704 | ||||
| Settlement of deferred consideration payable for acquisition of CTT | $ | 4,708,348 | $ | — | ||||
| Fair value of common stock warrants issued with preferred stock | $ | 503,774 | ||||||
| Beneficial conversion features of Asher Note | $ | 72,235 | ||||||
| Cumulative dividend payable recorded in accrued liabilities | $ | 5,542 | $ | — | ||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||
| For the Three Months Ended | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
| Cash Flows From Financing Activities: | ||||||||
| Loans from shareholder | 1,197,000 | — | ||||||
| Net change in line of credit | (887,066 | ) | 45,624 | |||||
| Payments on notes payable | — | (383,724 | ) | |||||
| Payments from restricted cash account | — | 378,272 | ||||||
| Common stock sales | — | 399,393 | ||||||
| Increase in bank overdraft | 262,132 | — | ||||||
| Net cash provided by financing activities of continuing operations | 572,066 | 439,565 | ||||||
| Net cash used in financing activities of discontinued operations | — | (14,111 | ) | |||||
| Net cash provided by financing activities | 572,066 | 425,454 | ||||||
| Net increase (decrease) in cash | (52,120 | ) | 109,577 | |||||
| Cash at beginning of period | 52,120 | 60,568 | ||||||
| Cash at end of period | $ | — | $ | 170,145 | ||||
| Supplemental Cash Flow Disclosures | ||||||||
| Interest paid | $ | 97,291 | $ | 253,549 | ||||
| Supplemental Schedule of Non-Cash Investing and Financing Activities | ||||||||
| Convertible notes conversion | $ | 53,500 | $ | — | ||||
| Proceeds from sale of properties to pay term note and vendors | $ | 308,870 | $ | — | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
FRONTIER OILFIELD SERVICES, INC.
| 1. | BASIS OF PRESENTATION: |
The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. However, in the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the periods presented have been made. The results for interim periods are not necessarily indicative of trends or of results to be expected for the full year. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 20122013 (including the notes thereto) set forth in Form 10-K.
| 2. | BUSINESS ACTIVITIES: |
Frontier Oilfield Services, Inc. a Texas corporation (and collectively with its subsidiaries, “we”, “our”, “Frontier”, “FOSI”, or the “Company”), was organized on March 24, 1995. The accompanying condensed consolidated financial statements include the accounts of the Company and Frontier Acquisition I, Inc., and its subsidiary Chico Coffman Tank Trucks, Inc. and its subsidiary Coffman Disposal, LLC, and Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC.
The Company’s current business, through its subsidiaries, is in the oil field servicesoilfield service industry, including the transportation and disposal of salt watersaltwater and other oil fieldoilfield fluids in Texas. The Company currently owns and operates thirteeneleven disposal wells in Texas. The Company’s customer base includes national, integrated, and independent oil and gas exploration companies.
| 3. | GOING CONCERN: |
The Company’s financial statements are prepared using 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, haveand has an accumulated deficit and a working capital deficiency. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues sufficient to meet ourits operating expenses. The Company’s continuation as a going concern is dependent upon management’s ability to raise equity or debt financing, and the attainment of profitable operations from the Company’s planned business.
The Company’s ability to continue as a going concern is dependent upon management’s ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
| 4. | SUMMARY OF SELECTED 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.
Reclassification of Discontinued Operations
In accordance with ASC Topic 205, regarding the presentation of discontinued operations the assets, liabilities and activity of FIG have been reclassified as discontinued operations for all periods presented.
Revenue Recognition
The Company recognizes revenues in accordance with (ASC 605), Revenue Recognition,when services are rendered, field tickets are signed and Staff Accounting Bulletin No 104,received, and accordingly all of the following criteria must be met for revenues to be recognized: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyerwhen payment is fixed and determinable and collectability is reasonably
Fair Value Measurements
The ASC Topic 820,Fair Value Measurements and Disclosures, Measurement,defines fair value, establishes a framework for measuring fair value in accordance with U.S. Generally Accepted Accounting Principles,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. Impairment analyses will be made
Fair Value of all assets using future cash flow analysis. An impairment loss would be recognized when estimated future cash flows expected to result fromFinancial Instruments
In accordance with the usereporting requirements of ASC Topic 825,Financial Instruments, the asset and its eventual disposition is less than its carrying amount.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Earnings based deferred consideration liability related to the CTT acquisition | — | — | 2,300,000 | 2,300,000 | ||||||||||||
Earnings Per Share (EPS)
Basic earnings per common share isare calculated by dividing net income or loss by the weighted average number of shares outstanding during the year. Diluted earnings per common share isare calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock options.options and warrants. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of shares that would have an anti-dilutiveantidilutive effect on earnings per common share. Anti-dilution results from an increase in earnings per share or reduction in loss per share from the inclusion of potentially dilutive shares in EPS calculations.
Reverse Stock Split
On November 1, 2013 the Company affected a four-to-one reverse stock split. All information in these condensed financial statements 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.
Property and Equipment
During the year ended March 31, 2014, the Company disposed of property and equipment with a cost of $292,000 and accumulated depreciation of $64,000. The Company received total proceeds of approximately $276,000 of which approximately $112,000 was paid directly to the lender and recognized a gain of $48,499 in the accompanying consolidated statements of operations. During the year ended March 31, 2013, the Company disposed of property and equipment with a cost of $65,000 and accumulated depreciation of $8,667. The Company received total proceeds of approximately $48,000 and recognized a loss of $8,660 in the accompanying consolidated statements of operations.
| 5. | BUSINESS ACQUISITIONS: |
Acquisition of Frontier Income and Growth, LLC
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 paid 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.
The acquisition date fair value of the Company’s equity interest in FIG held immediately before May 31, 2012 was $3,791,996. The Company’s fair value equity interest was determined by taking the fair value of the net assets acquired and deducting the majority interest ownership immediately before May 31, 2012. There was no gain or loss on re-measuring the investment.
The transaction has been accounted for using the acquisition method of accounting which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The Company has finalized the determination of the fair values of the assets acquired and liabilities assumed.
