CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus, including information included or incorporated by reference in this prospectus or any supplement to this prospectus,
include forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements
include, but are not limited to, statements regarding our or our managements expectations, hopes, beliefs, intentions or
strategies regarding the future and other statements that are other than statements of historical fact. In addition, any statements
that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions,
are forward-looking statements. The words anticipate, believe, continue, could,
estimate, expect, intend, may, might, plan,
possible, potential, predict, project, should, would
and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement
is not forward-looking.
The
forward-looking statements in this prospectus and the documents incorporated by reference herein and therein are based upon various
assumptions, many of which are based, in turn, upon further assumptions, including without limitation, managements examination
of historical operating trends, data contained in our records, and other data available from third parties. While we believe such
third-party information is reliable, we have not independently verified any third-party information and our internal data has
not been verified by any independent source. Although we believe that these assumptions were reasonable when made, because these
assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict
and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections,
which speak only as of the date on which they are made. As a result, you are cautioned not to place undue reliance on these forward-looking
statements.
In
addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein,
important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking
statements include among other things:
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our
future operating or financial results;
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our
financial condition and liquidity, including our ability to pay amounts that we owe, obtain additional financing in the future
to fund capital expenditures, acquisitions and other general corporate activities;
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our
ability to continue as a going concern;
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our
development of successful operations;
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the
speculative nature of oil and gas exploration;
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the
volatile price of oil and natural gas;
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the
demand for oil and natural gas which demand could be materially affected by the economic impacts of COVID-19;
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the
risk of incurring liability or damages as we conduct business operations due to the inherent dangers involved in oil and gas operations;
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our
ability to rely on strategic relationships which are subject to change;
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the
competitive nature of the oil and gas market;
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changes
in governmental rules and regulations; and
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other
factors listed from time to time in registration statements, reports or other materials that we have filed with or furnished to
the SEC, including the information under the Risk Factors sections of our Annual Report on Form 10-K for the year
ended December 31, 2019, and our Quarterly Report on Form 10-Q for the three months ended June 30, 2020, which is incorporated
by reference in this prospectus.
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These
factors and the other risk factors described in this prospectus and the documents incorporated by reference herein and therein
are not necessarily all of the important factors that could cause actual results or developments to differ materially from those
expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently,
actual results or developments anticipated by us may not be realized or, even if substantially realized, that they may not have
the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements.
We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. If one or more forward-looking statements are updated, no inference should be
drawn that additional updates will be made with respect to those or other forward-looking statements.
THE
COMPANY
Overview
We
are an energy company engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas properties
in the United States. We are primarily focused on the acquisition of early stage projects, the development and delineation of
these projects, and then the monetization of those assets once these activities are completed.
Since
2010, our primary focus has been the development of interests in oil and gas projects we hold in the Permian Basin in West Texas,
including the Orogrande Project in Hudspeth County, Texas, the Hazel Project in the Midland Basin and the project in Winkler County,
Texas in the Delaware Basin. We also hold interests in certain other oil and gas projects that we are in the process of divesting,
including the Hunton wells project as part of a partnership with Husky Ventures, Inc., or Husky, in central Oklahoma.
We
employ a private equity model within a public platform, with the goal to (i) enter into a play at favorable valuations, (ii) prove
up and delineate the play through committed capital and exhaustive geologic and engineering review, and (iii) monetize
our position through an exit to public and private independents that can continue full-scale development. Rich Masterson, our
consulting geologist, has originated several of our current plays, as discussed below, based on his tenure as a geologist since
1974. He is credited with originating the Wolfbone shale play in the Southern Delaware Basin of West Texas and has prepared prospects
totaling over 150,000 acres that have been leased, drilled and are currently being developed by Devon Energy Corp., Occidental
Petroleum Corporation, Noble Energy, and Samson Oil & Gas Ltd., among others.
In
April 2018, we announced that we have commenced a process that could result in the monetization of the Hazel Project. Pursuant
to our corporate strategy, in our opinion the development activity at the Hazel Project, coupled with nearby activities of other
oil and gas operators, is indicative of this project having achieved a level of value that suggests monetization. We believe that
the liquidity that would be provided from selling the Hazel Project could be used to pay off existing indebtedness and/or redeployed
into the Orogrande Project. In August 2020, our subsidiaries entered into an option agreement with a third party, under which,
in exchange for satisfying certain drilling obligations, the third party will have the option to purchase the entire Hazel Project
by March 31, 2021 (see Option Agreement with Masterson Hazel Partners, LP subsection under Current Projects
description below).
We
are also currently marketing the Orogrande Project for an outright sale or farm in partner and are taking measures on our own
to market the Winkler Project. These efforts are continuing.
We
operate our business through five wholly-owned subsidiaries, Torchlight Energy, Inc., a Nevada corporation, Torchlight Energy
Operating, LLC, a Texas limited liability company, Hudspeth Oil Corporation, a Texas corporation, Torchlight Hazel, LLC, a Texas
limited liability company, and Warwink Properties, LLC, a Texas limited liability company. We currently have four full-time employees
and we employ consultants for various tasks as needed.
Our
principal executive offices are located at 5700 W. Plano Parkway, Suite 3600, Plano, Texas 75093. The telephone number of our
principal executive offices is (214) 432-8002.
Current
Projects
Since
2010, our primary focus has been the development of interests in oil and gas projects we hold in the Permian Basin in West Texas.
We also hold minor interests in certain other oil and gas projects in Central Oklahoma that we are in the process of divesting.
As
of June 30, 2020, we had interests in four oil and gas projects: the Orogrande Project in Hudspeth County, Texas, the Hazel Project
in Sterling, Tom Green, and Irion Counties, Texas, the Winkler Project in Winkler County, Texas and the wells in Central Oklahoma.
Orogrande
Project, West Texas
On
August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (Hudspeth), McCabe Petroleum
Corporation (MPC), and Gregory McCabe, our Chairman. Mr. McCabe was the sole owner of both Hudspeth and MPC. Under
the terms and conditions of the Purchase Agreement, we purchased 100% of the capital stock of Hudspeth which held certain oil
and gas assets, including a 100% working interest in approximately 172,000 predominately contiguous acres in the Orogrande Basin
in West Texas. Mr. McCabe has, at his option, a 10% working interest back-in after payout and a reversionary interest if drilling
obligations are not met, all under the terms and conditions of a participation and development agreement among Hudspeth, MPC and
Mr. McCabe. Mr. McCabe also holds a 4.5% overriding royalty interest in the Orogrande acreage,- which he obtained prior to, and
was not a part of the August 2014 transaction. As of June 30, 2020, leases covering approximately 134,000 acres remain in effect.
We
believe all drilling obligations through June 30, 2020 have been met.
On
September 23, 2015, Hudspeth entered into a Farmout Agreement with Pandora Energy, LP (Pandora), Founders Oil &
Gas, LLC (Founders), and for the limited purposes set forth therein, MPC and Mr. McCabe, for the entire Orogrande
Project in Hudspeth County, Texas. The Farmout Agreement provided that Hudspeth and Pandora (collectively referred to as Farmor)
would assign to Founders an undivided 50% of the leasehold interest and a 37.5% net revenue interest in the oil and gas leases
and mineral interests in the Orogrande Project, which interests, except for any interests retained by Founders, would be reassigned
to Farmor by Founders if Founders did not spend a minimum of $45.0 million on actual drilling operations on the Orogrande Project
by September 23, 2017. Under a joint operating agreement also entered into on September 23, 2015, Founders was designated as operator
of the leases.
Effective
March 27, 2017 the property became subject to a DDU Agreement which allows for all 192 existing leases covering approximately
134,000 net acres leased from University Lands to be combined into one drilling and development unit for development purposes.
The term of the DDU Agreement expires on December 31, 2023, and the time to drill on the drilling and development unit continues
through December 2023. The DDU Agreement also grants the right to extend the DDU Agreement through December 2028 if compliance
with the DDU Agreement is met and the extension fee associated with the additional time is paid.
