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:  March 31, 2014

 

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.       Yes       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).       Yes       No

 

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   (Do not check if smaller reporting company) Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes       No

 

As of June 4, 2014 there were 5,894,986 shares of common stock, par value $0.01 per share, outstanding.

 

 
 

 

  FRONTIER OILFIELD SERVICES, INC.  

Index

 

  Pg. No.
PART I – Financial Information  
Item 1. Financial Statements  
Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 (Unaudited) F-1 & F-2
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited) F-3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited) F-4 & F-5
Notes to Condensed Consolidated Financial Statements as of March 31, 2014 (Unaudited) F-6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 7
Item 4T. Controls and Procedures 7
   
PART II – Other Information  
Item 1. Legal Proceedings 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8
Item 3. Defaults Upon Senior Securities 8
Item 5. Other Information 8
Item 6. Exhibits 8
   
SIGNATURES 9

 

 
 

 

PART 1 — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    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.

 

F- 1
 

 

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    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.

 

F- 2
 

 

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    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.

 

F- 3
 

 

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  

(Unaudited)

 

    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.

 

F- 4
 

 

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    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.

 

F- 5
 

 

FRONTIER OILFIELD SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

(Unaudited)

 

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, 2013 (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 oilfield service industry, including the transportation and disposal of saltwater and other oilfield fluids in Texas. The Company currently owns and operates eleven disposal wells in Texas. The Company’s customer base includes national, integrated, and independent oil and gas exploration companies. Frontier previously was in the business of acquiring and developing oil and gas properties, providing contract services to an affiliate and sponsoring and managing joint venture oil and gas development partnerships.

 

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, and has an accumulated deficit and 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 its 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 when services are rendered, field tickets are signed and received, and when payment is determinable and reasonably assured. The Company extends unsecured credit to its customers for amounts invoiced.

 

F- 6
 

 

Fair Value Measurements

 

The ASC Topic 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

 

Fair Value of Financial Instruments

 

In accordance with the reporting requirements of ASC Topic 825, Financial Instruments , the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the three months ended March 31, 2014 and 2013.

 

Earnings Per Share (EPS)

 

Basic earnings per common share are calculated by dividing net income or loss by the weighted average number of shares outstanding during the year. Diluted earnings per common share are calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock options and warrants. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of shares that would have an antidilutive 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. Currently there are 300,000 stock options and 3,500,000 warrants outstanding that could potentially have a dilutive effect to the EPS 

 

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.

 

 In September 2012, the Company acquired the remaining 49% ownership of FIG. The transaction was valued at $5,610,000.

 

F- 7
 

 

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 subject to possible future adjustments for earnings and share prices. The acquisition was facilitated by credit facilities loaned to the Company in the aggregate amount of $12,000,000 provided by Capital One and ICON (See below). Also, the Company established an escrow account from the seller’s cash proceeds to pay for potential liabilities arising from business activities prior to the purchase of CTT such as final net working capital adjustments. The escrow agent distributed $350,000 plus accrued interest less any pending unpaid claims to the seller on January 23, 2013. On May 20, 2013 the escrow agent distributed to the seller the remaining balance.

 

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. The 2013 comparative information is retrospectively adjusted to increase depreciation expense of $146,557 and a decrease in gain on disposal of equipment of $56,333.

 

The share based deferred consideration liability was settled in May 2013 in which the company issued an additional 143,228 shares of common stock in full satisfaction of the Company’s liability. A total of 437,500 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 previous 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 December 31, 2013 and the additional consideration to be paid based upon specific earnings targets were not achieved and therefore the contingent liability of $2,300,000 has been written off and included in other income (expense) for the year.

 

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 March 31, 2014 were as follows:

 

    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 March 31, 2014 is as follows:

  

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  

 

F- 8
 

 

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 stock 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. The granted shares vest proportionally each quarter for the calendar year ended December 31, 2014.

 

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 cost cutting and restructuring measures.

 

Summary Stock Compensation Table

 

The following table sets forth the Company’s paid or accrued stock compensation expense to its officers, directors and employees.

 

                      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 March 31, 2014, the Company’s unrecognized compensation expense related to the nonvested stock grants was $37,000.

 

A summary of the status of the Company’s option grants as of March 31, 2014 and December 31, 2013 and the changes during the periods then ended is presented below:

 

                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 three months ended March 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.

 

F- 9
 

 

A summary of the status of the Company’s vested and non-vested option grants at March 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     $ 0.71     $ 192,000  
Nonvested                    
Total       270,000     $ 0.71     $ 192,000  

 

7. BORROWINGS:

 

Borrowings as of March 31, 2014 were as follows:

 

    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 Business Credit Corp. (Capital One) and ICON Investments (ICON) the proceeds of which were primarily used for the cash portion of the acquisition.

 

a. Pursuant to the terms of the forbearance agreement, Capital One reduced its loan commitments from $9 million to $7.75 million consisting of a revolving loan commitment of $1.75 million and a term loan commitment of $6 million subject to the terms of the Credit Agreement. The Credit Agreement had 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 December 31, 2013), in which all of the loans were converted into base rate borrowings, bearing default interest 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 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.

