Item 1. DESCRIPTION OF BUSINESS.
General
We were incorporated as a Colorado corporation on May 30, 2007. From 2007 to 2009, our business was to act as a consultant in the development of equestrian facilities throughout the United States, but particularly in the West.
On September 30, 2009, we acquired CST Oil & Gas Corporation, a Colorado corporation, (“CST”) through a Share Exchange agreement (the “Share Exchange Agreement”) whereby the shareholders of CST exchanged all of their common stock for our common shares (the “Share Exchange”). In connection with the Share Exchange, the stockholders of CST exchanged all of their CST stock for a total of 8,000,000 shares of our common stock. Immediately prior to the Share Exchange, certain of our existing shareholders tendered a total of 8,000,000 shares of our common stock to us for cancellation, leaving 1,696,000 issued and outstanding common shares. As a result, following the Share Exchange we had 9,696,000 shares of its common stock issued and outstanding, of which approximately 84.6% were held by the former shareholders of CST. Following the closing of the Share Exchange, our name was changed to CST Holding Corp. on January 25, 2010.
CST Oil & Gas Corporation, a Colorado corporation was formed on May 8, 1985 to engage in the oil and gas business. CST Oil & Gas Corporation had been a private company since its formation and has carried on active operations in the oil and gas business. With the Share Exchange, we have succeeded to its operations. Currently, our focus is to provide well servicing and roustabout services to the petroleum industry in Kansas.
We have not been subject to any bankruptcy, receivership or similar proceeding.
Our address is 7060 B South Tucson Way, Centennial, Colorado 80112. Our telephone number is 303-617-7531.
Organization
We are comprised of one corporation with one wholly-owned subsidiary, CST Oil & Gas Corporation.
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Operations
We provide well servicing and roustabout services to the petroleum industry in Kansas. Our primary focus is to provide services that help maintain coal bed methane and oil wells operated by small and mid-size independent producers in the southeastern area of the state. Well servicing and roustabout services are required to maintain the gas and\or oil flow from a well. There is an ongoing need to periodically remove and replace damaged or corroded production tubing, retrieve safety valves or malfunctioning submersible pumps or risk substantial decline and possible complete loss of production. Roustabout services, which include well servicing and work immediately associated with the well, also includes site maintenance, pipeline installation, road and surface facilities construction. We currently own and operate one workover rig. We are evaluating expansion possibilities in this immediate area as the downturn in the industry has eliminated several competitors in southeastern Kansas. The long term plan for us is to expand with additional workover rigs into adjacent areas as commodity prices recover and drilling activity escalates.
Currently, our operations are profitable. We believe that we have sufficient capital to conduct our business operations or to sustain them at our present level indefinitely. To date, we have never had any discussions with any possible acquisition candidate nor have we any intention of doing so.
Drilling Contracts
As a provider of contract well services, our business and the profitability of our operations depend on the level of drilling activity by oil and natural gas exploration and production companies operating in the geographic markets where we operate. Our business has generally not been affected by seasonal fluctuations. The oil and natural gas exploration and production industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities. During periods of lower levels of drilling activity, price competition tends to increase and results in decreases in the profitability of daywork contracts. In this lower level drilling activity and competitive price environment, we may be more inclined to enter into footage contracts that expose us to greater risk of loss without commensurate increases in potential contract profitability.
We obtain our contracts for servicing oil and natural gas wells either through competitive bidding or through direct negotiations with customers. Our contracts generally provide for compensation on either a daywork or footage basis. The contract terms we offer generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used and the anticipated duration of the work to be performed. Generally, our contracts provide for the workover of a single well and typically permit the customer to terminate on short notice, usually on payment of an agreed fee.
Daywork Contracts. Under daywork drilling contracts, we provide a workover rig with required personnel to our customer who supervises the servicing of the well. We are paid based on a negotiated fixed rate per day while the rig is used. Daywork contracts specify the equipment to be used, the size of the hole and the depth of the well. Under a daywork contract, the customer bears a large portion of the out-of-pocket service costs and we generally bear no part of the usual risks associated with drilling, such as time delays and unanticipated costs.
Footage Contracts. Under footage contracts, we are paid a fixed amount for each foot drilled, regardless of the time required or the problems encountered in drilling the well. We typically pay more of the out-of-pocket costs associated with footage contracts as compared to daywork contracts. The risks to us on a footage contract are greater because we assume most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including the risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors’ services, supplies, cost escalation and personnel. We manage this additional risk through the use of engineering expertise and bid the footage contracts accordingly, and we maintain insurance coverage against some, but not all, drilling hazards. However, the occurrence of uninsured or under-insured losses or operating cost overruns on our footage jobs could have a negative impact on our profitability.
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Turnkey Contracts. Turnkey contracts typically provide for a drilling company to drill a well for a customer to a specified depth and under specified conditions for a fixed price, regardless of the time required or the problems encountered in drilling the well. The drilling company would provide technical expertise and engineering services, as well as most of the equipment and drilling supplies required to drill the well. The drilling company may subcontract for related services, such as the provision of casing crews, cementing and well logging. Under typical turnkey drilling arrangements, a drilling company would not receive progress payments and would be paid by its customer only after it had performed the terms of the drilling contract in full.
Although we have not historically entered into any turnkey contracts, we may decide to enter into such arrangements in the future. The risks to a drilling company under a turnkey contract are substantially greater than on a well drilled on a daywork basis. This is primarily because under a turnkey contract the drilling company assumes most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including the risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors’ services, supplies, cost escalations and personnel.
Operating Risks and Insurance
Our operations are subject to the many hazards inherent in the contract well servicing business, including the risks of:
•
blowouts;
•
fires and explosions;
•
loss of well control;
•
collapse of the borehole;
•
lost or stuck drill strings; and
•
damage or loss from natural disasters.
Any of these hazards can result in substantial liabilities or losses to us from, among other things:
•
suspension of drilling operations;
•
damage to, or destruction of, our property and equipment and that of others;
•
personal injury and loss of life;
•
damage to producing or potentially productive oil and natural gas formations through which we drill; and
•
environmental damage.
We seek to protect ourselves from some but not all operating hazards through insurance coverage. However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical. Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our customers. However, customers who provide contractual indemnification protection may not in all cases have sufficient financial resources or maintain adequate insurance to support their indemnification obligations. We can offer no assurance that our insurance or indemnification arrangements will adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a customer to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition. Furthermore, we may not be able to maintain adequate insurance in the future at rates we consider reasonable.
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Our insurance coverage includes property insurance on our rigs, drilling equipment and real property. Our insurance coverage for property damage to our rigs and to our drilling equipment is based on a third party estimate of the appraised value of the rigs and drilling equipment. The policy provides for a deductible on rigs of $1.0 million per occurrence. Our umbrella liability insurance coverage is $25.0 million per occurrence and in the aggregate, with a deductible of $10,000 per occurrence. We believe that we are adequately insured for public liability and property damage to others with respect to our operations. However, such insurance may not be sufficient to protect us against liability for all consequences of well disasters, extensive fire damage or damage to the environment.
