UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
THREE FORKS, INC.
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(Exact name of registrant as specified in its charter)
Colorado 45-4915308
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State or other jurisdiction of IRS Identification No.
incorporation or organization
555 ELDORADO BLVD., SUITE #100
BROOMFIELD, CO 80021
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 404-2160
Securities to be registered under Section 12(b) of the Act:
Name of each exchange
Title of each class to be so on which each class is
registered to be registered
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None None
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001
(Title of class)
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One).
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Large accelerated filer [___] Accelerated filer [___]
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Non-accelerated filer [___] Smaller reporting company [_X_]
(Do not check if a smaller
reporting company)
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TABLE OF CONTENTS
PAGE
TITLE NUMBER
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Item 1 BUSINESS 3
Item 1A RISK FACTORS 17
Item 2 FINANCIAL INFORMATION 25
Item 3 PROPERTIES 32
Item 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 32
Item 5 DIRECTORS AND EXECUTIVE OFFICERS 34
Item 6 EXECUTIVE COMPENSATION 39
Item 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 43
Item 8 LEGAL PROCEEDINGS 46
Item 9 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 47
Item 10 RECENT SALES OF UNREGISTERED SECURITIES 48
Item 11 DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED 56
Item 12 INDEMNIFICATION OF DIRECTORS AND OFFICERS 57
Item 13 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 58
Item 14 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 59
Item 15 FINANCIAL STATEMENTS AND EXHIBITS 59
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GENERAL
THE FOLLOWING IS A SUMMARY OF SOME OF THE INFORMATION CONTAINED IN THIS
DOCUMENT. UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES IN THIS DOCUMENT TO
"THREE FORKS," "WE," "US", OR "OUR" ARE TO THREE FORKS, INC. AND OUR
SUBSIDIARIES.
FOR A GLOSSARY OF TERMS USED IN THIS FILING PLEASE SEE PAGE 61.
ITEM 1. BUSINESS
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Three Forks, Inc. is filing this Form 10 on a voluntary basis in order to
become a 12(g) registered company under the Securities Exchange Act of 1934 and
60 days after the filing of this registration statement will be considered
effective and we will be automatically subject to future reporting obligations.
As of the date of this Registration Statement, we are an oil and gas development
and exploration Company and we have recognized net losses of ($2,099,834) since
March 28, 2012 (inception) through September 30, 2013. We have relied solely on
sales of our securities to fund our operations. To successfully execute our
business plan and fund future operations, we must raise funds that are not yet
committed. We are filing this Form 10 in order to create value for our
stockholders by being credited as a fully reporting public company.
REPORTS TO SECURITY HOLDERS
Once we are subject to the reporting requirements of Section 13 and Section
15(d) of the Exchange Act, we intend to file all required disclosures.
You may read and copy any materials we file with the SEC in the SEC's Public
Reference Section, Room 1580, 100 F Street N.E., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Section by calling
the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, which can be found at
http://www.sec.gov.
JUMPSTART OUR BUSINESS STARTUPS ACT
We qualify as an "emerging growth company" as defined in Section 101 of the
Jumpstart our Business Startups Act ("JOBS Act") as we did not have more than
$1,000,000,000 in annual gross revenue and did not have such amount as of
December 31, 2012, our last fiscal year.
We may lose our status as an emerging growth company on the last day of our
fiscal year during which (i) our annual gross revenue exceeds $1,000,000,000 or
(ii) we issue more than $1,000,000,000 in non-convertible debt in a three-year
period. We will lose our status as an emerging growth company if at any time we
are deemed to be a large accelerated filer. We will lose our status as an
emerging growth company on the last day of our fiscal year following the fifth
anniversary of the date of the first sale of common equity securities pursuant
to an effective registration statement.
As an emerging growth company, we may take advantage of specified reduced
reporting and other burdens that are otherwise applicable to generally reporting
companies. These provisions include:
- A requirement to have only two years of audited financial statement
and only two years of related Management Discussion and Analysis
Disclosures:
- Reduced disclosure about the emerging growth company's executive
compensation arrangements; and
- No non-binding advisory votes on executive compensation or golden
parachute arrangements.
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As an emerging growth company, we are exempt from Section 404(b) of the
Sarbanes-Oxley Act of 2002 and Section 14A(a) and (b) of the Securities Exchange
Act of 1934. Such sections are provided below:
Section 404(b) of the Sarbanes-Oxley Act of 2002 requires a public
company's auditor to attest to, and report on, management's assessment
of its internal controls.
Sections 14A(a) and (b) of the Securities and Exchange Act, implemented
by Section 951 of the Dodd-Frank Act, require companies to hold
shareholder advisory votes on executive compensation and golden
parachute compensation.
We have already taken advantage of these reduced reporting burdens in this
registration statement, which are also available to us as a smaller reporting
company as defined under Rule 12b-2 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
As long as we qualify as an emerging growth company, we will not be required to
comply with the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002
and Section 14A(a) and (b) of the Securities Exchange Act of 1934.
In addition, Section 107 of the JOBS Act also provides that an emerging growth
company can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act of 1933, as amended (the "Securities Act") for
complying with new or revised accounting standards. We are choosing to
irrevocably opt out of the extended transition period for complying with new or
revised accounting standards under Section 102(b)(2) of the JOBS Act.
HISTORY
Three Forks, Inc. (hereafter "Three Forks," "we," "us," or "our") was
incorporated on March 28, 2012 in the State of Colorado. Our business plan
focuses on our 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.
At present, our current 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 10% WI through a Farmout in 290
net, 320 gross acres with 5 wells. We are also the manager of Three
Forks No. 1, LLC ("Three Forks No. 1") which owns 87% of the working
interest in the Farmout acreage.
- In Pottawatomie County, Oklahoma, we have a 25% WI in 290/290
net/gross acres upon which the first well was drilled in July 2013 and
has now been completed and is being put into production.
- The Five JAB project located in Southeast Texas - Southwest Louisiana
where we have a non-operated 37.5% WI in 13 producing wells, 9 service
wells and 14 additional wellbores and on October 1, 2013, we acquired
an additional 37.5% WI in these same properties for a total of a 75%
WI.
We intend to acquire additional acreage to drill in other areas where deemed
attractive, though no such additional prospects have been identified at the time
of this filing.
On September 7, 2012, we acquired working interests between 10.12% and 10.50% in
5 producing oil and gas wells along with mineral interests in proved undeveloped
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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 restricted 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, we were
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 until
December 31, 2014. This escrow account at September 30, 2013 and December 31,
2012 has a balance of $55,122 and $55,081, respectively. On January 1, 2013, we
sold our entire interest in these oil and gas properties located in Weld County,
Colorado, for $1,600,000 in cash.
Our principal executive offices are located at 555 Eldorado Boulevard, Suite
100, Broomfield, Colorado and our telephone number is (303) 404-2160. We
maintain a website at www.threeforksinc.com, such website is not incorporated
into or a part of this filing.
CORPORATE STRUCTURE
The corporate structure is as follows:
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THREE FORKS, INC.
(A Colorado Corporation)
W. Edward Nichols - CEO, Director
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/ \ \
/ \ \
/ \ \
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TFI OPERATING COMPANY, INC.
(A Colorado Corporation) THREE FORKS NO. 1, LLC THREE FORKS LLC NO. 2
(Wholly-owned subsidiary of (A Colorado Limited (A Colorado Limited
Three Forks, Inc.) Liability Company) Liability Company)
Charles Pollard, CEO Three Forks, Inc., Manager Three Forks, Inc., Manager
(TFI Operating Company, Inc. (the Company does not (the Company does not
has yet to commence own an equity interest) own an equity interest)
operations as of
September 30, 2013)
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TFI Operating Company, Inc. ("TFI Operating") was incorporated in the state of
Colorado on January 2, 2013 as Three Forks Operating Company, Inc. On February
8, 2013, it changed its name to TFI Operating Company, Inc. TFI Operating was
established to handle and manage our exploration, drilling and production
operations, including our Archer County, Texas Farmout. At September 30, 2013,
TFI Operating did not have any assets and has yet to commence operations.
Three Forks No. 1 was organized in the State of Colorado on November 8, 2012. We
are the manager of Three Forks No. 1 and we do not hold an equity interest in
Three Forks No. 1. Three Forks No. 1 owns 87% of the working interest in the
Archer County, Texas Farmout. As the manager of Three Forks No. 1, we handle and
oversee the operations on the property in Archer County, Texas.
Mr. Lester Ranew, a director of the Company, holds a 6.81% equity interest in
the Three Forks No. 1, LLC.
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Three Forks LLC No. 2 (hereinafter "Three Forks No. 2") was organized in the
State of Colorado on December 4, 2013. We are the manager of the Three Forks No.
2 and we do not hold an equity interest in Three Forks No. 2. Three Forks No. 2
has been organized to fund and handle the proposed drilling of additional wells
in Archer County, Texas. At the time of this filing, Three Forks No. 2 does not
have any assets and has yet to commence operations.
RECENT CONVERTIBLE DEBT OFFERING
In September 2013, we commenced 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 JABS property discussed above. These notes are due in
September 2014 and are 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 conversion of the convertible
promissory notes into shares of our common stock could have a dilutive effect to
the holdings of our existing shareholders.
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.
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, officers and directors of the
Company, in exchange for secured convertible promissory notes provided the
Company with a total of $600,000 cash ($300,000 each). Mr. Pollard's and Mr.
Ranew's notes have a due date of January 2, 2014 and allow for the conversion of
the notes into common stock upon issuance. Their notes provide that in addition
to having a due date of January 2, 2014, that at the due date they will each
receive a $7,500 payment of fees and interest. If the notes are not paid at
January 2, 2014, the Company is required to take immediate steps to liquidate
the secured property and the due date will be extended to April 2, 2014. At
January 2, 2014, the Company failed to make payment on the notes. At that time
Mr. Pollard and Ranew each entered into an Extension and Waiver with the
Company. The Extension and Waiver provides that the payment date shall be
extended to April 2, 2014 and both holders have waived the provision that steps
be taken to liquidate the secured property at this time. If payment is made at
April 2, 2014, they will each receive a $15,000 payment of fees and interest. If
the property has not been liquidated at such date, they will each be assigned an
11.25% interest in the Five JABS properties.
At September 30, 2013, the Company had a total of $2,135,000 in outstanding
secured convertible promissory notes. These funds were used towards the purchase
of the remaining 37.5% WI in the Five JABS property.
RECENT OIL AND GAS ACQUISITIONS
ARCHER COUNTY, TEXAS
On December 31, 2012, we entered into a Farmout Agreement with Holms Energy
Development Corporation ("HEDC") to explore for oil, gas and methane production
in Archer County, Texas ("the Farmout"). In order to maintain the Farmout we
have to commence or cause to be commenced the drilling of at least 3 wells for
oil and/or gas prior to March 31, 2013 and pay for the costs associated with our
ownership of 100% of the working interest.
As such on December 31, 2012, we entered into a Purchase and Sale Agreement with
Three Forks No. 1 whereby in consideration of Three Forks No. 1 undertaking and
agreeing to pay its pro rata share of the costs associated with the drilling and
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completion of wells in Archer County, Texas, we initially assigned an 87% WI in
the properties to Three Forks No. 1. Subsequently in 2013, we similarly assigned
a 1%% WI in the Farmout to Three Forks No. 1 to each of Messrs. Walford, Young
and Nichols, officers and directors of the Company and retained a 10% WI in the
Farmout, with an additional back in after payout of 25%. At the time of this
filing and as part of this Farmout, 5 wells have been drilled on the property.
POTTOWATOMIE COUNTY, OKLAHOMA
On April 8, 2013, we entered into a Participation Agreement with Blue Quail,
Ltd. ("the Participation Agreement"). In exchange for an 80% Net Revenue
Interest ("NRI") and a 25% WI in the Jim #1-33 Well, and as of September 30,
2013 we have paid $198,000. The Jim #1-33 Well is has been being drilled in
Pottowatomie County, Oklahoma in the Bois D'Arc formation. The well has now been
completed and is currently being put into production at the time of this filing.
FIVE JAB - LOUISIANA AND TEXAS
On February 27, 2013, we entered into a Purchase and Participation Agreement
with Five JAB, Inc. ("the Purchase and Participation Agreement"). As part of the
Purchase and Participation Agreement, we are to acquire a 75% of the right,
title and working interest in 1,955.41 gross leasehold acres including 13
producing wells, 9 service wells and 14 additional wellbores in exchange for
cash of $3.8 million. The Purchase and Participation Agreement also provides for
our involvement in a development program that includes the drilling and
completion of workovers and well optimizations of certain of the existing wells.
Therefore on June 30, 2013, we acquired a 37.5% WI in those oil and gas
properties located in Louisiana and Texas totaling approximately 1,955.41 gross
acres in exchange for $1,900,000 in cash as part of the Purchase and
Participation Agreement. Further, this acquisition was subject to a reversionary
event whereby we must acquire on September 1, 2013 the remaining 37.5% of the
working interest in the properties for $1,900,000 in cash or we must return to
the Seller the 37.5% working interest acquired on June 30, 2013. On August 28,
2013, the Company and Five JAB, Inc. agreed to extend the September 1, 2013
deadline to October 1, 2013, without prejudice and penalty. On October 1, 2013,
the Company acquired the remaining 37.5% of working interest in the Five Jab,
Inc. properties for $1,942,143 in cash plus assumed liabilities in the amount of
$281,962.
Our acquisition of the 75% of working interest in the oil and gas properties has
been accounted for as an acquisition for accounting purposes.
AREAS OF INTEREST AND PROPERTY
ARCHER COUNTY, TEXAS
We have a 10% WI in a completed well that is currently producing from the
Ellenburger formation at approximately 4,900 feet. In late 2012, we entered into
a Farmout Agreement with the lease owner to develop the balance of the 320 acres
of property. We transferred the Farmout to Three Forks No. 1 to develop the 320
acres. We retained a 10% WI in these wells with a provision for a back-in of an
additional 25%, after payout to the equity holders of Three Forks No.1. After
payout, we will then own a 35% WI in the wells.
In late March 2013, 3-D seismic was shot across the property which revealed that
three Ellenburger highs exist on the acreage. The Ellenburger formation is
considered to be a part of the Bend Arch-Fort Worth Basin. Ellenburger Group
carbonate rocks represent a broad epeiric carbonate platform covering most of
Texas during the Early ORDOVICIAN period. The formation is a resultant of a
pronounced drop in SEA LEVEL sometime between Late Ordovician and Mississippian
time resulted in prolonged platform exposure.
In addition to the Ellenburger formation, the Caddo, Odom, Conglomerate,
Gardner, KMA, Gunsight, 600' Sand and the 400' Sand are all productive or
prospective on this lease. Due to active water drive reservoirs in most of these
formations, limited stimulation work will occur for these wells. The Ellenburger
formation has not been developed in the immediate vicinity of the wells and will
more than likely be a new field discovery, if proven productive in the field
work.
We intend to drill a minimum of nine wells to fully develop the reserve
potential on this lease and Three Forks No. 1, has paid $1.8 million in capital
for drilling and completion costs and about $200,000, for 3D seismic and
facilities.
PLEASE SEE PHOTO ATTACHED AS EXHIBIT 99.1.
In August 2013, the Company had successfully drilled five wells.
Three of the drilled wells are in varying stages of completion. The G. A.
Jennings "BB" #104 has been perforated and flow tested in the KMA interval. It
tested 9 BOPD and 17 BWPD for 24 hours prior to a fracture treatment on August
13, 2013, wherein 60,000 lbs. of sand were pumped under pressure to stimulate
the well and increase the well's overall flow rate. Final test data and
reporting is pending well flow back results. The G. A. Jennings "BB" #103 tested
oil from the Ellenburger formation at non-commercial rates. The well was
acidized to improve flow with only limited success. The well has since been
perforated in the Caddo and Bend and tested for 27 BOPD and 153 BWPD. In
September 2013, we completed the G.A. Jennings #105 well with an initial
potential test of 38 BOPD with a 58 BWPD from the Ellenburger formation
following an acid treatment. A fourth well - the #105 - is being drilled. Well
completion work in the #101 and #102 wells will follow the current well work.
One additional well is currently being permitted. We plan to drill up to nine
wells with an average well expected to initially test for 25-50 BOPD.
Capital expenditures ("Capex") on this project is $3.0 million. As of September
30, 2013, a total of $1.9 million has been invested for drilling and well
completion work, $50,000 for seismic acquisition, processing and interpretation,
and $250,000 for equipment including approximately $220,000 in total costs
incurred by the Company.
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PINK PROJECT, POTTAWATOMIE COUNTY, OKLAHOMA
We entered into a Participation Agreement with Blue Quail Ltd. of Chandler,
Oklahoma to participate with a 25% WI in up to six wells in a multiple pay area
within the Morvin Oilfield where the predominate production has been from the
Bois d'Arc member of the Hunton Lime. Additional pay intervals in the area
include the Red Forks Sand, Misener Sand, Viola Lime, Simpson Dolomite, and the
1st and 2nd Wilcox Sands.
Drilling operations began in early April with the geologist, driller and
operator (Blue Quail Ltd) each taking a 25% WI. Well number one has been drilled
and logged and completed. Facilities for this well have been installed and the
well is pumping to the permanent facilities at an estimated 30 BOPD and 60 BWPD.
PLEASE SEE PHOTO ATTACHED AS EXHIBIT 99.2.
The Jim #1-33 well is located in a multiple pay area within the Morvin Oilfield.
It contained 22 feet of microlog permeability in the Hunton Bois D'Arc interval.
Additional producing intervals in the area include the Red Forks Sand, Misener
Sand, Viola Lime, Simpson Dolomite, and the 1st and 2nd Wilcox Sands.
As of September 30, 2013, we have spent $198,000 on the Pink Project with a
total 2013 capex projected at approximately $1.2 million.
FIVE JAB - EVANGELINE/ST. MARY'S PARISHES, LOUISIANA AND MONTGOMERY/TYLER
COUNTY, TEXAS
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 $3,842,143 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.
We have agreed to capital spending in 2013 of $1.25 million for 11 workovers. We
expect to spend a total of $5 million for these projects.
Spread across Montgomery, Jasper and Tyler Counties in Texas and the Evangeline
and St. Mary Parishes in Louisiana, 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 plays make up the geological success of the area. The Five
Jab properties are all located on shore.
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COMPETITION, MARKETS, REGULATION AND TAXATION
COMPETITION.
There are a large number of companies and individuals engaged in the exploration
for minerals and oil and gas; accordingly, there is a high degree of competition
for desirable properties. Almost all of the companies and individuals so engaged
have substantially greater technical and financial resources than we do.
MARKETS.
The availability of a ready market for oil and gas discovered, if any, will
depend on numerous factors beyond our control, including the proximity and
capacity of refineries, pipelines, and the effect of state regulation of
production and of federal regulations of products sold in interstate commerce,
and recent intrastate sales. The market price of oil and gas are volatile and
beyond our control. The market for natural gas is also unsettled, and gas prices
have increased dramatically in the past four years with substantial fluctuation,
seasonally and annually.
There generally are only a limited number of gas transmission companies with
existing pipelines in the vicinity of a gas well or wells. In the event that
producing gas properties are not subject to purchase contracts or that any such
contracts terminate and other parties do not purchase our gas production, there
is no assurance that we will be able to enter into purchase contracts with any
transmission companies or other purchasers of natural gas and there can be no
assurance regarding the price which such purchasers would be willing to pay for
such gas. There presently exists an oversupply of gas in the certain areas of
the marketplace due to pipeline capacity, the extent and duration of which is
not known. Such oversupply may result in restrictions of purchases by principal
gas pipeline purchasers.
EFFECT OF CHANGING INDUSTRY CONDITIONS ON DRILLING ACTIVITY.
Lower oil and gas prices have caused a decline in drilling activity in the U.S.
from time to time. However, such reduced activity has also resulted in a decline
in drilling costs, lease acquisition costs and equipment costs, and an
improvement in the terms under which drilling prospects are generally available.
We cannot predict what oil and gas prices will be in the future and what effect
those prices may have on drilling activity in general, or on our ability to
generate economic drilling prospects and to raise the necessary funds with which
to drill them.
FEDERAL REGULATIONS.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONSIDERATION.
Oil and Gas: The oil and gas business in the United States is subject to
regulation by both federal and state authorities, particularly with respect to
pricing, allowable rates of production, marketing and environmental matters.
The production of crude oil and gas has, in recent years, been the subject of
increasing state and federal controls. No assurance can be given that newly
imposed or changed federal laws will not adversely affect the economic viability
of any oil and gas properties we may acquire in the future. Federal income and
"windfall profit" taxes have in the past affected the economic viability of such
properties.
The above paragraphs only give a brief overview of potential state and federal
regulations. Because we have only acquired specific properties, and because of
the wide range of activities in which we may participate, it is impossible to
set forth in detail the potential impact federal and state regulations may have
on us.
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COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS.
Our operations are subject to local, state and federal laws and regulations
governing environmental quality and pollution control. To date our compliance
with these regulations has had no material effect on our operations, capital,
earnings, or competitive position, and the cost of such compliance has not been
material. We are unable to assess or predict at this time what effect additional
regulations or legislation could have on our activities.
THE DEPARTMENT OF ENERGY.
The Department of Energy Organization Act (Pub. L. No. 95-91) became effective
October 1, 1977. Under this Act various agencies, including the Federal Energy
Administration (FEA) and the Federal Power Commission (FPC), have been
consolidated to constitute the cabinet-level Department of Energy (DOE). The
Economic Regulatory Administration (ERA), a semi-independent administration
within the DOE, now administers most of the regulatory programs formerly managed
by the FEA, including oil pricing and allocation. The Federal Energy Regulatory
Commission (FERC), an independent agency within the DOE, has assumed the FPC's
responsibility for natural gas regulation.
REGULATION AND PRICING OF NATURAL GAS.
Our operations may be subject to the jurisdiction of the Federal Energy
Regulatory Commission (FERC) with respect to the sale of natural gas for resale
in interstate and intrastate commerce. State regulatory agencies may exercise or
attempt to exercise similar powers with respect to intrastate sales of gas.
Because of its complexity and broad scope, the price impact of future
legislation on the operation of us cannot be determined at this time.
STATE REGULATIONS.
Our production of oil and gas, if any, will be subject to regulation by state
regulatory authorities in the states in which we may produce oil and gas. In
general, these regulatory authorities are empowered to make and enforce
regulations to prevent waste of oil and gas and to protect correlative rights
and opportunities to produce oil and gas as between owners of a common
reservoir. Some regulatory authorities may also regulate the amount of oil and
gas produced by assigning allowable rates of production.
PROPOSED LEGISLATION.
A number of legislative proposals have been and probably will continue to be
introduced in Congress and in the legislatures of various states, which, if
enacted, would significantly affect the petroleum industries. Such proposals and
executive actions involve, among other things, the imposition of land use
controls such as prohibiting drilling activities on certain federal and state
lands in roadless wilderness areas. At present, it is impossible to predict what
proposals, if any, will actually be enacted by Congress or the various state
legislatures and what effect, if any, such proposals will have.
ENVIRONMENTAL LAWS.
Oil and gas exploration and development are specifically subject to existing
federal and state laws and regulations governing environmental quality and
pollution control. Such laws and regulations may substantially increase the
costs of exploring for, developing, or producing oil and gas and may prevent or
delay the commencement or continuation of a given operation.
All of our operations involving the exploration for or the production of any
minerals are subject to existing laws and regulations relating to exploration
procedures, safety precautions, employee health and safety, air quality
standards, pollution of stream and fresh water sources, odor, noise, dust, and
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other environmental protection controls adopted by federal, state and local
governmental authorities as well as the right of adjoining property owners. We
may be required to prepare and present to federal, state or local authorities
data pertaining to the effect or impact that any proposed exploration for or
production of minerals may have upon the environment. All requirements imposed
by any such authorities may be costly, time consuming, and may delay
commencement or continuation of exploration or production operations.
It may be anticipated that future legislation will significantly emphasize the
protection of the environment, and that, as a consequence, our activities may be
more closely regulated to further the cause of environmental protection. Such
legislation, as well as future interpretation of existing laws, may require
substantial increases in equipment and operating costs to us and delays,
interruptions, or a termination of operations, the extent to which cannot now be
predicted.
TITLE TO PROPERTIES.
We are not the record owner of our interest in our properties and rely instead
on contracts with the owner or operator of the property, pursuant to which,
among other things, we have the right to have our interest placed of record. As
is customary in the oil and gas industry, a preliminary title examination will
be conducted at the time unproved properties or interests are acquired by us.
Prior to commencement of drilling operations on such acreage and prior to the
acquisition of proved properties, we will conduct a title examination and
attempt to remedy extremely significant defects before proceeding with
operations or the acquisition of proved properties, as we may deem appropriate.
Our properties are subject to royalty, overriding royalty and other interests
customary in the industry, liens incident to agreements, current taxes and other
burdens, minor encumbrances, easements and restrictions. Although we are not
aware of any material title defects or disputes with respect to its undeveloped
acreage, to the extent such defects or disputes exist, we would suffer title
failures.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
NUMBER OF PERSONS EMPLOYED
As of December 31, 2013, we have 6 full-time employees and 4 independent
consultants.
DESCRIPTION OF PROPERTIES/ASSETS
Real Estate None
Oil and Gas Properties See below.
Patents None
Trademarks None
As is customary in the oil and natural gas industry, we generally conduct a
preliminary title examination prior to the acquisition of properties or
leasehold interests. Prior to commencement of operations on such acreage, a
thorough title examination will usually be conducted and any significant defects
will be remedied before proceeding with operations. We believe the title to our
leasehold properties is good, defensible and customary with practices in the oil
and natural gas industry, subject to such exceptions that we believe do not
materially detract from the use of such properties. With respect to our
properties of which we are not the record owner, we rely instead on contracts
with the owner or operator of the property or assignment of leases, pursuant to
which, among other things, we generally have the right to have our interest
placed on record.
-12-
Our properties are generally subject to royalty, overriding royalty and other
interests customary in the industry, liens incident to agreements, current taxes
and other burdens, minor encumbrances, easements and restrictions. We do not
believe any of these burdens will materially interfere with our use of these
properties.
SUMMARY OF OIL AND NATURAL GAS RESERVES
PROVED DEVELOPED RESERVES AND PROVED UNDEVELOPED RESERVES
As of December 31, 2012, our reserves were solely attributable to our interest
in properties in Weld County, Colorado acquired on September 7, 2012 and which
were sold with an effective date of January 1, 2013 for $1.6 million in cash and
these properties were recorded on the balance sheet of the Company in accordance
with Topic 205 of the Codification as property held for sale. Therefore, the
Company did not disclose these properties in our financial statements as
unaudited supplemental information relating to oil and natural gas producing
activities since these properties were not considered part of the Company's
amortizable base under the full cost method of accounting followed by the
Company.
On February 8, 2013, we received a Reserves Report for the Five JAB properties
as part of our due diligence work for the property acquisition. The report is
for 8/8ths reserves of which we purchased 37.5% WI effective September 1, 2013
and an additional 37.5% WI on October 1, 2013 for a total of 75% WI. See
"Financial Statement and Exhibits."
