ITEM 1. DESCRIPTION OF BUSINESS.
Overview
We are an independent oil exploration and production company, engaged in acquiring oil leases and exploring and developing crude oil reserves and production in the Appalachian basin. While we have acquired working interests in existing wells in an effort to balance our revenue sources, we primarily focus our efforts on acreage acquisitions in which we will be the operator of the wells which we believe gives us the greatest ability to maximize our revenues over the long term. We concentrate our operations in Kentucky and Tennessee primarily in the Murfreesboro, Knox and Wells Creek formations, although we also have assets located in the Granville, Stones River and Sunnybrook formations. All of these formations are primary known producing formations. Our growth strategy is to focus on our operational growth in our core area, to convert our unproved reserves to proved reserves and to continue our acreage acquisitions while maintaining balanced, prudent financial management. In the past three recent years, we have realized substantial benefits from the sale of concentrations of our reserves, although this is not a focus, we do evaluate from time to time potential sales of our reserves for strategic and capital reasons.
Our Operations
Our operations are divided between leases in which we have a participation interest/overriding royalty interest and leases in which we are the operator. Interests owned by participation leases means we have a working or royalty interest in a property that is operated or maintained by another interest owner under an agreement. Overriding royalty interest means we assisted in the negotiations between the buyers and sellers of lease sales which we retained a royalty interest, receive a finder’s fee, and are provided options for additional participation of future wells. For participation leases, we receive payments for our oil sales from the operator and we are billed by the operator for a percentage of joint expenses relative to the costs of drilling and transporting the oil from the wells to the sales point.
For drilling operations on leases in which we are the operator, we hire third parties to provide contract drilling services to us on an as needed basis. We have been able to reduce or eliminate our financial exposure in the initial drilling in our projects by creating joint venture arrangements that provide for others to pay for all or a disproportionate share of the initial drilling costs in exchange for a working or royalty interest in the well. In 2014, we have sold working interest in 5 of our wells ranging from 37.5% to 50% working and royalty interest per well and for each well we are responsible for completion and operating costs on those wells ranging from 50% to 55% per well, to two individuals and/or entities on the Millard Willis, William Warren and Billy Walker lease. In 2013, we sold 27.5% of our working and operating interest in 6 of our wells ranging from 27.5% to 37.50% working and royalty interest per well , to two individuals and/or entities on the Millard Willis lease. This has allowed us to move forward in drilling a greater number of wells than we would otherwise able to drill based upon our limited financial resources. We expect to continue to use these types of relationships to partially or completely fund initial drilling of future wells.
Reserves
We own approximately 1,804.62 gross acres of leasehold interests with 38 producing oil wells in which we own an interest. Wells drilled in this area range from 900 feet to 2,000 feet in depth and the well spacing is generally four acres per well. The following table provides information on our reserves at December 31, 2014.
When used in this table, “Bbls” means barrels of oil. We also use a number of terms when describing our reserves. “Proved reserves” are the quantities of oil that, by analysis of geosciences and engineering data, can be estimated with reasonable certainty to be economically producible. We provide information on two types of proved reserves - developed and undeveloped. “Proved developed reserves” are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves” are reasonably certain reserves in drilling units immediately adjacent to the drilling unit containing a producing well as well as areas beyond one offsetting drilling unit from a producing well.
Under SEC rules we are also permitted to provide information about probable and possible reserves. “Probable reserves” are additional reserves that are less certain to be recovered than proved reserves but which, in sum with proved reserves, are as likely as not to be recovered. “Possible reserves” are additional reserves that are less certain to be recovered than probable reserves. The various reserve categories have different risks associated with them. Proved reserves are more likely to be produced than probable reserves and probable reserves are more likely to be produced than possible reserves. Because of these risks, the different reserve categories should not be considered to be directly additive.
Our reserve estimates at December 31, 2014 were prepared by Lee Keeling and Associates, Inc., an independent engineering firm. These reserve report which is filed as an exhibit to this report was prepared in accordance with the generally accepted petroleum engineering and evaluation principles and most recent definitions and guidelines established by the SEC. All reserve definitions comply with the applicable definitions of the rules of the SEC. The reserves were estimated using engineering and geological methods widely accepted in our industry. The accuracy of the reserve estimates is dependent upon the quality of available data and upon independent geological and engineering interpretation of that data. For proved developed producing, the estimates considered to be definitive, using performance methods that utilize extrapolations of various historical data including oil and water production and pressure history. For other than proved producing, proved undeveloped reserves and probable and possible reserve estimates were made using volumetric methods.
Our policies regarding internal controls over reserve estimates require reserves to be in compliance with the SEC definitions and guidance and for reserves to be prepared by an independent engineering firm under the supervision of our Chief Executive Officer. We provide the engineering firm with estimate preparation material such as property interests, production, current operation costs, current production prices and other information. This information is reviewed by our Chief Executive Officer to ensure accuracy and completeness of the data prior to submission to our third party engineering firm. A letter which identifies the professional qualifications of the independent engineering firm who prepared the reserve report is included in the reserve report. There was no conversion of undeveloped reserves to prove reserves or proved developed reserves during 2014.
The engineering report also projected discounted future net revenues from our net reserves and the present value, discounted at 10% per annum, of that future net revenue as summarized in the foregoing table. Future net revenues are the amount, exclusive of federal and state income taxes, that will accrue to the subject interests for continued operation of the properties to depletion. It should not be construed as a fair market or trading value. Provisions have been made for future expenses required for recompletion and drilling, but no provision has been made for the cost of plugging and abandoning the properties. The pricing used was based on a determination of a 12-month average price, calculated as the unweighted average price of the monthly prices received by us for oil for the 12-month period prior to the end of the reporting period.
The following table presents our producing oil wells at December 31, 2014.
(a) The number of gross wells is the total number of wells in which a working interest is owned.
(b) The number of net wells is the sum of fractional working interests we own in gross wells expressed as whole numbers and fractions thereof.
Certain of the leasehold interests we own are subject to royalty, overriding royalty and other outstanding interests customary to the industry. The properties may also be subject to additional burdens, liens or encumbrances customary to the industry, including items such as operating agreements, current taxes, development obligations under natural gas and oil leases, farm-out agreements and other restrictions. We do not believe that any of these burdens will materially interfere with the use of the properties. The following table presents leased acres as of December 31, 2014.
At December 31, 2014, there were 1,512.26 of gross acres of undeveloped acres and 649.38 acres of net undeveloped acres that we control under fee leases. The following table presents the net undeveloped acres that we control under fee leases and the period the leases are scheduled to expire, absent pre-expiration drilling and production which extends the term of the lease(s). The expiration dates of the leases are subject to automatic renewals so long as we are producing oil and/or gas on the lease.
The following table presents our net productive and dry development wells and our net productive and dry exploratory wells drilled during the past three fiscal years. There is no correlation between the number of productive wells completed during any period and the aggregate reserves to those wells. Productive wells consist of producing wells capable of commercial production.
As of the date of this report, we are continuing drilling activities on our leasehold interests in an effort to further expand our producing wells.
Customers, Sales and Delivery
We store extracted oil in on-site bulk storage tanks awaiting delivery to our customers. Our customers pay all costs associated with transporting the oil from these storage tanks. In each of 2014 and 2013 we had two customers who represented 100% of our oil sales. Because there are other purchasers that are capable of and willing to purchase our oil, and because we have the option to change purchasers if conditions so warrant, we believe that our oil production can be sold in the market in the event that it is not sold to our existing customers.
The following table presents information regarding production volumes and revenues, average sales prices and costs, after deducting royalties and interests of others, with respect to oil production attributable to our interest for the last three fiscal years. In the following table, average production cost are costs incurred to operate and maintain the wells and equipment and to pay the production costs, which does not include ad valoreum and severance taxes per unit of production, and is exclusive of work-over costs.
Competition
We compete with major integrated oil and natural gas companies and independent oil and gas companies. Most of our competitors have substantially larger financial resources, operations, staffs and facilities and our competitors may be able to pay more for prospective oil and gas properties or prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Given our size, limited operating history and limited financial resources there are no assurances we will ever be able to effectively compete in our segment.
Government Regulation
We are subject to numerous federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil lease for the cost of pollution clean-up resulting from operations, subject the lessee to liability for pollution damages and require suspension or cessation of operations in affected areas. Although environmental requirements have a substantial impact upon the energy industry, as a whole, we do not believe that these requirements affect us differently, to any material degree, than other companies in our industry. All of the jurisdictions in which we operate have statutory provisions regulating the exploration for and production of crude oil. These provisions include permitting regulations regarding the drilling of wells, maintaining bonding requirements to drill or operate wells, locating wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled and the plugging and abandoning of wells. We have made and will continue to make expenditures in our efforts to comply with these requirements, which we believe are necessary business costs in the oil industry.
Changes to existing, or additions of, laws, regulations, enforcement policies or requirements in one or more of regions in which we operate could require us to make additional capital expenditures. Given our limited resources, additional regulatory burdens, if enacted, would adversely impact our results of operations in future periods.
Employees
As of March 31, 2015, we had one full time employee, Mr. Page, our Chief Executive Officer and two part time employees.
Our History
We were incorporated in Delaware on May 17, 1994 as CD Kidz Inc. On March 20, 1995, our name was changed to Wanderlust Interactive, Inc. In March 1996, we completed an initial public offering of our securities and the net proceeds were used principally to establish our New York headquarters and to produce two CD-ROM games based upon the Pink Panther character, which games were completed in September 1996 and September 1997, respectively. We initially marketed such games through distributors in the United States and licensed such games for distribution by others both in the United States and in over fifteen foreign countries.