Our
drilling obligations include four wells in year 2020 and five wells per year in years 2021, 2022 and 2023. We have received a
waiver of the requirement to develop four wells in 2020. The drilling obligations are minimum yearly requirements and may be exceeded
if acceleration is desired.
During
2017, we assumed operational control from Founders Oil and Gas Operating LLC on the Orogrande Project. We were joined by Wolfbone
Investments, LLC, (Wolfbone), a company owned by Mr. McCabe. We, along with Hudspeth, Wolfbone and, for the limited
purposes set forth therein, Pandora, entered into an Assignment of Farmout Agreement with Founders, (the Assignment of
Farmout Agreement), pursuant to which we and Wolfbone will share the remaining commitments under the Farmout Agreement.
All original provisions of our carried interest were to remain in place including reimbursement to us on each wellbore. Founders
was to remain a 9.5% working interest owner in the Orogrande Project for the $9.5 million it had spent as of the date of the Assignment
of Farmout Agreement, and such interests were to be carried until $40.5 million is spent by Wolfbone and us, with each contributing
50% of such capital spend, under the existing agreement.
Our
working interest in the Orogrande Project thereby increased by 20.25% to a total of 67.75% and Wolfbone then owned 20.25%.
On
July 25, 2018, we and Hudspeth entered into a Settlement & Purchase Agreement (the Settlement Agreement) with
Founders (and Founders Oil & Gas Operating, LLC), Wolfbone and MPC, which agreement provides for Founders assigning all of
its working interest in the oil and gas leases of the Orogrande Project to Hudspeth and Wolfbone equally. Future well capital
spending obligations remained the same 50% contribution from Hudspeth and 50% from Wolfbone until such time as the $40.5 million
to be spent on the project. The Company estimates that there is still approximately $9.0 million remaining to be spent on the
project until such time as the capital expenditures revert back to the percentages of the working interest owners.
After
the assignment by Founders, Hudspeths working interest increased to 72.5%.
The
Company has drilled eight test wells in the Orogrande in order to stay in compliance with University Lands D&D Unit Agreement,
as well as, to test for potential shallow pay zones and deeper pay zones that may be present on structural plays. Development
of the wells continued into the six months ended June 30, 2020 to further capture and document the scientific base in support
of demonstrating the production potential of the property. The Company is currently marketing the project for an outright sale
or farm in partner. This marketing process has been long and arduous as the overall market is quite soft. Due to the size and
scope of the project, we are dealing with very large companies that have multitudes of people reviewing our material, which in
itself is extensive. During the marketing process, the Company and Wolfbone will endeavor to complete the University Maverick
A24 #1 as a potential producer in the Atoka formation. Should a farm out partner or sale not occur, the Company and Wolfbone will
continue to drill additional wells in the play in order to fulfill the obligations under the DDU Agreement
Rich
Masterson, our consulting geologist, is credited with originating the Orogrande Project in Hudspeth County in the Orogrande Basin.
With Mr. Mastersons assistance and based on all the science we have gathered to date, we have identified multiple unconventional
and conventional target pay zones with depths between 3,000 and 8,000 with primary pay, described as the Penn formation,
located at depths of 5,300 to 5,900. Based on our geologic analysis to date, this basin has stacked pay with zones including
the Wolfcamp, Penn, Barnett, Woodford, Atoka and more. These potential zones are prospective for oil and gas with a GOR of 1100
expected based on our gathered scientific information and analysis from independent third parties.
On
March 9, 2020, holders of notes payable by the Company entered into a Conversion Agreement under which the noteholders elected
to convert principal of $6,000,000 and approximately $1,331,000 of accrued interest on the notes, in accordance with their terms,
into an aggregate 6% working interest (of all such holders) in the Orogrande Project.
The
Orogrande Project ownership as of June 30, 2020 is detailed as follows:
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Revenue
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Working
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Interest
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Interest
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University Lands - Mineral Owner
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20.000
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%
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n/a
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ORRI - Magdalena Royalties, LLC, an entity controlled by Gregory McCabe, Chairman
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4.500
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%
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n/a
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ORRI - Unrelated Party
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0.500
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%
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n/a
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Hudspeth Oil Corporation, a subsidiary of Torchlight Energy Resources Inc.
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49.875
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%
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66.500
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%
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Wolfbone Investments LLC, an entity controlled controlled by Gregory McCabe, Chairman
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18.750
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%
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25.000
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%
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Conversion by Note Holders in March, 2020
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4.500
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%
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6.000
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%
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Unrelated Party
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1.875
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%
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2.500
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%
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100.000
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%
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100.000
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%
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Hazel
Project in the Midland Basin in West Texas
Effective
April 4, 2016, Torchlight Energy, Inc. (TEI) acquired from MPC a 66.66% working interest in approximately 12,000
acres in the Midland Basin. A back-in after payout of a 25% working interest was retained by MPC and another unrelated working
interest owner.
In
October 2016, the holders of all of our then-outstanding shares of Series C Preferred Stock (which were issued in July 2016) elected
to convert into a total 33.33% working interest in our Hazel Project, reducing our ownership from 66.66% to a 33.33% working interest.
The
Company has drilled six test wells on the Hazel Project to capture and document the scientific base in support of demonstrating
the production potential of the property.
Acquisition
of Additional Interests in Hazel Project
On
January 30, 2017, we entered into and closed an Agreement and Plan of Reorganization and a Plan of Merger with an entity which
was wholly-owned by Mr. McCabe, which resulted in the acquisition of approximately 40.66% working interest in the 12,000 gross
acres, 9,600 net acres, in the Hazel Project.
Also
on January 30, 2017, TEI entered into and closed a Purchase and Sale Agreement with Wolfbone. Under the agreement, TEI acquired
certain of Wolfbones Hazel Project assets, including its interest in the Flying B Ranch #1 well and the 40 acre unit surrounding
the well.
Upon
the closing of the transactions, our working interest in the Hazel Project increased by 40.66% to a total ownership of 74%.
Effective
June 1, 2017, we acquired an additional 6% working interest from unrelated working interest owners increasing our working interest
in the Hazel project to 80%, and an overall net revenue interest of 74-75%.
Mr.
Masterson, who assisted with development in our Orogrande project, is also credited with originating the Hazel Project in the
Midland Basin.
We
were required to drill one well every six months to hold the entire 12,000 acre block for eighteen months until to November 22,
2018, and thereafter two wells every six months. During 2019 and the six months ended June 30, 2020 modifications were completed
to mineral owner leases as described below.
Lease
Modifications
In
May 2019 we entered into agreements with two of the three mineral owners on the northern section of the leases to keep the entire
acreage block as one lease with a one-year extension. We issued each of them 50,000 shares of our common stock as consideration
for this extension. As of June 30, 2020, we have structured the extension agreement retroactively with the third mineral owner
for cash consideration. Due to this extension, our obligation for 2019 reduced to one obligation well. We finished that obligation
well targeting a shallow zone that showed oil potential. For the remainder of 2020 the Company must drill one well in June and
two wells by the December 31, 2020. Development of the June well was initiated during June, 2020.
In
April 2018, we announced that we have commenced a process that could result in the monetization of the Hazel Project. We believe
the development activity at the Hazel Project, coupled with nearby activities of other oil and gas operators, suggests that this
project has achieved a level of value worth monetizing. We anticipate that the liquidity that would be provided from selling the
Hazel Project could be redeployed into the Orogrande Project. While this process is underway, we will take all necessary steps
to maintain the leasehold as required. As of this prospectus, we continue to maintain the leases in good standing and continue
to market the acreage in an effort to focus on the Orogrande Project.
Option
Agreement with Masterson Hazel Partners, LP
On
August 13, 2020, our subsidiaries Torchlight Energy, Inc. and Torchlight Hazel, LLC (collectively, Torchlight) entered
into an option agreement (the Option Agreement) with Masterson Hazel Partners, LP (MHP) and McCabe
Petroleum Corporation. Under the agreement, MHP is obligated to drill and complete, or cause to be drilled and completed, at its
sole cost and expense, a new lateral well (the Well) on our Hazel Project, sufficient to satisfy Torchlights
continuous development obligations on the southern half of the prospect no later than September 30, 2020. MHP paid to Torchlight
$1,000 as an option fee at the time of execution of the Option Agreement. If MHP fails to meet the September 30, 2020 deadline,
then the options granted pursuant to the Option Agreement will automatically terminate, and Torchlight will retain the $1,000
option fee as its sole remedy. MHP is entitled to receive, as its sole recourse for the recoupment of drilling costs, the revenue
from production of the Well attributable to Torchlights interest until such time as it has recovered its reasonable costs
and expenses for drilling, completing, and operating the well.