Fair value of consideration transferred | $ | 3,877,000 | ||
Cash | $ | 907,132 | ||
Accounts receivable and accrued revenue | 1,794,260 | |||
Inventory | 61,905 | |||
Property and equipment (net) | 7,081,025 | |||
Deposits | 25,960 | |||
Other assets | 1,026,903 | |||
Notes payable | (2,346,973 | ) | ||
Accounts payable and accrued expenses | (881,216 | ) | ||
| Fair value of net assets acquired as of May 31, 2012 | 7,668,996 | |||
Non-controlling interest adjustment | (3,791,996 | ) | ||
Fair value of consideration transferred | $ | 3,877,000 | ||
In September 2012, the Company acquired the remaining 49% ownership of FIG. The transaction was valued at $5,610,000. The following is the final fair value of the non-controlling interest acquired by the Company in the transaction reconciled to the total final fair value of the consideration transferred:
Fair value of 49% interest in FIG | $ | 3,635,361 | ||
| Decrease in additional paid-in capital on purchase of 49% interest in FIG | 1,974,639 | |||
Fair value of consideration transferred | $ | 5,610,000 | ||
Acquisition of Chico Coffman Tank Trucks, Inc.
The Company through a wholly owned subsidiary, Frontier Acquisition I, Inc. completed the acquisition of Chico Coffman Tank Trucks, Inc. on July 31, 2012 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.
The transaction has been accounted for using the acquisition method of accounting which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The Company has finalized the determination of the fair values of the assets acquired and liabilities assumed.
| Cash and debt consideration | $ | 9,978,591 | ||||||
| Earnings based deferred compensation liability | 2,300,000 | |||||||
| Share based deferred compensation liability | 4,708,348 | |||||||
| Total fair value consideration | $ | 16,986,939 | ||||||
| Cash | $ | 78,135 | ||
| Accounts receivable | 3,023,355 | |||
| Inventory | 251,605 | |||
| Prepaid expenses | 655,616 | |||
| Property and equipment | 15,982,000 | |||
| Intangible assets | 4,067,735 | |||
| Other assets | 15,356 | |||
| Accounts payable and accrued expenses | (4,682,095 | ) | ||
| Financed insurance premiums | (81,024 | ) | ||
| Notes payable | (2,323,744 | ) | ||
| Fair value of consideration transferred | $ | 16,986,939 |
The share based deferred consideration liability was settled in May 2013 in which the company issued an additional 572,913143,228 shares of common stock in full satisfaction of the Company’s liability. A total of 1,750,000437,500 common shares were issued to settle the liability by increasing the amount of the equity by the same amount of the liability settlement with no gain or loss recognized for the liability settlement.
The Company’s operating results are substantially affected byprevious owner of CTT was granted the right to receive additional consideration based on specified earnings targets at the end of the contingency period, which is July 31, 2013, as specified in the CTT acquisition agreement. The fair value of the earnings based contingent liability was determined based on the earnings as of future fiscal period-ends. Based on CTT’s earnings through December 31, 2013 and 2012, the fair value of the earnings based contingent liability of $2,300,000 (recorded at the acquisition date) has changed as of CTT which can limit comparabilityDecember 31, 2013 and the additional consideration to be paid based upon specific earnings targets were not achieved and therefore the contingent liability of financial results$2,300,000 has been written off and included in other income (expense) for the nine months ended September 30, 2013 to 2012.
| 5. | INTANGIBLE ASSETS: |
In connection with the acquisition of CTT, the Company acquired intangible assets consisting of disposal well permits, and customer relationships. The Company valued the disposal well permits using the build-out (Greenfield) valuation technique. The customer relationships were valued by the Company using the excess earnings valuation technique.
Disposal well permits and customer relationships are considered definite-life intangible assets which are amortizable over their estimated useful life.
The intangible assets, net of amortization as of September 30, 2013March 31, 2014 were as follows:
| September 30, 2013 | |||||||||||||
| Accumulated | Weighted Average | ||||||||||||
| Gross | Amortization | Net | Useful Life | ||||||||||
| Intangible assets: | |||||||||||||
| Disposal well permits | $ | 2,093,867 | $ | (244,285 | ) | $ | 1,849,582 | 10 years | |||||
| Customer relationships | 1,973,867 | (230,285 | ) | 1,743,582 | 10 years | ||||||||
| $ | 4,067,734 | $ | (474,570 | ) | $ | 3,593,164 | |||||||
| March 31, 2014 | ||||||||||||||||
| Accumulated | Weighted Average | |||||||||||||||
| Gross | Amortization | Net | Useful Life | |||||||||||||
| Intangible assets: | ||||||||||||||||
| Disposal well permits | $ | 2,093,867 | $ | (348,978 | ) | $ | 1,744,889 | 10 years | ||||||||
| Customer relationships | 1,973,867 | (328,978 | ) | 1,644,889 | 10 years | |||||||||||
| $ | 4,067,734 | $ | (677,956 | ) | $ | 3,389,778 | ||||||||||
Future amortization expense for definite-life intangible assets as of September 30, 2013March 31, 2014 is as follows:
| Periods | ||||
| Ending | ||||
| September 30, | ||||
| 2014 | $ | 406,776 | ||
| 2015 | 406,776 | |||
| 2016 | 406,776 | |||
| 2017 | 406,776 | |||
| 2018 | 406,776 | |||
| Thereafter | 1,559,284 | |||
| $ | 3,593,164 | |||
| Periods Ending March 31, | |||||
| 2015 | $ | 406,776 | |||
| 2016 | 406,776 | ||||
| 2017 | 406,776 | ||||
| 2018 | 406,776 | ||||
| 2019 | 406,776 | ||||
| Thereafter | 1,355,898 | ||||
| $ | 3,389,778 | ||||
| 6. | STOCK BASED COMPENSATION: |
Under the terms of the Company’s employment agreements with its officers, certain officers receive a grant of 25,000 shares of the Company’s common stock per quarter and a grant of 5,000 shares of the Company’s common sharesstock times the number of years of completed service issued annually. In addition, certain officers receive 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 each option is up to two years from its date of issuance, at which time the option expires. Also, two officers who joined the Company in the first quarter of this year received a grant of certain restricted common stock shares as a sign-on bonus. The granted shares vest proportionally each quarter for the calendar year ended December 31, 2013.
