NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Torchlight
Energy Resources, Inc. 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.
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.
At
December 31, 2020, the Company had not yet achieved profitable operations. We had a net loss of $12,781,896 for the year ended
December 31, 2020 and had accumulated losses of $111,935,597 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, 2020 of $2,375,509. 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, institutional, or public 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.
The
COVID-19 pandemic caused the global economy to enter a recessionary period, which may be prolonged and severe. During 2020, the
exploration and production industry faced the dual impact of demand deterioration from COVID-19 and market oversupply from increased
production, which caused oil and natural gas prices to decline significantly for most of the year. It is uncertain how the pandemic
may impact our future operations.
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, convertible note receivable,
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. The recorded value of the Companys convertible
note receivable reflects the amount which management believes approximates fair value.
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, 2020, no valuation allowance was
considered necessary. Bad debt expense for 2020 and 2019 was $15,606 and $34,500, respectively.
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 quarterly 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, 2020 and 2019, the Company capitalized $2,353,700
and $2,858,753, 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 $2,108,301 and $1,494,769 for the years ended December 31, 2020 and 2019, respectively,
to recognize the adjustment required by the ceiling test.
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 to 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 statements of operation. 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.
The
Company values warrant and option awards using the Black-Scholes option pricing model.
Revenue
recognition – 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.
Revenues
from oil and gas sales are detailed as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil sales
|
|
$
|
187,755
|
|
|
$
|
716,014
|
|
|
|
|
|
|
|
|
|
|
Gas sales
|
|
|
5,624
|
|
|
|
30,249
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
193,379
|
|
|
$
|
746,263
|
|
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.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
3.
|
SIGNIFICANT
ACCOUNTING POLICIES - continued
|
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 revenue. 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 11,027,390
shares 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, 2020 and 2019.
Recent
accounting pronouncements not yet adopted –
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to
measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt
securities. Under current GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred.
The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses
for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company
expects to collect over the instruments contractual life. ASU 2016-13 also amends the credit loss measurement guidance
for available-for sale debt securities and beneficial interests in securitized financial assets. The guidance is applicable for
fiscal years beginning after December 15, 2019 and interim periods within those years, however, the FASB extended the effective
date for smaller reporting companies to fiscal years beginning after December 15, 2022. The Company is currently evaluating the
potential impact of the adoption of this standard on its related disclosures.
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 18, 2021, the date of issuance of these financial
statements. Subsequent events are disclosed in Note 11.
The
following table presents the capitalized costs for oil & gas properties of the Company :
Unevaluated
costs as of December 31, 2020 include cumulative costs on developing projects including the Orogrande and Hazel projects in West
Texas.
The
Company periodically adjusts for the separation of evaluated versus unevaluated costs within its full cost pool to recognize the
value impairment related to the expiration of, or changes in market value, of unevaluated leases. The impact of reclassifications
as they become necessary is to increase the basis for calculation of future periods depletion, depreciation and amortization
which effectively recognizes the impairment on the consolidated statement of operations over future periods. Reclassified costs
also become evaluated costs for purposes of ceiling tests and which may cause recognition of increased impairment expense in future
periods. The remaining cumulative unevaluated costs which have been reclassified within our full cost pool totals $5,881,635 as of December
31, 2020. As of December 31, 2020, evaluated costs are $-0- since we have no proved reserve value associated with our properties.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
4.
|
OIL
& GAS PROPERTIES - continued
|
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
We
are an energy company engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas properties
in the United States. We are primarily focused on the acquisition of early stage projects, the development and delineation of
these projects, and then the monetization of those assets once these activities are completed.
Since
2010, our primary focus has been the development of interests in oil and gas projects we hold in the Permian Basin in West Texas.
We also hold minor interests in certain other oil and gas projects in Central Oklahoma that we are in the process of divesting.
As
of December 31, 2020, we had interests in three oil and gas projects: the Orogrande Project in Hudspeth County, Texas, the Hazel
Project in Sterling, Tom Green, and Irion Counties, Texas, and two wells in Central Oklahoma.
