NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF BUSINESS
Torchlight
Energy Resources, Inc. (Company) was incorporated in October 2007 under the laws of the State of Nevada as Pole
Perfect Studios, Inc. (PPS). From its incorporation to November 2010, the company was primarily engaged in business
start-up activities.
On
November 23, 2010, we entered into and closed a Share Exchange Agreement (the Exchange Agreement) between the major
shareholders of PPS and the shareholders of Torchlight Energy, Inc. (TEI). As a result of the transactions effected
by the Exchange Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business.
TEI was incorporated under the laws of the State of Nevada in June 2010. We are engaged in the acquisition, exploitation and/or
development of oil and natural gas properties in the United States. We operate our business through our subsidiaries Torchlight
Energy Inc., Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC.
2.
GOING CONCERN
At
December 31, 2019, the Company had not yet achieved profitable operations. We had a net loss of $9,839,396 for the year ended
December 31, 2019 and had accumulated losses of $99,153,701 since our inception. We expect to incur further losses in the development
of our business. The Company had a working capital deficit as of December 31, 2019 of $13,226,742. These conditions raise substantial
doubt about the Companys ability to continue as a going concern.
The
Companys ability to continue as a going concern is dependent on its ability to generate future profitable operations and/or
to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when
they come due. Managements plan to address the Companys ability to continue as a going concern includes: (1) obtaining
debt or equity funding from private placement or institutional sources; (2) obtain 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 the Company to remain a going concern through the methods discussed above, there can be no assurances
that such methods will prove successful.
These
consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore,
the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amount and classifications of liabilities that may result from the outcome of this uncertainty.
3.
SIGNIFICANT ACCOUNTING POLICIES
The
Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted
in the United States of America. Accounting principles followed and the methods of applying those principles, which materially
affect the determination of financial position, results of operations and cash flows are summarized below:
Use
of estimates – The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and certain assumptions that affect the amounts reported
in these consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Basis
of presentation – The financial statements are presented on a consolidated basis and include all of the
accounts of Torchlight Energy Resources Inc. and its wholly owned subsidiaries, Torchlight Energy, Inc., Torchlight Energy
Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC. All significant intercompany
balances and transactions have been eliminated.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Risks
and uncertainties – The Companys operations are subject to significant risks and uncertainties, including
financial, operational, technological, and other risks associated with operating an emerging business, including the potential
risk of business failure.
Concentration
of risks – At times the Companys cash balances are in excess of amounts guaranteed by the Federal Deposit
Insurance Corporation. The Companys cash is placed with a highly rated financial institution, and the Company regularly
monitors the credit worthiness of the financial institutions with which it does business.
Fair
value of financial instruments – Financial instruments consist of cash, receivables, payables and promissory notes,
if any. The estimated fair values of cash, receivables, and payables approximate the carrying amount due to the relatively short
maturity of these instruments. The carrying amounts of any promissory notes approximate their fair value giving affect for the
term of the note and the effective interest rates.
For
assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy
as follows:
|
●
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
●
|
Level
2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset
or liability, either directly or indirectly through market corroboration.
|
|
●
|
Level
3 inputs are unobservable inputs based on managements own assumptions used to measure assets and liabilities at fair
value.
|
A
financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.
Cash
and cash equivalents – Cash and cash equivalents include certain investments in highly liquid instruments with original
maturities of three months or less.
Accounts
receivable – Accounts receivable consist of uncollateralized oil and natural gas revenues due under normal trade
terms, as well as amounts due from working interest owners of oil and gas properties for their share of expenses paid on their
behalf by the Company. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that
reflects managements best estimate of the amount that may not be collectible. As of December 31, 2019 and 2018, no valuation allowance was considered necessary.
Oil
and gas properties – The Company uses the full cost method of accounting for exploration and development activities
as defined by the Securities and Exchange Commission (SEC). Under this method of accounting, the costs of unsuccessful,
as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal
costs that are directly related to property acquisition, exploration and development activities but does not include any costs
related to production, general corporate overhead or similar activities.
Oil
and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs
excluded represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs
associated with leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition
costs to unevaluated properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated
over the life of the reservoir. Unevaluated properties are reviewed for impairment at least annually and are determined through
an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining
time in the commitment period, remaining capital plan, and political, economic, and market conditions.
Gains
and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly
alter the relationship between capitalized costs and proved reserves. Sales of less than 100% of the Companys interest in
the oil and gas property are treated as a reduction of the capital cost of the field, with no gain or loss recognized, as long
as doing so does not significantly affect the unit-of-production depletion rate. Costs of retired equipment, net of salvage value,
are usually charged to accumulated depreciation.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Capitalized
interest – The Company capitalizes interest on unevaluated properties during the periods in which they are excluded
from costs being depleted or amortized. During the years ended December 31, 2019 and 2018, the Company capitalized $2,858,753
and $2,020,019, respectively, of interest on unevaluated properties.
Depreciation,
depletion, and amortization – The depreciable base for oil and natural gas properties includes the sum of all capitalized
costs net of accumulated depreciation, depletion, and amortization (DD&A), estimated future development costs
and asset retirement costs not included in oil and natural gas properties, less costs excluded from amortization. The depreciable
base of oil and natural gas properties is amortized on a unit-of-production method.
Ceiling
test – Future production volumes from oil and gas properties are a significant factor in determining the full cost
ceiling limitation of capitalized costs. Under the full cost method of accounting, the Company is required to periodically perform
a ceiling test that determines a limit on the book value of oil and gas properties. If the net capitalized cost
of proved oil and gas properties, net of related deferred income taxes, plus the cost of unproved oil and gas properties, exceeds
the present value of estimated future net cash flows discounted at 10 percent, net of related realizable tax affects, plus the
cost of unproved oil and gas properties, the excess is charged to expense and reflected as additional accumulated DD&A. The
Company recorded an impairment expense of $1,494,769 and $139,891 for the years ended December 31, 2019 and 2018, respectively,
to recognize the adjustment required by the ceiling test. At December 31, 2019 an additional impairment of unevaluated costs of
$756,964 was added to the basis for future periods depletion.
The
ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on
the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated
abandonment costs.
The
determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality
of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable
reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may
vary considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less
reliable than those based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development
of proved oil and gas reserves could result in significant revisions of proved reserves. Other issues, such as changes in regulatory
requirements, technological advances, and other factors which are difficult to predict could also affect estimates of proved reserves
in the future.
Asset
retirement obligations – The fair value of a liability for an assets retirement obligation
(ARO) is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made,
with the corresponding charge capitalized as part of the carrying amount of the related long-lived asset. The liability is
accreted to its then-present value each subsequent period, and the capitalized cost is depleted over the useful life of the
related asset. Abandonment costs incurred are recorded as a reduction of the ARO liability.
Inherent
in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation
factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political
environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded
as a gain or loss upon settlement.
Income
taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more
likely than not that the related tax benefits will not be realized.
Authoritative
guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position
only after determining that the relevant tax authority would more likely than not sustain the position following an examination.
Management has reviewed the Companys tax positions and determined there were no uncertain tax positions requiring recognition
in the consolidated financial statements. Company tax returns remain subject to Federal and State tax examinations. Generally,
the applicable statutes of limitation are three to four years from their respective filings.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Estimated
interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax
expense in the statement of operations. The Company has not recorded any interest or penalties associated with unrecognized tax
benefits for any periods covered by these financial statements.
Share-based
compensation – Compensation cost for equity awards is based on the fair value of the equity instrument on the date
of grant and is recognized over the period during which an employee is required to provide service in exchange for the award.
The
Company accounts for stock option awards using the calculated value method. The expected term was derived using the simplified
method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110, which averages an awards weighted
average vesting period and contractual term for plain vanilla share options.
The
Company accounts for any forfeitures of options when they occur. Previously recognized compensation cost for an award is reversed
in the period that the award is forfeited.
The
Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient
completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during
the period from their issuance until performance completion.
In
June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services.
