UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

FORM 10-Q  

 
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  September 30, 2013
 
Or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from:             to             
 
Commission File Number: 0-30746
 

FRONTIER OILFIELD SERVICES, INC.
(Exact name of registrant as specified in its charter)  

   
Texas
75-2592165
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
   
3030 LBJ Freeway, Suite 1320
75234
(Address of principal executive offices)
(Zip Code)
 
(972) 234-2610
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)  
 

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x   Yes     o   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x Yes  o 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
o
Accelerated Filer
o
       
Non-Accelerated Filer
o   (Do not check if smaller reporting company)
Smaller Reporting Company     
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     o   Yes     x   No
 
As of November 14, 2013 there were 21,987,296 shares of common stock, par value $0.01 per share, outstanding.
 


 
 

 
 
  FRONTIER OILFIELD SERVICES, INC.
Index
     
   
Pg. No.
   
   
 
F-1 & F-2
 
               F-3
 
F-4 & F-5
 
               F-6
 
               3
 
               7
 
               7
     
   
 
               8
 
               8
 
               8
 
               8
 
               8
     
 
               9
 
 
 

 
 
PART 1 — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
September 30,
2013
   
December 31,
2012
 
             
ASSETS
 
Current Assets:
           
Cash
  $     $ 60,568  
Certificate of deposit
    77,614       77,614  
Accounts receivable
    1,441,300       2,892,481  
Inventory, primarily parts
    274,024       299,384  
Prepaid expenses, primarily insurance
    1,918,588       1,269,347  
Current assets of discontinued operations
    181,808       1,190,631  
Deferred loan origination fees, current portion
    300,970       336,297  
Total current assets
    4,194,304       6,126,322  
Property and equipment:
               
Property and equipment, at cost
    16,473,931       16,350,008  
Less accumulated depreciation
    (2,212,291 )     (684,503 )
Total property and equipment
    14,261,640       15,665,505  
Other assets:
               
Intangibles, net
    3,593,164       3,898,245  
Assets held for sale (Note 11)
    5,604,142       6,596,110  
Restricted cash
          619,922  
Other assets of discontinued operations
    10,620       25,960  
Deferred loan fees, net of current portion
    693,178       913,539  
Deposits
    13,417       14,892  
Total other assets
    9,914,521       12,068,668  
Total Assets
  $ 28,370,465     $ 33,860,495  
 
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)
 
   
September 30,
2013
   
December 31,
2012
 
             
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
             
Current Liabilities:
           
Current portion of long-term debt
  $ 10,266,567     $ 12,643,199  
Bank overdraft
    290,091        
Accounts payable
    3,893,562       3,629,236  
Accrued liabilities
    748,442       944,014  
Financed insurance premiums payable
    1,785,599       820,499  
Current liabilities of discontinued operations
    1,834,528       1,240,723  
Escrow liability
          619,922  
Deferred consideration payable for acquisition of CTT
    2,300,000       2,300,000  
Total current liabilities
    21,118,789       22,197,593  
Long-term debt, less current maturities (Note 8)
    2,216,714       2,055,096  
Non-current liabilities of discontinued operations
    124,567       170,474  
Deferred consideration payable for acquisition of CTT
          4,708,348  
Total Liabilities
    23,460,070       29,131,511  
Commitments and Contingencies (Note 9)
               
Stockholders’ Equity:
               
Preferred stock- $.01 par value; authorized 10,000,000; 1,750,000 issued and outstanding at September 30, 2013
    17,500        
Common stock- $.01 par value; authorized 100,000,000 shares;
               
21,587,296 shares issued and outstanding at September 30, 2013
               
18,116,357 shares issued and outstanding at December 31, 2012
    215,873       181,163  
Additional paid-in capital
    30,929,519       22,986,615  
Prepaid stock compensation
    (161,000 )      
Accumulated deficit
    (26,091,497 )     (18,438,794 )
Total stockholders’ equity
    4,910,395       4,728,984  
Total Liabilities and Stockholders’ Equity
  $ 28,370,465     $ 33,860,495  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
F-2

 

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
(UNAUDITED)
                         
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
2013
   
September 30,
2012
   
September 30,
2013
   
September 30,
2012
 
                         
Revenues, net of discounts
  $ 6,523,784     $ 7,202,034     $ 23,986,732     $ 7,203,943  
Costs and expenses:
                               
Direct operating costs
    5,424,491       5,614,228       18,072,026       5,615,929  
Indirect operating costs
    815,685       1,518,845       3,712,667       1,518,845  
General and administrative
    1,348,828       1,173,407       5,048,561       2,501,249  
Depreciation and amortization
    685,242       382,768       2,050,120       384,521  
Total costs and expenses
    8,274,246       8,689,248       28,883,374       10,020,544  
Operating loss
    (1,750,462 )     (1,487,214 )     (4,896,642 )     (2,816,601 )
Other (income) expense:
                               
Interest expense
    417,784       358,163       1,262,851       358,163  
Gain on disposal of property and equipment
    (648 )           (56,504 )      
Equity in loss of unconsolidated affiliated company
                      169,794  
Impairment loss on net profits interest in affiliate
          284,900               284,900  
Loss before provision for income taxes
    (2,167,598 )     (2,130,277 )     (6,102,989 )     (3,629,458 )
Provision for state income taxes
                      6,735  
Loss from continuing operations
    (2,167,598 )     (2,130,277 )     (6,102,989 )     (3,636,193 )
Loss from discontinued operations, net of income taxes
    (552,863 )     (238,443 )     (1,544,172 )     (343,783 )
Net loss
    (2,720,461 )     (2,368,720 )     (7,647,161 )     (3,979,976 )
Less: loss attributable to noncontrolling interest
          105,018             156,635  
Net loss attributable to Frontier Oilfield Services, Inc.
  $ (2,720,461 )   $ (2,263,702 )   $ (7,647,161 )   $ (3,823,341 )
                                 
Net loss per common share - basic and diluted:
                               