In
exchange for MHP satisfying the above drilling obligations, Torchlight granted to MHP the exclusive right and option to perform
operations, at MHPs sole cost and expense, on the Hazel Project sufficient to satisfy Torchlights continuous development
obligations on the northern half of the prospect. In the event that MHP exercises this drilling option and satisfies the continuous
development obligations on the northern half of the prospect, then MHP will have the option to purchase the entire Hazel Project
by March 31, 2021, under the terms of the form of Purchase and Sale Agreement included as an exhibit to the Option Agreement,
at an aggregate purchase price of $12,690,704 for approximately 9,762.08 net mineral acres, and not less than 74% net revenue
interest (approximately $1,300 per net mineral acre).
MHP
must exercise the above options no later than December 1, 2020, subject to extension to March 11, 2021 if MHP drills the Well
on the southern half of the prospect, provides notice no later than December 1, 2020 of its intent to conduct operations on the
northern half of the prospect and on or before December 15, 2020, conducts operations sufficient to satisfy the drilling obligations
regarding the second well on the northern half of the prospect.
In
the event MHP exercises its option to purchase the entire Hazel Project, McCabe Petroleum Corporation, which is owned by our chairman
Gregory McCabe, has agreed to reduce its reversionary interest in the Hazel Project from 20% to not more than 12.5%.
Winkler
Project, Winkler County, Texas
On
December 1, 2017, an Agreement and Plan of Reorganization was entered into with MPC and Warwink Properties, LLC (Warwink
Properties) to acquire certain assets, including a 10.71875% working interest in approximately 640 acres in Winkler County,
Texas. Also on December 1, 2017, MPC closed its transaction with MECO IV, LLC ( MECO), for the purchase and sale
of certain assets. Warwink Properties received a carry from MECO (through the tanks) of up to $1,179,076 in the next well drilled
on the Winkler County leases.
Also
on December 1, 2017, the transactions contemplated by the Purchase Agreement that TEI entered into with MPC closed. Under the
Purchase Agreement TEI acquired beneficial ownership of certain of MPCs assets, including acreage and wellbores located
in Ward County, Texas (the Ward County Assets).
Addition
to the Winkler Project
As
of May 7, 2018 our Winkler project in the Delaware Basin had begun the drilling phase of the first Winkler Project well, the UL
21 War-Wink 47 #2H. Additional acreage was leased by our operating partner under the Area of Mutual Interest Agreement (AMI) and
we exercised its right to participate for its 12.5% in the additional 1,080 gross acres. Our carried interest in the first well
was applied to this new well and allowed MECO to drill and produce potential revenues sooner than originally planned. The primary
leasehold is a 320-acre block and allows for 5,000-foot lateral wells to be drilled. The first well was completed and began production
in October, 2018 and is producing currently.
The
operator has informed us that there will be no planned additional wells in the acreage in 2020. All acreage is presently held
by production.
In
December 2018, the Company began to take measures on its own to market the Winkler Project in an effort to focus on the Orogrande.
This process is ongoing.
Hunton
Play, Central Oklahoma
Presently,
we are producing from one well in the Viking Area of Mutual Interest and one well in Prairie Grove.
Assessment
for Assets Held for Sale Classification
With
respect to marketing oil and natural gas properties, the Company has evaluated the properties being marketed to determine whether
any should be reclassified as held-for-sale at June 30, 2020. The held-for-sale criteria include: management commits to a plan
to sell; the asset is available for immediate sale; an active program to locate a buyer exists; the sale of the asset is probable
and expected to be completed within one year; the asset is being actively marketed for sale; and it is unlikely that significant
changes to the plan will be made. If each of these criteria is met, the property would be reclassified as held-for-sale on the
Companys consolidated balance sheets and measured at the lower of their carrying amount or estimated fair value less costs
to sell. Fair values are estimated using accepted valuation techniques, such as a discounted cash flow model, valuations performed
by third parties, earnings multiples, or indicative bids, when available. Management considers historical experience and all available
information at the time the estimates are made; however, the fair value that is ultimately realized upon the sale of the assets
to be divested may differ from the estimated fair values reflected in the consolidated financial statements. If each of these
criteria is met, DD&A expense would not be recorded on assets to be divested once they are classified as held for sale. Based
on managements assessment, certain criteria have not been met and no assets are classified as held for sale as of June
30, 2020.
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. Before investing in our common stock, you should carefully consider the risks
described below, together with all of the other information contained in this prospectus and incorporated by reference herein,
including from our most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q as well as any amendment
or update to our risk factors reflected in subsequent filings with the SEC. Some of these factors relate principally to our business
and the industry in which we operate. Other factors relate principally to your investment in our securities. The risks and uncertainties
described below and the risks and uncertainties incorporated by reference into this prospectus are not the only risks facing us.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially and adversely
affect our business and operations.
Risks
Related to our Business and Industry
We
have a limited operating history relative to larger companies in our industry, and may not be successful in developing profitable
business operations.
We
have a limited operating history relative to larger companies in our industry. Our business operations must be considered in light
of the risks, expenses and difficulties frequently encountered in establishing a business in the oil and natural gas industries.
As of June 30, 2020, we have generated limited revenues and have limited assets. We have an insufficient history at this time
on which to base an assumption that our business operations will prove to be successful in the long-term. Our future operating
results will depend on many factors, including:
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our
ability to raise adequate working capital;
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the
success of our development and exploration;
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the
demand for natural gas and oil;
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the
level of our competition;
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our
ability to attract and maintain key management and employees; and
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our
ability to efficiently explore, develop, produce or acquire sufficient quantities of
marketable natural gas or oil in a highly competitive and speculative environment while
maintaining quality and controlling costs.
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To
achieve profitable operations in the future, we must, alone or with others, successfully manage the factors stated above, as well
as continue to develop ways to enhance our production efforts. Despite our best efforts, we may not be successful in our exploration
or development efforts, or obtain required regulatory approvals. There is a possibility that some, or all, of the wells in which
we obtain interests may never produce oil or natural gas.
We
have limited capital and will need to raise additional capital in the future.
We
do not currently have sufficient capital to fund both our continuing operations and our planned growth. We will require additional
capital to continue to grow our business via acquisitions and to further expand our exploration and development programs. We may
be unable to obtain additional capital when required. Future acquisitions and future exploration, development, production and
marketing activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses,
as well as legal compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.
We
may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of
projects, debt financing, equity financing, or other means. We may not be successful in identifying suitable financing transactions
in the time period required or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising
additional capital, our resources may not be sufficient to fund our planned operations.
Our
ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both generally and
in the oil and gas industry in particular), our limited operating history, the location of our oil and natural gas properties
and prices of oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available
to us, if any) and the departure of key employees. Further, if oil or natural gas prices on the commodities markets decline, our
future revenues, if any, will likely decrease and such decreased revenues may increase our requirements for capital. If the amount
of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy
our capital needs (even to the extent that we reduce our operations), we may be required to cease our operations, divest our assets
at unattractive prices or obtain financing on unattractive terms.
Any
additional capital raised through the sale of equity may dilute the ownership percentage of our stockholders. Raising any such
capital could also result in a decrease in the fair market value of our equity securities because our assets would be owned by
a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to
our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances
of incentive awards under equity employee incentive plans, which may have a further dilutive effect.
We
may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees,
securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash
expenses in connection with certain securities we may issue, which may adversely impact our financial condition.
Our
auditor indicated that certain factors raise substantial doubt about our ability to continue as a going concern.