Markets
Our operations are conducted in Kansas. Our primary focus is to provide services that help maintain coal bed methane and oil wells operated by small and mid-size independent producers in the southeastern area of the state. We have no plans for any expansion at this time. No market surveys have ever been conducted to determine demand for our services.
We believe that the primary reason that clients would use us rather than competitors would be the existing relationships that we have and can develop. We believe that client loyalty and satisfaction can be the basis for success in this business. Therefore, we plan to develop and expand on already existing relationships to develop a competitive edge.
We are presently marketing our services. We utilize the expertise and existing business relationships of our principal officer, Mrs. Christine Tedesco, to develop our opportunities. All operational decisions will be made solely by Mrs. Tedesco.
Raw Materials
The materials and supplies we use in our operations include fuels to operate our equipment, pipe and collars. We do not rely on a single source of supply for any of these items. While we are not currently experiencing any shortages, from time to time there have been shortages of equipment and supplies during periods of high demand.
Shortages could result in increased prices for equipment or supplies that we may be unable to pass on to customers. In addition, during periods of shortages, the delivery times for equipment and supplies can be substantially longer. Any significant delays in our obtaining equipment or supplies could limit operations and jeopardize our relations with customers. In addition, shortages of equipment or supplies could delay and adversely affect our ability to obtain new contracts for our rigs, which could have a material adverse effect on our financial condition and results of operations.
Customers and Competition
We encounter substantial competition from other well service contractors. Our primary market area is highly fragmented and competitive. The fact that workover rigs are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry.
The well service contracts we compete for are usually awarded on the basis of competitive bids. Our principal competitors are Jackman Oilfield Services, Splane Pulling and Roustabout Services, Hurricane Oil Field Services, Gateway Titan Oilfield Services, and DJR Well Serving. We believe pricing and rig availability are the primary factors our potential customers consider in determining which drilling contractor to select. In addition, we believe the following factors are also important:
•
the type and condition of each of the competing workover rigs;
•
the mobility and efficiency of the rigs;
•
the quality of service and experience of the rig crews;
•
the offering of ancillary services; and
•
the ability to provide well servicing equipment adaptable to, and personnel familiar with, new technologies and techniques.
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While we must be competitive in our pricing, our competitive strategy generally emphasizes the quality of our equipment and the experience of our crews to differentiate us from our competitors. This strategy is less effective as lower demand for workover services or an oversupply of rigs usually results in increased price competition and makes it more difficult for us to compete on the basis of factors other than price. In all of the markets in which we compete, an oversupply of rigs can cause greater price competition.
Contract well service companies compete primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular time. If demand for workover services improves in a region where we operate, our competitors might respond by moving in suitable rigs from other regions. An influx of workover rigs from other regions could rapidly intensify competition and reduce profitability.
Many of our competitors have greater financial, technical and other resources than we do. Their greater capabilities in these areas may enable them to:
•
better withstand industry downturns;
•
compete more effectively on the basis of price and technology;
•
better retain skilled rig personnel; and
•
build new rigs or acquire and refurbish existing rigs so as to be able to place rigs into service more quickly than us in periods of high demand.
Although there are numerous competitors that provide substantially similar services as ours, our ability to provide multiple well and roustabout services at competitive rates with high quality personnel affords us a reasonable advantage. We strive to maintain an excellent work and safety record and consistently beat the competition in terms of quality work provided. At times, with limited available workover rigs and servicing equipment operating in the area, demand for such equipment exceeds supply. Since we maintain personnel and equipment in the Kansas area we have the ability to promptly relocate in response to changing market conditions.
Our principal effort at this point is to develop our customer base. We believe that the primary reason that customers would buy from us rather than competitors would be the existing relationships that we can develop. We believe that customer loyalty and satisfaction can be the basis for success in this business. Therefore, we plan to develop and expand on already existing relationships to develop a competitive edge.
Backlog
At December 31, 2010, we had no backlogs.
Employees
As of December 31, 2010, we had five employees. All of these employees are salaried administrative or supervisory employees. The rest of our employees are hourly employees, the majority of whom operate or maintain our drilling rig, workover rigs and rig-hauling trucks. The number of hourly employees fluctuates depending on the number of drilling projects we are engaged in at any particular time. None of our employees are subject to collective bargaining arrangements.
Our operations require the services of employees having the technical training and experience necessary to obtain the proper operational results. As a result, our operations depend, to a considerable extent, on the continuing availability of such personnel. Although we have not encountered material difficulty in hiring and retaining qualified rig crews, shortages of qualified personnel are occurring in our industry. If we should suffer any material loss of personnel to competitors or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be materially and adversely affected. While we believe our wage rates are competitive and our relationships with our employees are satisfactory, a significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both. The occurrence of either of these events for a significant period of time could have a material and adverse effect on our financial condition and results of operations.
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Proprietary Information
We own no proprietary information.
Government Regulation
Our operations are subject to stringent federal, state and local laws and regulations governing the protection of the environment and human health and safety. Several such laws and regulations relate to the handling, storage and disposal of oilfield waste and restrict the types, quantities and concentrations of such regulated substances that can be released into the environment. Several such laws also require removal and remedial action and other cleanup under certain circumstances, commonly regardless of fault. Planning, implementation and maintenance of protective measures are required to prevent accidental discharges. Spills of oil, natural gas liquids, drilling fluids and other substances may subject us to penalties and cleanup requirements. In addition, our operations are sometimes conducted in or near ecologically sensitive areas, which are subject to special protective measures and which may expose us to additional operating costs and liabilities related to restricted operations, for accidental discharges of oil, natural gas, drilling fluids, contaminated water or other substances or for noncompliance with other aspects of applicable laws and regulations. Historically, we have not been required to obtain environmental or other permits prior to drilling a well. Instead, the operator of the oil and gas property has been obligated to obtain the necessary permits at its own expense.
Research and Development
We have never spent any amount in research and development activities.
Environmental Compliance
The federal Clean Water Act, as amended by the Oil Pollution Act, the federal Clean Air Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the Safe Drinking Water Act, the Occupational Safety and Health Act, or OSHA, and their state counterparts and similar statutes and related regulations are the primary vehicles for imposition of such requirements and for civil, criminal and administrative penalties and other sanctions for violation of their requirements. The OSHA hazard communication standard and related regulations, the Environmental Protection Agency “community right-to-know” regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require us to organize and report information about the hazardous materials we use in our operations to employees, state and local government authorities and local citizens. In addition, CERCLA, also known as the “Superfund” law, and similar state statutes impose strict liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered responsible for the release or threatened release of hazardous substances into the environment. These persons include the current owner or operator of a facility where a release has occurred, the owner or operator of a facility at the time a release occurred and companies that disposed of or arranged for the disposal of hazardous substances found at a particular site. This liability may be joint and several. Such liability, which may be imposed for the conduct of others and for conditions others have caused, includes the cost of removal and remedial action as well as damages to natural resources. Few defenses exist to the liability imposed by environmental laws and regulations. It is also not uncommon for third parties to file claims for personal injury and property damage caused by substances released into the environment.
