UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10Q/A
AMENDMENT NO. 2
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(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from __________ to ___________
Commission file number: 000-55033
THREE FORKS, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 45-4915308
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(State of Incorporation) (IRS Employer ID Number)
555 ELDORADO BLVD., SUITE 100, BROOMFIELD, COLORADO 80021
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(Address of principal executive offices)
(303) 404-2160
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(Registrant's Telephone number)
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(Former Address and phone of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 for Regulation S-T (ss.232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 15, 2013, there were 11,503,477 shares of the registrant's common
stock issued and outstanding.
EXPLANATORY NOTE
THREE FORKS, INC., (THE "COMPANY"), IS FILING THIS AMENDMENT TO ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013 FILED AND AMENDED
WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 2013 AND JANUARY 31,
2014, RESPECTIVELY, FOR THE SOLE PURPOSE OF INCLUDING SEPARATELY THE HISTORICAL
FINANCIAL INFORMATION OF OUR PREDECESSOR, FIVE JAB INC. IN PART I, ITEM 1
FINANCIAL STATEMENTS. AS RESULT OF SUCH INCLUSION, PART I, ITEM 2, MANAGEMENTS'
DISCUSSION AND ANALYSIS HAS ALSO BEEN AMENDED. FURTHER, PART I, ITEM 4 CONTROLS
AND PROCEDURES HAS BEEN REVISED.
FIVE JAB INC.'S OIL AND GAS OPERATIONS PRIOR TO THE EFFECTIVE DATES OF THE
COMPANY ACQUIRING FIVE JAB ARE CONSIDERED TO BE THE OIL AND GAS OPERATIONS OF
THE COMPANY'S PREDECESSOR AND, THEREFORE HAVE BEEN REPORTED SEPARATELY IN THIS
FORM 10-Q/A.
THIS AMENDMENT DOES NOT REFLECT EVENTS OCCURRING AFTER THE ORIGINAL FILING
EXCEPT AS NOTED ABOVE. EXCEPT FOR THE FOREGOING AMENDED INFORMATION, THIS FORM
10-Q/A CONTINUES TO SPEAK AS OF THE DATE OF THE ORIGINAL FILING AND THE COMPANY
HAS NOT OTHERWISE UPDATED DISCLOSURES CONTAINED THEREIN OR HEREIN TO REFLECT
EVENTS THAT OCCURRED AT A LATER DATE.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Three Forks Inc. (Unaudited) PAGE
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Balance Sheets - September 30, 2013 and December 31, 2012 (Audited) 4
Statements of Operations -
Three Months ended September 30, 2013 and 2012 and 5
Nine Months ended September 30, 2013 and
From March 28, 2012 (inception) through September 30, 2012 6
Statements of Changes in Shareholders' Equity -
For the Nine Months ended September 30, 2013 7
Statements of Cash Flows -
Nine Months ended September 30, 2013 and
From March 28, 2012 (inception) through September 30, 2012 8
Notes to the Financial Statements 9
Financial Statements Five Jab Inc. (The Predecessor) (Unaudited)
Balance Sheets - September 30, 2013 and December 31, 2012 (Audited) 22
Statement of Operations -
Three Months ended September 30, 2013 and 2012 23
and Nine Months ended September 30, 2013 and 2012 24
Statement of Changes in Capital -
For the Nine Months ended September 30, 2013 25
Statements of Cash Flows -
Nine Months ended September 30, 2013 and 2012 26
Notes to Financial Statements 27
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
- NOT APPLICABLE
Item 4. Controls and Procedures 37
-1-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -NOT APPLICABLE 39
Item 1A. Risk Factors - NOT APPLICABLE 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities - NOT APPLICABLE 39
Item 4. Mine Safety Disclosure - NOT APPLICABLE 39
Item 5. Other Information - NOT APPLICABLE 40
Item 6. Exhibits 40
SIGNATURES 41
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PART I
ITEM 1. FINANCIAL STATEMENTS
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THREE FORKS INC.
BALANCE SHEETS
September 30, 2013 December 31, 2012
(Unaudited) (Audited)
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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
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Total current assets 2,469,810 620,028
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Disposal group held for sale of discontinued operations - 1,481,071
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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
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Total property and equipment 5,161,910 161,577
Less accumulated depreciation depletion and amortization (37,094) (449)
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Net property and equipment 5,124,816 161,128
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Long-term assets
Other long-term assets 61,289 55,081
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Total long-term assets 61,289 55,081
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Total assets $ 7,655,915 $ 2,317,308
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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
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Total current liabilities 4,566,244 49,110
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Long-term liabilities
Asset retirement obligations 281,962 -
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Total long-term liabilities 281,962 -
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Disposal group held for sale payables of discontinued operations - 7,745
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Total liabilities 4,848,206 56,855
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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)
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Total stockholders' equity 2,807,709 2,260,453
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Total liabilities and stockholders' equity $ 7,655,915 $ 2,317,308
========================= =========================
The accompanying notes are an integral part of these financial statements.