Continuing operations
  $ (0.10 )   $ (0.15 )   $ (0.30 )   $ (0.33 )
Discontinued operations
    (0.03 )     (0.01 )     (0.07 )     (0.02 )
Total
  $ (0.13 )   $ (0.16 )   $ (0.37 )   $ (0.35 )
                                 
Weighted Average Common Shares Outstanding:
                               
Basic and Diluted
    21,424,253       14,401,495       20,674,599       11,026,591  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
F-3

 
 
FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
(Unaudited)
             
   
For the Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
Cash Flows From Operating Activities:
           
Net loss
  $ (7,647,161 )   $ (3,979,976 )
Less: Loss from discontinued operations, net of taxes
    (1,544,172 )     (343,783 )
Loss from continuing operations, net of taxes
    (6,102,989 )     (3,636,193 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    2,050,120       384,521  
Issuance of common stock for services
    1,953,138       955,813  
Impairment loss on net profits interest in subsidiary
          284,900  
Equity loss of unconsolidated affiliated company
          169,794  
Gain on sale of property and equipment
    (56,504 )     (2,750 )
Amortization of deferred loan fees
    255,688       52,307  
Changes in operating assets and liabilities other than advances from affiliates:
               
Decrease (increase) in operating assets:
               
Accounts receivable
    1,451,181       (135,782 )
Inventory, primarily parts
    25,360       27,074  
Prepaid expenses, primarily insurance
    (649,241 )     419,454  
Deposits
    1,475       (2,996 )
Increase in operating liabilities:
               
Accounts payable and accrued liabilities
    63,212       994,176  
Financed insurance premiums payable
    965,100        
Net cash used in operating activities of continuing operations
    (43,460 )     (489,682 )
Net cash provided by operating activities of discontinued operations
    1,077,613       387,905  
Net cash provided by (used in) operating activities
    1,034,153       (101,777 )
                 
Cash Flows From Investing Activities:
               
Cash used for acquisition of subsidiaries net of cash received
          (1,900,402 )
Purchase of property and equipment
    (381,199 )     (287,783 )
Proceeds from sale property and equipment
    96,529       4,500  
Escrow liability
    (619,922 )      
Purchase of certificate of deposit
          (77,614 )
Payments to related party
          (288,790 )
Net cash used in investing activities of continuing operations
    (904,592 )     (2,550,089 )
Net cash provided by investing activities of discontinued operations
    5,306        
Net cash used in investing activities
    (899,286 )     (2,550,089 )
                 
Cash Flows From Financing Activities:
               
Proceeds from preferred stock subscriptions
    700,000       2,353,000  
Net change in line of credit
    (1,102,414 )      
Proceeds from notes payable
    803,500       2,308,509  
Payments on notes payable
    (1,843,865 )     (226,102 )
Payments from restricted cash account
    619,922        
Common stock sales
    400,393       90,000  
Deferred loan origination fees
          (1,455,042 )
Increase in bank overdraft
    290,091        
Net cash provided by (used in) financing activities of continuing operations
    (132,373 )     3,070,365  
Net cash used in financing activities of discontinued operations
    (63,062 )     (7,306 )
Net cash provided by (used in) financing activities
    (195,435 )     3,063,059  
                 
Net increase (decrease) in cash
    (60,568 )     411,193  
Cash at beginning of period
    60,568       5,050  
Cash at end of period
  $     $ 416,243  
 
 
F-4

 
 
FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
             
Supplemental Cash Flow Disclosures
 
Interest paid
  $ 1,007,163     $ 334,672  
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities
 
Issuance of common stock and debt for acquisitions
  $     $ 25,361,102  
Term notes payable issued for property and equipment
  $     $ 570,035  
Preferred stock issued for investment in affiliate
  $     $ 147,000  
Reduction of deferred loan origination fees against notes payable
  $     $ 45,704  
Settlement of deferred consideration payable for acquisition of CTT
  $ 4,708,348     $  
Fair value of common stock warrants issued with preferred stock
  $ 503,774          
Beneficial conversion features of Asher Note
  $ 72,235          
Cumulative dividend payable recorded in accrued liabilities
  $ 5,542     $  
                 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
F-5

 
 
FRONTIER OILFIELD SERVICES, INC.
September 30, 2013
(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, 2012 (including the notes thereto) set forth in Form 10-K.
 
2.
BUSINESS ACTIVITIES:
 
Frontier Oilfield Services, Inc. a Texas corporation (and collectively with its subsidiaries, “we”, “our”, “Frontier”, “FOSI”, or the “Company”), was organized on March 24, 1995. The accompanying condensed consolidated financial statements include the accounts of the Company and Frontier Acquisition I, Inc., and its subsidiary Chico Coffman Tank Trucks, Inc. and its subsidiary Coffman Disposal, LLC, and Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC.
 
The Company’s current business, through its subsidiaries, is in the oil field services industry, including the transportation and disposal of salt water and other oil field fluids in Texas. The Company currently owns and operates thirteen disposal wells in Texas. The Company’s customer base includes national, integrated, and independent oil and gas exploration companies.
 
3.
GOING CONCERN:
 
The Company’s financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  As of the date of this report, the Company has generated losses from operations, have an accumulated deficit and a working capital deficiency. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
 
In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues sufficient to meet our 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.
 
Business Combinations
 
The Company accounts for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) Topic 805, Business Combinations . The acquisition method requires that assets acquired and liabilities assumed including contingencies be recorded at their fair values as of the acquisition date.
 
Reclassification of Discontinued Operations
 
In accordance with ASC Topic 205, regarding the presentation of discontinued operations the assets, liabilities and activity of FIG have been reclassified as discontinued operations for all periods presented.
 
Revenue Recognition
 
The Company recognizes revenues in accordance with (ASC 605), Revenue Recognition, and Staff Accounting Bulletin No 104, and accordingly all of the following criteria must be met for revenues to be recognized: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably
 
 
F-6

 
 
assured. The majority of the Company’s revenue results from agreements with customers and revenues are generated upon performance of contracted services. Transportation and disposal rates are generally based on a fixed fee per barrel of disposal water or, in certain circumstances transportation is based on an hourly rate. Revenue is recognized based on the number of barrels transported or disposed or at hourly rates for transportation. Rates for other services are based on negotiated rates with the Company’s customers and revenue is recognized when the services have been performed. The Company extends unsecured credit to its customers for amounts invoiced.
 