Environmental laws and regulations are complex and subject to frequent changes. Failure to comply with governmental requirements or inadequate cooperation with governmental authorities could subject a responsible party to administrative, civil or criminal action. We may also be exposed to environmental or other liabilities originating from businesses and assets that we acquired from others. We believe we are in substantial compliance with applicable environmental laws and regulations and, to date, such compliance has not materially affected our capital expenditures, earnings or competitive position. We do not expect to incur material capital expenditures in our next fiscal year in order to comply with current or reasonably anticipated environment control requirements. However, our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of regulatory noncompliance or contamination may require us to make material expenditures or subject us to liabilities that we currently do not anticipate.
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In addition, our business depends on the demand for land drilling services from the oil and natural gas industry and, therefore, is affected by tax, environmental and other laws relating to the oil and natural gas industry generally, by changes in those laws and by changes in related administrative regulations. It is possible that these laws and regulations may in the future add significantly to our operating costs or those of our customers or otherwise directly or indirectly affect our operations.
How to Obtain Our SEC Filings
We file annual, quarterly, and special reports, proxy statements, and other information with the Securities Exchange Commission (SEC). Reports, proxy statements and other information filed with the SEC can be inspected and copied at the public reference facilities of the SEC at 100 F Street N.E., Washington, DC 20549. Such material may also be accessed electronically by means of the SEC's website at www.sec.gov.
Our investor relations department can be contacted at our principal executive office located at our principal office, 7060 B South Tucson Way, Centennial, Colorado 80112. Our telephone number is 303-617-7531.
Item 1A.
Item 1A. RISK FACTORS.
You should carefully consider the risks and uncertainties described below and the other information in this document before deciding to invest in shares of our common stock.
The occurrence of any of the following risks could materially and adversely affect our business, financial condition and operating result. In this case, the trading price of our common stock could decline and you might lose all or part of your investment.
Risks Relating to the Oil and Natural Gas Industry
We derive all our revenues from the oil and natural gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and natural gas prices.
Worldwide political, economic and military events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. Depending on the market prices of oil and natural gas, oil and natural gas exploration and production companies may cancel or curtail their drilling programs, thereby reducing demand for our services. Oil and natural gas prices have been volatile historically and, we believe, will continue to be so in the future. Many factors beyond our control affect oil and natural gas prices, including:
•
the cost of exploring for, producing and delivering oil and natural gas;
•
the discovery rate of new oil and natural gas reserves;
•
the rate of decline of existing and new oil and natural gas reserves;
•
available pipeline and other oil and natural gas transportation capacity;
•
the ability of oil and natural gas companies to raise capital;
•
actions by OPEC, the Organization of Petroleum Exporting Countries;
•
political instability in the Middle East and other major oil and natural gas producing regions;
•
economic conditions in the United States and elsewhere;
•
governmental regulations, both domestic and foreign;
•
domestic and foreign tax policy;
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•
weather conditions in the United States and elsewhere;
•
the pace adopted by foreign governments for the exploration, development and production of their national reserves;
•
the price of foreign imports of oil and natural gas; and
•
the overall supply and demand for oil and natural gas.
Any prolonged reduction in the overall level of exploration and development activities, whether resulting from changes in oil and natural gas prices or otherwise, can adversely impact us in many ways by negatively affecting:
•
our revenues, cash flows and profitability;
•
our ability to maintain or increase our borrowing capacity;
•
our ability to obtain additional capital to finance our business and make acquisitions, and the cost of that capital;
•
our ability to retain skilled rig personnel whom we would need in the event of an upturn in the demand for our services; and
•
the fair market value of our rig fleet.
Risks Relating to Our Business
Increases in the supply of rigs could decrease dayrates and utilization rates.
An increase in the supply of land rigs, whether through new construction or refurbishment, could decrease dayrates and utilization rates, which would adversely affect our revenues and profitability. In addition, such adverse affect on our revenue and profitability caused by such increased competition and lower dayrates and utilization rates could be further aggravated by any downturn in oil and natural gas prices. There has been a substantial increase in the supply of land rigs in the United States over the past two years which has led to a broad decline in dayrates and utilization industry wide.
A material reduction in the levels of exploration and development activities in Kansas or an increase in the number of rigs mobilized to Kansas could negatively impact our dayrates and utilization rates.
We currently conduct all of our operations in Kansas. A material reduction in the levels of exploration and development activities in Kansas due to a variety of oil and natural gas industry risks described above or an increase in the number of rigs mobilized to Kansas could negatively impact our dayrates and utilization rates, which could adversely affect our revenues and profitability.
We operate in a highly competitive, fragmented industry in which price competition could reduce our profitability.
The fact that workover rigs are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry.
The well service contracts we compete for are usually awarded on the basis of competitive bids or direct negotiations with customers. We believe pricing and quality of equipment are the primary factors our potential customers consider in determining which contractor to select. In addition, we believe the following factors are also important:
•
the type and condition of each of the competing workover rigs;
•
the mobility and efficiency of the rigs;
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•
the quality of service and experience of the rig crews;
•
the offering of ancillary services; and
•
the ability to provide equipment adaptable to, and personnel familiar with, new technologies and techniques.
While we must be competitive in our pricing, our competitive strategy generally emphasizes the quality of our equipment and experience of our rig crews to differentiate us from our competitors. This strategy is less effective as lower demand for drilling services or an oversupply of rigs usually results in increased price competition and makes it more difficult for us to compete on the basis of factors other than price. In all of the markets in which we compete, an oversupply of rigs can cause greater price competition which can, in turn, reduce our profitability.
Contract well service companies compete primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular time. If demand for drilling services improves in a region where we operate, our competitors might respond by moving in suitable rigs from other regions. An influx of rigs from other regions could rapidly intensify competition and reduce profitability.
We face competition from competitors with greater resources that may make it more difficult for us to compete, which can reduce our dayrates and utilization rates.
Some of our competitors have greater financial, technical and other resources than we do that may make it more difficult for us to compete, which can reduce our dayrates and utilization rates. Their greater capabilities in these areas may enable them to:
•
better withstand industry downturns;
•
compete more effectively on the basis of price and technology;
•
retain skilled rig personnel; and
•
build new rigs or acquire and refurbish existing rigs so as to be able to place rigs into service more quickly than us in periods of high drilling demand.
