ITEM 1. FINANCIAL STATEMENTS
FRONTIER OILFIELD SERVICES, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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June 30,
2018
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December 31,
2017
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ASSETS
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Current Assets:
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|
|
|
|
|
|
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Cash
|
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$
|
5,157
|
|
|
$
|
17,156
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Accounts receivable, net
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97,957
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|
|
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69,962
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|
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Advance to shareholder
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|
|
—
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|
|
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29,413
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Total current assets
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103,114
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116,531
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|
|
|
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Property and equipment, at cost
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7,616,948
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7,616,948
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Less: accumulated depreciation
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(4,559,879
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)
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(4,309,031
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)
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Property and equipment, net
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3,057,069
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3,307,917
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Intangibles, net
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298,778
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335,366
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Deposits
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2,302
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2,302
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Total other assets
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301,080
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337,668
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Total Assets
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$
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3,461,263
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$
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3,762,116
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current Liabilities:
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Current maturities of long-term debt, primarily stockholders, net of deferred loan fees
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$
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7,961,002
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$
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7,961,002
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Accounts payable
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1,438,190
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1,521,948
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Accrued liabilities
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1,552,602
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1,273,942
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Total current liabilities
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10,951,794
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10,756,892
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Long-term debt, less current maturities
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—
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—
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Total Liabilities
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10,951,794
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10,756,892
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Commitments and Contingencies (Note 7)
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Stockholders’ Deficit:
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Common stock- $.01 par value; authorized 100,000,000 shares; 13,868,788 shares issued and
outstanding at June 30, 2018 and December 31, 2017
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138,689
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138,689
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Additional paid-in capital
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34,918,653
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34,918,653
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Accumulated deficit
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(42,547,873
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)
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(42,052,118
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)
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Total stockholders’ deficit
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(7,490,531
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)
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(6,994,776
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)
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Total Liabilities and Stockholders’ Deficit
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$
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3,461,263
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$
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3,762,116
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The accompanying notes are an integral part
of these consolidated financial statements.
FRONTIER OILFIELD SERVICES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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For the Three Months Ended
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For the Six Months Ended
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June 30,
2018
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June 30,
2017
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June 30,
2018
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June 30,
2017
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Revenue, net of discounts
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$
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285,220
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$
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316,388
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$
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585,685
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$
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637,179
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Costs and expenses:
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Operating costs
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104,833
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216,224
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348,340
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530,198
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General and administrative
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183,272
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164,944
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226,557
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241,874
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Depreciation and amortization
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143,718
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115,321
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287,436
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230,643
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Total costs and expenses
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431,823
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496,489
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862,333
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1,002,715
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Operating loss
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(146,603
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)
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(180,101
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)
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(276,648
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)
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(365,536
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)
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Other (income) expense:
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|
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Interest expense
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109,550
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298,949
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219,107
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576,446
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Loss before provision for income taxes
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(256,153
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)
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(479,050
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)
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(495,755
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)
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|
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(941,982
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)
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Provision for income taxes
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—
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—
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—
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—
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Net loss
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$
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(256,153
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)
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$
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(479,050
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)
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$
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(495,755
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)
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$
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(941,982
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)
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Net loss per common share - basic:
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$
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(0.02
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)
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$
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(0.04
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)
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$
|
(0.04
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)
|
|
$
|
(0.08
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)
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Weighted Average Common Shares Outstanding:
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Basic
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13,868,788
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|
|
|
11,855,276
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13,868,788
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11,855,276
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The accompanying notes are an integral part
of these consolidated financial statements.
