Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------
FORM 10Q
-----------------
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number: 000-55033
THREE FORKS, INC.
-----------------
(Exact name of registrant as specified in its charter)
COLORADO 45-4915308
------------------------ ------------------------
(State of Incorporation) (IRS Employer ID Number)
PO BOX 1510, JOHNSTOWN, COLORADO 80534
--------------------------------------------------
(Address of principal executive offices)
(303) 404-2160
--------------------------------------------------
(Registrant's Telephone number)
555 ELDORADO BLVD., SUITE 100, BROOMFIELD, COLORADO 80021
---------------------------------------------------------
(Former Address and phone of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 for Regulation S-T (ss.232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 14, 2014, there were 11,697,677 shares of the registrant's common
stock issued and outstanding.
EXPLANATORY NOTE
FIVE JAB, INC.'S OIL AND GAS OPERATIONS PRIOR TO THE EFFECTIVE DATE OF THE
COMPANY ACQUIRING FIVE JAB, INC. SEPTEMBER 1, 2013 ARE CONSIDERED TO BE THE OIL
AND GAS OPERATIONS OF THE COMPANY'S PREDECESSOR AND, THEREFORE, HAVE BEEN
REPORTED SEPARATELY IN THIS FORM 10-Q.
-2-
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements 5
FINANCIAL STATEMENTS THREE FORKS, INC. (UNAUDITED)
Balance Sheets - September 30, 2014 and December 31, 2013 (Audited) 6
Statements of Operations -
Three and Nine Months ended September 30, 2014 and 2013 7
Statements of Changes in Shareholders' Equity -
Nine Months ended September 30, 2014 9
Statements of Cash Flows -
Nine Months ended September 30, 2014 and 2013 10
Notes to the Financial Statements 11
FINANCIAL STATEMENTS FIVE JAB, INC. (THE PREDECESSOR) (UNAUDITED)
Balance Sheet - September 1, 2013 (Audited) 24
Statement of Operations -
Three and Nine Months ended September 30, 2013 25
Statement of Cash Flows -
Nine Months ended September 30, 2013 26
Notes to Financial Statements 27
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
- NOT APPLICABLE
Item 4. Controls and Procedures 37
-3-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -NOT APPLICABLE 39
Item 1A. Risk Factors - NOT APPLICABLE 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities - NOT APPLICABLE 39
Item 4. Mine Safety Disclosure - NOT APPLICABLE 39
Item 5. Other Information - NOT APPLICABLE 39
Item 6. Exhibits 40
SIGNATURES 41
-4-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
-5-
THREE FORKS, INC.
BALANCE SHEETS
September 30, 2014 December 31, 2013
(Unaudited) (Audited)
------------------------- -------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 371,782 $ 121,174
Accounts receivable trade, net 273,540 276,570
Note receivable other 100,000 100,000
Prepaid and other current assets 9,315 20,442
------------------------- -------------------------
Total current assets 754,637 518,186
------------------------- -------------------------
PROPERTY AND EQUIPMENT
Oil and gas properties at cost, full-cost method of accounting
Unproved 215,072 214,584
Proved 5,982,044 5,614,987
Other 33,953 25,554
------------------------- -------------------------
Total property and equipment 6,231,069 5,855,125
Less accumulated depreciation, depletion and amortization (245,529) (65,038)
------------------------- -------------------------
Net property and equipment 5,985,540 5,790,087
------------------------- -------------------------
LONG-TERM ASSETS
Investment in equity securities 50,000 -
Other 61,330 61,330
------------------------- -------------------------
Total long-term assets 111,330 61,330
------------------------- -------------------------
Total assets $ 6,851,507 $ 6,369,603
========================= =========================
CURRENT LIABILITIES
Current maturities of convertible notes $ - $ 1,475,000
Current maturities of notes - 24,500
Accounts payable trade 87,940 425,133
Advances and accruals 195,626 192,517
Notes payable and advances, related party 311,010 812,205
------------------------- -------------------------
Total current liabilities 594,576 2,929,355
------------------------- -------------------------
LONG-TERM LIABILITIES
Note payable 1,175,000 -
Asset retirement obligations 335,465 307,854
------------------------- -------------------------
Total long-term liabilities 1,510,465 307,854
------------------------- -------------------------
Total liabilities 2,105,041 3,237,209
------------------------- -------------------------
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY
Preferred shares, no par value, 25,000,000 shares authorized;
no shares issued and outstanding - -
Common shares, $0.001 par value, 100,000,000 shares authorized;
11,697,677 and 11,681,477 shares issued and outstanding at
September 30, 2014 and December 31, 2013, respectively 11,698 11,681
Additional paid in capital 8,315,769 5,629,205
Accumulated deficit (3,581,001) (2,508,492)
------------------------- -------------------------
Total stockholders' equity 4,746,466 3,132,394
------------------------- -------------------------
Total liabilities and stockholders' equity $ 6,851,507 $ 6,369,603
========================= =========================
The accompanying notes are an integral part of these financial statements.
-6-
THREE FORKS, INC.
STATEMENTS OF OPERATIONS
For the Three Months ended September 30,
2014 2013
(Unaudited) (Unaudited)
--------------------- ---------------------
Revenue:
Oil and gas sales $ 560,855 $ 234,058
Management fees 15,000 48,000
--------------------- ---------------------
Total revenues 575,855 282,058
--------------------- ---------------------
Operating expenses:
Lease operating expenses 228,068 61,917
Production taxes 39,365 7,742
Depreciation, depletion and amortization 67,337 34,676
General and administrative expenses 396,719 562,574
--------------------- ---------------------
Total operating expenses 731,489 666,909
--------------------- ---------------------
Loss from operations (155,634) (384,851)
--------------------- ---------------------
Other income (expense):
Interest income 986 1,000
Interest expense (20,110) (4,836)
--------------------- ---------------------
Total other income (expense) (19,124) (3,836)
--------------------- ---------------------
Income taxes - -
--------------------- ---------------------
Net loss $ (174,758) $ (388,687)
===================== =====================
Net loss per common share
Basic and diluted $ (0.01) $ (0.03)
===================== =====================
Weighted average number of common shares
Basic and diluted 11,697,329 11,462,713
===================== =====================
The accompanying notes are an integral part of these financial statements.
-7-
THREE FORKS, INC.
STATEMENTS OF OPERATIONS
For the Nine Months ended September 30,
2014 2013
(Unaudited) (Unaudited)
--------------------- ---------------------
Revenue:
Oil and gas sales $ 1,510,468 $ 234,058
Management fees 77,000 112,000
--------------------- ---------------------
Total revenues 1,587,468 346,058
--------------------- ---------------------
Operating expenses:
Lease operating expenses 779,296 63,917
Production taxes 85,472 7,742
Depreciation, depletion and amortization 180,490 36,645
General and administrative expenses 1,543,575 1,503,956
--------------------- ---------------------
Total operating expenses 2,588,833 1,612,260
--------------------- ---------------------
Loss from operations (1,001,365) (1,266,202)
--------------------- ---------------------
Other income (expense):
Other Income - 22,000
Interest income 2,959 3,014
Interest expense (74,103) (4,837)
--------------------- ---------------------
Total other income (expense) (71,144) 20,177
--------------------- ---------------------
Loss from continuing operations
before income taxes (1,072,509) (1,246,025)
Income taxes - -
--------------------- ---------------------
Net loss from continuing operations (1,072,509) (1,246,025)
--------------------- ---------------------
Discontinued operations
Gain on disposal of property - 127,478
--------------------- ---------------------
Income from discontinued operations - 127,478
--------------------- ---------------------
Net loss $ (1,072,509) $ (1,118,547)
===================== =====================
Net loss from continuing operations $ (0.09) $ (0.11)
===================== =====================
Net income from discontinued operations
Basic and diluted $ - $ 0.01
===================== =====================
Net loss per common share
Basic and diluted $ (0.09) $ (0.10)
===================== =====================
Weighted average number of common shares
Basic and diluted 11,636,215 11,306,667
===================== =====================
The accompanying notes are an integral part of these financial statements.
-8-
THREE FORKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED SHARES COMMON SHARES ADDITIONAL TOTAL
NO PAR VALUE $.001 PAR VALUE PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- ------------- ------------- ------------ ------------- --------------- ---------------
BALANCES, December 31, 2013
(Audited) - $ - 11,681,477 $ 11,681 $ 5,629,205 $ (2,508,492) $ 3,132,394
Sale of shares for cash at
$3.00 per share - - 47,867 49 143,552 - 143,601
Sale of options for cash at
$1.00 per option - - - - 730,000 - 730,000
Issuance of warrants for debt - - - - 1,690,000 - 1,690,000
Issuance of shares for property 8,333 8 24,992 - 25,000
Issuance of options for property - - - - 25,000 - 25,000
Settlement of claims - - (40,000) (40) 4,241 - 4,201
Stock based compensation - - - - 68,779 - 68,779
Net loss for the period - - - - - (1,072,509) (1,072,509)
---------- ------------- ------------- ------------ ------------- --------------- ---------------
BALANCES, SEPTEMBER 30, 2014
(UNAUDITED) - $ - 11,697,677 $ 11,698 $ 8,315,769 $ (3,581,001) $ 4,746,466
========== ============= ============= ============ ============= =============== ===============
The accompanying notes are an integral part of these financial statements.