In February 1997, we acquired all of the outstanding stock of Western Technologies, Inc. as well as certain assets and liabilities of Smith Engineering, a sole proprietorship, from Jay Smith III, our then President, Chief Executive Officer and Treasurer. Western Technologies designed and developed video and computer games and electronic toys and electronic consumer products, mostly pursuant to funded contracts with other name brand manufacturers. The agreement provided for the sale of 100% of the outstanding shares of stock of Western Technologies and certain assets and certain liabilities of Smith Engineering in exchange for 266,667 shares of our common stock. The cost of the acquired enterprise was $5,082,000. We assigned value of $15 per share to the shares issued and assumed liabilities in excess of assets which amounted to $1,082,000. As part of the acquisition, a license agreement was entered into between Western Technologies and Mr. Smith in which Mr. Smith granted to Western Technologies the exclusive right to use and market patents and license agreements owned by Mr. Smith.
After expending most of the funds raised in our initial public offering to produce the two Pink Panther CD-ROM games during 1996 and 1997, we realized that the development costs of such CD-ROM games greatly exceeded both the short-term and long-term anticipated revenue streams from such products and shifted our focus to pre-funded or contract design and development work, such as that historically conducted by Western Technologies. In September 1997, we substantially downsized our New York office and shifted our headquarters to Western Technologies’ offices located in Los Angeles. In April 1998, we closed our New York office permanently and consolidated our entire staff in our remaining Los Angeles office and production space.
On May 14, 1998, our name was further changed to Adrenalin Interactive, Inc. In December 1999, we completed a reverse merger with McGlen Micro, Inc., in which the stockholders of McGlen Micro, Inc. acquired control of us. As a result of the acquisition, each share of McGlen Micro, Inc. was converted into 0.0988961 shares of our common stock, with 2,548,553 shares being issued. On December 17, 1999, we changed our name to McGlen Internet Group, Inc. and on March 15, 2002, we changed our name to Northgate Innovations, Inc.
On March 20, 2002, we completed a reverse acquisition with Lan Plus Corporation in which the stockholders of Lan Plus acquired control of our company. As a result of the acquisition, each share of Lan Plus was converted into approximately 3.128 shares of our common stock, with approximately 14,113,000 shares being issued. In addition, immediately prior to the close of the merger, we instituted a 10:1 reverse stock split and the our accounts payable to, and advances from Lan Plus, in the amount of approximately $2.3 million were converted to common stock eliminating the debt; the stock was then retired to treasury and cancelled. Lan Plus was a manufacturer of branded turnkey computer products and services. Under our Northgate(R) brand name we developed, manufactured, marketed, and sold a wide range of desktop systems, notebook computers, workstations and network servers, as well as offering a variety of hardware components and peripherals to complement our desktop systems, notebook computers, and network servers.
In December 2003, an investor group acquired a majority of our outstanding common stock and in early 2004 this investor group brought in a new management team and implemented a new business strategy. As part of this new business strategy, in June 2004, we changed our name from Northgate Innovations, Inc. to Digital Lifestyles Group, Inc. Beginning in late 2004, we deemphasized the sale of our Northgate(R) brand products to focus our resources solely on the development, marketing and sale of a new product line, branded hip-e, which featured desktop computers, notebook computers and peripherals and was designed and targeted to the teen market.
In April 2005, we received notice from Microsoft Corporation that it had terminated our license to use its proprietary Windows(R) operating system due to our failure to make required royalty payments. Due to the loss of the license, we were unable to ship our products, the majority of which use Microsoft’s proprietary Windows(R) operating system and as a result we were unable to fulfill any orders for our hip-e brand desktop computers. As we lacked sufficient funds required to renew our license with Microsoft and were unable to distribute or sell our products, our management team decided to cease all operations other than to liquidate our assets for the benefit of a secured creditor.
Prior to our entry into the energy industry through the leasing of our first oil and gas property in the fourth quarter of 2009, we were a “shell company” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934. As a result of entering into these leases and undertaking efforts to begin drilling operations on the sites we ceased to be a shell company.
On October 9, 2009 we changed our name to TN-K Energy Group Inc. to better reflect our current operations.
ITEM 1.A RISK FACTORS.
Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.
Our auditors have raised substantial doubts as to our ability to continue as a going concern.
Our financial statements have been prepared assuming we will continue as a going concern. Since inception we have experienced recurring losses from operations, which losses have caused an accumulated deficit of approximately $16.81 million as of December 31, 2014. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We anticipate that we will continue to incur losses in future periods until we are successful in significantly increasing our revenues. There are no assurances that we will be able to raise our revenues to a level which supports profitable operations and provides sufficient funds to pay our obligations. If we are unable to meet those obligations, we could be forced to cease operations in which event investors would lose their entire investment in our company.
Our primary assets serve as collateral under a line of credit due to a related party. If we should default on this obligation, the holder could foreclose on our assets and we would be unable to continue our business and operations. The conversion of this obligation into shares of our common stock will be dilutive to our stockholders.
We have granted Mr. Daniel (Allen) Page, a related party and the lender under the line of credit, a security interest in all of our assets. At December 31, 2014 we owed $170,000 of principal and $3,214 of accrued unpaid interest under this credit line which matured in December 2013 and is now due on demand. If we should default under the repayment of this obligation, the Mr. Page could seek to foreclose on these assets in an effort to seek repayment under the obligation. If he was successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenue and fund our ongoing operations would be materially adversely affected. In such an event we would be forced to cease operations and stockholders would likely lose their entire investment in our company. In addition, the principal and interest due under this credit line are convertible into shares of our common stock at conversion prices ranging from $0.12 to $0.35 per share, and we are obligated to issue him warrants upon the conversion of this obligation. The issuance of these securities will be dilutive to our existing stockholders.
We engage in a number of material transactions with a related party and there are no assurances the terms of these transactions are fair to our company.
As described later in this report under Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence, during 2014 and 2013 we entered into a number of transactions with Mr. Daniel (Allen) Page. While not an officer or director of our company, in his role as a consultant to us he has the ability to exert significant influence on our business and operations. These affiliated transactions may, from time to time, result in a conflict of interest for our management. Because these transactions are not subject to the approval of our stockholders and were not negotiated on an arms-length basis, investors in our company are wholly dependent upon the judgment of our management in these related party transactions.
Our business model and growth strategies may not prove successful over the long-term.
Our ability to develop our operations in the energy sector is constrained by our limited working capital and size of our operations. While we have been able to acquire participating interests in producing wells, as well leasing unproven acreage for our drilling operations, using minimal amounts of cash by leveraging our common stock, it is possible that the value of the shares we have issued have exceeded the price we would have paid for the same assets had we been negotiating a cash transaction. In 2014 and 2013, we recognized an impairment of $177,516 and $253,682, respectively, net of income tax on various properties we acquired as the value of the reserves was less than the value of the shares we issued as consideration in the transaction. While we believe that the internally generated values we ascribed to the various assets to determine the purchase prices at the time of the acquisitions have a great likelihood of proving accurate over time as the wells are drilled, there are no assurance that our believe is correct. In addition, our business model envisions that we will continue to utilize our common stock to the extent possible in lieu of cash for future acquisitions of acreage and participating interests. There are no assurances we will be able to continue this model, which may hinder our ability to expand our acreage holdings which is a key factor to our future growth.
There are a number of external factors which impact our operating results which are beyond our control.
The oil gas produced by us must be marketed in order for our company to receive revenues. Oil prices are not regulated, but instead are subject to factors which are generally beyond our control, such as the supply and demand. For example, reduced oil demand and excess oil supplies will result in lower prices. Other factors affecting the price and marketing of oil and natural gas production, which are also beyond our control cannot be accurately predicted, are:
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the cost, proximity, availability, and capacity of pipelines and other transportation facilities;
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the price and availability of other energy sources such as coal, nuclear energy, solar, wind and alternative fuels;
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local, state, and federal regulations regarding production, conservation, and transportation;
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overall domestic and global economic conditions;
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the impact of the U.S. dollar exchange rates on oil and natural gas prices;
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technological advances affecting energy consumption;
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governmental relations, regulations and taxation;
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the general level of supply and market demand for oil on a regional, national and worldwide basis and the impact of energy conservation efforts;
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weather conditions and fluctuating seasonal supply and demand for oil and natural gas;
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economic and political instability, including war or terrorist acts in oil producing countries, including those of the Middle East, Africa and South America;
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the amount of domestic production of oil gas; and
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the amount and price of imports of oil from foreign sources, which include production quotas for petroleum products from time to time with the intent of increasing, maintaining, or decreasing price levels.
We are unable to predict what effect these various factors will have on the future price of the oil, one or more of which will impact our revenues and profits in future periods.
We have a significant amount of past due debt.
At December 31, 2014, our balance sheet includes approximately $3.43 million of past due debt, including past due obligations and accrued expenses. The vast majority of these liabilities predate our current operations and our current management. We do not have the funds necessary to satisfy these obligations. There are judgments against our company for a significant amount of these past due obligations, all of which relate to obligations incurred prior to our current management. If one or more of these judgment creditors should attempt to collect the amounts due, it is unlikely that we would be able to continue our operations as they are presently conducted.
Estimates of oil reserves are inherently imprecise. Any material inaccuracies in these reserve estimates or underlying assumptions will affect materially the quantities and present value of our reserves.
The estimates of proved oil reserves and the future net cash flows attributable to those reserves were prepared by independent petroleum engineers and geologists. There are numerous uncertainties inherent in estimating quantities of proved oil reserves and cash flows attributable to such reserves, including factors beyond our control and that of our engineers. Reserve engineering is a subjective process of estimating underground accumulations of oil that cannot be measured in an exact manner. Different reserve engineers may make different estimates of reserves and cash flows based on the same available data. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to such reserves, is a function of the available data, assumptions regarding future oil prices and expenditures for future development drilling and exploration activities, and of engineering and geological interpretation and judgment. Additionally, reserves and future cash flows may be subject to material downward or upward revisions, based upon production history, development drilling and exploration activities and the price of oil. Actual future production, revenue, taxes, development drilling expenditures, operating expenses, underlying information, quantities of recoverable reserves and the value of cash flows from such reserves may vary significantly from the assumptions and underlying information set forth herein.