FRONTIER OILFIELD SERVICES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For the Six Months Ended
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|
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June 30, 2018
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|
June 30, 2017
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Cash Flows from Operating Activities:
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|
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Net loss
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|
$
|
(495,755
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)
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|
$
|
(941,982
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)
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|
Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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287,436
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230,643
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Amortization of deferred loan fees to interest expense
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|
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—
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|
|
|
104,364
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Changes in operating assets and liabilities:
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(Increase) decrease in operating assets:
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|
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|
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Accounts receivable
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(27,995
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)
|
|
|
(43,480
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)
|
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Increase (decrease) in operating liabilities:
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|
|
|
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Accounts payable
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|
|
(83,758
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)
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|
|
75,222
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|
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Accrued liabilities
|
|
|
278,660
|
|
|
|
493,499
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Net cash used in operating activities
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|
|
(41,412
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)
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|
|
(81,734
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)
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Cash Flows from Investing Activities:
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|
|
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Repayment of advance to shareholder
|
|
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29,413
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|
|
|
92,575
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|
|
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|
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Net cash provided by investing activities
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29,413
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|
|
|
92,575
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Cash Flows from Financing Activities:
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—
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|
|
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—
|
|
|
|
|
|
|
|
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Net increase (decrease) in cash
|
|
|
(11,999
|
)
|
|
|
10,841
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|
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Cash at beginning of the period
|
|
|
17,156
|
|
|
|
20,253
|
|
|
Cash at end of the period
|
|
$
|
5,157
|
|
|
$
|
31,094
|
|
|
|
|
|
|
|
|
|
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Supplemental Cash Flow Disclosures
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|
|
|
|
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Interest paid
|
|
$
|
33,637
|
|
|
$
|
—
|
|
|
Taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
FRONTIER OILFIELD SERVICES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(UNAUDITED)
The consolidated financial statements included
herein have been prepared by Frontier Oilfield Services, Inc. (“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 adjustments, unless otherwise indicated) 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, 2017 (including the notes thereto)
set forth in Form 10-K.
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 consolidated financial statements include the
accounts of the Company and Frontier Acquisition I, Inc., and its subsidiary Chico Coffman Tank Trucks, Inc. (CTT) 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.
Frontier operates its business in the oilfield
service industry and is primarily involved in the disposal of saltwater and other oilfield fluids in Texas. The Company currently
owns and operates five disposal wells in Texas, three within the Barnett Shale in North Texas and two in east Texas near the Louisiana
state line. The Company’s customers include national, integrated, and independent oil and gas exploration companies.
The Company’s financial statements
are prepared using U.S. generally accepted accounting principles (“U.S. GAAP”) 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 the financial
statements, the Company has generated losses from operations, has an accumulated deficit and working capital deficiency. These
factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
To continue as a going concern and achieve
a profitable level of operations, the Company will need, among other things, to increase its business volume and grow revenues,
reduce its operating expenses, raise additional capital resources and develop new and stable sources of revenue sufficient to meet
its operating expenses.
The Company’s ability to continue
as a going concern will be dependent upon management’s ability to successfully implement management’s plans to pursue
additional business volumes from new and existing customers, reduce indebtedness through sales of non-performing assets and conversions
of debt to equity, and rationalize the Company’s cost structure to achieve 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. The
Company’s continued existence will ultimately be dependent on its ability to generate sufficient cash flows to support its
operations as well as provide sufficient resources to retire existing liabilities on a timely basis. The Company faces significant
risk in implementing its business plan and there can be no assurance that financing for its operations and business plan will be
available or, if available, such financing will be on satisfactory terms.
|
4.
|
SUMMARY OF SELECTED ACCOUNTING POLICIES
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New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which provides guidance on a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers. The effective date for this ASU, which was deferred by ASU 2015-14 issued in
August 2015, is for fiscal years beginning after December 15, 2017. In March 2016, the FASB also issued ASU 2016-08, an amendment
to the guidance in ASU 2014-09 which revises the structure of the indicators to provide indicators of when the entity is the principal
or agent in a revenue transaction, and eliminated two of the indicators (“the entity’s consideration is in the form
of a commission” and “the entity is not exposed to credit risk”) in making that determination. This accounting
guidance in Accounting Standards Codification (“ASC”) 606 has been adopted by the Company using the full retrospective
method as of January 1, 2018. The Company reviewed its revenue stream and determined that there will be no impact to its financial
position, results of operations or liquidity. It was also determined that there will be no change in the amount or timing of revenue
recognized as a result of the adoption of the accounting standard. Therefore, no quantitative adjustment was required to be made
to prior periods presented on the unaudited consolidated financial statements after the adoption of the accounting standard.
