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FRONTIER OILFIELD SERVICES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 22, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations for the Twelve Months Ended December 31, 2013 and 2012.

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.

Recent Financial Developments

On September 20, 2013 we entered into a commitment with an individual accredited investor whereby the investor would acquire up to 750,000 shares of Frontier's 2013 Series A 7% Convertible Preferred Stock (the "Stock") for the sum of $300,000. The attributes of the Stock allow the holder to convert each share of the Stock into one and one-half shares of Frontier common stock and two warrants for an additional share at an exercise price of $0.20 per share.

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On August 20, 2013 we entered into a commitment with an individual accredited investor whereby the investor would acquire up to 1,000,000 shares of Frontier's 2013 Series A 7% Convertible Preferred Stock (the "Stock") for the sum of $400,000. The attributes of the Stock allow the holder to convert each share of the Stock into one and one-half shares of Frontier common stock and two warrants for an additional share at an exercise price of $0.20 per share.

On September 30, 2013 an accredited investor ("Lender") advanced the Company funds for operation. Total principal advances under this facility totaled $1,596,000 as of December 31, 2013. These advances are due on demand with interest rate of 0%.

On October 11, 2013 we sold one of our disposal wells known as the Highway 59 Disposal Well located in Marion County Texas for the principal sum of $1.3 million. The net proceeds of the sale were used primarily to pay down secured debt.

On November 1, 2013 the Board of Directors voted for a four-to-one reverse split of the company's common stock.

On February 11, 2014 we sold one of our disposal wells known as the Weiner Disposal Well located in Panola County Texas for the principal sum of $230,000. The proceeds of the sale were also used primarily to pay down secured debt.

On February 27, 2014 we sold 10 acres of vacant land located in Johnson County Texas for the principal sum of $125,000. The net proceeds of the sale were used to pay down secured debt.

On July 24, 2013, we approved the plan to sell certain assets and to discontinue the operations of Frontier Income and Growth, LLC (FIG) and its subsidiaries Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. The effective date of the discontinuation of operations is June 1, 2013.

On April 11, 2014, we refinanced the line of credit and the term loan from Capital One Bank, N.A with a shareholder who is an accredited investor. The terms of the new loan are the same as the previous credit agreement with Capital One Bank.

Results of Operations



For the year ended December 31, 2013 we reported a net loss from continuing operations of $5,835,596 as compared to a net loss from continuing operations of $5,648,836 for the year ended December 31, 2012. The components of these results are explained below.

Revenue- Revenues by subsidiaries are as follows:

Year Ended December 31, December 31, 2013 2012 Chico Coffman Tank Trucks, Inc. ("CTT") $ 30,208,968$ 16,375,629 Frontier Oilfield Services, Inc. ("FOSI") - 1,909 Total revenue $ 30,208,968$ 16,377,538



The increase in net revenue for the year is attributable to our acquisitions of Chico Coffman Tank Trucks ("CTT").

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Expenses- The components of our costs and expenses for the years ended December 31, 2013 and 2012 are as follows:

Year Ended December 31, 2013 CTT FOSI Total Costs and expenses: Direct costs $ 22,576,043 $ - $ 22,576,043 Indirect costs 4,711,645 - 4,711,645 General and administrative - 6,297,035 6,297,035 Depreciation and amortization 2,809,736 20,947 2,830,683 Total costs and expenses $ 30,097,424$ 6,317,982$ 36,415,406 Year Ended December 31, 2012 CTT FOSI Total Costs and expenses: Direct costs $ 12,262,990$ 1,701$ 12,264,691 Indirect costs 3,054,335 - 3,054,335 General and administrative - 4,010,383 4,010,383 Depreciation and amortization 1,191,883 8,253 1,200,136 Total costs and expenses $ 16,509,208$ 4,020,337$ 20,529,545



The increase in direct and indirect costs for the year is attributable to our acquisition of Chico Coffman Tank Trucks ("CTT").

The increase in general and administrative expenses for the year is attributable to stock compensation costs of $2,400,000, salaries and wages of $1,000,000, legal and professional fees of $2,010,000 and expenses in all other categories totaling $887,000. The increase in stock compensation cost is mostly attributable to an increase in number of shares awarded and a change in the method of determining the date for issuing common stock shares to executives for years of service. The employment contracts for two executives were modified January 1, 2013 which changed the date for awarding shares from annually to the anniversary date of the executive's years of service. The increase in legal and professional fees is attributable to the costs associated with the purchase of CTT and FIG, including pursuing other acquisition targets in 2013. The increase in salaries and wages is attributable to an increase in management head count positions in anticipation of the completion of acquisition efforts in 2013.

The increase in depreciation and amortization expense is attributable to purchase price allocation due to our acquisition of CTT.