Oil prices are volatile and significant decline in the price of crude oil will adversely impact our results in future periods.
Our revenues, profitability and liquidity are substantially dependent upon prevailing prices for oil, which can be extremely volatile. Even relatively modest drops in prices can significantly affect our financial results and impede our growth. Prices for oil may fluctuate widely in response to relatively minor changes in the supply of and demand for oil, market uncertainty and a wide variety of additional factors that are beyond our control, such as the domestic and foreign supply of oil; the price of foreign imports; the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; technological advances affecting energy consumption; domestic and foreign governmental regulations; and the variations between product prices at sales points and applicable index prices. Our operations are focused on oil exploration and production in the Appalachian Basin region of the United States. Regional oil prices may vary from national prices due to regional factors such as regional production being constrained by regional capacity.
Oil drilling operations are inherently risky.
The nature of the oil business involves a variety of risks, particularly the risk of drilling wells that are found to be unable to produce any oil at prices sufficient to repay the costs of the wells and the costs of producing the wells. We have recognized impairment expenses of $177,516 and $253,682 in 2014 and 2013, respectively. It is possible that in the future we will continue to recognize substantial impairment expenses when uneconomic wells and declines in oil prices result in impairments of the capitalized costs of our oil properties. The oil business also includes operating hazards such as fires, explosions, cratering, blow-outs and encountering formations with abnormal pressures. The occurrence of any of these risks could result in losses. The occurrence of any one of these significant events, if it is not fully insured against, could have a material adverse effect on our financial position and results of operations.
In our operations were we are the well operator, we utilize the services of independent drilling contractors. We do not carry insurance against well blow-outs and other unusual risks in the drilling, completion and operation of oil wells. In the event that fires, blow-outs and other events occur, our losses will not be covered by insurance and will have a material impact on our liquidity in future periods. If the scope of the accident is significant enough, it could cause us to cease a portion of our operations which would adversely impact our revenues in future periods. Our drilling activities also involve risks, such as drilling non-productive wells or dry holes, which are beyond our control. The cost of drilling and operating wells and of installing production facilities and pipelines is uncertain. Cost overruns are common risks that often make a project uneconomical. We may also decide to reduce or cease its drilling operations due to title problems, weather conditions or noncompliance with governmental requirements, all of which will adversely impact our results of operations in future periods.
We may be unable to find additional reserves.
Our revenues depend in part on whether we find or acquire additional reserves. Unless we conduct successful exploration and development activities, or acquire properties, our proved reserves will decline. Our future oil reserves and production as well as our cash flow and income are dependent on our ability to efficiently develop and exploit our current reserves and economically find or acquire additional reserves. Our planned exploration and development projects may not result in significant additional reserves, and we may be unable to drill productive wells at low reserve replacement costs.
We are subject to extensive government regulations.
Our business is affected by numerous federal, state and local laws and regulations, including energy, environmental, conservation, tax and other laws and regulations relating to the oil and gas industry. These include, but are not limited to:
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the prevention of waste,
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the discharge of materials into the environment,
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the conservation of oil and natural gas,
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pollution,
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permits for drilling operations,
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drilling bonds, and
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reports concerning operations, spacing of wells, and the unitization and pooling of properties.
Failure to comply with any laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of injunctive relief, or both. Moreover, changes in any of the above laws and regulations could have a material adverse effect on our business. Concerns of global warming may result in changes to laws and regulations that increase the cost of oil operations and decrease the use and demand for crude oil. In view of the many uncertainties with respect to current and future laws and regulations, including their applicability to us, we cannot predict the overall effect of such laws and regulations on our future operations.
Shortages of rigs, equipment, supplies and personnel could delay or otherwise adversely affect our cost of operations or our ability to operate according to our business plans.
We hire independent drilling operators for our operations. While we have not experienced any shortages to date, it is possible that we may experience shortages of drilling and completion rigs, field equipment and qualified personnel which may cause delays in our ability to continue to drill, complete, test and connect wells to processing facilities. It is also possible that we could be subject to sharp increases in these costs. The demand for and wage rates of qualified drilling rig crews generally rise in response to the increased number of active rigs in service and could increase sharply in the event of a shortage. Shortages of drilling and completion rigs, field equipment or qualified personnel could delay, restrict or curtail our exploration and development operations, which may materially adversely affect our business, financial condition and results of operations.
The tradability of our common stock is limited under the penny stock regulations which may cause the holders of our common stock difficulty should they wish to sell the shares.
Because the quoted price of our common stock is less than $5.00 per share, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2. DESCRIPTION OF PROPERTY.
Principal executive office
Our principal executive offices are located in approximately 1,200 square feet of office space which we rent from an unrelated third party on a month to month basis for a monthly rental of $350. While these facilities are suitable for our needs for foreseeable future, we may elect to move our offices closer to our drilling operations. In that event, we do not anticipate that we would have any difficulty in leasing suitable office space upon similar terms.
Oil and gas properties
Information on our oil and gas properties appears earlier in this report under Item 1. Business.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending or threatened litigation.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our operations.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted in the OTC Markets OTCQB tier under the symbol TNKY. The reported high and low last sale prices for the common stock are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
The last sale price of our common stock as reported on the OTC Markets OTCQB tier was $0.09 per share on June 10, 2015. As of June 10, 2015, there were approximately 125 record owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock. Under the terms of the Security Agreement with a related party described elsewhere herein, we are prohibited from declaring and paying dividends so long as there are amounts outstanding under the related secured credit line. Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits and dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
Recent Sales of Unregistered Securities
None except as previously reported.
Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations for 2014 and 2013 should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Item 1A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see our Financial Statements beginning on page of this annual report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on his evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer who also serves as our principal financial and accounting officer has concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of material weaknesses in our internal control over financial reporting as described below.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our 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. Our internal control over financial reporting includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the company’s financial reporting. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our management has concluded that as of December 31, 2014, our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles as a result of the material weaknesses.
The material weaknesses identified are related to insufficient personnel and accounting resources are not adequate to allow sufficient time to (i) perform a review of the consolidation and supporting financial statement disclosure schedules independent of the preparer (ii) adequately prepare for our quarterly reviews and annual audit and (iii) research all applicable accounting pronouncements as they relate to our financial statements and underlying disclosures. Due to these material weaknesses, in preparing our financial statements for the year ended December 31, 2014 we performed additional analysis and other post close procedures to ensure that such financial statements were stated fairly in all material respects in accordance with U.S. generally accepted accounting principles. While we hired an experienced accountant in 2011 in an effort to mitigate to an extent these material weaknesses, she is a part-time employee and we continue to lack sufficient personnel and resources. Although we believe the possibility of errors in our financial statements is remote, until such time as we hire a full time principal financial officer and expand our staff with qualified personnel, we expect to continue to report material weaknesses in our internal control over financial reporting.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive officers and directors
Ken Page. Mr. Page has served as Chairman of the Board and Chief Executive Officer of our company since September 2007. Prior to joining the company, in 2006 Mr. Page was an associate broker with No. 1 Quality Realty in Tennessee. From 2002 to 2006, Mr. Page was a programmer with S &S Precision Inc., a Tennessee manufacturer of industrial molds, tool and die material and packing.
Brad McNeil. Mr. McNeil has been a member of our Board of Directors since October 2007. Since 2000 Mr. McNeil has been the Plant Manager for Certified Cylinder, Inc., a Tennessee tank refurbisher. In addition, during the past 20 years Mr. McNeil has provided part-time field work for independent oil operators.
There are no family relationships between our officers and directors. Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.
Consulting Agreement with Daniel (Allen) Page
Since March 2010 we have been a party to a consulting agreement with Mr. Daniel (Allen) Page. Mr. Daniel (Allen) Page, a principal stockholder of our company, is also the father of our Chief Executive Officer. Under the terms of the most recent agreement with Mr. Daniel (Allen ) Page entered into in August 2012, he provides a variety of consulting services to us, including:
•
providing advice to us on matters related to our current and future drilling operations and overseeing certain of our drilling operations,
•
advising us on potential lease acquisitions and assisting our company in negotiations to expand our lease holdings,
•
assisting with the strategic analysis of our business objectives and assisting in the implementation of a strategic plan for our company, with a view towards enabling us to achieve our financial goals;
•
providing in-depth consultations to our management and Board of Directors to determine the amount and structure of the capital sought by our company;
•
assisting us with investor relations services, and
•
providing such additional general business advisory services as we may request from time to time
Under the terms of the 2012 agreement we agreed to pay Mr. Daniel (Allen) Page a fee of $46,000 and pay his expenses incurred in providing the services to us up to a maximum of $1,000 per month. We also provide Mr. Page with the full-time use of a company-owned vehicle as additional compensation. The initial term of the agreement is one year and the term automatically expands for successive one year terms unless either we or Mr. Page provide notice of non-renewal at least 60 days prior to the expiration of the then current term. The agreement contains customary confidentiality provisions. As of December 31, 2014, we have accrued as a liability an aggregate of $45,866 under this agreement.
We are also a party to a number of additional transactions with Mr. Daniel (Allen) Page as described later in this report under Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence. While he has not been elected as a member of our Board of Directors or appointed as an officer of our company, as a result of the scope of his services to us and the level of influence he has over our business and operations. Mr. Daniel (Allen) Page is deemed to be a control person of our company within the meaning of Rule 405 of the Securities Act of 1933.