Our operations involve operating hazards, which if not insured or indemnified against, could adversely affect our results of operations and financial condition.
Our operations are subject to the many hazards inherent in the contract well servicing business, including the risks of:
•
blowouts;
•
fires and explosions;
•
loss of well control;
•
collapse of the borehole;
•
lost or stuck drill strings; and
•
damage or loss from natural disasters.
Any of these hazards can result in substantial liabilities or losses to us from, among other things:
•
suspension of service operations;
•
damage to, or destruction of, our property and equipment and that of others;
•
personal injury and loss of life;
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•
damage to producing or potentially productive oil and natural gas formations through which we service; and
•
environmental damage.
We seek to protect ourselves from some but not all operating hazards through insurance coverage. However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical. Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our customers. However, customers who provide contractual indemnification protection may not in all cases maintain adequate insurance to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a customer to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition. Furthermore, we may be unable to maintain adequate insurance in the future at rates we consider reasonable.
We face increased exposure to operating difficulties because we have a substantial focus on drilling for natural gas.
A substantial number of our well service contracts are with exploration and production companies in search of natural gas, particularly in coal bed methane. Drilling on land for natural gas generally occurs at deeper drilling depths than drilling for oil. Although deep-depth drilling exposes us to risks similar to risks encountered in shallow-depth drilling, the magnitude of the risk for deep-depth drilling is greater because of the higher costs and greater complexities involved in drilling deep wells. We generally enter into International Association of Drilling Contractors contracts that contain “daywork” indemnification language that transfers responsibility for down hole exposures such as blowout and fire to the operator, leaving us responsible only for damage to our rig and our personnel. If we do not adequately insure the risk from blowouts or if our contractual indemnification rights are insufficient or unfulfilled, our profitability and other results of operation and our financial condition could be adversely affected in the event we encounter blowouts or other significant operating difficulties while drilling at deeper depths.
Our operations are subject to various laws and governmental regulations that could restrict our future operations and increase our operating costs.
Many aspects of our operations are subject to various federal, state and local laws and governmental regulations, including laws and regulations governing:
•
environmental quality;
•
pollution control;
•
remediation of contamination;
•
preservation of natural resources; and
•
worker safety.
Our operations are subject to stringent federal, state and local laws and regulations governing the protection of the environment and human health and safety. Several such laws and regulations relate to the disposal of hazardous oilfield waste and restrict the types, quantities and concentrations of such regulated substances that can be released into the environment. Several such laws also require removal and remedial action and other cleanup under certain circumstances, commonly regardless of fault. Planning, implementation and maintenance of protective measures are required to prevent accidental discharges. Spills of oil, natural gas liquids, drilling fluids and other substances may subject us to penalties and cleanup requirements. Handling, storage and disposal of both hazardous and non-hazardous wastes are also subject to these regulatory requirements. In addition, our operations are often conducted in or near ecologically sensitive areas, which are subject to special protective measures and that may expose us to additional operating costs and liabilities for accidental discharges of oil, natural gas, drilling fluids, contaminated water or other substances or for noncompliance with other aspects of applicable laws and regulations. Historically, we have not been required to obtain environmental or other permits prior to drilling a well. Instead, the operator of the oil and gas property has been obligated to obtain the necessary permits at its own expense.
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The federal Clean Water Act, as amended by the Oil Pollution Act, the federal Clean Air Act, the federal Resource Conservation and Recovery Act, the federal Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, the Safe Drinking Water Act, the Occupational Safety and Health Act, or OSHA, and their state counterparts and similar statutes are the primary vehicles for imposition of such requirements and for civil, criminal and administrative penalties and other sanctions for violation of their requirements. The OSHA hazard communication standard, the Environmental Protection Agency “community right-to-know” regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require us to organize and report information about the hazardous materials we use in our operations to employees, state and local government authorities and local citizens. In addition, CERCLA, also known as the “Superfund” law, and similar state statutes impose strict liability, without regard to fault or the legality of the original conduct, on certain classes of persons who are considered responsible for the release or threatened release of hazardous substances into the environment. These persons include the current owner or operator of a facility where a release has occurred, the owner or operator of a facility at the time a release occurred, and companies that disposed of or arranged for the disposal of hazardous substances found at a particular site. This liability may be joint and several. Such liability, which may be imposed for the conduct of others and for conditions others have caused, includes the cost of removal and remedial action as well as damages to natural resources. Few defenses exist to the liability imposed by environmental laws and regulations. It is also not uncommon for third parties to file claims for personal injury and property damage caused by substances released into the environment.
Environmental laws and regulations are complex and subject to frequent changes. Failure to comply with governmental requirements or inadequate cooperation with governmental authorities could subject a responsible party to administrative, civil or criminal action. We may also be exposed to environmental or other liabilities originating from businesses and assets that we acquired from others. We are in substantial compliance with applicable environmental laws and regulations and, to date, such compliance has not materially affected our capital expenditures, earnings or competitive position. We do not expect to incur material capital expenditures in our next fiscal year in order to comply with current or reasonably anticipated environment control requirements. However, our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of regulatory noncompliance or contamination may require us to make material expenditures or subject us to liabilities that we currently do not anticipate.
In addition, our business depends on the demand for land drilling services from the oil and natural gas industry and, therefore, is affected by tax, environmental and other laws relating to the oil and natural gas industry generally, by changes in those laws and by changes in related administrative regulations. It is possible that these laws and regulations may in the future add significantly to our operating costs or those of our customers or otherwise directly or indirectly affect our operations.
We rely on a few key employees whose absence or loss could disrupt our operations resulting in a loss of revenues.
Many key responsibilities within our business have been assigned to a small number of employees. The loss of their services, particularly the loss of Christine Tedesco, our Chief Executive and Financial Officer, could disrupt our operations resulting in a loss of revenues. We have no employment agreements our employees. In addition, we do not maintain “key person” life insurance policies on any of our employees. As a result, we are not insured against any losses resulting from the death of our key employees.
We may be unable to attract and retain qualified, skilled employees necessary to operate our business.
Our success depends in large part on our ability to attract and retain skilled and qualified personnel. Our inability to hire, train and retain a sufficient number of qualified employees could impair our ability to manage and maintain our business. We require skilled employees who can perform physically demanding work. Shortages of qualified personnel are occurring in our industry. As a result of the volatility of the oil and natural gas industry and the demanding nature of the work, potential employees may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. If we should suffer any material loss of personnel to competitors or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be materially and adversely affected. With a reduced pool of workers, it is possible that we will have to raise wage rates to attract workers from other fields and to retain our current employees. If we are not able to increase our service rates to our customers to compensate for wage-rate increases, our profitability and other results of operations may be adversely affected.
