SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 6 Months Ended |
Jun. 30, 2014 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract] | ' |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ' |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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NATURE OF OPERATIONS AND ORGANIZATION |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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CONCENTRATION OF CREDIT RISK |
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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. |
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CASH AND CASH EQUIVALENTS |
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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. |
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ACCOUNTS RECEIVABLE |
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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 June 30, 2014 and December 31, 2013. |
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OIL AND GAS ACTIVITIES |
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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 $6,307,129 and $5,614,987 included in the amortization base at June 30, |
2014 and December 31, 2013, respectively and the Company did not expense any |
capitalized costs for the three and six months ended June 30, 2014 and 2013, |
respectively. |
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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 June 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. |
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PROPERTY AND EQUIPMENT |
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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 |
six months ended June 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. |
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DEPRECIATION |
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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. |
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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. |
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Depreciation, depletion and amortization of oil and gas property and other |
property and equipment for the three months ended June 30, 2014 and 2013 is |
$56,895 and $1,137, respectively and for the six months ended June 30, 2014 and |
2013 is $113,154 and $1,970, respectively. |
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IMPAIRMENT OF LONG-LIVED ASSETS |
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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 six months ended June 30, 2014 and 2013, |
respectively that would be indicative of possible impairment. |
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ASSET RETIREMENT OBLIGATIONS |
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The Company's asset retirement obligations arise from plugging and abandonment |
liabilities for the Company's natural gas and oil wells. |
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OTHER COMPREHENSIVE (LOSS) |
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The Company has no material components of other comprehensive loss and |
accordingly, net loss is equal to comprehensive loss for the period. |
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INCOME TAXES |
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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. |
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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 $1,830,809 has been fully reserved at June 30, 2014. At June 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. |
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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 June 30, 2014, there were no |
uncertain tax positions that required accrual. |
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EARNINGS PER SHARE |
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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 June 30, 2014 |
and 2013, the Company had outstanding 8,520,000 and 4,175,000, respectively of |
potentially dilutive options and warrants. |
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USE OF ESTIMATES |
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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. |
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REVENUE RECOGNITION |
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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. |
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SHARE-BASED COMPENSATION |
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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. |
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GOING CONCERN AND MANAGEMENTS' PLANS |
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As shown in the accompanying financial statements for the period ended June 30, |
2014, the Company has reported an accumulated deficit of $3,406,244. At June 30, |
2014, the Company has current assets of $529,380, including cash and cash |
equivalents of $102,899 and current liabilities of $670,392. The Company does |
recognize revenues from the properties it acquired in 2013 and continues to |
develop these properties to improve production. |
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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 as well as use available funds at |
June 30, 2014 in the amount of $2,375,000 from its existing line of credit at |
Guaranty Bank and Trust. 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. |
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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. |
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OFF-BALANCE SHEET ARRANGEMENTS |
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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 |
June 30, 2014, the Company has not been involved in any unconsolidated SPE |
transactions. |
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RECLASSIFICATION |
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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. |
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RECENT ACCOUNTING PRONOUNCEMENTS |
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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. |