The board, with mutual agreement from the officers of the Company, elected to suspend all stock based compensation in 2014 as part of the Company’s common stock per calendar quarter (issued at the beginning of each quarter).
Summary Stock Compensation Table
The following table sets forth the Company’s paid or accrued stock compensation expense to its officers, directors and employees.
Stock Awards | Stock Options Awards | Non-Vested Stock Awards (1) | Securities Underlying Non-Vested Stock (1) | Total | ||||||||||||||||
Nine months ended September 30, 2013 | $ | 1,131,636 | $ | 64,500 | $ | 554,500 | 605,000 | $ | 1,750,636 | |||||||||||
Nine months ended September 30, 2012 | $ | 651,751 | $ | 69,750 | $ | 191,250 | 300,000 | $ | 912,751 | |||||||||||
| Securities | ||||||||||||||||||||
| Stock | Non-Vested | Underlying | ||||||||||||||||||
| Stock | Options | Stock | Non-Vested | |||||||||||||||||
| Awards | Awards | Awards (1) | Stock (1) | Total | ||||||||||||||||
| Three months ended March 31, 2014 | $ | — | $ | — | $ | 37,000 | — | $ | 37,000 | |||||||||||
| Three months ended March 31, 2013 | $ | 838,086 | $ | 42,300 | $ | 168,750 | 300,000 | $ | 1,049,136 | |||||||||||
(1) As of September 30, 2013,March 31, 2014, the Company’s unrecognized compensation expense related to the nonvested stock grants was $161,000.
A summary of the status of the Company’s option grants as of September 30, 2013March 31, 2014 and December 31, 20122013 and the changes during the periods then ended is presented below:
| Shares | Weighted-Average Exercise Price | Weighted Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding December 31, 2012 | 150,000 | $ | 1.54 | 1.64 | $ | 231,000 | ||||||||||
Granted | 120,000 | $ | 1.28 | 1.72 | $ | 153,600 | ||||||||||
Exercised | — | — | — | — | ||||||||||||
Forfeited | — | — | — | — | ||||||||||||
Outstanding September 30, 2013 | 270,000 | $ | 1.43 | 1.67 | $ | 386,100 | ||||||||||
| Weighted Average | ||||||||||||||||
| Weighted Average | Remaining Contractual | Aggregate | ||||||||||||||
| Exercise | Term | Intrinsic | ||||||||||||||
| Shares | Price | (in Years) | Value | |||||||||||||
| Outstanding December 31, 2013 | 300,000 | $ | 1.58 | 1.11 | $ | 474,450 | ||||||||||
| Granted | — | — | — | — | ||||||||||||
| Exercised | — | — | — | — | ||||||||||||
| Forfeited | (30,000 | ) | 0.70 | — | — | |||||||||||
| Outstanding March 31, 2014 | 270,000 | $ | 1.68 | 0.96 | $ | 453,450 | ||||||||||
The weighted average fair value at the grant date for options issued during the ninethree months ended September 30, 2013March 31, 2014 was estimated using the Black-Scholes option valuation model with the following inputs:
Average expected life in years | 2 | |||
Average risk-free interest rate | 2.00 | % | ||
Average volatility | 75 | % | ||
Dividend yield | 0 | % | ||
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 the Company’s changes in historical volatility, capital structure, and its daily trading volumes.
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 non-vested option grants at September 30, 2013March 31, 2014 and the weighted average grant date fair value is presented below:
| Shares | Weighted Average Grant Date Fair Value per Share | Weighted Average Grant Date Fair Value | ||||||||||
Vested | 270,000 | $ | .63 | $ | 169,500 | |||||||
Nonvested | — | — | — | |||||||||
Total | 270,000 | $ | .63 | $ | 169,500 | |||||||
| Shares | Weighted Average Grant Date Value per Share | Grant Date Value | ||||||||||
Nonvested | 175,000 | $ | 0.92 | $ | 161,000 | |||||||
Forfeited | 100,000 | $ | 1.90 | $ | 190,000 | |||||||
Total | 275,000 | $ | 1.28 | $ | 351,000 | |||||||
| Shares | Weighted Average Grant Date Fair Value per Share | Weighted Average Grant Date Fair Value | |||||||||||
| Vested | 270,000 | $ | 0.71 | $ | 192,000 | ||||||||
| Nonvested | — | — | — | ||||||||||
| Total | 270,000 | $ | 0.71 | $ | 192,000 | ||||||||
| BORROWINGS: |
Borrowings as of September 30, 2013 wasMarch 31, 2014 were as follows:
Revolving credit facility and term loan (a) | $ | 4,470,489 | ||
ICON term note (b) | 5,000,000 | |||
Notes payable(1) | 2,785,668 | |||
Installment notes(1) | 435,889 | |||
Total debt | 12,692,046 | |||
Less current portion | (10,350,765 | ) | ||
Total long-term debt | $ | 2,341,281 | ||
| March 31, | ||||
| 2014 | ||||
| Revolving credit facility and term loan (a) | $ | 2,772,969 | ||
| ICON term note (b) | 4,064,018 | |||
| Loans from shareholder (f) | 2,793,000 | |||
| Notes payable (c) | 2,082,407 | |||
| Installment notes (d) | 199,421 | |||
| Convertible note (e) | 91,676 | |||
| Total borrowings | $ | 12,003,491 | ||
In connection with the acquisition of CTT, the Company and its subsidiaries entered into loan agreements effective July 23, 2012 with Capital One Leverage FinanceBusiness Credit Corp. (Capital One) and ICON Investments (ICON) the proceeds of which were primarily used for the cash portion of the acquisition. The Company subsequently fell into technical default and on May 24, 2013 the Company entered into a forbearance agreement with Capital One.
| a. | Pursuant to the terms of the forbearance agreement, Capital One reduced its loan commitments from |
As of February 4, 2014 the Credit Agreement and Forbearance Agreement were due on March 31, 2014 and was amended as follows: the Revolving Commitments shall be reduced (on a weekly basis) by $50,000 on February 17, 2014 and each week thereafter. In addition, on February 7, 2014, the Administrative Agent and Lenders will commence establishing intra-month reserves of $25,000 per week for the monthly principal installments of the Term Loan on the first day of each subsequent month. Unless otherwise agreed upon by the Administrative Agent and Lenders, no further loans will be made after March 31, 2014.