Director Qualifications, Committees of our Board of Directors and the Role of our Board in Risk Oversight
We are a small company and we only recently begun operating in the energy sector during the fourth quarter of 2009. Mr. Page and Mr. McNeil were appointed to our Board of Directors in September 2007 and October 2007, respectively, at the time when we were a shell company. While Mr. Page and Mr. McNeil have remained members of our Board of Directors, we believe they each remain a good fit for our current needs. Mr. Page’s family has interests in oil and gas operations in Tennessee and Kentucky and through this family business Mr. Page brought both a practical understanding of the geographic particularities and as well as hands-on experience in our business sector to our Board. Since beginning operations in the energy sector, his relationships with landowners and independent drilling rig operators have facilitated our ability to quickly expand our business and develop revenue producing operations while conserving our limited capital. Mr. McNeil’s experience in field work with independent oil operators in Tennessee and Kentucky provides him with an enhanced understanding of our operations which provides an additional dimension to his role as an independent director.
Mr. Page serves as both our Chief Executive Officer and as one of the two members of our Board of Directors. Mr. McNeil is considered an independent director, but is not considered a “lead” independent director. The business and operations of our company are managed by our Board as a whole, including oversight of various risks, such as operational and liquidity risks that our company faces. Management is responsible for the day-to-day management of the risks we face, while the Board, as a whole, has responsibility for the oversight of risk management. In his role and as independent director, Mr. McNeil meets regularly with Mr. Page to discuss strategy and risks we face and to address any questions or concerns he may have on risk management and any other matters. We have not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. The functions of those committees are being undertaken by Board of Directors as a whole. Because we have only two directors, one of which is not independent, we believe that the establishment of these committees would be more form over substance.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees, nor do we have a policy regarding director diversity. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size and lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees. In considering a director nominee, it is likely that our Board will consider the professional and/or educational background of any nominee with a view towards how this person might bring a different viewpoint or experience to our Board.
Neither of our directors is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:
•
understands generally accepted accounting principles and financial statements,
•
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
•
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
•
understands internal controls over financial reporting, and
•
understands audit committee functions.
Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
Code of Ethics and Business Conduct
We have adopted a code of ethics applicable to our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial and accounting officer. We will provide a copy, without charge, to any person desiring a copy of the Code of Ethics, by written request to, 649 Sparta Highway, Suite 102, Crossville, TN 38571.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, all executive officers, directors and persons holding greater than 10% of our issued and outstanding stock have filed the required reports in a timely manner during 2014.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in 2014 and 2013 for our principal executive officer, each other executive officer serving as such whose annual compensation exceeded $100,000, and up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer of our company at December 31, 2014. The value attributable to any option awards is computed in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 7 of the Notes to our Financial Statements appearing later in this report.
1 All Other Compensation represents a monthly expense allowance payable to Mr. Page under the terms of his employment agreement.
Employment Agreement with Mr. Page
On September 27, 2007, we entered into an Employment Agreement with Mr. Page whereby he agreed to serve as our Chief Executive Officer and Chairman of our Board of Directors. The Employment Agreement has an initial term of one year and thereafter will automatically be extended for two year periods unless notice of non-renewal is given by either party no later than 30 days prior to the end of the expiration of each term. Under the Employment Agreement, Mr. Page initially was to receive a monthly salary of $6,000, plus $1,000 per month as an expense allowance.
In addition, under the Employment Agreement, after six months of employment, Mr. Page received a grant of a three year option to purchase 3,000,000 shares of our common stock at a price of $0.20 per share, which vested in six equal monthly installments from the date of issuance. These options expired unexercised in 2010. Mr. Page also received a right to immediately appoint two directors to our Board of Directors. Pursuant to the agreement, Mr. McNeil was appointed to our Board of Directors. Mr. Page does not have any present attention to appoint an additional director to our Board.
On September 29, 2009 we entered into an agreement with Mr. Page pursuant to which certain terms of his Employment Agreement were amended at his request in an effort to assist our company during our development of our new business. Under Amendment No. 1 to Mr. Page’s Employment Agreement, his base salary was reduced from $72,000 per year to $50,000 per year and we granted him non-qualified options to purchase an aggregate of 120,000 shares of our common stock pursuant to our 2009 Equity Compensation Plan which have an exercise price of $0.25 per share. The options vest in 12 equal monthly installments at the end of each month beginning in September 2009.
On July 1, 2012 we entered into an agreement with Mr. Page pursuant to which certain terms of his Employment Agreement were amended at his request in an effort to assist our company during our development of our new business. Under Amendment No. 2 to Mr. Page’s Employment Agreement, his base salary was reduced from $50,000 per year to $40,000 per year and he forgave his accrued wages of $ 85,076. We provide Mr. Page with the full time use of a company-owned vehicle as additional compensation. In May 2014, this employment agreement was amended to reduce the monthly salary to be $3,500 a month and the Company opting to pay health insurance in the amount of $542.02. In addition, on June 27, 2014 our Board of Directors granted Mr. Ken Page five year non-qualified options to purchase 1,560,000 shares of our common stock at an exercise price of $0.16 per share.
On August 21, 2014, we entered into an agreement with Mr. Page pursuant to which certain terms of his Employment Agreement were amended at his request in an effort to assist our company during development of our new business. Under Amendment No. 2 to Mr. Page’s Employment Agreement, his base salary was reduced from $46,000 annually to $42,000 and we agreed to pay his health insurance premiums initially at the rate of $524 per month, which such amount may be increased or decreased upon a change in cost of such insurance based upon a subsequent policy providing identical coverage. This amendment memorialized an oral agreement between parties entered into in May 2014.
The terms of the employment agreement were approved by our Board of Directors, of which Mr. Page is one of two members. We have not utilized the services of a compensation consultant.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2014:
Stock Option Plans
2004 Stock Incentive Plan
On March 22, 2004 our Board of Directors adopted, subject to stockholder approval, the 2004 Stock Incentive Plan (the “2004 Plan”). The 2004 Plan was approved by our stockholder in May 2004. No award could be granted under the 2004 Plan subsequent to the 10th anniversary of the date on which the plan was approved by our stockholders. The number of shares of our common stock available for issuance under the 2004 Plan was 3,500,000. At December 31, 2014 there were outstanding options to purchase 205,000 shares of our common stock at an exercise prices ranging from $0.25 to $0.56 per share.
2009 Equity Compensation Plan
On September 29, 2009 our Board of Directors adopted our 2009 Equity Compensation Plan (the “2009 Plan”). The purpose of the 2009 Plan is to enable our company to offer to our employees, officers, directors and consultants whose past, present and/or potential contributions to our company have been or will be important to our success, an opportunity to acquire a proprietary interest in our company. The types of long-term incentive awards that may be provided under the plan will enable us to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of its businesses. The plan authorizes the grant of (i) options which qualify as incentive stock options under Section 422(b) of the Internal Revenue Code of 1986, as amended, (ii) non-qualified options which do not qualify as incentive stock options, (iii) awards of our common stock (iv) and rights to make direct purchases of our common stock which may be subject to certain restrictions. We have reserved 4,800,000 shares of our common stock for issuance upon grants made under the plan. At December 31, 2012 we had options to purchase 2,188,000 shares of our common stock with exercise prices ranging from $0.12 to $0.30 outstanding under the 2009 Plan.
Compensation of Directors
We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board is determined from time to time by our Board of Directors based upon the amount of time expended by each of the directors on our behalf. Mr. Page, who is an executive officer of our company, does not receive any compensation specifically for his services as a director. In 2014 we did not compensate Mr. McNeil for his services to us as a director.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
At June 10, 2015, we had 38,176,085 shares of our common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of March 21, 2015 by:
•
each person known by us to be the beneficial owner of more than 5% of our common stock;
•
each of our directors;
•
each of our named executive officers; and
•
our named executive officers, directors and director nominees as a group.
Unless otherwise indicated, the business address of each person listed is in care of 649 Sparta Highway, Suite 102, Crossville, TN 38571. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.
(1) The number of shares of common stock beneficially owned by Mr. Ken Page includes shares underlying options to purchase:
•
1,500,000 shares of our common stock with an exercise price of $0.30 per share which expire in September 2015.
(2) Mr. Coomer’s address is 1115 Jamestown Street, Suite 3, Columbia, KY 42728.
(3) Mr. Coomer’s address is 401 Coomer Road, Columbia, KY 42728.
(4) Mr. Daniel (Allen) Page’s address is Post Office Box 574, Crossville, TN 38557. The number of shares owned by Mr. Page includes 1,054,852 shares which are presently outstanding, together with:
•
1,825,970 shares issuable upon the conversion of $180,000 principal amount due under the secured line of credit note with Mr. Daniel (Allen) Page, and
•
80,000 shares issuable upon the exercise of warrants with exercise prices ranging from $0.12 to $0.35 per share we will issue Mr. Daniel (Allen) Page upon the conversion or satisfaction of secured line of credit.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of December 31, 2014.
A description of the 2004 Stock Incentive Plan and the 2009 Equity Compensation Plan is contained earlier in this report under Part III, Item 11. Executive Compensation - Stock Option Plans.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
From time to time we enter into transactions with Mr. Daniel (Allen) Page, a related party. See Part III, Item 10., Directors, Executive Officers and Corporate Governance. During 2012 we entered into a number of joint venture transactions on various oil leases with Mr. Daniel (Allen) Page, including:
•
On April 12, 2012, we entered into a 35% interest in a 100% working interest in the Teddy Hicks Lease for an initial cost to us $10. We are responsible for 42% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 58% of such costs;
•
On July 27, 2012, we entered into a 85% interest in a 100% working interest in the Jimmie and Linda Irby Lease for an initial cost to us of $10;
•
On October 1, 2012, we entered into a 50% interest in a 87.5% working interest in the Gerald Norrad Lease for an initial cost to us of $10;
•
On October 1, 2012, we also entered into a 37.5% interest in a 75% working interest in the John Lee Lease for an initial cost to us of $10;
•
On October 1, 2012, we also entered into a 25% interest in a 87.5% working interest lease in the Barclay Kirkland Lease for an initial cost to the Company of $10;
•
On October 4, 2012, under the terms of a Memorandum of Understanding we participated and permitted 25% working interests as the operator in the Barclay Kirkland Well #1 in Cumberland County, Kentucky at the cost of approximately $15,500. We are responsible for 32% of the all costs associated with the well, and Mr. Page is responsible for the remaining 68% of such costs; and
•
On October 23, 2012, we entered into a 15% interest in an 75% working interest in John Lee Well #1 pursuant to the terms of an Assignment of Interest in Oil and Gas Lease dated October 1, 2012 by and our company and Mr. Page for an initial cost to the Company of $10. We are responsible for 25% of the costs on this well and Mr. Page is responsible for the remaining 75% of such costs.