-9-
THREE FORKS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months ended September 30,
2014 2013
(Unaudited) (Unaudited)
------------------- --------------------
OPERATING ACTIVITIES
Net loss from continuing operations attributable to
common stockholders $ (1,072,509) $ (1,246,025)
Income from discontinued operations - 127,478
Adjustments to reconcile net loss to net cash
flows used in operating activities:
Depreciation, depletion and amortization 180,490 36,645
Gain on settlement of claims 4,202 (22,000)
Gain on sale of disposal group held for sale - (127,478)
Shares issued for services, related party - 2,200
Shares issued for services - 39,160
Stock based compensation 68,779 -
Changes in operating assets and liabilities:
Accounts receivable trade 3,030 (148,385)
Prepaid and other current assets 11,127 (40,334)
Accounts payable trade (337,193) 190,241
Accrued and deposits payable 3,109 224,810
Advances and accruals, related party 98,805 82,776
------------------- --------------------
Net cash used in operating activities (1,040,160) (880,912)
------------------- --------------------
INVESTING ACTIVITIES
Additions to property and equipment, net of repayments (348,333) (2,976,228)
Additions to other long-term assets - (6,208)
Proceeds from sale of disposal group held for sale - 1,600,000
------------------- --------------------
Net cash used in investing activities (348,333) (1,382,436)
------------------- --------------------
FINANCING ACTIVITIES
Sale of common shares and options 873,601 2,621,443
Funds used to repurchase common shares - (975,000)
Funds from short-term convertible notes, net of repayments - 1,535,000
Funds from long-term debt 1,175,000 -
Repayment of convertible debt (385,000) -
Funds from short-term notes, related party - 600,000
Funds from short-term notes, net of repayment (24,500) 22,355
------------------- --------------------
Net cash provided by financing activities 1,639,101 3,803,798
------------------- --------------------
NET CHANGE IN CASH 250,608 1,540,450
CASH, Beginning 121,174 492,729
------------------- --------------------
CASH, Ending $ 371,782 $ 2,033,179
=================== ====================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Issuance of warrants in exchange for debt $ 1,690,000 $ -
=================== ====================
Issuance of equity in exchange for property $ 50,000 $ -
=================== ====================
Interest paid $ 53,992 $ -
=================== ====================
Income taxes paid $ - $ -
=================== ====================
The accompanying notes are an integral part of these financial statements.
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
NATURE OF OPERATIONS AND ORGANIZATION
Three Forks, Inc. (the "Company") was incorporated on March 28, 2012 in the
State of Colorado. The Company's business plan focuses on the development as an
independent energy company engaged in the acquisition, exploration, development
and production of North American conventional oil and gas properties through the
acquisition of leases and/or royalty interests and developing the properties for
maximum cash flow.
On September 7, 2012, the Company acquired working interests between 10.12% and
10.50% in five (5) producing oil and gas wells along with mineral interests in
proved undeveloped leaseholds totaling approximately 320 acres located in Weld
county Colorado valued at $1,477,990 as well as a 76.25% working interest in
undeveloped leaseholds totaling approximately 120 acres located in Morgan county
Colorado valued at $14,000 in exchange for the issuance of 700,000 shares of the
Company's common stock valued at $1,400,000 or $2.00 per share and the
assumption of certain debt in the amount of $91,990. In addition, the Company
was required to fund an escrow account in the amount of $55,000 for legal
services that may occur over a three year period from the date of the
acquisition and this escrow account at June 30, 2014 and December 31, 2013 has a
balance of $55,163 and $55,163 respectively. Effective January 1, 2013, the
Company sold its entire interest in these oil and gas properties located in Weld
county Colorado for $1,600,000 in cash. See Note 4 - Disposal Group Held for
Sale.
On December 31, 2012, the Company entered into a Farmout Agreement ("Farmout")
where the Company had a 100% working interest in 320gross/290net acres of
mineral interests located in Archer county Texas subject to the Farmout. In
consideration of Three Forks No. 1, LLC, a Colorado limited liability company
("Three Forks No. 1"), undertaking and paying it's pro rata portion of the costs
associated with the drilling and completion of 9 wells in Archer county Texas on
the Farmout property, the Company assigned 87% of the working interest in the
Farmout to Three Forks No. 1. Likewise, on January 1, 2013, the Company assigned
2% of the working interest in the Farmout to two members of the Board of
Directors of the Company.
Three Forks LLC No. 2 ("Three Forks No. 2") was organized in the State of
Colorado on December 4, 2013. The Company is the manager of the Three Forks No.
2 and at June 30, 2014, the Company holds a 4.00% equity interest in Three Forks
No. 2. Three Forks No. 2 has been organized to fund and develop the proposed
drilling of additional wells in Colorado, Oklahoma and Texas.
Effective June 30, 2013 and September 1, 2013, the Company acquired a 37.5% and
37.5% working interest, respectively or a total of 75% working interest in
certain oil and gas properties located in Louisiana and Texas totaling
approximately 1,955 gross acres known as the Five JAB, Inc. properties in
exchange for $3,869,497 in cash plus the assumption of liabilities in the amount
of $281,962 as part of a purchase sale and participation agreement dated
February 27, 2013 as well as participate in a development program that includes
the drilling and completion of additional wells.
The Company's acquisition of the 75% of working interest in the oil and gas
properties was accounted for as an acquisition for accounting purposes.
-11-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
CONCENTRATION OF CREDIT RISK
The Company, from time to time during the periods covered by these financial
statements, may have bank balances in excess of its insured limits. Management
has deemed this a normal business risk.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all cash and
highly liquid investments with initial maturities of three months or less to be
cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at their cost less any allowance for doubtful
accounts. The allowance for doubtful accounts is based on the management's
assessment of the collectability of specific customer accounts and the aging of
the accounts receivable. If there is deterioration in a major customer's
creditworthiness or if actual defaults are higher than the historical
experience, the management's estimates of the recoverability of amounts due to
the Company could be adversely affected. Based on the management's assessment,
there is no reserve recorded at September 30, 2014 and December 31, 2013.
OIL AND GAS ACTIVITIES
The Company follows the full cost method of accounting for oil and natural gas
operations. Under this method all productive and nonproductive costs incurred in
connection with the acquisition, exploration, and development of oil and natural
gas reserves are capitalized. No gains or losses are recognized upon the sale or
other disposition of oil and natural gas properties except in transactions that
would significantly alter the relationship between capitalized costs and proved
reserves. Unproved properties with significant acquisition costs are assessed
annually on a property-by-property basis and any impairment in value is charged
to expense. If the unproved properties are determined to be productive, the
related costs are transferred to proved oil and natural gas properties and are
depleted. Proceeds from sales of partial interests in unproved leases are
accounted for as a recovery of cost without recognizing any gain or loss until
all costs have been recovered. The costs of unproved oil and natural gas
properties are excluded from the amortizable base until the time that either
proven reserves are found or it has been determined that such properties are
impaired. As properties become proved, the related costs transfer to proved oil
and natural gas properties using full cost accounting. There were capitalized
costs of $5,982,044 and $5,614,987 included in the amortization base at
September 30, 2014 and December 31, 2013, respectively and the Company did not
expense any capitalized costs for the three and nine months ended September 30,
2014 and 2013, respectively.
The Company performs a quarterly "ceiling test" calculation to test its oil and
gas properties for possible impairment. The primary components impacting this
calculation are commodity prices, reserve quantities added and produced, overall
exploration and development costs, depletion expense, and tax effects. If the
net capitalized cost of the Company's oil and gas properties subject to
amortization (the carrying value) exceeds the ceiling limitation, the excess
would be charged to expense. The ceiling limitation is equal to the sum of the
present value discounted at 10% of estimated future net cash flows from proved
reserves, the cost of properties not being amortized, the lower of cost or
estimated fair value of unproved properties included in the costs being
amortized, and all related tax effects. At September 30, 2014 and December 31,
2013, the calculated value of the ceiling limitation exceeded the carrying value
of the Company's oil and gas properties subject to the test, and no impairment
was necessary.
-12-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
PROPERTY AND EQUIPMENT
Management capitalizes additions to property and equipment. Expenditures for
repairs and maintenance are charged to expense. Property and equipment are
carried at cost. Adjustment of the asset and the related accumulated
depreciation accounts are made for property and equipment retirements and
disposals, with the resulting gain or loss included in the statement of
operations. The Company has not capitalized any internal costs for the three and
nine months ended September 30, 2014 and 2013, respectively.
Other property and equipment, such as office furniture and equipment, and
computer hardware and software, are recorded at cost. Costs of renewals and
improvements that substantially extend the useful lives of the assets are
capitalized. Maintenance and repair costs are expensed when incurred.
DEPRECIATION
For financial reporting purposes, depreciation and amortization of other
property and equipment is computed using the straight-line method over the
estimated useful lives of assets at acquisition. For income tax reporting
purposes, depreciation of other equipment is computed using the straight-line
and accelerated methods over the estimated useful lives of assets at
acquisition.
Depreciation and depletion of capitalized acquisition, exploration and
development costs are computed on the units-of-production method by individual
fields on the basis of the total estimated units of proved reserves as the
related proved reserves are produced.
Depreciation, depletion and amortization of oil and gas property and other
property and equipment for the three months ended September 30, 2014 and 2013 is
$67,337 and $34,676, respectively and for the nine months ended September 30,
2014 and 2013 is $180,490 and $36,645, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with authoritative guidance on accounting for the impairment or
disposal of long-lived assets, as set forth in Topic 360 of the ASC, the Company
assesses the recoverability of the carrying value of its non-oil and gas
long-lived assets when events occur that indicate an impairment in value may
exist. An impairment loss is indicated if the sum of the expected undiscounted
future net cash flows is less than the carrying amount of the assets. If this
occurs, an impairment loss is recognized for the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. No events
occurred during the three and nine months ended September 30, 2014 and 2013,
respectively that would be indicative of possible impairment.