Under this ASU, the guidance on such payments to nonemployees is aligned with the requirements for share-based payments granted
to employees. ASU 2018-07 was effective for fiscal years beginning after December 15, 2018, however the Company opted for early
adoption effective July 1, 2018. In evaluating early adoption the Company determined that the change did not have a material impact
on its consolidated financial statements.
The
Company values warrant and option awards using the Black-Scholes option pricing model.
Revenue
recognition – On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, and the related
guidance in ASC 340-40 (the new revenue standard), and related guidance on gains and losses on derecognition of nonfinancial assets
ASC 610-20, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.
Under the modified retrospective method, the Company recognizes the cumulative effect of initially applying the new revenue standard
as an adjustment to the opening balance of retained earnings; however, no significant adjustment was required as a result of adopting
the new revenue standard. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard.
The impact of the adoption of the new revenue standard was immaterial to the Companys net loss.
The
Companys revenue is typically generated from contracts to sell natural gas, crude oil or NGLs produced from interests in
oil and gas properties owned by the Company. Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts
for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction
confirmations, which document the terms of each specific sale. The transaction confirmations specify a delivery point which represents
the point at which control of the product is transferred to the customer. These contracts frequently meet the definition of a
derivative under ASC 815, and are accounted for as derivatives unless the Company elects to treat them as normal sales as permitted
under that guidance. The Company elects to treat contracts to sell oil and gas production as normal sales, which are then accounted
for as contracts with customers. The Company has determined that these contracts represent multiple performance obligations which
are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity
to a designated delivery point.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
SIGNIFICANT ACCOUNTING POLICIES - continued
Revenues
from oil and gas sales are detailed as follows:
|
|
Year
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil sales
|
|
$
|
716,014
|
|
|
$
|
1,257,173
|
|
|
|
|
|
|
|
|
|
|
Gas sales
|
|
|
30,249
|
|
|
|
25,189
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
746,263
|
|
|
$
|
1,282,362
|
|
Revenue
is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of
third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange
for transferring control of those goods to the customer. Amounts allocated in the Companys price contracts are based on
the standalone selling price of those products in the context of long-term contracts. Payment is generally received one or two
months after the sale has occurred.
Gain
or loss on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers
subject to ASC 606. The Company may in the future use financial or physical contracts accounted for as derivatives as economic
hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to
physically settle but do not meet all of the criteria to be treated as normal sales.
Producer
Gas Imbalances. The Company applies the sales method of accounting for natural gas revenues. Under this method, revenues are
recognized based on the actual volume of natural gas sold to purchasers.
Basic
and diluted earnings (loss) per share – Basic earnings
(loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same way as basic earnings
(loss) per common share except that the denominator is increased to include the number of additional common shares that would be
outstanding if all potential common shares had been issued and if the additional common shares were dilutive. The calculation of
diluted earnings per share excludes 12,621,528 and 14,814,586 shares, respectively for the years ended December 31, 2019 and 2018,
issuable upon the exercise of outstanding warrants and options because their effect would be anti-dilutive.
Environmental
laws and regulations – The Company is subject to extensive federal, state, and local environmental laws and
regulations. Environmental expenditures are expensed or capitalized depending on their future economic benefit. The Company
believes that it is in compliance with existing laws and regulations. The Company accrued no liability as of December 31,
2019 and 2018.
Recent
adopted accounting pronouncements – In February 2016 the FASB, issued ASU, 2016-02, Leases. The ASU requires companies
to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02
was effective for the Company in the first quarter of 2019. The Company adopted the change which did not have a material impact
on its consolidated financial statements.
Other
recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Companys
financial position or results from operations.
Subsequent
events – The Company evaluated subsequent events through March 16, 2020 the date of issuance of these financial
statements. Subsequent events, if any, are disclosed in Note 11.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
OIL & GAS PROPERTIES
The
following table presents the capitalized costs for oil & gas properties of the Company as of December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Evaluated costs subject to amortization
|
|
$
|
13,243,541
|
|
|
$
|
11,664,586
|
|
Unevaluated costs
|
|
|
39,667,740
|
|
|
|
31,746,477
|
|
Total capitalized costs
|
|
|
52,911,281
|
|
|
|
43,411,063
|
|
Less accumulated depreciation, depletion and amortization
|
|
|
(12,729,238
|
)
|
|
|
(6,845,602
|
)
|
Total oil and gas properties
|
|
$
|
40,182,043
|
|
|
$
|
36,565,461
|
|
Unevaluated
costs as of December 31, 2019 include cumulative costs on developing projects including the Orogrande, Hazel, and Winkler projects
in West Texas.
The
Company identified impairment of $2,300,626 in 2017 related to its unevaluated properties. The Company adjusted the separation
of evaluated versus unevaluated costs within its full cost pool to recognize the value impairment related to the expiration of
unevaluated leases in 2017 in the amount of $2,300,626. The impact of this change was to increase the basis for calculation of
future periods depletion, depreciation and amortization to include $2,300,626 of cost which will effectively recognize
the impairment on the consolidated statement of operations over future periods. The $2,300,626 has also become an evaluated cost
for purposes of ceiling tests and which may further recognize the impairment expense recognized in future periods. The impact
of this cost reclassification at March 31, 2018 was a recognized impairment expense of $139,891. Impairment expense was recognized
for the year ended December 31, 2019 of $1,494,769. At December 31, 2019 an additional impairment of unevaluated costs of $756,964
was added to the basis for future periods depletion.
Due
to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that a further
write-down could occur. Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids, which geological
and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and
operating conditions. The independent engineering estimates include only those amounts considered to be proved reserves and do
not include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary
recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place.
Estimated reserves to be developed through secondary or tertiary recovery processes are classified as unevaluated properties.
Current
Projects
As
of December 31, 2019, 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 Hunton wells in
partnership with Husky Ventures 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, at closing, we purchased 100% of the capital stock of Hudspeth which holds
certain oil and gas assets, including a 100% working interest in approximately 172,000 mostly contiguous acres in the Orogrande
Basin in West Texas. As of December 31, 2017, leases covering approximately 134,000 acres remain in effect. As consideration,
at closing we issued 868,750 restricted shares of our common stock to Mr. McCabe and paid a total of $100,000 in geologic origination
fees to third parties. Additionally, 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. We believe all drilling obligations through December 31,
2019 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.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
OIL & GAS PROPERTIES - continued
On
March 27, 2017, Founders, Founders Oil & Gas Operating, LLC, Founders operating partner, Hudspeth and Pandora signed
a Drilling and Development Unit Agreement (the DDU Agreement), with the Commissioner of the General Land Office,
on behalf of the State of Texas, and as approved by the Board for Lease of University Lands, or University Lands, on the Orogrande
Project. The DDU Agreement has an effective date of January 1, 2017 and required a payment from Founders, Hudspeth and Pandora,
collectively, of $335,323 as the initial consideration fee. The initial consideration fee was paid by Founders in April 2017 and
was to be deducted from the required spud fee payable to us at commencement of the next well drilled.
The
DDU Agreement allows for all 192 existing leases covering approximately 133,000 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 began with one well to be spudded and drilled on or before September
1, 2017, and increased to two wells in year 2018, three wells in year 2019, four wells in year 2020 and five wells per year in
years 2021, 2022 and 2023. The drilling obligations are minimum yearly requirements and may be exceeded if acceleration is desired.
The DDU Agreement replaces all prior agreements, and will govern future drilling obligations on the drilling and development unit
if the DDU Agreement is extended. The Company drilled three wells during fourth quarter of 2019.
There
are two vertical tests wells in the Orogrande Project, the Orogrande Rich A-11 test well and the University Founders B-19 #1 test
well. The Orogrande Rich A-11 test well was spudded on March 31, 2015, drilled in the second quarter of 2015 and was evaluated
and numerous scientific tests were performed to provide key data for the field development thesis. We believe that future utility
of this well may be conversion to a salt water disposal well in the course of further development of the Orogrande acreage. The
University Founders B-19 #1 was spudded on April 24, 2016 and drilled in the second quarter of 2016. The well successfully pumped
down completion fluid in the third quarter of 2016 and indications of hydrocarbons were seen at the surface on this second Orogrande
Project test well. We believe that future utility of this well may be conversion to a salt water disposal well in the course of
further development of the Orogrande acreage.