 

F- 10
 

 

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 March 31, 2014, the Company was not in compliance 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 for interest owed. ICON also reserved all of its rights and remedies under the ICON Credit Agreement and common law by virtue of the Credit Parties default on their obligations.
     
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 is payable in monthly installments of $33,003 including interest, maturing December 1, 2018. The Company’s secondary note payable in the original amount of $219,555 dated June 1, 2007 bears interest at 4.79% and is payable in monthly installments of $2,488 including interest, maturing December 1, 2018. Both notes are subordinated to the Capital One and ICON notes. Payments of principal and interest have been suspended based upon defaults in the Capital One and ICON credit agreements. The suspension of the payments does not constitute a default in accordance with the subordinated agreement.
 
d. The Company’s installment loan with principal balances of approximately $199,000 for property and equipment used in the Company’s operations. At March 31, 2014, the loan matures in September 2017 with interest rates of 5.69% and monthly minimum payments of $5,377.
 
e. The Company entered into a convertible note agreement with Asher Enterprises, Inc. in the amount of $153,500 with a stated interest rate of 8% per annum and effective interest rate of 70% per annum. The note, due in May 19, 2014, is convertible into shares of the Company’s common stock, at the discretion of the holder commencing 180 days following the date of the debenture at a conversion price per share equal to a discount of 35% from the average of the lowest three closing prices for the Company’s stock during the ten days prior to conversion date. The Company evaluated the note and determined that the conversion option does not constitute a derivative liability for financial reporting purposes. The beneficial conversion feature discount resulting from the conversion price of $0.34, below the market price on August 15, 2013 of $0.53, resulted in a discount of $72,235 of which $23,470 was amortized during the period ended March 31, 2014. In 2014, the Company issued 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.
 
f. On September 30, 2013 an accredited investor, which is a shareholder of the Company, advanced the Company funds for operations. Total principal advances under this facility totaled $2,706,000 as of March 31, 2014. These advances are due on demand with interest rate of 0%. On May 27, 2014 in consideration of these advances the Company issued a note in the principal amount of $2,783,484 with interest at 9% for a term of 18 months.
 
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 $1,435,300 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, 2018 with one year renewal options. The monthly lease payment for the disposal well leases is $10,300.

 

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.

 

F- 11
 

 

b. 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 Company that were originated by Mr. Burroughs.

 

c. 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. EQUITY TRANSACTIONS:

 

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:

 

F- 12
 

 

    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 2,200,000 warrants for $440,000. 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 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 which expires on September 20, 2014.

 

F- 13
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 $2,500 per month.

 

The Company owns 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, 2018 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, 2013 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 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 March 31, 2014 we reported a net loss from continuing operations of $1,378,028 as compared to a net loss from continuing operations of $1,887,333 for the quarter ended March 31, 2013. The components of these results are explained below.

 

Revenue - Revenues by subsidiaries are as follows:

 

    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 majority of the loads will be disposed of in Company owned wells as opposed to third party wells where either the Company has to pay to dispose in these types of facilities and/or the Company does not benefit from skim oil that is collected to sell.

 

3
 

 

Expenses- The components of our costs and expenses for the three months ended March 31, 2014 and 2013 are as follows:

 

    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 overall reduction in salaries and other variable expenses including fuel and repairs and maintenance as a result of the planned volume decreases with specific customers.

 

The decrease in indirect costs for the three months is the result of overall reduction of administrative salaries positions combined with tighter expense controls.

 

The decrease in general and administrative costs for the three months for 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 was $37,000 for the three months ended March 31, 2014 compared to $1,049,000 for the three months ended March 31, 2013.

 

Other (Income) Expenses- The components of our costs and expenses for the three months ended March 31, 2014 and 2013 are as follows:

 

    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 decrease in interest expense is attributable to the decreasing 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 three months ended March 31, 2014 and 2013 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 $46,564 in provision for state income taxes.

 

Net loss – The components of our net loss by subsidiary are as follows:

 

4
 

 

    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 March 31, 2014 we had total current assets of $3.3 million. Our total current liabilities as of March 31, 2014 were $14.3 million. Thus, we had a working capital deficit of $11 million as of March 31, 2014.

 

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 believe 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 secure additional capital through business alliances with third parties or other debt or equity financing arrangements which will allow the Company to further operate in the water disposal segment of the oilfield services industry is strictly contingent upon our ability to locate adequate debt or equity financing There can be no assurance that we will be able to obtain debt or equity financing at terms that are acceptable to us.

 

The following table summarizes our sources and uses of cash for the three months ended March 31, 2014 and 2013:

 

    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 March 31, 2014, we had approximately $262,000 in cash deficit, a decrease of approximately $314,000 from December 31, 2013 due to our negative cash flow from operations. This was offset by cash flows from investing and financing activities.