During 2013 we entered into the following joint venture transaction on an oil lease with Mr. Daniel (Allen) Page:
•
On December 19, 2013, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the William Johnson Well #1 in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
During 2014 we entered into a number of joint venture transactions on various oil leases with Mr. Daniel (Allen) Page, including:
•
On February 16, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Gerald Norrad Well #3 at the cost of approximately $15,000. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
• On March 31, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Alan Parrish Well #1 in Clinton County, Kentucky at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
•
On May 9, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Lester Clark #1 in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
•
On May 29, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Alan Parrish Well #2 in Clinton County, Kentucky at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
•
On August 15, 2014, the Company entered into a 50% interest in an 87.5% working interest lease named the Johnny Ringley Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $1,000. The lease is of approximately 68 acres, located in Cumberland County, Kentucky.
•
On August 21, 2014, we entered into an agreement with Mr. Page pursuant to which certain terms of his Employment Agreement were amended at his request in an effort to assist our company during development of our new business. Under Amendment No. 2 to Mr. Page’s Employment Agreement, his base salary was reduced from $46,000 annually to $42,000 and we agreed to pay his health insurance premiums initially at the rate of $524 per month, which such amount may be increased or decreased upon a change in cost of such insurance based upon a subsequent policy providing identical coverage. This amendment memorialized an oral agreement between parties entered into in May 2014.
•
On September 26, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the David Wright in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
During 2014 we were also a party to several additional transactions with Mr. Daniel (Allen) Page, including:
•
Mr. Daniel (Allen) Page also provides a secured line of credit to us which is described earlier in this report under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Secured Line of Credit with Mr. Daniel (Allen) Page. During 2013 we paid Mr. Page $15,100 of interest under this secured credit line. At December 31, 2013 we owed Mr. Daniel (Allen) Page $180,000 principal and $0 of accrued but unpaid interest. In April 2013 we entered into a Security Agreement with Mr. Daniel (Allen) Page pursuant to which we granted him a security interest in all of our assets to ensure the repayment of the secured credit line which is described in greater detail earlier in this report; and
•
On August 15, 2012, effective July 1, 2012, we entered into a new Consulting Agreement with Mr. Daniel (Allen) Page which replaced the earlier agreement dated March 1, 2011. The terms of this agreement are described earlier in this report under Part III, Item 10. Directors, Executive Officers and Corporate Governance. At December 31, 2014 we owed Mr. Page $56,819 accrued consulting fees under this agreement, net of payments of $17,330 during 2014.
•
On September 17, 2013, we provided Mr. Page with the full time use of a company-owned vehicle as additional compensation for an initial cost of $12,000. We are responsible for 100% of the costs to maintain this vehicle.
As these transactions were not negotiated on an arms-length basis, there are no assurances that the terms of these transactions are as fair to our company as we might receive from an unrelated third party.
Director Independence
Mr. McNeil is considered “independent” within the meaning of meaning of Rule 5605 of the NASDAQ Marketplace Rules.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table shows the fees that were billed for the audit and other services provided by Liggett, Vogt and Webb P.A. in 2014 and 2013.
Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees - This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the Securities and Exchange Commission and other accounting consulting.
Tax Fees - This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees - This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to 2014 and 2013 were pre-approved by the entire Board of Directors.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
* filed herewith.
** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Annual Report on Form 10-K shall be deemed “furnished” and not “filed”.
(1)
Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2004.
(2)
Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2003.
(3)
Incorporated by reference to the Current Report on Form 8-K as filed on October 4, 2005.
(4)
Incorporated by reference to the Current Report on Form 8-K as filed on September 15, 2004.
(5)
Incorporated by reference to the Current Report on Form 8-K as filed on April 26, 2007.
(6)
Incorporated by reference to the Current Report on Form 8-K as filed on October 9, 2007.
(7)
Incorporated by reference to the Current Report on Form 8-K as filed on August 31, 2009.
(8)
Incorporated by reference to the Current Report on Form 8-K as filed on October 5, 2009.
(9)
Incorporated by reference to the Current Report on Form 8-K as filed on October 19, 2009.
(10)
Incorporated by reference to the Current Report on Form 8-K as filed on November 12, 2009.
(11)
Incorporated by reference to the Current Report on Form 8-K as filed on December 8, 2009.
(12)
Incorporated by reference to the Current Report on Form 8-K as filed on January 26, 2010.
(13)
Incorporated by reference to the Current Report on Form 8-K as filed on February 8, 2010.
(14)
Incorporated by reference to the Current Report on Form 8-K as filed on May 12, 2010.
(15)
Incorporated by reference the Quarterly Report on Form 10-Q for the period ended June 30, 2010.
(16)
Incorporated by reference to the Current Report on Form 8-K as filed on September 23, 2010.
(17)
Incorporated by reference to the Current Report on Form 8-K as filed on December 20, 2010.
(18)
Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2009.
(19)
Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2010.
(20)
Incorporated by reference to the Current Report on Form 8-K as filed on April 23, 2012.
(21)
Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2012.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Name
Positions
Date
/s/ Ken Page
Chief Executive Officer, President, Secretary,
May 26, 2015
Ken Page
Director, Principal Executive Officer and
Principal Financial and Accounting Officer
/s/ Brad McNeil
Director
May 26, 2015
Brad McNeil
Index of Exhibits
23.1
Consent of Lee Keeling & Associates, Inc. *
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer *
31.2
Rule 13a-14(a)/15d-14(a) Certification of principal financial and accounting officer *
32.1
Section 1350 Certification of Chief Executive Officer and principal financial and accounting officer *
99.1
Reserve Report of Lee Keeling & Associates, Inc. at December 31, 2014 *
TN-K ENERGY GROUP INC
CONTENTS
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
TN-K Energy Group, Inc.
We have audited the accompanying balance sheets of TN-K Energy Group, Inc. as of December 31, 2014 and 2013 and the related statements of operations, stockholders’ deficit, and cash flows for each of the years then ended December 31, 2014 and 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of its operations and cash flows for each of the years then ended December 31, 2014 and 2013, in conformity with generally accepted accounting principles in the United States.
The accompanying consolidated financial statements have been prepared assuming that TN-K Energy Group, Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses and will have to obtain additional financing to sustain operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
/s/ Liggett, Vogt & Webb, P.A.
LIGGETT, VOGT & WEBB, P.A.
Certified Public Accountants
New York, New York
May 29, 2015
TN-K Energy Group Inc
Balance Sheets
See accompanying notes to financial statements.
TN-K Energy Group, Inc.
Statements of Operations
See accompanying notes to financial statements.
TN-K Energy Group Inc
Statements of Cash Flows
See accompanying notes to financial statements.
TN-K Energy Group Inc
Statements of Changes in Stockholders’ Deficit
Years ended December 31, 2014 and 2013
See accompanying notes to financial statements.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION.
Organization
TN-K Energy Group Inc. is an independent energy company engaged in the acquisition, development and sale of crude oil reserves and production in the Appalachian Basin and to conduct directly and indirectly through third parties, operations on the properties. In these Notes, the terms “Company”, “TN-K”, “we”, “us”, “our” and terms of similar import refer to TN-K Energy Group Inc.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The Company has incurred losses since inception and a substantial portion of the debt is in default and has a stockholders’ deficit of $(2,067,587) as of December 31, 2014. The future of the Company is dependent upon its ability to obtain additional equity and/or debt financing and upon the continued development of commercially viable producing wells at levels which significantly increase the Company’s revenues and net income. Management cannot assure that the Company will be able to secure such financing or obtain financing on terms beneficial to the Company or that the Company will be able to significantly increase its revenues and net income. Failure to achieve these goals may result in the Company’s inability to continue as a going concern and the impairment of the recorded long-lived assets.
These financial statements do not include any adjustments relating to the recoverability and classifications of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Cash and Cash Equivalents - For purposes of reporting cash flows, we consider cash equivalents to be all highly liquid investments with a maturity of three months or less at the time of purchase. The Company typically has cash in banks in excess of federally insured amounts.
Use of Estimates - Our financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). Preparation in accordance with GAAP requires us to (1) adopt accounting policies within accounting rules set by the Financial Accounting Standards Board (“FASB”) and by the United States Securities and Exchange Commission (“SEC”) and (2) make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and other disclosed amounts. This Note describes our significant accounting policies. Our management believes the major estimates and assumptions impacting our financial statements are the following:
•
estimates of proven (i.e., reasonably certain) oil and gas reserve quantities, which affect the calculations of amortization and impairment of capitalized costs of oil and gas properties;
•
estimates of the fair value of oil and gas properties we own, particularly properties that we have not yet explored, or fully explored, by drilling and completing wells;
•
estimates of the fair value of stock options at date of grant;
•
estimates as to the future realization of deferred income tax assets; and
•
the assumption required by GAAP that proved reserves and generally proved reserve value for measuring capitalized cost impairment be based on the prices of oil and gas at the end of the reporting period.
The estimated fair values of our unevaluated oil and gas properties affect the calculation of gain on the sale of material properties and affect our assessment as to whether portions of unevaluated capitalized costs are impaired, which also affects the calculation of recorded amortization and impairment expense with regards to our capitalized costs of oil and gas properties.
