Correlate Energy Corp. - Quarter Report: 2014 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark one)

For the quarterly period ended: March 31, 2014

Or

For the transition period from:             to             

Commission File Number: 0-30746

FRONTIER OILFIELD SERVICES, INC.  

(Exact name of registrant as specified in its charter)

(972) 234-2610

(Registrant’s telephone number, including area code)

N/A 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes     ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

 FRONTIER OILFIELD SERVICES, INC.  

Index

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FRONTIER OILFIELD SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FRONTIER OILFIELD SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

(Unaudited)

The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. However, in the opinion of management, all adjustments (which include only normal recurring accruals) necessary to present fairly the financial position and results of operations for the periods presented have been made. The results for interim periods are not necessarily indicative of trends or of results to be expected for the full year. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2013 (including the notes thereto) set forth in Form 10-K.

Frontier Oilfield Services, Inc. a Texas corporation (and collectively with its subsidiaries, “we”, “our”, “Frontier”, “FOSI”, or the “Company”), was organized on March 24, 1995. The accompanying condensed consolidated financial statements include the accounts of the Company and Frontier Acquisition I, Inc., and its subsidiary Chico Coffman Tank Trucks, Inc. and its subsidiary Coffman Disposal, LLC, and Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC.

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

The Company’s financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  As of the date of this report, the Company has generated losses from operations, and has an accumulated deficit and working capital deficiency. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues sufficient to meet its operating expenses.  The Company’s continuation as a going concern is dependent upon management’s ability to raise equity or debt financing, and the attainment of profitable operations from the Company’s planned business.

The Company’s ability to continue as a going concern is dependent upon management’s ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations.  The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Reclassification of Discontinued Operations

In accordance with ASC Topic 205, regarding the presentation of discontinued operations the assets, liabilities and activity of FIG have been reclassified as discontinued operations for all periods presented.

Revenue Recognition

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

Fair Value Measurements

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

Fair Value of Financial Instruments

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

Earnings Per Share (EPS)

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

Reverse Stock Split

On November 1, 2013 the Company affected a four-to-one reverse stock split. All information in these condensed financial statements relating to the number of shares, price per share and per share amounts gives retroactive effect to the four-to-one reverse stock split of our capital stock.

Property and Equipment

During the year ended March 31, 2014, the Company disposed of property and equipment with a cost of $292,000 and accumulated depreciation of $64,000. The Company received total proceeds of approximately $276,000 of which approximately $112,000 was paid directly to the lender and recognized a gain of $48,499 in the accompanying consolidated statements of operations. During the year ended March 31, 2013, the Company disposed of property and equipment with a cost of $65,000 and accumulated depreciation of $8,667. The Company received total proceeds of approximately $48,000 and recognized a loss of $8,660 in the accompanying consolidated statements of operations.

Acquisition of Frontier Income and Growth, LLC

On June 4, 2012, the Company completed the 51% step acquisition of FIG. The Company acquired approximately 124 units of FIG which brought the total units owned by the Company to 1,168 and a 51% majority interest. The cash price paid was $5,080,000 less $1,203,000 borrowed from FIG that resulted in the fair value consideration for the 1,168 units of $3,877,000.

The acquisition date fair value of the Company’s equity interest in FIG held immediately before May 31, 2012 was $3,791,996. The Company’s fair value equity interest was determined by taking the fair value of the net assets acquired and deducting the majority interest ownership immediately before May 31, 2012. There was no gain or loss on re-measuring the investment.

The transaction has been accounted for using the acquisition method of accounting which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The Company has finalized the determination of the fair values of the assets acquired and liabilities assumed.

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

Acquisition of Chico Coffman Tank Trucks, Inc.