The reserves quantities as of September 30, 2013, that represent a 75% WI in the
Five Jab properties are estimated as follows:
Reserves
--------------------------------
Estimated Proved Reserves Data: Oil Natural Gas
(MBbls) (MMScf)
-------------- -----------------
Proved developed reserves 353.00 20.00
Proved undeveloped reserves 0 0
-------------- -----------------
Total proved reserves 353.00 20.00
============== =================
Estimates of proved developed and undeveloped reserves are inherently imprecise
and are continually subject to revision based on production history, results of
additional exploration and development, price changes and other factors. See
"Qualifications of Technical Persons and Internal Controls Over Reserves
Estimation Process."
QUALIFICATIONS OF TECHNICAL PERSONS AND INTERNAL CONTROLS OVER RESERVES
ESTIMATION PROCESS
The reserve report for the Five JAB acquisition was prepared for us on February
8, 2013, by Ralph E. Davis Associates, Inc, ("RED") as part of our acquisition
due diligence work. RED estimated, in accordance with petroleum engineering and
evaluation principles set forth in the Standards Pertaining to the Estimating
and Auditing of Oil and Gas Reserve Information promulgated by the Society of
Petroleum Engineers ("SPE Standards") and definitions and guidelines established
by the SEC, 100% of the proved reserve information for our onshore properties as
of December 31, 2012.
The technical persons responsible for preparing the reserves estimates presented
herein meet the requirements regarding qualifications, independence, objectivity
and confidentiality set forth in the Standards Pertaining to the Estimating and
Auditing of Oil and Natural Gas Reserves Information promulgated by the Society
of Petroleum Engineers.
The principal person at RED who prepared the reserve report is Mr. David G.
Cole. Mr. Cole has been a practicing petroleum engineer at RED since December
2011. Mr. Cole has over 25 years of practical experience in petroleum
engineering, with over 25 years of experience in the estimation and evaluation
-13-
of reserves. He graduated from Texas A&M University in 1987 with a Bachelors of
Science in Petroleum Engineering.
Mr. Charles Pollard, the Company's President and Chief Operating Officer, is
primarily responsible for the determination of and the presentation of the
reserves presented by the Company.
We have an internal staff of geoscience professionals who worked closely with
our independent petroleum engineering firms to ensure the integrity, accuracy
and timeliness of data furnished to them in their reserves estimation process.
The technical team consulted regularly with RED. We review with them our
properties and to discuss methods and assumptions used in their preparation of
the fiscal year-end reserves estimates. While we have no formal committee
specifically designated to review reserves reporting and the reserves estimation
process, a copy RED's reserve reports are reviewed with representatives of RED
and our internal technical staff before we disseminate any of the information is
disseminated. Additionally, our senior management reviews and approved the RED
reserve report and any internally estimated significant changes to the proved
reserves on an annual basis.
Estimates of oil and natural gas reserves are projections based on a process
involving an independent third party engineering firm's collection of all
required geologic, geophysical, engineering and economic data, and such firm's
complete external preparation of all required estimates and are forward-looking
in nature. These reports rely upon various assumptions, including assumptions
required by the SEC, such as constant oil and natural gas prices, operating
expenses and future capital costs. The process also requires assumptions
relating to availability of funds and timing of capital expenditures for
development of our proved undeveloped reserves. These reports should not be
construed as the current market value of our reserves. The process of estimating
oil and natural gas reserves is also dependent on geological, engineering and
economic data for each reservoir. Because of the uncertainties inherent in the
interpretation of this data, we cannot be certain that the reserves will
ultimately be realized. Our actual results could differ materially. See "Note 12
-- Supplemental Information Relating to Oil and Natural Gas Producing Activities
(Unaudited)" to our financial statements for additional information regarding
our oil and natural gas reserves.
Under SEC rules, proved reserves are those quantities of oil and natural gas,
which, by analysis of geoscience and engineering data, can be estimated with
reasonable certainty to be economically producible from a given date forward,
from known reservoirs, and under existing economic conditions, operating
methods, and government regulations. The term "reasonable certainty" implies a
high degree of confidence that the quantities of oil and/or natural gas actually
recovered will equal or exceed the estimate. To achieve reasonable certainty,
RED employs technologies consistent with the standards established by the
Society of Petroleum Engineers. The technologies and economic data used in the
estimation of our proved reserves include, but are not limited to, well logs,
geologic maps and available downhole and production data, seismic data and well
test data.
SUMMARY OF OIL AND NATURAL GAS PROPERTIES AND PROJECTS
PRODUCTION, PRICE AND COST HISTORY
During the period of March 28, 2012 (inception) through December 31, 2012, we
recognized a total of $1,105,441 in revenues from oil and gas sales of which
$1,026,715 was from the Five Jab properties, our predecessor, and $78,726 from
the properties in Weld County, CO. The $1,026,715 in sales from the Five Jab
properties was a result of the sale of 10,402 barrels of oil at an average price
of $105 per barrel and 2,393 Mcf of natural gas at an average price of $3.77 per
MCF and $78,726 in sales from the Weld county properties was a result of the
sale of 891 barrels of oil at an average price of $83 per barrel and 1,371 Mcf
of natural gas at an average price of $3.50 per MCF. Average production cost was
$46 per BOE. During the nine months ended September 30, 2013, we recognized a
total of $1,898,134 in revenues from oil and gas sales from the Five Jab
properties ($1,664,976 was from our predecessor) that was a result of the sale
of 17,533 barrels of oil (15,360 was from our predecessor) at an average price
of $106 per barrel and 8,163 Mcf of natural gas (7,676 was from our predecessor)
at an average price of $3.95 per MCF. Average production cost was $37 per BOE.
-14-
DEVELOPED AND UNDEVELOPED ACREAGE
The following table presents our total gross and net developed and undeveloped
acreage by region as of September 30, 2013:
Developed Acres Undeveloped Acres
-------------------------- -------------------------
Gross (1) Net(2) Gross Net
------------- ------------ ------------- -----------
Archer County, Texas 100.00 90.00 220 200
Texas/Louisiana 1,955.41 733.28 - -
Pottawatomie, Oklahoma 160.00 40.00 160 40
------------- ------------ ------------- -----------
TOTAL 2,215.41 863.28 380 240
============= ============ ============= ===========
(1) "Gross" means the total number of acres in which we have a working
interest.
(2) "Net" means the sum of the fractional working interests that we own in
gross acres.
Our net developed acreage is concentrated primarily in Texas and Louisiana
(95.36%). Our net undeveloped acreage is concentrated primarily in Texas
(83.33%) and Oklahoma (16.66%). The majority our net undeveloped acreage is held
by production and therefore is not subject to lease expiration terms.
PRODUCTIVE WELLS
The following table presents the total gross and net productive wells by area
and by oil completion as of September 30, 2013:
Oil Wells
----------------------------------
Gross (1) Net(2)
---------------- -----------------
Archer County, Texas 6 0.99
Texas, Louisiana 36 13.50
Pottawatomie, Oklahoma 1 0.25
---------------- -----------------
TOTAL 43 14.74
================ =================
(1) "Gross" means the total number of wells in which we have a working
interest.
(2) "Net" means the sum of the fractional working interest that we own in
gross wells.
DRILLING ACTIVITY
Our operational activities are focused on drilling and developing our properties
under lease.
ARCHER COUNTY
In June 2013, the Company had successfully drilled five wells and was in the
process of testing oil from the Ellenburger formation.
Three of the wells are in varying stages of completion. None of the wells were
dry holes. The G. A. Jennings "BB" #104 has been perforated and flow tested in
the KMA interval. It tested 9 BOPD and 17 BWPD for 24 hours prior to a fracture
treatment on August 13, 2013, wherein 60,000 lbs. of sand were pumped under
pressure to stimulate the well and increase the well's overall flow rate. Final
test data and reporting is pending well flow back results. The G. A. Jennings
"BB" #103 tested oil from the Ellenburger formation at non-commercial rates. The
well was acidized to improve flow with only limited success. The well has since
been perforated in the Caddo and Bend formations with oil and gas flow following
this work. The well is scheduled for an acid treatment later this month. Well
completion work in the #101 and #102 wells will follow the current well work. In
September 2013, we completed drilling on a fourth well, #105 and recently,
completed an initial potential test of 38 BOPD with a 58 BWPD on the well.
-15-
One additional well is currently being permitted. We plan to drill up to nine
wells with an average well expected to initially test for 25-50 BOPD.
PINK PROJECT, POTTAWATOMIE COUNTY, OKLAHOMA
Drilling operations began in early April with the geologist, driller and
operator (Blue Quail Ltd) each taking a 25% WI. Well number one has been drilled
and logged and completed. Facilities for this well have been installed and the
well is pumping to the permanent facilities at an estimated rate of 30 BOPD and
60 BWPD.
PLAN OF OPERATIONS
------------------ ------------------------------------------------------------
4th Quarter 2013 o Drill and complete 4-5 additional wells in Archer County;
o Drill and complete 2-3 additional wells in Oklahoma;
o 10-11 well workovers in Five JAB projects
------------------ ------------------------------------------------------------
1st Quarter 2014 o Drill and complete 6-8 wells in new development areas
------------------ ------------------------------------------------------------
2nd Quarter 2014 o Drill and complete 6-8 wells in new development areas
------------------ ------------------------------------------------------------
Our Budget for operations in the next year is as follows:
Working Capital $3,000,000
Drilling and Development of Five JAB Wells $1,500,000
Targeted Acquisition $7,000,000
Drilling and Development of new areas $2,000,000
Fees, commissions and general expenses $1,500,000
---------------------
$15,000,000
The Company may change any or all of the budget categories in the execution of
its business model. None of the line items are to be considered fixed or
unchangeable. The Company may need substantial additional capital to support its
budget. We have recognized minimal revenues from our operational activities
prior to June 30, 2013. During the three months ended September 30, 2013, we did
recognize $581,762 in revenue from oil and gas sales..
We have conducted a Private Offering of shares of our restricted common stock
for capital. We intend to raise up to $15 million in the next twelve months with
a structure not yet determined in debt or equity. As of September 30, 2013, the
Company had sold approximately 2,000,000 shares of its common stock, raising a
total of approximately $7,000,000. We cannot give any assurances that we will be
able to raise the full $15,000,000 to fund the budget. Further, we will need to
raise additional funds to support not only our expected budget, but our
continued operations. We cannot make any assurances that we will be able to
raise such funds or whether we would be able to raise such funds with terms that
are favorable to us.
In September 2013, we commenced 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 JABS property discussed above. These notes are due in
September 2014 and are 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 offering was not fully subscribed and a
total of $1,535,000 was raised.
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, officers and directors of the Company, in
-16-
exchange for secured convertible promissory notes provided the Company with a
total of $600,000 cash ($300,000 each).
At September 30, 2013, the Company had a total of $2,135,000 in outstanding
secured convertible promissory notes. These funds were used towards the purchase
of the remaining 37.5% WI in the Five JABS property.
Based on our current cash reserves of $2,033,179 as of September 30, 2013, we
have the cash for an operational budget of six months. We have generated minimal
and sporadic revenues to date and prior to June 30, 2013 such revenues were
generated by properties we sold on January 1, 2013. During the three months
ended September 30, 2013, we generated revenues of $629,762. If we are unable to
generate enough revenue, through our other subsidiaries, to cover our
operational costs, we will need to seek additional sources of funds. Currently,
we have NO committed source for any funds as of date hereof. No representation
is made that any funds will be available when needed. In the event funds cannot
be raised if and when needed, we may not be able to carry out our business plan
and could fail in business as a result of these uncertainties.
The independent registered public accounting firm's report on our financial
statements as of December 31, 2012, includes a "going concern" explanatory
paragraph that describes substantial doubt about our ability to continue as a
going concern.
ITEM 1A. RISK FACTORS
----------------------
FORWARD LOOKING STATEMENTS
THIS REGISTRATION STATEMENT INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING,
WITHOUT LIMITATION, STATEMENTS RELATING TO OUR PLANS, STRATEGIES, OBJECTIVES,
EXPECTATIONS, INTENTIONS AND ADEQUACY OF RESOURCES. THESE FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS
THAT MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY THE FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, AMONG OTHERS,
THE FOLLOWING: ABILITY OF US TO IMPLEMENT OUR BUSINESS STRATEGY; ABILITY TO
OBTAIN ADDITIONAL FINANCING; OUR LIMITED OPERATING HISTORY; UNKNOWN LIABILITIES
ASSOCIATED WITH FUTURE ACQUISITIONS; ABILITY TO MANAGE GROWTH; SIGNIFICANT
COMPETITION; ABILITY TO ATTRACT AND RETAIN TALENTED EMPLOYEES; AND FUTURE
GOVERNMENT REGULATIONS; AND OTHER FACTORS DESCRIBED IN THIS REGISTRATION
STATEMENT OR IN OTHER OF OUR FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. WE ARE UNDER NO OBLIGATION, TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
RISK FACTORS RELATING TO OUR COMPANY
OUR BUSINESS HAS AN OPERATING HISTORY OF ONLY A YEAR AND A HALF AND IS UNPROVEN
AND THEREFORE RISKY.
We have only recently begun operations under the business plan discussed herein.
Stockholders should be made aware of the risk and difficulties encountered by a
new enterprise in the oil and gas industry, especially in view of the intense
competition from existing businesses in the industry.
WE HAVE A LACK OF REVENUE HISTORY AND STOCKHOLDERS CANNOT VIEW OUR PAST
PERFORMANCE SINCE WE HAVE A LIMITED OPERATING HISTORY.
We were incorporated on March 28, 2012 for the purpose of engaging in any lawful
business and have adopted a plan to engage the acquisition, exploration, and if
warranted, development of natural resource properties. During the period of
inception March 28, 2012 (inception) through December 31, 2013, we did recognize
revenues of $78,726 from the operations of our properties in Weld County,
Colorado, which were sold in January 2013, as well as, recognize revenues of
$1,026,715 through our predecessor from the operations of the Five Jab
properties. We recognized revenues during the nine months ended September 30,
-17-
2013 of $2,010,134 of which $1,664,076 were revenues through our predecessor
from the operations of the Five Jab properties. We are not profitable. We must
be regarded as a new venture with all of the unforeseen costs, expenses,
problems, risks and difficulties to which such ventures are subject.
WE ARE NOT DIVERSIFIED AND WE WILL BE DEPENDENT ON ONLY ONE BUSINESS.
Because of the limited financial resources that we have, it is unlikely that we
will be able to diversify our operations. Our probable inability to diversify
our activities into more than one area will subject us to economic fluctuations
within the energy industry and therefore increase the risks associated with our
operations due to lack of diversification.
WE CAN GIVE NO ASSURANCE OF SUCCESS OR PROFITABILITY TO OUR STOCKHOLDERS.
There is no assurance that we will ever operate profitably. There is no
assurance that we will generate revenues or profits, or that the market price of
our common stock will be increased thereby.
WE MAY HAVE A SHORTAGE OF WORKING CAPITAL IN THE FUTURE WHICH COULD JEOPARDIZE
OUR ABILITY TO CARRY OUT OUR BUSINESS PLAN.
Our capital needs consist primarily of expenses related to geological
evaluation, general and administrative and exploration and workover
participation and could exceed $15,000,000 in the next twelve months. Such funds
are not currently committed, and we have cash of approximately $748,000 as of
the date of this filing.
If we find oil and gas reserves to exist on a prospect, we will need substantial
additional financing to fund the necessary exploration and development work.
Furthermore, if the results of that exploration and development work are
successful, we will need substantial additional funds for continued development.
There is no assurance that we will be successful in obtaining any financing.
These various financing alternatives may dilute the interest of our stockholders
and/or reduce our interest in the properties.
WE WILL NEED ADDITIONAL FINANCING FOR WHICH WE HAVE NO COMMITMENTS, AND THIS MAY
JEOPARDIZE EXECUTION OF OUR BUSINESS PLAN.
We have limited funds, and such funds may not be adequate to carryout the
business plan in the oil and gas industry. Our ultimate success depends upon our
ability to raise additional capital. We have not investigated the availability,
source, or terms that might govern the acquisition of additional capital and
will not do so until it determines a need for additional financing. If we need
additional capital, we have no assurance that funds will be available from any
source or, if available, that they can be obtained on terms acceptable to us. If
not available, our operations will be limited to those that can be financed with
our modest capital.
WE MAY IN THE FUTURE ISSUE MORE SHARES WHICH COULD CAUSE A LOSS OF CONTROL BY
OUR PRESENT MANAGEMENT AND CURRENT STOCKHOLDERS.
We may issue further shares as consideration for the cash or assets or services
out of our authorized but unissued common stock that would, upon issuance,
represent a majority of the voting power and equity of our Company. The result
of such an issuance would be those new stockholders and management would control
our Company, and persons unknown could replace our management at this time. Such
an occurrence would result in a greatly reduced percentage of ownership of our
Company by our current stockholders, which could present significant risks to
stockholders.
WE HAVE SECURED CONVERTIBLE DEBT WHICH IS CONVERTIBLE INTO OUR COMMON STOCK. A
CONVERSION OF SUCH DEBT COULD HAVE A DILUTIVE EFFECT TO EXISTING SHAREHOLDERS.
At October 10, 2013, we have outstanding secured convertible promissory notes
totaling $2,135,000. These notes are due starting in January 2014 through
September 2014 and are convertible into shares of our common stock in whole or
-18-
in part at a conversion price of $3.60 per share. The conversion of the
convertible promissory notes into shares of our common stock could have a
dilutive effect to the holdings of our existing shareholders.
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.
MR. POLLARD AND MR. RANEW, OFFICERS AND DIRECTORS OF THE COMPANY ARE HOLDERS OF
$600,000 OF THE SECURED CONVERTIBLE PROMISSORY NOTES AT TERMS DIFFERENT THAN
THOSE OF NON-AFFILIATED SECURED CONVERTIBLE PROMISSORY NOTE HOLDERS. A FAILURE
TO MEET THE TERMS OF SUCH DEBT, COULD RESULT IN THEM TAKING OWNERSHIP OF PART OF
THE ASSETS SECURING SUCH ASSETS.
Mr. Charles Pollard and Mr. Ranew, officers and directors of the Company, hold
$600,000 of the Secured Convertible Promissory Notes ($300,000 each).
Separately and after the secured promissory note offering in September 2013,
Pollard and Ranew 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. Pollard and Mr. Ranew in
exchange for secured convertible promissory notes provided the Company with a
total of $600,000 cash ($300,000 each). Their notes are due on January 2, 2014
and provide for conversion into shares of common stock at any time.
Mr. Pollard's and Ranew's notes provide that in addition to having a due date of
January 2, 2014, that at the due date they will each receive a $7,500 payment of
fees and interest. If the notes are not paid at January 2, 2014, the Company is
required to take immediate steps to liquidate the secured property and the due
date will be extended to April 2, 2014. At January 2, 2014, the Company failed
to make payment on the notes. At that time Mr. Pollard and Ranew each entered
into an Extension and Waiver with the Company. The Extension and Waiver provides
that the payment date shall be extended to April 2, 2014 and both holders have
waived the provision that steps be taken to liquidate the secured property at
this time. If payment is made at April 2, 2014, they will each receive a $15,000
payment of fees and interest. If the property has not been liquidated at April
2, 2014, they will each be assigned an 11.25% interest in the Five JABS
properties.
In addition, Tincup Oil and Gas, LLC, of which Mr. Ranew is a member of, holds a
Secured Convertible Promissory Note of $250,000 as part of the September 2013
Secured Convertible Promissory Note Offering.
WE HAVE AUTHORIZED AND DESIGNATED A CLASS A PREFERRED CONVERTIBLE STOCK, WHICH
HAVING VOTING RIGHTS EQUIVALENT TO OUR COMMON STOCK.
Class A Preferred Convertible Stock (the "Class A Preferred Stock") of which
500,000 shares of preferred stock have been authorized for the class and the
shares have a deemed purchase price at $4.50 per share. The Class A Preferred
Stock are to have voting rights equivalent to their conversion rate, one (1)
share of Class A Preferred Stock equals one (1) share of common stock. At this
time, no shares of the Class A Preferred Stock have been issued.
Holders of the Class A Preferred Stock would have the ability equal to that of
our common stockholders to vote in any vote of the common stockholders. The
Class A Preferred Stock would have a voting equivalent of 4.3%, if issued at
this time.
WE HAVE OPTIONS AND WARRANTS ISSUED AND OUTSTANDING WHICH ARE CONVERTIBLE INTO
OUR COMMON STOCK. A CONVERSION OF SUCH EQUITY INSTRUMENTS COULD HAVE A DILUTIVE
EFFECT TO EXISTING STOCKHOLDERS.
As of September 30, 2013, we have options and warrants issued and outstanding
exercisable into 4,450,000 shares of our common stock at ranges from $0.10 to
$3.00 per share. The options and warrants are exercisable in whole or in part.
-19-
The exercise of the options and warrants into shares of our common stock could
have a dilutive effect to the holdings of our existing stockholders.
OUR OFFICERS AND DIRECTORS MAY HAVE CONFLICTS OF INTERESTS AS TO CORPORATE
OPPORTUNITIES WHICH WE MAY NOT BE ABLE OR ALLOWED TO PARTICIPATE IN.
Presently there is no requirement contained in our Articles of Incorporation,
Bylaws, or minutes which requires officers and directors of our business to
disclose to us business opportunities which come to their attention. Our
officers and directors do, however, have a fiduciary duty of loyalty to us to
disclose to us any business opportunities which come to their attention, in
their capacity as an officer and/or director or otherwise. Excluded from this
duty would be opportunities which the person learns about through his
involvement as an officer and director of another company. We have no intention
of merging with or acquiring a business opportunity from any affiliate or
officer or director.
WE HAVE AGREED TO INDEMNIFICATION OF OFFICERS AND DIRECTORS AS IS PROVIDED BY
COLORADO STATUTES.
Colorado Statutes provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against attorney's fees and
other expenses incurred by them in any litigation to which they become a party
arising from their association with or activities our behalf. We will also bear
the expenses of such litigation for any of our directors, officers, employees,
or agents, upon such person's promise to repay us therefore if it is ultimately
determined that any such person shall not have been entitled to indemnification.
This indemnification policy could result in substantial expenditures by us that
we will be unable to recoup.
OUR DIRECTORS' LIABILITY TO US AND STOCKHOLDERS IS LIMITED
Colorado Statutes exclude personal liability of our directors and our
stockholders for monetary damages for breach of fiduciary duty except in certain
specified circumstances. Accordingly, we will have a much more limited right of
action against our directors that otherwise would be the case. This provision
does not affect the liability of any director under federal or applicable state
securities laws.
RISK FACTORS RELATING TO OUR BUSINESS
OUR BUSINESS, THE OIL AND GAS BUSINESS HAS NUMEROUS RISKS WHICH COULD RENDER US
UNSUCCESSFUL.
The search for new oil and gas reserves frequently results in unprofitable
efforts, not only from dry holes, but also from wells which, though productive,
will not produce oil or gas in sufficient quantities to return a profit on the
costs incurred. There is no assurance we will find or produce oil or gas from
any of the undeveloped acreage farmed out to us or which may be acquired by us,
nor are there any assurances that if we ever obtain any production it will be
profitable. (See "Business and Properties")
WE HAVE SUBSTANTIAL COMPETITORS WHO HAVE AN ADVANTAGE OVER US IN RESOURCES AND
MANAGEMENT.
We are and will continue to be an insignificant participant in the oil and gas
business. Most of our competitors have significantly greater financial
resources, technical expertise and managerial capabilities than us and,
consequently, we will be at a competitive disadvantage in identifying and
developing or exploring suitable prospects. Competitor's resources could
overwhelm our restricted efforts to acquire and explore oil and gas prospects
and cause failure of our business plan.
WE WILL BE SUBJECT TO ALL OF THE MARKET FORCES IN THE ENERGY BUSINESS, MANY OF
WHICH COULD POSE A SIGNIFICANT RISK TO OUR OPERATIONS.
The marketing of natural gas and oil which may be produced by our prospects will
be affected by a number of factors beyond our control. These factors include the
extent of the supply of oil or gas in the market, the availability of
competitive fuels, crude oil imports, the world-wide political situation, price
regulation, and other factors. Current economic and market conditions have
-20-
created dramatic fluctuations in oil prices. Any significant decrease in the
market prices of oil and gas could materially affect our profitability of oil
and gas activities.
There generally are only a limited number of gas transmission companies with
existing pipelines in the vicinity of a gas well or wells. In the event that
producing gas properties are not subject to purchase contracts or that any such
contracts terminate and other parties do not purchase our gas production, there
is assurance that we will be able to enter into purchase contracts with any
transmission companies or other purchasers of natural gas and there can be no
assurance regarding the price which such purchasers would be willing to pay for
such gas. There may, on occasion, be an oversupply of gas in the marketplace or
in pipelines; the extent and duration may affect prices adversely. Such
oversupply may result in reductions of purchases and prices paid to producers by
principal gas pipeline purchasers. (See "Our Business and Competition, Markets,
Regulation and Taxation.")
WE BELIEVE STOCKHOLDERS SHOULD CONSIDER CERTAIN NEGATIVE ASPECTS OF OUR
OPERATIONS.
DRY HOLES: We may expend substantial funds acquiring and potentially
participating in exploring properties which we later determine not to be
productive. All funds so expended will be a total loss to us.
TECHNICAL ASSISTANCE: We will find it necessary to employ technical
assistance in the operation of our business. As of the date of this Prospectus,
we have not contracted for any technical assistance. When we need it such
assistance is likely to be available at compensation levels we would be able to
pay.
UNCERTAINTY OF TITLE: We will attempt to acquire leases or interests in
leases by option, lease, farmout or by purchase. The validity of title to oil
and gas property depends upon numerous circumstances and factual matters (many
of which are not discoverable of record or by other readily available means) and
is subject to many uncertainties of existing law and our application. We intend
to obtain an oil and gas attorney's opinion of valid title before any
significant expenditure upon a lease.
GOVERNMENT REGULATIONS: The area of exploration of natural resources
has become significantly regulated by state and federal governmental agencies,
and such regulation could have an adverse effect on our operations. Compliance
with statutes and regulations governing the oil and gas industry could
significantly increase the capital expenditures necessary to develop our
prospects.
NATURE OF OUR BUSINESS: Our business is highly speculative, involves
the commitment of high-risk capital, and exposes us to potentially substantial
losses. In addition, we will be in direct competition with other organizations
which are significantly better financed and staffed than we are.
GENERAL ECONOMIC AND OTHER CONDITIONS: Our business may be adversely
affected from time to time by such matters as changes in general economic,
industrial and international conditions; changes in taxes; oil and gas prices
and costs; excess supplies and other factors of a general nature.
OUR BUSINESS IS SUBJECT TO SIGNIFICANT WEATHER INTERRUPTIONS.
Our activities may be subject to periodic interruptions due to weather
conditions. Weather-imposed restrictions during certain times of the year on
roads accessing properties could adversely affect our ability to benefit from
production on such properties or could increase the costs of drilling new wells
because of delays.
WE ARE SUBJECT TO SIGNIFICANT OPERATING HAZARDS AND UNINSURED RISK IN THE ENERGY
INDUSTRY.
Our proposed operations will be subject to all of the operating hazards and
risks normally incident to exploring, drilling for and producing oil and gas,
such as encountering unusual or unexpected formations and pressures, blowouts,
environmental pollution and personal injury. We will maintain general liability
insurance but we have not obtained insurance against such things as blowouts and
-21-
pollution risks because of the prohibitive expense. Should we sustain an
uninsured loss or liability, or a loss in excess of policy limits, our ability
to operate may be materially adversely affected.