Orogrande
Project, West Texas
On
August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (Hudspeth), McCabe Petroleum
Corporation (MPC), and Gregory McCabe, our Chairman. Mr. McCabe was the sole owner of both Hudspeth and MPC. Under
the terms and conditions of the Purchase Agreement, we purchased 100% of the capital stock of Hudspeth which held certain oil
and gas assets, including a 100% working interest in approximately 172,000 predominately contiguous acres in the Orogrande Basin
in West Texas. Mr. McCabe has, at his option, a 10% working interest back-in after payout and a reversionary interest if drilling
obligations are not met, all under the terms and conditions of a participation and development agreement among Hudspeth, MPC and
Mr. McCabe. Mr. McCabe also holds a 4.5% overriding royalty interest in the Orogrande acreage, - which he obtained prior to, and
was not a part of the August 2014 transaction. As of December 31, 2020, leases covering approximately 134,000 acres remain in
effect.
We
believe all drilling obligations through December 31, 2020 have been met.
Effective
March 27, 2017, the property became subject to a DDU Agreement which allows for all 192 existing leases covering approximately
134,000 net acres leased from University Lands to be combined into one drilling and development unit for development purposes.
The term of the DDU Agreement expires on December 31, 2023, and the time to drill on the drilling and development unit continues
through December 2023. The DDU Agreement also grants the right to extend the DDU Agreement through December 2028 if compliance
with the DDU Agreement is met and the extension fee associated with the additional time is paid.
Our
drilling obligations include four wells in year 2020 and five wells per year in years 2021, 2022 and 2023. We received a waiver
of the requirement to develop four wells in 2020. The drilling obligations are minimum yearly requirements and may be exceeded
if acceleration is desired.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
4.
|
OIL
& GAS PROPERTIES - continued
|
On
July 25, 2018, we and Hudspeth entered into a Settlement & Purchase Agreement (the Settlement Agreement) with
Founders (and Founders Oil & Gas Operating, LLC, former Operator), Wolfbone and MPC (entities controlled by our Chairman),
which agreement provided for Founders assigning all of its working interest in the oil and gas leases of the Orogrande Project
to Hudspeth and Wolfbone equally. Future well capital spending obligations remained the same 50% contribution from Hudspeth and
50% from Wolfbone until such time as the $40.5 million to be spent on the project. The Company estimates that there is still approximately
$8.7 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.
The
Company has drilled nine test wells in the Orogrande in order to stay in compliance with University Lands D&D Unit Agreement,
as well as, to test for potential shallow pay zones and deeper pay zones that may be present on structural plays. Development
of the wells continued through the year ended December 31, 2020 to further capture and document the scientific base in support
of demonstrating the production potential of the property. The Company is currently marketing the project for an outright sale
or farm in partner. This marketing process has been long and arduous as the overall market is quite soft. Due to the size and
scope of the project, we are dealing with very large companies that have multitudes of people reviewing our material, which in
itself is extensive. Should a farm out partner or sale not occur, the Company and Wolfbone will continue to drill additional wells
in the play in order to fulfill the obligations under the DDU Agreement
On
March 9, 2020, holders of notes payable by the Company entered into a Conversion Agreement under which the noteholders elected
to convert principal of $6,000,000 and approximately $1,331,000 of accrued interest on the notes, in accordance with their terms,
into an aggregate 6% working interest (of all such holders) in the Orogrande Project.
The
Orogrande Project ownership as of December 31, 2020 is detailed as follows:
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
4.
|
OIL
& GAS PROPERTIES - continued
|
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. A back-in after
payout of a 25% working interest was retained by MPC and another unrelated working interest owner.
In
October 2016, the holders of all of our then-outstanding shares of Series C Preferred Stock (which were issued in July 2016) elected
to convert into a total 33.33% working interest in our Hazel Project, reducing our ownership from 66.66% to a 33.33% working interest.
Acquisition
of Additional Interests in Hazel Project
On
January 30, 2017, we entered into and closed an Agreement and Plan of Reorganization and a Plan of Merger with an entity which
was wholly-owned by Mr. McCabe, which resulted in the acquisition of approximately 40.66% working interest in the 12,000 gross
acres, 9,600 net acres, in the Hazel Project.