During
the fourth quarter of 2017, the Company took back operational control from Founders 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. The Company estimates that there is still approximately $27.1 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.
Our
working interest in the Orogrande Project thereby increased by 20.25% to a total of 67.75% and Wolfbone then owned 20.25%.
Founders
was to operate a newly drilled horizontal well called the University Founders #A25 (at 5,540 depth in a 1,000 lateral)
with supervision from us and our partners. The University Founders #A25 was spudded on November 28, 2017. During the month of
April, 2018, we, MPC and Mr. McCabe were to assume full operational control including managing drilling plans and timing for all
future wells drilled in the project.
On
July 25, 2018, the Company 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 Hudspeth and Wolfbone to
each immediately pay $625,000 and for Hudspeth or the Company and Wolfbone or MPC to each pay another $625,000 on July 20, 2019,
as consideration for Founders assigning all of its working interest in the oil and gas leases of the Orogrande Project to Hudspeth
and Wolfbone equally. The final payments were made on July 18, 2019. The assignments to Hudspeth and Wolfbone were made in July
when the first payments were made. Future well capital spending obligations will require the same 50% contribution from Hudspeth
and 50% from Wolfbone until such time as the $40.5 million to be spent on the project (as per our Assignment of Farmout Agreement
with Founders) is completed. The Company estimates that there is still approximately $27.1 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 (for which Hudspeths total consideration was $1,250,000), Hudspeths working interest increased
to 72.5%.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
OIL & GAS PROPERTIES - continued
The
Orogrande Project ownership as of December 31, 2019 is detailed as follows:
|
|
Revenue
|
|
|
Working
|
|
|
|
Interest
|
|
|
Interest
|
|
|
|
|
|
|
|
|
University Lands - Mineral Owner
|
|
|
20.000
|
%
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
ORRI - Magdalena Royalties, LLC, an entity controlled by Gregory McCabe, Chairman
|
|
|
4.500
|
%
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
ORRI - Unrelated Party
|
|
|
0.500
|
%
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
Hudspeth Oil Corporation, a subsidiary of Torchlight Energy Resources Inc.
|
|
|
54.375
|
%
|
|
|
72.500
|
%
|
|
|
|
|
|
|
|
|
|
Wolfbone Investments LLC, an entity controlled by Gregory McCabe, Chairman
|
|
|
18.750
|
%
|
|
|
25.000
|
%
|
|
|
|
|
|
|
|
|
|
Unrelated Party
|
|
|
1.875
|
%
|
|
|
2.500
|
%
|
|
|
|
100.000
|
%
|
|
|
100.000
|
%
|
Reference
Note 11 – Subsequent Events for the reduction of 6% in the Companys working interest as a result of the conversion
of notes payable and accrued interest into working interest in the Orogrande.
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.
During the fourth quarter, 2018, the Company drilled three additional 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 these wells continued into the nine months ended September 30, 2019 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. In addition, 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. In addition, should a farm out partner or sale not occur, the Company and Wolfbone will proceed to drill
two additional wells in the play prior to year-end, in order to fulfill the obligations under the DDU Agreement. We drilled
to test the two obligation wells described above. The first well, the A35 1H, has been drilled and cased in the Penn Section
and tested with positive results of oil and gas production to the surface. This first well is a short horizontal in the proven
Penn Section where we will be looking to break through the dual porosity system in place with a larger frac designed to open
up the oil bearing pores. We are also drilled and cased the A25 #2 which targeted an identified structure. This well is designed
to test both conventional zones and potentially the unconventional Barnett and Woodford Zones ultimately drilling down to
the cellar around 7600 feet. Testing is ongoing.
Hazel
Project in the Midland Basin in West Texas
Effective
April 4, 2016, TEI acquired from MPC a 66.66% working interest in approximately 12,000 acres in the Midland Basin in exchange
for 1,500,000 warrants to purchase shares of our common stock with an exercise price of $1.00 for five years and a back-in after
payout of a 25% working interest to MPC.
Initial
development of the first well on the property, the Flying B Ranch #1, began July 9, 2016 and development continued through September
30, 2016. This well is classified as a test well in the development pursuit of the Hazel Project. We believe that this wellbore
will be utilized as a salt water disposal well in support of future development.
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.
As of December 31, 2019, no shares of our Series C Preferred Stock were outstanding.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
OIL & GAS PROPERTIES - continued
On
December 27, 2016, drilling activities commenced on the second Hazel Project well, the Flying B Ranch #2. The well is a vertical
test similar to our first Hazel Project well, the Flying B Ranch #1. Recompletion in an alternative geological formation for this
well was performed during the three months ended September 30, 2017; however, we believe that the results were uneconomic for
continuing production. We believe that this wellbore will be utilized as a salt water disposal well in support of future development.
We
commenced planning to drill the Flying B Ranch #3 horizontal well in the Hazel Project in June 2017 in compliance with the continuous
drilling obligation. The well was spudded on June 10, 2017. The well was completed and began production in late September 2017.
As of December 31, 2019 the well is shut in due to high lease operating expenses as a result of lack of three phase electricity
to the property which forced the use of diesel generation equipment to power the production facilities.
Acquisition
of Additional Interests in Hazel Project
On
January 30, 2017, we and our then wholly-owned subsidiary, Torchlight Acquisition Corporation, a Texas corporation (TAC),
entered into and closed an Agreement and Plan of Reorganization and a Plan of Merger with Line Drive Energy, LLC, a Texas limited
liability company (Line Drive), and Mr. McCabe, under which agreements TAC merged with and into Line Drive and the
separate existence of TAC ceased, with Line Drive being the surviving entity and becoming our wholly-owned subsidiary. Line Drive,
which was wholly-owned by Mr. McCabe, owned certain assets and securities, including approximately 40.66% of 12,000 gross acres,
9,600 net acres, in the Hazel Project and 521,739 warrants to purchase shares of our common stock (which warrants had been assigned
by Mr. McCabe to Line Drive). Upon the closing of the merger, all of the issued and outstanding shares of common stock of TAC
automatically converted into a membership interest in Line Drive, constituting all of the issued and outstanding membership interests
in Line Drive immediately following the closing of the merger, the membership interest in Line Drive held by Mr. McCabe and outstanding
immediately prior to the closing of the merger ceased to exist, and we issued Mr. McCabe 3,301,739 restricted shares of our common
stock as consideration therefor. Immediately after closing, the 521,739 warrants held by Line Drive were cancelled, which warrants
had an exercise price of $1.40 per share and an expiration date of June 9, 2020. A Certificate of Merger for the merger transaction
was filed with the Secretary of State of Texas on January 31, 2017. Subsequent to the closing the name of Line Drive Energy, LLC
was changed to Torchlight Hazel, LLC. We are required to drill one well every six months to hold the entire 12,000 acre block
for eighteen months, and thereafter two wells every six months starting June 2018. During the year ended December 31, 2019 modifications
were made to mineral owner leases as described below.
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, for consideration of $415,000, and additionally, Wolfbone caused to be cancelled a total of 2,780,000 warrants to purchase
shares of our common stock, including 1,500,000 warrants held by MPC, and 1,280,000 warrants held by Green Hill Minerals, an entity
owned by Mr. McCabes son, which warrant cancellations were effected through certain Warrant Cancellation Agreements. The
1,500,000 warrants held by MPC that were cancelled had an exercise price of $1.00 per share and an expiration date of April 4,
2021. The warrants held by Green Hill Minerals that were cancelled included 100,000 warrants with an exercise price of $1.73 and
an expiration date of September 30, 2018 and 1,180,000 warrants with an exercise price of $0.70 and an expiration date of February
15, 2020.