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Shortages in equipment and supplies could limit our operations and jeopardize our relations with customers.
The materials and supplies we use in our operations include fuels to operate our equipment, pipe, and collars. Shortages in equipment and supplies could limit our workover operations and jeopardize our relations with customers. We do not rely on a single source of supply for any of these items. From time to time there have been shortages of equipment and supplies during periods of high demand which we believe could reoccur. Shortages could result in increased prices for equipment or supplies that we may be unable to pass on to customers. In addition, during periods of shortages, the delivery times for equipment and supplies can be substantially longer. Any significant delays in our obtaining equipment or supplies could limit our operations and jeopardize our relations with customers. In addition, shortages of equipment or supplies could delay and adversely affect our ability to obtain new contracts for our workover rigs, which could negatively impact our revenues and profitability.
Risks Related to Ownership of Our Common Stock
We have incurred and will continue to incur increased costs as a result of being a public company.
As a result of becoming a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. We have incurred and will continue to incur costs associated with our public company reporting requirements and costs associated with recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC and the NASD. These rules and regulations could increase our legal and financial compliance costs and could make some activities more time-consuming and costly. These new rules and regulations could make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.
The price of our common stock may be extremely volatile.
In some future periods, our results of operations may be below the expectations of public market investors, which could negatively affect the market price of our common stock. Furthermore, the stock market in general has experienced extreme price and volume fluctuations in recent years. We believe that, in the future, the market price of our common stock could fluctuate widely due to variations in our performance and operating results or because of any of the following factors:
• announcements of new services, products, technological innovations, acquisitions or strategic relationships by us or our competitors;
• trends or conditions in the software, business process outsourcing and Internet markets;
• changes in market valuations of our competitors; and
• general political, economic and market conditions.
In addition, the market prices of securities of well service companies, including our own, have been volatile and have experienced fluctuations that have often been unrelated or disproportionate to a specific company's operating performance. As a result, investors may not be able to sell shares of our common stock at or above the price at which an investor purchase paid. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against that company. If any securities litigation is initiated against us, we could incur substantial costs and our management's attention could be diverted from our business.
Quarterly and annual operating results may fluctuate, which could cause our stock price to be volatile.
Our quarterly and annual operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular period. You should not rely on our results of operations during any particular period as an indication of our results for any other period. Factors that may adversely affect our periodic results may include the loss of a significant account or accounts.
Our operating expenses are based in part on our expectations of our future revenues and are partially fixed in the short term. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall.
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The significant concentration of ownership of our common stock will limit an investor's ability to influence corporate actions.
The concentration of ownership of our common stock may limit an investor's ability to influence our corporate actions and have the effect of delaying or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and may affect the market price of our common stock. Certain major stockholders, if they act together, are able to substantially influence all matters requiring stockholder approval, including the election of all directors and approval of significant corporate transactions and amendments to our articles of incorporation. These stockholders may use their ownership position to approve or take actions that are adverse to interests of other investors or prevent the taking of actions that are inconsistent with their respective interests.
The availability of a large number of authorized but unissued shares of common stock may, upon their issuance, lead to dilution of existing stockholders.
We are authorized to issue 50,000,000 shares of common stock, $0.001 par value per share, of which, as of December 31, 2010, 9,696,000 shares of common stock were issued and outstanding. These shares may be issued by our board of directors without further stockholder approval. The issuance of large numbers of shares, possibly at below market prices, is likely to result in substantial dilution to the interests of other stockholders. In addition, issuances of large numbers of shares may adversely affect the market price of our common stock.
Further, our Articles of Incorporation authorizes 1,000,000 shares of preferred stock, $0.10 par value per share. The board of directors is authorized to provide for the issuance of these unissued shares of preferred stock in one or more series, and to fix the number of shares and to determine the rights, preferences and privileges thereof. Accordingly, the board of directors may issue preferred stock which convert into large numbers of shares of common stock and consequently lead to further dilution of other shareholders.
We do not intend to pay cash dividends in the foreseeable future
We currently intend to retain all future earnings for use in the operation and expansion of our business. We do not intend to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.
There is currently a limited trading market for our securities and there can be no assurance that any liquid market will ever develop.
There is currently a limited trading market for our common stock. Our common stock trades on the Over-the-Counter Bulletin Board under the trading symbol CSTV as of April, 2010. However, there can be no assurance as to whether an orderly market will develop, (if ever) in our common stock. As a result, we expect that the price at which our stock trades is likely to fluctuate significantly. Prices for our common stock is determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception of us and general economic and market conditions. No assurances can be given that an orderly or liquid market will ever develop for the shares of our common stock. Owing to the anticipated low price of the securities, many brokerage firms may not be willing to effect transactions in the securities. Broker-dealers may be discouraged from effecting transactions in our common stock because they are considered a penny stock and are subject to the penny stock rules.”
Our common stock is subject to the Penny Stock Regulations
Our common stock is subject to the SEC's “penny stock” rules to the extent that the price remains less than $5.00. Those rules, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale, may further limit your ability to sell your shares.
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The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock, when and if a trading market develops, may fall within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the `penny stock` rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell their common stock in the secondary market.
Our common stock is illiquid and subject to price volatility unrelated to our operations
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
Sales of substantial amounts of common stock, or the perception that such sales could occur, and the existence of convertible securities to purchase shares of common stock at prices that may be below the then current market price of the common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
Our Drilling Rig
As of December 31, 2010, our drilling rig fleet consisted of one workover rig, which we market on a continuous basis. At the present time, this workover rig operates on a term contract of one year. We currently have no workover rigs held in inventory. Our rig is located in Bourbon County, Kansas. Our operating equipment is stored in Kansas on property owned by our majority shareholders, Mr. and Mrs. Tedesco.
Atoka Coal Labs, a company owned by Mr. and Mrs. Tedesco, has leased us its drilling rig on a perpetual basis at the lease rate of $2,500 per month.
Other Equipment and Property
As of December 31, 2010, we owned a fleet of two trucks and related transportation equipment that we use to transport our men and equipment to and from drilling sites. By owning our own trucks, we reduce the cost of equipment moves, downtime between workover rig moves and general wear and tear on our rig.
We believe that our operating workover rig and other related equipment are in good operating condition. Our employees perform periodic maintenance and minor repair work on our workover rig. Historically, we have relied on various oilfield service companies for major repair work and overhaul of our equipment. In the event of major breakdowns or mechanical problems, our rig could be subject to significant idle time and a resulting loss of revenue if the necessary repair services are not immediately available.