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THREE FORKS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For The Three Months Ended
September 30,
2013 2012
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Revenue
Oil and gas sales $ 234,058 $ -
Management fees 48,000 -
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Total revenues 282,058 $ -
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Operating expenses:
Lease operating expenses 61,917 -
Production taxes 7,742 -
Depreciation, depletion and amortization 34,676 -
General and administrative expenses 562,574 220,063
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Total operating expenses 666,909 220,063
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Loss from operations (384,851) (220,063)
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Other income (expense)
Interest income 1,000 -
Interest expense (4,836) -
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Total other income (expense) (3,836) -
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Loss before income taxes (388,687) (220,063)
Income taxes - -
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Net loss $ (388,687) $ (220,063)
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Net loss per common share
Basic and diluted $ (0.03) $ (0.03)
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Weighted average number of common shares
Basic and diluted 11,462,713 8,081,137
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The accompanying notes are an integral part of these financial statements.
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THREE FORKS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the
Nine Months For the Period
Ended March 28, 2012 (incpetion)
September 30, through September 30,
2013 2012
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Revenue
Oil and gas sales $ 234,058 $ -
Management fees 112,000 -
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Total revenues 346,058 -
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Operating expenses:
Lease operating expenses 63,917 -
Production taxes 7,742 -
Depreciation depletion and amortization 36,645 -
General and administrative expenses 1,503,956 491,311
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Total operating expenses 1,612,260 491,311
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Loss from operations (1,266,202) (491,311)
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Other income (expense)
Other Income 22,000 -
Interest income 3,014
Interest expense (4,837) -
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Total other income 20,177 -
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Loss from continuing operations
before income taxes (1,246,025) (491,311)
Income taxes - -
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Net loss from continuing operations (1,246,025) (491,311)
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Discontinued operations
Income from operations of discontinued
property - -
Gain on disposal of property 127,478 -
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Income from discontinued operations 127,478 -
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Net loss $ (1,118,547) $ (491,311)
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Net loss from continuing operations $ (0.11) $ (0.06)
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Net income from discontinued operations
Basic and diluted $ 0.01 $ -
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Net loss per common share
Basic and diluted $ (0.10) $ (0.06)
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Weighted average number of common shares
Basic and diluted 11,306,667 8,539,160
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The accompanying notes are an integral part of these financial statements.
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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, 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)
Net (loss) for the period - - - - - (1,118,547) (1,118,547)
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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.
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THREE FORKS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the
Nine Months For the Period
Ended March 28, 2012 (incpetion)
September 30, through September 30,
2013 2012
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OPERATING ACTIVITIES
Net (loss) from continuing operations attributable to
common stockholders $ (1,246,025) $ (491,311)
Income from discontinued operations 127,478 -
Adjustments to reconcile net (loss) to net cash
flows provided by (used in) operating activities:
Depreciation depletion and amortization 36,645 -
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
Shares issued for services 39,160 3,045
Changes in operating assets and liabilities:
Accounts receivable trade (148,385) -
Inventories (42,143) -
Due from others - related party (119,809) -
Prepaid and other current assets 1,005 (15,861)
Accounts payable trade 190,241 -
Accrued and deposits payable 224,810 31,967
Accrued liabilities, related party 202,585 20,250
Disposal group held for sale 804 -
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Net cash (used in) operating activities (880,912) (446,585)
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INVESTING ACTIVITIES
Funds loaned to a non affiliate - (100,000)
Additions to property and equipment (2,976,228) (251,738)
Additions to other long-term assets (6,208) -
Proceeds from sale of disposal group held for sale 1,600,000 -
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Net cash (used in) investing activities (1,382,436) (351,738)
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FINANCING ACTIVITIES
Sale of common shares 2,621,443 1,274,263
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
Funds from short-term notes, related party 600,000 -
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Net cash provided by financing activities 3,803,798 1,274,263
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NET CHANGE IN CASH 1,540,450 475,940
CASH, Beginning 492,729 -
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CASH, Ending $ 2,033,179 $ 475,940
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Issuance of common shares for oil and gas properties $ - $ 1,400,000
=================== ========================
Interest paid $ - $ -
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Income taxes paid $ - $ -
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The accompanying notes are an integral part of these financial statements.
-8-
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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 September 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 a 75% working interest in
certain oil and gas properties located in Louisiana and Texas totaling 1,955
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. On October 1, 2013, the Company paid $1,742,143 of the cash
to the seller of the Five Jab properties and, therefore, this amount was
recorded on the balance sheet as a liability "Due on acquisition of oil and gas
properties" at September 30, 2013.
The Company's acquisition of the 75% working interest in the Five Jab properties
was accounted for as an acquisition for accounting purposes. However, the oil
and gas operations of Five Jab prior to the effective dates of the acquisition
were considered to be the oil and gas operations of the Company's predecessor
and therefore, have been reported separately in this Form 10-Q.
INTERIM PRESENTATION
In the opinion of the management of the Company, the accompanying unaudited
financial statements include all material adjustments, including normal and
recurring adjustments, considered necessary to present fairly the financial
position and operating results of the Company for the period presented. The
-9-
financial statements and notes are presented as permitted by Form 10-Q, and do
not contain certain information included in the Company's Registration Statement
on Form 10-12G for the period March 28, 2012 (inception) through December 31,
2012. It is the Company's opinion that when the interim financial statements are
read in conjunction with the December 31, 2012 financial statements on Form
10-12G and its Current Report on Form 10-Q, the disclosures are adequate to make
the information presented not misleading. Interim results are not indicative of
results for a full year or any future period.