Fair Value Measurements
 
The ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with U.S. Generally Accepted Accounting Principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Impairment analyses will be made of all assets using future cash flow analysis. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.
 
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 June 30, 2014 (Note 9), as specified in the stock purchase agreement. The fair value of the earnings based contingent liability is to be determined based on the earnings as of future fiscal period-ends (See Note 9).
 
The fair value measurements of the Company’s contingent liabilities consisted of the following:
                         
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Liabilities
                       
Earnings based deferred consideration liability related to the CTT acquisition
                2,300,000       2,300,000  
 
There were no transfers between the three levels during the nine months ended September 30, 2013.
 
Earnings Per Share (EPS)
 
Basic earnings per common share is calculated by dividing net income or loss by the weighted average number of shares outstanding during the year. Diluted earnings per common share is calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock options. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of shares that would have an anti-dilutive 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.
 
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.
 
The following details the final fair value of the consideration transferred to effect the acquisition of FIG.
       
Fair value of consideration transferred
  $ 3,877,000  
 
The following is the final fair value of the net assets acquired by the Company in the acquisition, reconciled to the total fair value of the consideration transferred:
 
 
F-7

 
 
       
Cash
  $ 907,132  
Accounts receivable and accrued revenue
    1,794,260  
Inventory
    61,905  
Property and equipment (net)
    7,081,025  
Deposits
    25,960  
Other assets
    1,026,903  
Notes payable
    (2,346,973 )
Accounts payable and accrued expenses
    (881,216 )
Fair value of net assets acquired as of May 31, 2012
    7,668,996  
Non-controlling interest adjustment
    (3,791,996 )
Fair value of consideration transferred
  $ 3,877,000  
 
In September 2012, the Company acquired the remaining 49% ownership of FIG. The transaction was valued at $5,610,000. The following is the final fair value of the non-controlling interest acquired by the Company in the transaction reconciled to the total final fair value of the consideration transferred:
       
Fair value of 49% interest in FIG
  $ 3,635,361  
Decrease in additional paid-in capital on purchase of 49% interest in FIG
    1,974,639  
Fair value of consideration transferred
  $ 5,610,000  
 
Acquisition of Chico Coffman Tank Trucks, Inc.
 
The Company through a wholly owned subsidiary, Frontier Acquisition I, Inc. completed the acquisition of Chico Coffman Tank Trucks, Inc. on July 31, 2012 by acquiring all of the issued and outstanding stock of Chico Coffman Tank Trucks, Inc. (“CTT”) inclusive of its wholly owned subsidiary, Coffman Disposal, LLC for the sum of $16,986,939.
 
The transaction has been accounted for using the acquisition method of accounting which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The Company has finalized the determination of the fair values of the assets acquired and liabilities assumed.
 
The following details the final fair value of the consideration transferred to effect the acquisition of CTT.
 
Cash and debt consideration
  $ 9,978,591        
Earnings based deferred compensation liability
    2,300,000        
Share based deferred compensation liability
    4,708,348        
               
Total fair value consideration
          $ 16,986,939  
 
The following is the final fair value of the net assets acquired by the Company in the acquisition, reconciled to the total fair value of the consideration transferred:
 
Cash
  $ 78,135  
Accounts receivable
    3,023,355  
Inventory
    251,605  
Prepaid expenses
    655,616  
Property and equipment
    15,982,000  
Intangible assets
    4,067,735  
Other assets
    15,356  
Accounts payable and accrued expenses
    (4,682,095 )
Financed insurance premiums
    (81,024 )
Notes payable
    (2,323,744 )
Fair value of consideration transferred
  $ 16,986,939  
 
The share based deferred consideration liability was settled in May 2013 in which the company issued an additional 572,913 shares of common stock in full satisfaction of the Company’s liability. A total of 1,750,000 common shares were issued to settle the liability by increasing equity by the same amount of the liability settlement with no gain or loss recognized for the liability settlement.
 
 
F-8

 
 
The Company’s operating results are substantially affected by the acquisition of CTT which can limit comparability of financial results for the nine months ended September 30, 2013 to 2012.
 
6.
INTANGIBLE ASSETS:
 
In connection with the acquisition of CTT, the Company acquired intangible assets consisting of disposal well permits, and customer relationships. The Company valued the disposal well permits using the build-out (Greenfield) valuation technique. The customer relationships were valued by the Company using the excess earnings valuation technique.
 
Disposal well permits and customer relationships are considered definite-life intangible assets which are amortizable over their estimated useful life.
 
The intangible assets, net of amortization as of September 30, 2013 were as follows:
                     
    September 30, 2013
       
Accumulated
       
Weighted Average
   
Gross
 
Amortization
   
Net
 
Useful Life
Intangible assets:
                   
Disposal well permits
  $ 2,093,867     $ (244,285 )   $ 1,849,582  
10 years
Customer relationships
    1,973,867       (230,285 )     1,743,582  
10 years
    $ 4,067,734     $ (474,570 )   $ 3,593,164    
 
Future amortization expense for definite-life intangible assets as of September 30, 2013 is as follows:
 
Periods
     
Ending
     
September 30,
     
2014
  $ 406,776  
2015
    406,776  
2016
    406,776  
2017
    406,776  
2018
    406,776  
Thereafter
    1,559,284  
    $ 3,593,164  
 
7.
STOCK BASED COMPENSATION:
 
Under the terms of the Company’s employment agreements with its officers, certain officers receive a grant of 25,000 of the Company’s common stock per quarter and a grant of 5,000 of the Company’s common shares times the number of years of completed service issued annually. In addition, certain officers receive options to purchase up to 15,000 of the Company’s common stock per calendar quarter at an exercise price equal to the ending bid price of the last market day prior to the date of the option award. The option exercise period for each option is up to two years from its date of issuance, at which time the option expires. Also, two officers who joined the Company in the first quarter of this year received a grant of certain restricted common stock shares as a sign-on bonus. The granted shares vest proportionally each quarter for the calendar year ended December 31, 2013.
 