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We currently occupy approximately 450 square feet of office space which we rent from our President and largest shareholder on a month-to-month basis, currently without charge.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings, nor is our property the subject of any material legal proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held no shareholders meeting in the fourth quarter of our fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Holders
As of December 31, 2010, there were 38 record holders of our common stock, and there were 9,696,000 shares of our common stock issued and outstanding. As of April, 2010, our common stock became trading on the Over-the-Counter Bulletin Board under the trading symbol CSTV but there is no extensive history of trading. We had no public market for our common stock in 2009 or the first fiscal quarter of 2010.
On March 9 , 2011, the closing bid price of our common stock in the OTC Bulletin Board was $.16 per share and our volume was 5000 shares.
The Securities Enforcement and Penny Stock Reform Act of 1990
The Securities and Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).
A purchaser is purchasing penny stock which limits the ability to sell the stock. The shares offered by this prospectus constitute penny stock under the Securities and Exchange Act. The shares will remain penny stocks for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stock.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the Commission, which:
•
contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;
•
contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of the Securities Act of 1934, as amended;
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•
contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" prices for penny stocks and the significance of the spread between the bid and ask price;
•
contains a toll-free telephone number for inquiries on disciplinary actions;
•
defines significant terms in the disclosure document or in the conduct of trading penny stocks; and
•
contains such other information and is in such form (including language, type, size and format) as the Securities and Exchange Commission shall require by rule or regulation;
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer:
•
the bid and offer quotations for the penny stock;
•
the compensation of the broker-dealer and its salesperson in the transaction;
•
the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and
•
monthly account statements showing the market value of each penny stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities.
Equity Compensation Plan Information
We have no outstanding stock options or other equity compensation plans.
Reports
We are subject to certain reporting requirements and will furnish annual financial reports to our stockholders, certified by our independent accountants, and furnish unaudited quarterly financial reports in our quarterly reports filed electronically with the SEC. All reports and information filed by us can be found at the SEC website, www.sec.gov.
Stock Transfer Agent
The stock transfer agent for our securities is Corporate Stock Transfer of Denver, Colorado. Their address is 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209. Their phone number is (303)282-4800.
Dividend Policy
We have not previously declared or paid any dividends on our common stock and do not anticipate declaring any dividends in the foreseeable future. The payment of dividends on our common stock is within the discretion of our board of directors. We intend to retain any earnings for use in our operations and the expansion of our business. Payment of dividends in the future will depend on our future earnings, future capital needs and our operating and financial condition, among other factors that our board of directors may deem relevant. We are not under any contractual restriction as to our present or future ability to pay dividends.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
A smaller reporting company is not required to provide the information in this Item.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis and Plan of Operation contains forward-looking statements that involve future events, our future performance and our expected future operations and actions. In some cases, you can identify forward-looking statements by the use of words such as “may”, “will”, “should”, “anticipate”, “believe”, “expect”, “plan”, “future”, “intend”, “could”, “estimate”, “predict”, “hope”, “potential”, “continue”, or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including, but not limited to, the matters discussed in this report under the caption “Risk Factors”. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. We undertake no obligation to publicly update any forward looking-statements, whether as a result of new information, future events or otherwise.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included in this report.
Results of Operations
The following presents, for comparison purposes, the results of our consolidated operations, including the operations of CST Oil & Gas Corporation, as if this subsidiary had been a part of our company throughout the entire fiscal year 2009. In fact, we acquired CST Oil and Gas Corporation on September 30, 2009.
For the year ended December 31, 2010 our sales were $1,249,989. In comparison the period ended December 31, 2009 our sales were $488,540. All sales in 2010 and 2009 were to domestic companies under common control of our officers. We had a significant increase in the number and scope of our projects in 2010, compared to 2009.
For the year ended December 31, 2010 our cost of goods sold was $566,158. In comparison the period ended December 31, 2009 our cost of goods sold was $314,772.
Operating expenses, which consisted primarily of general and administrative expenses, were $582,219 and $111,477 respectively for the periods ended December 31, 2010 and 2009. The major component of general and administrative expenses for both 2010 and 2009 was salaries. The significant increase in 2010 over 2009 was directly related to higher operating costs and purchase of equipment related to our increased sales.
For the year ended December 31, 2010 we had net income of $70,458. In comparison for the period ended December 31, 2009 we had a profit of $61,439. The higher operating costs and provisions for income tax resulted in a lower profit margin in 2010, compared to 2009.
Our principal source of liquidity is our sales. We expect variation in sales to account for the difference between a profit and a loss. Also business activity is closely tied to the U.S. petroleum business. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to successfully develop our business and our ability to generate sales.
In any case, we try to operate with minimal overhead. Our primary activity will be to develop our sales. If we succeed in generating sufficient sales, we will continue to be profitable. We cannot guarantee that this will ever occur. Our plan is to build our company in any manner which will be successful.
Liquidity and Capital Resources.
As of December 31, 2010, we had cash or cash equivalents of $5,711. As of December 31, 2009, we had cash or cash equivalents of $38,563.
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For the periods ended December 31, 2010 and 2009 net cash provided by operating activities was $140,784 and $101,811, respectively.
For the periods ended December 31, 2010 and 2009 net cash used for investing activities was $173,636 and $66,442 respectively. The funds were used to purchase fixed assets utilized in our business.
For the year ended December 31, 2010 net cash used for or provided by financing activities was $-0-, while for the period ended December 31, 2009 we had net cash provided by financing activities of $59,956. These cash flows were all related to borrowings from a related party and a repayment of those borrowings.
Over the next twelve months we do not expect any material capital costs. We believe that we have sufficient capital in the short term for our current level of operations. This is because we believe that we can attract sufficient sales within our present organizational structure and resources to remain profitable in our operations. We do not anticipate needing to raise additional capital resources in the next twelve months In the event that we need additional capital,
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements with any party.
Critical Accounting Policies
Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies that we follow are set forth in Note 2 to our financial statements as included in this prospectus. These accounting policies conform to accounting principles generally accepted in the United States, and have been consistently applied in the preparation of the financial statements.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123R "Share Based Payment." This statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R addresses all forms of share based payment ("SBP") awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS No. 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. This statement is effective for public entities that file as small business issuers, as of the beginning of the first interim or annual reporting period that began after December 15, 2005. We adopted this pronouncement in all of our filings.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets - An Amendment of APB Opinion No. 29. The amendments made by SFAS No. 153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for non-monetary exchanges of similar productive assets and replace it with a broader exception for exchanges of non-monetary assets that do not have "commercial substance." SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 on its effective date did not have a material effect on our consolidated financial statements.
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In March 2005, the FASB issued Financial Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations - an Interpretation of FASB Statement No. 143", which specifies the accounting treatment for obligations associated with the sale or disposal of an asset when there are legal requirements attendant to such a disposition. We adopted this pronouncement in 2005, as required, but there was no impact as there are no legal obligations associated with the future sale or disposal of any assets.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and SFAS Statement No. 3". SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring retrospective application to prior periods' financial statements of the change in accounting principle, unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS No. 154 to have any impact on our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
A smaller reporting company is not required to provide the information in this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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CST Holding Corp.