Also,
on January 30, 2017, the Company entered into and closed a Purchase and Sale Agreement with Wolfbone. Under the agreement, we
acquired certain of Wolfbones Hazel Project assets, including its interest in the Flying B Ranch #1 well and the 40 acre
unit surrounding the well.
Upon
the closing of the transactions, our working interest in the Hazel Project increased by 40.66% to a total ownership of 74%.
Effective
June 1, 2017, we acquired an additional 6% working interest from unrelated working interest owners increasing our working interest
in the Hazel project to 80%, and an overall net revenue interest of 74-75%.
The
Company has drilled six test wells on the Hazel Project to capture and document the scientific base in support of demonstrating
the production potential of the property.
Lease
Modifications
In
May 2019 we entered into agreements with two of the three mineral owners on the northern section of the leases to keep the entire
acreage block as one lease with a one-year extension. We issued each of them 50,000 shares of our common stock as consideration
for this extension. As of December 31, 2020, we have structured the extension agreement retroactively with the third mineral owner
for cash consideration. Due to this extension, our obligation for 2019 reduced to one obligation well. We finished that obligation
well targeting a shallow zone that showed oil potential. For the remainder of 2020 the Company must drill one well in June and
two wells by the December 31, 2020. Development of the June well was initiated during June 2020. The December obligation was met
under the terms of the Option Agreement. See below.
Option
Agreement with Masterson Hazel Partners, LP
On
August 13, 2020, our subsidiaries Torchlight Energy, Inc. and Torchlight Hazel, LLC (collectively, Torchlight) entered
into an option agreement (the Option Agreement) with Masterson Hazel Partners, LP (MHP) and McCabe
Petroleum Corporation. Under the agreement, MHP was obligated to drill and complete, or cause to be drilled and completed, at its
sole cost and expense, a new lateral well (the Well) on our Hazel Project, sufficient to satisfy Torchlights
continuous development obligations on the southern half of the prospect no later than September 30, 2020. MHP has satisfied this
drilling obligation. MHP paid to Torchlight $1,000 as an option fee at the time of execution of the Option Agreement. MHP is entitled
to receive, as its sole recourse for the recoupment of drilling costs, the revenue from production of the Well attributable to
Torchlights interest until such time as it has recovered its reasonable costs and expenses for drilling, completing, and
operating the well.
In
exchange for MHP satisfying the above drilling obligations, Torchlight granted to MHP the exclusive right and option to
perform operations, at MHPs sole cost and expense, on the Hazel Project sufficient to satisfy Torchlights
continuous development obligations on the northern half of the prospect. Because MHP exercised this drilling option and
satisfied the continuous development obligations on the northern half of the prospect, under the terms of the Option
Agreement (as amended in September 2020) MHP now has the option to purchase the entire Hazel Project no later than May 31,
2021. Such purchase would be under the terms of a form of Purchase and Sale Agreement included as an exhibit to the Option
Agreement, at an aggregate purchase price of $12,690,704 for approximately 9,762 net mineral acres, and not less than 74%
net revenue interest (approximately $1,300 per net mineral acre).
In
the event MHP exercises its option to purchase the entire Hazel Project, McCabe Petroleum Corporation, which is owned by our chairman
Gregory McCabe, has agreed to reduce its reversionary interest in the Hazel Project from 20% to not more than 12.5%.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
4.
|
OIL
& GAS PROPERTIES - continued
|
Winkler
Project, Winkler County, Texas
On
December 1, 2017, an Agreement and Plan of Reorganization was entered into with MPC and Warwink Properties, LLC (Warwink
Properties) to acquire certain assets, including a 10.71875% working interest in approximately 640 acres in Winkler County,
Texas. Also, on December 1, 2017, MPC closed its transaction with MECO IV, LLC (MECO), for the purchase and sale
of certain assets.
Also,
on December 1, 2017, the transactions contemplated by the Purchase Agreement that TEI entered into with MPC closed. Under the
Purchase Agreement TEI acquired beneficial ownership of certain of MPCs assets, including acreage and wellbores located
in Ward County, Texas (the Ward County Assets).