WE ARE SUBJECT TO FEDERAL INCOME TAX LAWS AND CHANGES THEREIN WHICH COULD
ADVERSELY IMPACT US.
Federal income tax laws are of particular significance to the oil and gas
industry in which we engage. Legislation has eroded various benefits of oil and
gas producers and subsequent legislation could continue this trend. Congress is
continually considering proposals with respect to Federal income taxation which
could have a material adverse effect on our future operations and on our ability
to obtain risk capital which our industry has traditionally attracted from
taxpayers in high tax brackets.
WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION IN THE ENERGY INDUSTRY WHICH
COULD ADVERSELY IMPACT US.
The production and sale of oil and gas are subject to regulation by state and
federal authorities, the spacing of wells and the prevention of waste. There are
both federal and state laws regarding environmental controls which may
necessitate significant capital outlays, resulting in extended delays,
materially affect our earnings potential and cause material changes in the in
our proposed business. We cannot predict what legislation, if any, may be passed
by Congress or state legislatures in the future, or the effect of such
legislation, if any, on us. Such regulations may have a significant effect on
our operating results.
RISKS RELATING TO OWNERSHIP OF THREE FORKS, INC. COMMON STOCK
NO PUBLIC MARKET EXISTS FOR OUR COMMON STOCK AT THIS TIME, AND THERE IS NO
ASSURANCE OF A FUTURE MARKET.
There is no public market for our common stock, and no assurance can be given
that a market will develop or that a shareholder ever will be able to liquidate
his investment without considerable delay, if at all. If a market should
develop, the price may be highly volatile. Factors such as those discussed in
the "Risk Factors" section may have a significant impact upon the market price
of the shares offered hereby. Due to the low price of our securities, many
brokerage firms may not be willing to effect transactions in our securities.
Even if a purchaser finds a broker willing to effect a transaction in our
shares, the combination of brokerage commissions, state transfer taxes, if any,
and any other selling costs may exceed the selling price. Further, many lending
institutions will not permit the use of our shares as collateral for any loans.
OUR STOCK, IF EVER LISTED, WILL IN ALL LIKELIHOOD BE THINLY TRADED AND AS A
RESULT YOU MAY BE UNABLE TO SELL AT OR NEAR ASK PRICES OR AT ALL IF YOU NEED TO
LIQUIDATE YOUR SHARES.
The shares of our common stock, if ever listed, may be thinly-traded. We are a
small company which is relatively unknown to stock analysts, stock brokers,
institutional stockholders and others in the investment community that generate
or influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven, early stage company such as ours or purchase or recommend the purchase
of any of our Securities until such time as we became more seasoned and viable.
As a consequence, there may be periods of several days or more when trading
activity in our Securities is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that will
generally support continuous sales without an adverse effect on Securities
price. We cannot give you any assurance that a broader or more active public
trading market for our common Securities will develop or be sustained, or that
any trading levels will be sustained. Due to these conditions, we can give
stockholders no assurance that they will be able to sell their shares at or near
ask prices or at all if they need money or otherwise desire to liquidate their
securities.
-22-
OUR COMMON STOCK MAY BE VOLATILE, WHICH SUBSTANTIALLY INCREASES THE RISK THAT
YOU MAY NOT BE ABLE TO SELL YOUR SECURITIES AT OR ABOVE THE PRICE THAT YOU MAY
PAY FOR THE SECURITY.
If we are able to obtain an exchange listing of our common stock in the future,
because of the possible price volatility, you may not be able to sell your
shares of common stock when you desire to do so. The inability to sell your
securities in a rapidly declining market may substantially increase your risk of
loss because of such illiquidity and because the price for our securities may
suffer greater declines because of our price volatility.
The price of our common stock that will prevail in the market after this
offering may be higher or lower than the price you may pay. Certain factors,
some of which are beyond our control, that may cause our share price to
fluctuate significantly include, but are not limited to the following:
o Variations in our quarterly operating results;
o Loss of a key relationship or failure to complete significant
transactions;
o Additions or departures of key personnel; and
o Fluctuations in stock market price and volume.
Additionally, in recent years the stock market in general, has experienced
extreme price and volume fluctuations. In some cases, these fluctuations are
unrelated or disproportionate to the operating performance of the underlying
company. These market and industry factors may materially and adversely affect
our stock price, regardless of our operating performance. In the past, class
action litigation often has been brought against companies following periods of
volatility in the market price of those companies common stock. If we become
involved in this type of litigation in the future, it could result in
substantial costs and diversion of management attention and resources, which
could have a further negative effect on your investment in our stock.
THE REGULATION OF PENNY STOCKS BY THE SEC AND FINRA MAY DISCOURAGE THE
TRADABILITY OF OUR SECURITIES.
We are a "penny stock" company, as our stock price is less than $5.00 per share.
If we are able to obtain an exchange listing for our stock, we cannot make an
assurance that we will be able to maintain a stock price greater than $5.00 per
share and if the share price was to fall to such prices, that we wouldn't be
subject to the Penny Stocks rules. None of our securities currently trade in any
market and, if ever available for trading, will be subject to a Securities and
Exchange Commission rule that imposes special sales practice requirements upon
broker-dealers who sell such securities to persons other than established
customers or accredited stockholders. For purposes of the rule, the phrase
"accredited stockholders" means, in general terms, institutions with assets in
excess of $5,000,000, or individuals having a net worth in excess of $1,000,000
or having an annual income that exceeds $200,000 (or that, when combined with a
spouse's income, exceeds $300,000). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Effectively, this discourages broker-dealers from executing trades in
penny stocks. Consequently, the rule will affect the ability of purchasers in
this offering to sell their securities in any market that might develop
therefore because it imposes additional regulatory burdens on penny stock
transactions.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks". Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange
Act of 1934, as amended. Because our securities constitute "penny stocks" within
the meaning of the rules, the rules would apply to us and to our securities. The
rules will further affect the ability of owners of shares to sell our securities
in any market that might develop for them because it imposes additional
regulatory burdens on penny stock transactions.
Stockholders should be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
-23-
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differentials and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired consequent investor losses. Our
management is aware of the abuses that have occurred historically in the penny
stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
Inventory in penny stocks have limited remedies in the event of violations of
penny stock rules. While the courts are always available to seek remedies for
fraud against us, most, if not all, brokerages require their customers to sign
mandatory arbitration agreements in conjunctions with opening trading accounts.
Such arbitration may be through an independent arbiter. Stockholders may file a
complaint with FINRA against the broker allegedly at fault, and FINRA may be the
arbiter, under FINRA rules. Arbitration rules generally limit discovery and
provide more expedient adjudication, but also provide limited remedies in
damages usually only the actual economic loss in the account. Stockholders
should understand that if a fraud case is filed an against a company in the
courts it may be vigorously defended and may take years and great legal expenses
and costs to pursue, which may not be economically feasible for small
stockholders.
That absent arbitration agreements, specific legal remedies available to
stockholders of penny stocks include the following:
If a penny stock is sold to the investor in violation of the requirements listed
above, or other federal or states securities laws, the investor may be able to
cancel the purchase and receive a refund of the investment.
If a penny stock is sold to the investor in a fraudulent manner, the investor
may be able to sue the persons and firms that committed the fraud for damages.
The fact that we are a penny stock company will cause many brokers to refuse to
handle transactions in the stocks, and may discourage trading activity and
volume, or result in wide disparities between bid and ask prices. These may
cause stockholders significant illiquidity of the stock at a price at which they
may wish to sell or in the opportunity to complete a sale. Stockholders will
have no effective legal remedies for these illiquidity issues.
WE WILL PAY NO FORESEEABLE DIVIDENDS IN THE FUTURE.
We have not paid dividends on our common stock and do not ever anticipate paying
such dividends in the foreseeable future. Stockholders whose investment criteria
are dependent on dividends should not invest in our common stock.
RULE 144 SALES IN THE FUTURE MAY HAVE A DEPRESSIVE EFFECT ON OUR STOCK PRICE.
All of the outstanding shares of common stock are held by our present officers,
directors, and affiliate stockholders as "restricted securities" within the
meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted
shares, these shares may be resold only pursuant to an effective registration
statement or under the requirements of Rule 144 or other applicable exemptions
from registration under the Act and as required under applicable state
securities laws. Rule 144 provides in essence that a person who has held
restricted securities for six months may, under certain conditions, sell every
three months, in brokerage transactions, a number of shares that does not exceed
the greater of 1.0% of a company's outstanding common stock or the average
weekly trading volume during the four calendar weeks prior to the sale. There is
no limit on the amount of restricted securities that may be sold by a
non-affiliate after the owner has held the restricted securities for a period of
two years. A sale under Rule 144 or under any other exemption from the Act, if
available, or pursuant to subsequent registration of shares of common stock of
present stockholders, may have a depressive effect upon the price of the common
stock in any market that may develop.
-24-
OUR STOCKHOLDERS MAY SUFFER FUTURE DILUTION DUE TO ISSUANCES OF SHARES FOR
VARIOUS CONSIDERATIONS IN THE FUTURE.
There may be substantial dilution to Three Forks stockholders as a result of
future decisions of the Board to issue shares without shareholder approval for
cash, services, or acquisitions.
WE WILL BECOME A REPORTING COMPANY UPON THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT
We will become subject to the reporting requirements under the Securities and
Exchange Act of 1934, Section 13a, after the effectiveness of this offering,
pursuant to Section 15d of the Securities Act and we intend to be registered
under Section 12(g). As a result, stockholders will have access to the
information required to be reported by publicly held companies under the
Exchange Act and the regulations thereunder. As a result, we will be subject to
legal and accounting expenses that private companies are not subject to and this
could affect our ability to generate operating income.
ITEM 2. FINANCIAL INFORMATION
-----------------------------
MANAGEMENTS' DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED AND
AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED HEREIN.
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, SUCH AS STATEMENTS RELATING
TO OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS, PLANS, OBJECTIVES, FUTURE
PERFORMANCE AND BUSINESS OPERATIONS. THESE STATEMENTS RELATE TO EXPECTATIONS
CONCERNING MATTERS THAT ARE NOT HISTORICAL FACTS. THESE FORWARD-LOOKING
STATEMENTS REFLECT OUR CURRENT VIEWS AND EXPECTATIONS BASED LARGELY UPON THE
INFORMATION CURRENTLY AVAILABLE TO US AND ARE SUBJECT TO INHERENT RISKS AND
UNCERTAINTIES. ALTHOUGH WE BELIEVE OUR EXPECTATIONS ARE BASED ON REASONABLE
ASSUMPTIONS, THEY ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND THERE ARE A
NUMBER OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. BY MAKING
THESE FORWARD-LOOKING STATEMENTS, WE DO NOT UNDERTAKE TO UPDATE THEM IN ANY
MANNER EXCEPT AS MAY BE REQUIRED BY OUR DISCLOSURE OBLIGATIONS IN FILINGS WE
MAKE WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FEDERAL SECURITIES
LAWS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM OUR FORWARD-LOOKING
STATEMENTS.
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT ON OUR FINANCIAL
STATEMENTS AS OF SEPTEMBER 30, 2013 AND DECEMBER 31, 2012 INCLUDES A "GOING
CONCERN" EXPLANATORY PARAGRAPH THAT DESCRIBES SUBSTANTIAL DOUBT ABOUT OUR
ABILITY TO CONTINUE AS A GOING CONCERN.
PLAN OF OPERATIONS
We only began to recognize minimal revenues from our operations during the last
half of 2012. We have minimal capital, moderate cash. We are illiquid and need
cash infusions from investors or shareholders to provide capital, or loans from
any sources, none of which have been arranged nor assured.
PLAN OF OPERATIONS
------------------ ------------------------------------------------------------
4th Quarter 2013 o Drill and complete 4-5 additional wells in Archer County;
o Drill and complete 2-3 additional wells in Oklahoma;
o 10-11 well workovers in Five JAB projects
------------------ ------------------------------------------------------------
1st Quarter 2014 o Drill and complete 6-8 wells in new development areas
------------------ ------------------------------------------------------------
2nd Quarter 2014 o Drill and complete 6-8 wells in new development areas
------------------ ------------------------------------------------------------
-25-
Our Budget for operations in next year is as follows:
Working Capital $3,000,000
Drilling and Development of Five JAB Wells $1,500,000
Targeted Acquisition $7,000,000
Drilling and Development of the new areas $2,000,000
Fees, commissions and general expenses $1,500,000
--------------------
$15,000,000
The Company may change any or all of the budget categories in the execution of
its business model. None of the line items are to be considered fixed or
unchangeable. The Company may need substantial additional capital to support its
budget. We have recognized minimal revenues from our operational activities
prior to June 30, 2013. During the three months ended September 30, 2013, we
recognized $581,762 in revenue from oil and gas sales.
We have conducted a Private Offering of shares of our restricted common stock
for capital. We intend to raise up to$15 million in the next twelve months with
a structure not yet determined in debt or equity. As of September 30, 2013, the
Company had sold approximately 2,000,000 shares, raising a total of
approximately $7,000,000. We cannot give any assurances that we will be able to
raise the full $15,000,000 to fund the budget. Further, we will need to raise
additional funds to support not only our expected budget, but our continued
operations. We cannot make any assurances that we will be able to raise such
funds or whether we would be able to raise such funds with terms that are
favorable to us.
In September 2013, we commenced 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 JABS property discussed above. These notes are due in
September 2014 and are 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 offering was not fully subscribed and a
total of $1,535,000 was raised.
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, officers and 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 September 30, 2013, the Company had a total of $2,135,000 in outstanding
secured convertible promissory notes. These funds were used towards the purchase
of the remaining 37.5% WI in the Five JABS property.
Based on our current cash reserves of $2,033,179, at September 30, 2013, we have
the cash for an operational budget of six months. If we are unable to generate
enough revenue, through our other subsidiaries, to cover our operational costs,
we will need to seek additional sources of funds. Currently, we have NO
committed source for any funds as of date hereof. No representation is made that
any funds will be available when needed. In the event funds cannot be raised if
and when needed, we may not be able to carry out our business plan and could
fail in business as a result of these uncertainties.
Decisions regarding future participation in exploration wells or geophysical
studies or other activities will be made on a case-by-case basis. We may, in any
particular case, decide to participate or decline participation. If
participating, we may pay our proportionate share of costs to maintain our
proportionate interest through cash flow or debt or equity financing. If
participation is declined, we 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.
-26-
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2012
During the three months ended September 30, 2013, the Company recognized
$629,762 in revenue from its operational activities as compared to $102,537 for
2012. During the three months ended September 30, 2013, the Company recognized
revenue from two sources: $581,762 from the sale of oil and gas and $48,000 from
management fees as compared to $102,537 from the sale of oil and gas for 2012.
During the three months ended September 30, 2013, the Company incurred operating
expenses of $841,518. During the three months ended September 30, 2012, the
Company incurred operating expenses of $386,061. The increase of $455,457 was
primarily a result of the Company's increased operational activities resulting
from the acquisitions of certain properties, discussed above, and the Company's
focus on filing a registration statement on Form 10 with the SEC.
During the three months ended September 30, 2013, the Company recognized the
following operating expenses:
Three Months Ended
September 30, 2013
-------------------------
Operating Expense:
Lease operating expenses $ 175,657
Production taxes 24,080
Depreciation, depletion and amortization 42,645
General and administrative expenses 599,136
-------------------------
Total Operating Expenses: $ 841,518
During the three months ended September 30, 2013, the Company recognized a net
loss of $215,592 compared to a net loss of $283,524 during the three months
ended September 30, 2012. The decrease of $67,932 was a direct result of the
increase in operating expenses discussed above, offset by the $527,225 increase
in revenue.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THE PERIOD MARCH 28,
2012 (INCEPTION) THROUGH SEPTEMBER 30, 2012
During the nine months ended September 30, 2013, the Company recognized
$2,010,134 in revenue from its operational activities as compared to $524,881 in
revenue for the period of March 28, 2012 (inception) through September 30, 2012.
During the nine months ended September 30, 2013, the Company recognized revenue
from two sources: $1,898,134 from the sale of oil and gas and $112,000 from
management fees as compared to $524,881 from the sale of oil and gas for the
period of March 28, 2012 (inception) through September 30, 2012.
During the nine months ended September 30, 2013, the Company incurred operating
expenses of $2,399,051. During the period of March 28, 2012 (inception) through
September 30, 2012, the Company incurred operating expenses of $825,679. The
increase of $1,573,372 in operating expenses is primarily a result of the
Company's increased operational activities resulting from the operations of oil
and gas properties, acquisitions of certain properties, discussed above, and the
Company's focus on filing a registration statement on Form 10 with the SEC.
-27-
During the nine months ended September 30, 2013, the Company recognized the
following operating expenses:
Nine Months Ended
September 30, 2013
-------------------------
Operating Expense:
Lease operating expenses $ 604,088
Production taxes 88,344
Depreciation, depletion and amortization 117,725
General and administrative expenses 1,588,894
-------------------------
Total Operating Expenses: $ 2,399,051
During the nine months ended September 30, 2013, the Company recognized a net
loss of $241,262 compared to a net loss of $300,798 during the period of March
28, 2012 (inception) through September 30, 2012. The decrease of $59,536 was a
direct result of the $1,573,372 increase in operating expenses discussed above,
offset by a $20,177 increase in other income and a gain of $127,478 on the
disposal of property from discontinued operations as well as an increase in
revenue of $1,485,253.
RESULTS OF CONTINUING OPERATIONS FOR THE PERIOD OF MARCH 28, 2012 (INCEPTION)
THROUGH DECEMBER 31, 2012
During the period of March 28, 2012 (inception) through December 31, 2012, we
recognized $1,105,401 in revenue from our operational activities in the oil and
gas industry.
During the period of March 28, 2012 (inception) through December 31, 2012, we
recognized total operating expenses of $1,658,288 that consisted of $486,784 in
lease operating expenses, $56,079 in production taxes, $1,065,015 in general and
administrative expenses, and $50,410 in depreciation and amortization. We expect
such expenses to be increase during the full fiscal year of 2013, as we continue
to acquire and develop oil and gas projects and make additions to staff.
We recognized a net loss of $550,450 from continuing operations during the
period of March 28, 2012 (inception) through December 31, 2012.
RESULTS OF THE COMPANY'S DISCONTINUED OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2013 AS COMPARED TO THE PERIOD OF MARCH 28, 2012 (INCEPTION)
THROUGH DECEMBER 31, 2012. THERE WAS NO ACTIVITY FROM DISCONTINUED OPERATIONS
FOR THE PERIOD OF MARCH 28, 2012 (INCEPTION) THROUGH SEPTEMBER 30, 2012.
Overview. We sold all of our proved oil and gas properties located in Weld
County CO that were recorded as Disposal group held for sale during the nine
months ended September 30, 2013 and reported a net gain of $127,478 or $0.01 per
basic and fully-diluted share as compared to income of $27,741 or less than
$0.01 per basic and fully-diluted share for the period of March 28, 2012
(inception) through December 31, 2012.
Revenues. There were no revenues from oil and gas sales for the nine months
ended September 30, 2013 as compared to $78,726 for the period of March 28, 2012
(inception) through December 31, 2012.
Operating Expenses. There were no operating expenses from oil and gas operations
for the nine months ended September 30, 2013 as compared to $50,985 for the
period of March 28, 2012 (inception) through December 31, 2012.
LIQUIDITY
At September 30, 2013, the Company had total current assets of $2,469,810 and
total current liabilities of $4,566,244 resulting in a working capital deficit
of $2,096,434.
During the nine months ended September 30, 2013, the Company provided $77,453 in
funds from its operational activities. During the nine months ended September
30, 2013, the Company recognized a net loss of $241,262 which was adjusted for
-28-
such non-cash items as $117,725 in depreciation and amortization, $22,000 gain
on settlement of claims, $127,478 gain on sale of disposal group held for sale
and $41,360 in shares issued for services. During the period of March 28, 2012
(inception) through September 30, 2012, the Company used $206,112 in its
operations based upon a a net loss of $300,798 which was adjusted for the
non-cash item of $8,370 in shares issued for services.
During the nine months ended September 30, 2013, the Company used $1,382,436 in
its investing activities. During the nine months ended September 30, 2013, the
Company used $2,976,228 in additions to property and equipment and $6,208 in
other additions to long-term assets. During this period, the Company received
$1,600,000 from the sale of disposal group held for sale.
During the period of March 28, 2012 (inception) through September 30, 2012, the
Company used $351,738 in its investing activities. The Company loaned $100,000
to a non-affiliate and used $251,738 in additions to property and equipment.
During the nine months ended September 30 2013, the Company received $2,845,433
from its financing activities compared to $1,033,790 during the period of March
28, 2012 (inception) through September 30, 2012.
FINANCING ACTIVITIES
COMMON STOCK OFFERINGS
During the nine months ended September 30, 2013, as part of a private placement,
the Company issued 859,138 shares of its common stock for cash in the amount of
$2,621,443.
During the period March 28, 2012 (inception) through September 30, 2012, the
Company as part of a private placement, sold 3,799,575 shares of its common
stock for cash in the amount of $1,274,263 at $.01 per share to $1 per share.
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 are due 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 was 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. The offering was not fully subscribed for and therefore at September 30,
2013 the Company owes $1,535,000.
Separately and apart, an 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 have a due date of January
2, 2014 including interest at the rate of 10% per annum on the unpaid balance
and allow 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, that at the due date they will each receive a $7,500 payment of fees. e
Company is required to take immediate steps to liquidate the Five Jab properties
and the due date will be extended to April 2, 2014. At January 2, 2014, the
Company failed to make payment on the notes. At that time Mr. Pollard and Ranew
each entered into an Extension and Waiver with the Company. The Extension and
Waiver provides that the payment date shall be extended to April 2, 2014 and
both holders have waived the provision that steps be taken to liquidate the
secured property at this time. If payment is made at April 2, 2014, they will
each receive a $15,000 payment of fees. If the property has not been liquidated
at such date, they will each be assigned an 11.25% working interest in the Five
-29-
Jab properties. At September 30, 2013, the Company owes $600,000 including
accrued interest in the amount of $4,822.
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 known as the
Five Jab properties including 13 producing wells, 9 service wells and 14
additional wellbores located in the States of Texas and Louisiana.
AT DECEMBER 31, 2012
At December 31, 2012, we had current assets of $620,028, which included cash of
$492,729, a note receivable of $100,000 and prepaid and other current assets of
$27,299. At December 31, 2012, we had current liabilities of $49,110, consisting
of $4,427 in accounts payable, $15,000 in accrued liabilities of related
parties, $22,680 in accrued liabilities and a $7,003 note payable. At December
31, 2012, we had working capital of $570,918.
During the period of March 28, 2012 (inception) through December 31, 2012, we
used $444,708 in our operational activities. Net loss of $522,709 during the
period of March 28, 2011 (inception) through December 31, 2012 was reconciled by
non-cash items of $55,878 in depreciation and amortization and a total of $8,120
in service expenses paid in shares of our common stock.
During the period of March 28, 2012 (inception) through December 31, 2012, we
used $394,648 in our investing activities. During the period we loaned $100,000
to a non-affiliate, we expended $161,577 in the development of our oil and gas
properties and $133,071 in additions to long-term assets.
During the period of March 28, 2012 (inception) through December 31, 2012, we
received $1,833,620 from our financing activities, all from the sale of shares
of our common stock. During the period we sold 4,319,339 shares at between $0.01
to $3.00 per share.
SHORT TERM
On a short-term basis, we have not generated any revenue or revenues sufficient
to cover operations. Based on prior history, we will continue to have
insufficient revenue to satisfy current and recurring liabilities as the Company
continues exploration activities.
CAPITAL RESOURCES
The Company has only common stock as its capital resource.
We have no material commitments for capital expenditures within the next year,
however if operations are commenced, substantial capital will be needed to pay
for participation, investigation, exploration, acquisition and working capital.
NEED FOR ADDITIONAL FINANCING
We do not have capital sufficient to meet its cash needs. The Company will have
to seek loans or equity placements to cover such cash needs. Once exploration
commences, its needs for additional financing is likely to increase
substantially.
No commitments to provide additional funds have been made by the Company's
management or other stockholders. Accordingly, there can be no assurance that
any additional funds will be available to us to allow us to cover the Company's
expenses as they may be incurred.
The Company will need substantial additional capital to support its proposed
future energy operations. We have MINIMAL revenues. The Company has NO committed
source for any funds as of the date hereof. No representation is made that any
funds will be available when needed. In the event funds cannot be raised when
-30-
needed, we may not be able to carry out our business plan, may never achieve
sales or royalty income, and could fail in business as a result of these
uncertainties.
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 its 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.
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, 2013 and December 31, 2012.
REVENUE RECOGNITION
The Company recognizes revenue from the exploration and production of the
Company's oil and gas properties in the period of production.
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. The costs of unevaluated 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 evaluated, the related costs transfer to proved oil and natural gas
properties using full cost accounting. There were capitalized costs of
$4,338,489 and $0 included in the amortization base at September 30, 2013 and
December 31, 2012, respectively and the Company did not expense any capitalized
costs for the nine months ended September 30, 2013 and 2012 and for the period
March 28, 2012 (inception) through December 31, 2012.
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 nine
months ended September 30, 2013 and for the period March 28, 2012 (inception)
through September 30, 2012 and for the period March 28, 2012 (inception) through
December 31, 2012.
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
-31-
occurred during the nine months ended September 30, 2013 and for the period
March 28, 2012 (inception) through September 30, 2012 and for the period March
28, 2012 (inception) through December 31, 2012 that would be indicative of
possible impairment.
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, to be recognized in
the financial statements based on their fair values.
ITEM 3. PROPERTIES
------------------
FACILITIES
The corporate headquarters for Three Forks, Inc. operates out of Broomfield,
Colorado and operates out of an office building that occupies over 3,265 square
feet. The space is rented under a lease agreement for a period of 3 years and an
annual rent according to the schedule below. The address is 555 Eldorado Blvd.,
Suite 100, Broomfield, Colorado 80021 and the telephone number is (303) 404-2160
and the facsimile number is (303) 887-8220.
o 2013 - $22,781
o 2014 - $91,738
o 2015 - $54,416
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
----------------------------------------------------------------------
The following table sets forth information with respect to the beneficial
ownership of our outstanding common stock by:
o each person who is known by us to be the beneficial owner of
five percent (5%) or more of our common stock;
o our executive officers, and each director as identified in the
"Management -- Executive Compensation" section; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock and options, warrants
and convertible securities that are currently exercisable or convertible within
60 days of the date of this document into shares of our common stock are deemed
to be outstanding and to be beneficially owned by the person holding the
options, warrants or convertible securities for the purpose of computing the
percentage ownership of the person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
-32-
The information below is based on the number of shares of our common stock that
we believe was beneficially owned by each person or entity as of December 31,
2013.