On April 11, 2014 an accredited investor, who is also a shareholder and affiliate of the Company purchased the Capital One Note from Capital One and assumed all the existing terms and conditions of the Credit Agreement and Forbearance Agreements including Capital One’s security interest on the Company’s assets. As of June 1, 2014, these balances are past due.
| b. | The Company and its subsidiaries entered into a Term Loan, Guaranty and Security Agreement on July 23, 2012 with ICON for the amount of $5 million. The Loan Agreement provides for a 14% annual interest rate and monthly interest only payments with repayment of the principal and accrued but unpaid interest on February 1, 2018. ICON has a senior secured position on the Company’s disposal wells and a subordinated position to Capital One on all other Company properties and assets. The covenants in the ICON Note are in all material respects the same as in the Capital One Credit Agreement. As of |
| c. | The Company assumed two notes payable in connection with the 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 | |
| d. | The Company’s installment loan with principal balances of approximately $199,000 for property and |
| e. | The Company entered into a convertible note agreement with Asher Enterprises, Inc. in the amount of | |
| f. | On September 30, | |
| g. | On March 21, 2014 another accredited investor, which is a shareholder of the Company loaned the Company in the amount of $87,000. The loan has an interest rate of 7% with payment term as follows: |
| 1. | $5,000 by March 25, 2014 plus accrued interest | |
| 2. | $32,000 by March 28, 2014 plus accrued interest | |
| 3. | $12,500 by April 10, 2014 plus accrued interest | |
| 4. | $12,500 by May 10, 2014 plus accrued interest | |
| 5. | $25,000 on and before the sale of the next Trinity Disposal Well plus accrued interest |
| 9. | COMMITMENTS AND CONTINGENCIES: |
| a. |
| The Company is obligated for |
The Company’s operating lease agreement, as amended as of March 6, 2014, expires May 31, 2014 and now requires a base monthly rent payment of $2,500 for its office space located in Dallas, Texas. In addition in consideration for deferment in rental payments the Company executed a $20,000 10% promissory note payable with the following terms: estimated minimum $5,000 per month due and payable on the first day of each month and the entire unpaid principal balance of the promissory note, plus all accrued but unpaid interest, if any, shall be due and payable on or before September 1, 2014.
| On July 26, 2013, the Company entered into an employee termination agreement (the “Termination Agreement”) with the Company’s President and Chief Executive Officer, pursuant to which his employment with the Company terminated on July 26, 2013. Pursuant to the Termination Agreement, the Company is required to pay for a period of six months a gross monthly salary and consulting fee for a total of $12,500 per month and any accrued vacations In addition, the Company agreed to pay a structured success fee for any future acquisitions by the |
| From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs and legal costs associated with these matters when they become probable and the amount can be reasonably estimated. The Company’s management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows. |
| 10. |
| a. | During the year ended December 31, 2013, the Company issued 1,750,000 shares of cumulative convertible preferred stock and 3,500,000 warrants for $700,000. The 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 5 day average closing bid price of the market price. The amount of dividend in arrears was $37,026. The warrant features provide that 2 warrants may be exercised to purchase one share of common stock at a strike price of $0.20 per share with a term of 12-24 months from the date of issuance. The weighted average fair value for the warrants was estimated using the Black-Scholes option valuation model. The value of the warrants was calculated to be $503,774 that was recorded to additional paid-in capital. The Black-Scholes option valuation model inputs used are as follows: |
| Average expected life in years | 1 | |||
| Average risk-free interest rate | 4.00 | % | ||
| Average volatility | 75 | % | ||
| Dividend yield | 7 | % |
| b. | On February 24, 2014 and March 21, 2014, the Company issued a total of 341,372 shares to Asher Enterprises, Inc. in partial payment of the convertible note. This conversion resulted in a principal reduction of $53,500 in convertible note balance of the Company. The conversion resulted in loss on extinguishment of debt of $4,453. |
| 11. | DISCONTINUED OPERATIONS: |
On July 24, 2013, the Company approved the plan to sell certain assets and to discontinue the operations of Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. The effective date of the discontinuation of operations was June 1, 2013. The Company expects to sell all of FIG’s assets and winding down its operations in the next three months. During that period, FIG will continue to generate minimal activities related to its salt-water disposal operations.
The fixed assets of FIG are classified as assets held for sale in the consolidated balance sheets as of March 31, 2014 and December 31, 2013 in accordance with (ASC 205-20),Presentation of Financial Statements - Discontinued Operations. FIG’s net losses of $91,366 and $594,452 for the three months ended March 31, 2014 and 2013, are included in discontinued operations.
During three months ended March 31, 2014, the Company sold a disposal well of FIG for proceeds of $230,000 of which approximately $197,000 were paid directly to the Company’s lender at closing, resulting in a net loss of $45,032 which is included in discontinued operations for the period ended March 31, 2014. The proceeds paid directly to the Company’s lenders were included as a non-cash financing activity in the accompanying consolidated statement of cash flows.