Addition
to the Winkler Project
As
of May 7, 2018 our Winkler project in the Delaware Basin had begun the drilling phase of the first Winkler Project well, the UL
21 War-Wink 47 #2H. Additional acreage was leased by our operating partner under the Area of Mutual Interest Agreement (AMI) and
we exercised its right to participate for its 12.5% in the additional 1,080 gross acres. Our carried interest in the first well
was applied to this new well and allowed MECO to drill and produce potential revenues sooner than originally planned. The primary
leasehold is a 320-acre block and allows for 5,000-foot lateral wells to be drilled.
In
August 2020, the Company transferred a group of marginal unproductive wells (acquired as part of the original Winkler transaction)
to the Operator of the properties in exchange for a $7,000 credit against the outstanding account payable due to the Operator.
No gain or loss was recognized on the transaction.
On
November 11, 2020 (effective November 1, 2020), the Company and MPC sold their entire interest in the Winkler project for a total
purchase price of $450,000, with $100,000 allocated to MPC and $350,000 allocated to the Company. In connection with this transaction,
MPC agreed to have its $100,000 portion of the purchase price paid directly to the Company in exchange for the Company issuing
MPC 313,480 shares of common stock.
Hunton
Play, Central Oklahoma
Presently,
we are producing from one well in the Viking Area of Mutual Interest and one well in Prairie Grove.
5.
|
RELATED
PARTY BALANCES
|
As
of December 31, 2020, and December 31, 2019, related party payables were $98,805 and $45,000, respectively, due to our executive
officers and directors. Accrued payroll was $1,213,779 and $996,176,
respectively, consisting of accrued and unpaid compensation due to our executive officers.
On
September 18, 2020, McCabe Petroleum Corporation, an entity owned by Greg McCabe, Torchlights Chairman, provided a bridge
loan to Torchlight for $1,500,000. See the description below under the subsection Secured Convertible Promissory Note Issued
in Third Quarter, 2020 in Note 9, which description is incorporated herein by reference. The Company evaluated the note
for beneficial conversion feature (BCF) and derivative accounting criteria and concluded that there was no BCF or
derivative accounting treatment applicable. In addition, Mr. McCabe loaned the Company $100,000 on December 30, 2020. Both of
these notes have been retired by conversion into common stock in 2021.
As
of December 31, 2020, and 2019, the Company had a $92,320 and 61,693, respectively, for an account receivable due from McCabe Petroleum
Corporation for amounts advanced related to the Orogrande development cost sharing agreement.
401(k)
Plan
The
Company has established a 401(k) Plan which is designed to be qualified under Section 401(k) of the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) Plan within statutory and 401(k) Plan limits. The Company makes matching contributions
the first 6% of employee contributions. The Company made matching contributions of $26,017 and $19,200 for the years ended December
31, 2020 and 2019, respectively.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
6.
|
COMMITMENTS
AND CONTINGENCIES
|
Leases
The
Company is subject to a sublease agreement through October 31, 2021 for occupancy of its office premises which requires monthly
rent payments of $3,512.
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. Torchlight
has denied the allegations and has 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. Torchlight has also asserted counterclaims for attorney fees. On January 14, 2021, Goldstone Holding
Company, LLC dismissed its claims without prejudice, leaving Torchlights counterclaims for attorney fees as the only pending
claim in the case. On February 26, 2021, Torchlight filed a non-suit without prejudice on its counterclaims for attorney fees,
leaving no claims in the case. However, Goldstone Holding Company, LLC asked the court to re-instate its claims. That matter is
set for hearing on March 25, 2021. If the court does reinstate the case, Torchlight intends to re-assert its attorney fees
claim and to contest Goldstones claims.
On
April 30, 2020, our wholly owned subsidiary, Hudspeth Oil Corporation, filed suit against Datalog LWT, Inc. d/b/a Cordax Evaluation
Technologies. The suit seeks the recovery of approximately $1.4 million in costs incurred as a result of a tool failure during
drilling activities on the University Founders A25 #2 well that is located in the Orogrande Field. Working interest owner
Wolfbone Investments, LLC, a company owned by our Chairman Gregory Mccabe, is a co-plaintiff in that action. After the suit was
filed, Cordax filed a mineral lien in the amount of $104,500.01 against the Orogrande Field and has sued the operator and counterclaimed
against Hudpspeth for breach of contract, seeking the same amount as the lien. We are contesting the lien in good faith.