OFFICERS AND DIRECTORS
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER (1) OWNER CLASS (2)
----------------------- ------------------------------------------- ------------------- ---------------
Common shares W. Edward Nichols, Chief Executive 2,000,000 17.38%
Officer, Chairman of the Board & Secretary
Common shares Charles Pollard, President, Chief Operating
Officer & CEO of TFI Operating Company, Inc. -0- -0-%
and Director (3)
Common shares Donald Walford, Director 2,000,000 17.38%
Common shares William Young, Director (4) 400,000 3.47%
Common shares Lester Ranew, Director (5) 66,667 5.79%
Common shares Paul Dragul, Director (6) 162,000 1.40%
----------------------- ------------------------------------------- ------------------- ---------------
Common shares All Directors and Executive Officers as a 4,628,667 40.23%
Group (6 persons)
------------------- ---------------
(1) The address of each person listed below, unless otherwise
indicated, is c/o Three Forks, Inc., 555 Eldorado Blvd., #100,
Broomfield, Colorado 80021.
(2) Based upon 11,503,474 shares issued and outstanding on a fully
diluted basis. Options and Warrants exercisable for 4,175,000
shares of common stock are not included in this number as they
are not considered to be exercisable in the next 60 days.
(3) Mr. Pollard holds an option exercisable for 2,250,000 shares
of our common stock. The option has a term of 3 years and an
exercise price of $0.10 per share. The option does provide for
a cashless exercise. Mr. Pollard holds a Secured Convertible
Promissory Note for $300,000 convertible into shares of our
common stock at $3.60 per share.
(4) Mr. Young holds an option exercisable for 100,000 shares of
our common stock. The option has a term of 3 years and an
exercise price of $0.10 per share. The option does provide for
a cashless exercise. Mr. Young is to receive 4,395 shares of
our common stock, which are currently held in escrow on behalf
of the Gulfstar shareholders.
(5) Mr. Ranew is to receive 6,037 shares of our common stock which
are currently held in escrow on behalf of the Gulfstar
shareholders. Mr. Ranew holds a Secured Convertible Promissory
Note for $300,000, convertible into shares of our common stock
at $3.60 per share. Tincup Oil and Gas, LLC of which Mr. Ranew
is a member, holds a Secured Convertible Promissory Note for
$250,000, convertible into shares of our common stock at $3.60
per share.
(6) Mr. Dragul holds 137,000 shares of common stock directly and
25,000 shares indirectly through NTC & Co for the benefit of
Paul Dragul.
-33-
GREATER THAN 5% STOCKHOLDERS
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNER CLASS (1)
------------------ ------------------------------------- ------------------- ---------------
Common shares Shareholders of Gulfstar Energy Corp.(2) 700,000 6.08%
------------------
(1) Based upon 11,503,477 shares issued and outstanding on a fully
diluted basis. Options and Warrants exercisable for 4,175,000
shares of common stock are not included in this number as they
are not considered to be exercisable in the next 60 days.
(2) Gulfstar Energy agreed to sell certain mineral interest to the
Company for cash and stock in September 2012. The transaction
closed and 700,000 shares of the Company are held by the
shareholders of Gulfstar. Gulfstar is in a voluntary
liquidation. We have agreed to include the 700,000 shares in a
registration statement on Form S-1 to register the shares for
distribution to the Gulfstar shareholders for re-sale by these
shareholders. The timing of such registration has not been
established at the time of this filing.
Rule 13d-3 under the Securities Exchange Act of 1934 governs the determination
of beneficial ownership of securities. That rule provides that a beneficial
owner of a security includes any person who directly or indirectly has or shares
voting power and/or investment power with respect to such security. Rule 13d-3
also provides that a beneficial owner of a security includes any person who has
the right to acquire beneficial ownership of such security within sixty days,
including through the exercise of any option, warrant or conversion of a
security. Any securities not outstanding which are subject to such options,
warrants or conversion privileges are deemed to be outstanding for the purpose
of computing the percentage of outstanding securities of the class owned by such
person. Those securities are not deemed to be outstanding for the purpose of
computing the percentage of the class owned by any other person. Included in
this table are only those derivative securities with exercise prices that we
believe have a reasonable likelihood of being "in the money" within the next
sixty days.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
----------------------------------------
The following table sets forth information as to persons who currently serve as
our directors or executive officers, including their ages as of December 31,
2013.
Name Age Position
------------------ ---- ------------------------------------------------------
W. Edward Nichols 71 Chief Executive Officer, Chairman of the Board and
Secretary**
Charles Pollard 54 President, Chief Operating Officer of Three Forks, Inc.,
and Chief Executive Officer of TFI Operating Company,
Inc. and Director
Donald Walford 67 Director and Executive Vice President of Finance **
William F. Young 64 Director
Lester Ranew 52 Director
Paul Dragul 79 Director
-34-
** On October 7, 2013, Mr. Hattenbach, our Chief Financial Officer, resigned his
position. On October 22, 2013, Mr. Walford our Chief Executive Officer was
appointed the Executive Vice President of Finance and Mr. Nichols our Chairman
of the Board was appointed the Chief Executive Officer. On January 28, 2014, the
Board of Directors voted unanimously to terminate Mr. Walford as the Executive
Vice President of Finance. He retained his position on the Company's Board of
Directors.
Our officers are elected by the board of directors at the first meeting after
each annual meeting of our stockholders and hold office until their successors
are duly elected and qualified under our bylaws.
The directors named above will serve until the next annual meeting of our
stockholders. Thereafter, directors will be elected for one-year terms at the
annual stockholders' meeting. Officers will hold their positions at the pleasure
of the board of directors absent any employment agreement. There is no
arrangement or understanding between our directors and officers and any other
person pursuant to which any director or officer was or is to be selected as a
director or officer.
BIOGRAPHICAL INFORMATION
W. EDWARD NICHOLS, CHIEF EXECUTIVE OFFICER SINCE OCTOBER 22, 2013, CHAIRMAN OF
THE BOARD SINCE MARCH 2012 AND SECRETARY SINCE INCEPTION.
Mr. Nichols is currently a practicing attorney with Nichols & Nichols in Denver,
Colorado. He is authorized to practice in the states of Colorado and Kansas, the
United States Federal Courts, and Supreme Court of the United States. He is also
Managing Director of Nichols & Company, a management consulting firm he founded
on May 25, 2000 and through the firm has worked as a private investment banker
and consultant with venture capital companies in the U.S. and Europe. Mr.
Nichols grew up in the oil patch and has owned and operated gas processing
plants in Kansas and Wyoming. He has also co-owned and operated oil drilling,
production and gas gathering companies in Kansas. From 2010 to March 2012, Mr.
Nichols was a director of Gulfstar Energy Corporation (fka Bedrock Energy
Corporation), a publicly registered company.
Mr. Nichols holds a BBA from Washburn University and in 1971 received a JD from
Washburn University School of Law in Topeka, Kansas.
Mr. Nichols, as a founder of the Company, brings to the board of directors not
only his experience in the venture capital arena, but also provides the board
with his corporate legal experience.
CHARLES POLLARD, PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR SINCE MARCH 1,
2013 AND CEO OF TFI OPERATING COMPANY, INC., A SUBSIDIARY OF THREE FORKS, INC.
Charles Pollard has 32 years of experience in the energy industry, including
senior positions with MAK J Energy as President/COO (2009-2013), Petro-Canada
Resources as Sr. VP of Engineering /Operations (2004-2008), Flatiron Petroleum
as COO (2003-2004), and Ensign Oil & Gas as VP Engineering/Operations from
(2001-2003). Mr. Pollard was President & CEO Redstone Resources Inc.
(2000-2001). Prior to that he worked two years for Ocean Energy and 17 years for
Occidental Petroleum. Mr. Pollard has been Chief Executive Officer of TFI
Operating Company, Inc., our wholly-owned subsidiary since March 2013.
Mr. Pollard has been the recipient of numerous industry awards and is the author
of a variety of technical papers and publications.
Mr. Pollard received his B.S. in Petroleum Engineering from Mississippi State
University Magna Cum Laude in 1981 and is a graduate of the Executive Management
program of UCLA (1997). He also is a Registered Professional Engineer in the
states of Texas and Wyoming.
Mr. Pollard was appointed to the Board of Director due to his technical
expertise in the oil and gas industry.
-35-
DONALD WALFORD, DIRECTOR SINCE 2012
Mr. Walford served as the Company's Chief Executive Officer from the inception
of the Company through October 22, 2013. He served as the Company's Executive
Vice President from October 22, 2013 through January 28, 2014.
Mr. Walford has served as a Director and Broker from 1990 to date of Colorado
Landmark Reality. He has served as the Chairman and Vice President of Eveia
Medical from 2007 through 2010.
Mr. Walford was licensed as a principal, NASD Series 7, commodities broker and
all other principal securities licenses including an Allied Member of the New
York Stock Exchange, from 1967 through 1992.
Mr. Walford's career has included consulting work for the United States
Attorney, and with three Federal Court jurisdictions as an expert in securities
matters. Mr. Walford has had a diverse experience in corporate operations in
industries such as agri-business, medical equipment, electronics, engineering,
consumer manufacturing, construction and development, and oil and gas.
Mr. Walford received his B.A. Liberal Arts with a concentration in Fine Arts in
1967 from Harpur College, State University of New York (kna Binghamton
University.)
Mr. Walford, as a founder of the Company, was appointed to the Board of
Directors, not only for his management skills, but also his experience in
private offerings and the public arena.
WILLIAM F. YOUNG, DIRECTOR
Mr. Young has over 30 years of experience in the oil and gas industry. He is
currently President of Georgia Energy in Griffin, Georgia. Georgia Energy
markets various gas and oil products, including propane and other gas products
for residential use, as well as fuel operated generators. Mr. Young has also
served as President of Eastside Petroleum from 1991 to date. Eastside Petroleum
is a fuel distributor dealing in light and heavy oils and lubricants primarily
for use in aviation. Mr. Young has also worked in management of oil and gas
distribution with Phillips 66. He is a veteran of the U.S. Navy where he served
in Naval Aviation, serving from 1968 through 1974.
Mr. Young was appointed to the Board of Directors due to his technical expertise
in the oil and gas industry.
LESTER RANEW, DIRECTOR
Lester Ranew is the founder, owner and president of Ranew's, a major precision
fabrication and industrial coatings company located in Milner, Georgia. Mr.
Ranew founded the Company in 1981 as small paint and motor vehicle body shop.
Since that time, Ranew's has grown to include three manufacturing divisions
serving small and large transportation and heavy equipment companies both
domestically and abroad.
Mr. Ranew was appointed to the Board of Director due to his experience in not
only management but also for his experience in the oil and gas equipment.
PAUL DRAGUL, DIRECTOR
Dr. Dragul is a Board Certified otolaryngologist specializing in head and neck
surgery. He received his medical degree from the University of Cincinnati
College of Medicine in 1960 and completed his residency at the University of
Colorado Medical Center in 1967. He also earned a Bachelor of Science, Pharmacy
degree from the University of Cincinnati in 1956, where he was student body
president. Dr. Dragul is a member of the American Academy of Otolaryngology/Head
and Neck Surgery and several other medical societies.
-36-
Dr. Dragul was appointed to the Board of Directors due to his operational and
managerial experiences.
KEY EMPLOYEES
CHRISTIANA (JANA) ORLANDINI, CHIEF GEOLOGIST SINCE MAY 2013
Ms. Orlandini has previous experience with Exploration and Production majors
including, Marathon and Chevron. She has worked projects in the Williston Basin,
Greater Green River Basin, DJ Basin, San Juan, Piceance, Uintah, Gulf Coast and
lately, the Permian Basin.
Ms. Orlandini has supervised the geological aspects of many drilling programs,
including vertical "stack and frac" and multi-lateral horizontal programs, in
both conventional and unconventional targets.
She received a B.S. in Geology from Texas A&M University in 1982.
LARRY G. SESSIONS, DRILLING/OPERATIONS MANAGER SINCE JUNE 2013
Mr. Sessions has 49 years of oil and gas experience in domestic and
international drilling and production operations. He began his career in 1964
with Shell Oil Company in New Orleans as an assistant engineering trainee. Over
the next 25 years, he worked in various roles of increasing responsibility for
Shell Oil including international assignments in the Middle East, S. E. Asia,
the North Sea and Russia. Following his career with Shell, Larry was an
independent drilling and operations consultant before joining J. M. Huber
Company in 2000 as Sr. Operations Manager. More recently, Larry has held
positions of Operations Manager with Petro-Canada Resources USA and Drilling
Manager with MAK-J Energy.
Mr. Sessions attended Louisiana State University in the early 1960's.
FORMER OFFICERS AND DIRECTORS
TODD B. HATTENBACH, CHIEF FINANCIAL OFFICER FROM JULY 1, 2013 THROUGH OCTOBER 7,
2013
Mr. Hattenbach is a financial professional with over 19 years of experience of
which 17 years have been in energy. He has a broad background covering mergers &
acquisitions, divestitures, capital markets, investment banking, investor
relations, modeling and forecasting, financial planning, and more. Mr.
Hattenbach has been instrumental in structuring over $1 billion in public and
private equity placements and debt facilities during his career. As an
independent consultant with his company, Capital Risk Consulting, his clients
ranged from small private companies to large public companies. He provided
expertise in the areas of acquisitions, mergers, divestitures as well as having
been part of the management team that took a company public in a $200 million
IPO on the New York Stock Exchange and serving as their investor relations
director. In addition to consulting Todd served as Vice President of Finance for
SFC Energy Partners, a $1 billion oil and gas private equity firm, where he was
responsible for modeling, forecasting, and originating investments ranging from
$35 million to over $100 million. Prior positions include Assistant Vice
President at CoBank, ACB where he was an underwriter for purchased paper
transactions focused on power plants and natural gas pipelines. Mr. Hattenbach
started his energy career with Enron Corp in various groups focused on power
plant and pipeline development as well as oil and gas mezzanine finance.
Mr. Hattenbach has a B.S. in Business Administration from Trinity University and
a M.A. in International Studies from the University of Denver.
-37-
CONFLICTS OF INTEREST - GENERAL.
Our directors and officers are, or may become, in their individual capacities,
officers, directors, controlling shareholder and/or partners of other entities
engaged in a variety of businesses. Thus, there exist potential conflicts of
interest including, among other things, time, efforts and corporation
opportunity, involved in participation with such other business entities. While
the officers and directors of our business are engaged full time in our business
activities, the amount of time they devote to other business may be up to
approximately 5 hours per week.
CONFLICTS OF INTEREST - CORPORATE OPPORTUNITIES
Certain of our officers and directors may be directors and/or principal
stockholders of other companies and, therefore, could face conflicts of interest
with respect to potential acquisitions. In addition, our officers and directors
may in the future participate in business ventures, which could be deemed to
compete directly with us. Additional conflicts of interest and non-arms length
transactions may also arise in the future in the event our officers or directors
are involved in the management of any firm with which we transact business. Our
Board of Directors has adopted a policy that we will not seek a merger with, or
acquisition of, any entity in which management serve as officers or directors,
or in which they or their family members own or hold a controlling ownership
interest. Although the Board of Directors could elect to change this policy, the
Board of Directors has no present intention to do so. In addition, if we and
other companies with which our officers and directors are affiliated both desire
to take advantage of a potential business opportunity, then the Board of
Directors has agreed that said opportunity should be available to each such
company in the order in which such companies registered or became current in the
filing of annual reports under the Exchange Act subsequent to January 1, 2013.
Our officers and directors may actively negotiate or otherwise consent to the
purchase of a portion of their common stock as a condition to, or in connection
with, a proposed merger or acquisition transaction. It is anticipated that a
substantial premium over the initial cost of such shares may be paid by the
purchaser in conjunction with any sale of shares by our officers and directors
which is made as a condition to, or in connection with, a proposed merger or
acquisition transaction. The fact that a substantial premium may be paid to our
officers and directors to acquire their shares creates a potential conflict of
interest for them in satisfying their fiduciary duties to us and our other
stockholders. Even though such a sale could result in a substantial profit to
them, they would be legally required to make the decision based upon the best
interests of us and our other stockholders, rather than their own personal
pecuniary benefit.
ANNUAL MEETING
Our annual meeting of stockholders is expected to be held at a future date as
soon as practicable after the filing of this Form 10. This will be an annual
meeting of stockholders for the election of directors. The annual meeting will
be held at our principal office or at such other place as permitted by the laws
of the State of Colorado and on such date as may be fixed from time to time by
resolution of our board of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
We are managed under the direction of our board of directors.
The board of directors has no nominating, auditing committee or a compensation
committee. Therefore, the selection of person or election to the board of
directors was neither independently made nor negotiated at arm's length.
EXECUTIVE COMMITTEE
The members of the Board of Directors serve as our executive committee.
-38-
AUDIT COMMITTEE
The members of the Board of Directors serve as our audit committee and as such
our audit committee is not considered to have independent members or to be
independent.
PREVIOUS "BLANK CHECK" OR "SHELL" COMPANY INVOLVEMENT
Mr. Nichols, the Chairman of our Board has been involved in prior "shell"
companies - Gulfstar Energy Corporation and General Environmental Corporation.
No other members of our management have been involved in private "blank-check"
or "shell" companies.
ITEM 6. EXECUTIVE COMPENSATION
------------------------------
EXECUTIVE AND DIRECTORS COMPENSATION
SUMMARY OF EXECUTIVES AND DIRECTOR COMPENSATION TABLE
The following table sets forth the compensation paid to our officers from the
period of March 28, 2012 (Inception) through December 31, 2012.
SUMMARY EXECUTIVES COMPENSATION TABLE
IN DOLLARS
-------------------- ------ ---------- ------- -------- -------- ------------ -------------- ------------ ---------
Non-equity Non-qualified
incentive deferred
Contract Stock Option plan compensation All other
Payments Bonus awards awards compensation earnings compensation Total
Name & Position Year ($) ($) ($) ($) ($) ($) ($) ($)
-------------------- ------ ---------- ------- -------- -------- ------------ -------------- ------------ ---------
Donald Walford, 2012 135,000 76,000 2,000 0 0 0 0 $213,000
Former Exec VP of
Finance(1)
-------------------- ------ ---------- ------- -------- -------- ------------ -------------- ------------ ---------
Charles Pollard, 2012 0 0 0 0 0 0 0 0
Pres. & COO (2)
-------------------- ------ ---------- ------- -------- -------- ------------ -------------- ------------ ---------
Todd B. 2012 0 0 0 0 0 0 0 0
Hattenbach, Former
CFO (3)
-------------------- ------ ---------- ------- -------- -------- ------------ -------------- ------------ ---------
W. Edward Nichols,
CEO, Secretary, 2012 104,89 0 2,000 0 0 0 0 $106,892
Chairman (4)
-------------------- ------ ---------- ------- -------- -------- ------------ -------------- ------------ ---------
(1) Mr. Walford served as the Chief Executive Officer of the Company from
its inception to October 22, 2013, at that time he was appointed the
Executive Vice President of Finance. He served as the Executive Vice
President from October 22, 2013 through January 28, 2014. Mr. Walford
in connection with his services as an officer, director and founder
was issued 2,000,000 shares of common stock, such shares were valued
at $2,000 or $0.001 per share.
(2) Mr. Pollard became an Officer in March 1, 2013. As part of Mr.
Pollard's employment he was issued an option for 2,250,000 shares. The
option has no value using the Black-Scholes method.
(3) Mr. Hattenbach served as an Officer from July 1, 2013 through October
7, 2013.
(4) Mr. Nichols was appointed the Chief Executive Officer on October 22,
2013. Mr. Nichols, in connection with his services as an officer,
director and founder was issued 2,000,000 shares of common stock, such
shares were valued at $2,000 or $0.001 per share.
EMPLOYMENT AGREEMENTS
We have employment/consultant agreements as of September 30, 2013, with our key
officers, as listed below. Described below are the compensation packages our
Board approved for our executive officers. The compensation agreements were
approved by our board based upon recommendations conducted by the board.
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NAME POSITION ANNUAL COMPENSATION
-------------------- ------------------------------- -------------------
Donald Walford Former Executive Vice President
of Finance $192,000 (1)
Charles Pollard President & COO $210,000 (2)
W. Edward Nichols CEO, Chairman & Secretary $120,000 (3)
Todd B. Hattenbach Former CFO $150,000 (4)
(1) Pursuant to an employment agreement effective September 1, 2012 and
amended in February 2013, Mr. Walford receives a base salary of $192,000 per
year. In addition to the base salary, Mr. Walford shall be paid a monthly car
allowance of $600. In February 2013, the term of the agreement was extended
through September 2016. On October 22, 2013, Mr. Walford was appointed the
Executive Vice President of Finance and no changes were made to his employment
agreement as a result of the change of position. On January 28, 2014, Mr.
Walford was given 30-day notice of his termination for cause.
The employment agreement provided that Mr. Walford would be paid a bonus of one
half of one percent of the net asset increases as reflected in our balance sheet
from time to time. The basis of the calculation would be the net assets as
listed in our financials and shall at least be paid every six months within 30
days after the accounting for the applicable period has been completed.
Upon thirty (30) days written notice, the employment may be terminated without
further liability on the part of the Company. Cause is considered to be (i)
Conviction of a felony, a crime or moral turpitude or commission of an act of
embezzlement or fraud against the Company or affiliate thereof: (ii) deliberate
dishonesty of resulting in damages to the Company or affiliate thereof; and
(iii) dereliction of duty, misfeasance or malfeasance. If there is a termination
for cause the benefits of any bonus for the period preceding termination would
be forfeit.
The Company may terminate the agreement at will upon 60 days written notice. In
the Company decides to terminate it would be required to repurchase 50% of Mr.
Walford's shares up to 1,000,000 shares at a price equal to 90% of the average
trading prices over the 60 days preceding the notice of termination. The Company
would have to pay 50% of the repurchase within price within 30 days of
termination and the balance within 60 additional days.
(2) Effective March 1, 2013, we entered into an Executive Employment Agreement
with Charles Pollard to become our Chief Operating Officer and Director and the
CEO of TFI Operating. Pursuant to the Agreement, Mr. Pollard will receive a base
salary of $210,000 per year. The base salary shall thereafter be reassessed
annually by the Board of Directors based upon the performance of Mr. Pollard. In
addition, Mr. Pollard: i) shall be eligible to receive up to 500,000 shares of
our common stock based upon his performance as to the production and reserve
growth of us and mutually agreed upon between himself and the Board of
Directors; and ii) he shall be entitled to participate in all benefit programs
established by us. This Agreement may be terminated by either party without
cause upon thirty days written notice. Also as part of this Agreement and
subsequently amended in June 2013, Mr. Pollard was granted non-qualified stock
options to purchase 2,250,000 shares of our common stock at $0.10 per share. The
stock options will have a cashless exercise option and a tag along sales option
for Mr. Pollard should the CEO or other members of the Board of Directors elect
to sell the shares of common stock prior to a public stock offering. See the
table below for a description of the vesting provisions and term of the stock
options.
(3) Pursuant to a Consulting Agreement, effective September 1, 2012, Mr. Nichols
receives a Base Fee of $120,000 per year for the first six months and which
increased to $180,000 on the first day of March 2013. In addition to the Base
Fee, Mr. Nichols is paid a monthly car allowance of $600. Mr. Nichols shall be
paid an annual bonus of one half of one percent of the net asset increases over
the prior year. The basis of the calculation shall be the net assets as listed
in our financials and shall be paid every six months within 30 days after the
accounting for the applicable period has been completed. The original term of
the Consulting Agreement was extended through September 2016. On October 22,
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2013, Mr. Nichols was appointed the Chief Executive Officer of the Company and
no changes have been made to the Consulting Agreement as a result of the change
of position.
Upon thirty (30) days written notice, the employment may be terminated without
further liability on the part of the Company. Cause is considered to be (i)
Conviction of a felony, a crime or moral turpitude or commission of an act of
embezzlement or fraud against the Company or affiliate thereof: (ii) deliberate
dishonesty of resulting in damages to the Company or affiliate thereof; and
(iii) dereliction of duty, misfeasance or malfeasance. If there is a termination
for cause the benefits of any bonus for the period preceding termination would
be forfeit.
The Company may terminate the agreement at will upon 60 days written notice. In
the Company decides to terminate it would be required to repurchase 50% of Mr.
Nichol's shares up to 1,000,000 shares at a price equal to 90% of the average
trading prices over the 60 days preceding the notice of termination. The Company
would have to pay 50% of the repurchase within price within 30 days of
termination and the balance within 60 additional days.
(4) Mr. Hattenbach resigned as the Chief Financial Officer on October 7, 2013.
He did not have an employment agreement with the Company, he worked on an at
will basis.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
There are employment contracts, compensatory plans or arrangements, including
payments to be received from us, with respect to any of our directors or
executive officers which would in any way result in payments to any such person
because of his or her resignation, retirement or other termination of employment
with us. These agreements do not provide for payments to be made as a result of
any change in control of us, or a change in the person's responsibilities
following such a change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors in our entirety acts as the compensation committee for
Three Forks, Inc.
DIRECTOR COMPENSATION
The following table sets forth certain information concerning compensation paid
to our directors for services as directors, but not including compensation for
services as officers reported in the "Summary Executives' Compensation Table"
during the year ended December 31, 2012:
NON-QUALIFIED
FEES EARNED NON-EQUITY DEFERRED
OR PAID IN STOCK OPTION INCENTIVE PLAN COMPENSATION ALL OTHER
CASH AWARDS AWARDS COMPENSATION EARNINGS COMPENSATION TOTAL
NAME YEAR ($) ($) ($) ($) ($) ($) ($)
------------ ----- -------------- ---------- --------- ---------------- ----------------- ---------------- -----------
W. Edward 2012 0 0 0 0 0 0 $0
Nichols
Donald 2012 0 0 0 0 0 0 $0
Walford
Charles 2012 0 0 0 0 0 0 $0
Pollard
------------
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Messrs. Young, Ranew and Dragul were appointed our directors in 2013 and
therefore are not represented in the table.
(1) Mr. Nichols receives a salary pursuant to an agreement with the
Company for his services to the Company. Mr. Nichols in connection
with his services as an officer, director and founder was issued
2,000,0000 shares of common stock, such shares were valued at $2,000
or $0.001 per share.
(2) Mr. Walford receives a salary pursuant to an employment agreement with
the Company for his services as an officer of the Company. Mr. Walford
in connection with his services as an officer, director and founder
was issued 2,000,000 shares of common stock, such shares were valued
at $2,000 or $0.001 per share. On January 28, 2014, Mr. Walford's
employment agreement was terminated.
The term of office for each Director is one (1) year, or until his/her successor
is elected at our annual meeting and qualified. The term of office for each of
our Officers is at the pleasure of the Board of Directors.
The Board of Directors has no nominating, auditing committee or a compensation
committee. Therefore, the selection of person or election to the Board of
Directors was neither independently made nor negotiated at arm's length.
At this time, our Directors do not receive cash compensation for serving as
members of our Board of Directors.
LIMITATION ON LIABILITY AND INDEMNIFICATION
We are a Colorado corporation. The Colorado Revised Statutes (CRS) provides that
the articles of incorporation of a Colorado corporation may contain a provision
eliminating or limiting the personal liability of a director to the corporation
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except that any such provision may not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or our stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) acts
specified in Section 78 (concerning unlawful distributions), or (iv) any
transaction from which a director directly or indirectly derived an improper
personal benefit. Our articles of incorporation contain a provision eliminating
the personal liability of directors to our company' or our stockholders for
monetary damages to the fullest extent provided by the CRS.
The CRS provides that a Colorado corporation must indemnify a person who was
wholly successful, on the merits or otherwise, in defense of any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative and whether formal or informal (a
"Proceeding"), in which he or she was a party because the person is or was a
director, against reasonable expenses incurred by him or her in connection with
the Proceeding, unless such indemnity is limited by the corporation's articles
of incorporation. Our articles of incorporation do not contain any such
limitation.