ASSET RETIREMENT OBLIGATIONS
The Company's asset retirement obligations arise from plugging and abandonment
liabilities for the Company's natural gas and oil wells.
OTHER COMPREHENSIVE LOSS
The Company has no material components of other comprehensive loss and
accordingly, net loss is equal to comprehensive loss for the period.
-13-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
INCOME TAXES
The Company accounts for income taxes under the liability method as prescribed
by ASC authoritative guidance. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted rates expected to be in effect during
the year in which the basis difference reverses. The realizability of deferred
tax assets are evaluated annually and a valuation allowance is provided if it is
more likely than not that the deferred tax assets will not give rise to future
benefits in the Company's income tax returns.
The Company assessed the likelihood of utilization of the deferred tax asset, in
light of the recent losses. As a result of this review, the deferred tax asset
of $1,815,000 has been fully reserved at September 30, 2014. At September 30,
2014, the Company has incurred net operating losses for income tax purposes of
approximately $4,700,000. Such losses may be carried forward and are scheduled
to expire in the year 2033, if not utilized, and may be subject to certain
limitations as provided by the Internal Revenue Code.
The Company has adopted ASC guidance regarding accounting for uncertainty in
income taxes. This guidance clarifies the accounting for income taxes by
prescribing the minimum recognition threshold an income tax position is required
to meet before being recognized in the financial statements and applies to all
income tax positions. Each income tax position is assessed using a two-step
process. A determination is first made as to whether it is more likely than not
that the income tax position will be sustained, based upon technical merits,
upon examination by the taxing authorities. If the income tax position is
expected to meet the more likely than not criteria, the benefit recorded in the
financial statements equals the largest amount that is greater than 50% likely
to be realized upon its ultimate settlement. At September 30, 2014, there were
no uncertain tax positions that required accrual.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net loss available to
common shareholders by the weighted-average number of common shares outstanding
during each period. Diluted net loss per common share is calculated by dividing
the net loss by the weighted-average number of common shares outstanding
including the effect of the Company's potentially dilutive securities. The
Company's potentially dilutive securities consist of options and warrants to
purchase the Company's common stock. Potentially dilutive securities are not
included in the weighted average calculation for net loss per common share since
their effect would be anti-dilutive due to the net loss. The treasury method is
used by the Company to measure the dilutive effect of stock options and
warrants. Since the option price is significantly greater than the current value
of the Company's common stock, management has determined the effective exercise
of the dilutive securities would have no effect on the weighted-average number
of common shares outstanding for the periods presented. Therefore, the basic and
diluted weighted average number of common shares outstanding for net loss from
continuing operations is the same for the periods presented. At September 30,
2014 and 2013, the Company had outstanding 9,720,000 and 5,044,395, respectively
of potentially dilutive options and warrants.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures 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,
and such differences may be material to the financial statements.
-14-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
REVENUE RECOGNITION
The Company recognizes revenue from the exploration and production of the
Company's oil and gas properties in the period of production. Management fee
income is recognized in the period where the Company performs the services as
manager of a limited liability company.
SHARE-BASED COMPENSATION
The Company accounts for share-based payment accruals under authoritative
guidance on stock compensation as set forth in the Topics of the ASC. The
guidance requires all share-based payments to employees and non-employees,
including grants of employee and non-employee stock options and warrants, to be
recognized in the financial statements based on their fair values.
GOING CONCERN AND MANAGEMENTS' PLANS
As shown in the accompanying financial statements for the period ended September
30, 2014, the Company has reported an accumulated deficit of $3,581,001. At
September 30, 2014, the Company has current assets of $754,637, including cash
and cash equivalents of $371,782 and current liabilities of $594,576. The
Company does recognize revenues from the properties it acquired in 2013 and
continues to develop these properties to improve production.
To the extent the Company's operations are not sufficient to fund the Company's
capital and current growth requirements the Company will attempt to raise
capital through the sale of additional equity. At the present time, the Company
cannot provide assurance that it will be able to raise funds through the further
issuance of equity in the Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, however, the above conditions raise
substantial doubt about the Company's ability to do so. The financial statements
do not include any adjustment to reflect the possible future effect on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result should the Company be unable to continue as a
going concern.
OFF-BALANCE SHEET ARRANGEMENTS
As part of its ongoing business, the Company has not participated in
transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities (SPEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. From its incorporation on March 28, 2012 through
September 30, 2014, the Company has not been involved in any unconsolidated SPE
transactions.
RECLASSIFICATION
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period financial statement presentation. Such
reclassifications had no effect on the Company's net loss.
-15-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed all recently issued but not yet effective accounting
pronouncements and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or results of operations.
NOTE 2 - RELATED PARTY TRANSACTIONS
-----------------------------------
ADVANCES PAYABLE - RELATED PARTY
During the nine months ended September 30, 2014, the Company was advanced funds
from affiliates in the amount of $84,635 and at September 30, 2014 owes these
affiliates $311,010 including accrued expenses in the amount of $14,170.
SHARES FOR SERVICES
During the nine months ended September 30, 2013, a member of the Board of
Directors was issued 25,000 shares of the Company's common stock in exchange for
services in the amount of $2,200 or at a fair value of $0.088 per share.
CONSULTING SERVICES
During the nine months ended September 30, 2014, the Company paid an officer and
director $163,170 in fees and during the nine months ended September 30, 2013
the Company paid two of its officers and directors $188,361 in fees as part of
consulting arrangements approved by the Board of Directors.
During the nine months ended June 30, 2013, the Company paid an affiliate of one
of its directors $55,000 in fees as part of a consulting agreement approved by
the Board of Directors.
LIMITED LIABILITY COMPANIES
The Company is the manager of Three Forks No. 1, LLC, a Colorado limited
liability company. See Note 1 - Summary of Significant Accounting Policies
"Nature of Operations and Organization" and Note 9 - Management Agreement.
The Company is the manager of the Three Forks LLC No. 2 and the Company holds an
equity interest of 4.00% in Three Forks LLC No. 2. Three Forks LLC No. 2 has
been organized to fund and develop the proposed drilling of additional wells in
Archer County, Texas. See Note 1 - Summary of Significant Accounting Policies
"Nature of Operations and Organization" and Note 9 - Management Agreement.
Certain officers and members of the Board of Directors of the Company are
members of Tincup Oil and Gas LLC, a Colorado limited liability company and on
March 31, 2014, Tincup Oil and Gas LLC purchased 190,000 two year warrants in
consideration for and cancellation of $190,000 in debt. See Note 10 - Secured
Convertible Promissory Notes.
-16-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
NOTE 3 - NOTE RECEIVABLE
------------------------
In May 2012, the Company loaned Holms Energy Development Corp (HEDC") $100,000
which is evidenced by an unsecured promissory note dated May 30, 2012 whereby
the unpaid principal amount of the promissory note is due and payable on Demand
at any time on or after March 15, 2013 including any and all unpaid and accrued
interest at the rate of four percent (4%) per annum of the outstanding
principal. HEDC may offset the principal amount of the promissory note with any
amounts due from the Company pursuant to the certain Joint Venture Cooperation
and Profit Allocation Agreement between the Company and HEDC dated May 1, 2012
("JV Agreement") as per Note 8. At September 30, 2014 and December 31, 2013, the
Company is owed $100,000 plus accrued interest in the amount of $9,315 and
$6,356, respectively.
NOTE 4 - DISPOSAL GROUP HELD FOR SALE
-------------------------------------
The Company, as part of an agreement dated September 7, 2012, acquired certain
oil and gas mineral interest, including five (5) producing wells, located in
Weld county Colorado. The Company determined that these mineral interests were
considered a Disposal Group Held for Sale as set forth in Topic 205 of the ASC
and therefore, the Company at December 31, 2012 recorded the property as a
separate asset in the amount of $1,472,521 [net of $5,658 in amortization] on
the balance sheet. Effective January 1, 2013, the Company sold these properties
for $1,600,000 in cash. See Note 5 - Discontinued Operations.
In addition and as part of the sale, the purchasers of the property deposited
with the Company $400,000 to be used towards the AFE costs in the drilling of
future oil and gas wells. At September 30, 2014 and December 31, 2013, the
Company owes $400,000 including $209,520 due to a member of the Board of
Directors.
NOTE 5 - DISCONTINUED OPERATIONS
--------------------------------
In January 2013, the Company sold all of its proved oil and gas properties
located in Weld County, CO for $1,600,000 in cash and for the nine months ended
September 30, 2013, the Company recorded a gain of $127,478 on the sale of the
disposal group held for sale. The properties consisted solely of oil and gas
properties that were acquired in 2012.
There were no operations for the three and nine months ended September 30, 2014
and for the three months ended September 30, 2013.
NOTE 6 - ASSET RETIREMENT OBLIGATIONS
-------------------------------------
The property's asset retirement obligations reported as accrued liabilities
arise from the plugging and abandonment liabilities for oil and gas wells. The
Company has determined there is no salvage value associated with the property's
tangible assets at the time the wells are retired. There were no wells retired
during the three and nine months ended September 30, 2014 and the property's
asset retirement obligations at September 30, 2014 are $335,465.
NOTE 7 - INFORMATION ON BUSINESS SEGMENTS
-----------------------------------------
At September 30, 2014, the Company considered its business activities to
constitute a single segment.