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. The Company maintains its cash in institutions insured by the
Federal Deposit Insurance Corporation ("FDIC"). At September 30, 2013, the
Company has $1,783,179 in cash deposits in excess of FDIC insured limits.
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.
INVENTORIES
The Company's inventories, which consist of in-transit oil, are stated at lower
of cost (using the first-in, first-out method) or market. We recorded
impairments, as needed, to adjust the carrying amount of inventories to the
lower of cost or market.
OIL AND GAS ACTIVITIES
The Company follows the full cost method of accounting for oil and natural gas
operations. Under this method all productive and nonproductive costs incurred in
connection with the acquisition, exploration, and development of oil and natural
gas reserves are capitalized. No gains or losses are recognized upon the sale or
other disposition of oil and natural gas properties except in transactions that
would significantly alter the relationship between capitalized costs and proved
reserves. Unproved properties with significant acquisition costs are assessed
annually on a property-by-property basis and any impairment in value is charged
to expense. If the unproved properties are determined to be productive, the
related costs are transferred to proved oil and natural gas properties and are
depleted. Proceeds from sales of partial interests in unproved leases are
accounted for as a recovery of cost without recognizing any gain or loss until
all costs have been recovered. The costs of unproved oil and natural gas
properties are excluded from the amortizable base until the time that either
proven reserves are found or it has been determined that such properties are
impaired. As properties become proved, the related costs transfer to proved oil
and natural gas properties using full cost accounting. There were capitalized
costs of $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.
-10-
The Company performs a quarterly "ceiling test" calculation to test its oil and
gas properties for possible impairment. The primary components impacting this
calculation are commodity prices, reserve quantities added and produced, overall
exploration and development costs, depletion expense, and tax effects. If the
net capitalized cost of the Company's oil and gas properties subject to
amortization (the carrying value) exceeds the ceiling limitation, the excess
would be charged to expense. The ceiling limitation is equal to the sum of the
present value discounted at 10% of estimated future net cash flows from proved
reserves, the cost of properties not being amortized, the lower of cost or
estimated fair value of unproved properties included in the costs being
amortized, and all related tax effects. At September 30, 2013, the calculated
value of the ceiling limitation exceeded the carrying value of the Company's oil
and gas properties subject to the test, and no impairment was necessary.
PROPERTY AND EQUIPMENT
Management capitalizes additions to property and equipment. Expenditures for
repairs and maintenance are charged to expense. Property and equipment are
carried at cost. Adjustment of the asset and the related accumulated
depreciation accounts are made for property and equipment retirements and
disposals, with the resulting gain or loss included in the statement of
operations. The Company has not capitalized any internal costs for the nine
months ended September 30, 2013 and for the period March 28, 2012 (inception)
through September 30, 2012.
Other property and equipment, such as office furniture and equipment, and
computer hardware and software, are recorded at cost. Costs of renewals and
improvements that substantially extend the useful lives of the assets are
capitalized. Maintenance and repair costs are expensed when incurred.
DEPRECIATION
For financial reporting purposes, depreciation and amortization of other
property and equipment is computed using the straight-line method over the
estimated useful lives of assets at acquisition. For income tax reporting
purposes, depreciation of other equipment is computed using the straight-line
and accelerated methods over the estimated useful lives of assets at
acquisition.
Depreciation and depletion of capitalized acquisition, exploration and
development costs are computed on the units-of-production method by individual
fields on the basis of the total estimated units of proved reserves as the
related proved reserves are produced.
Depreciation, depletion and amortization of oil and gas property and other
property and equipment for the three and nine months ended September 30, 2013 is
$34,676 and $0, respectively and $0, respectively for the comparative periods of
2012.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with authoritative guidance on accounting for the impairment or
disposal of long-lived assets, as set forth in Topic 360 of the ASC, the Company
assesses the recoverability of the carrying value of its non-oil and gas
long-lived assets when events occur that indicate an impairment in value may
exist. An impairment loss is indicated if the sum of the expected undiscounted
future net cash flows is less than the carrying amount of the assets. If this
occurs, an impairment loss is recognized for the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. No events
occurred during the nine months ended September 30, 2013 and for the period
March 28, 2012 (inception) through September 30, 2012 that would be indicative
of possible impairment.
-11-
ASSET RETIREMENT OBLIGATIONS
The Company's asset retirement obligations arise from plugging and abandonment
liabilities for the Company's natural gas and oil wells.
OTHER COMPREHENSIVE (LOSS)
The Company has no material components of other comprehensive loss and
accordingly, net loss is equal to comprehensive loss for the period.
INCOME TAXES
The Company accounts for income taxes under the liability method as prescribed
by ASC authoritative guidance. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted rates expected to be in effect during
the year in which the basis difference reverses. The realizability of deferred
tax assets are evaluated annually and a valuation allowance is provided if it is
more likely than not that the deferred tax assets will not give rise to future
benefits in the Company's income tax returns.