Additionally, each Director, except for Mr. O’Donnell, is awarded 25,000 shares of the Company’s common stock per calendar quarter (issued at the beginning of each quarter).
 
Summary Stock Compensation Table
 
The following table sets forth the Company’s paid or accrued stock compensation expense to its officers, directors and employees.
                               
   
Stock
Awards
   
Stock
Options
Awards
   
Non-Vested
Stock
Awards (1)
   
Securities
Underlying
Non-Vested
Stock (1)
   
Total
 
Nine months ended September 30, 2013
  $ 1,131,636     $ 64,500     $ 554,500       605,000     $ 1,750,636  
                                         
Nine months ended September 30, 2012
  $ 651,751     $ 69,750     $ 191,250       300,000     $ 912,751  
 
 
F-9

 
 
(1) As of September 30, 2013, the Company’s unrecognized compensation expense related to the nonvested stock grants was $161,000.
 
The Company executed a contract on January 12, 2012 for consulting and marketing services. Under the terms of the contract a portion of the fees to be paid are in the form of the Company’s common stock. For the nine months ended September 30, 2012 the Company recorded professional fees of $43,062 with an offsetting credit to stockholders’ equity. The Company executed a contract on May 10, 2013 for consulting and marketing services. Under the terms of the contract a portion of the fees to be paid are in the form of the Company’s common stock. For the nine months ended September 30, 2013 the Company recorded professional fees of $202,502 with an offsetting credit to stockholders’ equity.
 
A summary of the status of the Company’s option grants as of September 30, 2013 and December 31, 2012 and the changes during the periods then ended is presented below:
                         
   
Shares
   
Weighted-Average
Exercise Price
   
Weighted Average
Remaining
Contractual Term
(in Years)
   
Aggregate
Intrinsic
Value
 
                         
Outstanding December 31, 2012
    150,000     $ 1.54       1.64     $ 231,000  
Granted
    120,000     $ 1.28       1.72     $ 153,600  
Exercised
                       
Forfeited
                       
Outstanding September 30, 2013
    270,000     $ 1.43       1.67     $ 386,100  
 
The weighted average fair value at the grant date for options during the nine months ended September 30, 2013 was estimated using the Black-Scholes option valuation model with the following inputs:
       
Average expected life in years
    2  
Average risk-free interest rate
    2.00 %
Average volatility
    75 %
Dividend yield
    0 %
 
Risk-free interest rates for the options were taken from the Daily Federal Yield Curve Rates on the grant dates for the expected life of the options as published by the Federal Reserve. The expected volatility was based upon historical data and other relevant factors such as the Company’s changes in historical volatility, capital structure, and its daily trading volumes.
 
In calculating the expected life of stock options, the Company determines the amount of time from grant date to contractual term date for vested options. In developing the expected life assumption, all amounts of time are weighted by the number of underlying options.
 
A summary of the status of the Company’s vested and non-vested option grants at September 30, 2013 and the weighted average grant date fair value is presented below:
                   
   
Shares
   
Weighted Average
Grant Date
Fair Value per Share
   
Weighted Average
Grant Date
Fair Value
 
Vested
    270,000     $ .63     $ 169,500  
Nonvested
                 
Total
    270,000     $ .63     $ 169,500  
 
The status of the Company’s non-vested stock grant at September 30, 2013 and the grant date value is presented below:
                   
   
Shares
   
Weighted Average
Grant Date
Value per Share
   
Grant Date
Value
 
Nonvested
    175,000     $ 0.92     $ 161,000  
Forfeited
    100,000     $ 1.90     $ 190,000  
Total
    275,000     $ 1.28     $ 351,000  
 
 
F-10

 
 
8.
LONG-TERM DEBT:
 
Long-term debt as of September 30, 2013 was as follows:
       
Revolving credit facility and term loan (a)
  $ 4,470,489  
ICON term note (b)
    5,000,000  
Notes payable (1)  
    2,785,668  
Installment notes (1)  
    435,889  
Total debt
    12,692,046  
Less current portion
    (10,350,765 )
Total long-term debt
  $ 2,341,281  
 
 
(1)
$84,198 and $124,567 are classified as current liabilities and non-current liabilities of discontinued operations, respectively.
 
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. The Company subsequently fell into technical default and on May 24, 2013 the Company entered into a forbearance agreement with Capital One.
 
 
a.
Pursuant to the terms of the forbearance agreement, Capital One reduced its loan commitments from $15 million to $9 million consisting of a revolving loan commitment of $3 million and a term loan commitment of $6 million subject to the terms of the Credit Agreement. The Credit Agreement has a maturity date of July 23, 2017 and pursuant to the forbearance agreement, provides for a default interest rate which is the base rate plus the applicable margin plus 2% (6.75% and 7.75%, respectively as of September 30, 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 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.
 
Subsequent to September 30, 2013, the Company amended the forbearance agreement dated October 11, 2013. As part of the new forbearance agreement, Capital One reduced its loan commitments from $9 million to $7,750,000 consisting of revolving loan commitment of $1,750,000 and a term loan commitment of $6 million. In addition to the initial agreement, the Company has to raise $500,000 in equity and sell certain fixed assets of the Company (See Note 11).
 
 
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 14% monthly interest only payments with repayment of the principal and accrued but unpaid interest on February 1, 2018. ICON has a senior secured position on the Company’s disposal wells and a subordinated position to Capital One on all other Company properties and assets. The covenants in the ICON Note are in all material respects the same as in the Capital One Credit Agreement. As of September 30, 2013, the Company was in technical default resulting from its inability to maintain two financial ratios of the debt covenants and accordingly classified the entire note balance as a current liability.
 
 
c.
The Company and its subsidiaries entered into a consulting agreement with Great American Group (GA) to sell all of the trucks and trailers owned by Trinity Disposal & Trucking, LLC. As part of the sale of the assets, GA guaranteed the sale in the amount of $1,305,000 and advanced the Company $650,000. The advance will be paid after GA completes the sale of the assets.
 
 
d.
The Company entered into a convertible note agreement with Asher Enterprises, Inc. in the amount of $153,500. The note, due in May 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 $11,996 was amortized during the nine months ended September 30, 2013.
 
