Tero Oilfield Services Ltd.
Condensed Financial Statements
September 30, 2014 and 2013
| Tero Oilfield Services Ltd. | ||||||
| Condensed Balance Sheets | ||||||
| September | June 30, | |||||
| 30, 2014 | 2014 | |||||
| (Unaudited) | ||||||
| ASSETS | ||||||
| CURRENT ASSETS: | ||||||
| Cash | $ | 34,858 | $ | 21,208 | ||
| Accounts receivable, net | 312,283 | 202,359 | ||||
| Other current assets | 19,493 | 20,376 | ||||
| Total current assets | 366,634 | 243,943 | ||||
| Property and equipment, net | 396,302 | 427,712 | ||||
| TOTAL ASSETS | $ | 762,936 | $ | 671,655 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | ||||||
| CURRENT LIABILITIES: | ||||||
| Accounts payable and accrued liabilities | 94,267 | $ | 71,174 | |||
| Current maturities of long-term debt | 87,846 | 91,925 | ||||
| Due to shareholders | 45,387 | 47,494 | ||||
| Total current liabilities | 227,500 | 210,593 | ||||
| Notes payable, less current maturities | 274,220 | 286,952 | ||||
| Asset retirement obligations | 259,132 | 271,164 | ||||
| TOTAL LIABILITIES | 760,852 | 768,709 | ||||
| SHAREHOLDERS’ EQUITY (DEFICIT) | 2,084 | (97,054 | ) | |||
| TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY (DEFICIT) | $ | 762,936 | $ | 920,447 | ||
The accompanying notes are an integral part of these condensed financial statements.
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| Tero Oilfield Services Ltd. | ||||||
| Condensed Statements of Income and Shareholders’ Equity (Deficit) | ||||||
| For the Three Months Ended | ||||||
| September 30, | ||||||
| 2014 | 2013 | |||||
| REVENUE | $ | 406,358 | $ | 293,069 | ||
| COST OF GOODS SOLD | 163,460 | 207,235 | ||||
| Gross profit | 242,898 | 85,834 | ||||
| OPERATING EXPENSES: | ||||||
| Selling and marketing | 2,063 | 2,102 | ||||
| Depreciation | 21,751 | 24,215 | ||||
| General and administrative | 106,599 | 112,751 | ||||
| TOTAL OPERATING EXPENSES | 130,413 | 139,068 | ||||
| Operating income (loss) | 112,485 | (53,234 | ) | |||
| OTHER INCOME (EXPENSES): | ||||||
| Interest expense, net | (5,639 | ) | (2,396 | ) | ||
| TOTAL OTHER EXPENSES | (5,639 | ) | (2,396 | ) | ||
| Earnings (loss) before income taxes | 106,846 | (55,630 | ) | |||
| Provision for income taxes | 10,000 | -- | ||||
| NET INCOME (LOSS) | 96,846 | (55,630 | ) | |||
| Other Comprehensive Income: | ||||||
| Cumulative translation adjustment | 2,292 | (205 | ) | |||
| COMPREHENSIVE INCOME (LOSS) | $ | 99,138 | $ | (55,835 | ) | |
| SHAREHOLDERS’ EQUITY (DEFICIT): | ||||||
| Shareholders’ equity (deficit) – Beginning of period | $ | (97,054 | ) | $ | 13,716 | |
| Net income (loss) | 96,846 | (55,630 | ) | |||
| Cumulative Translation Adjustment | 2,292 | (205 | ) | |||
| Shareholders’ equity (deficit) – End of period | $ | 2,084 | $ | (42,119 | ) | |
The accompanying notes are an integral part of these condensed financial statements.
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Tero Oilfield Services Ltd.