The Company assessed the likelihood of utilization of the deferred tax asset, in
light of the recent losses. As a result of this review, the deferred tax asset
of $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 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.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net loss available to
common shareholders by the weighted-average number of common shares outstanding
during each period. Diluted net loss per common share is calculated by dividing
the net loss by the weighted-average number of common shares outstanding
including the effect of the Company's potentially dilutive securities. The
Company's potentially dilutive securities consist of options, warrants and
convertible promissory notes to purchase the Company's common stock. Potentially
dilutive securities are not included in the weighted average calculation for net
loss per common share since their effect would be anti-dilutive due to the net
loss. The treasury method is used by the Company to measure the dilutive effect
of stock options, warrants and convertible promissory notes. Since the option
price is significantly greater than the current value of the Company's common
stock, management has determined the effective exercise of the dilutive
securities would have no effect on the weighted-average number of common shares
outstanding for the periods presented. Therefore, the basic and diluted weighted
average number of common shares outstanding for net income from continuing
operations is the same for the periods presented. For the three and nine months
ended September 30, 2013 and for the period March 28, 2012 (inception) through
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September 30, 2012, the Company had outstanding 5,044,395 and 0, respectively of
potentially dilutive options, warrants and convertible promissory notes.
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.
REVENUE RECOGNITION
The Company recognizes revenue from the exploration and production of the
Company's oil and gas properties in the period of production. Management fee
income is recognized in the period where the Company performs the services as
manager of a limited liability company.
SHARE-BASED COMPENSATION
The Company accounts for share-based payment accruals under authoritative
guidance on stock compensation as set forth in the Topics of the ASC. The
guidance requires all share-based payments to employees and non-employees,
including grants of employee and non-employee stock options, 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.
OFF-BALANCE SHEET ARRANGEMENTS
As part of its ongoing business, the Company has not participated in
transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities (SPEs), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. From its incorporation on March 28, 2012 through
September 30, 2013, the Company has not been involved in any unconsolidated SPE
transactions.
-13-
RECLASSIFICATION
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period financial statement presentation. Such
reclassifications had no effect on the Company's net loss.
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
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.
-14-
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.
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 7. 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
for Sale as set forth in Topic 205 of the ASC and therefore, the Company at
December 31, 2012 recorded the property as a current 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 its 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 a 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:
-15-
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 period of March 28, 2012 (inception)
through September 30, 2012.
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
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
====================
-16-
NOTE 7 - INFORMATION ON BUSINESS SEGMENTS
-----------------------------------------
The Company has only one business operating segment - exploration and
production. However, the Company does receive a management fee as manager of a
limited liability company as per its operating agreement but per ASC Topic 280
the Company has not reported this activity as a separate operating segment since
the Company does not regularly review the operating results, allocate specific
resources or maintain certain financial information regarding this activity. See
Note 9 - Management Agreement.
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
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
-17-
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,
the Company granted options and warrants in the amount of 4,450,000 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 vest immediately upon the date of grant.
The following table summarizes information related to the outstanding and vested
options at September 30, 2013:
-18-
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 or warrants for the nine months ended September
30, 2013.
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 859,138 shares of its common stock for
cash in the amount of $2,621,443 as more fully described in the financial
statements.
During the period March 28, 2012 (inception) through September 30, 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
-19-
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 285,000 shares of
its common stock to consultants for services valued at $195 and $2,850
respectively and, in addition, 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.
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 - 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. The following table summarizes the future minimum payments under
this 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.
-20-
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.
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
-21-
5 JAB INC (THE PREDECESSOR)
BALANCE SHEETS
September 30, December 31,
2013 2012
(Unaudited) (Audited)
---------------------- ---------------------
Assets
Current assets
Due on sale of oil and gas properties $ 1,742,143 $ -
---------------------- ---------------------
Property and equipment:
Oil and gas properties, successful efforts method of accounting:
Proved - 1,616,030
---------------------- ---------------------
Total property and equipment - 1,616,030
Less accumulated depreciation, depletion and amortization - 73,265
---------------------- ---------------------
Net property and equipment - 1,542,765
---------------------- ---------------------
Total assets $ 1,742,143 $ 1,542,765
====================== =====================
Liabilities and Capital
Current liabilities $ - $ -
Long-term liabilities
Asset retirement obligations - 275,085
---------------------- ---------------------
Total liabilities - 275,085
Commitments and contingencies - -
Capital 1,742,143 1,267,680
---------------------- ---------------------
Total liabilities and capital $ 1,742,143 $ 1,542,765
====================== =====================
See accompanying notes are an integral part of these financial statements.