This amendment also clarifies that each
indicator may be relevant to the assessment depending on the terms and conditions of the contract. In April 2016, the FASB also
issued ASU 2016-10, which clarifies the implementation guidance on identifying promised goods or services and on determining whether
an entity’s promise to grant a license with either a right to use the entity’s intellectual property (which is satisfied
at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The new accounting
standards have been implemented by the Company. This accounting guidance has been adopted by the Company as of January1, 2018.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which provides guidance for the recognition,
measurement, presentation, and disclosure of financial assets and liabilities. The guidance is effective for the fiscal year beginning
after December 15, 2017, including interim periods within that year. This accounting guidance has been adopted by the Company as
of January 1, 2018.
In February 2016, the FASB issued ASU 2016-02,
Leases,
which will change the criteria under which leases are identified and accounted for as on- or off-balance sheet.
The guidance is effective for the fiscal year beginning after December 15, 2018, including interim periods within that year. The
new guidance will be applied by the Company as of January 1, 2019 for all periods presented. The Company is in the process
of evaluating the impacts of the adoption of this ASU.
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.
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 assets or liabilities
measured at fair value on a 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 six months ended June
30, 2018 and 2017, except as disclosed.
Earnings (Loss) 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 period. 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 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. Currently there are no stock options in 2018 or 2017 which
have been excluded from EPS that could potentially have a dilutive effect on EPS in the future.
|
5.
|
STOCK BASED COMPENSATION
|
In July 2018, the Board of Directors of the Company
approved the issuance of an aggregate of 891,390 shares of common stock to the members of the Board of Directors. Two members of
the Board of Directors received 250,000 shares each. One member of the Board of Directors received 100,000 shares. Outside consultants
to the Company received an aggregate of 291,390 shares in exchange for their services to the Company.
Borrowings as of June 30, 2018 and December
31, 2017 were as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility and term loan (a)
|
|
$
|
747,757
|
|
|
$
|
747,757
|
|
|
Term note (b)
|
|
|
4,330,820
|
|
|
|
4,330,820
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans from stockholders (c) (d)
|
|
|
2,870,484
|
|
|
|
2,870,484
|
|
|
Installment notes (e)
|
|
|
11,941
|
|
|
|
11,941
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
7,961,002
|
|
|
|
7,961,002
|
|
|
Less current portion
|
|
|
(7,961,002
|
)
|
|
|
(7,961,002
|
)
|
|
Total long-term debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
a.
|
The Revolving Credit Facility and Term Loan (Senior Loan Facility) have a maturity date of July 23, 2017 and a default interest rate which is the base rate plus the applicable margin plus 2% (6.92% at June 30, 2018, and December 31, 2017). The term loan portion of the Senior Loan Facility requires monthly payments of $100,000 plus interest. The loans are secured by all of the Company’s properties and assets except for its disposal wells. The Senior Loan Facility has a subordinated secured position in the disposal wells. The Senior Loan Facility is owned by an accredited investor, who is also a significant stockholder in the Company. In September 2016, the holder of the Senior Loan Facility foreclosed on certain land and buildings owned by the Company in settlement of a portion of the outstanding amount of principal on the Senior Loan Facility. Consequently, the Company charged off the net book value of the land and buildings totaling $591,705 against the outstanding principal on the Senior Loan Facility, leaving a principal balance of $747,757 remaining.
|
|
|
b.
|
The Company and its subsidiaries entered a Term Loan, Guaranty and Security Agreement on July 23, 2012 with ICON for $5 million (the “Loan Agreement”). The Loan Agreement is owned by an accredited investor who assumed the terms and conditions of the Loan Agreement. The Loan Agreement provides for monthly payments of interest and with repayment of the principal and all accrued but unpaid interest due on February 1, 2018. The payment of principal and accrued interest due on February 1, 2018 was not made. The Loan Agreement provides the lender with a senior secured position on the Company’s disposal wells and a subordinated position to the Senior Loan Facility on all other Company properties and assets. As of June 30, 2018 and December 31, 2017, the Company was not in compliance with its debt covenants under the Loan Agreement and the lender had not exercised its rights under the Loan Agreement. The outstanding balance of the note pursuant to the Loan Agreement is included in current liabilities at June 30, 2018 and December 31, 2017 because the Company was not in compliance with its debt covenants, including the timely payment of interest. On June 30, 2017, the holder of the Loan Agreement agreed to exchange the outstanding accrued interest on the Loan Agreement for common stock in the company, and agreed to lower the interest rate on the Loan Agreement to 3% annually effective July 1, 2017.