The
financial statements included with our Annual Report on Form 10-K for the year ended December 31, 2019, and our Quarterly Report
on Form 10-Q for the three months ended June 30, 2020, are presented under the assumption that we will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable
length of time. We had a net loss of approximately $9.8 million for the year ended December 31, 2019 and a net loss of approximately
$7.0 million for the six months ended June 30, 2020. We had an accumulated deficit in aggregate of approximately $99.2 million
and $106.1 million as of December 31, 2019, and June 30, 2020, respectively. We are not generating sufficient operating cash flows
to support continuing operations, and expect to incur further losses in the development of our business.
In
our financial statements for the year ended December 31, 2019, our auditor indicated that certain factors raised substantial doubt
about our ability to continue as a going concern. Additionally, the notes to consolidated unaudited interim financial statements
included in our Quarterly Report on Form 10-Q for the three months ended June 30, 2020, also indicated that certain factors raised
substantial doubt about our ability to continue as a going concern. These factors included our accumulated deficit, as well as
the fact that we were not generating sufficient cash flows to meet our regular working capital requirements. Our ability to continue
as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing
to meet our obligations and repay our liabilities arising from normal business operations when they come due. Managements
plan to address our ability to continue as a going concern includes: (1) obtaining debt or equity funding from private placement,
institutional or public sources; (2) obtaining loans from financial institutions, where possible, or (3) participating in joint
venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to
allow us to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove
successful. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We
have $12.5 million in secured debt obligations coming due in April of 2021; if we were unable to pay off, extend or refinance
these debt obligations when due, such a default may result in the foreclosure on most of our assets.
On
April 10, 2017, we sold two 12% unsecured promissory notes with a total of $8,000,000 in principal amount (the 2017 Notes)
to David A. Straz, Jr. Foundation (the Straz Foundation) and the David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986
(the Straz Trust) in a private transaction. In addition, on February 6, 2018, we sold to the Straz Trust in a private
transaction a 12% unsecured promissory note with a principal amount of $4,500,000 (the 2018 Note and, together with
the 2017 Notes, the Notes), containing substantially the same terms as the 2017 Notes. Interest only is due and
payable on the Notes each month at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable
at maturity. The holders of the Notes also receive annual payments of common stock at the rate of 2.5% of principal amount outstanding,
based on a volume-weighted average price.
On
April 24, 2020, we entered into a Note Amendment Agreement with each of the Straz Foundation and the Straz Trust, and The Northern
Trust Company and Christopher M. Straz, as co-trustees of the Straz Trust. Under the Note Amendment Agreements, the parties agreed
to amend and restate the 2017 Notes and the 2018 Note. Under the Note Amendment Agreements, the maturity dates of the 2017 Note
and the 2018 Note held by the Straz Trust were extended from April 10, 2020 to April 10, 2021. We had previously extended the
maturity date of the 2017 Note held by the Straz Foundation to April 10, 2021 and paid it a fee of $80,000 under the terms of
the extension.
Under
the Note Amendment Agreements, we and our subsidiaries provided a first priority lien on certain collateral in favor of the collateral
agent (the Straz Trust) for the benefit of the lenders. The collateral includes all assets and property held by Hudspeth Oil Corporation
and Torchlight Hazel, LLC, which includes without limitation our working interest in certain oil and gas leases in Hudspeth County,
Texas, known as the Orogrande Project and our working interest in certain oil and gas leases in the Midland Basin
in West Texas, known as the Hazel Project. Further, these subsidiaries, along with Torchlight Energy, Inc., provided
guaranties with respect to payment of the three promissory notes. The Note Amendment Agreements also provide that (a) upon any
disposition of less than 100% of our right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay
an amount equal to 75% of the proceeds thereof (up to the outstanding amount due under the Notes), unless such disposition results
in us owning less than a 45% working interest (on an 8/8ths basis) in the Orogrande Project or the Hazel Project, in which case
the prepayment amount is to be equal to 100% of such proceeds (up to the outstanding amount due under the Notes); and (b) upon
any disposition of 100% of our right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay
an amount equal to 100% of the proceeds thereof (up to the outstanding amount due under the Notes).
Additionally,
the Notes, as amended, now provide conversion rights whereby the lenders will have the right, at each such lenders option,
to convert any portion of principal and interest into shares of our common stock at a conversion price of $1.50 per share.
The
Note Amendment Agreements also provided that no later than May 25, 2020, we were obligated to pay: (a) to the lenders all past
due interest that had accrued on the existing promissory notes, and (b) to the Straz Trust a fee of $170,000, which payments were
made. Further, the agreements have certain typical affirmative covenants regarding legal compliance and payment of taxes. The
agreements also provide certain notice and disclosure requirements, including notice of material events, such as defaults under
other obligations and litigation.
Our
present plan is to monetize existing assets and/or raise additional capital to pay off the $12.5 million in principal due under
the Notes on or before maturity on April 10, 2021. If we are unable to timely pay off, extend or refinance the Notes, we would
be in default and the holders would have the right to foreclose on the Orogrande Project and Hazel Project assets, which would
have a material adverse impact on our financial condition.
The
negative covenants contained in the Note Amendment Agreements to the 2017 Notes and the 2018 Note may limit our activities and
make it difficult to run our business.
The
Note Amendment Agreements to the 2017 Notes and the 2018 Note contain negative covenants which may make it difficult for us to
run our business. Under the Note Amendment Agreements, we may not create new indebtedness, unless such indebtedness is not secured
by any lien on the Orogrande Project or Hazel Project (the Collateral) and such indebtedness does not have a maturity
date on or before 90 days after the maturity date of the Notes. The Note Amendment Agreements also prohibit the creation of new
liens on the Collateral, except under certain circumstances. Additionally, the Note Amendment Agreements restrict our ability
to declare or pay dividends, enter into transactions with affiliates of ours, or change the nature of our business.
Failure
to comply with the negative covenants could accelerate the repayment of any debt outstanding under the Notes. Additionally, as
a result of these negative covenants, we may be at a disadvantage compared to our competitors that have greater operating and
financing flexibility than we do.
Lastly,
we may have difficulty securing additional sources of capital through debt financing. If we do not succeed in raising additional
capital, our resources may not be sufficient to fund our planned operations.
As
a non-operator, our development of successful operations relies extensively on third-parties who, if not successful, could have
a material adverse effect on our results of operation.
We
expect to primarily participate in wells operated by third-parties. As a result, we will not control the timing of the development,
exploitation, production and exploration activities relating to leasehold interests we acquire. We do, however, have certain rights
as granted in our joint operating agreements that allow us a certain degree of freedom such as, but not limited to, the ability
to propose the drilling of wells. If our drilling partners are not successful in such activities relating to our leasehold interests,
or are unable or unwilling to perform, our financial condition and results of operation could have an adverse material effect.
Further,
financial risks are inherent in any operation where the cost of drilling, equipping, completing and operating wells is shared
by more than one person. We could be held liable for the joint activity obligations of the operator or other working interest
owners such as nonpayment of costs and liabilities arising from the actions of the working interest owners. In the event the operator
or other working interest owners do not pay their share of such costs, we would likely have to pay those costs. In such situations,
if we were unable to pay those costs, there could be a material adverse effect to our financial position.
We
are mainly concentrated in one geographic area, which increases our exposure to many of the risks enumerated herein.
Operating
in a concentrated area increases the potential impact that many of the risks stated herein may have upon our ability to perform.
For example, we have greater exposure to regulatory actions impacting Texas, natural disasters in the geographic area, competition
for equipment, services and materials available in the area and access to infrastructure and markets. In addition, the effect
of fluctuations on supply and demand may become more pronounced within specific geographic oil and gas producing areas such as
the Permian Basin, which may cause these conditions to occur with greater frequency or magnify the effect of these conditions.
Due to the concentrated nature of our portfolio of properties, a number of our properties could experience any of the same conditions
at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies
that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our
financial condition and results of operations.
We
may be unable to monetize the Orogrande, Hazel and Warwink Projects at an attractive price, if at all, and the disposition of
such assets may involve risks and uncertainties.