The CRS provides that a Colorado corporation may indemnify a person made a party
to a Proceeding because the person is or was a director against any obligation
incurred with respect to a Proceeding to pay a judgment, settlement, penalty,
fine (including an excise tax assessed with respect to an employee benefit plan)
or reasonable expenses incurred in the Proceeding if the person conducted
himself or herself in good faith and the person reasonably believed, in the case
of conduct in an official capacity with the corporation, that the person's
conduct was in the corporation's best interests and, in all other cases, his or
her conduct was at least not opposed to the corporation's best interests and,
with respect to any criminal proceedings, the person had no reasonable cause to
believe that his or her conduct was unlawful. Our articles of incorporation and
bylaws allow for such indemnification. A corporation may not indemnify a
director in connection with any Proceeding by or in the right of the corporation
in which the director was adjudged liable to the corporation or, in connection
with any other Proceeding charging that the director derived an improper
personal benefit, whether or not involving actions in an official capacity, in
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which Proceeding the director was judged liable on the basis that he or she
derived an improper personal benefit. Any indemnification permitted in
connection with a Proceeding by or in the right of the corporation is limited to
reasonable expenses incurred in connection with such Proceeding.
The CRS, unless otherwise provided in the articles of incorporation, a Colorado
corporation may indemnify an officer, employee, fiduciary, or agent of the
corporation to the same extent as a director and may indemnify such a person who
is not a director to a greater extent, if not inconsistent with public policy
and if provided for by our bylaws, general or specific action of our board of
directors or stockholders, or contract. Our articles of incorporation provide
for indemnification of our directors, officers, employees, fiduciaries and
agents to the full extent permitted by Colorado law.
Our articles of incorporation also provide that we may purchase and maintain
insurance on behalf of any person who is or was a director or officer of our
company or who is or was serving at our request as a director, officer or agent
of another enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not we would have the power to indemnify him or her against
such liability.
EQUITY COMPENSATION PLAN INFORMATION
KEY EMPLOYEES STOCK COMPENSATION PLAN
Effective May 1, 2013, our Stock Option and Award Plan (the "Stock Incentive
Plan") was approved by our Board of Directors. Under the 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 us 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 or
exercise 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 our common stock are subject to the Stock
Incentive Plan and maybe either a qualified or non-qualified stock option. The
shares issued for the Stock Incentive Plan may be either treasury or authorized
and unissued shares. As of September 30, 2013, we have granted non-qualified
stock options to purchase 3,900,000 shares of our common stock under the Plan.
WARRANTS
Effective May 30, 2013 and as part of a consulting agreement, the Company issued
a warrant to a consultant in exchange for cash in the amount of $27.50. The
warrant entitles the consultant to purchase over a five year period at a price
of $3.00 per share up to 275,000 shares of the Company's common stock. The
warrant has a cashless exercise option.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------------------------------------------------------
Other than the stock transactions discussed below, we have not entered into any
transaction nor are there any proposed transactions in which any of our
founders, directors, executive officers, stockholders or any members of the
immediate family of any of the foregoing had or is to have a direct or indirect
material interest.
We have employment agreements as of September 30, 2013, with our key officers,
as listed below. Described below are the compensation packages our Board
approved for our executive officers. The compensation agreements were approved
by our board based upon recommendations conducted by the board.
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NAME POSITION ANNUAL COMPENSATION
-------------------- ------------------------------- -------------------
Donald Walford Former Executive Vice President
of Finance $192,000 (1)
Charles Pollard President & COO $210,000 (2)
W. Edward Nichols CEO, Chairman & Secretary $120,000 (3)
Todd B. Hattenbach Former CFO $150,000 (4)
--------------------
(1)Pursuant to an employment agreement effective September 1, 2012 and amended
in February 2013, Mr. Walford receives a base salary of $192,000 per year. In
addition to the base salary, Mr. Walford shall be paid a monthly car allowance
of $600. In February 2013, the term of the agreement was extended through
September 2016. On October 22, 2013, Mr. Walford was appointed the Executive
Vice President of Finance and no changes were made to his employment agreement
as a result of the change of position. On January 28, 2014, Mr. Walford was
given 30-day notice of his termination for cause.
Mr. Walford would be paid a bonus of one half of one percent of the net asset
increases as reflected in our balance sheet from time to time. The basis of the
calculation would be the net assets as listed in our financials and shall at
least be paid every six months within 30 days after the accounting for the
applicable period has been completed. In February 2013, the term of the
agreement was extended through September 2016. On October 22, 2013, Mr. Walford
was appointed the Executive Vice President of Finance no changes have been made
to his employment agreement as a result of the change of position.
(2) Effective March 1, 2013, we entered into an Executive Employment Agreement
with Charles Pollard to become our Chief Operating Officer and Director and the
CEO of TFI Operating. Pursuant to the Agreement, Mr. Pollard will receive a base
salary of $210,000 per year. The base salary shall thereafter be reassessed
annually by the Board of Directors based upon the performance of Mr. Pollard. In
addition, Mr. Pollard: i) shall be eligible to receive up to 500,000 shares of
our common stock based upon his performance as to the production and reserve
growth of us and mutually agreed upon between himself and the Board of
Directors; and ii) he shall be entitled to participate in all benefit programs
established by us. This Agreement may be terminated by either party without
cause upon thirty days written notice. Also as part of this Agreement and
subsequently amended in June 2013, Mr. Pollard was granted non-qualified stock
options to purchase 2,250,000 shares of our common stock at $0.10 per share. The
stock options will have a cashless exercise option and a tag along sales option
for Mr. Pollard should the CEO or other members of the Board of Directors elect
to sell the shares of common stock prior to a public stock offering. See the
table below for a description of the vesting provisions and term of the stock
options.
(3) Pursuant to a Consulting Agreement, effective September 1, 2012, Mr. Nichols
receives a Base Fee of $120,000 per year for the first six months and which
increased to $180,000on the first day of March 2013. In addition to the Base
Fee, Mr. Nichols is paid a monthly car allowance of $600. Mr. Nichols shall be
paid an annual bonus of one half of one percent of the net asset increases over
the prior year. The basis of the calculation shall be the net assets as listed
in our financials and shall be paid every six months within 30 days after the
accounting for the applicable period has been completed. The original term of
the Consulting Agreement was extended through September 2016. On October 22,
2013, Mr. Nichols was appointed the Chief Executive Officer of the Company no
changes have been made to the Consulting Agreement as a result of the change of
position.
(4) Mr. Hattenbach resigned as the Chief Financial Officer on October 7, 2013.
He did not have an employment agreement with the Company and worked on an at
will basis.
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STOCK ISSUANCES
The following officers and directors of the Company have been issued stock,
options and/or warrants as listed below.
NUMBER OF
NAME POSITION SHARES TYPE OF EQUITY REASON FOR ISSUANCE
------------------------- ----------------------------- ------------ ----------------------- ---------------------------
Don Walford Director & Former Exec VP of
Finance 2,000,000 Common Shares Services
Edward Nichols CEO, Chairman & Secretary 2,000,000 Common Shares Services
Chuck Pollard President & COO 2,250,000 Stock Option Services
William Young Director 400,000 Common Shares Services
Paul Dragul Director 162,000 Common Shares Cash and services
Lester Ranew Director 66,667 Common Shares Cash
THREE FORKS NO. 1 LLC
On December 31, 2012, we entered into a Farmout Agreement where we had a 100%
working interest in 320 gross and 290 net acres of mineral interests located in
Archer County Texas subject to the Farmout. In consideration of 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, we assigned 87% of the working interest in the Farmout to the LLC.
Likewise, on January 1, 2013, we assigned 1% of the WI to each Messrs. Walford,
Young and Nichols, officers and directors of the Company, (a total of 3% of the
WI) in the Farmout. These WIs' were assigned the proportional cash payment of 1%
of the project costs.
Mr. Lester Ranew, a director of the Company, purchase 6 Units in the Three Forks
No. 1, representing 6.81% equity interest in Three Forks No. 1.
DUE FROM OTHERS - RELATED PARTIES
During the nine months ended September 30, 2013, we advanced funds to two of our
affiliates, TFI Operating in the amount of $1,096 and Three Forks No. 1 in the
amount of $118,713 and at September 30, 2013 we are owed $119,809.
ACCRUED LIABILITIES - RELATED PARTY
During the nine months ended September 30, 2012, the Company was advanced funds
from on of its members of the Board of Directors, Lester Ranew, who is also a
member of Tin Cup LLC and at September 30, 2013, the Company owes $209,520. In
addition, at September 30, 2013, the Company owed Mr. Ranew $8,065 for accrued
revenues from oil and gas production.
At December 31, 2012, we owed an affiliate of one of our former officer and
director a total of $15,000 in fees for services rendered.
SHARES FOR SERVICES
During the nine months ended September 30, 2013, Mr. Dragul and Mr. Panigrahi a
member of the Board of Directors and a former member, respectively were issued
25,000 and 175,000 shares of our common stock in exchange for services in the
amount of $17,600 or at a fair value of $0.088 per share.
In March 2012, the Company issued 5,325,000 shares of its common stock to its
members of the Board of Directors and officers in exchange for services in the
amount of $5,325 or at a fair value of $0.001 per share.
-45-
CONSULTING SERVICES
During the nine months ended September 30, 2013, and for the period March 28,
2012 (inception) through September 30, 2012, respectively the Company paid
Messrs. Nichols and Walford totally $188,361 and $40,684, in fees as part of
consulting arrangements approved by the Board of Directors.
SECURED CONVERTIBLE PROMISSORY NOTES
In September 2013, we commenced 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 JABS property discussed above. These notes are due in
September 2014 and are 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 conversion of the convertible
promissory notes into shares of our common stock could have a dilutive effect to
the holdings of our existing shareholders.
One of the subscribers of this offering was Tincup Oil and Gas, LLC, which
subscribed for a $250,000 secured convertible promissory note. Mr. Ranew, a
director of the Company, is a member of Tincup Oil and Gas, LLC.
The offering was not fully subscribed and a total of $1,535,000 was raised.
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, officers and directors of the Company, in
exchange for secured convertible promissory notes provided the Company with a
total of $600,000 cash ($300,000 each). Mr. Pollard's and Mr. Ranew's notes have
a due date of January 2, 2014 and allow for the conversion of the notes into
common stock upon issuance. Their notes provide that in addition to having a due
date of January 2, 2014, that at the due date they will each receive a $7,500
payment of fees and interest. If the notes are not paid at January 2, 2014, the
Company is required to take immediate steps to liquidate the secured property
and the due date will be extended to April 2, 2014. At January 2, 2014, the
Company failed to make payment on the notes. At that time Mr. Pollard and Ranew
each entered into an Extension and Waiver with the Company. The Extension and
Waiver provides that the payment date shall be extended to April 2, 2014 and
both holders have waived the provision that steps be taken to liquidate the
secured property at this time. If payment is made at April 2, 2014, they will
each receive a $15,000 payment of fees and interest. If the property has not
been liquidated at such date, they will each be assigned an 11.25% interest in
the Five JABS properties.
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.
ITEM 8. LEGAL PROCEEDINGS
-------------------------
We anticipate that we (including any future subsidiaries) will from time to time
become subject to claims and legal proceedings arising in the ordinary course of
business. It is not feasible to predict the outcome of any such proceedings and
we cannot assure that their ultimate disposition will not have a materially
adverse effect on our business, financial condition, cash flows or results of
operations. As of the filing of this Form 10, we are not a party to any pending
legal proceedings, nor are we aware of any civil proceeding or government
authority contemplating any legal proceeding.
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ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
MARKET INFORMATION
Currently there is no public trading market for our stock, and we have not
applied to have the common stock quoted for trading in any venue.
We intend to obtain a listing for our stock on an exchange in the future, but
cannot make any assurances that we will be approved for such listing, as the
exchanges have certain listing requirements that we would have to meet. Such
listing requirements at a minimum include, but are not limited to:
- Stockholders' equity of at least $4,000,000 and/or 2 years of
operating history and/or pre-tax income of at least $750,000
in our last fiscal year or two of the last three fiscal years;
- Be able to meet certain distribution requirements; and
- Be able to meet certain market values of publicly held shares
and aggregate market values of the shares.
RULES GOVERNING LOW-PRICE STOCKS THAT MAY AFFECT OUR STOCKHOLDERS' ABILITY TO
RESELL SHARES OF OUR COMMON STOCK
We are a "penny stock" company, as our stock price is less than $5.00 per share.
If we are able to obtain an exchange listing for our stock, we cannot make an
assurance that we will be able to maintain a stock price greater than $5.00 per
share and if the share price was to fall to such prices, that we wouldn't be
subject to the Penny Stocks rules.
The penny stock rules require broker-dealers, prior to a transaction in a penny
stock not otherwise exempt from the rules, to make a special suitability
determination for the purchaser to receive the purchaser's written consent to
the transaction prior to sale, to deliver standardized risk disclosure documents
prepared by the SEC that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer must also
provide the customer with current bid and offer quotations for the penny stock.
In addition, the penny stock regulations require the broker-dealer to deliver,
prior to any transaction involving a penny stock, a disclosure schedule prepared
by the SEC relating to the penny stock market, unless the broker-dealer or the
transaction is otherwise exempt. A broker-dealer is also required to disclose
commissions payable to the broker-dealer and the registered representative and
current quotations for the securities. Finally, a broker-dealer is required to
send monthly statements disclosing recent price information with respect to the
penny stock held in a customer's account and information with respect to the
limited market in penny stocks.
HOLDERS
As of December 31, 2013, we have approximately 450 stockholders of record of our
common stock.
DIVIDENDS
As of the filing of this registration statement, we have not paid any dividends
to stockholders. There are no restrictions which would limit our ability to pay
dividends on common equity or that are likely to do so in the future. The
Colorado Revised Statutes, however, do prohibit us from declaring dividends
where, after giving effect to the distribution of the dividend; we would not be
able to pay our debts as they become due in the usual course of business; or our
total assets would be less than the sum of the total liabilities plus the amount
that would be needed to satisfy the rights of stockholders who have preferential
rights superior to those receiving the distribution.
-47-
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
------------------------------------------------
We have sold securities since inception (March 28, 2012) without registering the
securities under the Securities Act of 1933 as shown in the following tables:
SHARES ISSUED FOR PRIVATE OFFERINGS
Since our inception in March 2012 through September 2012, we have shares of our
common stock at a price of $0.01 per share in exchange for cash to the
individuals and the amounts set forth below.
Number of Shares Consideration Name
--------------------------------------------------------------------------------
5,000 $ 50 Melvin & Judith Einsidler
20,000 $ 200 William C. Gascoigne
5,000 $ 50 Robert Bradley
5,500 $ 55 Donald Einsidler
100,000 $ 1,000 Jacobs Enterprises, Ltd
45,000 $ 450 Robert W. Simmons
10,000 $ 100 Robert Reynolds
11,000 $ 110 Richard Davis
30,000 $ 300 Dennis Kaboth
7,500 $ 75 Jeremy Isaacs
2,500 $ 25 David & Lois Einsidler
16,500 $ 165 Barry Isaacs
5,500 $ 55 Risa Einsidler
137,000 $ 1,370 Bruce Theuerkauf
19,500 $ 195 Ralph T. Meloro, Trustee of
the Lisa B. Meloro Irrevocable
Trust
40,000 $ 400 Dennis Noel
60,000 $ 600 Donald S. Heauser
30,000 $ 300 Eric Hample
150,000 $ 1,500 Dennis and MaryJo Gabriel
2,215 $ 22 Diane Leeds Einsidler
10,000 $ 100 Vladimir & Glida Scerbo
160,000 $ 1,600 Robert Scerbo
2,500 $ 25 Marc & Caryn Schneider
5,500 $ 55 Charles Ras
50,000 $ 500 James Ford
5,000 $ 50 John Phelps
21,000 $ 210 Sean Fleming
75,000 $ 750 Neilson Family Trust
150,000 $ 1,500 Michael McNally
2,500 $ 25 Joseph G. Hoenigmann
2,500 $ 25 Christopher Pesce
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
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100,000 $ 1,000 Clarene O Hample Revocable
Trust, Brent Hample Trustee
7,500 $ 75 Leah & Greg Isaacs
67,000 $ 670 Joan M. Jacobson
17,000 $ 170 Christian Farr
20,000 $ 200 John Cooper
25,000 $ 250 Steve Remmert
25,000 $ 250 Gerald Smart Trust
6,500 $ 65 Michael Einsidler
16,667 $ 167 Alexander Biggs
16,667 $ 167 Thomas B. Biggs
7,000 $ 70 Leland Beckley
7,000 $ 70 Byron Beckley
7,000 $ 70 Trenton Toftoy
10,000 $ 100 James Iverson
100,000 $ 1,000 Robert & Cynthia Toftoy
25,000 $ 250 Joel Ripmaster
7,000 $ 70 Patricia Nauman
3,500 $ 35 Ralph Toftoy
5,000 $ 50 Monica Sherman
40,000 $ 400 Richard Rinella
5,000 $ 50 Bernard Rinella
17,000 $ 170 Breff Leasing
7,000 $ 70 Underhill Trucking -
25,000 $ 250 Gerald Smart Trust
200,000 $ 2,000 Henry Moxely
10,000 $ 100 Nicole Saunders
10,000 $ 100 Glenda Weiss
3,200 $ 32 Terry Jacobson
38,000 $ 380 Tom Ness
5,000 $ 50 John Bryan
25,000 $ 250 Robert & Donna Wittenauer
25,000 $ 250 Donna Wittenauer FBO LK Latimer
5,000 $ 50 Timothy Scott
10,000 $ 100 Patrick J. Donovan
25,000 $ 250 Mihcael Pryblo
100,000 $ 1,000 Adelaide Biggs
15,000 $ 150 George Biggs
15,000 $ 150 Marcia Biggs
15,000 $ 150 Adelaide Andrews
4,000 $ 40 Amanda Germany
40,000 $ 400 Paul Dragul
6,250 $ 63 Daniel and Lesli Underhill
2,500 $ 25 Stephen Cohen
3,400 $ 34 Ron Anderson
60,000 $ 600 Cracked Crab LLC
7,500 $ 75 Jeff Rosenberg
40,000 $ 400 Glenda Weiss
50,000 $ 500 Christopher Jacobs
2,500 $ 25 Joseph Willen
35,000 $ 350 Paul Dragul
40,000 $ 400 Steward Mosko
-49-
25,000 $ 250 Gary Walford
50,000 $ 500 Brian Remington
10,000 $ 100 Daniel Rainey
50,000 $ 500 E. Dean Davis
25,000 $ 250 Lawson Farmer
25,000 $ 250 Cain Griffin Group, LLc
6,000 $ 60 Charles W. Jones
4,000 $ 40 FNB Griffin custodian for
Individual IRA Charles W. Jones
2,500 $ 25 Edward Vitko
2,500 $ 25 Mike Vitko
11,667 $ 117 Robert & Cynthia Toftoy
500 $ 5 Marla Alstadt
250 $ 3 Gary Lee Young
From July 2012 through September 2012, we have shares of our common stock at a
price of $1.00 per share in exchange for cash to the individuals and the amounts
set forth below.
Number of Shares Consideration Name
--------------------------------------------------------------------------------
8,000 $ 8,000 Robert & Cynthia Toftoy
15,000 $ 15,000 Bruce Theuerkauf Jr.
50,000 $ 50,000 James Ford
1,000 $ 1,000 Brian Hassett
25,000 $ 25,000 Willie Love
15,000 $ 15,000 Robert Reynolds
100,000 $ 100,000 Edward Vitko
10,000 $ 10,000 Caryn & Marc Schneider
1,000 $ 1,000 Diane Leeds Einsidler
4,876 $ 4,876 Bruce Molloy FBO Mariana Molloy
6,000 $ 6,000 Bruce Molloy
10,000 $ 10,000 Larry & Gayla Johnson
12,000 $ 12,000 David Newman
25,000 $ 25,000 Michael Faletti, Jr.
5,000 $ 5,000 Robert Bradley
2,250 $ 2,250 Thomas G. Nixon
20,000 $ 20,000 Jonathan Sherman,
25,000 $ 25,000 William and Suzanne Knopf
100,000 $ 100,000 Alexander Withall Declaration fo
Trust- W. Knopf Trustee
10,000 $ 10,000 Bruce Molloy
50,000 $ 50,000 Christopher Jacobs
10,000 $ 10,000 Henry H. Moxley
6,000 $ 6,000 James H. Campbell
2,750 $ 2,750 Thomas and Linda Nixon
25,000 $ 25,000 Michael Pryblo
5,000 $ 5,000 James Iverson
37,000 $ 37,000 Paul Dragul
30,000 $ 30,000 David Kelley
6,000 $ 6,000 Cottonwood NB LLC
-50-
2,800 $ 2,800 Karen A. Baker
5,000 $ 5,000 Rodney J. Buhr
5,000 $ 5,000 Spyglass Capital Group LLC
2,000 $ 2,000 Samuel H. Rabin
14,000 $ 14,000 Ronald Cox
5,000 $ 5,000 Willie and Carol Love, Jr
20,000 $ 20,000 Steven A. Scalf
10,000 $ 10,000 Keil & Elizabeth Johnson
10,000 $ 10,000 Russel D. and Judith A. Noel
20,000 $ 20,000 Robert and Cynthia Toftoy
50,000 $ 50,000 Joan jacobson Trust
50,000 $ 50,000 James R. Stewart
5,000 $ 5,000 Irene A. Brown
5,000 $ 5,000 James Iverson
3,000 $ 3,000 Kenneth Knudson
100,000 $ 100,000 Dennis and MaryJo Gabriel
20,000 $ 20,000 Robert Scerbo
50,000 $ 50,000 Edward Vitko
30,000 $ 30,000 Falettiko Oil & Gas, LLc
25,000 $ 25,000 Mike Vitko
7,000 $ 7,000 Larry & Gayle Johnson
5,000 $ 5,000 Willie and Carol Love
6,000 $ 6,000 Vladimir Scerbo
25,000 $ 25,000 Robert Reynolds
10,000 $ 10,000 Bruce Theuerkauf Jr.
35,000 $ 35,000 Cain Griffin Group, Inc
30,000 $ 30,000 David. D. Duvick
25,000 $ 25,000 Caroline Justice
10,000 $ 10,000 Cottonwood NB LLC
10,000 $ 10,000 Steven A. Scalf
2,250 $ 2,250 Gary Lee Young
30,000 $ 30,000 David Kelley
10,000 $ 10,000 Sauney & Geraldine Pippin
20,000 $ 20,000 Steve Scalf
30,000 $ 30,000 Bernard Bols
16,667 $ 16,667 Breff Leasing
33,334 $ 33,334 Gary Underhill
50,000 $ 50,000 Bill Baber
13,000 $ 13,000 Debbie Hamen
2,000 $ 2,000 Bruce Theuerkauf Jr
81,000 $ 81,000 Dayspring Capital, LLC
12,500 $ 12,500 Tom Ness
7,500 $ 7,500 Robert Toftoy
2,500 $ 2,500 Edward Vitko
2,500 $ 2,500 Mike Vitko
-51-
From October 2012 through December 2012, we have shares of our common stock at a
price of $2.25 per share in exchange for cash to the individuals and the amounts
set forth below.
Number of Shares Consideration Name
--------------------------------------------------------------------------------
10,000 $ 22,500 Tamar and Bruce Mar
44,444 $ 99,999 James R. Stewart
40,000 $ 90,000 Rich Sharpenter
50 $ 113 Kathie Hayes
500 $ 1,125 Maria Terrazas
2,222 $ 5,000 Tim L. Briggs
1,000 $ 2,250 Edward W. Sharpenter
1,600 $ 3,600 Rodney Buhr
20,000 $ 45,000 Alexander Withall/ Knopf
20,000 $ 45,000 Eric Hample
9,955 $ 22,399 Rich Sharpenter
50 $ 113 Ned Sharpenter
50 $ 113 Becky sharpenter
50 $ 113 Nick Sharpenter
50 $ 113 Lindsey Sharpenter
50 $ 113 Lillian Sharpenter
50 $ 113 Marc Sharpenter
50 $ 113 Leanne Sharpenter
50 $ 113 Joanne Blincoe
50 $ 113 Jim Blincoe
50 $ 113 Todd Blincoe
50 $ 113 Marie Blincoe
50 $ 113 Sophie Blincoe
50 $ 113 Emma Blincoe
50 $ 113 Tom Blincoe
50 $ 113 Judy Blincoe
50 $ 113 Jay Blincoe
50 $ 113 Emily Blincoe
225 $ 506 Trevor J. Buhr
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
-52-
From January 2013 through September 2013, we have shares of our common stock at
a price of $3.00 per share in exchange for cash to the individuals and the
amounts set forth below.
Number of Shares Consideration Name
--------------------------------------------------------------------------------
20,000 $ 60,000 Dr William R. King
10,000 $ 30,000 Ronney Ledford Jr. LLc
10,000 $ 30,000 Francis Construction
10,000 $ 30,000 Lorie J.and Josephine Mangham, Jr.
10,000 $ 30,000 Tim Dender
1,034 $ 3,102 Rich Sharpenter
1,000 $ 3,000 Karen Anderson Baker
10,000 $ 30,000 William & Joyce Babb
6,665 $ 19,995 Ronnie Cain
7,000 $ 21,000 William Stewart
16 $ 48 Rich Sharpenter
16,667 $ 50,001 Seth Sleezer IV
8,333 $ 24,999 Ronney Ledford Jr.
66,667 $ 200,001 Lester Ranew
46,667 $ 140,001 FNB Griffin Custodian for
Individual IRA Timothy R. Dender
10,000 $ 30,000 FNB Griffin Custodian for
individual IRA Linda Jordan
2,000 $ 6,000 Kenneth and Shirley Thompson
13,334 $ 40,002 Barry L. Jacobson
26,667 $ 80,001 James and Teresa Stewart
8,334 $ 25,002 Jared and Christina Adam
3,333 $ 9,999 Ronnie Can
1,671 $ 5,013 Patricia K. Huber
10,000 $ 30,000 Amanda Remington
13,334 $ 40,002 Arthur C. Krepps III
10,000 $ 30,000 C. Roan Berry
1,500 $ 4,500 Creative Solutions Invesments, LLC
1,000 $ 3,000 Darrell L & Mary A Gulseth JTWROS
15,000 $ 45,000 Herbert T. Sears
20,000 $ 60,000 James and Teresa Stewart
500 $ 1,500 Kelly Anderson
500 $ 1,500 Kirk Anderson
500 $ 1,500 Kyle Anderson
3,500 $ 10,500 Mitchell Gulseth
20,000 $ 60,000 Raymond Dender
10,000 $ 30,000 Richard Coleman Clements
8,333 $ 24,999 Ronny Ledford Jr.
10,000 $ 30,000 SCI Investments, LLC
2,000 $ 6,000 Star Net Investments, LLC
100,000 $ 300,000 Robert E. Long
10,000 $ 30,000 Timothy Dender
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
-53-
500 $ 1,500 Kelly Anderson
500 $ 1,500 Kirk Anderson
500 $ 1,500 Kyle Anderson
500 $ 1,500 Marla Alstadt
10,000 $ 30,000 Amanda Remington
8,333 $ 24,999 Ronny Ledford Jr.