The Company through a wholly owned subsidiary, Frontier Acquisition I, Inc. completed the acquisition of Chico Coffman Tank Trucks, Inc. on July 31, 2012 by acquiring all of the issued and outstanding stock of Chico Coffman Tank Trucks, Inc. (“CTT”) inclusive of its wholly owned subsidiary, Coffman Disposal, LLC for the sum of $16,986,939 subject to possible future adjustments for earnings and share prices. The acquisition was facilitated by credit facilities loaned to the Company in the aggregate amount of $12,000,000 provided by Capital One and ICON (See below). Also, the Company established an escrow account from the seller’s cash proceeds to pay for potential liabilities arising from business activities prior to the purchase of CTT such as final net working capital adjustments. The escrow agent distributed $350,000 plus accrued interest less any pending unpaid claims to the seller on January 23, 2013. On May 20, 2013 the escrow agent distributed to the seller the remaining balance.

The transaction has been accounted for using the acquisition method of accounting which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The Company has finalized the determination of the fair values of the assets acquired and liabilities assumed. The 2013 comparative information is retrospectively adjusted to increase depreciation expense of $146,557 and a decrease in gain on disposal of equipment of $56,333.

The share based deferred consideration liability was settled in May 2013 in which the company issued an additional 143,228 shares of common stock in full satisfaction of the Company’s liability. A total of 437,500 common shares were issued to settle the liability by increasing the amount of the equity by the same amount of the liability settlement with no gain or loss recognized for the liability settlement.

The previous owner of CTT was granted the right to receive additional consideration based on specified earnings targets at the end of the contingency period, which is July 31, 2013, as specified in the CTT acquisition agreement. The fair value of the earnings based contingent liability was determined based on the earnings as of future fiscal period-ends. Based on CTT’s earnings through December 31, 2013 and 2012, the fair value of the earnings based contingent liability of $2,300,000 (recorded at the acquisition date) has changed as of December 31, 2013 and the additional consideration to be paid based upon specific earnings targets were not achieved and therefore the contingent liability of $2,300,000 has been written off and included in other income (expense) for the year.

In connection with the acquisition of CTT, the Company acquired intangible assets consisting of disposal well permits, and customer relationships. The Company valued the disposal well permits using the build-out (Greenfield) valuation technique. The customer relationships were valued by the Company using the excess earnings valuation technique.

Disposal well permits and customer relationships are considered definite-life intangible assets which are amortizable over their estimated useful life.

The intangible assets, net of amortization as of March 31, 2014 were as follows:

Future amortization expense for definite-life intangible assets as of March 31, 2014 is as follows:

Under the terms of the Company’s employment agreements with its officers, certain officers receive a grant of 25,000 shares of the Company’s common stock per quarter and a grant of 5,000 shares of the Company’s common stock times the number of years of completed service issued annually. In addition, certain officers receive options to purchase up to 15,000 of the Company’s common stock per calendar quarter at an exercise price equal to the ending bid price of the last market day prior to the date of the option award. The option exercise period for each option is up to two years from its date of issuance, at which time the option expires. The granted shares vest proportionally each quarter for the calendar year ended December 31, 2014.

The board, with mutual agreement from the officers of the Company, elected to suspend all stock based compensation in 2014 as part of the Company’s cost cutting and restructuring measures.

Summary Stock Compensation Table

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

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

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

The weighted average fair value at the grant date for options issued during the three months ended March 31, 2014 was estimated using the Black-Scholes option valuation model with the following inputs:

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 March 31, 2014 and the weighted average grant date fair value is presented below:

Borrowings as of March 31, 2014 were as follows:

In connection with the acquisition of CTT, the Company and its subsidiaries entered into loan agreements effective July 23, 2012 with Capital One Business Credit Corp. (Capital One) and ICON Investments (ICON) the proceeds of which were primarily used for the cash portion of the acquisition.

As of February 4, 2014 the Credit Agreement and Forbearance Agreement were due on March 31, 2014 and was amended as follows: the Revolving Commitments shall be reduced (on a weekly basis) by $50,000 on February 17, 2014 and each week thereafter. In addition, on February 7, 2014, the Administrative Agent and Lenders will commence establishing intra-month reserves of $25,000 per week for the monthly principal installments of the Term Loan on the first day of each subsequent month. Unless otherwise agreed upon by the Administrative Agent and Lenders, no further loans will be made after March 31, 2014.