Condensed Statements of Cash Flows
| For the Three Months Ended | ||||||
| September 30, | ||||||
| 2014 | 2013 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
| Net income (loss) | $ | 96,846 | $ | (55,630 | ) | |
| Adjustments to reconcile net income to net cashprovidedby operating activities: | ||||||
| Depreciation | 21,751 | 24,215 | ||||
| Changes in operating assets and liabilities: | ||||||
| Short-term investments | -- | (1,870 | ) | |||
| Accounts receivable | (109,923 | ) | (103,246 | ) | ||
| Other current assets | 883 | 2,651 | ||||
| Accounts payable and accrued liabilities | 23,093 | 43,254 | ||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITES | 32,650 | (90,626 | ) | |||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
| Purchase of property and equipment | (8,920 | ) | (3,475 | ) | ||
| NET CASH USED IN INVESTING ACTIVITIES | (8,920 | ) | (3,475 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
| Debt retired | -- | (3,706 | ) | |||
| NET CASH USED IN FINANCING ACTIVITIES | -- | (3,706 | ) | |||
| Effects of currency translation on cash and cash equivalents | (10,080 | ) | 4,165 | |||
| NET INCREASE (DECREASE) IN CASH | 13,650 | (93,642 | ) | |||
| CASH AT BEGINNING OF PERIOD | 21,208 | 56,138 | ||||
| CASH (BANK OVERDRAFT) AT END OF PERIOD | $ | 34,858 | $ | (37,504 | ) | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||
| Cash paid during the periods for: | ||||||
| Interest | $ | -- | $ | -- | ||
| Income taxes | $ | -- | $ | -- | ||
| NON-CASH INVESTING AND FINANCING | ||||||
| ACTIVITIES: | $ | -- | $ | -- | ||
The accompanying notes are an integral part of these condensed financial statements.
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Tero Oilfield Services Ltd.
Notes to Condensed Financial Statements
September 30, 2014 and 2013
NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Tero Oilfield Services Ltd, Inc. (“the Company”, “Tero”) was incorporated in the State of Alberta on January 31, 1997.
Tero Oilfield Services Ltd., an energy services company, provides specialized services to upstream oil and natural gas companies operating in the Western Canadian Sedimentary Basin. Through the exploration and production of oil and gas a significant regular stream of waste is generated by the oil and gas producers. The oil and gas producers are required to dispose of this waste in an environmentally approved manner as stipulated by Alberta Energy, Alberta’s energy regulator.
The Company assists upstream oil and natural gas companies with the disposal fluids and solids and/or treatment of by-products. To dispose of liquid wastes, oil and gas producers are required to inject them into approved permitted injection wells. An injection well disposes of the waste fluids deep into the ground into porous rock formations outside of known oil and gas production zones and well as underground aquifers. The company owns and operates a full Class 1B liquid and sold oilfield waste handling facility in Wardlow, Alberta, Canada. This class of well is approved for the disposal of produced water, specific common oilfield waste streams and waste streams meeting specific criteria.
On August 20, 2012, the Company entered into a letter of intent with Lithium Exploration Group, Inc. (Lithium) pursuant to which Tero agreed to sell to 75% of its issued and outstanding common shares of Lithium in exchange for an aggregate of $1,500,000 Canadian.
On March 1, 2014, Alta Disposal Ltd. (Alta), a wholly-owned subsidiary of Lithium, completed a share purchase agreement with Tero and Garry Hofmann, the sole shareholder of Tero. Pursuant to the agreement, Mr. Hofmann agreed to sell and Lithium agreed to purchase 50% of the issued and outstanding common shares of Tero in exchange for an aggregate of $1,000,000 Canadian.
Lithium has been granted an option to acquire an additional 25% of the shares in Tero for $500,000 Canadian by February 28, 2015.
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Tero Oilfield Services Ltd.
Notes to Condensed Financial Statements
September 30, 2014 and 2013
Basis of Presentation
The accompanying condensed financial statements are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
These interim financial statements as of and for the three months ended September 30, 2014 and 2013 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The results for the three months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any future period. All references to September 30, 2014 and 2013 in these footnotes are unaudited.
The condensed balance sheet as of June 30, 2014 has been derived from the audited financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
For the purpose of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less at date of acquisition to be cash equivalents.
Short-Term Investments
The Company invests excess cash in GST accounts with maturities typically at one year.
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Tero Oilfield Services Ltd.