-22-
5 JAB INC (THE PREDECESSOR)
STATEMENTS OF OPERATIONS
For the Three Months Ended
September 30,
2013 2012
(Unaudited) (Unaudited)
--------------------------- -----------------------
Revenue:
Oil and gas sales $ 347,704 $ 102,537
--------------------------- -----------------------
Total revenues 347,704 102,537
--------------------------- -----------------------
Operating expenses:
Lease operating expense 111,740 126,387
Production taxes 16,338 13,583
General and administrative expense 36,563 9,375
Depreciation, depletion and amortization 7,970 16,653
--------------------------- -----------------------
Total operating expenses 172,611 165,998
--------------------------- -----------------------
Gain on sale of oil and gas properties 1,244,904 -
--------------------------- -----------------------
Income (loss) from operations 1,419,997 (63,461)
Income taxes - -
--------------------------- -----------------------
Net income (loss) $ 1,419,997 $ (63,461)
=========================== =======================
See accompanying notes are an integral part of these financial statements.
-23-
5 JAB INC (THE PREDECESSOR)
STATEMENTS OF OPERATIONS
For the Nine Months Ended
September 30,
2013 2012
(Unaudited) (Unaudited)
--------------------------- -----------------------
Revenue:
Oil and gas sales $ 1,664,076 $ 698,585
--------------------------- -----------------------
Total revenues 1,664,076 698,585
--------------------------- -----------------------
Operating expenses:
Lease operating expense 540,171 292,829
Production taxes 80,602 38,568
General and administrative expense 84,938 28,500
Depreciation, depletion and amortization 81,080 49,960
--------------------------- -----------------------
Total operating expenses 786,791 409,857
--------------------------- -----------------------
Gain on sale of oil and gas properties 2,277,453 -
--------------------------- -----------------------
Income from operations 3,154,738 288,728
Income taxes - -
--------------------------- -----------------------
Net income $ 3,154,738 $ 288,728
=========================== =======================
See accompanying notes are an integral part of these financial statements.
-24-
5 JAB INC (THE PREDECESSOR)
STATEMENT OF CAPITAL
ACCUMLATED
CAPITAL INCOME TOTAL
-------------------- ------------------- ---------------------
BALANCES, December 31, 2012 (Audited) 761,703 505,977 1,267,680
Distributions to owners (761,703) (1,918,572) (2,680,275)
Net income for the period - 3,154,738 3,154,738
-------------------- ------------------- ---------------------
BALANCES, SEPTEMBER 30, 2013 (Unaudited) $ - $ 1,742,143 $ 1,742,143
==================== =================== =====================
The accompanying notes are an integral part of these financial statements.
-25-
5 JAB INC (THE PREDECESSOR)
STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
2013 2012
(Unaudited) Unaudited)
----------------------- ------------------------
OPERATING ACTIVITIES
Net income attributable to owners $ 3,154,738 $ 288,728
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation, depletion and amortization 81,080 49,960
Gain on sale of oil and gas properties (2,277,453) -
----------------------- ------------------------
Net cash provided by operating activities 958,365 338,688
----------------------- ------------------------
INVESTING ACTIVITIES
Costs expended in developing oil and gas properties (378,090) (327,583)
Proceeds from sale of oil and gas properties 2,100,000 -
----------------------- ------------------------
Net cash provided by (used in) investing activities 1,721,910 (327,583)
----------------------- ------------------------
FINANCING ACTIVITIES
Distributions to owners (2,680,275) (11,105)
----------------------- ------------------------
Net cash (used in) financing activities (2,680,275) (11,105)
----------------------- ------------------------
NET CHANGE IN CASH - -
CASH, Beginning - -
----------------------- ------------------------
CASH, Ending $ - $ -
======================= ========================
SUPPLEMENTAL SCHEDULE OF
OF CASH FLOW INFORMATION
Interest paid $ - $ -
======================= ========================
Income taxes paid $ - $ -
======================= ========================
The accompanying notes are an integral part of these financial statements.
-26-
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
This summary of significant accounting policies is presented to assist in
understanding 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
5 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 5 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.
Effective June 30, 2013 and September 1, 2013, the Business sold a 37.5% and
37.5% working interest, respectively or a total of a 75% working interest in
certain oil and gas properties located in Louisiana and Texas totaling 1,955
gross acres known as the Five Jab properties to Three Forks Inc. in exchange for
$3,842,143 in cash plus the assumption of the ARO liabilities in the amount of
$281,962 as part of a purchase sale and participation agreement dated February
27, 2013 as well as a participation in a development program that included the
drilling and completion of additional wells. On October 1, 2013, the Business
collected $1,742,143 of the cash from the buyer of the Five Jab properties and,
therefore, this amount was recorded on the balance sheet as an asset "Due from
sale of oil and gas properties" at September 30, 2013.
BASIS OF PRESENTATION
These financial statements represent the historical costs of the Business based
upon generally accepted accounting principles for the periods presented.
INCOME TAXES
The Business is taxed as a 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 and payment is made to the Business.
-27-
PROPERTY AND EQUIPMENT
The Business accounts for its crude oil and natural gas exploration and
development activities under the successful efforts method of accounting. Under
such method, costs of productive exploratory wells, development dry holes and
productive wells and undeveloped leases are capitalized. Oil and gas lease
acquisition costs are also capitalized. Exploration costs and certain geological
or geophysical expenses charged to expense as incurred. Exploratory drilling
costs are initially capitalized, but evaluated quarterly and charged to expense
if and when the well is determined not to have found reserves in commercial
quantities. The sale of a partial interest in a proved property is accounted for
as a cost recovery and no gain or loss is recognized as long as this treatment
does not significantly affect the units-of-production amortization rate. A gain
or loss is recognized for all other sale of producing properties. See Note 2 -
Sale of Significant Oil and Gas Properties.