On April 11, 2014 an accredited investor, who is also a shareholder and affiliate of the Company purchased the Capital One Note from Capital One and assumed all the existing terms and conditions of the Credit Agreement and Forbearance Agreements including Capital One’s security interest on the Company’s assets. As of June 1, 2014, these balances are past due.

The Company’s operating lease agreement, as amended as of March 6, 2014, expires May 31, 2014 and now requires a base monthly rent payment of $2,500 for its office space located in Dallas, Texas. In addition in consideration for deferment in rental payments the Company executed a $20,000 10% promissory note payable with the following terms: estimated minimum $5,000 per month due and payable on the first day of each month and the entire unpaid principal balance of the promissory note, plus all accrued but unpaid interest, if any, shall be due and payable on or before September 1, 2014.

On July 24, 2013, the Company approved the plan to sell certain assets and to discontinue the operations of Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. The effective date of the discontinuation of operations was June 1, 2013. The Company expects to sell all of FIG’s assets and winding down its operations in the next three months. During that period, FIG will continue to generate minimal activities related to its salt-water disposal operations.

The fixed assets of FIG are classified as assets held for sale in the consolidated balance sheets as of March 31, 2014 and December 31, 2013 in accordance with (ASC 205-20), Presentation of Financial Statements - Discontinued Operations. FIG’s net losses of $91,366 and $594,452 for the three months ended March 31, 2014 and 2013, are included in discontinued operations.

During three months ended March 31, 2014, the Company sold a disposal well of FIG for proceeds of $230,000 of which approximately $197,000 were paid directly to the Company’s lender at closing, resulting in a net loss of $45,032 which is included in discontinued operations for the period ended March 31, 2014. The proceeds paid directly to the Company’s lenders were included as a non-cash financing activity in the accompanying consolidated statement of cash flows.

FIG’s revenue and net loss before income tax are summarized as follows:

Assets and liabilities classified as discontinued operations are as follows:

Subsequent to March 31, 2014, the Company issued 1,100,000 shares of cumulative convertible preferred stock and 2,200,000 warrants for $440,000. The preferred stock features a 7% cumulative dividend, payable quarterly, with payment at the option of the Company to be made in kind or in shares of common stock based on a per share valuation set at a 25% discount to the 5 day average closing bid price of the market price. The warrant features provide that 2 warrants may be exercised to purchase one share of common stock at a strike price of $0.20 per share which expires on September 20, 2014.

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

CAUTIONARY STATEMENT

Statements in this report which are not purely historical facts, including statements regarding the Company’s anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Act of 1934, as amended. All forward-looking statements in this report are based upon information available to us on the date of the report. Any forward-looking statements involve risks and uncertainties that could cause actual results or events to differ materially from events or results described in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

DESCRIPTION OF PROPERTIES

Our principal executive offices are located in an office building located at 3030 LBJ Freeway, Dallas, Texas, 75234. The lease on the office space runs through May 31, 2014 with the option to renew the lease for an additional five years. The average base lease payment over the remaining term of the lease is $2,500 per month.

The Company owns 7.055 acres in Chico, Texas on which it has 5 buildings used for its water disposal operations in that area. The Company also owns 7.49 acres in Harrison County, Texas on which three of its disposal wells are located along with a small manufactured office and repair shop. In addition, the Company is obligated under long-term leases for the use of land where seven of its disposal wells are located. Three of the leases are for extended periods of time. The first lease expires on February 7, 2023 (with two options to renew for an additional 10 years each). The second lease expires on December 1, 2034 with no option to renew and the third lease expires on May 31, 2018 with no option to renew. The monthly lease payment for the disposal well leases is $10,300.

SIGNIFICANT ACCOUNTING POLICIES

A summary of significant accounting policies is included in Note 2 to the audited consolidated financial statements included on Form 10-K for the year ended December 31, 2013 as filed with the United States Securities and Exchange Commission. Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about our operating results and financial condition.