Since
Mr. McCabe held the controlling interest in both Line Drive and Wolfbone, the transactions were combined for accounting purposes.
The working interest in the Hazel Project was the only asset held by Line Drive. The warrant cancellation was treated in the aggregate
as an exercise of the warrants with the transfer of the working interests as the consideration. We recorded the transactions as
an increase in its investment in the Hazel Project working interests of $3,644,431, which is equal to the exercise price of the
warrants plus the cash paid to Wolfbone.
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 in exchange for 268,656 shares
of common stock valued at $373,430, increasing our working interest in the Hazel project to 80%, and an overall net revenue interest
of 74-75%.
Mr.
Masterson is credited with originating the Hazel Project in the Midland Basin. With Mr. Mastersons assistance, we are targeting
prospects in the Midland Basin that have 150 to 130 feet of thickness, are likely to require six to eight laterals per bench,
have the potential for 12 to 16 horizontal wells per section, and 200 long lateral locations, assuming only two benches.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
OIL & GAS PROPERTIES - continued
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 filing, we continue to maintain the leases in good standing and continue to
market the acreage in an effort to focus on the Orogrande Project.
During
the year ended December 31, 2019 the Company deepened the Flying B #4 and took whole cores through all of the Wolfcamp
A and the upper portion of the Wolfcamp B. In addition, 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. At December 31, 2019 we were structuring the
extension agreement with the third mineral owner for cash consideration. Due to this extension, our obligation in November reduces
to one obligation well. We have finished that obligation well and are awaiting results. This well is targeting a shallow zone
that is showing oil potential.
The
marketing process is ongoing for the Hazel project. We continue to encounter, as does the entire industry, a soft market for acquisitions
and divestitures transactions. We will continue to look to sell the property or joint venture the property via farm in or a drillco
transaction.
Winkler
Project, Winkler County, Texas
On
December 1, 2017, the Agreement and Plan of Reorganization that we and our then wholly-owned subsidiary, Torchlight Wolfbone Properties,
Inc., a Texas corporation (TWP), entered into with MPC and Warwink Properties, LLC (Warwink Properties)
on November 14, 2017 closed. Under the agreement, TWP merged with and into Warwink Properties and the separate existence of TWP
ceased, with Warwink Properties being the surviving entity and becoming our wholly-owned subsidiary. Warwink Properties was wholly
owned by MPC. Warwink Properties owns certain assets, including a 10.71875% working interest in approximately 640 acres in Winkler
County, Texas. Upon the closing of the merger, all of the issued and outstanding shares of common stock of TWP converted into
a membership interest in Warwink Properties, constituting all of the issued and outstanding membership interests in Warwink Properties
immediately following the closing of the merger, the membership interest in Warwink Properties held by MPC and outstanding immediately
prior to the closing of the merger ceased to exist, and we issued MPC 2,500,000 restricted shares of our common stock as consideration.
Also on December 1, 2017, MPC closed its transaction with MECO IV, LLC ( MECO), for the purchase and sale of certain
assets as contemplated by the Purchase and Sale Agreement dated November 9, 2017 among MPC, MECO and additional parties thereto
(the MECO PSA), to which we are not a party. Under the MECO PSA, 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. A Certificate of Merger for the merger transaction
was filed with the Secretary of State of Texas on December 5, 2017.
Also
on December 1, 2017, the transactions contemplated by the Purchase Agreement that TEI entered into with MPC closed. Under the
Purchase Agreement, which was entered into on November 14, 2017, TEI acquired beneficial ownership of certain of MPCs assets,
including acreage and wellbores located in Ward County, Texas (the Ward County Assets). As consideration under the
Purchase Agreement, at closing TEI issued to MPC an unsecured promissory note in the principal amount of $3,250,000, payable in
monthly installments of interest only beginning on January 1, 2018, at the rate of 5% per annum, with the entire principal amount
together with all accrued interest due and payable on January 1, 2021. In connection with TEIs acquisition of beneficial
ownership in the Ward County Assets, MPC sold those same assets, on behalf of TEI, to MECO at closing of the MECO PSA, and accordingly,
TEI received $3,250,000 in cash for its beneficial interest in the Ward County Assets. Additionally, at closing of the MECO PSA,
MPC paid TEI a performance fee of $2,781,500 in cash as compensation for TEIs marketing and selling the Winkler County
assets of MPC and the Ward County Assets as a package to MECO.
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. Our operating partner, MECO had begun the pilot hole on the project. The plan is to evaluate the various potential
zones for a lateral leg to be drilled once logging is completed. We expect the most likely target to be the Wolfcamp A interval.
The well is on 320 newly acquired acres offsetting the original leasehold we entered into in December, 2017. The 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 at a cash cost of $447,847 in July, 2018. Our carried interest in the first
well, as outlined in the agreement, was originally planned to be on the first acreage acquired. That carried interest is being
applied to this new well and will allow MECO to drill and produce potential revenues sooner than originally planned. The primary
leasehold is a 320-acre block directly west of the current position and will allow for 5,000-foot lateral wells to be drilled.
The well was completed and began production in October, 2018 and is producing currently. Recently the operator has informed us
that there will be no planned additional wells in the acreage this year. All acreage is presently held by production.
TORCHLIGHT
ENERGY RESOURCES, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
OIL & GAS PROPERTIES - continued
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.
Assets
Held for Sale
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 December 31, 2019. 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, these criteria have not been met and no assets are classified as held for
sale as of December 31, 2019.
5.
RELATED PARTY PAYABLES
As
of December 31, 2019 and 2018, related party payables of $45,000, and accrued payroll was $996,176 and $816,176,
respectively, consisting of accrued and unpaid compensation due to our executive officers.
6.
COMMITMENTS AND CONTINGENCIES
Leases
The
Company had a noncancelable lease for its office premises that expired on November 30, 2019 and which required the payment of
base lease amounts and executory costs such as taxes, maintenance and insurance. Effective June 1, 2019 the Company entered into
an agreement with a company that had been subleasing a portion of its office space to become the primary obligor on the lease
and to assume full responsibility for lease payments after lease expiration on November 30, 2019. The Company continued after
November 30, 2019 as a subtenant on a month to month basis.
Legal
Matters
On
January 31, 2020, Torchlight Energy Resources, Inc. and its wholly owned subsidiaries Torchlight Energy, Inc. and Torchlight Energy
Operating, LLC were served with a lawsuit brought by Goldstone Holding Company, LLC (Goldstone Holding Company, LLC v. Torchlight
Energy, Inc., et al., in the 160th Judicial District Court of Dallas County, Texas). On February 24, 2020, Torchlight Energy
Resources, Inc., Torchlight Energy, Inc., and Torchlight Energy Operating, LLC timely filed their answer, affirmative defenses,
and requests for disclosure. The suit, which seeks monetary relief over $1 million, makes unspecified allegations of misrepresentations
involving a November 2015 participation agreement and a 2016 amendment to the participation agreement. We have denied the allegations
and have asserted several affirmative defenses including but not limited to, that the suit is barred by the applicable statute
of limitations, that the claims have been released, and that the claims are barred because of contractual disclaimers between
sophisticated parties.
Environmental
matters
The
Company is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and
regulations applicable to the Companys operations could require substantial capital expenditures or could adversely affect
its operations in other ways that cannot be predicted at this time. As of December 31, 2019 and 2018, no amounts
had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund
any future material amounts.
7.
STOCKHOLDERS EQUITY
Common
Stock
During
the years ended December 31, 2019 and 2018, the Company issued 4,686,100 and 5,750,000 shares of common stock, respectively, for
cash of $3,512,917 and $6,049,734.
During
the years ended December 31, 2019 and 2018, the Company issued 416,667 and -0- shares of common stock, respectively, for a subscription
of $183,963 and $-0-.
During
the years ended December 31, 2019 and 2018, the Company issued 312,593 and 450,000 shares of common stock, respectively, with
total fair values of $365,400 and $545,000 as compensation for services.