Unproved properties with significant acquisition costs are assessed quarterly on
a property-by-property basis and any impairment in value is charged to expense.
If the unproved properties are determined to be productive, the related costs
are transferred to proved oil and gas properties. Proceeds from sales of partial
interests in unproved leases are accounted for as a recovery of costs without
recognizing any gain or loss until all costs have been recovered. There are no
unproved properties at September, 2013 and December 31, 2012.
Depletion and amortization of capitalized acquisition, exploration and
development costs are computed on the units-of-production method by property on
the basis of total estimated units of proved reserves as the related proved
reserves are produced. The long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of the asset exceeds the estimated future cash flows, an
impairment charged is recognized in the amount by which the carrying amount of
the asset exceeds the fair value of the asset. No impairment was recognized at
September 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 three and nine months ended September 30, 2013
were $7,970 and $81,080, respectively and for the three and nine months ended
September 30, 2012 were $16,653 and $49,960, respectively.
ASSET RETIREMENT OBLIGATIONS
An asset retirement obligation ("ARO") is an estimated liability for the cost to
retire a tangible asset. The Business' AROs arise from plugging and abandonment
liabilities for its oil wells. The Business records AROs at fair value in the
period in which there is a legal obligation, whether by government action or
contractual arrangement, to incur these costs and can make a reasonable estimate
of the fair value of the liability. AROs are calculated based on the present
value of the estimated removal and other closure costs using our credit-adjusted
risk-free rate. When the liability is initially recorded, we capitalize the cost
by increasing the book value of the related long-lived tangible asset. The
liability is accreted to its estimated settlement value and the related
capitalized cost is depreciated over the asset's useful life. The Business
recognizes a gain or loss at settlement for any difference between the
settlement amount and the recorded liability, which is recorded as a loss on
asset disposals and impairments in the statements of operations. The Business
estimates settlement dates by considering its past practice, industry practice,
management's intent and estimated economic lives. The ARO at September 30, 2013
and December 31, 2012 is $0 and $275,085, respectively.
-28-
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 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 its 75% working interest in the Properties to Three Forks Inc.
as more fully described in Note 1 in accordance with ASC Topic 360 and recorded
a gain on the sale of the oil and gas properties in the Statement of Operations
for the three and nine months ended September 30, 2013 in the amounts of
$1,244,904 and $2,277,453, respectively.
NOTE 3 - INFORMATION ON BUSINESS SEGMENTS
-----------------------------------------
At September 30, 2013 and December 31, 2012, the Company considered its business
activities to constitute a single segment.
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
-29-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED HEREIN. IN CONNECTION WITH, AND
BECAUSE WE DESIRE TO TAKE ADVANTAGE OF, THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WE CAUTION READERS REGARDING
CERTAIN FORWARD LOOKING STATEMENTS IN THE FOLLOWING DISCUSSION AND ELSEWHERE IN
THIS REPORT AND IN ANY OTHER STATEMENT MADE BY, OR ON OUR BEHALF, WHETHER OR NOT
IN FUTURE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. FORWARD-LOOKING
STATEMENTS ARE STATEMENTS NOT BASED ON HISTORICAL INFORMATION AND WHICH RELATE
TO FUTURE OPERATIONS, STRATEGIES, FINANCIAL RESULTS OR OTHER DEVELOPMENTS.
FORWARD LOOKING STATEMENTS ARE NECESSARILY BASED UPON ESTIMATES AND ASSUMPTIONS
THAT ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR CONTROL AND MANY
OF WHICH, WITH RESPECT TO FUTURE BUSINESS DECISIONS, ARE SUBJECT TO CHANGE.
THESE UNCERTAINTIES AND CONTINGENCIES CAN AFFECT ACTUAL RESULTS AND COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD LOOKING
STATEMENTS MADE BY, OR ON OUR BEHALF. WE DISCLAIM ANY OBLIGATION TO UPDATE
FORWARD-LOOKING STATEMENTS.
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT ON THE COMPANY'S
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012 AND THE PERIOD OF MARCH 28, 2012
(INCEPTION) THROUGH DECEMBER 31, 2012, INCLUDES A "GOING CONCERN" EXPLANATORY
PARAGRAPH, THAT DESCRIBES SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO
CONTINUE AS A GOING CONCERN.
PLAN OF OPERATIONS
Three Forks is focused on the development of its business plan as an independent
energy company engaged in the acquisition, exploration, development and
production of North American conventional oil and gas properties through the
acquisition of leases and/or royalty interests.
At present, our oil and gas projects consist of:
- In Archer County, Texas, we are a 49% working interest ("WI") owner in
a joint venture agreement where the joint venture has drilled and
completed one well.
- In Archer County, Texas, we have a 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 75% WI in 13 producing wells, 9 service
wells and 14 additional wellbores.
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.