|
|
|
c.
|
On May 27, 2014 an accredited investor, who is also a stockholder in the Company, entered a loan agreement with the Company for $2,783,484. As of June 30, 2018 and December 31, 2017 the principal balance of the note was $2,783,484. The note bears interest at 9% per annum. The terms of the note require the cash payment of one-half of the interest cost monthly (4.5% per annum), and the remaining half is accrued as payment in kind interest. The note and all accrued interest were due and payable in November 27, 2015. The principal and interest on the note payable is past due pursuant to its terms.
|
|
|
d.
|
On March 21, 2014 the CEO of the Company, who is also a stockholder in the Company entered a promissory note agreement whereby the CEO loaned the Company $87,000. The promissory note has an interest rate of 7% per annum. The note was to be paid in installments throughout the year ended December 31, 2014 with a portion of the repayment conditioned upon the sale of certain of the Company’s disposal wells. The principal and interest on the note payable to the CEO is past due pursuant to its terms.
|
|
|
e.
|
The Company has an installment loan with an outstanding principal balance of approximately $11,941 used to acquire property and equipment for use in the Company’s operations. The collateral for the loan was no longer in use in the Company’s operations and was returned to the lender May 2016. The reduction in principal from the surrender of the collateral was less than the total balance owed. The remaining principal balance of the loan is past due and is classified as a short-term liability.
|
|
|
f.
|
Unamortized debt issuance costs
are amortized as interest expense over the terms of the related notes payable using the effective interest method and are classified
as a discount to the related recorded debt balance. Total interest expense on debt discount for the six months ended June 30, 2018
and 2017 was $0 and $104,364, respectively.
On June 30, 2017, an affiliate
of an accredited investor who is also a principal stockholder agreed to exchange approximately $2.0 million in accounts payable
and accrued liabilities for 2,013,546 shares of common stock of the Company. The Board approved the exchange and issuance of the
shares on June 30, 2017. The liabilities exchanged for common stock included the affiliates full interest in the accrued interest
payable to the stockholder associated with the Loan Agreement and the Senior Loan Facility. The 2,013,546 shares of common stock
were issued on August 31, 2017.
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7.
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COMMITMENTS AND CONTINGENCIES
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a.
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The Company is obligated for approximately $1.3 million under long-term leases for the use of land where five of its disposal wells are located. The two of the leases are for extended periods. 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. In April 2018, the company terminated a land lease on its expiration date of May 31, 2018. The aggregate monthly lease payment for the disposal well leases is $9,000.
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b.
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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.
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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. Important factors with respect to any such forward-looking statements,
including certain risks and uncertainties that could cause actual results to differ materially from the Company’s expectations
(“Cautionary Statements”), are disclosed in the Company’s annual report on Form 10-K, including, without limitation,
in conjunction with the forward-looking statements under the caption “Risk Factors.” In addition, important factors
that could cause actual results to differ materially from those in the forward-looking statements included herein include, but
are not limited to, limited working capital, limited access to capital, changes from anticipated levels of sales and revenues changes
in the oil and gas markets especially in the oil field services markets and fluids disposal business, future national or regional
economic and competitive conditions, changes in relationships with customers, difficulties in developing new business in the disposal
business, difficulties integrating any new businesses or products acquired, replacing the lost customer revenue, regulatory change,
the ability of the Company to meet its stated business goals, the Company’s restructuring initiatives, the Company’s
ability to sustain profitability, the Company’s ability to service its debt, its ability to comply with covenants contained
in its financing arrangements, the current defaults existing under the Company’s senior and subordinated credit arrangements,
and general economic and business conditions. Although the Company believes the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will prove to have been correct. All subsequent written
and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements. We do not undertake to update any forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements.