10,000 $ 30,000 Richard Coleman Clements
1,500 $ 4,500 Creative Solutions Invesments, LLC
2,000 $ 6,000 Star Set Investments, LLC
20,000 $ 60,000 Raymond Dender
20,000 $ 60,000 James and Teresa Stewart
3,333 $ 10,000 Ray & Betty Chally
10,000 $ 30,000 M&M Funding, LLC
12,000 $ 36,000 FNB Griffin Custodian for
William C. Weldon IRA
10,000 $ 30,000 FNB Griffin Custodian for
Wendy Williams IRA
10,000 $ 30,000 FNB Griffin Custodian for
Lewis G. Sanders IRA
10,000 $ 30,000 FNB Griffin Custodian for
William House Jr. IRA
SECURED CONVERTIBLE PROMISSORY NOTE OFFERING
In September 2013, we commenced 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 JABS property discussed earlier in the document. These
notes are due in September 2014 and are 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 offering was not
fully subscribed and a total of $1,535,000 was raised.
NOTEHOLDER AMOUNT OF THE NOTE
-----------------------------------------------------------------------
Tincup Oil and Gas , LLC (1) $250,000
C. Roan Berry/Environtech Corp. $100,000
Timothy Dender $400,000
Dennis W. & Mary J. Gabriel $60,000
Charles Jones $100,000
Estate of William King $100,000
Estate of William King $500,000
Caroline J. Fisher, Ph. D $25,000
------------------------------------------------------------------------
(1) Mr. Ranew, a director of the Company, is a member of Tincup Oil and
Gas, LLC.
EXEMPTION FROM REGISTRATION CLAIMED
Sales and issuances by us of the unregistered securities listed above were made
by us in reliance upon Rule 506 of Regulation D to the individuals listed above.
All of the individuals and/or entities listed above that purchased the
unregistered securities were all known to us and our management, through
pre-existing business relationships, as long standing business associates,
friends, 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 our management 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 us. 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
-54-
in any further resale or disposition. Each purchaser made written representation
under Rule 506 of Regulation D, including net worth and sophistication. We
required written representation that each purchaser who was not an accredited
investor, either alone or with his purchaser representative, had such knowledge
and experience in financial and business matters that he/she was capable of
evaluating the merits and risks of the prospective investment, and the issuer
reasonably believed (based on written representations) immediately prior to
making any sale that the purchaser came within this description.
SHARES ISSUED FOR COMPENSATION OR SERVICES
Since our inception in March 2012 through September 30, 2013, we have issued a
total of 6,250,000 shares of our common stock in exchange for services to the
individuals and the amounts set forth below.
NUMBER OF SHARES CONSIDERATION NAME
--------------------------------------------------------------------------------
2,000,000 Services W Edward Nichols (1)
2,000,000 Services Donald Walford (1)
75,000 Services Lisa Baird
500,000 Services William Young (1)
750,000 Services Marc Pindus
150,000 Services Michael Littman
15,000 Services Debbie Hamen
15,000 Services Joe Ford
15,000 Services Herb Sears
200,000 Services Hawkeye Oil and Gas Ventures LLC
50,000 Services William Baber
10,000 Services Joe Ford
175,000 Services Prabhas Panigrahi
25,000 Services Paul Dragul (1)
270,000 Services Maxim Group Inc.
MATERIAL RELATIONSHIPS
(1) Director/Officer
EXEMPTION FROM REGISTRATION CLAIMED
All of the sales by us of the unregistered securities listed immediately above
were made by us in reliance upon Section 4(2) of the Act. All of the individuals
and/or entities listed above that purchased the unregistered securities were all
known to us and our management, through pre-existing business relationships, as
long standing business associates, friends, 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 our
management 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 us. 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.
-55-
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
----------------------------------------------------------------
COMMON STOCK
We are presently authorized to issue one-hundred million (100,000,000) shares of
our $0.001 par value common shares. A total of 11,503,477 common shares are
deemed issued and outstanding as of December 31, 2013.
All shares, when issued, will be fully paid and non-assessable. All shares are
equal to each other with respect to voting, liquidation, and dividend rights.
Special Stockholders' meetings may be called by our Officers or Directors, or
upon the request of holders of at least one-tenth (1/10th) of the outstanding
shares. Holders of shares are entitled to one vote at any Stockholders' meeting
for each share they own as of the record date set by our Board of Directors.
There is no quorum requirement for Stockholders' meetings. Therefore, a vote of
the majority of the shares represented at a meeting will govern even if this is
substantially less than a majority of the shares outstanding. Holders of shares
are entitled to receive such dividends as may be declared by our Board of
Directors out of funds legally available therefore, and upon liquidation are
entitled to participate pro rata in a distribution of assets available for such
a distribution to Stockholders. There is no conversion, pre-emptive or other
subscription rights or privileges with respect to any shares. Reference is made
to our Articles of Incorporation and our By-Laws as well as to the applicable
statutes of the State of Colorado for a more complete description of the rights
and liabilities of holders of shares. It should be noted that the Board of
Directors without notice to the Stockholders may amend the By-Laws. Our shares
do not have cumulative voting rights, which means that the holders of more than
fifty percent (50%) of the shares voting for election of Directors may elect all
the Directors if they choose to do so. In such event, the holders of the
remaining shares aggregating less than fifty percent (50%) of the shares voting
for election of Directors may not be able to elect any Director.
PREFERRED STOCK
We are presently authorized to issue twenty-five million (25,000,000) preferred
shares our $10 par value preferred shares. No shares of preferred stock are
issued and outstanding as of December 31, 2013.
On June 12, 2013 the Board authorized the Class A Preferred Convertible Stock
(the "Class A Preferred Stock") of which 500,000 shares of preferred stock have
been authorized for the class and the shares have a deemed purchase price at
$4.50 per share. The Class A Preferred Stock are to have voting rights
equivalent to their conversion rate, one (1) share of Class A Preferred Stock
equals one (1) share of common stock. At this time, no shares of the Class A
Preferred Stock have been issued.
KEY EMPLOYEES STOCK COMPENSATION PLAN
We adopted a Stock Option and Award Plan on May 1, 2013. We have authorized
5,000,000 shares of common stock to be available for the Plan. We have granted
options exercisable for 3,900,000 shares of our common stock under the Plan.
WARRANTS
Effective May 30, 2013 and as part of a consulting agreement, the Company issued
a warrant to a consultant in exchange for cash in the amount of $27.50. The
warrant entitles the consultant to purchase over a five year period at a price
of $3.00 per share up to 275,000 shares of the Company's common stock. The
warrant has a cashless exercise option.
SECURED CONVERTIBLE PROMISSORY NOTES
In September 2013, we commenced 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 JABS property discussed above. These notes are due in
September 2014 and are convertible into shares of our common stock in whole or
-56-
in part at a conversion price of $3.60 per share 6 months after issuance of the
secured convertible promissory note. The conversion of the convertible
promissory notes into shares of our common stock could have a dilutive effect to
the holdings of our existing shareholders.
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.
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, officers and directors of the Company, in
exchange for secured convertible promissory notes provided the Company with a
total of $600,000 cash ($300,000 each). Mr. Pollard's and Mr. Ranew's notes have
a due date of January 2, 2014 and allow for the conversion of the notes into
common stock upon issuance. Their notes provide that in addition to having a due
date of January 2, 2014, that at the due date they will each receive a $7,500
payment of fees and interest. If the notes are not paid at January 2, 2014, the
Company is required to take immediate steps to liquidate the secured property
and the due date will be extended to April 2, 2014. At January 2, 2014, the
Company failed to make payment on the notes. At that time Mr. Pollard and Ranew
each entered into an Extension and Waiver with the Company. The Extension and
Waiver provides that the payment date shall be extended to April 2, 2014 and
both holders have waived the provision that steps be taken to liquidate the
secured property at this time. If payment is made at April 2, 2014, they will
each receive a $15,000 payment of fees and interest. If the property has not
been liquidated at such date, they will each be assigned an 11.25% interest in
the Five JABS properties.
At September 30, 2013, the Company had a total of $2,135,000 in outstanding
secured convertible promissory notes. These funds were used towards the purchase
of the remaining 37.5% WI in the Five JABS property.
STOCKHOLDERS
Each Stockholder has sole investment power and sole voting power over the shares
owned by such Stockholder. No Stockholder has entered into or delivered any lock
up agreement or letter agreement regarding shares or options thereon. Under
Colorado laws, no lock up agreement is required regarding our shares as it might
relate to an acquisition.
TRANSFER AGENT AND REGISTRAR
Our transfer agent for our securities is Continental Stock and Transfer Company
at 17 Battery Place, New York, New York 10004 Phone: 212-509-4000.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
--------------------------------------------------
Under our Articles of Incorporation and By-Laws, we may indemnify an officer or
director who is made a party to any proceeding, including a lawsuit, because of
his position, if he acted in good faith and in a manner he reasonably believed
to be in our best interest. No officer or director may be may be indemnified,
however, where the officer or director acted committed intentional misconduct,
fraud, or an intentional violation of the law.
We may advance expenses incurred in defending a proceeding. To the extent that
the officer or director is successful on the merits in a proceeding as to which
he is to be indemnified, we must indemnify him against all expenses incurred,
including attorney's fees. With respect to a derivative action, indemnity may be
made only for expenses actually and reasonably incurred in defending the
proceeding, and if the officer or director is judged liable, only by a court
order. The indemnification is intended to be to the fullest extent permitted by
the laws of the State of Colorado.
-57-
Regarding the indemnification for liabilities arising under the Securities Act
of 1933, which may be permitted to officers and directors under Colorado law, we
are informed that, in the opinion of the Securities and Exchange Commission,
indemnification is against public policy, as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities is asserted by our officer(s), director(s), or controlling
person(s) in connection with the securities being registered, we will, unless in
the opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to a court of appropriate jurisdiction. We will then be governed by the
court's decision.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The following is a complete list of the financial statements filed as a part of
this Report.
o Audited financial statements of Three Forks, Inc. for the period March
28, 2012 (inception) through December 31, 2012 and unaudited financial
statements for the nine months ended September 30, 2013 and for the
period March 28, 2012 (inception) through September 30, 2012 (pages
F-1 through F-21)
o Audited financial statements of Five Jab, Inc. for the years ended
December 31, 2012 and 2011 and unaudited financial statements for the
nine months ended September 30, 2013 and 2012 (pages F-22 through
F-33)
o Pro Forma Financial Statements of Three Forks, Inc. as of June 30,
2013 and for the period March 28, 2012 (inception) through December
31, 2012 (pages F-34 through F-38)
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
-58-
THREE FORKS, INC.
FINANCIAL STATEMENTS
FOR THE PERIOD OF MARCH 28, 2012 (INCEPTION) THROUGH DECEMBER 31, 2012
AUDITED
AND
THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND FOR THE PERIOD OF
MARCH 28, 2012 (INCEPTION) THROUGH SEPTEMBER 30, 2012
(UNAUDITED)
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF THREE FORKS, INC.:
We have audited the accompanying balance sheet of Three Forks, Inc. ("the
Company") as of December 31, 2012 and the related statement of operations,
stockholders' equity (deficit) and cash flows for the period March 28, 2012
(inception) through December 31, 2012. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the financial position of Three Forks, Inc., as of December
31, 2012, and the results of its operations and its cash flows for the period
March 28, 2012 (inception) through December 31 2012, in conformity with
generally accepted accounting principles in the United States of America.
The company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ B F Borgers CPA PC
B F BORGERS CPA PC
Denver, CO
January 31, 2014
F-2
THREE FORKS, INC.
BALANCE SHEETS
September 30, 2013 December 31, 2012
(Unaudited) (Audited)
------------------------- -------------------------
ASSETS
Current assets
Cash and cash equivalents $ 2,033,179 $ 492,729
Accounts receivable trade, net 148,385 -
Inventories 42,143 -
Note receivable other 100,000 100,000
Due from others, related party 119,809 -
Prepaid and other current assets 26,294 27,299
------------------------- -------------------------
Total current assets 2,469,810 620,028
------------------------- -------------------------
Disposal group held for sale of discontinued operations - 1,481,071
------------------------- -------------------------
Property and equipment
Oil and gas properties at cost, full-cost method of accounting
Unproved 797,867 150,001
Proved 4,338,489 -
Other 25,554 11,576
------------------------- -------------------------
Total property and equipment 5,161,910 161,577
Less accumulated depreciation and amortization (37,094) (449)
------------------------- -------------------------
Net property and equipment 5,124,816 161,128
------------------------- -------------------------
Long-term assets
Other long-term assets 61,289 55,081
------------------------- -------------------------
Total long-term assets 61,289 55,081
------------------------- -------------------------
Total assets $ 7,655,915 $ 2,317,308
========================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of convertible notes $ 1,535,000 $ -
Current maturities of notes 29,358 7,003
Accounts payable trade 194,668 4,427
Due on acquisition of oil and gas properties 1,742,143 -
Accrued and deposits payable 247,490 22,680
Accrued liabilities and notes payable, related party 817,585 15,000
------------------------- -------------------------
Total current liabilities 4,566,244 49,110
------------------------- -------------------------
Long-term liabilities
Asset retirement obligations 281,962 -
------------------------- -------------------------
Total long-term liabilities 281,962 -
------------------------- -------------------------
Disposal group held for sale payables of discontinued operations - 7,745
------------------------- -------------------------
Total liabilities 4,848,206 56,855
------------------------- -------------------------
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;
11,503,477 and 10,799,339 shares issued and outstanding at
September 30, 2013 and December 31, 2012, respectively 11,503 10,799
Additional paid in capital 4,896,040 3,230,941
Accumulated deficit (2,099,834) (981,287)
------------------------- -------------------------
Total stockholders' equity 2,807,709 2,260,453
------------------------- -------------------------
Total liabilities and stockholders' equity $ 7,655,915 $ 2,317,308
========================= =========================
The accompanying notes are an integral part of these financial statements.
F-3
THREE FORKS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Period From For the Period From
March 28, 2012 March 28, 2012
For the Nine (inception) (inception)
Months Ended Through Through
September 30, 2013 September 30, 2012 December 31, 2012
(Unaudited) (Unaudited) (Audited)
-------------------------- -------------------------- -------------------------
Revenue
Oil and gas sales $ 1,898,134 $ 524,881 $ 1,105,401
Management fees 112,000 - -
-------------------------- -------------------------- -------------------------
Total revenues 2,010,134 524,881 1,105,401
-------------------------- -------------------------- -------------------------
Operating expenses:
Lease operating expenses 604,088 235,328 486,784
Production taxes 88,344 29,205 56,079
Depreciation and amortization 117,725 49,960 50,410
General and administrative expenses 1,588,894 511,186 1,065,015
-------------------------- -------------------------- -------------------------
Total operating expenses 2,399,051 825,679 1,658,288
-------------------------- -------------------------- -------------------------
Loss from operations (388,917) (300,798) (552,887)
-------------------------- -------------------------- -------------------------
Other income (expense)
Other Income 22,000 - -
Interest income 3,014 - 2,437
Interest expense (4,837) - -
-------------------------- -------------------------- -------------------------
Total other income 20,177 - 2,437
-------------------------- -------------------------- -------------------------
Loss from continuing operations
before income taxes (368,740) (300,798) (550,450)
Income taxes - - -
-------------------------- -------------------------- -------------------------
Net loss from continuing operations (368,740) (300,798) (550,450)
-------------------------- -------------------------- -------------------------
Discontinued operations
Income from operations of discontinued
property - - 27,741
Gain on disposal of property 127,478 - -
-------------------------- -------------------------- -------------------------
Income from discontinued operations 127,478 - 27,741
-------------------------- -------------------------- -------------------------
Net loss $ (241,262) $ (300,798) $ (522,709)
========================== ========================== =========================
Net loss from continuing operations $ (0.03) $ (0.04) $ (0.06)
========================== ========================== =========================
Net income from discontinued operations
Basic and diluted $ 0.01 $ - $ 0.00
========================== ========================== =========================
Net loss per common share
Basic and diluted $ (0.02) $ (0.04) $ (0.06)
========================== ========================== =========================
Weighted average number of common shares
Basic and diluted 11,306,667 8,539,160 9,222,607
========================== ========================== =========================
The accompanying notes are an integral part of these financial statements.
F-4
THREE FORKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED SHARES COMMON SHARES ADDITIONAL TOTAL
$10 PAR VALUE $.001 PAR VALUE PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------- ----------- --------- ----------- ------------- ---------------
BALANCES, March 28, 2012 - $ - - $ - $ - $ - $ -
Issuance of shares for services
valued at $0.001 per share - related party - - 5,325,000 5,325 - - 5,325
Issuance of shares for services
valued at $0.001 per share - - 195,000 195 - - 195
Issuance of shares for services
valued at $0.01 per share - - 260,000 260 2,340 - 2,600
Issuance of shares for property
valued at $2.00 per share - - 700,000 700 1,399,300 - 1,400,000
Sale of shares for cash at $0.01 per share - - 2,700,399 2,700 24,237 - 26,937
Sale of shares for cash at $0.50 per share - - 225 - 112 - 112
Sale of shares for cash at $1.00 per share - - 1,505,051 1,505 1,503,546 - 1,505,051
Sale of shares for cash at $2.25 per share - - 52,630 53 118,365 - 118,418
Sale of shares for cash at $3.00 per share - - 61,034 61 183,041 - 183,102
Distributions to working interest owners
of five jab inc. - - - - - (508,538) (508,538)
Adjustment to equity of five jab inc. - - - - - 49,960 49,960
Net loss for the period - - - - - (522,709) (522,709)
------ ------- ----------- --------- ----------- ------------- ---------------
BALANCES, DECEMBER 31, 2012 (Audited) - - 10,799,339 10,799 3,230,941 (981,287) 2,260,453
Issuance of shares for services
valued at $0.088 per share - related party - - 25,000 25 2,175 - 2,200
Issuance of shares for services
valued at $0.088 per share - - 445,000 445 38,715 - 39,160
Sale of shares for cash at $.01 per share - - 40,000 40 360 - 400
Sale of shares for cash at $1.50 per share - - 100,001 100 149,902 - 150,002
Sale of shares for cash at $2.00 per share - - 25,000 25 49,975 - 50,000
Sale of shares for cash at $3.00 per share - - 807,021 807 2,420,234 - 2,421,041
Correction of prior issuance of shares - - (112,884) (113) 113 - -
Repurchase of shares at $3.00 per share - - (275,000) (275) (824,725) - (825,000)
Repurchase of shares at $1.50 per share - - (100,000) (100) (149,900) - (150,000)
Retirement of shares to settle claims - - (250,000) (250) (21,750) - (22,000)
Distributions to working interest owners
of five jab inc. - - - - - (958,365) (958,365)
Adjustment to equity of five jab inc. - - - - - 81,080 81,080
Net (loss) for the period - - - - - (241,262) (241,262)
------ ------- ----------- --------- ----------- ------------- ---------------
BALANCES, SEPTEMBER 30, 2013 (Unaudited) - $ - 11,503,477 $ 11,503 $4,896,040 $ (2,099,834) $ 2,807,709
====== ======= =========== ========= =========== ============= ===============
The accompanying notes are an integral part of these financial statements.
F-5
THREE FORKS, INC.
STATEMENTS OF CASH FLOWS
For the Period For the Period
From From
March 28, 2012 March 28, 2012
For the Nine (inception) (Inception)
Months Ended Through Through
September 30, 2013 September 30, 2012 December 31, 2012
(Unaudited) (Unaudited) (Audited)
--------------------- --------------------- -------------------
OPERATING ACTIVITIES
Net (loss) from continuing operations attributable to
common stockholders $ (368,740) $ (300,798) $ (550,450)
Income from discontinued operations 127,478 - 27,741
Adjustments to reconcile net (loss) to net cash
flows provided by (used in) operating activities:
Depreciation and amortization 117,725 49,960 55,878
Gain on settlement of claims (22,000) - -
Gain on sale of disposal group held for sale (127,478) - -
Shares issued for services - related party 2,200 5,325 5,325
Shares issued for services 39,160 3,045 2,795
Changes in:
Accounts receivable trade (148,385) - (22,010)
Inventories (42,143) - (5,289)
Due from others - related party (119,809) - -
Prepaids and other current assets 1,005 (15,861)
Accounts payable trade 190,241 - 4,427
Accrued and deposits payable 224,810 31,967 15,000
Accrued liabilities, related party 202,585 20,250 22,680
Disposal group held for sale 804 - (805)
--------------------- --------------------- -------------------
Net cash (used in) by operating activities 77,453 (206,112) (444,708)
--------------------- --------------------- -------------------
INVESTING ACTIVITIES
Funds loaned to a non affiliate - (100,000) (100,000)
Additions to property and equipment (2,976,228) (251,738) (161,577)
Additions to long-term assets (6,208) - (133,071)
Proceeds from sale of disposal group held for sale 1,600,000 - -
--------------------- --------------------- -------------------
Net cash (used in) investing activities (1,382,436) (351,738) (394,648)
--------------------- --------------------- -------------------
FINANCING ACTIVITIES
Sale of common shares 2,621,443 1,274,263 1,833,620
Funds used to repurchase common shares (975,000) - -
Funds from short-term convertible notes, net of repayment 1,535,000 - -
Funds from short-term notes, net of repayment 22,355 - 7,003
Funds from short-term notes, related party 600,000 - -
Distributions to working interest owners - five jab inc. (958,365) (240,473) (508,538)
--------------------- --------------------- -------------------
Net cash provided by financing activities 2,845,433 1,033,790 1,332,085
--------------------- --------------------- -------------------
NET CHANGE IN CASH 1,540,450 475,940 492,729
CASH, Beginning 492,729 - -
--------------------- --------------------- -------------------
CASH, Ending $ 2,033,179 $ 475,940 $ 492,729
===================== ===================== ===================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Issuance of common shares for oil and gas properties $ - $ - $ 1,400,000
===================== ===================== ===================
Interest paid $ - $ - $ -
===================== ===================== ===================
Income taxes paid $ - $ - $ -
===================== ===================== ===================
The accompanying notes are an integral part of these financial statements.
F-6
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
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, 2013 and December 31, 2012 has a
balance of $55,122 and $55,081 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
("LLC"), 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 the LLC. Likewise, on January 1, 2013, the Company assigned 3% of the
working interest in the Farmout to three members of the Board of Directors of
the Company.
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 1955 gross acres known as the Five Jab properties in exchange for
$3,842,143 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 37.5% of working interest in the oil and gas
properties was accounted for as an acquisition for accounting purposes.
PREDECESSOR FINANCIAL INFORMATION
The aforementioned Five Jab oil and gas properties that were acquired by the
Company effective June 30, 2013 and September 1, 2013 were determined to be the
oil and gas operations of the Company's predecessor prior to the date the
Company effectively acquired such properties. As a result, all of the
accompanying financial information for the periods presented includes both the
accounts of the Company and the accounts of the Five Jab oil and gas operations.
The Five Jab oil and gas operations are owned separately by various working
interest owners and, therefore are taxed as a disregard 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. In addition, the accounts of the
Five Jab oil and gas operations are comprised of revenues and expenses from oil
and gas activity and the related distributions to the working interest owners of
such net cash flow from the oil and gas operations.
F-7
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
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 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, 2013 and December
31, 2012 there were no uncertain tax positions that required accrual.
(LOSS) PER SHARE
(Loss) per share requires presentation of both basic and diluted (loss) per
common share. Common share equivalents, if used, would consist of any options,
warrants and contingent shares, and would not be included in the weighted
average calculation since their effect would be anti-dilutive due to the net
(loss). At September 30, 2013 and December 31, 2012, the Company had outstanding
5,044,395 and 0, respectively options, warrants or contingent shares.
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.
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, 2013 and December 31, 2012.
REVENUE RECOGNITION
The Company recognizes revenue from the exploration and production of the
Company's oil and gas properties in the period of production.
F-8
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
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. The costs of unevaluated 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 evaluated, the related costs transfer to proved oil and natural gas
properties using full cost accounting. There were capitalized costs of
$4,338,489 and $0 included in the amortization base at September 30, 2013 and
December 31, 2012, respectively and the Company did not expense any capitalized
costs for the nine months ended September 30, 2013 and for the period March 28,
2012 (inception) through September 30, 2012 and for the period March 28, 2012
(inception) through December 31, 2012.
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 nine
months ended September 30, 2013 and for the period March 28, 2012 (inception)
through September 30, 2012 and for the period March 28, 2012 (inception) through
December 31, 2012.
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 nine months ended September 30, 2013 and for the period
March 28, 2012 through September 20, 2012 and for the period March 28, 2012
(inception) through December 31, 2012 that would be indicative of possible
impairment.
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 and amortization of oil and gas property and other property and
equipment for the nine months ended September 30, 2013 and for the period March
28, 2012 (inception) through September 30, 2012 is $117,725 and $49,960,
respectively and $50,410 for the period March 28, 2012 (inception) through
December 31, 2012.
F-9
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
OTHER COMPREHENSIVE INCOME
The Company has no material components of other comprehensive loss and
accordingly, net loss is equal to comprehensive loss for the period.
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, 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, 2013, the Company has reported an accumulated deficit of $2,099,834. At
September 30, 2013, the Company has current assets of $2,469,810, including cash
and cash equivalents of $2,033,179 and current liabilities of $4,564,294 but has
sold its major proved oil and gas property as described in Note 4.
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 shares of stock. 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.
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 evaluates events and transactions after the balance sheet date but
before the financial statements are issued.
NOTE 2 - RELATED PARTY TRANSACTIONS
-----------------------------------
DUE FROM OTHERS - RELATED PARTY
During the nine months ended September 30, 2013, the Company advanced funds to
two of its affiliates and at September 30, 2013 the Company is owed $119,809.
ACCRUED LIABILITIES AND NOTES PAYABLE - RELATED PARTY
During the nine months ended September 30, 2013, the Company was advanced funds
from one of its members of the Board of Directors ("Board Member"), who is also
a member of Tin Cup LLC and at September 30, 2013 the Company owes $209,520. See
Note 4 - Disposal Group Held for Sale. In addition, at September 30, 2013, the
Company owes the Board Member $8,065 for accrued revenues from oil and gas
production. Also, during September 2013, the Company borrowed $300,000 in funds
F-10
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
from both an officer of the Company and the Board Member and at September 30,
2013 the Company owes $600,000. See Note 10 - Secured Convertible Promissory
Notes.
At December 31, 2012, the Company owed an affiliate of an officer and director
of the Company a total of $15,000 in fees for services rendered.
SHARES FOR SERVICES
During the nine months ended September 30, 2013, a former member and a current
member of the Board of Directors were issued 200,000 shares of the Company's
common stock in exchange for services in the amount of $17,600 or at a fair
value of $0.088 per share.
In March 2012, the Company issued 5,325,000 shares of its common shares to its
members of the Board of Directors and officers in exchange for services in the
amount of $5,325 or at a fair value of $0.001 per share.
CONSULTING SERVICES
During the nine months ended September 30, 2013 and for the period March 28,
2012 (inception) through September 30, 2012, the Company paid two of its
officers and directors $188,361 and $40,684, respectively in fees as part of
consulting arrangements approved by the Board of Directors.
During the nine months ended September 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.
During the period March 28, 2012 (inception) through December 31, 2012, the
Company paid three of its officers and directors $180,892 in fees as part of
consulting arrangements 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.