During
the years ended December 31, 2019 and 2018, the Company issued 167,845 and -0- shares of common stock respectively, for lease
interests with total fair values of $183,714 and $-0-.
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
STOCKHOLDERS EQUITY - continued
During
the years ended December 31, 2019 and 2018, the Company issued 100,000 and -0- shares of common stock respectively, for lease
extensions with total fair values of $125,000 and $-0-.
During
the years ended December 31, 2019 and 2018, the Company issued 45,455 and -0- shares of common stock respectively, in conversions
of notes payable valued at $50,000 and $-0-.
During
the years ended December 31, 2019 and 2018, the Company issued 202,316 and 172,342 shares of common stock respectively, in payment
in kind on notes payable valued at $314,108 and $221,024.
During
the years ended December 31, 2019 and 2018, the Company issued 168,690 and 400,000 shares of common stock, respectively, resulting
from warrant and option exercises for consideration totaling $184,843 and $200,000.
Warrants
and Options
During
the years ended December 31, 2019 and 2018, the Company issued and vested 100,000 and 1,220,000 warrants, respectively, with total
fair values of $99,000 and $510,575, respectively, as compensation for services and 2,032,122 warrants in connection with financings
in 2019.
During
the years ended December 31, 2019 and 2018, the Company issued 700,000 and 600,000 stock options, respectively. The Company vested
700,000 and 700.000 stock options, respectively, with total fair values of $236,500 and $343,750 respectively, as compensation
for services.
A
summary of warrants outstanding as of December 31, 2019 and 2018 by exercise price and year of expiration is presented below:
Exercise
|
|
|
Expiration Date In
|
|
|
|
|
Price
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
12/31/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.70
|
|
|
|
420,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
420,000
|
|
$
|
0.80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,666,667
|
|
|
|
1,666,667
|
|
$
|
1.03
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
$
|
1.14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
$
|
1.21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
$
|
1.35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
365,455
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
365,455
|
|
$
|
1.40
|
|
|
|
321,737
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
321,737
|
|
$
|
1.63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
$
|
1.64
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
$
|
1.80
|
|
|
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,250,000
|
|
$
|
2.00
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
$
|
2.23
|
|
|
|
339,901
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
339,901
|
|
|
|
|
|
|
2,331,638
|
|
|
|
520,000
|
|
|
|
365,455
|
|
|
|
720,000
|
|
|
|
100,000
|
|
|
|
1,666,667
|
|
|
|
5,703,760
|
|
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
STOCKHOLDERS EQUITY - continued
Exercise
|
|
|
Expiration Date In
|
|
|
|
|
Price
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
12/31/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.70
|
|
|
|
-
|
|
|
|
420,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
420,000
|
|
$
|
0.77
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
$
|
1.00
|
|
|
|
25,116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,116
|
|
$
|
1.03
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
$
|
1.08
|
|
|
|
37,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,500
|
|
$
|
1.14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
600,000
|
|
$
|
1.21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
120,000
|
|
$
|
1.40
|
|
|
|
-
|
|
|
|
1,121,736
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,121,736
|
|
$
|
1.50
|
|
|
|
-
|
|
|
|
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
$
|
1.64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
$
|
1.80
|
|
|
|
-
|
|
|
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,250,000
|
|
$
|
2.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400,000
|
|
$
|
2.23
|
|
|
|
-
|
|
|
|
832,512
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
832,512
|
|
$
|
2.50
|
|
|
|
35,211
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,211
|
|
$
|
3.50
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
$
|
4.50
|
|
|
|
700,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
$
|
6.00
|
|
|
|
22,580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,580
|
|
$
|
7.00
|
|
|
|
700,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
|
|
|
|
|
1,635,407
|
|
|
|
3,624,248
|
|
|
|
820,000
|
|
|
|
-
|
|
|
|
720,000
|
|
|
|
6,799,655
|
|
A
summary of stock options outstanding as of December 31, 2019 and 2018 by exercise price and year of expiration is presented below:
Exercise
|
|
|
Expiration Date In
|
|
|
|
|
Price
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
12/31/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.85
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
600,000
|
|
$
|
0.97
|
|
|
|
-
|
|
|
|
259,742
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259,742
|
|
$
|
1.10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
800,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
800,000
|
|
$
|
1.19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
|
|
-
|
|
|
|
700,000
|
|
$
|
1.57
|
|
|
|
4,500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,500,000
|
|
$
|
1.63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,026
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,026
|
|
|
|
|
|
|
4,500,000
|
|
|
|
259,742
|
|
|
|
858,026
|
|
|
|
700,000
|
|
|
|
600,000
|
|
|
|
6,917,768
|
|
Exercise
|
|
|
Expiration
Date In
|
|
|
|
|
Price
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
12/31/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.97
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259,742
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259,742
|
|
$
|
1.10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
800,000
|
|
|
|
-
|
|
|
|
800,000
|
|
$
|
1.19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
600,000
|
|
$
|
1.57
|
|
|
|
1,497,163
|
|
|
|
4,500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,997,163
|
|
$
|
1.63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,026
|
|
|
|
-
|
|
|
|
58,026
|
|
$
|
1.79
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
|
|
|
1,497,163
|
|
|
|
4,800,000
|
|
|
|
259,742
|
|
|
|
858,026
|
|
|
|
600,000
|
|
|
|
8,014,931
|
|
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
STOCKHOLDERS EQUITY - continued
At
December 31, 2019 and 2018, the Company had reserved 12,621,528 and 14,814,586 common shares for future exercise of warrants and options.
Warrants
and options granted were valued using the Black-Scholes Option Pricing Model. The assumptions used in calculating the fair value
of the warrants and options issued were as follows:
2019
|
|
|
|
Risk-free
interest rate
|
1.65%
- 2.46%
|
Expected
volatility of common stock
|
77%
- 107%
|
Dividend
yield
|
0.00%
|
Discount
due to lack of marketability
|
20%
|
Expected
life of option/warrant
|
Three
to Five Years
|
|
|
2018
|
|
|
|
Risk-free
interest rate
|
2.15%
- 2.83%
|
Expected
volatility of common stock
|
114%
- 119%
|
Dividend
yield
|
0.00%
|
Discount
due to lack of marketability
|
20%
|
Expected
life of option/warrant
|
2.75
to Five Years
|
8.
INCOME TAXES
The
Company recorded no income tax provision for 2019 and 2018 because of losses incurred. The Company has placed a full valuation
allowance against net deferred tax assets because future realization of these assets is not assured.
There are no uncertain tax positions
accounted for in this tax provision.
The
following is a reconciliation between the federal income tax benefit computed at statutory federal income tax rates and actual
income tax provision for the years ended December 31, 2019 and 2018:
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Federal income tax benefit at statutory rate
|
|
$
|
(2,066,273
|
)
|
|
$
|
(1,221,483
|
)
|
Permanent Differences
|
|
|
1,336
|
|
|
|
505
|
|
Annual reconciling adjustment
|
|
|
10,949
|
|
|
|
1,449,429
|
|
Change in valuation allowance
|
|
|
2,053,988
|
|
|
|
(228,451
|
)
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
8.
INCOME TAXES - continued
The
tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December
31, 2019 and 2018 are as follows:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
14,066,645
|
|
|
$
|
11,968,500
|
|
Stock based compensation
|
|
|
4,688,694
|
|
|
|
4,490,775
|
|
Disallowed interest expense
|
|
|
285,205
|
|
|
|
69,505
|
|
Other
|
|
|
288,030
|
|
|
|
302,131
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Investment in oil and gas properties
|
|
|
(3,322,760
|
)
|
|
|
(2,879,086
|
)
|
Net deferred tax assets and liabilities
|
|
|
16,005,814
|
|
|
|
13,951,825
|
|
Less valuation allowance
|
|
|
(16,005,814
|
)
|
|
|
(13,951,825
|
)
|
Total deferred tax assets and liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company had a net deferred tax asset related to federal
net operating loss carryforwards of $66,984,025 and $63,070,504 at December 31, 2019 and 2018, respectively. The federal net operating
loss carryforward will begin to expire in 2034. Realization of the deferred tax asset is dependent, in part, on generating sufficient
taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net
deferred tax asset because future realization of these assets is not assured.