FINANCIAL STATEMENTS
December 31, 2009 and 2010
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CST HOLDING CORP.
Financial Statements
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RONALD R. CHADWICK, P.C.
Certified Public Accountant
2851 South Parker Road, Suite 720
Aurora, Colorado 80014
Telephone (303)306-1967
Fax (303)306-1944
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
CST Holding Corp.
Centennial, Colorado
I have audited the accompanying consolidated balance sheets of CST Holding Corp. as of December 31, 2009 and 2010, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CST Holding Corp. as of December 31, 2009 and 2010, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Aurora, Colorado
/s/ Ronald R. Chadwick, P.C.
March 25, 2011
RONALD R. CHADWICK, P.C.
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CST HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part
of the consolidated financial statements.
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CST HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part
of the consolidated financial statements.
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CST HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part
of the consolidated financial statements.
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CST HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued On Following Page)
The accompanying notes are an integral part
of the consolidated financial statements.
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CST HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued From Previous Page)
The accompanying notes are an integral part
of the consolidated financial statements.
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CST HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Whistlepig Enterprises, Inc. (“Whistlepig”) was incorporated May 30, 2007 in the State of Colorado. CST Oil and Gas Corporation were incorporated in the State of Colorado on May 8, 1985. Effective September 30, 2009 Whistlepig was acquired by CST Oil and Gas Corporation in a transaction classified as a reverse acquisition. Whistlepig concurrently changed its name to CST Holding Corp. The financial statements represent the activity of CST Oil and Gas Corporation from December 31, 2007 forward, and the consolidated activity of CST Oil and Gas Corporation and Whistlepig from September 30, 2009 forward. CST Oil and Gas Corporation and Whistlepig are hereinafter referred to collectively as the "Company". The Company sells oil and gas field workover services. The Company may also engage in any other business that is permitted by law, as designated by the Board of Directors of the Company.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect 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 could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents.
Accounts receivable
The Company reviews accounts receivable periodically for collectability and establishes an allowance for doubtful accounts and records bad debt expense when deemed necessary. At December 31, 2009 the Company had no balance in its allowance for doubtful accounts, and at December 31, 2010 the Company had $181,693 in its allowance for doubtful accounts from unpaid related party receivables, with a corresponding 2010 bad debt expense of $181,693.
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CST HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Property and equipment
Property and equipment are recorded at cost and depreciated under accelerated or straight line methods over each item's estimated useful life.
Revenue recognition
Revenue is recognized on an accrual basis as earned under contract terms. Specifically, revenue from product sales is recognized subsequent to a customer ordering a product at an agreed upon price, delivery has occurred, and collectability is reasonably assured.
Advertising costs
Advertising costs are expensed as incurred. The Company had no advertising costs in 2009 and $518 in 2010.
Income tax
The Company accounts for income taxes pursuant to ASC 740. Under ASC 740 deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net income (loss) per share
The net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive and would increase the earnings or decrease loss per share.
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CST HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Financial Instruments
The carrying value of the Company’s financial instruments, as reported in the accompanying balance sheets, approximates fair value.
Long-Lived Assets
In accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that may suggest impairment. If impairment testing indicates a lack of recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its fair value.
Products and services, geographic areas and major customers
The Company earns revenue from the sale of oil and gas field workover services, but does not separate different services into operating segments. All sales each year were to domestic companies under common control of the Company’s officers.
NOTE 2. RELATED PARTY TRANSACTIONS
All Company sales in 2009 and 2010 of $488,540 and $1,249,989 were to companies related by common control, and the Company paid companies related by common control approximately $57,000 and $107,000 for cost of sales. At December 31, 2008 the Company owed $40,000 to an officer for due on demand, non-interest bearing working capital advances which were repaid in 2009, and the Company’s net accounts receivable at end 2010 of $24,250 were due from a related party company. The Company in 2010 purchased a truck for $87,500 from a company related by common control.
NOTE 3. REVERSE ACQUISITION
On September 30, 2009 Whistlepig Enterprises, Inc. entered into an acquisition agreement (the "Agreement") with CST Oil and Gas Corporation, acquiring 100% of the outstanding common stock of CST Oil and Gas Corporation through the issuance of 8,000,000 shares of its common stock with no readily available market price. The transaction was accounted for as a reverse acquisition as the shareholders of CST Oil and Gas Corporation retained the majority of the outstanding common stock of Whistlepig after the share exchange. Effective with the Agreement, the Company's stockholders' equity was retroactively recapitalized as that of CST Oil and Gas Corporation, while 100% of the assets and liabilities of Whistlepig valued at $44, consisting of cash $44,
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CST HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2010
NOTE 3. REVERSE ACQUISITION (Continued):
were recorded as being acquired in the reverse acquisition for its 1,696,000 outstanding common shares on the acquisition date. (Immediately prior to the acquisition Whistlepig had 9,696,000 outstanding common shares. 8,000,000 of these shares were surrendered by the holders for cancellation). Subsequent to the September 30, 2009 recapitalization, Whistlepig and CST Oil and Gas Corporation remain separate legal entities (with Whistlepig as the parent of CST Oil and Gas Corporation). The accompanying consolidated financial statements exclude the financial position, results of operations and cash flows of Whistlepig prior to the September 30, 2009 acquisition. Whistlepig concurrent with the transaction changed its name to CST Holding Corp.
NOTE 4. INCOME TAXES
Deferred income taxes arise from the temporary differences between financial statement and income tax recognition of net operating losses and other items. Loss carryovers are limited under the Internal Revenue Code should a significant change in ownership occur.
Prior to 2009, and for the first nine months of 2009 the Company operated as an S-corporation, was a pass-through entity for federal income tax purposes and paid no income tax at the corporate level.
The Company accounts for income taxes pursuant to ASC 740. The components of the Company’s deferred tax assets and liabilities are as follows:
Income taxes at Federal and state statutory rates are reconciled to the Company’s actual income taxes as follows:
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ITEM 9.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
We did not have any disagreements on accounting and financial disclosures with our present accounting firm during the reporting period.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Accordingly, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.
Management’s Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U. S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
i. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
ii. provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U. S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
iii. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.
Management has concluded that our internal control over financial reporting was effective as December 31, 2010.
Inherent Limitations Over Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error and circumvention by collusion or overriding of controls. Accordingly, even an effective internal control system may not prevent or detect material misstatements on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting.
We have made no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Attestation Report of the Registered Public Accounting Firm.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this annual report on Form 10-K affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
Nothing to report.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Officers and Directors
The following tables set forth information regarding the Company’s current executive officers and directors as of December 31, 2010.