 

5
 

 

Net cash used in operating activities was approximately $789,000 for the three months ended March 31, 2014, consisted of approximately $745,000 of net cash used for operating activities in addition to approximately $44,000 net cash used in operating activities of discontinued operations. Net cash provided by operating activities was approximately $617,000 for the three months ended March 31, 2013, consisted of approximately $780,000 of net cash provided by operating activities offset by approximately $162,000 net cash used in operating activities of discontinued operations.

 

Net cash provided by investing activities was approximately $164,000 for the three months ended March 31, 2014 related to proceeds for certain asset sales. Net cash used in investing activities was approximately $933,000 for the three months ended March 31, 2013 which consisted of approximately $32,000 net cash used by investing activities of discontinued operations, approximately $378,000 related to release of the escrow funds related to the CTT purchase, and approximately $571,000 used for capital expenditures.

 

Net cash provided by financing activities was approximately $572,000 for the three months ended March 31, 2014 which consisted of approximately $1.2 million cash received from borrowings and approximately $887,000 in debt repayments, in which none was related to discontinued operations. Net cash provided by financing activities was approximately $425,000 for the three months ended March 31, 2013 which consisted of approximately $399,000 cash received from common stock sales, approximately $378,000 for the escrow funds release to the CTT purchase and approximately $384,000 in debt repayments offset by approximately $14,000 net cash used in financing activities of discontinued operations.

 

The oil and gas industry is subject to various trends including the availability of capital for drilling new wells, prices received for crude oil and natural gas, sources of crude oil outside our area of operations, interest rates, and the overall 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 gas industry.

 

Capital Expenditures

 

Capital expenditures for three months ended March 31, 2013 of $571,000, were mainly related to the improvements of our disposal wells. We currently are not anticipating any major expenditure for the remainder of 2014.

 

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 $9 million to $7.75 million consisting of a revolving loan commitment of $1.75 million and a term loan commitment of $6 million subject to the terms of the Credit Agreement. The Credit Agreement had 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 December 31, 2013), in which all of the loans were converted into base rate borrowings, bearing default interest 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 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.

 

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 March 31, 2014, the Company was not in compliance 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 for interest owed. ICON also reserved all of its rights and remedies under the ICON Credit Agreement and common law by virtue of the Credit Parties default on their obligations.

 

6
 

 

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 additional 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 obtain additional equity and debt financing to increase our available cash so that we are able to reduce our accounts payable and our outstanding indebtedness. There can be no assurance that we will be able to obtain the additional equity or debt financing 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, as compared to the rest of the oil and gas industry.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

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) in Internal 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 March 31, 2014.

 

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 system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

7
 

 

PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

None

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Subsequent to March 31, 2014, the Company issued 1,100,000 shares of cumulative convertible preferred stock and 2,200,000 warrants for $440,000. 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 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 which expires on September 20, 2014.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

Item 5. OTHER INFORMATION

 

None

 

Item 6. EXHIBITS

 

(a) EXHIBITS:

 

31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1 Certification of Chief Executive Officer/Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

  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

  

8
 

 

SIGNATURES

 

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 June 4, 2014

 

FRONTIER OILFIELD SERVICES, INC.

 

SIGNATURE:    /s/ Donald Ray Lawhorne  
  Donald Ray Lawhorne,
Chief Executive Officer
 

 

9


 

 

 

Frontier Oilfield Services, Inc. 10-Q

Exhibit 31.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Donald Ray Lawhorne, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Frontier Oilfield Services, Inc.

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 and 15d-14) for the registrant and have:

 

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

 

Dated this June 4, 2014

 

/s/ Donald Ray Lawhorne


Donald Ray Lawhorne, 

Chief Executive Officer

 


 

 

Frontier Oilfield Services, Inc. 10-Q

Exhibit 31.2

 

CERTIFICATION PURSUANT TO 

18 U.S.C. SECTION 1350, 

AS ADOPTED PURSUANT TO  

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Kenneth K. Conte, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Frontier Oilfield Services, Inc.

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-14 and 15d-14) for the registrant and have:

 

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

 

Dated this June 4, 2014

 

/s/ Kenneth K. Conte


Kenneth K. Conte, 

Chief Operating Officer and Chief Financial Officer
  


 

 

 

Frontier Oilfield Services, Inc. 10-Q

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

  

In connection with the Quarterly Report of Frontier Oilfield Services, Inc. (the “ Company ”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), I, Donald Ray Lawhorne, Chief Executive Officer and Principal Executive of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

 

Dated this June 4, 2014

 

By: /s/ Donald Ray Lawhorne


Donald Ray Lawhorne, 

Chief Executive Officer
  


 

 

 

Frontier Oilfield Services, Inc. 10-Q

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,  

AS ADOPTED PURSUANT TO  

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Frontier Oilfield Services, Inc. (the “ Company ”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), I, Kenneth K. Conte, Chief Operating Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

 

Dated this June 4, 2014

 

By: /s/ Kenneth K. Conte


Kenneth K. Conte,

Chief Operating Officer and Chief Financial Officer