The preparation of financial statements in conformity with US Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

RESULTS OF OPERATIONS

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

Revenue- Revenues by subsidiaries are as follows:

The decrease in net revenue for the three months is attributable to a reduced number of loads transported resulting in management’s decision to change direction with its customers by focusing only on customers where the majority of the loads will be disposed of in Company owned wells as opposed to third party wells where either the Company has to pay to dispose in these types of facilities and/or the Company does not benefit from skim oil that is collected to sell.

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

The decrease in direct costs for the three months is attributable to the overall reduction in salaries and other variable expenses including fuel and repairs and maintenance as a result of the planned volume decreases with specific customers.

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

The decrease in general and administrative costs for the three months for FOSI were specifically related to acquisition costs that have been eliminated as a result of management’s focus internally on operations and customer relationships. In addition, management reduced professional fees to $242,000 for the three months ended March 31, 2014 compared to $360,000 for the three months ended March 31, 2013. In addition stock compensation was $37,000 for the three months ended March 31, 2014 compared to $1,049,000 for the three months ended March 31, 2013.

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

The decrease in interest expense is attributable to the decreasing principal balance of the Capital One and ICON Notes. Due to our non-compliance with the debt covenants, we paid the higher default interest rate for the Capital One and ICON notes.

We have not recorded any federal income taxes for the three months ended March 31, 2014 and 2013 because of our accumulated losses. Also, since there is continued uncertainty as to the realization of a tax asset, we have not recorded any tax benefit. In addition we have $46,564 in provision for state income taxes.

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

Discontinued operations - On July 24, 2013, management and the Board of Directors of the Company elected to discontinue the operations and sell the fixed assets of Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. The effective date of the discontinuation of operations was June 1, 2013.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows and Liquidity

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

Our primary focus is to secure additional capital through business alliances with third parties or other debt or equity financing arrangements to stabilize and improve the financial condition of the Company and lower our cost of borrowing. Any such additional funding will be done on an “as needed” basis and will only be done in those instances in which we believe such additional financings will accomplish these goals. However, actual results may differ from management’s plan and the amount may be material.

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

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

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

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

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

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

The oil and gas industry is subject to various trends including the availability of capital for drilling new wells, prices received for crude oil and natural gas, sources of crude oil outside our area of operations, interest rates, and the overall health of the economy. We are not aware of any specific trends that are unusual to our Company, as compared to the rest of the oil and gas industry.

Capital Expenditures

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

Indebtedness

In connection with the acquisition of CTT, the Company and its subsidiaries entered into loan agreements effective July 23, 2012 with Capital One Leverage Finance Corp. (Capital One) and ICON Investments (ICON) the proceeds of which were primarily used for the cash portion of the acquisition. Due to the Company’s technical default, on May 24, 2013, the Company entered into a forbearance agreement with Capital One.

Pursuant to the terms of the forbearance agreement, Capital One reduced its loan commitments from $9 million to $7.75 million consisting of a revolving loan commitment of $1.75 million and a term loan commitment of $6 million subject to the terms of the Credit Agreement. The Credit Agreement had a maturity date of July 23, 2017 and pursuant to the forbearance agreement, provides for a default interest rate which is the base rate plus the applicable margin plus 2% (6.75% and 7.75%, respectively as of December 31, 2013), in which all of the loans were converted into base rate borrowings, bearing default interest rates, at the expiration of the applicable interest period. All new loans shall be base rate borrowings, bearing default interest rates. As part of the forbearance agreement, the Company was required to raise $2 million in equity, pursue certain potential restructuring transactions and provide daily borrowing base certificates along with other financial reports as requested. The term loan portion of the Credit Agreement requires monthly payments of $100,000 plus interest with the balance of the loan plus unpaid interest was due on July 23, 2017. The Credit Agreement also provides for the payment of an unused commitment fee of .375% per annum. The loans are secured by all of the Company’s properties and assets except for its disposal wells wherein Capital One has a subordinated loan position to ICON. Pursuant to the terms of the Credit Agreement and the affirmative covenants, the Company is obligated to maintain all deposits with Capital One Bank, N.A.