Notes to Condensed Financial Statements
September 30, 2014 and 2013
Accounts Receivable
Accounts receivable arise in the normal course of business and are reported net of an allowance for doubtful accounts. The allowance is based on management’s estimate of the uncollectible trade accounts receivable based on historical collection experience and management’s evaluation of the collectability of outstanding accounts receivable. Contractual terms and payment history determine when receivables are delinquent. The Company evaluated its accounts receivable at September 30, 2014 and did not record an allowance for doubtful accounts because of the assurance of collectability of those receivables. The Company’s allowance for doubtful accounts at September 30, 2013 was $1,601.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. There were no impairment losses taken for the three months ended September 30, 2014 and 2013.
Revenue Recognition
It is the Company’s policy that revenue from product sales or services will be recognized in accordance with ASC 605“Revenue Recognition”. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
The Company generates revenue by handling waste generated by oil and gas producers in the area. Specifically, the waste streams handled by the Company can be classified into the following categories:
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Tero Oilfield Services Ltd.
Notes to Condensed Financial Statements
September 30, 2014 and 2013
Asset RetirementObligation
The liability for the fair value of environmental and site restoration obligations are recorded when the obligations are incurred and the fair value can be reasonably estimated. The obligations are normally incurred at the time the related assets are brought into production. The fair value of the obligation is based on the estimated cash flows required to settle the obligations discounted using an estimate of the Company's financing rate. The fair value of the obligations is recorded as a liability with the same amount recorded as an increase in capitalized costs. The amounts included in capitalized costs are amortized using an amortization rate of 10%. The liability is adjusted for accretion expense representing the increase in the fair value of the obligations due to the passage of time.
Cost of Goods Sold
Cost of goods sold for the quarters ended September 30, 2014 and 2013 consisted of the following:
| 2014 | 2013 | |||||
| Fuel & oil disposal | $ | 22,399 | $ | 11,507 | ||
| Insurance | 10,697 | 10,042 | ||||
| Repairs and maintenance | 32,236 | 91,520 | ||||
| Skim oil processing fees | 12,929 | 8,040 | ||||
| Solids processing | 55,984 | 30,680 | ||||
| Subcontract trucking | 9,063 | 10,112 | ||||
| Utilities | 6,533 | 9,059 | ||||
| Other | 13,619 | 36,275 | ||||
| TOTAL COST OF GOODS SOLD | $ | 163,460 | $ | 207,235 | ||
Advertising
The Company expenses the costs associated with advertising when incurred. Advertising expense totaled $2,063 and $2,102 for the quarters ended September 30, 2014 and 2013, respectively.
Foreign currency translation
The Company’s reporting is the US Dollar and the functional currency is Canadian Dollars. The accounts of the Company are maintained using the local currency (Canadian Dollar) as the functional currency. All assets and liabilities are translated into U.S. Dollars at balance sheet date, shareholders’ equity is translated at historical rates and revenue and expense accounts are translated at the average exchange rate for the year or the reporting period. The translation adjustments are deferred as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated statements of operations.
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Tero Oilfield Services Ltd.
Notes to Condensed Financial Statements
September 30, 2014 and 2013
Comprehensive Income (Loss)
FASC Topic No. 220, “Comprehensive Income,” establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. From inception to September 30, 2014, the Company had no material items of other comprehensive income except for the foreign currency translation adjustment.
NOTE 2 – CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances in bank deposit accounts which, at times, may exceed Canadian federally insured limits. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risks associated with these accounts. There was no excess of the deposit liabilities over the amounts covered by federal insurance at September 30, 2014 and 2013.
The Company grants credit to its customers throughout Canada and generally do not require collateral. Consequently, the company’s ability to collect the amounts due from customers is affected by economic fluctuations in the oil and gas industry.
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable at September 30, 2014 and June 30, 2014 consisted of the following:
| September | June 30, | ||||||
| 30, 2014 | 2014 | ||||||
| Accounts receivable | $ | 312,283 | $ | 202,359 | |||
| Less allowance for doubtful accounts | -- | - | |||||
| $ | 312,283 | $ | 202,359 |
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Tero Oilfield Services Ltd.