Certain officers and members of the Board of Directors of the Company are
members of Tin Cup LLC, a Colorado limited liability company and at September
30, 2013, Tin Cup LLC is owed $250,000. See Note 10 - Secured Convertible
Promissory Notes.
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 that 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 2013 and December 31, 2012, the
Company is owed $100,000 plus accrued interest in the amount of $5,315 and
$2,356, respectively.
NOTE 4 - DISPOSAL GROUP HELD FOR SALE
-------------------------------------
The Company, as part of an agreement dated September 7, 2012, incurred costs in
the amount of $1,477,990 in acquiring 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
F-11
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
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 and
recorded in the statement of operations for the nine months ended September 30,
2013 a gain on the sale of assets in the amount of $127,478 under 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, 2013, the Company owes $400,000
including $209,520 due to a member of the Board of Directors.
NOTE 5 - SIGNIFICANT ACQUISITIONS
---------------------------------
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 1955 gross acres in exchange for $3,842,143 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 acquisition was accounted for using the acquisition method in
accordance with guidance provided in ASC Topic 805.
The following table presents the allocation of the purchase price to the assets
acquired and liabilities assumed, based on their fair values at June 30, 2013
and September 1, 2013, respectively:
Purchase price:
Oil and gas properties $4,124,105
Liabilities assumed $ 281,962
----------
Total consideration $3,842,143
==========
Subsequent to the effective dates of june 30, 2013 and september 1, 2013, the
Company reported in the Statement of Operations for the three and nine months
ended September 30, 2013 revenues from oil and gas sales in the amount of
$234,058 and $234,058, respectively related to the Five Jab oil and gas
properties.
NOTE 6 - 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 less the basis in the properties of $1,472,522 (net
of $5,469 of depreciation, depletion and amortization). The properties consisted
solely of oil and gas properties that were acquired in 2012.
The financial results of the disposal group held for sale have been classified
as discontinued operations in our statements of operations for all period
presented. There were no operations for the nine months ended September 30, 2013
and for the period of March 28, 2012 (inception) through September 30, 2012. For
the period of March 28, 2012 (inception) through December 31, 2012 the Company
recognized revenues from oil and gas sales of $78,726 and operation expenses of
$50,985 or operating income from discontinued operations of $27,741.
The assets and liabilities related to the Company discontinued oil and gas
operations are reflected as assets and liabilities of discontinued operations in
the accompany balance sheets. There are no assets and liabilities at September
F-12
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
30, 2013. The following summarizes the components of these assets and
liabilities at December 31, 2012:
Assets
Current Assets
Disposal group held for sale:
Accounts receivable $ 8,550
Oil and gas properties, net 1,472,521
--------------------
Total current assets of
discontinued operations $ 1,481,071
====================
Liabilities
Current Liabilities
Disposal group held for sale:
Accounts payable $ 7,745
--------------------
Total current liabilities of
discontinued operations $ 7,745
====================
NOTE 7 - INFORMATION ON BUSINESS SEGMENTS
-----------------------------------------
At September 30, 2013 and December 31, 2012, the Company considered its business
activities to constitute a single segment.
NOTE 8 - JOINT VENTURE AGREEMENT
--------------------------------
At September 30, 2013 and December 31, 2012, the Company paid $163,456 and
$134,000, respectively 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 HEDC. 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 AGREEMENT
-----------------------------
The Company is the manager of a tax partnership known as Three Forks No 1 LLC
and as manager receives a fee in the amount of $16,000 per month. The Company
owns no interest in the LLC but does own a 10% working interest in the Farmout
property as more fully described in Note 1. For the three and nine months ended
September 30, 2013, the Company reported management fee income in the amount of
$48,000 and $112,000, respectively.
NOTE 10 - 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 are due 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 was 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. The offering was not fully subscribed for and therefore at September 30,
2013 the Company owes $1,535,000.
Separately and apart, an 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
F-13
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
cash or a total of $600,000. Their promissory notes have a due date of January
2, 2014 including interest at the rate of 10% per annum on the unpaid balance
and allow 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, that at the due date they will each receive a $7,500 payment of fees. If
the promissory notes are not paid at January 2, 2014, the Company is required to
take immediate steps to liquidate the Five Jab properties and the due date will
be extended to April 2, 2014. At January 2, 2014, the Company failed to make
payment on the notes. At that time Mr. Pollard and Ranew each entered into an
Extension and Waiver with the Company. The Extension and Waiver provides that
the payment date shall be extended to April 2, 2014 and both holders have waived
the provision that steps be taken to liquidate the secured property at this
time. If payment is made at April 2, 2014, they will each receive a $15,000
payment of fees. If the property has not been liquidated at such date, they will
each be assigned an 11.25% working interest in the Five Jab properties. At
September 30, 2013, the Company owes $600,000 including accrued interest in the
amount of $4,822.
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 known as the
Five Jab properties including 13 producing wells, 9 service wells and 14
additional wellbores located in the States of Texas and Louisiana.
NOTE 11 - SHARE BASED COMPENSATION
----------------------------------
PRESIDENT AND CHIEF OPERATING OFFICER
The Company granted to its President and Chief Operating Officer effective March
5, 2013, 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 three years
from the effective date of the grant. The options vest over the term of the
option. 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. During the nine months ended September 30, 2013,
options in the amount of 4,450,000 were granted under the 2013 Stock Incentive
Plan including cashless options to a Board member to acquire up to 100,000
shares of the Company's common stock at an option price of $.10 per share for a
period of three years from the effective date of the grant. The options were
immediately vested upon the date of grant.
F-14
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
The following table summarizes information related to the outstanding and vested
options at September 30, 2013:
Outstanding and
Vested Options
and Warrants
-------------------
Number of shares
Non-Qualified stock options 2,250,000
2013 Stock Incentive Plan 2,200,000
Weighted average remaining contractual life
Non-Qualified stock options 2.4 years
2013 Stock Incentive Plan 1.2 years
Weighted average exercise price
Non-Qualified stock options $0.10
2013 Stock Incentive Plan $0.47
Number of shares vested
Non-Qualified stock options 429,452
2013 Stock Incentive Plan 1,062,466
Aggregate intrinsic value
Non-Qualified stock options $0
2013 Stock Incentive Plan $0
The aggregate intrinsic value of outstanding securities is the amount by which
the fair value of underlying (common) shares exceeds the exercise price of the
options issued and outstanding.
No options or warrants were exercised or expired during the nine months ended
September 30, 2013. The Company did not realize any income tax expense related
to the exercise of stock options for the nine months ended September 30, 2013.
The fair value of the options granted was estimated as of the grant date using
the Black-Scholes option pricing model with the following assumptions:
Volatility 76%
Expected Option Term 1-3 years
Risk-free interest rate 2.90%
Expected dividend yield 0.00%
The expected term of the options granted was 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 ten-year U.S. Treasury bond rate.
F-15
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
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, 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, 2013 and December 31, 2012 there were a total of
11,503,477 and 10,799,339 shares of common stock issued and outstanding,
respectively.
During the nine months ended September 30, 2013, as described in Note 2, the
Company issued 200,000 shares of its common stock in exchange for services
valued at $17,600. The Company also issued 270,000 shares of its common stock to
a consultant for services valued at $23,760. In addition, and as part of a
private placement, the Company issued 775,472 shares of its common stock for
cash in the amount of $2,392,927 as more fully described in the financial
statements..
During the period March 28, 2012 (inception) through December 31, 2012, as
described in Note 1, the Company issued 700,000 shares of its common stock in
exchange for oil and gas properties and, as described in Note 2, the Company
issued 5,325,000 shares of its common stock to its officers and directors for
services valued at $5,325. The Company also issued 195,000 and 260,000 shares of
its common stock to consultants for services valued at $195 and $2,600
respectively and, in addition as part of a private placement, issued 4,319,339
shares of its common stock for cash in the amount of $1,833,620 as more fully
described in the financial statements.
REPURCHASE AND RETIREMENT OF COMMON SHARES
Effective March 26, 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. In addition, the Company agreed to repurchase from the
employee 100,000 shares of their common stock in exchange for $150,000 in cash.
Also, effective March 26, 2013, the Company entered into a repurchase agreement
with two of its shareholders to acquire their 275,000 shares of common stock in
exchange for cash of $825,000.
NOTE 13 - INCOME TAXES
----------------------
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 $807,748 has been fully reserved at September 30, 2013.
At September 30, 2013, the Company has incurred net operating losses for income
tax purposes of approximately $2,090,000.Such losses may be carried forward and
are scheduled to expire in the year 2032, if not utilized, and may be subject to
certain limitations as provided by the Internal Revenue Code.
The effective income tax rate at December 31, 2012 differs from the U.S Federal
statutory income tax rate due to the following:
Federal statutory income rate $ 334,000
State income tax, net of federal benefit 45,000
Permanent items 1,000
Change in valuation allowance (380,000)
----------
$ -
==========
F-16
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
The components of the deferred tax assets and liabilities at December 31, 2012
are as follows:
Long-term deferred tax assets:
Federal net operating loss $ 380,000
Long-term deferred tax liabilities:
Valuation allowance (380,000)
---------
Net long-term deferred tax assets $ -
=========
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 $380,000 had been fully reserved at December 31, 2012.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
OPERATING LEASE
The Company leases office space in Broomfield Colorado under a cancelable
operating lease that allows either party the option to terminate the lease. Rent
expense for the nine months ended September 30, 2013 and for the period March
28, 2012 (inception) through September 30, 2012 was $52,239 and $26,323,
respectively and for the period from March 28, 2012 (inception) through December
31, 2012 was $46,254. The following table summarizes the future minimum payments
under this non-cancelable lease at September 30, 2013:
2013 $ 22,781
2014 $ 91,738
2015 $ 54,416
2016 $ -
2017 $ -
---------
$ 168,935
CONSULTING AGREEMENTS
The Company has a twelve month agreement effective December 1, 2012 with a
consultant to perform services at the rate of $15,000 per month. Effective
November 1, 2013, the Company entered into a new twelve month agreement with the
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
to acquire up to 1,000,000 shares of the Company's common stock at an option
price of $.010 per share over a three year period from the effective date of the
grant. The options vest over the term of the option.
The Company entered into a four year agreement effective September 1, 2012 and
amended March 1, 2013 with its interim Chief Executive Officer to perform
services at the base rate of $180,000 per year under certain terms and
conditions.
EMPLOYMENT AGREEMENTS
The Company entered into a two year employment agreement effective September 1,
2012 and amended in February 2013 with its Executive Vice President of Finance
that includes compensation of a base salary of $192,000 per year under certain
terms and conditions.
The Company entered into a three year employment agreement effective March 1,
2013 with its President and Chief Operating Officer that includes compensation
of a base salary of $210,000 per year under certain terms and conditions
including non-qualified stock options as described in Note 11.
F-17
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
NOTE 15 - SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
------------------------------------------------------------------
There are numerous uncertainties inherent in estimating quantities of proved
crude oil and natural gas reserves. Crude oil and natural gas reserve
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be precisely measured. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of such estimate. Accordingly, reserves estimates are often different
from the quantities of crude oil and natural gas that are ultimately recovered.
Proved oil and gas reserves are those quantities of oil and gas, which, by
analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible - from a given date forward, from known
reservoirs, and under existing economic conditions, operating methods, and
government regulations - prior to the time at which contracts providing the
right to operate expire, unless evidence indicates that renewal is reasonably
certain, regardless of whether deterministic or probabilistic methods are used
for the estimation. The project to extract the hydrocarbons must have commenced
or the operator must be reasonably certain that it will commence the project
within a reasonable time.
The area of the reservoir considered as proved includes all of the following:
(a) the area identified by drilling and limited by fluid contacts, if any, and
(b) adjacent undrilled portions of the reservoir that can, with reasonable
certainty, be judged to be continuous with it and to contain economically
producible oil or gas on the basis of available geoscience and engineering data.
In the absence of data on fluid contacts, proved quantities in a reservoir are
limited by the lowest known hydrocarbons as seen in a well penetration unless
geoscience, engineering, or performance data and reliable technology establish a
lower contact with reasonable certainty.
Reserves that can be produced economically through application of improved
recovery techniques (including but not limited to, fluid injection) are included
in the proved classification when both of the following occur: (a) successful
testing by a pilot project in an area of the reservoir with properties no more
favorable than in the reservoir as a whole, the operation of an installed
program in the reservoir of an analogous reservoir, or other evidence of
reliable technology establishes the reasonable certainty of the engineering
analysis on which the project or program was based, and (b) the project has been
approved for development by all necessary parties and entities, including
governmental entities.
Existing economic conditions include prices and costs at which economic
productivity from a reservoir is to be determined. The price shall be the
average price during the 12-month period prior to the ending date of the period
covered by the report, determined as an unweighted arithmetic average of the
first-day-of-the-month price for each month within such period, unless prices
are defined by contractual arrangements, excluding escalations based upon future
conditions.
Proved developed oil and gas reserves are proved reserves that can be expected
to be recovered: (i) through existing wells with existing equipment and
operating methods or in which the cost of the required equipment is relatively
minor compared to the costs of a new well; and (ii) through installed extraction
equipment and infrastructure operational at the time of the reserve estimate if
the extraction is by means not involving a well.
Proved undeveloped oil and gas reserves are proved reserves that are expected to
be recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those directly offsetting development spacing areas
that are reasonably certain of production when drilled, unless evidence using
reliable technology exists that establishes reasonable certainty of economic
productivity at greater distances. Undrilled locations can be classified as
having undeveloped reserves only if a development plan has been adopted
indicating that they are scheduled to be drilled within five years, unless the
specific circumstances, justify a longer time. Under no circumstances shall
estimates for undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
F-18
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
contemplated, unless such techniques have been proved effective by actual
projects in the same reservoir or an analogous reservoir, or by other evidence
using reliable technology establishing reasonable certainty.
"Prepared" reserves are those quantities of reserves which were prepared by an
independent petroleum consultant. "Audited" reserves are those quantities of
revenues which were estimated by the Company's employees and audited by an
independent petroleum consultant. An audit is an examination of a company's
proved oil and gas reserves and net cash flow by an independent petroleum
consultant that is conducted for the purpose of expressing an opinion as to
whether such estimates, in aggregate, are reasonable and have been determined
using methods and procedures widely accepted within the industry and in
accordance with SEC rules.
Estimates of the Company's crude oil and natural gas reserves and present values
at June30, 2013 were prepared by the Company using the estimates of Five Jab
Inc.'s' crude oil and natural gas reserves and present values at December 31,
2012 prepared by Ralph E. Davis Associates, Inc., independent reserve engineers,
and rolled forward for oil and gas operations and activity incurred by Five Jab
Inc. during the six months ended June 30, 2013.
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Estimated quantities of proved crude oil and natural gas reserves at September
30, 2013 and December 31, 2012 and changes in the reserves during the periods
are shown below (in thousands). These reserve estimates have been prepared in
compliance with Securities and Exchange Commission regulations using the average
price during the 12-month period, determined as an unweighted average of the
first-day-of-the-month for each month.
Oil Natural Gas Total
(MBbls) (MMcf) (Mboe) (1)
----------------- ----------------- -----------------
Estimated proved reserves at March 28, 2012 [2] 380 24 385
Purchase of proved reserves - - -
Production of Five Jab Inc. (10) (2) (11)
----------------- ----------------- -----------------
Estimated proved reserves at December 31, 2012 370 22 374
Purchase of proved reserves - - -
Production of Five Jab Inc. (15) (2) (17)
Production of Three Forks Inc. (2) - (2)
----------------- ----------------- -----------------
Estimated proved reserves at September 30, 2013: 353 20 355
================= ================= =================
Proved developed reserves:
December 31, 2012 - - -
September 30, 2013 353 20 355
Proved undeveloped reserves:
December 31, 2012 - - -
September 30, 2013 - - -
Base pricing, before adjustments for contractual
differentials: $/bbl WTI spot $/mmbtu Hhub Spot
September 30, 2013 $106.87 $4.97
-------------
[1] Mboe is based on a ratio of 6 Mcf to 1 barrel.
[2] Information at March 28, 2012 represents the Three Forks Inc.
predecessor historical information of Five Jab Inc.
F-19
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
Information with respect to the standardized measure of discounted future net
cash flows relating to proved reserves is summarized below. The price used to
estimate the reserves is held constant over the life of the reserve. Future
production and development costs are derived based on current costs assuming
continuation of existing economic conditions.
The discounted future net cash flows related to proved oil and gas reserves at
September 30, 2013 and December 31, 2012 (in thousands):
September 30, December 31,
2013 2012 [1]
------------------ -----------------
Future cash inflows $ 36,124 $ 39,729
Less future costs:
Production 14,135 14,827
Development 657 960
Income taxes 7,253 8,140
------------------ -----------------
Future net cash flows 14,079 15,802
10% discount factor (5,743) (6,423)
------------------ -----------------
Standardized measure of discounted
future net cash flows $ 8,336 $ 9,379
================== =================
Estimated future development costs $ 657 $ 960
================== =================
--------------------------------------
[1] Information at December 31, 2012 represents the Three Forks Inc.
predecessor historical information of Five Jab Inc.
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
F-20
THREE FORKS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
CHANGES IN DISCOUNTED FUTURE NET CASH FLOWS
The following summarizes the principal sources of change in the standardized
measure of discounted future net cash flows during the nine months ended
September 30, 2013 and the period March 28, 2012 (inception) through December
31, 2012 (in thousands):
For the Period
For the Nine Months March 28, 2012
Ended (inception) through
September 30, 2013 Decmeber 31, 2012
------------------------ ----------------------
Beginning of the period [1] $ 9,379 $ 9,942
Purchase of proved
reserves - -
Revisions of other of
Five Jab Inc. 163 -
Sales of oil and natural
gas produced during
the period, net of
production costs for Five
Jab Inc. (1,043) (563)
Sales of oil and natural
gas produced during
the period, net of
production costs for
Three Forks Inc. (163) -
------------------------ ----------------------
End of period [1] $ 8,336 $ 9,379
======================== ======================
-------------------
[1] Beginning of the period balances at March 28, 2012 and January 1, 2013
represents the Three Forks Inc. predecessor historical information of
Five Jab Inc.
F-21
FIVE JAB, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 and 2011
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013
F-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FIVE JAB, INC.:
We have audited the accompanying balance sheets of Five Jab, Inc. ("the
Company") as of December 31, 2012 and 2011, and the related statement of
operations, stockholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the financial position of Five Jab, Inc., as of December 31,
2012 and 2011, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles in
the United States of America.
The company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
/s/ B F Borgers CPA PC
B F BORGERS CPA PC
Denver, CO
January 31, 2014
F-23
FIVE JAB, INC.
BALANCE SHEETS
December 31,
------------------------------------
September 30, 2013 2012 2011
(Unaudited) (Audited) (Audited)
-------------------- ------------------------------------
ASSETS
Current assets $ - $ - $ -
Property and equipment:
Oil and gas properties, successful efforts method of accounting:
Proved - 1,616,030 791,853
-------------------- ----------------- -----------------
Total property and equipment - 1,616,030 791,853
Less accumulated depreciation, depletion and amortization - 73,265 6,651
-------------------- ----------------- -----------------
Net property and equipment - 1,542,765 785,202
-------------------- ----------------- -----------------
Total assets $ - $ 1,542,765 785,202
==================== ================= =================
LIABILITIES AND CAPITAL
Current liabilities $ - $ - $ -
Long-term liabilities
Asset retirement obligations - 275,085 29,295
-------------------- ----------------- -----------------
Total liabilities - 275,085 29,295
Commitments and contingencies - - -
Capital - 1,267,680 755,907
-------------------- ----------------- -----------------
Total liabilities and capital $ - $ 1,542,765 $ 785,202
==================== ================= =================
See accompanying notes are an integral part of these financial statements.
F-24
FIVE JAB, INC.
STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, For the Years Ended December 31,
----------------------------------------- --------------------------------------
2013 2012 2012 2011
(Unaudited) (Unaudited) (Audited) (Audited)
------------------ -------------------- ------------------ -----------------
Revenue:
Oil and gas sales $ 1,664,076 $ 698,585 $ 1,279,105 $ 81,081
------------------ -------------------- ------------------ -----------------
Total revenues 1,664,076 698,585 1,279,105 81,081
------------------ -------------------- ------------------ -----------------
Operating expenses:
Lease operating expense 540,171 292,829 544,285 68,128
Production taxes 80,602 38,568 65,442 3,518
General and administrative expense 84,938 28,500 62,625 8,580
Depreciation, depletion and amortization 81,080 49,960 66,614 6,651
------------------ -------------------- ------------------ -----------------
Total operating expenses 786,791 409,857 738,966 86,877
------------------ -------------------- ------------------ -----------------
Other Income
Gain on sale of oil and gas properties 2,277,453 - - -
------------------ -------------------- ------------------ -----------------
Total other income 2,277,453 - - -
------------------ -------------------- ------------------ -----------------
Income (loss) from operations
before income taxes 3,154,738 288,728 540,139 (5,796)
------------------ -------------------- ------------------ -----------------
Income taxes - - - -
------------------ -------------------- ------------------ -----------------
Net income (loss) $ 3,154,738 $ 288,728 $ 540,139 $ (5,796)
================== ==================== ================== =================
See accompanying notes are an integral part of these financial statements.
F-25
FIVE JAB, INC.
STATEMENT OF CAPITAL
ACCUMULATED TOTAL
(DEFICIT) STOCKHOLDERS'
CAPITAL INCOME EQUITY
----------------- ------------------- ---------------------
BALANCES, January 1, 2011 $ - $ - $ -
Contribution of capital from owners 761,703 - 761,703
Net loss for the period - (5,796) (5,796)
----------------- ------------------- ---------------------
BALANCES, DECEMBER 31, 2011 (Audited) 761,703 (5,796) 755,907
Distributions to owners - (28,366) (28,366)
Net income for the period - 540,139 540,139
----------------- ------------------- ---------------------
BALANCES, DECEMBER 31, 2012 (Audited) 761,703 505,977 1,267,680
Distributions to owners (761,703) (3,660,715) (4,422,418)
Net income for the period - 3,154,738 3,154,738
----------------- ------------------- ---------------------
BALANCES, SEPTEMBER 30, 2013 (Unaudited) $ - $ - $ -
================= =================== =====================
The accompanying notes are an integral part of these financial statements.
F-26
FIVE JAB, INC.
STATEMENTS OF CASH FLOWS
For the Nine months Ended September 30, For the Years Ended December 31,
--------------------------------------- ---------------------------------
2013 2012 2012 2011
(Unaudited) Unaudited) (Audited) (Audited)
-------------------- ---------------- ---------------- ---------------
OPERATING ACTIVITIES
Net income (loss) attributable to owners $ 3,154,738 $ 288,728 $ 540,139 $ (5,796)
Adjustments to reconcile net income (loss) to net cash
flows provided by operating activities:
Depreciation, depletion and amortization 81,080 49,960 66,614 6,651
Gain on sale of oil and gas properties (2,277,453) - - -
Changes in:
Accrued liabilities (275,085) 106,271 245,790 29,295
-------------------- ---------------- ---------------- ---------------
Net cash provided by operating activities 683,280 444,959 852,543 30,150
-------------------- ---------------- ---------------- ---------------
INVESTING ACTIVITIES
Costs expended in developing oil and gas properties (103,005) (327,583) (824,177) (791,853)
Proceeds from sale of oil and gas properties 3,842,143 - - -
-------------------- ---------------- ---------------- ---------------
Net cash provided (used in) by investing activities 3,739,138 (327,583) (824,177) (791,853)
-------------------- ---------------- ---------------- ---------------
FINANCING ACTIVITIES
Contribution of capital from owners - - - 761,703
Distributions to owners (4,422,418) (117,376) (28,366) -
-------------------- ---------------- ---------------- ---------------
Net cash provided (used in) by financing activities (4,422,418) (117,376) (28,366) 761,703
-------------------- ---------------- ---------------- ---------------
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.
F-27
FIVE JAB, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
This summary of significant accounting policies is presented to assist in
understanding of 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., 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
proved 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
Since the Business owns 75% of the working interest in the Properties and Three
Forks Inc. is acquiring 100% of this working interest in the Properties then
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 disregard 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.
PROPERTY AND EQUIPMENT
The Business accounts for its crude oil and natural gas exploration and
development activities under the successful efforts method of accounting.
However, the accompanying financial statements are prepared using the full cost
method of accounting and the Company intends to continue using the full cost
method of accounting for the Properties. The Company has determined there is no
material difference between the full cost method of accounting and the
successful efforts method of accounting as it relates to the Properties as the
Business acquired the Properties when they were considered proved and the
F-28
FIVE JAB, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND
DECEMBER 31, 2012 AND 2011
Business incurred only completion and workover costs after the Business acquired
the Properties. Under the full cost 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. The costs of unevaluated 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 evaluated, the related costs transfer to proved
oil and natural gas properties using full cost accounting.
Depletion and amortization of capitalized acquisition, exploration and
development costs are computed on the units-of-production method by property on
the basis of the 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 30, 2013 and December 31, 2012.
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 nine months ended September 30, 2013 and 2012
were $81,080 and $49,960 and for the years ended December 31, 2012 and 2011 were
$66,614 and $6,651, respectively.
OTHER COMPREHENSIVE INCOME
The Company has no material components of other comprehensive income (loss) and
accordingly, net income (loss) is equal to comprehensive income (loss) 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 December 18, 2013, the date
the financial statements were available to be issued, and has concluded no
events need to be reported.
NOTE 2 - SALE OF OIL AND GAS PROPERTIES
---------------------------------------
The Business sold 100% of its 75% working interest in the Properties to Three
Forks Inc. effective June 30, 2013 (37.5% WI) and September 1, 2013 (37.5% WI)
for $3,842,143 in cash plus the assumption of liabilities in the amount of
$281,962 and recognized in accordance with ASC Topic 360 a gain on the sale in
the amount of $2,277,453 as reported in the statement of operations for the nine
months ended September 30, 2013.
F-29
FIVE JAB, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND
DECEMBER 31, 2012 AND 2011
NOTE 3 - ASSET RETIREMENT OBLIGATIONS
-------------------------------------
The Property's asset retirement obligations reported as accrued liabilities
arise from the plugging and abandonment liabilities for the 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. The following is a
reconciliation of the Property's asset retirement obligations for the nine
months ended September 30, 2013 and for the years ended December 31, 2012 and
2011.
For the Nine Months For the Years Ended December 31,
Ended -----------------------------------------
September 30, 2013 2012 2011
--------------------- ------------------- -------------------
Beginning of period $ 275,085 $ 29,295 $ -
Obligations incurred
(from new wells) - 245,790 29,295
Change in estimate 6,877 - -
Sale of proved reserves (281,962) - -
--------------------- ------------------- -------------------
End of period - 275,085 29,295
Less: current retirement obligation - - -
--------------------- ------------------- -------------------
Long-term retirement obligation $ - $ 275,085 $ 29,295
===================== =================== ===================
NOTE 4 - INFORMATION ON BUSINESS SEGMENTS
-----------------------------------------
At September 30, 2013 and December 31, 2012 and 2011, the Company considered its
business activities to constitute a single segment.