We
have commenced a process that could result in the monetization of the Orogrande, Hazel and Warwink Projects. Such dispositions
may result in proceeds to us in an amount less than we expect or less than our assessment of the value of the assets. We do not
know if we will be able to successfully complete such disposition on favorable terms or at all. In addition, the sale of these
assets involves risks and uncertainties, including disruption to other parts of our business, potential loss of customers or revenue,
exposure to unanticipated liabilities or result in ongoing obligations and liabilities to us following any such divestiture.
For
example, in connection with a disposition, we may enter into transition services agreements or other strategic relationships,
which may result in additional expense. In addition, in connection with a disposition, we may be required to make representations
about the business and financial affairs of the business or assets. We may also be required to indemnify the purchasers to the
extent that our representations turn out to be inaccurate or with respect to certain potential liabilities. These indemnification
obligations may require us to pay money to the purchasers as satisfaction of their indemnity claims. It may also take us longer
than expected to fully realize the anticipated benefits of this transaction, and those benefits may ultimately be smaller than
anticipated or may not be realized at all, which could adversely affect our business and operating results. Any of the foregoing
could adversely affect our financial condition and results of operations.
Because
of the speculative nature of oil and gas exploration, there is risk that we will not find commercially exploitable oil and gas
and that our business will fail.
The
search for commercial quantities of oil and natural gas as a business is extremely risky. We cannot provide investors with any
assurance that any properties in which we obtain a mineral interest will contain commercially exploitable quantities of oil and/or
gas. The exploration expenditures to be made by us may not result in the discovery of commercial quantities of oil and/or gas.
Problems such as unusual or unexpected formations or pressures, premature declines of reservoirs, invasion of water into producing
formations and other conditions involved in oil and gas exploration often result in unsuccessful exploration efforts. If we are
unable to find commercially exploitable quantities of oil and gas, and/or we are unable to commercially extract such quantities,
we may be forced to abandon or curtail our business plan, and as a result, any investment in us may become worthless.
Strategic
relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.
Our
ability to successfully acquire oil and gas interests, to build our reserves, to participate in drilling opportunities and to
identify and enter into commercial arrangements with customers will depend on developing and maintaining close working relationships
with industry participants and our ability to select and evaluate suitable properties and to consummate transactions in a highly
competitive environment. These realities are subject to change and our inability to maintain close working relationships with
industry participants or continue to acquire suitable property may impair our ability to execute our business plan.
To
continue to develop our business, we will endeavor to use the business relationships of our management to enter into strategic
relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil
and gas companies, including those that supply equipment and other resources that we will use in our business. We may not be able
to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics
of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be
inclined to in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships
are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.
The
price of oil and natural gas has historically been volatile. If it were to decrease substantially, our projections, budgets, and
revenues would be adversely affected, potentially forcing us to make changes in our operations.
Our
future financial condition, results of operations and the carrying value of any oil and natural gas interests we acquire will
depend primarily upon the prices paid for oil and natural gas production. Oil and natural gas prices historically have been volatile
and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows
from operations are highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects
the amount of our cash flows available for capital expenditures and our ability to borrow money or raise additional capital. The
prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:
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the
level of consumer demand for oil and natural gas;
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the
domestic and foreign supply of oil and natural gas;
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the
ability of the members of the Organization of Petroleum Exporting Countries (OPEC)
to agree to and maintain oil price and production controls;
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the
price of foreign oil and natural gas;
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domestic
governmental regulations and taxes;
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the
price and availability of alternative fuel sources;
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market
uncertainty due to political conditions in oil and natural gas producing regions, including
the Middle East; and
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worldwide
economic conditions.
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These
factors as well as the volatility of the energy markets generally make it extremely difficult to predict future oil and natural
gas price movements with any certainty. Declines in oil and natural gas prices affect our revenues, and could reduce the amount
of oil and natural gas that we can produce economically. Accordingly, such declines could have a material adverse effect on our
financial condition, results of operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties.
If the oil and natural gas industry experiences significant price declines, we may be unable to make planned expenditures, among
other things. If this were to happen, we may be forced to abandon or curtail our business operations, which would cause the value
of an investment in us to decline or become worthless.
The
recent global downturn in the price of oil may materially and adversely affected our results of operations, cash flows and financial
condition, and this trend could continue during 2020 and potentially beyond.
In
March and April of 2020, the market experienced a precipitous decline in oil prices in response to oil demand concerns due to
the economic impacts of the a highly transmissible and pathogenic coronavirus disease known as COVID-19 and anticipated increases
in supply from Russia and OPEC, particularly Saudi Arabia. Although oil prices partially rebounded in May and early June of 2020,
generally, demand for oil has declined substantially. These trends materially and adversely affect our results of operations,
cash flows and financial condition, and, unless conditions in our industry improve, this trend will continue during 2020 and potentially
beyond. See also Risks Related the COVID-19 Pandemic below.
If
oil or natural gas prices remain depressed or drilling efforts are unsuccessful, we may be required to record additional write
downs of our oil and natural gas properties.
If
oil or natural gas prices remain depressed or drilling efforts are unsuccessful, we could be required to write down the carrying
value of certain of our oil and natural gas properties. Write downs may occur when oil and natural gas prices are low, or if we
have downward adjustments to our estimated proved reserves, increases in our estimates of operating or development costs, deterioration
in drilling results or mechanical problems with wells where the cost to re drill or repair is not supported by the expected economics.
Under
the full cost method of accounting, capitalized oil and gas property costs less accumulated depletion and net of deferred income
taxes may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil
and gas reserves plus the cost of unproved properties not subject to amortization (without regard to estimates of fair value),
or estimated fair value, if lower, of unproved properties that are subject to amortization. Should capitalized costs exceed this
ceiling, an impairment would be recognized.
The
Company recognized an impairment charge of $2,108,301 for the six months ended June 30, 2020, $1,494,769 for the year ended December
31, 2019 and $139,891 for the year ended December 31, 2018.
The
Company periodically adjusts for the separation of evaluated versus unevaluated costs within its full cost pool to recognize the
value impairment related to the expiration of, or changes in market value, of unevaluated leases. The impact of reclassifications
as they become necessary is to increase the basis for calculation of future periods depletion, depreciation and amortization
which effectively recognizes the impairment on the consolidated statement of operations over future periods. Reclassified costs
also become evaluated costs for purposes of ceiling tests and which may cause recognition of increased impairment expense in future
periods. The cumulative unevaluated costs which have been reclassified within our full cost pool totals $5,881,635 as of June
30, 2020.
Because
of the inherent dangers involved in oil and gas operations, there is a risk that we may incur liability or damages as we conduct
our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.
The
oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other
environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury
or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental
damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be
liable for environmental damages caused by previous owners of property purchased and leased by us. In recent years, there has
also been increased scrutiny on the environmental risk associated with hydraulic fracturing, such as underground migration and
surface spillage or mishandling of fracturing fluids including chemical additives. This technology has evolved and continues to
evolve and become more aggressive. We believe that new techniques can increase estimated ultimate recovery per well to over 1.0
million barrels of oil equivalent, and have increased initial production two or three fold. We believe that recent designs have
seen improvement in, among other things, proppant per foot, barrels of water per stage, fracturing stages, and clusters per fracturing
stage. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could
reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of our properties and/or
force us to expend substantial monies in connection with litigation or settlements. In addition, we will need to quickly adapt
to the evolving technology, which could take time and divert our attention to other business matters. We currently have no insurance
to cover such losses and liabilities, and even if insurance is obtained, it may not be adequate to cover any losses or liabilities.
We cannot predict the availability of insurance or the availability of insurance at premium levels that justify our purchase.
The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial
condition and operations. We may elect to self-insure if management believes that the cost of insurance, although available, is
excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The
occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results
of operations.
The
market for oil and gas is intensely competitive, and competition pressures could force us to abandon or curtail our business plan.
The
market for oil and gas exploration services is highly competitive, and we only expect competition to intensify in the future.
Numerous well-established companies are focusing significant resources on exploration and are currently competing with us for
oil and gas opportunities. Other oil and gas companies may seek to acquire oil and gas leases and properties that we have targeted.