FIG’s revenue and net loss before income tax are summarized as follows:
| For The Three Months Ended | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
| Revenues | $ | 57,017 | $ | 1,891,865 | ||||
| Loss from discontinued operations, net of income taxes | $ | (91,366 | ) | $ | (594,452 | ) | ||
Assets and liabilities classified as discontinued operations are as follows:
| March 31, 2014 | December 31, 2013 | |||||||
| Cash | $ | 1,107 | $ | 56,240 | ||||
| Accounts receivable | 72,685 | 69,819 | ||||||
| Inventory, primarily parts | — | — | ||||||
| Prepaid expenses, primarily insurance | — | — | ||||||
| Deposits | 10,493 | 10,620 | ||||||
| Total assets | $ | 84,285 | $ | 136,679 | ||||
| Current portion of long-term debt | $ | — | $ | — | ||||
| Accounts payable | 1,272,406 | 1,340,936 | ||||||
| Accrued liabilities | 110,857 | 134,807 | ||||||
| Long-term debt, less current maturities | — | — | ||||||
| Total liabilities | $ | 1,383,263 | $ | 1,475,743 | ||||
| 12. | SUBSEQUENT EVENT: |
Subsequent to March 31, 2014, the Company issued 1,100,000 shares of cumulative convertible preferred stock and 3,500,0002,200,000 warrants for $700,000.$440,000. The preferred stock features a 7% cumulative dividends,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 5 day average closing bid price of the market price. The warrant features provide that 2 warrants may be exercised to purchase one share of common stock at a strike price of $0.20 per share with a term of 12-24 months from the date of issuance. The weighted average fair value for the warrants was estimated using the Black-Scholes option valuation model. The value of the warrants was calculated to be $503,774 that was recorded to additional paid-in capital. The Black-Scholes option valuation model inputs used are as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | September | September | |||||||||||||
| 2013 | 2012 | 30, 2013 | 30, 2012 | |||||||||||||
| Revenues | $ | 759,509 | $ | 2,649,804 | $ | 4,648,825 | $ | 3,512,469 | ||||||||
| Net loss before income tax | $ | (552,863 | ) | $ | (238,443 | ) | $ | (1,544,172 | ) | $ | (343,783 | ) | ||||
| September 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| Cash | $ | 23,941 | $ | 7,256 | ||||
| Accounts receivable | 157,867 | 1,027,527 | ||||||
| Inventory, primarily parts | — | 21,347 | ||||||
| Prepaid expenses, primarily insurance | — | 134,501 | ||||||
| Deposits | 10,620 | 25,960 | ||||||
| Total assets | $ | 192,428 | $ | 1,216,591 | ||||
| Current portion of long-term debt | $ | 84,198 | $ | 84,668 | ||||
| Accounts payable | 1,642,515 | 1,036,382 | ||||||
| Accrued liabilities | 107,815 | 119,673 | ||||||
| Long-term debt, less current maturities | 124,567 | 170,474 | ||||||
| Total liabilities | $ | 1,959,095 | $ | 1,411,197 | ||||
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.
DESCRIPTION OF PROPERTIES
Our principal executive offices are located in an office building located at 3030 LBJ Freeway, Dallas, Texas, 75234. The lease on the office space runs through May 31, 2014 with the option to renew the lease for an additional five years. The average base lease payment over the remaining term of the lease is $7,644$2,500 per month.
The Company owns 10 acres of vacant land in Johnson County and 7.055 acres in Chico, Texas on which it has 5 buildings used for its water disposal operations in that area. The Company also owns 7.49 acres in Harrison County, Texas on which three of its disposal wells are located along with a small manufactured office and repair shop. In addition, the Company is obligated under long-term leases for the use of land where seven of its 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 payment for the disposal well leases is $10,300.
SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 2 to the audited consolidated financial statements included on Form 10-K for the year ended December 31, 20122013 as filed with the United States Securities and Exchange Commission. Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about our operating results and financial condition.
The preparation of financial statements in conformity with U.S.US 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
RESULTS OF OPERATIONS
For the quarter ended September 30, 2013March 31, 2014 we reported a net loss from continuing operations of $2,167,598$1,378,028 as compared to a net loss from continuing operations of $2,130,277$1,887,333 for the quarter ended September 30, 2012.March 31, 2013. The components of these results are explained below.
Revenue
- Revenues by subsidiaries are as follows:| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||
| Chico Coffman Tank Trucks, Inc. | $ | 6,523,784 | $ | 7,202,034 | $ | 23,986,732 | $ | 7,202,034 | ||||||||
Frontier Income and Growth, LLC. (discontinued operations) | — | — | — | — | ||||||||||||
| Frontier Oilfield Services, Inc. | — | — | — | 1,909 | ||||||||||||
| Total revenue | $ | 6,523,784 | $ | 7,202,034 | $ | 23,986,732 | $ | 7,203,943 | ||||||||
| Revenue from discontinued operations | $ | 759,509 | $ | 2,649,804 | $ | 4,648,825 | $ | 3,512,469 | ||||||||
| Three Months Ended | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
| Chico Coffman Tank Trucks, Inc. (“CTT”) | $ | 4,868,867 | $ | 9,099,919 | ||||
| Frontier Oilfield Services, Inc. (“FOSI”) | 145 | — | ||||||
| Total revenue | $ | 4,869,012 | $ | 9,099,919 | ||||
The decrease in net revenue for the three months is attributable to a reduced number of loads transported resulting in management’s decision to change direction with its customers by focusing only on customers where the discontinued operationsmajority of
Expenses-
The components of our costs and expenses for the three months ended March 31, 2014 and| Nine Months Ended September 30, 2013 | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||||||||||
| CTT | FIG | FOSI | Total | CTT | FIG | FOSI | Total | |||||||||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||||||||||
| Direct costs | $ | 18,072,026 | $ | — | $ | — | $ | 18,072,026 | $ | 5,614,176 | $ | — | $ | 1,753 | $ | 5,615,929 | ||||||||||||||||
| Indirect costs | 3,712,667 | — | — | 3,712,667 | 1,518,845 | — | — | 1,518,845 | ||||||||||||||||||||||||
| General and administrative | — | — | 5,048,561 | 5,048,561 | — | — | 2,501,249 | 2,501,249 | ||||||||||||||||||||||||
| Depreciation and amortization | 2,041,189 | — | 8,931 | 2,050,120 | 381,209 | — | 3,312 | 384,521 | ||||||||||||||||||||||||
| Total costs and expenses | $ | 23,825,882 | $ | — | $ | 5,057,492 | $ | 28,883,374 | $ | 7,514,230 | $ | — | $ | 2,506,314 | $ | 10,020,544 | ||||||||||||||||
| Costs and expenses from discontinued operations | $ | 6,192,997 | $ | 3,856,252 | ||||||||||||||||||||||||||||
| Three Months Ended September 30, 2013 | Three Months Ended September 30, 2012 | |||||||||||||||||||||||||||||||
| CTT | FIG | FOSI | Total | CTT | FIG | FOSI | Total | |||||||||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||||||||||