The biographies of each of our executive officers and directors are as follows:
Christine Tedesco is the co-founder and Chief Operating Officer of CST and has held this position since its founding in 1985. Since 1994, she has also been a Vice President and Director of Atoka Coal Bed Methane Laboratories, a provider of surface geochemical technologies for natural gas exploration companies. In 2000, she co-founded Running Foxes Petroleum, a petroleum and natural gas exploration and production company. She continues with these companies in these capacities to the present. Ms. Tedesco obtained a BA Degree in Marketing from Kent State University in 1974.
Michael Thomsen has over 30 years experience in the natural resources industry and has worked in over 40 countries in exploration and project acquisitions. He is the former Chairman of Oil Quest Resources plc, a British oil and gas exploration company which merged into the North Sea oil explorer, Encore Oil plc in 2006. His work with US energy producer Freeport-McMoRan Inc. from 1977 to 1987 included exploration in the Gulf of Mexico, the Permian Basin of west Texas, the Sinai-Sea region of Egypt, the Sergipe Basin offshore Brazil and the Neuquen Basin of western Argentina. His US experience with Freeport was primarily directed at the Permian Basin of west Texas and his international work involved basin evaluation in Egypt, Brazil and Argentina. From 1988 to 2002 he was a director of exploration for Gold Fields and Newmont, two major international natural resources groups. He is currently Chairman of Nighthawk Energy plc, a London listed company with oil and gas assets in the US. Mr. Thomsen obtained a Bachelors Degree from the University of Wisconsin majoring in Geology graduating with honors.
Term of Office
The Company’s directors are appointed to hold office until the next annual general meeting of the Company’s stockholders or until removed from office in accordance with the Company’s bylaws and the provisions of the Colorado Revised Statutes.
The Company’s officers are appointed by the Company’s Board of Directors and hold office until they resign, are removed, or elect not to stand for re-election.
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Legal Proceedings Involving Directors, Executive Officers and Certain Beneficial Owners.
The Company is not aware of any legal proceedings to which any current or prospective director, officer, affiliate of the Company, or owner of more than five percent of the Company’s Common Stock (beneficially or of record) is a party adverse in interest to the Company.
Family Relationships
Our control shareholders, Steven A. Tedesco and Christine Tedesco, are husband and wife.
Committees of the Board of Directors
There are no committees of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the “34 Act”) requires our officers and directors and persons owning more than ten percent of the Common Stock, to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Additionally, Item 405 of Regulation S-K under the 34 Act requires us to identify in its Form 10-K and proxy statement those individuals for whom one of the above referenced reports was not filed on a timely basis during the most recent year or prior years. To our knowledge, based solely on our review of the copies of such reports furnished to us and representations that no other reports were required during the fiscal year ended December 31, 2010, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were timely complied with.
Code of Ethics
Our Board of directors has not adopted a code of ethics but plans to do so in the future.
Options/SAR Grants and Fiscal Year End Option Exercises and Values
We have not had a stock option plan or other similar incentive compensation plan for officers, directors and employees, and no stock options, restricted stock or SAR grants were granted or were outstanding at any time.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
No compensation has been paid and no stock options granted to any of our officers or directors since inception in 2007. Further, the officers and directors are not accruing any compensation pursuant to any agreement with us. We have no plans to pay any compensation to our officers or directors in the future.
None of our officers and directors will receive any finder’s fee, either directly or indirectly, as a result of their respective efforts to implement our business plan outlined herein.
No retirement, pension, profit sharing, stock option or insurance programs or other similar programs have been adopted by us for the benefit of its employees.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information with respect to the beneficial ownership of our Common Stock as of December 31, 2010, for: (i) each person who we know beneficially owns more than 5% of our Common Stock; (ii) each of our Directors; (iii) each of our Officers and (iv) all of our Directors and Executive Officers as a group. As of December 31, 2010, (the “Record Date”), there were 9,696,000 shares of the Company’s common stock issued and outstanding. Each stockholder’s percentage ownership is based on 9,696,000 shares of our common stock outstanding as of December 31, 2010. Except as otherwise indicated, the address of each of the persons in this table is 7060 B South Tucson Way, Centennial, Colorado 80112.
______________
(1)
Includes 4,050,000 shares owned of record by Christine Tedesco and 4,050,000 shares owned of record by Steven A. Tedesco. In addition, Steven A. Tedesco owns 100,000 shares of record. Christine and Steven Tedesco are husband and wife. A total of 8,000,000 shares were acquired in the Share Exchange transaction. A total of 100,000 shares have been privately purchased from existing shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We currently occupy approximately 450 square feet of office space which we rent from our President and largest shareholder on a month-to-month basis, currently without charge.
All of our sales in 2009 and 2010 of $488,540 and $1,249,989 were to companies related by common control to us through our major shareholders, Mr. and Mrs. Tedesco. We paid these companies related by common control approximately $57,000 and $107,000 for cost of sales.
At December 31, 2008 we owed $40,000 to one of our officers, which was due on demand. These were non-interest bearing working capital advances which were repaid in 2009. At the end of 2010, we had net accounts receivable of $24,250 due from a related party company.
We purchased a truck in 2010 for $87,500 from a company related by common control.
Our operating equipment is stored in Kansas on property owned by our majority shareholders, Mr. and Mrs. Tedesco.
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Atoka Coal Labs, a company owned by Mr. and Mrs. Tedesco, has leased us its drilling rig on a perpetual basis at the lease rate of $2,500 per month.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent auditor, Ronald R. Chadwick, P.C., Certified Public Accountants, billed an aggregate of $9,500 for the year ended December 31, 2010 and for professional services rendered for the audit of the Company's annual financial statements and review of the financial statements included in its quarterly reports. The firm billed an aggregate of $9,500 for the period ended December 31, 2009 and for professional services rendered for the audit of the Company's annual financial statements and review of the financial statements included in its quarterly reports.
We do not have an audit committee and as a result our board of directors performs the duties of an audit committee. Our board of directors evaluates the scope and cost of the engagement of an auditor before the auditor renders audit and non-audit services.
ITEM 15.
ITEM 15. EXHIBITS FINANCIAL STATEMENT SCHEDULES.
The following financial information is filed as part of this report:
(a) (1) FINANCIAL STATEMENTS
(2) SCHEDULES
(3) EXHIBITS. The following exhibits required by Item 601 to be filed herewith are incorporated by reference to previously filed documents:
* Previously filed with Form 8-K, September 30, 2009
** Previously filed with Form SB-2 Registration Statement, January 24, 2008.
(b) Reports on Form 8-K. No report under cover of Form 8-K was filed for the fourth fiscal quarter of 2010.
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2011.
CST HOLDING CORP.
By:
/s/ Christine Tedesco
Christine Tedesco
Chief Executive Officer, Chief Financial Officer, and President (principal executive officer) (principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacity and on the date indicated.
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