We have added the manufacturer of one of the tool components that we contend was a cause of the tool failure. The suit, Hudspeth
Oil Corporation and Wolfbone Investments, LLC v. Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies, was filed in the
189th Judicial District Court of Harris County, Texas.
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, 2020 and 2019, 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.
Common
Stock
On
January 10, 2020, the Company sold 600,000 shares of common stock for cash at $0.60 per share for total proceeds of $360,000 in
a private placement.
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 proceeds of $1,997,118 after deducting underwriting discounts and other
offering expenses payable by the Company.
In
May 2020, the Company issued 680,376 shares of common stock in satisfaction of the payment in kind valued at $314,107 due on April
10, 2020 under the terms of the promissory notes held by the Straz Foundation and the Straz Trust (see Note 9 below).
In
May 2020, we issued 1,630,434 restricted shares of common stock to an investor for the purchase price of $750,000. The investor,
Maverick Oil & Gas Corporation, is the operator for our Orogrande Project. Our subsidiary Hudspeth Oil Corporation owed the
investor in excess of $750,000 on unpaid balances and cost overruns on work performed on the Orogrande Project, which amount was
due and payable. The investor agreed to a future credit of $750,000 in the balance of accounts receivable owed to it by Hudspeth
Oil as consideration for the purchase of the common stock. Under the terms of the sale, we provided registration rights to the
investor.
On
May 20, 2020, the Company announced the closing of its underwritten public offering of 3,450,000 shares of its common stock at
a public offering price of $0.34 per share, for total proceeds of $886,622 after deducting underwriting discounts and other offering
expenses payable by the Company. In connection with the offering the Company issued 172,500 warrants valued at $36,225 using the
Black Scholes method.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
7.
|
STOCKHOLDERS
EQUITY - continued
|
On
June 16, 2020, the Company announced the closing of its registered direct offering of 7,894,737 shares of its common stock at
a public offering price of $0.38 per share, for total proceeds of $2,783,691 after deducting underwriting discounts and other
offering expenses payable by the Company. In connection with the offering the Company issued 3,157,895 warrants. The warrants
were exercised on July 9, 2020 under the cashless provisions in the agreement resulting in the Company issuing 3,157,895 shares
of common stock for which no cash was received. Of the total proceeds received from the offering, $854,887 was allocated to the
warrants using the pro rata percentage of the number of warrants to the total shares ultimately issued under the offering terms.
During
the year ended December 31, 2020, the Company issued 317,857 shares of common stock with a fair value of $161,750 as compensation
for services.
During
the year ended December 31, 2020, the Company issued 40,000 shares of common stock to a vendor with a fair value of $26,000 for
delay in payment on outstanding account payable.
During
the year ended December 31, 2020, the Company issued 40,000 shares of common stock to note holders as compensation for extension
of the maturity date of the notes. The fair value of the shares was $16,000.
During
the year ended December 31, 2020, the Company issued 257,143 shares of common stock to a vendor with a fair value of $90,000 in
payment of an outstanding account payable.
During
the year ended December 31, 2020, the Company issued 100,000 shares of common stock to the former CEO of the Company with a fair
value of $45,000 in payment of an accrued liability from prior years.
On
July 20, 2020, the Company entered into a Sales Agreement to conduct an at-the-market equity offering program pursuant
to which the Company may issue and sell, from time to time at its sole discretion, shares of its common stock having an aggregate
offering price of up to $7,000,000. The Sales Agent is entitled to an aggregate fixed commission of 3.0% of the gross proceeds
from shares sold. Gross proceeds from sales of 1,557,173 shares under the Sales Agreement through December 31, 2020 totaled $511,966.
Commissions and offering expenses on the sales totaled $125,981, resulting in net proceeds of $385,985 during the period.
During
the year ended December 31, 2020, the Company issued 3,726,412 shares of common stock in conversion of principal and interest
on notes payable with a fair value of $1,666,596.
During
the year ended December 31, 2020, the Company issued 313,480 shares of common stock to its Chairman, Gregory McCabe in connection
with the sale of the Warwink property.