NOTE 5 - SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
-----------------------------------------------------------------
There are numerous uncertainties inherent in estimating quantities of proved
crude oil and natural gas reserves. Crude oil and natural gas reserve
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be precisely measured. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of such estimate. Accordingly, reserves estimates are often different
from the quantities of crude oil and natural gas that are ultimately recovered.
Proved oil and gas reserves are those quantities of oil and gas, which, by
analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible - from a given date forward, from known
reservoirs, and under existing economic conditions, operating methods, and
government regulations - prior to the time at which contracts providing the
right to operate expire, unless evidence indicates that renewal is reasonably
certain, regardless of whether deterministic or probabilistic methods are used
for the estimation. The project to extract the hydrocarbons must have commenced
or the operator must be reasonably certain that it will commence the project
within a reasonable time.
The area of the reservoir considered as proved includes all of the following:
(a) the area identified by drilling and limited by fluid contacts, if any, and
(b) adjacent undrilled portions of the reservoir that can, with reasonable
certainty, be judged to be continuous with it and to contain economically
producible oil or gas on the basis of available geoscience and engineering data.
In the absence of data on fluid contacts, proved quantities in a reservoir are
limited by the lowest known hydrocarbons as seen in a well penetration unless
F-30
FIVE JAB, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND
DECEMBER 31, 2012 AND 2011
geoscience, engineering, or performance data and reliable technology establish a
lower contact with reasonable certainty.
Reserves that can be produced economically through application of improved
recovery techniques (including but not limited to, fluid injection) are included
in the proved classification when both of the following occur: (a) successful
testing by a pilot project in an area of the reservoir with properties no more
favorable than in the reservoir as a whole, the operation of an installed
program in the reservoir of an analogous reservoir, or other evidence of
reliable technology establishes the reasonable certainty of the engineering
analysis on which the project or program was based, and (b) the project has been
approved for development by all necessary parties and entities, including
governmental entities.
Existing economic conditions include prices and costs at which economic
productivity from a reservoir is to be determined. The price shall be the
average price during the 12-month period prior to the ending date of the period
covered by the report, determined as an unweighted arithmetic average of the
first-day-of-the-month price for each month within such period, unless prices
are defined by contractual arrangements, excluding escalations based upon future
conditions.
Proved developed oil and gas reserves are proved reserves that can be expected
to be recovered: (i) through existing wells with existing equipment and
operating methods or in which the cost of the required equipment is relatively
minor compared to the costs of a new well; and (ii) through installed extraction
equipment and infrastructure operational at the time of the reserve estimate if
the extraction is by means not involving a well.
Proved undeveloped oil and gas reserves are proved reserves that are expected to
be recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those directly offsetting development spacing areas
that are reasonably certain of production when drilled, unless evidence using
reliable technology exists that establishes reasonable certainty of economic
productivity at greater distances. Undrilled locations can be classified as
having undeveloped reserves only if a development plan has been adopted
indicating that they are scheduled to be drilled within five years, unless the
specific circumstances, justify a longer time. Under no circumstances shall
estimates for undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual
projects in the same reservoir or an analogous reservoir, or by other evidence
using reliable technology establishing reasonable certainty.
"Prepared" reserves are those quantities of reserves which were prepared by an
independent petroleum consultant. "Audited" reserves are those quantities of
revenues which were estimated by the Company's employees and audited by an
independent petroleum consultant. An audit is an examination of a company's
proved oil and gas reserves and net cash flow by an independent petroleum
consultant that is conducted for the purpose of expressing an opinion as to
whether such estimates, in aggregate, are reasonable and have been determined
using methods and procedures widely accepted within the industry and in
accordance with SEC rules.
Estimates of the Properties crude oil and natural gas reserves and present
values at September 30, 2013 were prepared by the Company using the estimates of
the Properties crude oil and natural gas reserves and present values at December
31, 2012 prepared by Ralph E. Davis Associates, Inc., independent reserve
engineers, and rolled forward for oil and gas operations and activity incurred
during the nine months ended September 30, 2013. Likewise, estimated of the
Properties crude oil and natural gas reserves and present values at December 31,
2011 were prepared by the Company using the December 31, 2012 information and
rolled back for oil and gas operations and activity incurred during the year
ended December 31, 2012.
F-31
FIVE JAB, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND
DECEMBER 31, 2012 AND 2011
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Estimated quantities of proved crude oil and natural gas reserves at September
30, 2013 and December 31, 2012 and changes in the reserves during the periods
are shown below (in thousands). These reserve estimates have been prepared in
compliance with Securities and Exchange Commission regulations using the average
price during the 12-month period, determined as an unweighted average of the
first-day-of-the-month for each month.
Oil Natural Gas Total
(MBbls) (MMcf) (Mboe) (1)
----------------- ----------------- -----------------
Estimated proved reserves at January 1, 2011 - - -
Purchase of proved reserves 384 25 388
Production (1) (2) (1)
----------------- ----------------- -----------------
Estimated proved reserves at December 31, 2011 383 23 - 387
Production (13) (1) (13)
----------------- ----------------- -----------------
Estimated proved reserves at December 31, 2012 370 22 374
Sale of properties [2] (355) (20) (357)
Production (15) (2) (17)
----------------- ----------------- -----------------
Estimated proved reserves at September 30, 2013: - - -
================= ================= =================
Proved developed reserves:
December 31, 2011 383 23 387
December 31, 2012 370 22 374
September 30, 2013 - - -
Proved undeveloped reserves:
December 31, 2011 - - -
December 31, 2012 - - -
September 30, 30, 2013 - - -
Base pricing, before adjustments for contractual
differentials: $/bbl WTI spot $/mmbtu Hhub Spot
December 31, 2011 $99.99 $3.56
December 31, 2012 $105.69 $3.77
September 30, 2013 $106.87 $4.97
----------------------------
[1] Mboe is based on a ratio of 6 Mcf to 1 barrel.
[2] Effective June 30, 2013, 37.5% WI and effective September 1, 2013,
37.5% WI in proved properties was sold to Three Forks Inc.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
Information with respect to the standardized measure of discounted future net
cash flows relating to proved reserves is summarized below. The price used to
estimate the reserves is held constant over the life of the reserve. Future
production and development costs are derived based on current costs assuming
continuation of existing economic conditions.
The discounted future net cash flows related to proved oil and gas reserves at
September 30, 2013 and December 31, 2012 and 2011 (in thousands):
F-32
FIVE JAB, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2013 AND
DECEMBER 31, 2012 AND 2011
December 31,
September 30, ----------------------------------------------
2013 2012 2011
--------------------- -------------------- --------------------
Future cash inflows $ - $ 39,729 $ 42,873
Less future costs:
Production - 14,827 15,437
Development - 960 1,784
Income taxes - 8,140 8,721
--------------------- -------------------- --------------------
Future net cash flows - 15,802 16,931
10% discount factor - (6,423) (6,883)
--------------------- -------------------- --------------------
Standardized measure of discounted
future net cash flows $ - $ 9,379 $ 10,048
===================== ==================== ====================
Estimated future development costs $ - $ 960 $ 1,784
===================== ==================== ====================
CHANGES IN DISCOUNTED FUTURE NET CASH FLOWS
The following summarizes the principal sources of change in the standardized
measure of discounted future net cash flows during the nine months ended
September 30, 2013 and the years ended December 31, 2012 and 2011 (in
thousands):
For the Nine Months For the Years Ended December 31,
Ended ---------------------------------------------------
September 30, 2013 2012 2011
------------------------------ ------------------------ ------------------------
Beginning of the period $ 9,379 $ 10,048 $ -
Purchase of proved
reserves - - 10,058
Sale of proved reserves [1] (8,336) - -
Changes in estimated
future development costs - - -
Sales of oil and natural
gas produced during
the period, net of
production costs (1,043) (669) (10)
------------------------------ ------------------------ ------------------------
End of period $ - $ 9,379 $ 10,048
============================== ======================== ========================
---------------------
[1] Sale of proved reserves to Three Forks Inc.
F-33
PRO FORMA FINANCIAL STATEMENTS
OF
THREE FORKS, INC. AS OF JUNE 30, 2013
AND
FOR THE PERIOD MARCH 28, 2012 (INCEPTION) THROUGH DECEMBER 31, 2012
F-34
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATMENTS UNDER RULE 8-03(b)(4) OF
REGULATION S-X
Effective June 30, 2013, the Company acquired a 37.5% working interest in
certain oil and gas properties located in Louisiana and Texas totaling
approximately 1955.41 gross acres in exchange for $1,900,000 in cash as part of
a purchase sale and participation agreement dated February 27, 2013 to acquire a
total of 75% working interest in the properties as well as participate in a
development program that includes the drilling and completion of additional
wells. This acquisition is subject to a reversionary event whereby the Company
must acquire on October 1, 2013, the remaining 37.5% of the working interest in
the properties for $1,900,000 in cash plus a dollar amount of nominal
adjustments at closing or the Company must revert back to the Seller the 37.5%
working interest acquired effective June 30, 2013 and therefore, the Company
deems this acquisition of October 1, 2013 as probable in accordance with DCF-FRM
2005.4.
The Company's acquisition of the working interest in the oil and gas properties
was accounted for as an acquisition for accounting purposes.
The accompanying Unaudited Pro Forma Condensed Balance Sheet gives effect to the
acquisition of the 37.5% of oil and gas working interests on October 1, 2013 as
if it had been consummated on June 30, 2013.
The accompanying Unaudited Pro Forma Condensed Statement of Operations for the
six months ended June 30, 2013 gives effect to the acquisition as if it had been
consummated for the current interim period as though the transaction occurred at
the beginning of the period.
The accompanying Unaudited Pro Forma Condensed Statement of Operations for the
year ended December 31, 2012 gives effect to the acquisition as though the
transaction occurred at January 1, 2012. The historical information of the
Company reflects the period March 28, 2012 (inception) through December 31,
2012. Therefore, since the Company's operations are for a period greater than 9
months then the Company can rely on the guidance in Rule 3-06 of Regulation S-X
to satisfy the requirement to present a pro forma statement of operations for
the most recent fiscal year. As such, the accompanying Unaudited Pro Forma
Condensed Statement of Operations for the period March 28, 2012 (inception)
through December 31, 2012 includes in the Pro Forma Adjustments the acquired
operations of the 75% working interest for the similar period of March 28, 2012
through December 31, 2012.
The Unaudited Pro Forma Financial Statements should be read in conjunction with
the historical financial statements of the Company. The Unaudited Pro Forma
Financial Statements do not purport to be indicative of the financial position
or results of operations that would have actually been obtained had such
transactions been completed as of the assumed dates and for the period
presented, or which may be obtained in the future. The Pro Forma adjustments are
described in the accompanying notes and are based upon available information and
certain assumptions that the Company believes are reasonable.
F-35
THREE FORKS, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 2013
(UNAUDITED)
Historical
-------------------
ASSETS Three Forks, Inc. Pro forma adjustments Note Pro forma
------------------- ---------------------------- --------------------
Cash and cash equivalents $ 741,728 $ - $ 741,728
Due from others - related party 103,897 - 103,897
Other 109,324 - 109,324
------------------- -------------------- --------------------
Total current assets 954,949 - 954,949
------------------- -------------------- --------------------
Property and equipment
oil and gas properties
Unproved 517,113 - 517,113
Proved 1,972,532 2,281,962 [a] 4,254,494
Other 23,349 - 23,349
------------------- -------------------- --------------------
Total oil and gas properties 2,512,994 2,281,962 4,794,956
Less DDA (2,419) - (2,419)
------------------- -------------------- --------------------
Net property and equipment 2,510,575 2,281,962 4,792,537
------------------- -------------------- --------------------
Long-term assets 62,597 - 62,597
------------------- -------------------- --------------------
Total assets $ 3,528,121 $ 2,281,962 $ 5,810,083
=================== ==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 167,661 $ - $ 167,661
Accrued liabilities - related party 227,784 - 227,784
Accrued liabilities 30,400 281,962 312,362
Deposits 186,880 - 186,880
Note payable 2,001 - 2,001
------------------- -------------------- --------------------
Total current liabilities 614,726 281,962 896,688
------------------- -------------------- --------------------
Common stock 11,420 667 [a] 12,087
Additional paid in capital 4,675,123 1,999,333 [a] 6,674,456
Accumulated deficit (1,773,148) - (1,773,148)
------------------- -------------------- --------------------
Total stockholders' (deficit) equity 2,913,395 2,000,000 4,913,395
------------------- -------------------- --------------------
Total liabilities and stockholders' equity $ 3,528,121 $ 2,281,962 $ 5,810,083
=================== ==================== ====================
[a] Represents the issuance of 667,333 shares of the Company's common stock to
investors at $3.00 per share as part of a private placement. The $2,000,000
in proceeds from the sale of shares will be used to acquire a 37.5% working
interest in the oil and gas properties owned by 5 Jab Inc. and the other
owners of the working interests and the assumption an asset retirement
obligation of $281,962.
F-36
THREE FORKS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(UNAUDITED)
Historical
----------------------- Pro forma
Three Forks, Inc. adjustments Note Pro forma
----------------------- ------------------------- ------------------
Revenues $ - $ 1,316,372 [a] $ 1,316,372
----------------------- ----------------- ------------------
Operating expenses
Lease operating expenses - 428,431 [a] 428,431
Productions taxes - 64,264 [a] 64,264
General and Administrative expense 941,383 48,375 [a] 989,758
DDA 1,970 73,110 [a] 75,080
----------------------- ----------------- ------------------
Total operating expenses 943,353 614,180 1,557,533
----------------------- ----------------- ------------------
Loss from operations (943,353) 702,192 (241,161)
Other income 151,492 - 151,492
----------------------- ----------------- ------------------
Loss before income taxes (791,861) 702,192 (89,669)
Income taxes - - -
----------------------- ----------------- ------------------
Net loss $ (791,861) $ 702,192 $ (89,669)
======================= ================= ==================
Basic and diluted net loss per common share $ (0.07) $ (0.01)
======================= ==================
Weighted average number of common
shares outstanding 11,218,180 667,333 11,885,514
======================= ================= ==================
[a] Represents the Company's acquisition of 75.% WI in the oil and gas
properties and operations of the acquired properties for the six months
ended June 30, 2013.
F-37
THREE FORKS, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 28, 2012 (INCEPTION) THROUGH DECEMBER 31, 2012
(UNAUDITED)
Historical
----------------------- Pro forma
Three Forks, Inc. adjustments Note Pro forma
----------------------- ------------------------- ------------------
Revenues $ - $ 1,105,401 [a] $ 1,105,401
----------------------- ----------------- ------------------
Operating expenses
Lease operating expenses - 486,784 [a] 486,784
Productions taxes - 56,079 [a] 56,079
General and Administrative expense 1,011,016 53,999 [a] 1,065,015
DDA 449 49,961 [a] 50,410
----------------------- ----------------- ------------------
Total operating expenses 1,011,465 646,823 1,658,288
----------------------- ----------------- ------------------
Loss from operations (1,011,465) 458,578 (552,887)
Other income 2,437 - 2,437
----------------------- ----------------- ------------------
Income (loss) from continuing operations
before income taxes (1,009,028) 458,578 (550,450)
Income taxes - - -
----------------------- ----------------- ------------------
Net income (loss) from continuing operations (1,009,028) 458,578 (550,450)
Discontinued operations
Income from operations of discontinued property 27,741 - 27,741
----------------------- ----------------- ------------------
Net income (loss) $ (981,287) $ 458,578 $ (522,709)
======================= ================= ==================
Basic and diluted net loss per common share $ (0.11) $ (0.05)
======================= ==================
Weighted average number of common
shares outstanding 9,222,607 667,333 9,889,941
======================= ================= ==================
[a] Represents the Company's acquisition of 75.% WI in the oil and gas
properties and the operations of the acquired properties for the period
March 28, 2012 through December 31, 2012.
F-38
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
-------------------------------------------
(a)
o Audited financial statements of Three Forks, Inc. for the period March
28, 2012 (inception) through December 31, 2012 and unaudited financial
statements for the nine months ended September 30, 2013 and for the
period March 28, 2012 (inception) through September 30, 2012 (pages
F-1 through F-21)
o Audited financial statements of Five Jab, Inc. for the years ended
December 31, 2012 and 2011 and unaudited financial statements for the
nine months ended September 30, 2013 and 2012 (pages F-22 through
F-33)
o Pro Forma Financial Statements of Three Forks, Inc. as of June 30,
2013 and for the period March 28, 2012 (inception) through December
31, 2012 (pages F-34 through F-38)
(b) EXHIBIT NO. DESCRIPTION
----------- -----------------------------------------------------------------------------
3(i).1 Articles of Incorporation of Three Forks, Inc. - 3/28/12 *
3(i).2 Articles of Organization of Three Forks No. 1, LLC - 11/8/2012 *
3(i).3 Articles of Incorporation of Three Forks Operating Company, Inc. - 1/2/13 *
3(i).4 Articles of Amendment - Name Change to TFI Operating Company, Inc. - 2/8/13 *
3(i).5 Articles of Organization of Three Forks LLC No. 2 - 12/4/2013 **
3(ii).1 Bylaws of Three Forks, Inc. *
3(ii).2 Bylaws of TFI Operating Company (fka Three Forks Operating Company, Inc.) *
10.1 Employment Agreement, Donald Walford *
10.2 Amendment to Employment Agreement, Donald Walford *
10.3 Consulting Agreement with W. Edward Nichols *
10.4 Amendment to Consulting Agreement with W. Edward Nichols *
10.5 Employment Agreement, Charles Pollard *
10.6 Operating Agreement of Three Forks No. 1, LLC *
10.7 Amendment to Operating Agreement of Three Forks No. 1, LLC *
10.8 Certificate of Designation of Class A Convertible Preferred Stock *
10.9 Stock Option Plan *
-59-
10.10 Farmout Agreement *
10.11 Purchase & Sale Agreement, Three Forks, Inc. & TFI No. 1, LLC 12/31/12 *
10.12 Purchase, Sale & Participation Agreement, Five Jab, Inc. & Three Forks,
Inc. 2/27/13 ***
10.13 Blue Quail, Ltd. Participation Agreement 4/8/13 *
10.14 1st Amendment to Purchase, Sale & Participation Agreement, Five Jab, Inc. &
Three Forks, Inc. 4/30/13 *
10.15 2nd Amendment to Purchase, Sale & Participation Agreement, Five Jab, Inc. &
Three Forks, Inc. **
10.16 3rd Amendment to Purchase, Sale & Participation Agreement, Five Jab, Inc. &
Three Forks, Inc. **
10.17 4th Amendment to Purchase, Sale & Participation Agreement, Five Jab, Inc. &
Three Forks, Inc. **
10.18 Form of Convertible Promissory Note & Mortgage, Security and Pledge
Agreement *
10.19 Operating Agreement of Three Forks LLC No. 2 **
21.1 List of Subsidiaries of Three Forks, Inc. **
23.1 Consent of Independent Registered Public Accounting Firm **
99.1 Archer County, Texas picture, page 8 **
99.2 Pink Project, Pottawatamie County, Oklahoma picture, page 9 **
* Incorporated herewith by reference, filed as exhibits to Amendment No. 1 to
the Registration Statement on Form 10, filed with the SEC on November 4,
2013.
** Filed herewith.
*** Filed in accordance with Item 601(b)(2). As indicated certain exhibits to
the Purchase, Sale & Participation Agreement, Five Jab, Inc. & Three Forks,
Inc. have been omitted from filing by the Company. Theses schedules
include:
- Exhibit A - Description of Properties, Interest and Wells
- Exhibit B - Attached to Purchase, Sale & Participation Agreement by
and between Five Jab, Inc. and Three Forks, Inc.
- Exhibit C - Operating Agreement
- Exhibit A-1 - List of Leases and Wells
Copies of such Exhibits to the Purchase, Sale & Participation Agreement,
Five Jab, Inc. & Three Forks, Inc., will be furnished upon request, please
contact the Company to make such request.
-60-
GLOSSARY OF TERMS
The following are definitions of terms used in this Registration Statement:
BBL. An abbreviation for the term "barrel" which is a unit of
measurement of volume of oil or related petroleum products. One barrel (one bbl)
is the equivalent of 42 U.S. gallons or approximately 159 liters.
BONUS PAYMENT. Usually a one-time payment made to a mineral owner as
consideration for the execution of an oil and gas lease.
CASING POINT. That point in time during the drilling of an oil well at
which a decision is made to install well casing and to attempt to complete the
well as an oil producer.
COMPLETION. The procedure used in finishing and equipping an oil or gas
well for production.
DELAY RENTAL. Payment made to the lessor under a nonproducing oil and
gas lease at the end of each year to continue the lease in force for another
year during its primary term.
DEVELOPMENT WELL. A well drilled to a known producing formation in a
previously discovered field, usually offsetting a producing well on the same or
an adjacent oil and gas lease.
EXPLORATORY WELL. A well drilled either (a) in search of a new and as
yet undiscovered pool of oil or gas or (b) with the hope of significantly
extending the limits of a pool already developed (also known as a "wildcat
well").
FARMIN. An agreement which allows a party earn a full or partial
working interest (also known as an "earned working interest") in an oil and gas
lease in return for providing exploration or development funds.
FARMOUT. An agreement whereby the owner of the leasehold or working
interest agrees to assign a portion of his interest in certain acreage subject
to the drilling of one or more specific wells or other performance by the
assignee as a condition of the assignment. Under a farmout, the owner of the
leasehold or working interest may retain some interest such as an overriding
royalty interest, an oil and gas payment, offset acreage or other type of
interest.
GROSS ACRE. An acre in which a working interest is owned. The number of
gross acres is the total number of acres in which an interest is owned (see "Net
Acre" below).
GROSS WELL. A well in which a working interest is owned. The number of
gross wells is the total number of wells in which a working interest is owned.
LANDOWNER ROYALTY. That interest retained by the holder of a mineral
interest upon the execution of an oil and gas lease which usually ranges from
1/8 to 1/4 of all gross revenues from oil and gas production unencumbered with
an expenses of operation, development or maintenance.
LEASES. Full or partial interests in oil or gas properties authorizing
the owner of the lease to drill for, produce and sell oil and gas upon payment
of rental, bonus, royalty or any of them. Leases generally are acquired from
private landowners (fee leases) and from federal and state governments on
acreage held by them.
LEASE PLAY. A term used to describe lease acquisition activity in a
prospect or geologically defined area.
MCF. An abbreviation for "1,000 cubic feet," which is a unit of
measurement of volume for natural gas.
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NET WELL OR ACRE. A net well or acre exists when the sum of the
fractional ownership working interests in gross wells or acres equals one. The
number of net wells or acres is the sum of the factional working interests owned
in gross wells or acres expressed as whole number and fractions thereof.
NET REVENUE INTEREST ("NRI"). The fractional undivided interest in the
oil or gas or in the revenues from the sale of oil or gas attributable to a
particular working interest after reduction for a proportionate share of
landowner's royalty interest and overriding royalty interest.
OVERRIDING ROYALTY. An interest in the gross revenues or production
over and above the landowner's royalty carved out of the working interest and
also unencumbered with any expenses of operation, development or maintenance.
PAYOUT. The point in time when the cumulative total of gross income
from the production of oil and gas from a given well (and any proceeds from the
sale of such well) equals the cumulative total cost and expenses of acquiring,
drilling, completing and operating such well, including tangible and intangible
drilling and completion costs.
PROSPECT. A geological area which is believed to have the potential for
oil or gas production.
PROVED RESERVES. Proved oil and gas reserves are those quantities of
oil and gas, which, by analysis of geoscience and engineering data, can be
estimated with reasonable certainty to be economically producible - from a given
date forward, from known reservoirs, and under existing economic conditions,
operating methods, and government regulations - prior to the time at which
contracts providing the right to operate expire, unless evidence indicates that
renewal is reasonably certain, regardless of whether deterministic or
probabilistic methods are used for the estimation. The project to extract the
hydrocarbons must have commenced or the operator must be reasonably certain that
it will commence the project within a reasonable time.
The area of the reservoir considered as proved includes all of the following:
(a) the area identified by drilling and limited by fluid contacts, if any, and
(b) adjacent undrilled portions of the reservoir that can, with reasonable
certainty, be judged to be continuous with it and to contain economically
producible oil or gas on the basis of available geoscience and engineering data.
In the absence of data on fluid contacts, proved quantities in a reservoir are
limited by the lowest known hydrocarbons as seen in a well penetration unless
geoscience, engineering, or performance data and reliable technology establish a
lower contact with reasonable certainty.
Reserves that can be produced economically through application of improved
recovery techniques (including but not limited to, fluid injection) are included
in the proved classification when both of the following occur: (a) successful
testing by a pilot project in an area of the reservoir with properties no more
favorable than in the reservoir as a whole, the operation of an installed
program in the reservoir of an analogous reservoir, or other evidence of
reliable technology establishes the reasonable certainty of the engineering
analysis on which the project or program was based, and (b) the project has been
approved for development by all necessary parties and entities, including
governmental entities.
Existing economic conditions include prices and costs at which economic
productivity from a reservoir is to be determined. The price shall be the
average price during the 12-month period prior to the ending date of the period
covered by the report, determined as an unweighted arithmetic average of the
first-day-of-the-month price for each month within such period, unless prices
are defined by contractual arrangements, excluding escalations based upon future
conditions.
PROVED DEVELOPED RESERVES. Proved developed oil and gas reserves are
proved reserves that can be expected to be recovered: (i) through existing wells
with existing equipment and operating methods or in which the cost of the
required equipment is relatively minor compared to the costs of a new well; and
(ii) through installed extraction equipment and infrastructure operational at
the time of the reserve estimate if the extraction is by means not involving a
well.
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PROVED UNDEVELOPED RESERVES. Proved undeveloped oil and gas reserves
are proved reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively major expenditure
is required for recompletion. Reserves on undrilled acreage shall be limited to
those directly offsetting development spacing areas that are reasonably certain
of production when drilled, unless evidence using reliable technology exists
that establishes reasonable certainty of economic productivity at greater
distances. Undrilled locations can be classified as having undeveloped reserves
only if a development plan has been adopted indicating that they are scheduled
to be drilled within five years, unless the specific circumstances, justify a
longer time. Under no circumstances shall estimates for undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual projects in the same reservoir or an analogous
reservoir, or by other evidence using reliable technology establishing
reasonable certainty.
REVERSIONARY INTEREST. The portion of the working interest in an oil
and gas lease which will be returned to its former owner when payout occurs or
after a predetermined amount of production and income has been produced.
UNDEVELOPED LEASEHOLD ACREAGE. Leased acreage on which wells have not
been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas.
WORKING INTEREST ("WI"). An interest in an oil and gas lease entitling
the holder at its expense to conduct drilling and production operations on the
leased property and to receive the net revenues attributable to such interest,
after deducting the landowner's royalty, any overriding royalties, production
costs, taxes and other costs.
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SIGNATURES:
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this amended registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
THREE FORKS, INC.
/s/ W. Edward Nichols January 31, 2014
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W. Edward Nichols
(Chief Executive Officer/Principal Executive Officer/
Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ W. Edward Nichols January 31, 2014
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Edward Nichols, Chairman of the Board of Directors
/s/ Charles Pollard January 31, 2014
------------------------------------------------------------
Charles Pollard, Director
/s/ William F. Young January 31, 2014
------------------------------------------------------------
William F. Young, Director
/s/ Paul Dragul January 31, 2014
------------------------------------------------------------
Paul Dragul, Director
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