-30-
Our milestones for the next twelve months include:
------------------- ------------------------------------------------------------
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 had recognized minimal revenues from our operational activities prior
to June 30, 2013. During the three months ended September 30, 2013, we
recognized revenues of $234,058 from oil and gas sales.
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 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 such revenues were generated by properties we
sold on January 1, 2013. If we are unable to begin 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.
-31-
ACQUISITION OF FIVE JAB INC.
Five Jab Inc., an operator of oil and gas properties, and a number of other
owners owned 75% of the working interest in certain leases located in the states
of Texas and Louisiana. These leases are proved leaseholds only and include 11
producing crude oil wells and one well that also produced natural gas (the
"Properties").
Effective June 30, 2013 and September 1, 2013, Five Jab sold a 37.5% and 37.5%
working interest, respectively or a total of a 75% working interest in certain
oil and gas properties located in Louisiana and Texas totaling 1,955 gross acres
known as the Five Jab properties to the Company in exchange for $3,842,143 in
cash plus the assumption of the ARO liabilities in the amount of $281,962 as
part of a purchase sale and participation agreement dated February 27, 2013 as
well as a participation in a development program that included the drilling and
completion of additional wells. The Company's acquisition of the 75% working
interest in the Five Jab properties was accounted for as an acquisition for
accounting purposes. However, the oil and gas operations of Five Jab prior to
the effective dates of the acquisition were considered to be the oil and gas
operations of the Company's predecessor and therefore, a separate set of
financial statements have been reported separately in this Form 10-Q and a
separate discussion of the their operations will follow the discussion of the
Company's result of operations and liquidity.
RESULTS OF OPERATIONS OF THREE FORKS INC.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2012
During the three months ended September 30, 2013, the Company recognized
$282,058 in revenue from its operational activities. During the three months
ended September 30, 2012, the Company did not recognize any revenues from its
operational activities. During the three months ended September 30, 2013, the
Company recognized revenue from two sources: $234,058 from the sale of oil and
gas and $48,000 from management fees.
During the three months ended September 30, 2013, the Company incurred operating
expenses of $666,909. During the three months ended September 30, 2012, the
Company incurred operating expenses of $220,063. The increase of $446,846 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 $ 61,917
Production taxes 7,742
Depreciation, depletion and amortization 34,676
General and administrative expenses 562,574
-------------------------
Total Operating Expenses: $ 669,909
-32-
During the three months ended September 30, 2013, the Company recognized a net
loss of $388,687 compared to a net loss of $220,063 during the three months
ended September 30, 2012. The increase of $168,624 was a direct result of the
increase in operating expenses discussed above, offset by the $282,058 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 $364,058
in revenue from its operational activities. During the period of March 28, 2012
(inception) through September 30, 2012, the Company did not recognize any
revenue from its operational activities. During the nine months ended September
30, 2013, the Company recognized revenue from two sources: $234,058 from the
sale of oil and gas and $112,000 from management fees.
During the nine months ended September 30, 2013, the Company incurred operating
expenses of $1,612,260. During the period of March 28, 2012 (inception) through
September 30, 2012, the Company incurred operating expenses of $491,311. The
increase of $1,120,949 in operating expenses 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 nine months ended September 30, 2013, the Company recognized the
following operating expenses:
Nine Months Ended
September 30, 2013
-------------------------
Operating Expense:
Lease operating expenses $ 61,917
Production taxes 7,742
Depreciation, depletion and amortization 36,645
General and administrative expenses 1,503,956
-------------------------
Total Operating Expenses: $ 1,612,260
During the nine months ended September 30, 2013, the Company recognized a net
loss of $1,118,547 compared to a net loss of $491,311 during period of March 28,
2012 (inception) through September 30, 2012. The increase of $627,236 was a
direct result of the $1,120,949 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.
LIQUIDITY OF THREE FORKS INC.
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 used $880,912 in
funds from its operational activities. During the nine months ended September
30, 2013, the Company recognized a net loss of $1,246,025 which was adjusted for
such non-cash items as $36,645 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 $446,585 in its
operations, a net loss of $491,311 was adjusted for the non-cash item of $8,370
in shares issued for services.
-33-
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 $3,803,798
from its financing activities compared to $1,274,263 during the period of March
28, 2013 (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. 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
-34-
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.
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 and acquisition of oil and gas
properties as well as 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
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
-35-
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. Management fee
income is recognized in the period where the Company performs the services as
manager of a limited liability company.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil and natural gas
operations. Under this method all productive and nonproductive costs incurred in
connection with the acquisition, exploration, and development of oil and natural
gas reserves are capitalized. No gains or losses are recognized upon the sale or
other disposition of oil and natural gas properties except in transactions that
would significantly alter the relationship between capitalized costs and proved
reserves. 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 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 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 (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.
RESULTS OF OPERATIONS OF FIVE JAB INC.
During the nine months ended September 30, 2013, Five Jab recognized revenues of
$1,664,076 compared to $698,585 for the nine months ended September 30, 2012.
The resultant increase of $965,491 was a result of re-work efforts.