During
the year ended December 31, 2019, the Company issued 4,696,100 shares of common stock for cash of $3,446,880.
During
the year ended December 31, 2019 the Company issued 416,667 shares of common stock for a subscription of $183,963.
During
the year ended December 31, 2019 the Company issued 312,593 shares of common stock with total fair value of $365,400 as compensation
for services.
During
the year ended December 31, 2019 the Company issued 167,845 shares of common stock for lease interests with total fair value of
$250,000.
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
7.
|
STOCKHOLDERS
EQUITY - continued
|
During
the year ended December 31, 2019 the Company issued 100,000 shares of common stock for lease extensions with total fair values
of $125,000.
During
the year ended December 31, 2019 the Company issued 45,455 shares of common stock in conversions of notes payable valued at $50,000.
During
the year ended December 31, 2019 the Company issued 202,316 shares of common stock in payment in kind on notes payable valued
at $314,108.
During
the year ended December 31, 2019 the Company issued 168,690 shares of common stock resulting from warrant and option exercises
for consideration totaling $184,843.
Warrants
and Options
During
the year ended December 31, 2020, the Company issued 715,000 warrants with total fair value of $148,900 as compensation for services
and recorded expense of $68,250 related to options issued in prior periods.
During
the year ended December 31, 2020, the Company issued 750,000 warrants valued at $382,500 in connection with the conversion of
convertible notes payable into working interest in the Companys Orogrande Project.
During
the year ended December 31, 2020, the Company issued 600,000 warrants valued at $366,000 in connection with the sale of 600,000
shares of common stock valued at $360,000 in a private placement. Of the total proceeds received from the offering $181,488 was
allocated to the warrants using the pro rata percentage of the fair market value of the warrants.
During
the year ended December 31, 2020, the Company issued 172,500 warrants valued at $36,225 in connection with the offering of common
stock on May 20, 2020 as referred to above.
In
connection with the registered direct offering closed June 16, 2020, as referenced above, the Company issued 3,157,895 warrants.
The warrants were exercised on July 9, 2020 under the cashless provisions in the agreement resulting in the Company issuing 3,157,895
shares of common stock for which no cash was received. Of the total proceeds received from the offering $854,887 was allocated
to the warrants using the pro rata percentage of the number of warrants to the total shares ultimately issued under the offering
terms.
During
the year ended December 31, 2019 the Company issued and vested 100,000 warrants with total fair values of $99,000 as compensation
for services and 2,032,122 warrants in connection with financings in 2019 and recorded expense of $241,570 related to warrants
issued in prior periods.
During
the year ended December 31, 2019 the Company issued 700,000 stock options. The Company vested 700,000 stock options with total
fair value of $236,500 as compensation for services.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
7.
|
STOCKHOLDERS
EQUITY - continued
|
A summary
of warrants outstanding as of December 31, 2020 and 2019 by exercise price and year of expiration is presented
below:
Exercise
|
|
|
Expiration Date in
|
|
|
|
|
Price
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Total
|
|
$
|
0.425
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172,500
|
|
|
|
172,500
|
|
$
|
0.500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
$
|
0.70
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
965,000
|
|
|
|
965,000
|
|
$
|
0.80
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,266,667
|
|
|
|
2,266,667
|
|
$
|
1.03
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
$
|
1.14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
$
|
1.21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
$
|
1.35
|
|
|
|
-
|
|
|
|
365,455
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
365,455
|
|
$
|
1.63
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
$
|
1.64
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
$
|
2.00
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
|
|
|
520,000
|
|
|
|
365,455
|
|
|
|
1,220,000
|
|
|
|
100,000
|
|
|
|
3,404,167
|
|
|
|
5,609,622
|
|
Exercise
|
|
|
Expiration Date in
|
|
|
|
|
Price
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Total
|
|
$
|
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
|
|
On
June 11, 2020, 4,500,000 stock options previously granted to officers of the Company in 2015 expired.