The fair value of stock options at the date of grant to employees and members of our Board of Directors is based on judgment as to expected future volatility of our common stock and expected future choices by option holders as to when options are exercised.
Actual results may differ from estimates and assumptions of future events. Future production may vary materially from estimated oil and gas proved reserves. Actual future prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting.
Fair Value - The carrying amounts reported in the balance sheets for cash, and accounts receivable approximate fair value because of the immediate or short-term maturity of these financial instruments. Predominately most of the payables are the results of operations and financings of our prior business which ceased operations in 2005, as a result of the undercapitalized nature of our Company and the age of these delinquent payables, we are unable to determine the fair value of these payables.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).
The Company utilizes the methods of fair value measurement as described in ASC 820 to value its financial assets and liabilities. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hieracy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
•
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
•
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
•
Level 3: Unobservable inputs are used when little or no market data is available. The fair value of hierarchy gives the lowest priority to Level 3 inputs.
Accounts Receivable and Credit Policies - We have certain trade receivables consisting of oil and gas sales obligations due under normal trade terms. Our management regularly reviews trade receivables and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. At December 31, 2014 and 2013, management had determined no allowance for uncollectible receivables was necessary. At December 31, 2014and 2013, we had accounts receivable and receivables from the sale of a partial interest in oil wells of $17,572 and $17,318, respectively.
Asset Retirement Obligations - When we incur an obligation for future asset retirement costs, we record as a liability and as a cost of the acquired asset the present value of the estimated future asset retirement obligation. For example, when we drill a well, we record a liability and an asset cost for the present value of estimated costs we will incur at the end of the well’s life to plug the well, remove surface equipment and provide restoration of the well site’s surface. Over time, accretion of the liability is recognized as an operating expense, and the capitalized cost is amortized over the expected useful life of the related asset. Our asset retirement obligations (“ARO”) relate primarily to the plugging, dismantlement, removal, site reclamation and similar activities of our oil and gas properties. Due to the small amount of such monies related to the asset retirement obligations as of December 31, 2014 and December 31, 2013, this amount is included in accrued expenses on the balance sheet.
The following table reflects the change in ARO for the years ended December 31, 2014:
Oil and Gas Properties - We use the successful efforts method of accounting for oil and gas activities. Under this method, subject to a limitation based on estimated value, all costs are capitalized directly associated with property acquisition, exploration and development. Internal costs that are capitalized at December 31, 2014 and 2013, were nil as such costs have been limited to costs directly identifiable with acquisition, exploration and development activities for the Company’s account and exclude indirect costs and costs related to production or general corporate overhead.
The Company follows the successful efforts method of accounting for its oil and gas activities. Accordingly, costs associated with the acquisition, drilling and equipping of successful exploratory wells are capitalized. Geological and geophysical costs, delay and surface rentals and drilling costs of unsuccessful exploratory wells are charged to expense as incurred. Costs of drilling development wells are capitalized. Upon the sale or retirement of oil and gas properties, the cost and accumulated depreciation or depletion are removed from the accounts and any gain or loss is credited or charged to operations.
Capitalized costs of oil and gas properties evaluated as having, or not having, proved reserves are amortized in the aggregate by country using the unit-of-production method based upon estimated proved oil and gas reserves. The Company currently does not have any gas production which is sold, but we have developed policies to be inclusive of such production, if and when the Company becomes capable of selling such gas. For amortization purposes, relative volumes of oil and gas production and reserves are converted at the energy equivalent conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil. Amortizable costs include estimates of future development costs of proved undeveloped reserves. The costs of properties not yet evaluated are not amortized until evaluation of the property. We make such evaluations for a well and associated lease rights when it is determined whether or not the well has proved oil and gas reserves. Other unevaluated properties are evaluated for impairment as of the end of each calendar quarter based upon various factors at the time, including drilling plans, drilling activity, management’s estimated fair values of lease rights by project, and remaining lives of leases.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
as of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).
Capitalized costs of oil properties (net of related deferred income taxes) may not exceed a ‘ceiling’ amount equal to the present value, discounted at 10% per annum, of the estimated future net cash flows from proved oil reserves plus the cost of unevaluated properties (adjusted for related income tax effects). Should capitalized costs exceed this ceiling, the excess is charged to earnings as an impairment expense, net of its related reduction of the deferred income tax provision. The present value of estimated future net cash flows is computed by applying period-end oil prices of oil to estimated future production of proved oil gas reserves as of period-end, less estimated future expenditures (at period-end rates) to be incurred in developing and producing the proved reserves and assuming continuation of economic conditions existing at period-end. SEC guidance allows the ceiling to be increased for subsequent events occurring reasonably before the filing date of the affected financial statements and indicative that capitalized costs were not impaired at period-end. Such subsequent events are increased oil prices and the proving up of additional reserves on properties owned at period-end. The present value of proved reserves’ future net cash flows excludes future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet.
Equipment - We record at cost any long-lived tangible assets that are not oil properties. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets of three to seven years. Expenditures for replacements, renewals, and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Long-lived assets, other than oil and properties, are evaluated for impairment to determine if current circumstances and market conditions indicate the carrying amount may not be recoverable. We have not recognized any impairment losses on non oil and gas long-lived assets.
Impairment - The accounting guidance, Accounting for the Impairment and Disposal of Long-Lived Assets, requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil properties accounted for using the successful efforts method of accounting (which we use) are excluded from this requirement but continue to be subject to the successful efforts method’s impairment rules.
Revenue Recognition - We recognize oil revenues from our interests in producing wells when production is delivered to, and title has transferred to, the purchaser and to the extent the selling price is reasonably determinable. We recognize the sale of the partial interests in our oil wells once the terms of such contract have been fulfilled. Commission and finder’s fee revenues were recorded upon the culmination of the sale of oil well interests between the third parties
Major Customers - During the years ended December 31, 2014 and 2013, we had two customers, accounting for 100% of oil sales. Because there are other purchasers that are capable of and willing to purchase our oil and because we have the option to change purchasers on our properties if conditions so warrant, we believe that our oil production can be sold in the market in the event that it is not sold to our existing customers, but in some circumstances a change in customers may entail significant transition costs and/or shutting in or curtailing production for weeks or even months during the transition to a new customer.
Net Loss Per Share - Basic net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted number of common shares outstanding during the period. Any common shares issued as a result of the exercise of stock options and warrants would come from newly issued common shares from our remaining authorized shares. For the year ended December 31, 2013, there were 3,393,000 stock options outstanding and $180,000 of convertible debt, excluded from the computation of dilutive securities as the effect would have been anti-dilutive. For the year ended December 31, 2014, there were 3,215,000 stock options outstanding and $170,000 of convertible debt, excluded from the computation of dilutive securities as the effect would have been anti-dilutive.
Concentration of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash. We maintain substantially all cash assets at one financial institution. We periodically evaluate the credit worthiness of financial institutions, and maintain cash accounts only in large high quality financial institutions. We believe that credit risk associated with cash is remote. The Company is exposed to credit risk in the event of nonpayment by counter parties, a significant portion of which are concentrated in energy related industries. The creditworthiness of customers and other counter parties is subject to continuing review.
Share-Based Compensation - We adopted the accounting guidance for, Share-Based Payments, on a modified prospective basis. The accounting guidance requires publicly-held companies to recognize in their statements of operations the grant-date fair value of stock options and other equity-based compensation to employees, consistent with the rules for options to non-employees.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
as of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).
Reclassification - Certain amounts in the 2014 and 2013 consolidated financial statements have been reclassified to conform to the December 31, 2014 financial statement presentation. Such reclassifications have had no effect on net income.
Recent Accounting Pronouncements- All other newly issued but not yet effective accounting pronouncements have been deemed to either not be relevant or immaterial to the operations and reporting disclosures of the Company.
In June 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The update gives entities a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included in Subtopic 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. The update removes inconsistencies and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
ASU 2014 -15 issued August 2014
In August 2014, the FASB issued Accounting Standards Update “ASU” 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued).
The amendments in this Update are effective for public and nonpublic entities for annual period’s ending after December 15, 2016. Early adoption is permitted.
NOTE 3 - OIL AND GAS PROPERTIES AND EQUIPMENT.
Oil and Gas Properties and equipment consisted of the following:
Unevaluated Oil Properties
Costs directly associated with the acquisition and evaluation of unproved properties is excluded from the amortization computation. The following table shows, by year incurred, the unevaluated oil and gas property costs (net of transfers to evaluated costs and net of sales proceeds) excluded from the amortization computation:
Costs associated with unevaluated properties are primarily lease acquisition costs. At December 31, 2014 and December 31, 2013, we drilled 3 and 3 dry holes respectively and recorded an impairment expense of $37,145 and $120,557, associated with dry holes. Pending costs of $0 and $1,640 for wells-in-progress existed at December 31, 2014 and 2013, respectively. There are no unevaluated costs relating to significant development activities. Reclassification of other unproved property costs to evaluated costs is largely dependent on (i) how quickly we drill on the unevaluated property, (ii) the results of such drilling, (iii) if third-parties pay drilling costs to earn a portion of our interest, and (iv) quarterly assessments of such costs for impairments.
Prospect leasing and acquisition normally require one to three years, and the subsequent evaluation normally requires an additional one to three years.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 3 - OIL AND GAS PROPERTIES AND EQUIPMENT (continued).
Acquisitions and sales of oil properties
On January 23, 2013, per a Memorandum of Understanding the Company participated and permitted 25% working interests as the operator in the Betty McCoomas Well #7 at the cost of $18,500 and is responsible for 32% of the all costs associated with the well.
On April 17, 2013 per Memorandum of Understanding the Company sold 27.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #1 for $22,000 and is responsible for 35% of all the costs associated with the well.
On April 23, 2013, per a Memorandum of Understanding the Company participated and permitted 60% working interests as the operator in the Millard Willis Well #1 at the cost of $18,500 and is responsible for 65% of the all costs associated with the well.