 
F-11

 
 
9.
COMMITMENTS AND CONTINGENCIES:
 
 
a.
During the year ended December 31, 2012 a complaint was filed with the Texas Railroad Commission (RRC) regarding the operation of one of Trinity Disposal Wells, LLC’s wells in East Texas. The complaint requested that the RRC terminate the well injection permit on the basis that the Company violated the terms of the permit by failing to confine injection fluids to the permitted interval and that the escape of such fluids is causing waste and poses a threat to fresh water. The Company answered the complaint and presented expert testimony contradicting the claim. On May 24, 2013, the RRC dismissed the complaint and ruled in favor of the Company.
 
 
b.
A share based deferred consideration liability was recorded as part of the CTT purchase consideration based on the Stock Purchase Agreement dated June 29, 2012. The previous owner of CTT received $4,708,348 in consideration in the form of common shares with a right to receive additional common shares if the share price of the company falls below $4.00 per share at the end of the measurement period, which is January 25, 2014, as specified in the stock purchase agreement. The share based deferred compensation liability was settled on May 1, 2013 in which the company issued an additional 572,913 shares of common stock in full satisfaction of the Company’s liability. A total of 1,750,000 common shares were issued to settle the liability.
 
 
c.
An earnings based deferred consideration liability was recorded as part of the CTT purchase consideration based on the Stock Purchase Agreement dated June 29, 2012 which was amended on May 1, 2013. The previous owner of CTT was granted the right to receive additional consideration based on specified earnings targets at the end of the measurement period, which ends on June 30, 2014, as specified in the amended agreement dated May 1, 2013. Because the fair value of the earnings based contingent liability will largely be determined based on the earnings as of future fiscal period-ends, it is not possible to determine a probable range of possible outcomes of the valuation of the earnings based contingent liability at this time. Accordingly, there was no change in the fair value from the acquisition date through September 30, 2013. Future gains and losses on the re-measurement of the earnings based contingent liability will be included in other income (expense). As of September 30, 2013, the value of the earnings based liability was $2,300,000.
 
 
d.
The Company is obligated for $1,529,500 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, 2022 with no option to renew. The monthly lease payment for the disposal well leases is $10,300. The Company is also obligated for $107,010 under an operating lease agreement for rent of its office space in Dallas, Texas. The term of the lease is from March 1, 2011 through May 31, 2014. The average monthly base lease payment over the remaining term of the lease is $7,644.
 
 
e.
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 the Company’s acquisitions that were originated by Mr. Burroughs.
 
 
f.
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.
PREFERRED STOCK AND WARRANTS:
 
During the nine months ended September 30, 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 7% cumulative dividends, payable quarterly, with payment at the option of the Company to be made in kind or in shares of common stock based on a per share valuation set at a 25% discount to the 5 day average closing bid price of the market price. The warrant features provide that 2 warrants may be exercised to purchase one share of common stock at a strike price of $0.20 per share with a term of 12-24 months from the date of issuance. The weighted average fair value for the warrants was estimated using the Black-Scholes option valuation model. The value of the warrants was calculated to be $503,774 that was recorded to additional paid-in capital. The Black-Scholes option valuation model inputs used are as follows:
       
Average expected life in years
    1  
Average risk-free interest rate
    4.00 %
Average volatility
    75 %
Dividend yield
    7 %
 
 
F-12

 
 
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 is June 1, 2013.
 
The fixed assets of FIG are classified as assets held for sale in the consolidated balance sheets as of September 30, 2013 in accordance with (ASC 205-20), Presentation of Financial Statements - Discontinued Operations.  FIG’s net losses of $552,863 and $1,544,172 for the three months ended September 30, 2013 and nine months ended September 30, 2013 are included in discontinued operations.
 
The carrying amounts of the fixed assets, net of accumulated depreciation as of September 30, 2013 were $5,604,142. FIG’s revenue and net loss before income tax are summarized as follows:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
   
September
   
September
 
   
2013
   
2012
      30, 2013       30, 2012  
                             
Revenues
  $ 759,509     $ 2,649,804     $ 4,648,825     $ 3,512,469  
                                 
Net loss before income tax
  $ (552,863 )   $ (238,443 )   $ (1,544,172 )   $ (343,783 )
 
Assets and liabilities classified as discontinued operations are as follows:
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
             
Cash
  $ 23,941     $ 7,256  
Accounts receivable
    157,867       1,027,527  
Inventory, primarily parts
          21,347  
Prepaid expenses, primarily insurance
          134,501  
Deposits
    10,620       25,960  
Total assets
  $ 192,428     $ 1,216,591  
                 
Current portion of long-term debt
  $ 84,198     $ 84,668  
Accounts payable
    1,642,515       1,036,382  
Accrued liabilities
    107,815       119,673  
Long-term debt, less current maturities
    124,567       170,474  
Total liabilities
  $ 1,959,095     $ 1,411,197  
 
12.
SUBSEQUENT EVENT:
 
Subsequent to September 30, 2013, an investor invested approximately $1 million for general working capital needs of the Company. The Company completed the sale of a portion of FIG’s assets subsequent to September 30, 2013 and received proceeds approximately $2.6 million. The proceeds were used to pay down the debt and as a working capital of the Company.
 
Subsequent to September 30, 2013, the Company granted 200,000 shares to each of the two officers of the Company for a total of 400,000 shares to be vested at the rate of 50,000 shares every 3 months beginning October 1, 2013.
 
 
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 $7,644 per month.
 