On
July 15, 2020, we entered into new one-year employment agreements with John Brda, our President and Chief Executive Officer, and
Roger Wurtele, our Chief Financial Officer. As part of their employment compensation, the Compensation Committee granted Mr. Brda
an option to purchase a total of up to 2,250,000 shares of common stock, including up to 375,000 shares at an exercise price of
$0.50 per share and up to 1,875,000 shares at an exercise price of $1.00 per share, and granted Mr. Wurtele an option to purchase
a total of up to 750,000 shares of common stock, including up to 375,000 shares at an exercise price of $0.50 per share and up
to 375,000 shares at an exercise price of $1.00 per share. The options were granted under our Amended and Restated 2015 Stock
Option Plan. The options of both executives will vest upon either (a) the approval by shareholders of a change of control occurring
prior to July 15, 2021, or (b) the Company entering into a letter of intent with a third party prior to July 15, 2021 that contemplates
a change of control, and the change of control transaction closes with that third party (or an affiliate(s) of that third party)
at a date not later than July 15, 2022; subject, however, to acceleration and earlier vesting of all of the options in the event
of (i) the termination of employment by the employee for good reason under his employment agreement or (ii) a determination
of the Compensation Committee, at its discretion. In the event of the death or disability of the employee prior to vesting or
if the Company terminates the employees employment for reasons other than for cause under the employment
agreement prior to vesting, the option will still vest upon the occurrence of the events described under clauses (a) or (b) above.
The options, to the extent such options have not been exercised, will terminate and become null and void on July 15, 2025, if
and only if the options vest as described above, or on July 15, 2021, if the options do not vest as described above, subject to
the occurrence of the events contemplated under clause (b) above whereby the options would not terminate until July 15, 2022.
At such time that the options vest, the Black Scholes valuation of the options will be recorded as an expense.
TORCHLIGHT
ENERGY RESOURCES, INC
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
7.
|
STOCKHOLDERS
EQUITY - continued
|
A summary
of stock options outstanding as of December 31, 2020 and 2019 by exercise price and year of expiration is presented
below:
Exercise
|
|
|
Expiration Date in
|
|
|
|
|
Price
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Total
|
|
$
|
0.50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
750,000
|
|
|
|
750,000
|
|
$
|
1.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,250,000
|
|
|
|
2,250,000
|
|
$
|
0.85
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600,000
|
|
|
|
-
|
|
|
|
600,000
|
|
$
|
0.97
|
|
|
|
259,742
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259,742
|
|
$
|
1.10
|
|
|
|
-
|
|
|
|
800,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
800,000
|
|
$
|
1.19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
$
|
1.63
|
|
|
|
-
|
|
|
|
58,026
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,026
|
|
|
|
|
|
|
259,742
|
|
|
|
858,026
|
|
|
|
700,000
|
|
|
|
600,000
|
|
|
|
3,000,000
|
|
|
|
5,417,768
|
|
Exercise
|
|
|
Expiration Date in
|
|
|
|
|
Price
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
Total
|
|
$
|
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
|
|
At
December 31, 2020, the Company had reserved 11,027,390 common shares for future exercise of warrants and options.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
7.
|
STOCKHOLDERS
EQUITY - continued
|
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:
The
Company recorded no income tax provision for 2020 and 2019 because of losses incurred.
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, 2020 and 2019:
The
tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December
31, 2020 and 2019 are as follows:
The
Company had a net deferred tax asset related to federal net operating loss carryforwards of $77,359,811 and $66,984,025 at December
31, 2020 and December 31, 2019, respectively. The federal net operating loss carryforward will begin to expire in 2033. 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.
TORCHLIGHT ENERGY RESOURCES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Promissory
Notes Issued in 2017
On
April 10, 2017, we sold two 12% unsecured promissory notes with a total of $8,000,000 in principal amount to David A. Straz, Jr.
Foundation (the Straz Foundation) and the David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986 (the Straz
Trust) in a private transaction. Interest only was due and payable on the notes each month at the rate of 12% per annum,
with a balloon payment of the outstanding principal due and payable at maturity on April 10, 2020. The holders of the notes also
received 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 94.25% 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.
The
effective interest rate was 16.15%.
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 had been extended for one year, from April 10, 2020 to April 10, 2021.
As
part of the terms of this extension agreement, the Company paid the noteholder a fee of $80,000 on February 20, 2020.