Additionally, other companies engaged in our line of business may compete with us from time to time in obtaining capital from
investors. Competitors include larger companies which, in particular, may have access to greater resources, may be more successful
in the recruitment and retention of qualified employees and may conduct their own refining and petroleum marketing operations,
which may give them a competitive advantage. Actual or potential competitors may be strengthened through the acquisition of additional
assets and interests. Additionally, there are numerous companies focusing their resources on creating fuels and/or materials which
serve the same purpose as oil and gas, but are manufactured from renewable resources.
As
a result, we may not be able to compete successfully and competitive pressures may adversely affect our business, results of operations,
and financial condition. If we are not able to successfully compete in the marketplace, we could be forced to curtail or even
abandon our current business plan, which could cause any investment in us to become worthless.
We
may not be able to successfully manage growth, which could lead to our inability to implement our business plan.
Any
growth of the company may place a significant strain on our managerial, operational and financial resources, especially considering
that we currently only have a small number of executive officers, employees and advisors. Further, as we enter into additional
contracts, we will be required to manage multiple relationships with various consultants, businesses and other third parties.
These requirements will be exacerbated in the event of our further growth or in the event that the number of our drilling and/or
extraction operations increases. Our systems, procedures and/or controls may not be adequate to support our operations or that
our management will be able to achieve the rapid execution necessary to successfully implement our business plan. If we are unable
to manage our growth effectively, our business, results of operations and financial condition will be adversely affected, which
could lead to us being forced to abandon or curtail our business plan and operations.
The
due diligence undertaken by us in connection with all of our acquisitions may not have revealed all relevant considerations or
liabilities related to those assets, which could have a material adverse effect on our financial condition or results of operations.
The
due diligence undertaken by us in connection with the acquisition of our properties may not have revealed all relevant facts that
may be necessary to evaluate such acquisitions. The information provided to us in connection with our diligence may have been
incomplete or inaccurate. As part of the diligence process, we have also made subjective judgments regarding the results of operations
and prospects of the assets. If the due diligence investigations have failed to correctly identify material issues and liabilities
that may be present, such as title defects or environmental problems, we may incur substantial impairment charges or other losses
in the future. In addition, we may be subject to significant, previously undisclosed liabilities that were not identified during
the due diligence processes and which may have a material adverse effect on our financial condition or results of operations.
Our
operations are heavily dependent on current environmental regulation, changes in which we cannot predict.
Oil
and natural gas activities that we will engage in, including production, processing, handling and disposal of hazardous materials,
such as hydrocarbons and naturally occurring radioactive materials (if any), are subject to stringent regulation. We could incur
significant costs, including cleanup costs resulting from a release of hazardous material, third-party claims for property damage
and personal injuries fines and sanctions, as a result of any violations or liabilities under environmental or other laws. Changes
in or more stringent enforcement of environmental laws could force us to expend additional operating costs and capital expenditures
to stay in compliance.
Various
federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection
of the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact
our operations and costs. These regulations include, among others, (i) regulations by the Environmental Protection Agency and
various state agencies regarding approved methods of disposal for certain hazardous and non-hazardous wastes; (ii) the Comprehensive
Environmental Response, Compensation, and Liability Act, Federal Resource Conservation and Recovery Act and analogous state laws
which regulate the removal or remediation of previously disposed wastes (including wastes disposed of or released by prior owners
or operators), property contamination (including groundwater contamination), and remedial plugging operations to prevent future
contamination; (iii) the Clean Air Act and comparable state and local requirements which may result in the gradual imposition
of certain pollution control requirements with respect to air emissions from our operations; (iv) the Oil Pollution Act of 1990
which contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States;
(v) the Resource Conservation and Recovery Act which is the principal federal statute governing the treatment, storage and disposal
of hazardous wastes; and (vi) state regulations and statutes governing the handling, treatment, storage and disposal of naturally
occurring radioactive material.
We
believe that we will be in substantial compliance with applicable environmental laws and regulations. To date, we have not expended
any amounts to comply with such regulations, and we do not currently anticipate that future compliance will have a materially
adverse effect on our consolidated financial position, results of operations or cash flows. However, if we are deemed to not be
in compliance with applicable environmental laws, we could be forced to expend substantial amounts to be in compliance, which
would have a materially adverse effect on our financial condition.
Government
regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions
or delays.
Vast
quantities of natural gas, natural gas liquids and oil deposits exist in deep shale and other unconventional formations. It is
customary in our industry to recover these resources through the use of hydraulic fracturing, combined with horizontal drilling.
Hydraulic fracturing is the process of creating or expanding cracks, or fractures, in deep underground formations using water,
sand and other additives pumped under high pressure into the formation. As with the rest of the industry, our third-party operating
partners use hydraulic fracturing as a means to increase the productivity of most of the wells they drill and complete. These
formations are generally geologically separated and isolated from fresh ground water supplies by thousands of feet of impermeable
rock layers.
We
believe our third-party operating partners follow applicable legal requirements for groundwater protection in their operations
that are subject to supervision by state and federal regulators. Furthermore, we believe our third-party operating partners
well construction practices are specifically designed to protect freshwater aquifers by preventing the migration of fracturing
fluids into aquifers.
Hydraulic
fracturing is typically regulated by state oil and gas commissions. Some states have adopted, and other states are considering
adopting, regulations that could impose more stringent permitting, public disclosure, and/or well construction requirements on
hydraulic fracturing operations.
In
addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city
ordinances, that may restrict or prohibit the performance of well drilling in general and/or hydraulic fracturing in particular.
There are also certain governmental reviews either underway or being proposed that focus on deep shale and other formation completion
and production practices, including hydraulic fracturing. Depending on the outcome of these studies, federal and state legislatures
and agencies may seek to further regulate such activities. Certain environmental and other groups have also suggested that additional
federal, state and local laws and regulations may be needed to more closely regulate the hydraulic fracturing process.
Further,
the EPA has asserted federal regulatory authority over hydraulic fracturing involving diesel fuels under the Solid
Waste Disposal Acts Underground Injection Control Program. The EPA is also engaged in a study of the potential impacts
of hydraulic fracturing activities on drinking water resources in the states where the EPA is the permitting authority. These
actions, in conjunction with other analyses by federal and state agencies to assess the impacts of hydraulic fracturing could
spur further action toward federal and/or state legislation and regulation of hydraulic fracturing activities.
We
cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted
in the future and, if so, what actions any such laws or regulations would require or prohibit. Restrictions on hydraulic fracturing
could make it prohibitive for our third-party operating partners to conduct operations, and also reduce the amount of oil, natural
gas liquids and natural gas that we are ultimately able to produce in commercial quantities from our properties. If additional
levels of regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could
be subject to delays, increased operating and compliance costs and process prohibitions.
Our
estimates of the volume of reserves could have flaws, or such reserves could turn out not to be commercially extractable. As a
result, our future revenues and projections could be incorrect.
Estimates
of reserves and of future net revenues prepared by different petroleum engineers may vary substantially depending, in part, on
the assumptions made and may be subject to adjustment either up or down in the future. Our actual amounts of production, revenue,
taxes, development expenditures, operating expenses, and quantities of recoverable oil and gas reserves may vary substantially
from the estimates. Oil and gas reserve estimates are necessarily inexact and involve matters of subjective engineering judgment.
In addition, any estimates of our future net revenues and the present value thereof are based on assumptions derived in part from
historical price and cost information, which may not reflect current and future values, and/or other assumptions made by us that
only represent our best estimates. If these estimates of quantities, prices and costs prove inaccurate, we may be unsuccessful
in expanding our oil and gas reserves base with our acquisitions. Additionally, if declines in and instability of oil and gas
prices occur, then write downs in the capitalized costs associated with any oil and gas assets we obtain may be required. Because
of the nature of the estimates of our reserves and estimates in general, reductions to our estimated proved oil and gas reserves
and estimated future net revenues may be required in the future, and our estimated reserves may not represent commercially extractable
petrocarbons. If our reserve estimates are incorrect, we may be forced to write down the capitalized costs of our oil and gas
properties.
Decommissioning
costs are unknown and may be substantial. Unplanned costs could divert resources from other projects.