-17-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
NOTE 8 - JOINT VENTURE AGREEMENT
--------------------------------
Through September 30, 2014, the Company has paid a total of $163,456 in costs to
drill an oil and gas well in Archer County Texas as part of the JV Agreement
entered into between the Company and Holms Energy Development Corp. The Company
will receive revenues and be responsible for 49% of the costs to drill and
complete each well the Company elects to participate in on such leases that are
part of the JV Agreement.
NOTE 9 - MANAGEMENT AGREEMENTS
------------------------------
THREE FORKS NO. 1, LLC
The Company is the manager of Three Forks No. 1, LLC, a partnership, and as
manager received a fee for the period January 1, 2014 through March 31, 2014 in
the amount of $5,000 per month. The Company received no further fees after March
31, 2014 as Three Forks No. 1 ceased its oil and gas operations. The Company
owns no interest in Three Forks No. 1 but does own an 11% working interest in
the Farmout property as more fully described in Note 1. For the nine months
ended September 30, 2014 and 2013, respectively the Company reported management
fee income in the amount of $47,000 and $0, respectively including $32,000 in
total fees that were due for the months of November and December of 2013.
THREE FORKS LLC NO. 2
The Company is the manager of Three Forks No. 2, a partnership, and as manager
receives a fee beginning April 1, 2014 in the amount of $5,000 per month. The
Company owns a 4.00% equity interest in Three Forks No. 2. For the nine months
ended September 30, 2014 and 2013, respectively the Company reported management
fee income in the amount of $30,000 and $0, respectively.
The Company reports its investment in Three Forks No. 2 under the equity method
of accounting as set forth in Topic 323 of the ASC and therefore at September
30, 2014 its carrying value is $50,000. During the nine months ended September
30, 2014, the Company reported no gain or loss from its investment in Three
Forks No. 2.
NOTE 10 - SECURED PROMISSORY NOTES
----------------------------------
CREDIT FACILITY
On May 9, 2014, the Company closed on a four (4) year Credit Facility with
Guaranty Bank and Trust ("GBT") for a loan commitment up to $50,000,000. This
Credit Facility allows the Company subject to certain terms and conditions to
borrow from the Credit Facility amounts in the form of a note issued by the
Company to GBT. The notes are collateralized by the Company's oil and gas
properties and require that the Company pay interest monthly in arrears on the
unpaid balance of the notes at varying rates but not to exceed 5.0% per annum.
During the nine months ended September 30, 2014, the Company borrowed $1,175,000
from the Credit Facility that was used towards financing costs, working capital,
workover of additional wells acquired from Five JAB and payment in full of
outstanding promissory notes due by the Company totaling $385,000 including
$300,000 owed to the Company's former chief executive officer and current
director. Therefore, at September 30, 2014, the Company owes $1,175,000 on the
debt and during the three and nine months ended September 30, 2014, the Company
paid $19,993 and $27,576, respectively of interest on the debt.
-18-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
SECURED CONVERTIBLE PROMISSORY NOTES
In September 2013, the Company commenced a private offering of $2,000,000 of
Secured Convertible Promissory Notes in order to complete the purchase of the
remaining 37.5% working interest in the Five JAB properties discussed in Note 1.
These promissory notes in the amount of $1,475,000 have a maturity date in
September 2014 including interest at the rate of 10% per annum on the unpaid
balance and are convertible into shares of the Company's common stock in whole
or in part at a conversion price of $3.60 per share 6 months after issuance of
the promissory note. One of the subscribers of this offering is Tincup Oil and
Gas, LLC, which subscribed for a $250,000 promissory note. A director of the
Company is a member of Tincup Oil and Gas, LLC. During the three months ended
March 31, 2014, the holders of promissory notes purchased 1,390,000 of two year
warrants in consideration for and cancellation of $1,390,000 of debt. During the
nine months ended September 30, 2014, the Company paid $85,000 in cash to the
holders of the promissory notes and therefore at September 30, 2014, the Company
has paid in full the debt.
Separately and apart, a former officer and director of the Company, agreed to
make up the difference of the Secured Convertible Promissory Note Offering
towards the purchase price of the Five JAB properties in a separate transaction
under separate terms with the Company. The officer and director in exchange for
secured convertible promissory notes provided the Company each with $300,000 in
cash or a total of $600,000. Their promissory notes had a due date of January 2,
2014 including interest at the rate of 10% per annum on the unpaid balance and
allowed for the conversion of the promissory notes at issuance into common stock
in whole or in part at a conversion price of $3.60 per share. The promissory
notes provided that in addition to having a due date of January 2, 2014 and
stated interest, that at the due date they would each receive an additional
consideration totaling $15,000 in fees. During the three months ended March 31,
2014, the director purchased 300,000 of two year warrants in consideration for
and cancellation of his $300,000 promissory note. During the nine months ended
September 30, 2014, the former officer was paid $300,000 as full payment of his
promissory note. Therefore, at September 30 2014, the Company has paid in full
the debt.
NOTE 11 - SHARE BASED COMPENSATION
----------------------------------
The Company granted to a former officer and current director effective March 5,
2013 and amended March 1, 2014, cashless options to acquire up to 2,250,000
shares of the Company's common stock at an option price of $0.10 per share for a
period of five years from the effective date of the grant. The options are fully
vested. These options are not part of the Company's 2013 Stock Incentive Plan.
2013 STOCK INCENTIVE PLAN
Effective May 1, 2013, the Company's 2013 Stock Option and Award Plan (the "2013
Stock Incentive Plan") was approved by its Board of Directors and shareholders.
Under the 2013 Stock Incentive Plan, the Board of Directors may grant options or
purchase rights to purchase common stock to officers, employees, and other
persons who provide services to the Company or any related company. The
participants to whom awards are granted, the type of awards granted, the number
of shares covered for each award, and the purchase price, conditions and other
terms of each award are determined by the Board of Directors, except that the
term of the options shall not exceed 10 years. A total of 5 million shares of
the Company's common stock are subject to the 2013 Stock Incentive Plan. The
shares issued for the 2013 Stock Incentive Plan may be either treasury or
authorized and unissued shares.
-19-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
The following table summarizes information related to the outstanding and vested
options and warrants at September 30, 2014:
Outstanding and
Vested Options
and Warrants
----------------------
Number of shares
Non-Qualified stock options 5,895,000
2013 Stock Incentive Plan 3,825,000
Weighted average remaining contractual life
Non-Qualified stock options 3.08 years
2013 Stock Incentive Plan 3.10 years
Weighted average exercise price
Non-Qualified stock options $0.50
2013 Stock Incentive Plan $0.40
Number of shares vested
Non-Qualified stock options 5,895,000
2013 Stock Incentive Plan 2,373,790
Aggregate intrinsic value
Non-Qualified stock options $180,492
2013 Stock Incentive Plan $112,569
The aggregate intrinsic value of outstanding securities is the amount by which
the fair value of underlying (common) shares exceeds the amount paid for and the
exercise price of the options issued and outstanding. During the nine months
ended September 30, 2014 and 2013, the Company granted and sold options and
warrants that had a total fair value of $134,434 and $289,758, respectively and
reported $27,407 and $0 as compensation expense for the three months ended
September 30, 2014 and 2013, respectively and $68,779 and $0 as compensation
expense for the nine months ended September 30, 2014 and 2013, respectively in
the statements of operations.
No options or warrants were exercised or expired during the nine months ended
September 30, 2014 and 2013. The fair value of the options and warrants granted
and sold were estimated as of the grant date using the Black-Scholes option
pricing model with the following assumptions:
Volatility 123.60%
Expected Option Term 2-5 years
Risk-free interest rate 11% - 17%
Expected dividend yield 0.00%
-20-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
The expected term of the options and warrants granted and sold were estimated to
be the contractual term. The expected volatility was based on an average of the
volatility disclosed based upon comparable companies who had similar expected
option terms. The risk-free rate was based on the one-year U.S. Treasury bond
rate.
NOTE 12 - STOCKHOLDERS' EQUITY
------------------------------
PREFERRED SHARES
The Company is authorized to issue 25,000,000 shares of no par value preferred
stock. At September 30, 2014 and December 31, 2013, the Company has no preferred
shares issued and outstanding.
COMMON SHARES
The Company is authorized to issue 100,000,000 shares of $0.001 voting common
stock. At September 30, 2014 and December 31, 2013 there were a total of
11,697,677 and 11,681,477 shares of common stock issued and outstanding,
respectively.
During the nine months ended September 30, 2014, the Company, as part of a
private placement, sold 47,867 shares of its common stock for $143,600 or $3.00
per share and issued 25,000 shares of its common stock in exchange for one unit
of membership interest in Three Forks No. 1, LLC valued at $25,000. Also, the
Company sold three year options to acquire 730,000 shares of its common stock at
an exercise price of $1.00 per share in exchange for cash in the amount of
$730,000 and issued three year options to acquire 25,000 shares of its common
stock at an exercise price of $1.00 per share in exchange for one unit of
membership interest in Three Forks LLC No. 2.
During the nine months ended September 30, 2013, as part of a private placement,
the Company sold 859,138 shares of its common stock for cash in the amount of
$2,621,443.
In addition, during the nine months ended September 30, 2013, as described in
Note 2, the Company issued 25,000 shares of its common stock in exchange for
services valued at $2,200 and issued 445,000 shares of its common stock to
consultants in exchange for services valued at $39,160 or $0.088 per share.