DESCRIPTION OF PROPERTIES
Our principal executive offices are located
at 220 Travis St. Suite 501, Shreveport, Louisiana 71101.
The Company has three operating wells near
Chico, Texas. Two of these disposal well locations have small buildings for well monitoring and operations. We also own 7.49 acres
in Harrison County, Texas on which three of our disposal wells are located, along with a small office and repair shop for the operation
of these wells.
We are obligated under long-term leases
for the use of land where five of our disposal wells are located. The leases are for extended periods. 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. The aggregate monthly lease payments for the disposal well leases are $9,000.
SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies
is included in Note 3 to the audited consolidated financial statements included on Form 10-K for the year ended December 31, 2017
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. The Company has adopted the revenue recognition requirements of ASC 606 as of January 1, 2018.
RESULTS OF OPERATIONS
For the six months ended June 30, 2018,
we reported a net loss of $495,755 as compared to a net loss of $941,982 for the six months ended June 30, 2017. The components
of these results are explained below.
Revenue
- Total revenue decreased
by $51,494 or 8% from $637,179 for the six months ended June 30, 2017 to $585,685 for the six months ended June 30, 2018. The
decrease was due lower volumes of fluids disposed in the disposal wells.
Expenses -
The components of our costs and expenses
for the six months ended June 30, 2018 and 2017 are as follows:
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For the Six Months Ended
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%
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June 30,
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June 30,
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Increase
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2018
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2017
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(Decrease)
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Costs and expenses:
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Direct operating costs
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$
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348,340
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$
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530,198
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-34
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%
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General and administrative
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226,557
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|
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241,874
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-6
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%
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Depreciation and amortization
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|
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287,436
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230,643
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25
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%
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Total cost and expenses
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$
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862,333
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$
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1,002,715
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-14
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%
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The decrease in the volumes of saltwater
and other fluids disposed caused a decrease in operating expenses for the six months ended June 30, 2018. Management has focused
on reducing general and administrative expenses until disposed volumes are increased.
Interest Expenses -
Interest
expense for the six months ended June 30, 2018 was $219,107, a 62% reduction from interest expense of $576,446 for the six months
ended June 30, 2017. This reduction is due to the Loan Agreement interest rate reduction to 3% during 2017.
Operating results for the six months ended
June 30, 2018 and 2017 reflect a net loss of $495,755 and $941,982 respectively. We have not recorded any federal income taxes
for the six months ended June 30, 2018 and 2017 because of our accumulated losses and our substantial net operating loss carry
forwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Liquidity
As of June 30, 2018, we had total current
assets of $103,114. Our total current liabilities as of June 30, 2018 were approximately $10.9 million, including approximately
$8.0 million of debt classified as current liabilities. We had a working capital deficit of approximately $10.8 million and $10.6
million as of June 30, 2018 and December 31, 2017.
Management is focused on working closely
with our current lenders to fund operations through current cash flows, and pay interest costs when excess cash becomes available.
Management plans to work with our current lenders and debt holders to lower our cost of borrowing by renegotiating the terms of
our existing debt and potentially offering debt holders an opportunity to exchange their debt for equity in the Company. Management
will seek additional financing in those instances in which we believe such additional financings will assist in accomplishing our
goals. There can be no assurance that management’s plan will succeed.
On June 30, 2017, an affiliate of an accredited
investor who is also a principal stockholder agreed to exchange approximately $2.0 million in accounts payable and accrued liabilities
for 2,013,546 shares of common stock of the Company. The Board approved the exchange and issuance of the shares on June 30, 2017.
The liabilities exchanged for common stock included the affiliates full interest in the accrued interest payable to the stockholder
associated with the Loan Agreement and the Senior Loan Facility. The 2,013,546 shares of common stock were issued on August 31,
2017.
Our ability to obtain access to additional
capital through third parties or other debt or equity financing arrangements is strictly contingent upon our ability to locate
adequate financing or equity investments on commercially reasonable terms. There can be no assurance that we will be able to obtain
such financing on acceptable terms.