We
may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines which we use for production
of oil and natural gas reserves. Abandonment and reclamation of these facilities and the costs associated therewith is often referred
to as decommissioning. We accrue a liability for decommissioning costs associated with our wells, but have not established
any cash reserve account for these potential costs in respect of any of our properties. If decommissioning is required before
economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining
at any particular time to cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs.
The use of other funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas
of our business.
We
may have difficulty distributing production, which could harm our financial condition.
In
order to sell the oil and natural gas that we are able to produce, if any, the operators of the wells we obtain interests in may
have to make arrangements for storage and distribution to the market. We will rely on local infrastructure and the availability
of transportation for storage and shipment of our products, but infrastructure development and storage and transportation facilities
may be insufficient for our needs at commercially acceptable terms in the localities in which we operate. This situation could
be particularly problematic to the extent that our operations are conducted in remote areas that are difficult to access, such
as areas that are distant from shipping and/or pipeline facilities. These factors may affect our and potential partners
ability to explore and develop properties and to store and transport oil and natural gas production, increasing our expenses.
Furthermore,
weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we will operate,
or labor disputes may impair the distribution of oil and/or natural gas and in turn diminish our financial condition or ability
to maintain our operations.
Our
business will suffer if we cannot obtain or maintain necessary licenses.
Our
operations will require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities.
Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to change in regulations and
policies and to the discretion of the applicable governments, among other factors. Our inability to obtain, or our loss of or
denial of extension of, any of these licenses or permits could hamper our ability to produce revenues from our operations.
Challenges
to our properties may impact our financial condition.
Title
to oil and gas interests is often not capable of conclusive determination without incurring substantial expense. While we have
made and intend to make appropriate inquiries into the title of properties and other development rights we have acquired and intend
to acquire, title defects may exist. In addition, we may be unable to obtain adequate insurance for title defects, on a commercially
reasonable basis or at all. If title defects do exist, it is possible that we may lose all or a portion of our right, title and
interests in and to the properties to which the title defects relate. If our property rights are reduced, our ability to conduct
our exploration, development and production activities may be impaired. To mitigate title problems, common industry practice is
to obtain a title opinion from a qualified oil and gas attorney prior to the drilling operations of a well.
We
rely on technology to conduct our business, and our technology could become ineffective or obsolete.
We
rely on technology, including geographic and seismic analysis techniques and economic models, to develop our reserve estimates
and to guide our exploration, development and production activities. We and our operator partners will be required to continually
enhance and update our technology to maintain its efficacy and to avoid obsolescence. The costs of doing so may be substantial
and may be higher than the costs that we anticipate for technology maintenance and development. If we are unable to maintain the
efficacy of our technology, our ability to manage our business and to compete may be impaired. Further, even if we are able to
maintain technical effectiveness, our technology may not be the most efficient means of reaching our objectives, in which case
we may incur higher operating costs than we would were our technology more efficient.
The
loss of key personnel would directly affect our efficiency and profitability.
Our
future success is dependent, in a large part, on retaining the services of our current management team. Our executive officers
possess a unique and comprehensive knowledge of our industry and related matters that are vital to our success within the industry.
The knowledge, leadership and technical expertise of these individuals would be difficult to replace. The loss of one or more
of our officers could have a material adverse effect on our operating and financial performance, including our ability to develop
and execute our long-term business strategy. We do not maintain key-man life insurance with respect to any employees. We do have
employment agreements with each of our executive officers.
We
have limited management and staff and are dependent upon partnering arrangements and third-party service providers.
We
currently have four full-time employees, including our Chief Executive Officer and Chief Financial Officer. The loss of these
individuals would have an adverse effect on our business, as we have very limited personnel. We leverage the services of other
independent consultants and contractors to perform various professional services, including engineering, oil and gas well planning
and supervision, and land, legal, environmental and tax services. We also pursue alliances with partners in the areas of geological
and geophysical services and prospect generation, evaluation and prospect leasing. Our dependence on third-party consultants and
service providers create a number of risks, including but not limited to:
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the
possibility that such third parties may not be available to us as and when needed; and
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the
risk that we may not be able to properly control the timing and quality of work conducted with respect to its projects.
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If
we experience significant delays in obtaining the services of such third parties or they perform poorly, our results of operations
and stock price could be materially adversely affected.
Our
officers and directors control a significant percentage of our current outstanding common stock and their interests may conflict
with those of our stockholders.
As
of the date of this prospectus, our executive officers and directors collectively and beneficially own approximately 17% of our
outstanding common stock. This concentration of voting control gives these affiliates substantial influence over any matters which
require a stockholder vote, including without limitation the election of directors and approval of merger and/or acquisition transactions,
even if their interests may conflict with those of other stockholders. It could have the effect of delaying or preventing a change
in control or otherwise discouraging a potential acquirer from attempting to obtain control of us. This could have a material
adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the then prevailing
market prices for the shares of our common stock they hold.
In
the future, we may incur significant increased costs as a result of operating as a public company, and our management may be required
to devote substantial time to new compliance initiatives.
In
the future, we may incur significant legal, accounting, and other expenses as a result of operating as a public company. The Sarbanes-Oxley
Act of 2002 (the Sarbanes-Oxley Act), as well as new rules subsequently implemented by the SEC, have imposed various
requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel
will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will
increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we
expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability
insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting
and disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing on
the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In
performing this evaluation and testing, management concluded that our internal control over financial reporting is effective as
of December 31, 2019. Our continued compliance with Section 404, will require that we incur substantial accounting expense and
expend significant management efforts. We do not have an internal audit group. We have however, engaged independent professional
assistance for the evaluation and testing of internal controls.
Terrorist
attacks or cyber-incidents could result in information theft, data corruption, operational disruption and/or financial loss.
Like
most companies, we have become increasingly dependent upon digital technologies, including information systems, infrastructure
and cloud applications and services, to operate our businesses, to process and record financial and operating data, communicate
with our business partners, analyze mine and mining information, estimate quantities of coal reserves, as well as other activities
related to our businesses. Strategic targets, such as energy-related assets, may be at greater risk of future terrorist or cyber-attacks
than other targets in the United States. Deliberate attacks on, or security breaches in, our systems or infrastructure, or the
systems or infrastructure of third parties, or cloud-based applications could lead to corruption or loss of our proprietary data
and potentially sensitive data, delays in production or delivery, difficulty in completing and settling transactions, challenges
in maintaining our books and records, environmental damage, communication interruptions, other operational disruptions and third-party
liability. Our insurance may not protect us against such occurrences. Consequently, it is possible that any of these occurrences,
or a combination of them, could have a material adverse effect on our business, financial condition, results of operations and
cash flows. Further, as cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify
or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents.
We
have adopted an Information Security Policy and Acceptable Use Statement to address precautions with respect to data security
and we have created an Incident Response Plan which outlines appropriate responses in case of a reported breach. These policies
and plan have been executed in coordination with our independent Information Technology Service provider.
Risks
Related the COVID-19 Pandemic
An
occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to negatively affect, and has to date negatively
affected, our operations.
The
occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to, and has already, negatively affected our operations.
A pandemic typically results in social distancing, travel bans and quarantine, and the effects of, and response to, the COVID-19
pandemic has limited access to our facilities, properties, management, support staff and professional advisors. These, in turn,
have not only negatively impacted our operations and financial condition, but our overall ability to react timely to mitigate
the impact of this event. Further, the COVID-19 pandemic has resulted in declines in the demand for, and the price of, oil and
gas, and it is unclear how long this decline will last. The full effect on our business and operation is currently unknown. In
the event that the effects of COVID-19 continue in the future and/or the economy continues to deteriorate, we may be forced to
curtail our operations and may be unable to pay our debt obligations as they come due.
The
coronavirus/COVID-19 pandemic has had a negative effect on oil and gas prices, and depending on the severity and longevity of
the pandemic, it may result in a major economic recession which will continue to depress oil and gas prices and cause our business
and results of operations to suffer.