The Company owns 10 acres of vacant land in Johnson County and 7.055 acres in Chico, Texas on which it has 5 buildings used for its water disposal operations in that area. The Company also owns 7.49 acres in Harrison County, Texas on which three of its disposal wells are located along with a small manufactured office and repair shop. In addition, the Company is obligated under long-term leases for the use of land where seven of its disposal wells are located. Three of the leases are for extended periods of time. The first lease expires on February 7, 2023 (with two options to renew for an additional 10 years each). The second lease expires on December 1, 2034 with no option to renew and the third lease expires on May 31, 2022 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, 2012 as filed with the United States Securities and Exchange Commission. Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about our operating results and financial condition.
 
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
 
RESULTS OF OPERATIONS
 
For the quarter ended September 30, 2013 we reported a net loss from continuing operations of $2,167,598 as compared to a net loss from continuing operations of $2,130,277 for the quarter ended September 30, 2012. The components of these results are explained below.
 
Revenue - Revenues by subsidiaries are as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
   
September 30, 2013
   
September 30, 2012
 
                         
Chico Coffman Tank Trucks, Inc.
  $ 6,523,784     $ 7,202,034     $ 23,986,732     $ 7,202,034  
                                 
Frontier Income and Growth, LLC. (discontinued operations)
                       
                                 
Frontier Oilfield Services, Inc.
                      1,909  
                                 
Total revenue
  $ 6,523,784     $ 7,202,034     $ 23,986,732     $ 7,203,943  
                                 
Revenue from discontinued operations
  $ 759,509     $ 2,649,804     $ 4,648,825     $ 3,512,469  
 
The increase in net revenue for the nine months is attributable to our recent acquisitions of Chico Coffman Tank Trucks (“CTT”) and Frontier Income and Growth (“FIG”). The decrease in net revenue for the three months is attributable to the discontinued operations of
 
 
3

 
 
FIG and change in the overall customer base of CTT including discontinuation of a business line that led to a decrease in revenue customer base of CTT.
 
Expenses- The components of our costs and expenses for the three months and nine months ended September 30, 2013 and 2012 are as follows:
 
   
Nine Months Ended September 30, 2013
    Nine Months Ended September 30, 2012  
   
CTT
   
FIG
   
FOSI
   
Total
   
CTT
   
FIG
   
FOSI
   
Total
 
Costs and expenses:
                                               
Direct costs
  $ 18,072,026     $     $     $ 18,072,026     $ 5,614,176     $     $ 1,753     $ 5,615,929  
Indirect costs
    3,712,667                   3,712,667       1,518,845                   1,518,845  
General and administrative
                5,048,561       5,048,561                   2,501,249       2,501,249  
Depreciation and amortization
    2,041,189             8,931       2,050,120       381,209             3,312       384,521  
                                                                 
Total costs and expenses
  $ 23,825,882     $     $ 5,057,492     $ 28,883,374     $ 7,514,230     $     $ 2,506,314     $ 10,020,544  
                                                                 
Costs and expenses from discontinued operations
                          $ 6,192,997                             $ 3,856,252  
                                                                 
   
Three Months Ended September 30, 2013
    Three Months Ended September 30, 2012  
   
CTT
   
FIG
   
FOSI
   
Total
   
CTT
   
FIG
   
FOSI
   
Total
 
Costs and expenses:
                                                               
Direct costs
  $ 5,424,491     $     $     $ 5,424,491     $ 5,614,176     $     $ 52     $ 5,614,228  
Indirect costs
    815,685                   815,685       1,518,845                   1,518,845  
General and administrative
                1,348,828       1,348,828                   1,173,407       1,173,407  
Depreciation and amortization
    679,256             5,986       685,242       381,209             1,560       382,769  
                                                                 
Total costs and expenses
  $ 6,919,432     $     $ 1,354,814     $ 8,274,246     $ 7,514,230     $     $ 1,175,018     $ 8,689,248  
                                                                 
Costs and expenses from discontinued operations
                          $ 1,312,372                             $ 2,888,247  
 
 
The increase in direct costs for the nine months is attributable to our recent acquisitions of Chico Coffman Tank Trucks (“CTT”) and Frontier Income and Growth (“FIG”). The decrease in direct costs for the three months is attributable to the discontinued operations of FIG and discontinuation of a business line that led to reduction in headcount and expenses of CTT.
 
The increase in indirect costs for the nine months is attributable to our recent acquisitions of Chico Coffman Tank Trucks (“CTT”) and Frontier Income and Growth (“FIG”). The decrease in indirect costs for the three months is attributable to the discontinued operations of FIG and discontinuation of a business line that led to reduction in headcount and expenses of CTT.
 
The increase in general and administrative expenses for the nine months is attributable to stock compensation costs of $840,000, salaries and wages of $309,000, legal and professional fees of $1,180,000 and expenses in all other categories totaling $218,000. The increase in stock compensation cost is mostly attributable to an increase in number of shares awarded and a change in the method of determining the date for issuing common stock shares to executives for years of service. The employment contracts for two executives were modified January 1, 2013 which changed the date for awarding shares from annually to the anniversary date of the executive’s years of service. The increase in legal and professional fees is attributable to the costs associated with the purchase of CTT and FIG, including pursuing other acquisition targets in 2013. The increase in salaries and wages is attributable to increase in management head count position in anticipation of the increase of acquisition efforts in 2013.
 
The increase in depreciation and amortization expense is attributable to purchase price allocation due to our recent acquisitions of CTT and FIG.
 
Other (Income) Expenses- The components of our costs and expenses for the three months and nine months ended September 30, 2013 and 2012 are as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
   
September 30, 2013
   
September 30, 2012
 
                         
Interest expense
  $ 417,784     $ 358,163     $ 1,265,759     $ 358,163  
                                 
Gain on disposal of property and equipment
    (648 )           (56,504 )      
                                 
Equity in loss of unconsolidated affiliated company
                      169,794  
                                 
Impairment loss on net profits interest in affiliate
          284,900             284,900  
                                 
Total other (income) expenses
  $ 417,136     $ 643,063     $ 1,209,255     $ 812,857  
 
 
4

 
 
The increase in interest expense is attributable to the new Capital One and ICON notes.
 