Notes to Condensed Financial Statements
September 30, 2014 and 2013
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2014 and June 30, 2014 consisted of the following:
| September | June 30, 2014 | ||||||
| 30, 2014 | |||||||
| Vehicles | $ | 365,277 | $ | 382,238 | |||
| Disposal wells | 497,053 | 520,131 | |||||
| Machinery and equipment | 957,800 | 992,992 | |||||
| 1,820,130 | 1,895,361 | ||||||
| Less accumulated depreciation | (1,423,828 | ) | (1,467,649 | ) | |||
| Net book value | $ | 396,302 | $ | 427,712 |
Depreciation expense for property and equipment was $21,751 and $24,215 for the quarters ended September 30, 2014 and 2013.
NOTE 5 – INCOME TAXES
The Company is treated as a Canadian controlled private corporation for federal and provincial taxes. Earnings (losses) before income taxes were $106,846 and $(55,630) for the quarters ending September 30, 2014 and 2013.
| Tax Rate Reconciliation | 2014 | 2013 | ||||
| Federal statutory rate | 38.0 % | 38.0 % | ||||
| Statutory deductions | (23.9 | ) | 38.0 | |||
| Provincial statutory rate, net of federal tax benefit | .5 | -- | ||||
| Effective tax rate | 14.6 % | -- % |
| Provision for Income Taxes | 2014 | 2013 | ||||
| Federal | $ | 9,425 | $ | -- | ||
| Provincial | 575 | -- | ||||
| Total | $ | 10,000 | $ | -- |
NOTE 5 – SHAREHOLDER ADVANCES
Shareholder advances consisted of $45,387 and $47,494 at September 30, 2014 and June 30, 2014, respectively. The advances do not bear interest, have a specified due date or require collateral.
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Tero Oilfield Services Ltd.
Notes to Condensed Financial Statements
September 30, 2014 and 2013
NOTE 6 – LONG-TERM DEBT
Long-Term Debt at September 30, 2014 and June 30, 2014 consisted of the following:
| September | June 30, | |||||
| 30, 2014 | 2014 | |||||
| Note for share redemption payable in annual installments of $95,087 with the first installment due on March 1, 2014 including accrued interest at 2%. | $ | 362,066 | $ | 378,877 | ||
| Less current maturities | (87,846 | ) | (91,925 | ) | ||
| $ | 274,220 | $ | 286,952 |
Future principal payments on the note payable are scheduled as follows:
Year Ending September 30,
| 2014 | |||
| 2015 | $ | 87,846 | |
| 2016 | 89,588 | ||
| 2017 | 91,394 | ||
| 2018 | 93,238 | ||
| 2019 | -- | ||
| $ | 362,066 |
NOTE 7 – ASSET RETIREMENT OBLIGATION
The Company owns and operates a full Class 1B liquid and solid oilfield waste handling facility in Wardlow, Alberta, Canada. Annual inspections are performed by the Waste Management and Liability Management Departments of the Alberta Energy Regulator (AER). AER requires the Company to secure Letters of Credit or make deposits equal to the estimated costs of well and surface facility abandonment and reclamation.
| September | June 30, | |||||
| 30, 2014 | 2014 | |||||
| Asset retirement obligation at beginning of year | $ | 287,260 | $ | 259,667 | ||
| Accretion expense | -- | - | ||||
| Change due to foreign currency translation | (28,128 | ) | 11,497 | |||
| Asset retirement obligation | $ | 259,132 | $ | 271,164 |
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Tero Oilfield Services Ltd.
Notes to Condensed Financial Statements
September 30, 2014 and 2013
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company is not involved in any litigation and Management is not aware of any outstanding contingencies.
Leases and Obligations
The Company entered into a surface easement lease for road usage through an agreement dated September 27, 1997 and amended on April 28, 2005 which permits use of 5.432 acres for $2,420 per year. The lease is renewed annually.
The Company has obtained Letters of Credit from its bank to satisfy its legal obligations to remediate well and surface abandonment as explained in Note 7. The outstanding balances of the Letters of Credit were $259,132 and $271,164 at September 30, 2014 and June 30, 2014, respectively.
NOTE 9 – MAJOR CUSTOMERS AND VENDORS
The Company has four customers that represent approximately 65% of its revenue for the quarters ended September 30, 2014. The Company has six customers that represent approximately 80% of its accounts receivable at September 30, 2014. The Company is not reliant on any specific vendor for its equipment purchases and can establish additional relationships with minimal disruption.
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