REPURCHASE OF COMMON SHARES
During the nine months ended September 30, 2014, the Company entered into a
settlement agreement with a former officer and director to settle certain claims
against the employee and as part of the agreement the Company agreed to
repurchase 40,000 shares of the Company's common stock owned by the employee as
well as personal property valued at $4,202 in exchange for the assumption of a
loan due to Three Forks No. 1, LLC in the amount of $25,000 plus interest in the
amount of $1,701 and as a result the Company realized $4,202 in equity.
During the nine months ended September 30, 2013, the Company entered into a
settlement agreement with one of its employees to settle certain claims against
the employee valued at $22,000 in exchange for the employee returning to the
Company 250,000 shares of their common stock. Also, the Company agreed to
repurchase from the employee 100,000 shares of their common stock in exchange
for $150,000 in cash.
-21-
THREE FORKS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 and 2013
(Unaudited)
In addition, during the nine months ended September 30, 2013, the Company
entered into a repurchase agreement with two of its shareholders, including a
director, to acquire their 275,000 shares of common stock in exchange for cash
of $825,000 of which 83,334 shares of common stock was repurchased from the
director for cash of $250,000 or $3.00 per share.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
OPERATING LEASE
The Company leases office space in Broomfield, Colorado under an operating lease
that allows either party the option to terminate the lease. The Company elected
to terminate the office lease effective November 1, 2014 and thus under the
lease the Company is responsible for the months of November and December 2014.
Therefore, the future minimum payments under the lease at September 30, 2014 are
$15,305. The Company's rent expense for the three and nine months ended
September 30, 2014 and 2013 was $17,847 and $50,999, respectively and $22,662
and $52,239, respectively.
CONSULTING AGREEMENTS
Effective November 1, 2013, the Company entered into a twelve month agreement
with a consultant to perform services at the rate of $200,000 per year under
certain terms and conditions that includes the granting of non-qualified stock
options in exchange for cash of $50,000 to acquire up to 1,000,000 shares of the
Company's common stock at an option price of $.010 per share over a five year
period from the effective date of the grant. The options are fully vested.
The Company entered into a four year agreement effective September 1, 2012 and
amended March 1, 2014 and 2013 with its Chief Executive Officer to perform
services at the base rate of $204,000 per year under certain terms and
conditions. In addition, the CEO shall earn a bonus of one half of one percent
of the net asset increase over the prior year effective for the period beginning
October 1, 2012. The bonus shall be paid every six months and the amount due to
the CEO at September 30, 2014 is $14,170.
EMPLOYMENT AGREEMENT
The Company entered into a three year employment agreement on June 10, 2014 to
become effective July 7, 2014 with its President and Chief Operating Officer
that included among other benefits compensation of a base salary of $8,487 per
month and reimbursement of expenses at no less than $7,876 per month under
certain terms and conditions including cashless options to acquire up to
1,200,000 shares of the Company's common stock at an option price of $0.10 per
share for a period of five years from the effective date of the grant. The
options vest at the rate of 10% upon the effective date of the agreement and
vest ratably over a 3 year vesting period commencing on the effective date of
the agreement. These options are part of the Company's 2013 Stock Incentive
Plan. See Note 14 - Subsequent Events.
NOTE 14 - SUBSEQUENT EVENTS
---------------------------
EMPLOYMENT AGREEMENT
Effective October 31, 2014, the President and Chief Operating Officer resigned
from the Company and under the terms of the employment agreement earned options
to acquire up to 240,000 shares of the Company common stock.
-22-
FINANCIAL STATEMENTS OF FIVE JAB, INC.
(THE PREDECESSOR) (UNAUDITED)
-23-
FIVE JAB, INC.
BALANCE SHEET
September 1, 2013
(Audited)
-------------------
ASSETS
Current Assets $ -
-------------------
Total assets $ -
===================
LIABILITIES AND CAPITAL
Current liabilities $ -
Total liabilities -
Commitments and contingencies -
Capital -
-------------------
Total liabilities and capital $ -
===================
See accompanying notes are an integral part of these financial statements.
-24-
FIVE JAB, INC. (THE PREDECESSOR)
STATEMENT OF OPERATIONS
For the Three For the Nine
Months Ended Months Ended
September 30, 2013 September 30, 2013
(Unaudited) (Unaudited)
------------------ -------------------
Revenue:
Oil and gas sales $ 347,704 $ 1,664,076
------------------ -------------------
Total revenues 347,704 1,664,076
------------------ -------------------
Operating expenses:
Lease operating expense 111,740 540,171
Production taxes 16,338 80,602
General and administrative expense 36,563 84,938
Depreciation, depletion and amortization 7,970 81,080
------------------ -------------------
Total operating expenses 172,611 786,791
------------------ -------------------
Income from operations 175,093 877,285
Other Income
Gain on sale of oil and gas properties 1,244,904 2,277,453
------------------ -------------------
Total other income 1,244,904 2,277,453
Income before income taxes 1,419,997 3,154,738
Income taxes - -
------------------ -------------------
Net income $ 1,419,997 $ 3,154,738
================== ===================
See accompanying notes are an integral part of these financial statements.
-25-
FIVE JAB, INC. (THE PREDECESSOR)
STATEMENT OF CASH FLOWS
For the Nine
Months Ended
September 30, 2013
(Unaudited)
-------------------
OPERATING ACTIVITIES
Net income attributable to owners $ 3,154,738
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation, depletion and amortization 81,080
Gain on sale of oil and gas properties (2,277,453)
-------------------
Net cash provided by operating activities 958,365
-------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (378,090)
Proceeds from sale of oil and gas properties 2,100,000
-------------------
Net cash provided by investing activities 1,721,910
-------------------
FINANCING ACTIVITIES
Distributions to owners (2,680,275)
-------------------
Net cash (used in) by financing activities (2,680,275)
-------------------
NET CHANGE IN CASH -
CASH, Beginning -
-------------------
CASH, Ending $ -
===================
SUPPLEMENTAL SCHEDULE OF
OF CASH FLOW INFORMATION
Interest paid $ -
===================
Income taxes paid $ -
===================
The accompanying notes are an integral part of these financial statements.
-26-
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
This summary of significant accounting policies is presented to assist in
understanding the Business's financial statements. The policies conform to
accounting principles generally accepted in the United States of America and
have been consistently applied in the preparation of these financial statements.
NATURE OF OPERATIONS AND ORGANIZATION
Five JAB, Inc. ("Five JAB"), an operator of oil and gas properties, and a number
of other owners own 75% of the working interest in certain leases located in the
states of Texas and Louisiana (the "Business" or "Five JAB, Inc."). These leases
are held by production leaseholds only and include 11 producing crude oil wells
and one well that also produced natural gas (the "Properties"). In addition, all
of the wells were purchased by the Business and therefore there are no drilling
costs incurred by the Business.
The Business sold 100% of its 75% working interest in the Properties to Three
Forks, Inc. effective June 30, 2013 (37.5% WI) and effective September 1, 2013
(37.5% WI) for $3,842,143 in cash plus the assumption of certain liabilities in
the amount of $281,962.
BASIS OF PRESENTATION
These financial statements represent the historical costs of the Business based
upon generally accepted accounting principles for the periods presented.
INCOME TAXES
The Business is taxed as a disregarded entity for income tax purposes and as
such each of the owners report separately their pro rata share of income,
deductions and losses. Therefore, no provision for income taxes is made in the
accompanying financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses as of and during the reporting
periods. These estimates and assumptions are based on management's best
estimates and judgment. Management evaluates its estimates and assumptions on an
ongoing basis using historical experience and other factors, including the
current economic environment, which management believes to be reasonable under
the circumstances. Such estimates and assumptions are adjusted when facts and
circumstances dictate. As future events and their effects cannot be determined
with precision, actual results could differ from these estimates. Any change in
estimates resulting from continuous changes in the economic environment will be
reflected in the financial statements in the future periods.
REVENUE RECOGNITION
Revenues are recognized on production as it is taken and delivered to the
purchasers and payment is made to the Business.
PROPERTY AND EQUIPMENT
The Business accounts for its crude oil and natural gas exploration and
development activities under the successful efforts method of accounting. Under
such method, costs of productive exploratory wells, development dry holes and
productive wells and undeveloped leases are capitalized. Oil and gas lease
-27-
acquisition costs are also capitalized. Exploration costs and certain geological
or geophysical expenses charged to expense as incurred. Exploratory drilling
costs are initially capitalized, but evaluated quarterly and charged to expense
if and when the well is determined not to have found reserves in commercial
quantities. The sale of a partial interest in a proved property is accounted for
as a cost recovery and no gain or loss is recognized as long as this treatment
does not significantly affect the units-of-production amortization rate. A gain
or loss is recognized for all other sale of producing properties.
Unproved properties with significant acquisition costs are assessed quarterly on
a property-by-property basis and any impairment in value is charged to expense.
If the unproved properties are determined to be productive, the related costs
are transferred to proved oil and gas properties. Proceeds from sales of partial
interests in unproved leases are accounted for as a recovery of costs without
recognizing any gain or loss until all costs have been recovered. There are no
unproved properties at September 1, 2013.
Depletion and amortization of capitalized acquisition, exploration and
development costs are computed on the units-of-production method by property on
the basis of total estimated units of proved reserves as the related proved
reserves are produced. The long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of the asset exceeds the estimated future cash flows, an
impairment charged is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset. No impairment was recognized at
September 1, 2013.
Other property and equipment are carried at cost. Depreciation is provided using
the straight-line method of accounting over the assets' estimated useful lives
of seven years.