We have not recorded any federal income taxes for the nine months ended September 30, 2013 and 2012 because of our accumulated losses. Also, since there is continued uncertainty as to the realization of a tax asset, we have not recorded any tax benefit. In addition we have not recorded a provision for state income taxes due to the operating loss sustained this quarter.
 
Net loss – The components of our net loss by subsidiaries are as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
   
September 30, 2013
   
September 30, 2012
 
                         
Chico Coffman Tank Trucks, Inc.
  $ (404,596 )   $ (332,504 )   $ 154,950     $ (332,504 )
                                 
Frontier Income and Growth, LLC. (discontinued operations)
    (552,863 )     (238,443 )     (1,544,172 )     (343,783 )
                                 
Frontier Oilfield Services, Inc.
    (1,763,002 )     (1,692,755 )     (6,257,939 )     (3,147,054 )
                                 
Total net loss
  $ (2,720,461 )   $ (2,263,702 )   $ (7,647,161 )   $ (3,823,341 )
 
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. The fixed assets of FIG are classified as assets held for sale in the consolidated balance sheets as of September 30, 2013.  FIG’s net losses of $647,760 from June 1, 2013 to September 30, 2013 are included in discontinued operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash Flows and Liquidity
 
As of September 30, 2013 we had total current assets of $4.17 million. Our total current liabilities as of September 30, 2013 were $21.09 million. Thus, we had a working capital deficit of $16.92 million as of September 30, 2013.
 
Based upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next twelve months. We have negative working capital and rely on proceeds from equity and loans to fund our operations.  We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all.
 
The following table summarizes our sources and uses of cash for the nine months ended September 30, 2013 and 2012:

   
For the Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
             
Net cash used in operating activities of continuing operations
  $ (43,460 )   $ (489,682 )
Net cash provided by operating activities of discontinued operations
    1,077,613       387,905  
Net cash provided by (used in) operating activities
    1,034,153       (101,777 )
                 
Net cash used in investing activities of continuing operations
    (904,592 )     (2,550,089 )
Net cash provided by investing activities of discontinued operations
    5,306        
Net cash used in investing activities
    (899,286 )     (2,550,089 )
                 
Net cash provided by (used in) financing activities of continuing operations
    (132,373 )     3,070,365  
Net cash used in financing activities of discontinued operations
    (63,062 )     (7,306 )
Net cash provided by (used in) financing activities
    (195,435 )     3,063,059  
                 
Net increase (decrease) in cash
  $ (60,568 )   $ 411,193  
 
 
As of September 30, 2013, we had no cash and cash equivalents, a decrease of $68,000 from December 31, 2012 as our improved cash flow from operations was offset by capital expenditures, escrow funds payment and reductions in outstanding indebtedness. Currently we are focusing on paying down our existing indebtedness with our lender with the proceeds of the sale of FIG’s assets.
 
 
5

 
 
Net cash provided by operating activities was $1.03 million for the nine month ended September 30, 2013, consisted of $1.08 million net cash provided by operating activities of discontinued operations, add-back of non cash items and other adjustments of $4.2 million (of which $2.05 million was depreciation and amortization) and a $1.86 million change in net operating assets and liabilities offset by a net loss of $7.65 million. The increase in net operating activities resulted from improvements in the Company’s trade cycle, including collections of accounts receivable.
 
Net cash used in operating activities was $102,000 for the nine month ended September 30, 2012, consisted of $388,000 net cash provided by operating activities of discontinued operations, add-back of non cash items and other adjustments of $1.84 million (of which $385,000 was depreciation and amortization) and a $1.3 million change in net operating assets and liabilities offset by a net loss of $3.98 million. The decrease in net operating activities mainly resulted from the acquisitions of CTT and FIG.
 
Net cash used in investing activities was $899,000 for the nine months ended September 30, 2013 which consisted primarily of $381,000 of capital expenditures and $619,000 release of escrow funds to JD Coffman.
 
Net cash used in investing activities was $2.55 million for the nine months ended September 30, 2012 which consisted primarily of $1.9 million of cash used for acquisition of CTT and FIG, $288,000 for capital expenditures and $$289,000 payments to related party.
 
Net cash used in financing activities was $207,000 for the nine months ended September 30, 2013 which consisted primarily of $46,000 net cash used in financing activities of discontinued operations, $1.1 million cash received from preferred and common stock sales, $620,000 cash receipts from escrow funds, $806,000 in borrowings and $1.86 million in debt payments.
 
Net cash provided by financing activities was $3.06 million for the nine months ended September 30, 2012 which consisted primarily of $2.44 million cash received from preferred and common stock sales, $1.46 million payment of loan origination fees, $2.31 in borrowings and $233,000 in debt payments.
 
Capital Expenditures
 
Capital expenditures for nine months ended September 30, 2013 and 2012 of $381,000 and $288,000, respectively, were mainly related to the improvements of our disposal wells and our fleet of vehicles. We currently are not anticipating any major expenditures for the remainder of 2013.
 
Indebtedness
 
In connection with the acquisition of CTT, the Company and its subsidiaries entered into loan agreements effective July 23, 2012 with Capital One Leverage Finance Corp. (Capital One) and ICON Investments (ICON) the proceeds of which were primarily used for the cash portion of the acquisition. Due to the Company’s technical default, on May 24, 2013, the Company entered into a forbearance agreement with Capital One.
 
Pursuant to the terms of the forbearance agreement, Capital One reduced its loan commitments from $15 million to $9 million consisting of revolving loan commitment of $3 million and a term loan commitment of $6 million subject to the terms of the Credit Agreement. The Credit Agreement has a maturity date of July 23, 2017 and pursuant to the forbearance agreement, provides for default interest rate which is the base rate plus the applicable margin plus 2% (6.75% and 7.75%, respectively as of September 30, 2013), in which all of the loans were converted into base rate borrowings, bearing the default interest rate, 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 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.
 
Subsequent to September 30, 2013, the Company amended the forbearance agreement dated October 11, 2013. As part of the new forbearance agreement, Capital One reduced its loan commitments from $9 million to $7,750,000 consisting of revolving loan commitment of $1,750,000 and a term loan commitment of $6 million. In addition to the initial agreement, the Company is required to raise $500,000 in equity and sell certain fixed assets of the company.
 