| Direct costs | $ | 5,424,491 | $ | — | $ | — | $ | 5,424,491 | $ | 5,614,176 | $ | — | $ | 52 | $ | 5,614,228 | ||||||||||||||||
| Indirect costs | 815,685 | — | — | 815,685 | 1,518,845 | — | — | 1,518,845 | ||||||||||||||||||||||||
| General and administrative | — | — | 1,348,828 | 1,348,828 | — | — | 1,173,407 | 1,173,407 | ||||||||||||||||||||||||
| Depreciation and amortization | 679,256 | — | 5,986 | 685,242 | 381,209 | — | 1,560 | 382,769 | ||||||||||||||||||||||||
| Total costs and expenses | $ | 6,919,432 | $ | — | $ | 1,354,814 | $ | 8,274,246 | $ | 7,514,230 | $ | — | $ | 1,175,018 | $ | 8,689,248 | ||||||||||||||||
| Costs and expenses from discontinued operations | $ | 1,312,372 | $ | 2,888,247 | ||||||||||||||||||||||||||||
| Three Months Ended March 31, 2014 | ||||||||||||
| CTT | FOSI | Total | ||||||||||
| Costs and expenses: | ||||||||||||
| Direct costs | $ | 3,977,597 | $ | — | $ | 3,977,597 | ||||||
| Indirect costs | 836,682 | — | 836,682 | |||||||||
| General and administrative | — | 513,244 | 513,244 | |||||||||
| Depreciation and amortization | 706,377 | 5,237 | 711,614 | |||||||||
| Total costs and expenses | $ | 5,520,656 | $ | 518,481 | $ | 6,039,137 | ||||||
| Three Months Ended March 31, 2013 | ||||||||||||
| CTT | FOSI | Total | ||||||||||
| Costs and expenses: | ||||||||||||
| Direct costs | $ | 6,567,270 | $ | — | $ | 6,567,270 | ||||||
| Indirect costs | 1,471,171 | — | 1,471,171 | |||||||||
| General and administrative | — | 1,871,168 | 1,871,168 | |||||||||
| Depreciation and amortization | 714,503 | 2,956 | 717,459 | |||||||||
| Total costs and expenses | $ | 8,752,944 | $ | 1,874,124 | $ | 10,627,068 | ||||||
The decrease in direct costs for the three months is attributable to the discontinued operations of FIG and discontinuation of a business line that led tooverall reduction in headcountsalaries and other variable expenses including fuel and repairs and maintenance as a result of CTT.
The decrease in indirect costs for the three months is attributable to the discontinued operationsresult of FIG and discontinuationoverall reduction of a business line that led to reduction in headcount and expenses of CTT.
The increasedecrease in general and administrative expensescosts for the ninethree months is attributablefor FOSI were specifically related to acquisition costs that have been eliminated as a result of management’s focus internally on operations and customer relationships. In addition, management reduced professional fees to $242,000 for the three months ended March 31, 2014 compared to $360,000 for the three months ended March 31, 2013. In addition stock compensation costs of $840,000, salaries and wages of $309,000, legal and professional fees of $1,180,000 and expenses in all other categories totaling $218,000. The increase in stock compensation cost is mostly attributablewas $37,000 for the three months ended March 31, 2014 compared to an increase in number of shares awarded and a change in$1,049,000 for the method of determining the date for issuing common stock shares to executives for years of service. The employment contracts for two executives were modified January 1, 2013 which changed the date for awarding shares from annually to the anniversary date of the executive’s years of service. The increase in legal and professional fees is attributable to the costs associated with the purchase of CTT and FIG, including pursuing other acquisition targets inthree months ended March 31, 2013. The increase in salaries and wages is attributable to increase in management head count position in anticipation of the increase of acquisition efforts in 2013.
Other (Income) Expenses-
The components of our costs and expenses for the three months ended March 31, 2014 and| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||
| Interest expense | $ | 417,784 | $ | 358,163 | $ | 1,265,759 | $ | 358,163 | ||||||||
| Gain on disposal of property and equipment | (648 | ) | — | (56,504 | ) | — | ||||||||||
| Equity in loss of unconsolidated affiliated company | — | — | — | 169,794 | ||||||||||||
| Impairment loss on net profits interest in affiliate | — | 284,900 | — | 284,900 | ||||||||||||
| Total other (income) expenses | $ | 417,136 | $ | 643,063 | $ | 1,209,255 | $ | 812,857 | ||||||||
| Three Months Ended | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
| Interest expense | $ | 205,385 | $ | 351,524 | ||||
| (Gain) loss on disposal of property and equipment | (48,499 | ) | 8,660 | |||||
| Loss on extinguishment of debt | 4,453 | — | ||||||
| Total other (income) expenses | $ | 161,339 | $ | 360,184 | ||||
The increasedecrease in interest expense is attributable to the newdecreasing principal balance of the Capital One and ICON Notes. Due to our non-compliance with the debt covenants, we paid the higher default interest rate for the Capital One and ICON notes.
We have not recorded any federal income taxes for the ninethree months ended September 30,March 31, 2014 and 2013 and 2012 because of our accumulated losses. Also, since there is continued uncertainty as to the realization of a tax asset, we have not recorded any tax benefit. In addition we have not recorded a$46,564 in provision for state income taxes due to the operating loss sustained this quarter.
Net loss –
The components of our net loss by| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2013 | September 30, 2012 | September 30, 2013 | September 30, 2012 | |||||||||||||
| Chico Coffman Tank Trucks, Inc. | $ | (404,596 | ) | $ | (332,504 | ) | $ | 154,950 | $ | (332,504 | ) | |||||
Frontier Income and Growth, LLC. (discontinued operations) | (552,863 | ) | (238,443 | ) | (1,544,172 | ) | (343,783 | ) | ||||||||
| Frontier Oilfield Services, Inc. | (1,763,002 | ) | (1,692,755 | ) | (6,257,939 | ) | (3,147,054 | ) | ||||||||
| Total net loss | $ | (2,720,461 | ) | $ | (2,263,702 | ) | $ | (7,647,161 | ) | $ | (3,823,341 | ) | ||||
| Three Months Ended | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
| Chico Coffman Tank Trucks, Inc. (“CTT”) | $ | (649,863 | ) | $ | 317,345 | |||
| Frontier Income and Growth, LLC. and its subsidiaries, Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. (“FIG”) | (91,366 | ) | (594,452 | ) | ||||
| Frontier Oilfield Services, Inc. (“FOSI”) | (728,165 | ) | (2,204,678 | ) | ||||
| Total net loss | $ | (1,469,394 | ) | $ | (2,481,785 | ) | ||
Discontinued operations -
On July 24, 2013, management and the Board of Directors of the Company elected to discontinue the operations and sell the fixed assets of Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. The effective date of the discontinuation of operations was June 1, 2013.LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Liquidity
As of September 30, 2013March 31, 2014 we had total current assets of $4.17$3.3 million. Our total current liabilities as of September 30, 2013March 31, 2014 were $21.09$14.3 million. Thus, we had a working capital deficit of $16.92$11 million as of September 30, 2013.