The following table summarizes our sources
and uses of cash for the six months ended June 30, 2018 and 2017:
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For the Six Months Ended
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June 30, 2018
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June 30, 2017
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Net cash used in operating activities
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$
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(41,412
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)
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$
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(81,734
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)
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Net cash provided by investing activities
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29,413
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92,575
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Net cash provided by (used in) financing activities
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—
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—
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|
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|
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|
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Net increase (decrease) in cash
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$
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(11,999
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)
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$
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10,841
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As of June 30, 2018, we had $5,157
in cash, a decrease of $11,999 from December 31, 2017 due to cash used by operations.
Net cash used in operating activities was
$41,412 for the six months ended June 30, 2018 due primarily to the operating loss. Net cash used by operating activities was $81,734
for the six months ended June 30, 2017.
Net cash provided by investing activities
was $29,413 for the six months ended June 30, 2018 due to repayment of an advance from an entity owned by one of the principal
shareholders of the Company. The cash advance was held in an investment account of the entity and is due on demand to the Company
at any time. Net cash provided by investing activities was $92,575 for the six months ended June 30, 2017.
Capital Expenditures
The Company suspended capital expenditures
during the six months ended June 30, 2018 due to the lower volumes disposed. The Company does not currently anticipate any major
capital expenditures for the remainder of 2018.
Indebtedness
On April 11, 2014 an accredited investor,
who is also a stockholder in the Company purchased the Capital One Note from Capital One and assumed all the existing terms and
conditions of the Senior Loan Facility including Capital One’s security interest in the Company’s assets.
The Company and its subsidiaries entered
a Term Loan, Guaranty and Security Agreement (the “Loan Agreement”) on July 23, 2012 with ICON for $5 million. The
Loan Agreement has a senior secured position in the Company’s disposal wells and a subordinated position to the Senior Loan
Facility on all other Company properties and assets. The covenants in the Loan Agreement are, in all material respects, the same
as in the Senior Loan Facility. On December 27, 2014 an affiliate of an accredited investor who is also a stockholder purchased
the note payable associated with the Loan Agreement. The accredited investor assumed the terms and conditions of the Loan Agreement.
As of June 30, 2018, the Company was not in compliance with its debt covenants under the Loan Agreement and the lender had not
exercised their rights under the Loan Agreement. The outstanding balance of the Loan Agreement note is included in current liabilities
at June 30, 2018 and December 31, 2017 because the Company was not in compliance with its debt covenants.
On June 30, 2017, the holder of the Loan
Agreement agreed to exchange the outstanding accrued interest on the Loan Agreement for common stock in the company, and agreed
to lower the interest rate on the Loan Agreement to 3% annually effective July 1, 2017.
In September 2016, the holder of the Senior
Loan Facility foreclosed on certain land and buildings owned by the Company in settlement of a portion of the outstanding amount
of principal on the Senior Loan Facility. Consequently, the Company charged off the net book value of the land and buildings totaling
$591,705 against the outstanding principal on the Senior Loan Facility, leaving a principal balance of $747,757 remaining. The
Board is considering issuing stock for the deficiency balance of this loan and the related accrued interest.
On June 30, 2017, an affiliate of an accredited
investor who is also a principal stockholder agreed to exchange approximately $2.0 million in accounts payable and accrued liabilities
for 2,013,546 shares of common stock of the Company. The Board approved the exchange and issuance of the shares on June 30, 2017.
The liabilities exchanged for common stock included the affiliates full interest in the accrued interest payable to the stockholder
associated with the Loan Agreement and the Senior Loan Facility. The common stock was issued on August 31, 2017.
Outlook
Management may seek to acquire other profitable
oilfield service companies to broaden the Company’s customer base and capabilities. Management may need to incur additional
financing in those instances in which we believe such additional financings will assist in accomplishing our goals. There can be
no assurance that management’s plan will succeed.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management evaluated, with the participation
of our Chief Executive Officer (CEO) and Chief Accounting Officer (CAO), 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
.
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, 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.