On May 16, 2013 per Memorandum of Understanding the Company sold 27.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #2 for $22,000 and is responsible for 35% of all the costs associated with the well.
On May 16, 2013, per a Memorandum of Understanding the Company participated and permitted 60% working interests as the operator in the Millard Willis Well #2 at the cost of $18,500 and is responsible for 65% of the all costs associated with the well.
On July 9, 2013 per Memorandum of Understanding the Company sold 37.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #3 for $30,000 and is responsible for 45% of all the costs associated with the well.
On July 9, 2013, per a Memorandum of Understanding the Company participated and permitted 50% working interests as the operator in the Millard Willis Well #3 at the cost of $18,500 and is responsible for 55% of the all costs associated with the well.
On July 9, 2013 per Memorandum of Understanding the Company sold 37.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #4 for $30,000 and is responsible for 45% of all the costs associated with the well.
On July 9, 2013, per a Memorandum of Understanding the Company participated and permitted 50% working interests as the operator in the Millard Willis Well #4 at the cost of $18,500 and is responsible for 55% of the all costs associated with the well.
On September 11, 2013, the Company completed the sale to Aquilo Resources, LLC of its 60% working and operating interests in the Millard Willis Well #1 for a cash payment of $229,250, which included a commission payment of $5,000 to Beaver Excavating.
On September 17, 2013, per a Bill of Sale the Company purchased a truck to add to their fleet for approximately $12, 000.
On September 30, 2013 per Memorandum of Understanding the Company sold 37.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #5 for $30,000 and is responsible for 45% of all the costs associated with the well.
On September 30, 2013, per a Memorandum of Understanding the Company participated and permitted 50% working interests as the operator in the Millard Willis Well #5 at the cost of $18,500 and is responsible for 55% of the all costs associated with the well.
On October 11, 2013 per Memorandum of Understanding the Company sold 37.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #7 for $30,000 and is responsible for 45% of all the costs associated with the well.
On October 11, 2013, per a Memorandum of Understanding the Company participated and permitted 50% working interests as the operator in the Millard Willis Well #7 at the cost of $18,500 and is responsible for 55% of the all costs associated with the well.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
as of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 3 - OIL AND GAS PROPERTIES AND EQUIPMENT (continued).
On October 11, 2013, per a Memorandum of Understanding the Company participated and permitted 50% working interests as the operator in the Millard Willis Well #7 at the cost of $18,500 and is responsible for 55% of the all costs associated with the well.
On October 25, 2013, per a Bill of Sale the Company purchased a new truck to add to their fleet for approximately $15, 500.
On December 19, 2013, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the William Johnson Well #1 in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On January 4, 2014, per a Memorandum of Understanding the Company participated and permitted 87.5% working interests as the operator in the Todd Anderson Well #4 at the cost of approximately $27,500 and is responsible for 100% of the all costs associated with the well.
On February 16, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Gerald Norrad Well #3 at the cost of approximately $15,000. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On March 26, 2014 per Memorandum of Understanding the Company sold 37.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #8 for approximately $12,000 and is responsible for 45% of all the costs associated with the well.
On March 31, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Alvin Parrish Well #1 in Clinton County, Kentucky at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On May 9, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Lester Clark #1 in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On May 29, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Alvin Parrish Well #2 in Clinton County, Kentucky at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On June 4, 2014, per a Memorandum of Understanding the Company participated and permitted 50% working interests as the operator in the Millard Willis Well #8 at the cost of $18,500 and is responsible for 55% of the all costs associated with the well.
On June 30, 2014 per Memorandum of Understanding the Company sold 37.5% working and royalty interest to two individuals and/or entities in the Millard Willis Well #9 for $35,000 and is responsible for 45% of all the costs associated with the well.
On August 4, 2014, per a Memorandum of Understanding the Company participated and permitted 50% working interests as the operator in the Millard Willis Well #9 at the cost of $18,500 and is responsible for 55% of the all costs associated with the well.
On August 15, 2014, the Company entered into a 50% interest in an 87.5% working interest lease named the Johnny Ringley Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $1,000. The lease is of approximately 68 acres, located in Cumberland County, Kentucky.
On August 20, 2014, per a Memorandum of Understanding the Company participated in 20% working interests in the Kyle Padgett well #7 at the cost of $4,250 and is responsible for 25% of the all costs associated with the well.
On September 8, 2014, the Company entered into an 87.5% working interest lease named the William Warren II Lease between the Company for an initial cost to the Company of $10. The lease is of approximately 640 acres, located in Overton County, Kentucky.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
as of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 3 - OIL AND GAS PROPERTIES AND EQUIPMENT (continued).
On September 8, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Lester Clark #1 in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On September 26, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the David Wright in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On September 30, 2014 per Memorandum of Understanding the Company sold 50% working and royalty interest to four individuals and/or entities in the William Warren II Well #1 for $35,000 and is responsible for 50% of all the costs associated with the well.
On November 18, 2014 per Memorandum of Understanding the Company sold 50% working and royalty interest to four individuals and/or entities in the Billy Walker Well #1 for $35,000 and is responsible for 50% of all the costs associated with the well.
Impairment of Oil Properties
We use the successful efforts-cost accounting method, which requires recognition of an impairment of oil and gas properties when the total capitalized costs (net of related deferred income taxes) exceed a “ceiling” as described in Note 3.
Amortization Rate
Amortization of oil property is calculated quarterly based on the quarter’s production in barrels of oil equivalent (“BOE”) times an amortization rate. The amortization rate is an amortization base divided by the BOE sum of proved reserves at the end of the quarter and production during the quarter. The amortization base consists of (i) the capitalized evaluated oil costs at the end of the quarter before recording any impairment at quarter’s end, plus (ii) estimated future development costs for the proved reserves, less (iii) accumulated amortization at the beginning of the quarter.
NOTE 4 - LOAN PAYABLE, CONVERTIBLE NOTES PAYABLE, CONVERTIBLE NOTES PAYABLE - RELATED PARTY.
The following table shows by type of asset the Depreciation, Depletion and Amortization (“DD&A”) expense for the year ended December 31, 2014 and 2013:
The resulting depletion for the year ended December 31, 2014 and 2013, respectively, have been recorded under the caption heading “oil lease operating expense” on our Statement of Operations.
In April 2007, we executed an agreement with Mr. Daniel (Allen) Page “Mr. Page” whereby we received $250,000 in funds to be advanced through a line of credit which was evidenced by a convertible promissory note. The note bears interest at a rate of 7.5% per annum and had an original maturity date of April 23, 2008. The initial $250,000 advanced under the credit line is convertible at any time into shares of our common stock at a price per share equal to $0.35. We pay interest only payments until the maturity date of the convertible note, unless it is converted or prepaid. Upon maturity or the conversion of the initial $250,000 principal amount and interest due under the note, we also agreed to issue to Mr. Page a four year warrant to purchase shares of common stock with an exercise price of $0.35 per share in an amount equal to 20% of the total shares issued upon conversion of the note. On September 27, 2007, Mr. Page amended the note to provide an additional $100,000 of working capital to us. Under the terms of the amendment, the additional $100,000 is convertible into shares of our common stock at a price per share equal to $0.18. As consideration for this increase of availability under the credit line, at such time as the note matures or he converts the additional $100,000 into common stock, we agreed to issue him a warrant to purchase shares of common stock equal to 20% of the total shares to be issued upon the conversion of that portion of the note with an exercise price of $0.18 per share. On May 1, 2009, we entered into a second amendment of the note to provide for an additional $50,000 of working capital to us, bringing the total amount available under the credit line to $400,000, and to extend the maturity date of the note to December 31, 2009. Under the terms of the amendment, the additional $50,000 is convertible into shares of our common stock at a price per share equal to $0.12. As consideration for this extension, upon maturity of the note or at such time as he converts the note we agreed to issue him a warrant to purchase shares of common stock equal to 20% of the total share amount issued upon conversion of the note, with an exercise price of $0.12 per share, solely as it relates to this additional $50,000.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 4 - LOAN PAYABLE, CONVERTIBLE NOTES PAYABLE, CONVERTIBLE NOTES PAYABLE - RELATED PARTY (continued).
On December 8, 2009, Mr. Page extended the due date of the note to June 30, 2010. The warrants we will issue Mr. Page will expire four years from the date of issuance, which shall be deemed to be on the earlier of (i) the maturity date of the note; (ii) the date on which the funds are advanced in full and owing by us; or (iii) the date on which we elect to pay off the note in full during the term. We agreed to register for resale the shares underlying the convertible note and warrants, but we have not filed the required registration statement. On June 29, 2010, Mr. Page extended the due date of the note to December 31, 2010. Effective December 13, 2010, the Company entered into a Fifth Amendment to the Convertible Line of Credit Note with Mr. Daniel (Allen) Page pursuant to which he extended the due date of all amounts due under the Convertible Line of Credit to December 31, 2011. The Convertible Line of Credit is now due on demand. In April 2012, the Company entered into a Security Agreement with Mr. Page pursuant to which it granted him a security interest in all of the Company’s assets as collateral for the amounts due under the Convertible Line of Credit.
At December 31, 2014 and 2013, we owed Mr. Page $170,000 and $180,000, respectively of principal and approximately $0 and $455, respectively of accrued but unpaid interest under this credit line. Mr. Daniel (Allen) Page a principal stockholder of our Company, is the father of Mr. Ken Page, currently our sole officer and a member of our Board of Directors. We have also entered into a number of joint ventures with Mr. Page. See Note 7 - Related Party Transactions.
Convertible notes payable and loans payable are summarized as follows:
NOTE 5 - INCOME TAXES.
We account for income taxes under the accounting guidance, “Accounting for Income Taxes,” which provides for an asset and liability approach in accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.