Our primary focus is to secure additional capital through business alliances with third parties or other debt or equity financing arrangements to stabilize and improve the financial condition of the Company and lower our cost of borrowing. Any such additional funding will be done on an “as needed” basis and will only be done in those instances in which we do not have sufficient cashbelieve such additional financings will accomplish these goals. However, actual results may differ from management’s plan and the amount may be material.
Our ability to operate oursecure additional capital through business at the current level for the next twelve months. We have negative working capital and rely on proceeds from equity and loans to fund our operations. We intend to fund operations through increased sales andalliances with third parties or other debt and/or equity financing arrangements which may be insufficientwill allow the Company to fund expendituresfurther operate in the water disposal segment of the oilfield services industry is strictly contingent upon our ability to locate adequate debt or other cash requirements.equity financing There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assuranceobtain debt or equity financing at terms that such additional financing will be availableare acceptable to us on acceptable terms or at all.
The following table summarizes our sources and uses of cash for the ninethree months ended September 30, 2013March 31, 2014 and 2012:
| For the Nine Months Ended | ||||||||
| September 30, 2013 | September 30, 2012 | |||||||
| Net cash used in operating activities of continuing operations | $ | (43,460 | ) | $ | (489,682 | ) | ||
| Net cash provided by operating activities of discontinued operations | 1,077,613 | 387,905 | ||||||
| Net cash provided by (used in) operating activities | 1,034,153 | (101,777 | ) | |||||
| Net cash used in investing activities of continuing operations | (904,592 | ) | (2,550,089 | ) | ||||
| Net cash provided by investing activities of discontinued operations | 5,306 | — | ||||||
| Net cash used in investing activities | (899,286 | ) | (2,550,089 | ) | ||||
| Net cash provided by (used in) financing activities of continuing operations | (132,373 | ) | 3,070,365 | |||||
| Net cash used in financing activities of discontinued operations | (63,062 | ) | (7,306 | ) | ||||
| Net cash provided by (used in) financing activities | (195,435 | ) | 3,063,059 | |||||
| Net increase (decrease) in cash | $ | (60,568 | ) | $ | 411,193 | |||
| For the Three Months Ended | ||||||||
| March 31, 2014 | March 31, 2013 | |||||||
| Net cash provided by (used in) operating activities of continuing operations | $ | (745,010 | ) | $ | 779,768 | |||
| Net cash used in operating activities of discontinued operations | (43,649 | ) | (162,277 | ) | ||||
| Net cash provided by (used in) operating activities | (788,659 | ) | 617,491 | |||||
| Net cash provided by (used in) investing activities of continuing operations | 164,473 | (901,647 | ) | |||||
| Net cash used in investing activities of discontinued operations | — | (31,721 | ) | |||||
| Net cash provided by (used in) investing activities | 164,473 | (933,368 | ) | |||||
| Net cash provided by financing activities of continuing operations | 572,066 | 439,565 | ||||||
| Net cash used in financing activities of discontinued operations | — | (14,111 | ) | |||||
| Net cash provided by financing activities | 572,066 | 425,454 | ||||||
| Net increase (decrease) in cash | $ | (52,120 | ) | $ | 109,577 | |||
As of September 30, 2013,March 31, 2014, we had noapproximately $262,000 in cash and cash equivalents,deficit, a decrease of $68,000approximately $314,000 from December 31, 2012 as2013 due to our improvednegative cash flow from operationsoperations. This was offset by capital expenditures, escrow funds paymentcash flows from investing and reductionsfinancing activities.
Net cash used in outstanding indebtedness. Currently we are focusing on paying down our existing indebtedness with our lender withoperating activities was approximately $789,000 for the proceedsthree months ended March 31, 2014, consisted of the saleapproximately $745,000 of FIG’s assets.
Net cash provided by operatinginvesting activities of discontinued operations, add-back of non cash items and other adjustments of $1.84 million (of which $385,000 was depreciation and amortization) and a $1.3 million change in net operating assets and liabilities offset by a net loss of $3.98 million. The decrease in net operating activities mainly resulted fromapproximately $164,000 for the acquisitions of CTT and FIG.
Net cash used in investing activities was $2.55 million for the nine months ended September 30, 2012 which consisted primarily of $1.9 million of cash used for acquisition of CTT and FIG, $288,000 for capital expenditures and $$289,000 payments to related party.
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, $1.1 million cash received from preferredinterest rates, and common stock sales, $620,000 cash receipts from escrow funds, $806,000 in borrowingsthe overall health of the economy. We are not aware of any specific trends that are unusual to our Company, as compared to the rest of the oil and $1.86 million in debt payments.
Capital Expenditures
Capital expenditures for ninethree months ended September 30,March 31, 2013 and 2012 of $381,000 and $288,000, respectively,$571,000, were mainly related to the improvements of our disposal wells and our fleet of vehicles.wells. We currently are not anticipating any major expendituresexpenditure for the remainder of 2013.
Indebtedness
In connection with the acquisition of CTT, the Company and its subsidiaries entered into loan agreements effective July 23, 2012 with Capital One Leverage Finance Corp. (Capital One) and ICON Investments (ICON) the proceeds of which were primarily used for the cash portion of the acquisition. Due to the Company’s technical default, on May 24, 2013, the Company entered into a forbearance agreement with Capital One.