Other (Income) Expenses- The components of our costs and expenses for the years ended December 31, 2013 and 2012 are as follows:

Years Ended December 31, December 31, 2013 2012 Interest expense $ 1,840,982$ 871,970 (Gain) Loss on disposal of property and equipment 15,967 134,767 Equity in loss of unconsolidated affiliated company - 169,794 Gain on deferred compensation payable write-off (2,300,000 ) - Impairment loss on net profits interest in affiliate - 284,900 Total other (income) expenses $ (443,051 )$ 1,461,431



The increase in interest expense is attributable to the Capital One and ICON note. Due to our non-compliance with the debt covenants, we paid default interest rate for the Capital One and ICON notes.

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We have not recorded any federal income taxes for the years ended December 31, 2013 and 2012 because of our accumulated losses. Also, since there is continued uncertainty as to the realization of a tax asset, we have not recorded any tax benefit.

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

Years Ended December 31, December 31, 2013 2012 Chico Coffman Tank Trucks, Inc. ("CTT") $ (74,351 )$ (363,195 )Frontier Income and Growth, LLC. and its subsidiaries, Trinity Disposal & Trucking, LLC and Trinity Disposal Wells, LLC. ("FIG") (2,899,458 ) (1,131,692 ) Frontier Oilfield Services, Inc. ("FOSI") (5,761,245 ) (5,285,641 ) Total net loss $ (8,735,054 )$ (6,780,528 )



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 December 31, 2013 we had total current assets of $3.9 million. Our total current liabilities as of December 31, 2013 were $17.1 million. Thus, we had a working capital deficit of $13.2 million as of December 31, 2013.

In the past we have primarily acquired producing oil and gas properties with opportunities for future development and contracted well operations to contractors. Currently, 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/equity financing arrangements to acquire companies and/or assets 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 financing or equity to pay for these additional companies and/or assets. There can be no assurance that we will be able to obtain the opportunity to buy companies and/or assets that are suitable for our investment or we may be able to obtain financing or equity to pay for the costs of these additional companies and/or assets at terms that are acceptable to us. Additionally, if economic conditions justify the same, we may hire additional employees although we do not currently have any definite plans to make additional hires.

The following table summarizes our sources and uses of cash for the years ended December 31, 2013 and 2012: 13 For the Years Ended December 31, 2013 December 31, 2012 Net cash used in operating activities of continuing operations $ (778,502 )$ (1,580,752 ) Net cash provided by operating activities of discontinued operations 721,133 724,479 Net cash used in operating activities (57,369 ) (856,273 ) Net cash used in investing activities of continuing operations (898,615 ) (1,759,266 ) Net cash provided by (used in) investing activities of discontinued operations 453,632 (128,493 ) Net cash used in investing activities (444,983 ) (1,887,759 ) Net cash provided by financing activities of continuing operations 540,281 4,302,669 Net cash used in financing activities of discontinued operations (46,377 ) (1,503,119 ) Net cash provided by financing activities 493,904 2,799,550 Net increase (decrease) in cash $ (8,448 ) $ 55,518



As of December 31, 2013, we had $52,000 in cash and cash equivalents, a decrease of $8,000 from December 31, 2012 due to our negative cash flow from operations, capital expenditures and reductions in outstanding indebtedness. This was offset by, cash flows from discontinued operations.

Net cash used in operating activities was $57,000 for the year ended December 31, 2013, consisted of $778,000 of net cash used for operating activities offset by $721,000 net cash provided by operating activities of discontinued operations. Net cash used in operating activities was $856,000 for the year ended December 31, 2012, consisted of $1.6 million of net cash used for operating activities offset by $724,000 net cash provided by operating activities of discontinued operations.

Net cash used in investing activities was $445,000 for the year ended December 31, 2013 which consisted of $454,000 net cash provided by investing activities of discontinued operations offset by $402,000 used for capital expenditures and the $619,000 release of escrow funds to JD Coffman. Net cash used in investing activities was $1.9 million for the year ended December 31, 2012 which consisted of $128,000 net cash used by investing activities of discontinued operations, $1.5 million of cash used for acquisition of CTT and FIG, and $436,000 used for capital expenditures.

Net cash provided by financing activities was $493,000 for the year ended December 31, 2013 which consisted of $1.1 million cash received from preferred and common stock sales, $1.2 million in borrowings and $620,000 cash receipts from escrow funds offset by $46,000 net cash used in financing activities of discontinued operations, and $2.6 million in repayments of debt. Net cash provided by financing activities was $2.8 million for the year ended December 31, 2012 which consisted of $3.6 million cash received from preferred and common stock sales and $1.1 million in related party borrowings offset by $1.5 million net cash used in financing activities of discontinued operations, and $890,000 in repayments of debt.

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.


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Source: Edgar Glimpses