Income tax expenses and effective income tax rates for the years ended December 31, 2014 and 2013 consist of the following:
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 5 - INCOME TAXES (continued).
The effective income tax rate for the years ended December 31, 2014 and 2013 differ from the U.S. Federal statutory income tax rate as follows:
For federal income tax purposes, exploration and production companies usually deduct when incurred all intangible costs of drilling and completing wells. However, such companies are allowed the annual option of capitalizing portions of such costs and amortizing the capitalized costs over sixty months or over oil and gas reserves. We anticipate that amortization of the capitalized intangible costs will not significantly reduce future percentage depletion, which current tax law generally limits to the respective producing property’s income net of the amortization.
A 50% or more change in ownership of the Company over a three year period may result in a limitation as the portion of the net operating losses to be used in any given year. We may have triggered a limitation of the use of our net operating losses under IRC Section 382. We have yet to make such determination if in fact our portion of our net operating losses have been limited by past ownership changes.
The Company has net operating loss carryforwards as of December 31, 2014 and 2013 of $43.4 million and $42.6 million, respectively. These net operating loss carryforwards expire at various dates through 2034. The related deferred tax assets of $16.4 million and $16.4 million have been fully reserved, primarily due to the lack of recurring income from operations.
NOTE 6 - STOCKHOLDERS’ DEFICIT.
Stock Options
On March 22, 2004 our Board of Directors adopted, subject to stockholder approval, the 2004 Stock Incentive Plan (the “2004 Plan”).
The 2004 Plan was approved by our stockholder in May 2004. No award could be granted under the 2004 Plan subsequent to the 10th anniversary of the date on which the plan was approved by our stockholders. The number of shares of our common stock available for issuance under the 2004 Plan was 3,500,000.
On September 29, 2009 our Board of Directors adopted our 2009 Equity Compensation Plan (the “2009 Plan”). The plan authorizes the grant of (i) options which qualify as incentive stock options under Section 422(b) of the Internal Revenue Code of 1986, as amended, (ii) non-qualified options which do not qualify as incentive stock options, (iii) awards of our common stock (iv) and rights to make direct purchases of our common stock which may be subject to certain restrictions. We have reserved 4,800,000 shares of our common stock for issuance upon grants made under the plan.
In May 2014, this employment agreement was amended to reduce the monthly salary to be $3,500 a month and the Company opting to pay health insurance in the amount of $524.02. In addition, on June 27, 2014 our Board of Directors granted Mr. Ken Page five year non-qualified options under to purchase 1,560,000 shares of our common stock at an exercise price of $0.16 per share. The Options were valued using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield of 0%, annual volatility of 175%, risk free interest rate of 2.0%, and expected life of 4.5 years.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 6 - STOCKHOLDER’S DEFICIT (continued).
Compensation based stock option and warrant activity for warrants and qualified and unqualified stock options are summarized as follows:
The following table summarizes information about options outstanding and exercisable at December 31, 2014:
The compensation expense attributed to the issuance of the options and warrants will be recognized as they vest / earned. These stock options and warrants are exercisable for five to ten years from the grant date. The unamortized compensation expense attributed to the unvested options as of December 31, 2014 was $149,389.
The intrinsic value of these options and warrants at December 31, 2014 and 2013 was $0 and $3,600, respectively.
NOTE 7 - RELATED PARTY TRANSACTIONS.
In May 2014, this employment agreement was amended to reduce the monthly salary to be $3,500 a month and the Company opting to pay health insurance in the amount of $524.02. In addition, on June 27, 2014 our Board of Directors granted Mr. Ken Page five year non-qualified options under to purchase 1,560,000 shares of our common stock at an exercise price of $0.16 per share. The Options were valued using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield of 0%, annual volatility of 175%, risk free interest rate of 2.0%, and expected life of 4.5 years. The fair value of these options was determined to be $313,192, which is being amortized over the five year vesting period.
On December 19, 2013, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the William Johnson Well #1 in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On February 16, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Gerald Norrad Well #3 at the cost of approximately $15,000. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 7 - RELATED PARTY TRANSACTIONS (continued).
On March 31, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Alan Parrish Well #1 in Clinton County, Kentucky at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On May 9, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Lester Clark #1 in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On May 29, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the Alan Parrish Well #2 in Clinton County, Kentucky at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
On August 15, 2014, the Company entered into a 50% interest in an 87.5% working interest lease named the Johnny Ringley Lease between the Company and Mr. Daniel (Allen) Page, a related party, for an initial cost to the Company of $1,000. The lease is of approximately 68 acres, located in Cumberland County, Kentucky.
On August 21, 2014, we entered into an agreement with Mr. Page pursuant to which certain terms of his Employment Agreement were amended at his request in an effort to assist our company during development of our new business. Under Amendment No. 2 to Mr. Page’s Employment Agreement, his base salary was reduced from $46,000 annually to $42,000 and we agreed to pay his health insurance premiums initially at the rate of $524 per month, which such amount may be increased or decreased upon a change in cost of such insurance based upon a subsequent policy providing identical coverage. This amendment memorialized an oral agreement between parties entered into in May 2014.
On September 26, 2014, per a Memorandum of Understanding the Company participated and permitted 43.75% working interests as the operator in the David Wright in Fentress County, Tennessee at the cost of approximately $16,500 and is responsible for 50% of the all costs associated with the well. The Company is responsible for 50% of the costs on this well and Mr. Daniel (Allen) Page is responsible for the remaining 50% of such costs.
At December 31, 2014 and December 31, 2013 we owed Mr. Page $170,000 and $180,000, respectively of principal and approximately $0 and $0, respectively of accrued but unpaid interest under this credit line. At December 31, 2014 and December 31, 2013 we owed Mr. Page $51,768 and $56,820, respectively of accrued consulting expenses.
NOTE 8 - COMMITMENTS AND CONTINGENCIES.
The Company may be subject to various possible contingencies, which are derived primarily from interpretations of federal and state laws and regulations affecting the oil and gas industry. Although management believes it has complied with the various laws and regulations, new rulings and interpretations may require the Company to make future adjustments.
The Company continually evaluates its leasehold interests, therefore certain leases may be abandoned by the Company in the normal course of business.
The Company has been involved in litigation from time to time as a result of the failure to make payments on certain of its past due debts. Overall management believes the net recorded value of its past due payables adequately cover the total financial exposure of the past due payables.
NOTE 9 ─ SUBSEQUENT EVENTS.
On January 1, 2015 per Memorandum of Understanding the Company sold 50% working and royalty interest to two individuals and/or entities in the Millard Willis Well #10 for $35,000 and is responsible for 50% of all the costs associated with the well.
On January 2, 2015 per Memorandum of Understanding the Company sold 50% working and royalty interest to two individuals and/or entities in the Johnny Ringley Well #1 for $35,000 and is responsible for 50% of all the costs associated with the well.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 9 ─ SUBSEQUENT EVENTS (continued).
On January 31, 2015 per Memorandum of Understanding the Company sold 50% working and royalty interest to four individuals and/or entities in the William Warren Well #2 for $35,000 and is responsible for 50% of all the costs associated with the well.
On March 31, 2015 per Memorandum of Understanding the Company sold 50% working and royalty interest to two individuals and/or entities in the Sherrie Miles Well #1 for $35,000 and is responsible for 50% of all the costs associated with the well.
NOTE 10 - INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED).
The Company continues to operate through its oil production in 2014 and some limited amounts of exploration. The information presented below regarding the Company’s proved developed producing reserves, proved developed and proved undeveloped reserves were prepared by independent petroleum engineering consultants. All reserves are located within the continental United States.
As at December 31, 2014 and 2013 the oil reserves consisted of the following;
Present worth discounted at 10% (PV-10 Value) is the estimated present worth of the future net revenues from our proved developed producing reserves before income taxes, discounted at 10% per annum. PV-10 Value is considered a non-GAAP financial measure under SEC regulations because it does not include the effects of future income taxes, as is required in computing the standardized measure of discounted future net cash flows. PV-10 Value is widely used by security analysts and investors when evaluating oil and natural gas companies. Because many factors that are unique to each individual company impact the amount of future income taxes to be paid, the use of a pre-tax measure provides greater comparability of assets when evaluating companies. PV-10 Value is computed on the same basis as the standardized measure of discounted future net cash flows but without deducting income taxes.
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 10 - INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED) (continued).
Estimated net quantities of proved developed and undeveloped reserves of oil and gas for the year ended December 31, 2014 and 2013 are presented in table below.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES
Future net cash flows presented below are computed using year-end prices and costs. Future corporate overhead expenses and interest expense have not been included.
The principal sources of changes in the standardized measure of discounted future net cash flows during the year ended December 31, 2014 and 2013 are as follows:
TN-K ENERGY GROUP INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2014 and 2013 and for the Years Ended December 31, 2014 and 2013
NOTE 10 - INFORMATION REGARDING PROVED OIL AND GAS RESERVES (UNAUDITED) (continued).
The standardized measure of discounted future net cash flows relating to proved oil and gas reserves and the changes in standardized measure of discounted future net cash flows relating to proved oil and gas reserves were prepared in accordance with the provisions of the accounting guidance. Future cash inflows were computed by applying current prices at year-end to estimated future production. Future production and development costs (including the estimated asset retirement obligation) are computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at year-end, based on year-end costs and assuming continuation of existing economic conditions. Future income tax expenses are calculated by applying appropriate year-end tax rates to future pretax cash flows relating to proved oil and gas reserves, less the tax basis of properties involved and tax credits and loss carryforwards relating to oil and gas producing activities. Future net cash flows are discounted at the rate of 10% annually to derive the standardized measure of discounted future cash flows. This calculation procedure does not necessarily result in an estimate of the fair market value of the Company’s proved oil and gas properties. All new well interest acquired, sold and drilled in 2014 were exploratory and have yet to consummate any production of oil.