9.
PROMISSORY NOTES
On April 10, 2017, the Company sold to investors in a private
transaction two 12% unsecured promissory notes with a total amount of $8,000,000 in principal amount. Interest only is due and
payable on these notes each month at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable
at maturity on April 10, 2020. The holders of these notes will also receive annual payments of common stock at the rate of 2.5%
of principal amount outstanding, based on a volume-weighted average price. Both notes were sold at an original issue discount of
5.75% and accordingly, we received total proceeds of $7,540,000 from the investors. We used the proceeds for working capital and
general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior
debt.
These
12% promissory notes allow for early redemption. The notes also contain certain covenants under which we have agreed that, except
for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred
in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the
payment in full of the 12% notes, unless consented to by the holders.
The
effective interest rate is 16.15%.
On
April 24, 2017, we used $2,509,500 of the proceeds from this financing to redeem and repay a portion of the outstanding 12% Series
B Convertible Unsecured Promissory Notes. Separately, $1,000,000 of the principal amount of the Series B Notes plus accrued interest
was converted into 1,007,890 shares of common stock and $64,297 was rolled into the new debt financing.
On
February 6, 2018, we sold to an investor in a private transaction a 12% unsecured promissory note with a principal amount of $4,500,000.
Interest only is due and payable on the note each month at the rate of 12% per annum, with a balloon payment of the outstanding
principal due and payable at maturity on April 10, 2020. The holder of the note will also receive annual payments of common stock
at the rate of 2.5% of principal amount outstanding, based on a volume-weighted average price. We sold the note at an original
issue discount of 3.73% and accordingly, we received total proceeds of $4,332,150 from the investor. We used the proceeds for
working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital
and repayment of prior debt.
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
9.
PROMISSORY NOTES - continued
This
12% promissory note allows for early redemption, provided that if we redeem before February 6, 2019, we must pay the holder all
unpaid interest and common stock payments on the portion of the note redeemed that would have been earned through February 6,
2019. The note also contains certain covenants under which we have agreed that, except for financing arrangements with established
commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will
not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% note, unless consented
to by the holder.
The
effective interest rate is 15.88%.
In
April 2019 and 2018, respectively, the holders of the notes described above received 202,316 and 172,342 shares of common stock
as a payment in kind representing the annual payments of common stock due at the rate of 2.5% of principal amount outstanding
as of April 10 based on a volume-weighted average price calculation.
Unsecured
promissory note transactions through December 31, 2019 are summarized as follows:
Unsecured promissory note balance - December 31, 2018
|
|
$
|
11,862,080
|
|
|
|
|
|
|
Accretion of discount and amortization of debt issuance costs
|
|
|
515,750
|
|
|
|
|
|
|
Unsecured promissory note balance - December 31, 2019
|
|
$
|
12,377,830
|
|
$8,564,297
of the 2017 and 2018 Note have balloon payments of outstanding principal due and payable at maturity on April 10, 2020.
The
maturity date of the remaining $4 million in 2017 Notes was extended to April 10, 2021 and is classified as a long term
liability in our consolidated balance sheet.
On
October 17, 2018, we sold to certain investors in a private transaction 16% Series C Unsecured Convertible Promissory Notes with
a total principal amount of $6,000,000. Interest and principal were due and payable on the notes in one balloon payment at maturity
on April 17, 2020. The notes were convertible, at the election of the holders, into an aggregate 6% working interest in certain
oil and gas leases in Hudspeth County, Texas, known as our Orogrande Project. After an analysis of the transaction
and a review of applicable accounting pronouncements, management concluded that the notes issued on October 17, 2018 which contain
a conversion right for holders to convert into a working interest in the Orogrande Project of the Company, meet a specific scope
exception to the provisions requiring derivative accounting.
The
notes allowed us to redeem them early only upon the event of a fundamental transaction, such as a merger or sale of substantially
all our assets. The notes provided that the noteholders may accelerate and declare any and all of the obligations under the notes
to be immediately due and payable in the event of default, such as nonpayment, failure to perform required conversions, failure
to perform any covenant or agreement under the notes, an insolvency event, or certain defaults or judgments. As part of the sale
of the of the notes, the noteholders required that McCabe Petroleum Corporation, a Texas corporation owned by our Chairman Gregory
McCabe (MPC), provide them a put option whereby they had the right to have MPC purchase from them any unpaid principal
amount due on the notes. Additionally, the notes provided that if there was a fundamental transaction, Mr. McCabe would be required
to pay a fee to each noteholder that elects not to convert or require MPC to purchase the principal amount under the note, which
fee would be equal to such noteholders pro-rata share of a total fee amount of $1,500,000.
We
received total proceeds of $6,000,000 from the sale of the notes, of which $3,000,000 was used to pay back the promissory note
issued to MPC on December 1, 2017, which note was due on December 31, 2020. We used the remaining proceeds for working capital
and general corporate purposes, which includes, without limitation, drilling and lease acquisition capital.
Prior
to entering into the above transactions, our Board of Directors formed a special committee composed of independent directors to
analyze and authorize the transactions on behalf of Torchlight Energy Resources, Inc. and determine whether the transactions are
fair to the company. In this role, the special committee engaged an independent financial consulting firm which rendered a fairness
opinion deeming that the transactions were fair to the company, from a financial point of view, and contained terms no less favorable
to the company than those that could be obtained in arms length transactions.
See
Note 11 – Subsequent Events below for disclosure of the conversion of the notes which occurred on March 9,
2020.
In
February and March, 2019 the Company raised a total of $2,000,000 from investors through the sale of 14% Series D Unsecured Convertible
Promissory Notes. Principal is payable in a lump sum at maturity on May 11, 2020 with payments of interest payable monthly at
the rate of 14% per annum. Holders of the notes have the right to convert principal and interest at any time into common stock
at a conversion price of $1.08 per share. The Company has the right to redeem the notes at any time, provided that the redemption
amount must include all interest that would have been earned through maturity. The Company evaluated the notes for beneficial
conversion features and derivative accounting criteria and concluded that derivative accounting treatment is not applicable.
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
9.
PROMISSORY NOTES - continued
In
July 2019, the Company issued 8% Unsecured Convertible Promissory notes in the amount of $2,010,000 together with warrants to
purchase our common stock. The principal and accrued interest on the notes are convertible into shares of common stock at $1.10
per common share at any time after the original issue date. Along with the notes, the three year warrants equal to 20% of the
number of shares of common stock issuable upon the conversion of the notes were issued to note holders. The warrants are exercisable
at $1.35 per share.
Warrants
issued along with the notes meet the requirements of the scope exemptions in ASC 815-10-15-74 and are thus classified as equity
upon issuance. The Company determined the fair value of the warrants using the Black Scholes pricing formula and is recognized
as a discount on the carrying amount of the notes and is credited to additional paid in capital. The fair value of the warrants
at the issuance date was determined to be $240,455.
A
beneficial conversion feature (BCF) of a convertible note is normally characterized as the convertible portion feature
that provides a rate of conversion that is below market value or in the money when issued. The BCF related to the
issuance of the notes was recorded at the issuance date. The BCF was measured using the intrinsic value method and is shown as
a discount to the carrying amount of the convertible note and is credited to additional paid in capital. The intrinsic value of
the BCF at the issuance date of the notes was determined to be $1,145,546.
The
allocated fair values of the BCF and the warrants was recorded as a debt discount from the face amount of the notes and such discount
is being accreted over the expected term of the notes and is charged to interest expense. The Company recognized interest expense
for 2019 of $199,972 from the amortization of debt discount from these notes.