The Credit Agreement contains certain restrictive debt covenants that require the Company to maintain a certain ratio and restrictions commencing with the month ending December 31, 2012. The major requirements are that the Company must maintain a monthly Fixed Charge Coverage Ratio each month that cannot be less than 1.0 to 1.0, a rolling twelve month Leverage Ratio determined on the last day of each month that cannot be greater the 4.50 to 1.0 and the Company cannot incur capital expenditures that exceeds $3 million in any fiscal year. As of September 30, 2013, the Company was in technical default resulting from its inability to maintain two financial ratios of the debt covenants.
 
 
6

 
 
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 14% monthly interest only payments with repayment of the principal and accrued but unpaid interest on February 1, 2018. ICON has a senior secured position on the Company’s disposal wells and a subordinated position to Capital One on all other Company properties and assets. The covenants in the ICON Note are in all material respects the same as in the Capital One Credit Agreement. As of September 30, 2013, the Company was in technical default resulting from its inability to maintain two financial ratios of the debt covenants.
 
Outlook
 
In response to the recent losses, the Company is reviewing various aspects of its operations to reduce costs. In connection with its review, the Company has elected to discontinue the operations of Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. The discontinuation may include the sale of certain 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 acquire additional equity and debt financing to increase our available cash so that we might pay down our accounts payable and pare back our outstanding indebtedness. Our ability to secure additional capital through business alliances with third parties or other debt/equity financing arrangements will also allow us to acquire companies and/or assets to further increase our operations in the water disposal segment of the oilfield services industry. There can be no assurance that we will be able to obtain the additional equity or debt financing or take advantage of any opportunity to buy companies and/or assets that are suitable for our investment or that we may be able to obtain financing or equity to pay for the costs of these additional companies and/or assets at terms that are acceptable to us. The oil and gas industry 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 4T. 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 September 30, 2013.
 
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.
 
The Company’s management has identified a material weakness in the effectiveness of internal control over financial reporting related to a shortage of resources in the accounting department required to assure appropriate segregation of duties with employees having appropriate accounting qualifications related to the Company’s unique industry accounting and disclosure rules. Management has outsourced certain financial functions to mitigate the material weakness in internal control over financial reporting.  The Company is reviewing its finance and accounting staffing requirements.
 
Internal Control Over Financial Reporting
 
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As a result, no corrective actions were required or undertaken.
 
Limitations on the Effectiveness of Controls. Our management, including the CEO and CFO, does not expect that its disclosure controls or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
 
 
7

 
 
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.
 
PART II. OTHER INFORMATION
 
Item 1. LEGAL PROCEEDINGS
 
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the nine months ended September 30, 2013, the Company issued 1,750,000 shares of cumulative convertible preferred stock and 3,500,000 warrants for $700,000 to an accredited investor. The sale was accomplished as an exempt sale under Section 4(5) of the Securities Act of 1933, as amended. The preferred stock features 7% cumulative dividends, payable quarterly, with payment at the option of the Company to be made in kind or in shares of common stock based on a per share valuation set at a 25% discount to the 5 day average closing bid price of the market price. The warrant features provide that 2 warrants may be exercised to purchase one share of common stock at a strike price of $0.20 per share with a term of 12-24 months from the date of issuance. The weighted average fair value for the warrants was estimated using the Black-Scholes option valuation model. The proceeds of the sale of the preferred stock were used by the company as working capital.
 
Subsequent to September 30, 2013, the Company granted 200,000 shares to each of the two officers of the Company for a total of 400,000 shares to be vested at the rate of 50,000 shares every 3 months beginning October 1, 2013.
 
Item 3. DEFAULTS UPON SENIOR SECURITIES
 
Item 5. OTHER INFORMATION
 
On May 1, 2013, the Company entered into an agreement with the former owner of CTT to amend the Stock Purchase Agreement dated June 29, 2012. Under the terms of the new agreement, the section relating to the deferred earn-out consideration which at June 30, 2012 was $2,300,000 was deleted in its entirety. It was further agreed that prior to July 1, 2013, the Company and the seller will replace the earn-out provisions previously set forth and replace it with a revised earn-out provision covering the period from July 1, 2013 to June 30, 2014.
 
The revised earn-out will be earned each quarter during the new measurement period where CTT exceeds its targeted earnings before interest, taxes, depreciation and amortization threshold for such quarter and, if there is such excess, then the earn-out payment to be made to the seller for such quarter will be an agreed-upon percentage of such excess. Since the targeted earnings and percentage have not been agreed to at this time it is not feasible to determine the effect, if any, on the deferred earn-out consideration liability recorded at September 30, 2013.
 
In addition, the section of the Agreement pertaining to the deferred stock consideration was amended wherein the Company agreed to issue an additional 572,913 of common stock shares in full satisfaction of the Company’s obligation to issue additional shares under the previous provisions of the Agreement. The amendment did not change the value of the deferred consideration; rather, it settles the Company’s share obligation portion to the seller. The total number of shares issued under the Amended Agreement is 1,750,000.
 
Item 6. EXHIBITS
 
 
(a)
EXHIBITS:
 
 
 
 
     
                   
101
101.INS XBRL Instance Document
     
   
101.SCH XBRL Taxonomy Schema
     
   
101.CAL XBRL Taxonomy Calculation Linkbase
     
   
101.LAB XBRL Taxonomy Label Linkbase
     
   
101.PRE XBRL Taxonomy Presentation Linkbase
     
   
101.DEF XBRL Taxonomy Definition Linkbase
 
 
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 November 14, 2013
 
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 November 14, 2013
 
/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, John Van der Wiel, 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 November 14, 2013
 
/s/ John Van der Wiel
 
John Van der Wiel,
 
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 September 30, 2013, 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 November 14, 2013
 
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 September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “ Report ”), I, John Van der Wiel, 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 November 14, 2013
 
By: /s/ John Van der Wiel
 
John Van der Wiel,
Chief Financial Officer