Depreciation, depletion and amortization of oil and gas properties and other
property and equipment for the three and nine months ended September 30, 2013
was $7,970 and $81,080, respectively.
OTHER COMPREHENSIVE INCOME
The Company has no material components of other comprehensive income and
accordingly, net income is equal to comprehensive income for the periods
presented.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed all recently issued but not yet effective accounting
pronouncements and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or results of operations.
SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the financial
statements were available to be issued, and has concluded no events need to be
reported.
NOTE 2 - INFORMATION ON BUSINESS SEGMENTS
-----------------------------------------
At September 1, 2013, the Company considered its business activities to
constitute a single segment.
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED HEREIN. IN CONNECTION WITH, AND
BECAUSE WE DESIRE TO TAKE ADVANTAGE OF, THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WE CAUTION READERS REGARDING
CERTAIN FORWARD LOOKING STATEMENTS IN THE FOLLOWING DISCUSSION AND ELSEWHERE IN
THIS REPORT AND IN ANY OTHER STATEMENT MADE BY, OR ON OUR BEHALF, WHETHER OR NOT
IN FUTURE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. FORWARD-LOOKING
STATEMENTS ARE STATEMENTS NOT BASED ON HISTORICAL INFORMATION AND WHICH RELATE
TO FUTURE OPERATIONS, STRATEGIES, FINANCIAL RESULTS OR OTHER DEVELOPMENTS.
FORWARD LOOKING STATEMENTS ARE NECESSARILY BASED UPON ESTIMATES AND ASSUMPTIONS
THAT ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR CONTROL AND MANY
OF WHICH, WITH RESPECT TO FUTURE BUSINESS DECISIONS, ARE SUBJECT TO CHANGE.
THESE UNCERTAINTIES AND CONTINGENCIES CAN AFFECT ACTUAL RESULTS AND COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD LOOKING
STATEMENTS MADE BY, OR ON OUR BEHALF. WE DISCLAIM ANY OBLIGATION TO UPDATE
FORWARD-LOOKING STATEMENTS.
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT ON THE COMPANY'S
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2013 AND FOR THE YEAR THEN ENDED
INCLUDES A "GOING CONCERN" EXPLANATORY PARAGRAPH, THAT DESCRIBES SUBSTANTIAL
DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN.
PLAN OF OPERATIONS
Three Forks is focused on the development of its business plan as an independent
energy company engaged in the acquisition, exploration, development and
production of North American conventional oil and gas properties through the
acquisition of leases and/or royalty interests.
PROJECTS
At present, our oil and gas projects consist of:
- In Archer County, Texas, we are a 49% working interest ("WI") owner in
a joint venture agreement where the joint venture has drilled and
completed one well.
- In Archer County, Texas, we have a 33.25 % WI through a Farmout in 290
net, 320 gross acres with 5 wells. During the nine months ended
September 30, 2014, Three Forks No. 1, LLC effectively transferred its
working interest in the Farmout acreage to Three Forks LLC No. 2 which
is managed by Three Forks, Inc.
- In Pottawatomie County, Oklahoma, we have a 25% WI in 290/290
net/gross acres upon which two wells have been drilled and put into
production. In Seminole County, Oklahoma we also have two wells in
which we have a 25% WI on a lease containing 160/160 net/gross acres.
- The Five JAB project is located in Southeast Texas - Southwest
Louisiana where we have a non-operated 75% WI in 13 producing wells, 9
service wells and 14 additional wellbores.
- In Weld County, Colorado, we have a 67.125% WI through a Farmout in
107 net, 160 gross acres with 5 wells.
-29-
OPERATIONS
The Company has closed its Broomfield, Colorado office and has no employees as
of November 1, 2014. The Company is being operated through its Board of
Directors and an independent consultant who performs various administrative and
accounting functions. At the present time, the Company has no specific plans on
the drilling of any additional prospects and the Company's existing producing
wells are being operated by Five JAB, Inc., who is an operator out of Texas.
CAPITAL PLANS
We previously conducted a private offering of our restricted common stock for
capital and, as a result, from March 28, 2012 (inception) through November 8,
2014, the Company sold approximately 5,500,000 shares of its common stock,
raising a total of approximately $5,000,000.
We sold options to acquire shares of our Company common stock and thus from
March 28, 2012 (inception) through November 8, 2014, the Company granted options
to acquire 980,000 shares of the common stock at an exercise price of $1.00 per
share in exchange for cash of $980,000.
In September 2013, we held a private offering of $2,000,000 Secured Convertible
Promissory Notes in order to complete the purchase of the remaining 37.5% WI in
the Five JAB's property discussed elsewhere in this filing. These notes were due
in September 2014 and were convertible into shares of our common stock in whole
or in part at a conversion price of $3.60 per share 6 months after issuance of
the secured convertible promissory note. The Secured Convertible Promissory
Notes are secured by the Company's 75% of the right, title and working interest
in 1,955 gross leasehold acres including 13 producing wells, 9 service wells and
14 additional wellbores located in the States of Texas and Louisiana, the Five
JABS properties. The offering was not fully subscribed and a total of $1,535,000
was raised. Tincup Oil and Gas, LLC of which Mr. Ranew, a director of the
Company, is a member, holds a Secured Convertible Promissory Note for $250,000.
During the nine months ended September 30, 2014, holders of the above promissory
notes purchased 1,390,000 warrants issued by the Company in consideration for
and cancellation of their promissory notes issued to them by the Company in the
amount of $1,390,000 and in addition, the Company paid $145,000 in cash on the
debt. A warrant entitles the holder for a term of two years to purchase one
share of common stock of the Company at the rate of $1.00 per share. Therefore,
at September 30, 2014, the Company has paid in full the debt.
Separately and apart, two members of management agreed to make up the difference
of the Secured Convertible Promissory Note Offering and the purchase price of
Five JABS in a separate transaction with separate terms with the Company. Mr.
Charles Pollard and Mr. Lester Ranew, directors of the Company, in exchange for
secured convertible promissory notes provided the Company with a total of
$600,000 cash ($300,000 each). At December 31, 2013, the Company owed a total of
$600,000 to Mr. Pollard and Mr. Ranew. Their promissory notes had a due date of
January 2, 2014 including interest at the rate of 10% per annum on the unpaid
balance and allowed for the conversion of the promissory notes at issuance into
common stock in whole or in part at a conversion price of $3.60 per share. The
promissory notes provide that in addition to having a due date of January 2,
2014 and stated interest, that at the due date they would each receive an
additional consideration totaling $15,000 in fees. During the three months ended
March 31, 2014, Mr. Ranew purchased 300,000 of two year warrants in
consideration for and cancellation of his $300,000 promissory note. During the
nine months ended September 30, 2014, Mr. Pollard was paid $300,000 as full
payment of his promissory note. Therefore, at September 30 2014, the Company has
paid in full the debt.
-30-
On May 9, 2014, the Company closed on a four (4) year Credit Facility with
Guaranty Bank and Trust ("GBT") for a loan commitment up to $50,000,000. This
Credit Facility allows the Company subject to certain terms and conditions to
borrow from the Credit Facility amounts in the form of a note issued by the
Company to GBT. The notes are collateralized by the Company's oil and gas
properties and require that the Company pay interest monthly in arrears on the
unpaid balance of the notes at varying rates but not to exceed 5.0% per annum.
During the nine months ended September 30, 2014, the Company borrowed $1,175,000
from the Credit Facility that was used towards financing costs, working capital,
workover of additional wells acquired from Five JAB and payment in full of
outstanding promissory notes due by the Company totaling $385,000 including
$300,000 owed to Mr. Pollard. Therefore, at September 30, 2014, the Company owes
$1,175,000 on the debt and during the three and nine months ended September 30,
2014, the Company paid $19,993 and $27,576, respectively of interest on the
debt.
Based on our current cash reserves of $371,782 at September 30, 2014 and the
closing of our office including the corporate and administrative operations, we
have sufficient cash for the remainder of 2014 and the first part of 2015. We
had recognized minimal revenues from our operational activities during the year
ended December 31, 2013. During the nine months ended September 30, 2014, we
recognized revenues of $1,510,468 from oil and gas sales and expect to recognize
revenues from our oil and gas activities during the foreseeable future.
MANAGEMENT
The current Board is in negotiations with a group to bring in new equity capital
that would allow for the retirement of the existing Credit Facility with GBT,
change in the membership of the current Board, addition of new management to
operate the Company and additional funds to drill existing and potentially new
wells. Based upon our current plans to retain our existing producing wells and
no additional drilling activity, we have no borrowing capacity under our current
Credit Facility with Guaranty Bank and Trust. The Company can make no assurance
or representation that new equity capital will be available or that any
negotiations will be successful.
FIVE JAB, INC.
In June 2013, we acquired 37.5% WI and the remaining 37.5% WI effective
September 1, 2013 for a total of 75% WI in 27 producing/9 service wells in Texas
and Louisiana currently operated by Five JAB, Inc. out of Tomball, Texas, in
exchange for $3,869,497 in cash plus the assumption of liabilities in the amount
of $281,962. The remaining 25% WI is owned by Five JAB, Inc. and other
non-affiliated owners. The properties currently produce 100 BOPD and 50 MCFPD.
The purchase included working interests in 13 producing wells, 9 service wells
and 14 additional wellbores, which are spread across Montgomery, Jasper and
Tyler Counties in Texas and the Evangeline and St. Mary Parishes in Louisiana.