As of February 4, 2014 the Credit Agreement and Forbearance Agreement were due on March 31, 2014 and was amended as follows: the Revolving Commitments shall be reduced (on a weekly basis) by $50,000 on February 17, 2014 and each week thereafter. In addition, on February 7, 2014, the Administrative Agent and Lenders will commence establishing intra-month reserves of $25,000 per week for the monthly principal installments of the Term Loan on the first day of each subsequent month. Unless otherwise agreed upon by the Administrative Agent and Lenders, no further loans will be made after March 31, 2014.

On April 11, 2014 an accredited investor, who is also a shareholder and affiliate of the Company purchased the Capital One Note from Capital One and assumed all the existing terms and conditions of the Credit Agreement and Forbearance Agreements including Capital One’s security interest on the Company’s assets. As of June 1, 2014, these balances are past due.

The Company and its subsidiaries entered into a Term Loan, Guaranty and Security Agreement on July 23, 2012 with ICON for the amount of $5 million. The Loan Agreement provides for a 14% annual interest rate and monthly interest only payments with repayment of the principal and accrued but unpaid interest on February 1, 2018. ICON has a senior secured position on the Company’s disposal wells and a subordinated position to Capital One on all other Company properties and assets. The covenants in the ICON Note are in all material respects the same as in the Capital One Credit Agreement. As of March 31, 2014, the Company was not in compliance of its debt covenants and accordingly classified the entire note balance as a current liability. In addition, on February 10, 2014 the Company received a notice of payment default for interest owed. ICON also reserved all of its rights and remedies under the ICON Credit Agreement and common law by virtue of the Credit Parties default on their obligations.

Outlook

In response to the recent losses, the Company is reviewing various aspects of its operations to reduce costs. In connection with its review, the Company has elected to discontinue the operations of Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. The discontinuation may include the sale of additional non-core assets of Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC, but there can be no assurance that we will receive sufficient value in any sale to cover our losses or that if we cease operations in any service area that the assets will be profitably employed elsewhere.

Due to our recent losses we are attempting to obtain additional equity and debt financing to increase our available cash so that we are able to reduce our accounts payable and our outstanding indebtedness. There can be no assurance that we will be able to obtain the additional equity or debt financing at terms that are acceptable to us. The oil and gas industry which the Company tracks closely is subject to various trends including the availability of capital for drilling new wells, prices received for crude oil and natural gas, sources of crude oil outside our area of operations, interest rates, and the overall health of the economy. We are not aware of any specific trends that are unusual to our Company, as compared to the rest of the oil and gas industry.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the quarter covered by this quarterly report on Form 10-Q. In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s internal controls over financial reporting were not effective in that there was a material weakness as of March 31, 2014.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.

The Company’s management has identified a material weakness in the effectiveness of internal control over financial reporting related to a shortage of resources in the accounting department required to assure appropriate segregation of duties with employees having appropriate accounting qualifications related to the Company’s unique industry accounting and disclosure rules. Management has outsourced certain financial functions to mitigate the material weakness in internal control over financial reporting. The Company is reviewing its finance and accounting staffing requirements.

Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As a result, no corrective actions were required or undertaken.

Limitations on the Effectiveness of Controls.

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

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None

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

Subsequent to March 31, 2014, the Company issued 1,100,000 shares of cumulative convertible preferred stock and 2,200,000 warrants for $440,000. The preferred stock features a 7% cumulative dividend, payable quarterly, with payment at the option of the Company to be made in kind or in shares of common stock based on a per share valuation set at a 25% discount to the 5 day average closing bid price of the market price. The warrant features provide that 2 warrants may be exercised to purchase one share of common stock at a strike price of $0.20 per share which expires on September 20, 2014.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

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

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

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

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

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the June 4, 2014

FRONTIER OILFIELD SERVICES, INC.

9