Effective
October 31, 2019, the Company issued 10% Unsecured Convertible Promissory notes in the amount of $540.000. Principal and interest
are due at maturity on December 3, 2020. The principal and accrued interest on the notes are convertible into shares of common
stock at $.75 per common share at any time after the original issue date
The
Company evaluated the July, 2019 and the October, 2019 notes for beneficial conversion features and derivative accounting criteria and concluded that
derivative accounting treatment was not applicable.
10.
ASSET RETIREMENT OBLIGATIONS
The
following is a reconciliation of the asset retirement obligations liability through December 31, 2019:
Asset retirement obligations – December 31, 2018
|
|
$
|
14,353
|
|
|
|
|
|
|
Accretion expense
|
|
|
569
|
|
Estimated liabilities recorded
|
|
|
8,397
|
|
|
|
|
|
|
Asset retirement obligations – December 31, 2019
|
|
$
|
23,319
|
|
11.
SUBSEQUENT EVENTS
On
October 17, 2018, we sold to certain investors in a private transaction 16% Series C Unsecured Convertible Promissory Notes with
a total principal amount of $6,000,000, with interest and principal due and payable on the notes in one balloon payment at maturity
on April 17, 2020 (at maturity a total of $1,500,000 in interest would be due and payable on the notes). On March 9, 2020, each
of the noteholders entered into a Conversion Agreement with us and our subsidiary Hudspeth Oil Corporation (“Hudspeth”),
under which the noteholders elected to convert the notes, in accordance with their terms, into an aggregate 6% working interest
(of all such holders) in certain oil and gas leases in Hudspeth County, Texas, known as our “Orogrande Project.” Principal
of $6,000,000 and approximately $1,339,000 of accrued interest were converted at March 9, 2020.
The
principal amount converted on March 9, 2020 of $6,000,000 plus interest accrued to December 31, 2019 of $1,157,260 is classified
as a long term liability in the accompanying consolidated balance sheet .
The
Conversion Agreements also provided additional consideration to the noteholders including a limited carry, a top-off obligation
of us and Hudspeth, and warrants to purchase a total of 750,000 restricted shares of our common stock, which warrants will have
a term of five years and an exercise price of $0.70 per share. The limited carry provides that for the remainder of the 2020 calendar
year, Hudspeth will pay all costs and expenses attributable to the assigned working interests, except where prohibited by law
or regulation. The top-off obligation provides that, subject to the terms and conditions of the Conversion Agreements, if (a)
we sell our entire working interest in the Orogrande Project, (b) as part of such sale, the holders entire working interests
are sold, and (c) the gross proceeds received by all the holders in such transaction are equal to less than $9,000,000; then we
must pay the holders an amount equal to $9,000,000, (i) less gross proceeds the holders received in the transaction, (ii) less
the amount of the carry the holders received under the Conversion Agreements, and (iii) less any gross proceeds the holders received
in any farmouts occurring prior to the transaction.
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
11.
SUBSEQUENT EVENTS - continued
On February
20, 2020, the Company extended the maturity on $4 million of the 12% unsecured promissory notes previously due in April, 2020.
The maturity date of the subject promissory note has been extended for one year, from April 10, 2020 to April 10, 2021 and is
classified as a long term liability in the accompanying consolidated balance sheet.
As
part of the terms of the referenced extension agreement, the Company paid the noteholder a fee of $80,000. The promissory note
was originally issued in April 2017, and provides for monthly payments of interest only at the rate of 12% per annum, with a balloon
payment of the outstanding principal due and payable at maturity. The noteholder also receives annual payments of common stock
at the rate of 2.5% of the principal amount outstanding, based on a volume-weighted average price.
On
January 16, 2020, the Company announced the closing of its underwritten public offering of 3,285,715 shares of its common stock
at a public offering price of $0.70 per share, for total gross proceeds of approximately $2.3 million, before deducting underwriting
discounts and other offering expenses payable by the Company.
A
shelf registration statement relating to the shares of common stock issued in the offering was filed with the Securities and Exchange
Commission (the SEC).
TORCHLIGHT
ENERGY RESOURCES, INC.
SUPPLEMENTAL
INFORMATION ON OIL AND GAS EXPLORATION
AND
PRODUCTION ACTIVITIES
(Unaudited)
The
unaudited supplemental information on oil and gas exploration and production activities has been presented in accordance with
Financial Accounting Standards Board Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas
and the SECs final rule, Modernization of Oil and Gas Reporting.
Investment
in oil and gas properties during the years ended December 31, 2019 and 2018 is detailed as follows:
|
|
2019
|
|
|
2018
|
|
Property acquisition costs
|
|
$
|
-
|
|
|
$
|
1,072,047
|
|
Development costs
|
|
$
|
6,641,467
|
|
|
$
|
9,191,041
|
|
Exploratory costs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
9,415,551
|
|
|
$
|
10,263,088
|
|
Property
acquisition costs presented above exclude interest capitalized into the full cost pool of $2,858,753 in 2019 and $2,084,026 in
2018.
Property
acquisition cost relates to the Companys acquisition of additional working interests in the Orogrande Project in west Texas
and the acquisition of the Warwink Project, also in west Texas. The development costs include work in the Orogrande, Hazel, and
Warwink projects in west Texas. No development costs were incurred for Oklahoma properties in 2019.
Oil
and Natural Gas Reserves
Reserve
Estimates
SEC
Case. The following tables sets forth, as of December 31, 2019, our estimated net proved oil and natural gas reserves, the
estimated present value (discounted at an annual rate of 10%) of estimated future net revenues before future income taxes (PV-10)
and after future income taxes (Standardized Measure) of our proved reserves and our estimated net probable oil and natural gas
reserves, each prepared using standard geological and engineering methods generally accepted by the petroleum industry and in
accordance with assumptions prescribed by the Securities and Exchange Commission (SEC). All of our reserves are
located in the United States.
The
PV-10 value is a widely used measure of value of oil and natural gas assets and represents a pre-tax present value of estimated
cash flows discounted at ten percent. PV-10 is considered a non-GAAP financial measure as defined by the SEC. We believe that
our PV-10 presentation is relevant and useful to our investors because it presents the estimated discounted future net cash flows
attributable to our proved reserves before taking into account the related future income taxes, as such taxes may differ among
various companies. We believe investors and creditors use PV-10 as a basis for comparison of the relative size and value of our
proved reserves to the reserve estimates of other companies. PV-10 is not a measure of financial or operating performance under
GAAP and neither it nor the Standardized Measure is intended to represent the current market value of our estimated oil and natural
gas reserves. PV-10 should not be considered in isolation or as a substitute for the standardized measure of discounted future
net cash flows as defined under GAAP.
The
estimates of our proved reserves and the PV-10 set forth herein reflect estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future development costs, using prices and costs under existing
economic conditions at December 31, 2019. For purposes of determining prices, we used the average of prices received for each
month within the 12-month period ended December 31, 2019, adjusted for quality and location differences, which was $62.04 per
barrel of oil and $3.10 per MCF of gas. This average historical price is not a prediction of future prices. The amounts shown
do not give effect to non-property related expenses, such as corporate general administrative expenses and debt service, future
income taxes or to depreciation, depletion and amortization.