Geologically, these wells are located in the Gulf Coast Upper
Jurassic-Cretaceous-Tertiary province. This province extends on shore and off
shore in the states of Texas, Louisiana, Mississippi and Florida. The multiple
conventional pays make up the geological success of the area. The Five JAB
properties are all located onshore.
Workovers were initiated in September of 2013 and three were completed in 2013.
Another 3 workovers were completed during the first nine months of 2014.
The Company's acquisition of the 75% working interest in the Five JAB properties
was accounted for as an acquisition for accounting purposes. However, the oil
and gas operations of Five JAB prior to the effective dates of the acquisition
were considered to be the oil and gas operations of the Company's predecessor
-31-
and therefore, a set of financial statements have been reported separately in
this Form 10-Q and a separate discussion of the their operations will follow the
discussion of the Company's result of operations and liquidity.
RESULTS OF OPERATIONS OF THREE FORKS, INC.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2013
During the three months ended September 30, 2014, the Company recognized
$575,855 in revenue from its operational activities comprised of $560,855 from
the sale of oil and gas and $15,000 from management fees. The $560,855 in sales
was a result of the sale of 5,939 barrels of oil at an average price of $94 per
barrel and 267 MCF of gas at an average price of $5.24 per MCF. During the three
months ended September 30, 2013, the Company recognized $282,058 in revenues
from its operational activities comprised of $234,058 from the sale of oil and
gas and $48,000 form management fees. The $234,058 in sales was a result of the
sale of 2,463 barrels of oil at an average price of $95 per barrel and 326 MCF
of gas at an average price of $5.68 per MCF. The increase in oil and gas sales
of $326,797 was due predominantly to the increased operational activities as
discussed above.
During the three months ended September 30, 2014, the Company incurred operating
expenses of $731,489 as compared to the three months ended September 30, 2013 of
$666,909. The increase of $64,580 was primarily a result of the Company's
increased operational activities due to the acquisition of certain properties,
discussed above, and the Company's focus on filing registration statements with
the SEC.
During the three months ended September 30, 2014, the Company recognized the
following operating expenses:
Three Months Ended
September 30, 2014
-------------------------
Operating Expense:
Lease operating expenses $ 228,068
Production taxes 39,365
Depreciation, depletion and amortization 67,337
General and administrative expenses 396,719
-------------------------
Total Operating Expenses: $ 731,489
Of the $396,719 in general and administrative expenses incurred during the three
months ended September 30, 2014, include expenses related to the Company filing
as a public reporting company that are comprised of legal, auditing and
accounting professional fees as well as other consulting and investor relations
fees.
During the three months ended September 30, 2014, the Company recognized a net
loss of $174,758 as compared to a net loss of $388,687 during the three months
ended September 30, 2013. The decrease of $213,929 was a direct result of the
$64,580 increase in operating expenses discussed above, offset by the increase
in revenues of $293,797 and an increase in other expense of $15,288.
-32-
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2013
During the nine months ended September 30, 2014, the Company recognized
$1,587,468 in revenue from its operational activities comprised of $1,510,468
from the sale of oil and gas and $77,000 from management fees. The $1,510,468 in
sales was a result of the sale of 15,045 barrels of oil at an average price of
$100 per barrel and 5,056 MCF of gas at an average price of $4.12 per MCF.
During the nine months ended September 30, 2013, the Company recognized $346,058
in revenues from its operational activities comprised of $234,058 from the sale
of oil and gas and $112,000 form management fees. The $234,058 in sales was a
result of the sale of 2,463 barrels of oil at an average price of $95 per barrel
and 326 MCF of gas at an average price of $5.68 per MCF. The increase in oil and
gas sales of $1,276,410 was due predominantly to the increased operational
activities as discussed above.
During the nine months ended September 30, 2014, the Company incurred operating
expenses of $2,588,833 as compared to the nine months ended September 30, 2013
of $1,612,260. The increase of $976,573 was primarily a result of the Company's
increased operational activities due to the acquisition of certain properties,
discussed above, and the Company's completion of registration statements and
current reports with the SEC.
During the nine months ended September 30, 2014, the Company recognized the
following operating expenses:
Nine Months Ended
September 30, 2014
-------------------------
Operating Expense:
Lease operating expenses $ 779,296
Production taxes 85,472
Depreciation, depletion and amortization 180,490
General and administrative expenses 1,543,575
-------------------------
Total Operating Expenses: $ 2,588,833
Of the $1,543,575 in general and administrative expenses incurred during the
nine months ended September 30, 2014, include expenses related to the Company
filing as a public reporting company that are comprised of legal, auditing and
accounting professional fees as well as other consulting and investor relations
fees.
During the nine months ended September 30, 2014, the Company recognized a net
loss of $1,072,509 as compared to a net loss of $1,118,547 during the nine
months ended September 30, 2013. The decrease of $46,038 was a direct result of
the $976,573 increase in operating expenses discussed above, offset by the
increase in revenues of $1,241,410 and an increase in other expense of $91,321
along with a decrease in a gain of $127,478 on the disposal of property from
discontinued operations.
LIQUIDITY OF THREE FORKS, INC.
At September 30, 2014, the Company had total current assets of $754,637 and
total current liabilities of $594,576 resulting in working capital of $160,061.
During the nine months ended September 30, 2014, the Company used $1,040,160 in
funds towards its operational activities. The Company recognized a net loss of
$1,072,509 which was adjusted for such non-cash items as $180,490 in
depreciation, depletion and amortization, $68,779 in stock based compensation
and $4,202 from settlement of claims. During the nine months ended September 30,
-33-
2013, the Company used $880,912 in funds toward its operational activities. The
Company recognized a net loss of $1,246,025 which was adjusted for the non-cash
items as $36,645 in depreciation, depletion and amortization, $22,000 gain on
the settlement of claims, $127,478 gain on the sale of disposal group held for
sale and $41,360 in shares issued for services.
During the nine months ended September 30, 2014, the Company used $348,333 in
its investing activities comprised of net additions to property and equipment.
During the nine months ended September 30, 2013, the Company used $1,382,436 in
its investing activities comprised of the proceeds from the sale of disposal
group held for sale in the amount of $1,600,000 net of additions to property and
equipment in the amount of $2,976,228 and additions to other long-term assets in
the amount of $6,208.
During the nine months ended September 30 2014, the Company was provided
$1,639,101 from its financing activities comprised of sale of common shares in
the amount of $143,600, sale of options in the amount of $730,000, funds from
credit facility of $1,175,000 net of repayment of debt in the amount of
$409,500. During the nine months ended September 30, 2013, the Company was
provided $3,803,798 from its financing activities comprised of sale of common
shares in the amount of $2,621,443 net of funds used to repurchase common shares
in the amount of $975,000, funds from the issuance of short-term convertible
notes in the amount of $2,135,000 and funds from the issuance of short-term
notes, net of repayment in the amount of $22,355.
FINANCING ACTIVITIES
COMMON STOCK OFFERINGS
During the nine months ended September 30, 2014, as part of a private placement,
the Company sold 47,687 shares of its common stock for cash in the amount of
$143,600. During the nine months ended September 30, 2013, the Company as part
of a private placement, the Company sold 859,138 shares of its common stock for
cash in the amount of $2,621,443 or from $1.50 to $3.00 per share.
SALE OF OPTIONS
During the nine months ended September 30, 2014, the Company sold options to
acquire 730,000 shares of its common stock at an exercise price of $1.00 per
share in exchange for cash in the amount of $730,000.
REPURCHASE COMMON SHARES
During the nine months ended September 30, 2014, the Company entered into a
settlement agreement with a former officer and director to settle certain claims
against the employee and as part of the agreement the Company agreed to
repurchase 40,000 shares of the Company's common stock owned by the employee as
well as personal property valued at $4,202 in exchange for the assumption of a
loan due to Three Forks No. 1, LLC in the amount of $25,000 plus interest in the
amount of $1,701 and as a result the Company realized $4,202 in equity.
During the nine months ended September 30, 2013, the Company entered into a
settlement agreement with one of its employees to settle certain claims against
the employee valued at $22,000 in exchange for the employee returning to the
Company 250,000 shares of their common stock. Also, the Company agreed to
repurchase from the employee 100,000 shares of their common stock in exchange
for $150,000 in cash.
-34-
In addition, during the nine months ended September 30, 2013, the Company
entered into a repurchase agreement with two of its shareholders, including a
director, to acquire their 275,000 shares of common stock in exchange for cash
of $825,000 of which 83,334 shares of common stock was repurchased from the
director for cash of $250,000 or $3.00 per share.
CAPITAL RESOURCES
Depending upon the Company's financial capabilities, decisions regarding future
participation in exploration wells or geophysical studies or other activities
will be made on a case-by-case basis. The Company may, in any particular case,
decide to participate or decline participation. If participating, we may pay our
proportionate share of costs to maintain the Company's proportionate interest
through cash flow or debt or equity financing. If participation is declined, the
Company may elect to farmout, non-consent, sell or otherwise negotiate a method
of cost sharing in order to maintain some continuing interest in the prospect.
To assist in funding, the Company procured a Credit Facility through Guaranty
Bank and Trust during the second quarter of 2014 that allowed the Company to
meet its needs to pay for participation, investigation, exploration and
acquisition of oil and gas properties as well as working capital. The Company
has the ability to sell its own common stock as well as options to acquire
common stock of the Company. However, we can make no assurance or representation
that funds will be available from the sale of equity or its Credit Facility to
carry out a business plan.