Pursuant to the terms of the forbearance agreement, Capital One reduced its loan commitments from $15$9 million to $9$7.75 million consisting of a revolving loan commitment of $3$1.75 million and a term loan commitment of $6 million subject to the terms of the Credit Agreement. The Credit Agreement hashad a maturity date of July 23, 2017 and pursuant to the forbearance agreement, provides for a default interest rate which is the base rate plus the applicable margin plus 2% (6.75% and 7.75%, respectively as of September 30,December 31, 2013), in which all of the loans were converted into base rate borrowings, bearing the default interest rate,rates, at the expiration of the applicable interest period. All new loans shall be base rate borrowings, bearing default interest rates. As part of the forbearance agreement, the Company was required to raise $2 million in equity, pursue certain potential restructuring transactions and provide daily borrowing base certificates along with other financial reports as requested. The term loan portion of the Credit Agreement requires monthly payments of $100,000 plus interest with the balance of the loan plus unpaid interest was due on July 23, 2017. The Credit Agreement also provides for the payment of an unused commitment fee of .375% per annum. The loans are secured by all of the Company’s properties and assets except for its disposal wells wherein Capital One has a subordinated loan position to ICON. Pursuant to the terms of the Credit Agreement and the affirmative covenants, the Company is obligated to maintain all deposits with Capital One Bank, N.A.
As of February 4, 2014 the CompanyCredit Agreement and Forbearance Agreement were due on March 31, 2014 and was amended as follows: the forbearance agreement dated October 11, 2013. As partRevolving Commitments shall be reduced (on a weekly basis) by $50,000 on February 17, 2014 and each week thereafter. In addition, on February 7, 2014, the Administrative Agent and Lenders will commence establishing intra-month reserves of $25,000 per week for the monthly principal installments of the new forbearance agreement, Capital One reduced its loan commitments from $9 million to $7,750,000 consisting of revolving loan commitment of $1,750,000 and a term loan commitment of $6 million. In addition to the initial agreement, the Company is required to raise $500,000 in equity and sell certain fixed assets of the company.
On April 11, 2014 an accredited investor, who is also a shareholder and affiliate of the Company cannot incur capital expenditures that exceeds $3 million in any fiscal year.purchased the Capital One Note from Capital One and assumed all the existing terms and conditions of the Credit Agreement and Forbearance Agreements including Capital One’s security interest on the Company’s assets. As of September 30, 2013, the Company was in technical default resulting from its inability to maintain two financial ratios of the debt covenants.
The Company and its subsidiaries entered into a Term Loan, Guaranty and Security Agreement on July 23, 2012 with ICON for the amount of $5 million. The Loan Agreement provides for a 14% annual interest rate and monthly interest only payments with repayment of the principal and accrued but unpaid interest on February 1, 2018. ICON has a senior secured position on the Company’s disposal wells and a subordinated position to Capital One on all other Company properties and assets. The covenants in the ICON Note are in all material respects the same as in the Capital One Credit Agreement. As of September 30, 2013,March 31, 2014, the Company was not in technicalcompliance of its debt covenants and accordingly classified the entire note balance as a current liability. In addition, on February 10, 2014 the Company received a notice of payment default resulting fromfor interest owed. ICON also reserved all of its inability to maintain two financial ratiosrights and remedies under the ICON Credit Agreement and common law by virtue of the debt covenants.
Outlook
In response to the recent losses, the Company is reviewing various aspects of its operations to reduce costs. In connection with its review, the Company has elected to discontinue the operations of Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. The discontinuation may include the sale of certainadditional non-core assets of Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC, but there can be no assurance that we will receive sufficient value in any sale to cover our losses or that if we cease operations in any service area that the assets will be profitably employed elsewhere.
Due to our recent losses we are attempting to acquireobtain additional equity and debt financing to increase our available cash so that we might pay downare able to reduce our accounts payable and pare back our outstanding indebtedness. Our ability to secure additional capital through business alliances with third parties or other debt/equity financing arrangements will also allow us to acquire companies and/or assets to further increase our operations in the water disposal segment of the oilfield services industry. There can be no assurance that we will be able to obtain the additional equity or debt financing or take advantage of any opportunity to buy companies and/or assets that are suitable for our investment or that we may be able to obtain financing or equity to pay for the costs of these additional companies and/or assets at terms that are acceptable to us. The oil and gas industry which the Company tracks closely 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 health of the economy. We are not aware of any specific trends that are unusual to our company,Company, as compared to the rest of the oil and gas industry.
Not required for smaller reporting companies.
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the quarter covered by this quarterly report on Form 10-Q. In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s internal controls over financial reporting were not effective in that there was a material weakness as of September 30, 2013.
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 the Company’s internal controls.
The Company’s management has identified a material weakness in the effectiveness of internal control over financial reporting related to a shortage of resources in the accounting department required to assure appropriate segregation of duties with employees having appropriate accounting qualifications related to the Company’s unique industry accounting and disclosure rules. Management has outsourced certain financial functions to mitigate the material weakness in internal control over financial reporting. The Company is reviewing its finance and accounting staffing requirements.
Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As a result, no corrective actions were required or undertaken.
Limitations on the Effectiveness of Controls.
Our management, including the CEO and CFO, does not expect that its disclosure controls or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
None
Subsequent to March 31, 2014, the Company issued 1,750,0001,100,000 shares of cumulative convertible preferred stock and 3,500,0002,200,000 warrants for $700,000 to an accredited investor. The sale was accomplished as an exempt sale under Section 4(5) of the Securities Act of 1933, as amended.$440,000. The preferred stock features a 7% cumulative dividends,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 5 day average closing bid price of the market price. The warrant features provide that 2 warrants may be exercised to purchase one share of common stock at a strike price of $0.20 per share with a term of 12-24 months from the date of issuance. The weighted average fair value for the warrants was estimated using the Black-Scholes option valuation model. The proceeds of the sale of the preferred stock were used by the company as working capital.
None
None
| (a) | EXHIBITS: |
| 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 November 14, 2013
FRONTIER OILFIELD SERVICES, INC.
| SIGNATURE: | ||
/s/ Donald Ray Lawhorne | ||
| Donald Ray Lawhorne, | ||
Chief Executive Officer |