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
|
|
Reserves
|
|
|
Future Net Revenue (M$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present Value
Discounted
|
|
Category
|
|
Oil (Bbls)
|
|
|
Gas (Mcf)
|
|
|
Total (BOE)
|
|
|
Total
|
|
|
at 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Producing
|
|
|
14,700
|
|
|
|
21,100
|
|
|
|
18,217
|
|
|
$
|
634
|
|
|
$
|
514
|
|
Proved Nonproducing
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total Proved
|
|
|
14,700
|
|
|
|
21,100
|
|
|
|
18,217
|
|
|
$
|
634
|
|
|
$
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized Measure of Future Net Cash Flows Related to Proved Oil and Gas Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Probable Undeveloped
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
December 31, 2018
|
|
|
|
Reserves
|
|
|
Future Net Revenue (M$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted
|
|
Category
|
|
Oil (Bbls)
|
|
|
Gas (Mcf)
|
|
|
Total (BOE)
|
|
|
Total
|
|
|
at 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Producing
|
|
|
177,300
|
|
|
|
51,100
|
|
|
|
185,817
|
|
|
$
|
4,027
|
|
|
$
|
2,029
|
|
Proved Undeveloped
|
|
|
797,500
|
|
|
|
105,800
|
|
|
|
815,133
|
|
|
$
|
15,313
|
|
|
$
|
2,895
|
|
Total Proved
|
|
|
974,800
|
|
|
|
156,900
|
|
|
|
1,000,950
|
|
|
$
|
19,340
|
|
|
$
|
4,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized Measure of Future Net Cash Flows Related to Proved Oil and Gas Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Probable Undeveloped
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
upward revisions of previous estimates from 2017 to 2018 of proved reserves of 972,500 BBLS and 113,100 MCF resulted primarily
from 2018 reserve report calculations for the Companys properties which included reserves from producing properties in
the Hazel and Warwink Projects for the first time. The decrease in producing reserves from 2018 to 2019 from 185,817 to 18,217
BOE is related to the shut in of the Hazel Flying B #3 well in May, 2019 and the decline in production in the Oklahoma properties.
Neither of these properties were economic under the 2019 Reserve Report.
Reserve
values as of December 31, 2019 are related to a single producing well in the Warwink Project.
BOE
equivalents are determined by combining barrels of oil with MCF of gas divided by six.
Standardized
Measure of Oil & Gas Quantities - Volume Rollforward
|
Year
Ended December 31, 2019
|
The
following table sets forth the Companys net proved reserves, including the changes therein, and proved developed reserves:
|
|
Crude Oil (Bbls)
|
|
|
Natural Gas (Mcf)
|
|
|
BOE
|
|
TOTAL PROVED RESERVES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
974,780
|
|
|
|
156,940
|
|
|
|
1,000,937
|
|
Revisions of previous estimates
|
|
|
(944,985
|
)
|
|
|
(121,400
|
)
|
|
|
(965,218
|
)
|
Extensions, discoveries and other additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Divestiture of Reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Acquisition of Reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Production
|
|
|
(15,085
|
)
|
|
|
(14,410
|
)
|
|
|
(17,487
|
)
|
End of period
|
|
|
14,710
|
|
|
|
21,130
|
|
|
|
18,233
|
|
Standardized
Measure of Oil & Gas Quantities - Volume Rollforward
|
Year
Ended December 31, 2018
|
The
following table sets forth the Companys net proved reserves, including the changes therein, and proved developed reserves:
|
|
Crude Oil (Bbls)
|
|
|
Natural Gas (Mcf)
|
|
|
BOE
|
|
TOTAL PROVED RESERVES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
2,300
|
|
|
|
43,800
|
|
|
|
9,600
|
|
Revisions of previous estimates
|
|
|
21,257
|
|
|
|
(7,709
|
)
|
|
|
19,972
|
|
Extensions, discoveries and other additions
|
|
|
974,110
|
|
|
|
138,670
|
|
|
|
997,222
|
|
Divestiture of Reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Acquisition of Reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Production
|
|
|
(22,887
|
)
|
|
|
(17,821
|
)
|
|
|
(25,857
|
)
|
End of period
|
|
|
974,780
|
|
|
|
156,940
|
|
|
|
1,000,937
|
|
Standardized
Measure of Oil & Gas Quantities
|
Year
Ended December 31, 2019 & 2018
|
The
standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves is as follows:
|
|
2019
|
|
|
2018
|
|
Future cash inflows
|
|
$
|
843,040
|
|
|
$
|
46,335,070
|
|
Future production costs
|
|
|
(196,670
|
)
|
|
|
(15,042,900
|
)
|
Future development costs
|
|
|
-
|
|
|
|
(11,740,000
|
)
|
Future income tax expense
|
|
|
-
|
|
|
|
-
|
|
Future net cash flows
|
|
|
646,370
|
|
|
|
19,552,170
|
|
10% annual discount for estimated timing of cash flows
|
|
|
(107,070
|
)
|
|
|
(14,210,840
|
)
|
Standardized measure of discounted future net cash flows related to proved reserves
|
|
$
|
539,300
|
|
|
$
|
5,341,330
|
|
A
summary of the changes in the standardized measure of discounted future net cash flows applicable to proved oil and natural gas
reserves is as follows:
|
|
2019
|
|
|
2018
|
|
Balance, beginning of period
|
|
$
|
5,341,330
|
|
|
$
|
123,268
|
|
Net change in sales and transfer prices and in production (lifting) costs related to future production
|
|
|
1,176,090
|
|
|
|
40,762
|
|
Changes in estimated future development costs
|
|
|
1,851,760
|
|
|
|
(8,718,999
|
)
|
Net change due to revisions in quantity estimates
|
|
|
(5,896,344
|
)
|
|
|
289,740
|
|
Accretion of discount
|
|
|
(868,787
|
)
|
|
|
1,036
|
|
Other
|
|
|
(1,763,161
|
)
|
|
|
(385,278
|
)
|
|
|
|
|
|
|
|
|
|
Net change due to extensions and discoveries
|
|
|
-
|
|
|
|
14,467,005
|
|
Net change due to sales of minerals in place
|
|
|
-
|
|
|
|
-
|
|
Sales and transfers of oil and gas produced during the period
|
|
|
(294,912
|
)
|
|
|
(476,204
|
)
|
Previously estimated development costs incurred during the period
|
|
|
993,324
|
|
|
|
-
|
|
Net change in income taxes
|
|
|
-
|
|
|
|
-
|
|
Balance, end of period
|
|
$
|
539,300
|
|
|
$
|
5,341,330
|
|
Due
to the inherent uncertainties and the limited nature of reservoir data, both proved and probable reserves are subject to change
as additional information becomes available. The estimates of reserves, future cash flows, and present value are based on various
assumptions, including those prescribed by the SEC, and are inherently imprecise. Although we believe these estimates are reasonable,
actual future production, cash flows, taxes, development expenditures, operating expenses, and quantities of recoverable oil and
natural gas reserves may vary substantially from these estimates.
In
estimating probable reserves, it should be noted that those reserve estimates inherently involve greater risk and uncertainty
than estimates of proved reserves. While analysis of geoscience and engineering data provides reasonable certainty that proved
reserves can be economically producible from known formations under existing conditions and within a reasonable time, probable
reserves involve less certainty than reserves with a higher classification due to less data to support their ultimate recovery.
Probable reserves have not been discounted for the additional risk associated with future recovery. Prospective investors should
be aware that as the categories of reserves decrease with certainty, the risk of recovering reserves at the PV-10 calculation
increases. The reserves and net present worth discounted at 10% relating to the different categories of proved and probable have
not been adjusted for risk due to their uncertainty of recovery and thus are not comparable and should not be summed into total
amounts.
Reserve
Estimation Process, Controls and Technologies
The
reserve estimates, including PV-10 estimates, set forth above were prepared by PeTech Enterprises, Inc. for the Companys
Properties in Oklahoma. A copy of their full reports with regard to our reserves is attached as Exhibit 99.1 to this annual report
on Form 10-K. These calculations were prepared using standard geological and engineering methods generally accepted by the petroleum
industry and in accordance with SEC financial accounting and reporting standards.
Results of Operations for Oil and Gas Producing Activities
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
Total
|
|
|
Texas
|
|
|
Oklahoma
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas revenue
|
|
$
|
746,263
|
|
|
$
|
725,668
|
|
|
$
|
20,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
$
|
451,325
|
|
|
$
|
426,096
|
|
|
$
|
25,229
|
|
Depreciation, depletion, and amortization
|
|
$
|
4,388,868
|
|
|
$
|
3,814,938
|
|
|
$
|
573,930
|
|
Exploration expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
4,840,193
|
|
|
$
|
4,241,034
|
|
|
$
|
599,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations (excluding corporate overhead and interest costs)
|
|
$
|
(4,093,930
|
)
|
|
$
|
(3,515,366
|
)
|
|
$
|
(578,564
|
)
|