CRITICAL ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE
Accounts receivable are stated at their cost less any allowance for doubtful
accounts. The allowance for doubtful accounts is based on the management's
assessment of the collectability of specific customer accounts and the aging of
the accounts receivable. If there is deterioration in a major customer's
creditworthiness or if actual defaults are higher than the historical
experience, the management's estimates of the recoverability of amounts due to
the Company could be adversely affected. Based on the management's assessment,
there is no reserve recorded at September 30, 2014 and December 31, 2014.
REVENUE RECOGNITION
The Company recognizes revenue from the exploration and production of the
Company's oil and gas properties in the period of production. Management fee
income is recognized in the period where the Company performs the services as
manager of a limited liability company.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil and natural gas
operations. Under this method all productive and nonproductive costs incurred in
connection with the acquisition, exploration, and development of oil and natural
gas reserves are capitalized. No gains or losses are recognized upon the sale or
other disposition of oil and natural gas properties except in transactions that
would significantly alter the relationship between capitalized costs and proved
reserves. Unproved properties with significant acquisition costs are assessed
annually on a property-by-property basis and any impairment in value is charged
to expense. If the unproved properties are determined to be productive, the
related costs are transferred to proved oil and natural gas properties and are
depleted. Proceeds from sales of partial interests in unproved leases are
accounted for as a recovery of cost without recognizing any gain or loss until
all costs have been recovered. The costs of unproved oil and natural gas
-35-
properties are excluded from the amortizable base until the time that either
proven reserves are found or it has been determined that such properties are
impaired. As properties become proved, the related costs transfer to proved oil
and natural gas properties using full cost accounting. There were capitalized
costs of $5,982,044 and $5,614,987 included in the amortization base at
September 30, 2014 and December 31, 2013, respectively and the Company did not
expense any capitalized costs for the three and nine months ended September 30,
2014 and 2013.
The Company performs a quarterly "ceiling test" calculation to test its oil and
gas properties for possible impairment. The primary components impacting this
calculation are commodity prices, reserve quantities added and produced, overall
exploration and development costs, depletion expense, and tax effects. If the
net capitalized cost of the Company's oil and gas properties subject to
amortization (the carrying value) exceeds the ceiling limitation, the excess
would be charged to expense. The ceiling limitation is equal to the sum of the
present value discounted at 10% of estimated future net cash flows from proved
reserves, the cost of properties not being amortized, the lower of cost or
estimated fair value of unproved properties included in the costs being
amortized, and all related tax effects. At September 30, 2014 and December 31,
2013, the calculated value of the ceiling limitation exceeded the carrying value
of the Company's oil and gas properties subject to the test, and no impairment
was necessary.
Management capitalizes additions to property and equipment. Expenditures for
repairs and maintenance are charged to expense. Property and equipment are
carried at cost. Adjustment of the asset and the related accumulated
depreciation accounts are made for property and equipment retirements and
disposals, with the resulting gain or loss included in the statement of
operations. The Company has not capitalized any internal costs for the three and
nine months ended September 30, 2014 and 2013.
Other property and equipment, such as office furniture and equipment, and
computer hardware and software, are recorded at cost. Costs of renewals and
improvements that substantially extend the useful lives of the assets are
capitalized. Maintenance and repair costs are expensed when incurred.
For financial reporting purposes, depreciation and amortization of other
property and equipment is computed using the straight-line method over the
estimated useful lives of assets at acquisition. For income tax reporting
purposes, depreciation of other equipment is computed using the straight-line
and accelerated methods over the estimated useful lives of assets at
acquisition.
Depreciation and depletion of capitalized acquisition, exploration and
development costs are computed on the units-of-production method by individual
fields on the basis of the total estimated units of proved reserves as the
related proved reserves are produced.
Depreciation, depletion and amortization of oil and gas property and other
property and equipment for the three months ended September 30, 2014 and 2013 is
$67,337 and $34,676, respectively and for the nine months ended September 30,
2014 and 2013 is $180,490 and $36,645, respectively.
SHARE-BASED COMPENSATION
The Company accounts for share-based payment accruals under authoritative
guidance on stock compensation as set forth in the Topics of the ASC. The
guidance requires all share-based payments to employees and non-employees,
including grants of employee and non-employee stock options and warrants, to be
recognized in the financial statements based on their fair values.
-36-
RESULTS OF OPERATIONS OF FIVE JAB, INC.
During the three months ended September 30, 2013, Five JAB, Inc. recognized
revenues of $347,704 from oil and gas sales and incurred operating expenses of
$172,611 comprised of $111,740 of lease operating expense, $16,338 of production
taxes, $36,563 of general and administrative expense and $7,970 of depreciation,
depletion and amortization expense. During the three months ended September 30,
2013, Five JAB, Inc. recognized gain on the sale of oil and gas properties of
$1,244,904. During the three months ended September 30, 2013, Five JAB, Inc.
recognized net income of $1,419,997.
During the nine months ended September 30, 2013, Five JAB, Inc. recognized
revenues of $1,664,076 from oil and gas sales and incurred operating expenses of
$540,171 comprised of $540,171 of lease operating expense, $80,602 of production
taxes, $84,938 of general and administrative expense and $81,080 of
depreciation, depletion and amortization expense. During the nine months ended
September 30, 2013, Five JAB, Inc. recognized gain on the sale of oil and gas
properties of $2,277,453. During the nine months ended September 30, 2013, Five
JAB, Inc. recognized net income of $3,154,738.
LIQUIDITY OF FIVE JAB, INC.
At September 1, 2013, Five JAB, Inc. had no assets or liabilities.
During the nine months ended September 30, 2013, Five JAB, Inc. was provided
funds of $958,453 from its operating activities, was provided funds of
$1,721,910 from its investment activities and used funds of $2,680,275 from its
financing activities.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) and that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Financial Officer (Principal
Executive Officer and Principal Financial Officer), as appropriate, to allow for
timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), our Chief Financial Officer carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation and the evaluation
conducted at March 31, 2014, our Chief Financial Officer has concluded that our
disclosure controls and procedures are not effective in timely alerting them to
material information required to be included in our periodic SEC filings and to
ensure that information required to be disclosed in our periodic SEC filings is
accumulated and communicated to our management, including our Chief Financial
Officer, to allow timely decisions regarding required disclosure.
-37-
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the company in accordance
with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The
Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company's internal control over
financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
Company's assets;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that the Company's
receipts and expenditures are being made only in accordance with
authorizations of the Company's management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's financial
statements.
We have identified certain material weaknesses in internal control over
financial reporting relating to a shortage of accounting and reporting personnel
due to limited financial resources and the size of our Company, as detailed
below:
(1) The Company currently does not have, but is in the process of
developing formally documented accounting policies and procedures,
which includes establishing a well-defined process for financial
reporting.
(2) As is the case with many companies of similar size, we currently lack
segregation of duties in the accounting department. Until our
operations expand and additional cash flow is generated from
operations, a complete segregation of duties within our accounting
function will not be possible.
Considering the nature and extent of our current operations and any risks or
errors in financial reporting under current operations and the fact that we have
been a small business with limited employees, such items caused a weakness in
internal controls involving the areas disclosed above.
We have concluded that our internal controls over financial reporting were
ineffective at September 30, 2014 due to the existence of the material
weaknesses noted above that we have yet to fully remediate.
There was no change in our internal control over financial reporting that
occurred during the fiscal quarter ended September 30, 2014 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
-38-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
None.
ITEM 1A. RISK FACTORS
---------------------
Not Applicable to Smaller Reporting Companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-------------------------------------------------------------------
During the period of July 1, 2014 through September 30, 2014, the Company made
the following issuances of its equity securities.
------------ ------------------- ------------- ------------- -------------------
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------ ------------------- ------------- ------------- -------------------
July 2014 Common Shares 2,000 $6,000 Business Associates
------------ ------------------- ------------- ------------- -------------------
EXEMPTION FROM REGISTRATION CLAIMED
All of the above sales by the Company of its unregistered securities were made
by the Company in reliance upon Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). All of the individuals
and/or entities that purchased the unregistered securities were primarily
existing shareholders, known to the Company and its management, through
pre-existing business relationships, as long standing business associates and
employees. All purchasers were provided access to all material information,
which they requested, and all information necessary to verify such information
and were afforded access to management of the Company in connection with their
purchases. All purchasers of the unregistered securities acquired such
securities for investment and not with a view toward distribution, acknowledging
such intent to the Company. All certificates or agreements representing such
securities that were issued contained restrictive legends, prohibiting further
transfer of the certificates or agreements representing such securities, without
such securities either being first registered or otherwise exempt from
registration in any further resale or disposition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------
None.
ITEM 4. MINE SAFETY DISCLOSURE
------------------------------
Not Applicable.
ITEM 5. OTHER INFORMATION
-------------------------
None.
-39-
ITEM 6. EXHIBITS
----------------
EXHIBITS. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31.1 Certification of Chief Executive and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
Exhibit 32.1 Certification of Principal Executive and Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
Exhibit 101.INS XBRL Instance Document
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document (1)
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (1)
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (1)
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document (1)
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1)
--------------------
(1) Pursuant to Rule 406T of Regulation S-T, this interactive data file is
deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed
not filed for purposes of Section 18 of the Securities Exchange Act of
1934, and otherwise is not subject to liability under these sections.
-40-
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THREE FORKS, INC.
-------------------------------------------
(REGISTRANT)
Dated: November 14, 2014 By: /s/ W. Edward Nichols
----------------------------------
W. Edward Nichols,
(Chief Executive Officer &
Principal Accounting Officer)
-41