The
inability and/or unwillingness of individuals to congregate in large groups, travel and/or visit retail businesses or travel outside
of their homes will, and has to date, had a negative effect on the demand for, and the current prices of, oil and gas. Additionally,
the demand for oil and gas is based partially on global
economic conditions. If the COVID-19 pandemic results in a global economic recession, there
will be a continued negative effect on the demand for oil and gas and this will have a negative effect on our operating results.
All of the above may be exacerbated in the future as the COVID-19 outbreak and the governmental responses thereto continue.
Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices.
If the economic climate in the United States or abroad continues to deteriorate, demand for petroleum products could further diminish,
which will impact the price at which we can sell our oil and gas, impact the value of our working interests and other oil and
gas assets, affect the ability of our vendors, suppliers and customers to continue operations, affect our operations and ultimately
adversely impact our results of operations, liquidity and financial condition.
Risks
Related to Our Common Stock
There
presently is a limited market for our common stock, and the price of our common stock may be volatile.
Our
common stock is currently quoted on The NASDAQ Stock Market LLC. There has been and may continue to be volatility in the volume
and market price of our common stock moving forward. This volatility may be caused by a variety of factors, including the lack
of readily available quotations, the absence of consistent administrative supervision of bid and ask quotations,
and generally lower trading volume. In addition, factors such as quarterly variations in our operating results, changes in financial
estimates by securities analysts, or our failure to meet our or their projected financial and operating results, litigation involving
us, factors relating to the oil and gas industry, actions by governmental agencies, national economic and stock market considerations,
as well as other events and circumstances beyond our control could have a significant impact on the future market price of our
common stock and the relative volatility of such market price.
Securities
analysts may not initiate coverage or continue to cover our shares of common stock and this may have a negative impact on the
market price of our shares of common stock.
The
trading market for our shares of common stock will depend, in part, on the research and reports that securities analysts publish
about our business and our shares of common stock. We do not have any control over these analysts. If securities analysts do not
cover our shares of common stock, the lack of research coverage may adversely affect the market price of those shares. If securities
analysts do cover our shares of common stock, they could issue reports or recommendations that are unfavorable to the price of
our shares of common stock, and they could downgrade a previously favorable report or recommendation, and in either case our share
prices could decline as a result of the report. If one or more of these analysts does not initiate coverage, ceases to cover our
shares of common stock or fails to publish regular reports on our business, we could lose visibility in the financial markets,
which could cause our share prices or trading volume to decline.
Offers
or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
Our
stockholders could sell substantial amounts of common stock in the public market, including shares sold under the registration
statement on Form S-3 (File No. 333-233653) we filed regarding shares of our common stock issued in several private offerings
in 2019 and shares of our common stock issuable upon conversion of the Notes or upon the filing of any additional registration
statements that register such shares and/or upon the expiration of any statutory holding period under Rule 144 of the Securities
Act, if available, or upon the expiration of trading limitation periods. Such volume could create a circumstance commonly referred
to as a market overhang and in anticipation of which the market price of our common stock could fall. Additionally,
we have vested stock options and warrants to purchase up to an aggregate of approximately 8.4 million shares of our common stock
that are presently exercisable as of the date of this prospectus. The exercise of a large amount of these securities followed
by the subsequent sale of the underlying stock in the market would likely have a negative effect on our common stocks market
price. The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for
us to secure additional financing through the sale of equity or equity-related securities in the future at a time and price that
we deem reasonable or appropriate.
Our
directors and officers have rights to indemnification.
Our
Bylaws provide, as permitted by governing Nevada law, that we will indemnify our directors, officers, and employees, whether or
not then in service as such, against all reasonable expenses actually and necessarily incurred by him or her in connection with
the defense of any litigation to which the individual may have been made a party because he or she is or was a director, officer,
or employee of the company. The inclusion of these provisions in the Bylaws may have the effect of reducing the likelihood of
derivative litigation against directors and officers, and may discourage or deter stockholders or management from bringing a lawsuit
against directors and officers for breach of their duty of care, even though such an action, if successful, might otherwise have
benefited us and our stockholders.
We
do not anticipate paying any cash dividends on our common stock.
We
do not anticipate paying cash dividends on our common stock for the foreseeable future. The payment of dividends, if any, would
be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any
dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement
our business strategy; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.
NASDAQ
may delist our common stock from trading on its exchange, which could limit shareholders ability to trade our common stock;
further, we are presently not in compliance with NASDAQs minimum bid price rule.
As
a listed company on NASDAQ, we are required to meet certain financial, public float, bid price and liquidity standards on an ongoing
basis in order to continue the listing of our common stock. If we fail to meet these continued listing requirements, our common
stock may be subject to delisting. If our common stock is delisted and we are not able to list our common stock on another national
securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our shareholders
could face significant material adverse consequences, including limited availability of market quotations for our common stock
and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional
securities and obtain additional financing in the future.
Further,
on November 21, 2019 we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market advising us that the
staff had determined that we no longer meet the requirement of Listing Rule 5550(a)(2) which requires us to maintain a minimum
bid price of $1 per share. The Listing Rules provided us with a compliance period of 180 calendar days in which to regain compliance.
Although we did not regain compliance by the August 3, 2020 deadline, on August 4, 2020 Nasdaq notified us that it has granted
us an additional 180 calendar days, or until February 1, 2021, to regain compliance. Our eligibility for the extension was based
on us meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements
for initial listing on the Nasdaq Capital Market with the exception of the bid price requirement, and our written notice of our
intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If at any
time during this additional time period the closing bid price of our common stock is at least $1 per share for a minimum of 10
consecutive business days, we will regain compliance and this matter will be closed. If we choose to regain compliance by implementing
a reverse stock split, under Nasdaq rules we must complete the split no later than ten business days prior to February 1, 2021
in order to timely regain compliance. We are currently reviewing our options to regain compliance with the Nasdaq Listing Rules,
but we have made no decisions at this time.
In
the event that our common stock is delisted from Nasdaq, U.S. broker-dealers may be discouraged from effecting transactions in
shares of our common stock because they may be considered penny stocks and thus be subject to the penny stock rules.
The
SEC has adopted a number of rules to regulate penny stock that restricts transactions involving stock which is
deemed to be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9
under the Exchange Act. These rules may have the effect of reducing the liquidity of penny stocks. Penny stocks
generally are equity securities with a price of less than $5.00 per share (other than securities registered on certain national
securities exchanges or quoted on Nasdaq if current price and volume information with respect to transactions in such securities
is provided by the exchange or system). Our shares of common stock have in the past constituted, and may again in the future constitute
a penny stock within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon
U.S. broker-dealers may discourage such broker-dealers from effecting transactions in shares of our common stock, which could
severely limit the market liquidity of such shares of common stock and impede their sale in the secondary market.
A
U.S. broker-dealer selling penny stock to anyone other than an established customer or accredited investor (generally,
an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or
her spouse) must make a special suitability determination for the purchaser and must receive the purchasers written consent
to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the penny
stock regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a penny stock,
a disclosure schedule prepared in accordance with SEC standards relating to the penny stock market, unless the broker-dealer
or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer
and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit
monthly statements disclosing recent price information with respect to the penny stock held in a customers account
and information with respect to the limited market in penny stocks.
Issuance
of our stock in the future could dilute existing shareholders and adversely affect the market price of our common stock.
We
have the authority to issue up to 150,000,000 shares of common stock and 10,000,000 shares of preferred stock, and to issue options
pursuant to our Amended and Restated 2015 Stock Option Plan and warrants to purchase shares of our common stock. We are authorized
to issue significant amounts of common stock in the future, subject only to the discretion of our board of directors. These future
issuances could be at values substantially below the price paid for our common stock by investors. In addition, we could issue
large blocks of our stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval. Because
the trading volume of our common stock is relatively low, the issuance of our stock may have a disproportionately large impact
on its price compared to larger companies.
The
issuance of preferred stock in the future could adversely affect the rights of the holders of our common stock.
An
issuance of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting
rights and dividends and in liquidation over the common stock and could, upon conversion or otherwise, have all of the rights
of our common stock. Our board of directors authority to issue preferred stock could discourage potential takeover attempts
or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts
more difficult or costly to achieve.