-36-
During the nine months ended September 30, 2013, Five Jab incurred operating
expenses of $786,791 compared to $409,857 for the nine months ended September
30, 2012. The increase of $376,934 was a result of increases of $247,342 in
lease operating expense, a $42,034 increase in general and administrative
expense and a $31,120 increase in depreciation, depletion and amortization
expense.
During the nine months ended September 30, 2013, Five Jab recognized net income
of $3,154,738 compared to $288,728 during the nine months ended September 30,
2012. The increase of $2,866,010 is a result of not only the $965,491 increase
in revenues offset by the $786,791 increase in operational expenses, but the
result of a one-time gain of $2,277,453 recognized on the sale of the oil and
gas properties to Three Forks, Inc.
LIQUIDITY OF FIVE JAB INC.
At September 30, 2013, Five Jab had total current assets of $1,742,143, which
consisted solely of an amount due in connection with the sale of oil and gas
properties to Three Forks, Inc. At September 30, 2013, Five Jab did not have any
liabilities.
During the nine months ended September 30, 2013, Five Jabs, recognized funds of
$958,365 from its operating activities, $1,721,910 from its investment
activities and used $2,680,275 in its financing activities.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) and that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Financial Officer (Principal
Executive Officer and Principal Financial Officer), as appropriate, to allow for
timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), our Chief Financial Officer carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation and the evaluation
conducted at September 30, 2013, our Chief Financial Officer has concluded that
our disclosure controls and procedures are not effective in timely alerting them
to material information required to be included in our periodic SEC filings and
to ensure that information required to be disclosed in our periodic SEC filings
is accumulated and communicated to our management, including our Chief Financial
Officer, to allow timely decisions regarding required disclosure.
-37-
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the company in accordance
with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The
Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company's internal control over
financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
Company's assets;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that the Company's
receipts and expenditures are being made only in accordance with
authorizations of the Company's management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's financial
statements.
We have identified certain material weaknesses in internal control over
financial reporting relating to a shortage of accounting and reporting personnel
due to limited financial resources and the size of our Company, as detailed
below:
(1) The Company currently does not have, but is in the process of
developing formally documented accounting policies and procedures,
which includes establishing a well-defined process for financial
reporting.
(2) As is the case with many companies of similar size, we currently lack
segregation of duties in the accounting department. Until our
operations expand and additional cash flow is generated from
operations, a complete segregation of duties within our accounting
function will not be possible.
Considering the nature and extent of our current operations and any risks or
errors in financial reporting under current operations and the fact that we have
been a small business with limited employees, such items caused a weakness in
internal controls involving the areas disclosed above.
We have concluded that our internal controls over financial reporting were
ineffective as of September 30, 2013, due to the existence of the material
weaknesses noted above that we have yet to fully remediate.
There was no change in our internal control over financial reporting that
occurred during the fiscal quarter ended September 30, 2013, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
-38-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
None.
ITEM 1A. RISK FACTORS
---------------------
Not Applicable to Smaller Reporting Companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-------------------------------------------------------------------
During the period of July 1, 2013 through September 30, 2013, the Company made
the following issuances of its equity securities.
TITLE OF NO. OF CLASS OF
DATE OF SALE SECURITIES SHARES CONSIDERATION PURCHASER
--------------- ------------------ --------- ------------- -------------------
July 2013
through Common Shares 73,666 $221,000 Business Associates
September 2013
September 2013 Convertible -- $1,535,000 Business Associates
Promissory Notes
September 2013 Convertible -- $600,000 Officer & Directors
Promissory Notes
EXEMPTION FROM REGISTRATION CLAIMED
All of the above sales by the Company of its unregistered securities were made
by the Company in reliance upon Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). All of the individuals
and/or entities that purchased the unregistered securities were primarily
existing shareholders, known to the Company and its management, through
pre-existing business relationships, as long standing business associates and
employees. All purchasers were provided access to all material information,
which they requested, and all information necessary to verify such information
and were afforded access to management of the Company in connection with their
purchases. All purchasers of the unregistered securities acquired such
securities for investment and not with a view toward distribution, acknowledging
such intent to the Company. All certificates or agreements representing such
securities that were issued contained restrictive legends, prohibiting further
transfer of the certificates or agreements representing such securities, without
such securities either being first registered or otherwise exempt from
registration in any further resale or disposition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------
None.
ITEM 4. MINE SAFETY DISCLOSURE
------------------------------
Not Applicable.
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ITEM 5. OTHER INFORMATION
-------------------------
None.
ITEM 6. EXHIBITS
----------------
EXHIBITS. The following is a complete list of exhibits filed as part of this
Form 10-Q/A. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31.1 Certification of Chief Executive and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Executive and Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
Exhibit 101.INS XBRL Instance Document
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document (1)
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (1)
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document (1)
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document (1)
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (1)
-----------------
(1) Pursuant to Rule 406T of Regulation S-T, this interactive data file is
deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not
filed for purposes of Section 18 of the Securities Exchange Act of 1934,
and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THREE FORKS, INC.
---------------------------------
(REGISTRANT)
Dated: April 7, 2014 By: /s/ W. Edward Nichols
-----------------------------------
W. Edward Nichols,
(Chief Executive Officer &
Principal Accounting Officer)
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