Promissory
Notes Issued in 2018
On
February 6, 2018, we sold to the Straz Trust in a private transaction a 12% unsecured promissory note with a principal amount
of $4,500,000. Interest only was 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 also received 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 96.27% 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.
The
effective interest rate was 15.88%.
Extension
of Promissory Notes
On
April 24, 2020, the Company entered into a Note Amendment Agreement with each of the Straz Foundation, as a lender, the Straz
Trust, as a lender and collateral agent, and The Northern Trust Company and Christopher M. Straz, as co-trustees of the Straz
Trust. Under the Note Amendment Agreement, the parties agreed to amend and restate the two promissory notes issued to the Straz
Trust on April 10, 2017 and February 6, 2018 that have total principal outstanding of $8,500,000, along with the promissory note
issued to the Straz Foundation on April 10, 2017 which had an outstanding principal amount of $4,000,000. Under the Note Amendment
Agreement, the maturity dates of the two promissory notes held by the Straz Trust and the Note held by the Foundation were extended
to April 10, 2021. We had previously extended the maturity date of the promissory note held by the Straz Foundation to April 10,
2021.
Under
the Note Amendment Agreements, we and our subsidiaries provided a first priority lien on certain collateral in favor of the collateral
agent for the benefit of the lenders. The collateral includes all assets and property held by Hudspeth Oil Corporation and Torchlight
Hazel, LLC, which includes without limitation our working interest in certain oil and gas leases in Hudspeth County, Texas, known
as the Orogrande Project and our working interest in certain oil and gas leases in the Midland Basin in West Texas,
known as the Hazel Project. Further, these subsidiaries, along with Torchlight Energy, Inc., provided guaranty with
respect to payment of the three promissory notes. The Note Amendment Agreements also provided restrictions on the use of proceeds
if the Orogrande Project or the Hazel Project were sold.
Additionally,
the promissory notes, as amended, provided conversion rights whereby the lenders have the right, at each such lenders option,
to convert any portion of principal and interest into shares of common stock of Torchlight Energy Resources, Inc. at a conversion
price of $1.50 per share.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
9.
|
PROMISSORY
NOTES - continued
|
The
Note Amendment Agreements (as further amended) provided that no later than May 25, 2020, we were obligated to pay: (a) to the
lenders all past due interest that has accrued on the existing promissory notes, and (b) to the Straz Trust a fee of $170,000,
which payments were made. Further, the agreements had certain negative covenants regarding related party transactions, dividends, stock
repurchases, grants of liens on other assets, and payment of accrued executive compensation. There are also typical affirmative
covenants regarding legal compliance and payment of taxes. The $170,000 extension fee was paid on May 22 and the interest payments
were made on June 17, 2020 within the terms of a forbearance agreement which provided an extension of the due date of the interest
payments.
All
other terms and conditions of the three original promissory notes remained substantially unchanged, including without limitation,
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, and annual payments of common stock at the rate of 2.5% of the principal amount outstanding, based on a volume-weighted
average price.
In
May 2020 and April 2019, respectively, the holders of the notes described above received 680,376 and 202,316 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.
The
12% promissory note transactions through December 31, 2020 are summarized as follows:
These
notes payable issued in 2017 and 2018 totaling $12,500,000 were retired by conversion into common stock in 2021 and are classified
as a long-term liability in our consolidated balance sheet. Reference Subsequent Events in Note 11.
Convertible
Notes Issued in October 2018
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 contained
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.
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 the Orogrande Project. Principal of $6,000,000 and approximately $1,331,000
of accrued interest were converted at March 9, 2020.
TORCHLIGHT ENERGY RESOURCES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
9.
|
PROMISSORY
NOTES - continued
|
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.
The
transaction was treated as an extinguishment of debt. The fair value of the working interest transferred in the conversion of
the debt was $8,778,000 and the value of warrants issued to the holders was $382,500. The Company recognized a loss on extinguishment
of debt in the amount of $1,829,651 during the year ended December 31, 2020. The Company recorded $170,215 as additional
Loss on Extinguishment of Debt to account for the cost of the carry through December 31, 2020
Convertible
Notes Issued in First Quarter 2019
On
February 11, 2019 the Company raised a total of $2,000,000 from investors through the sale of two 14% Series D Unsecured Convertible
Promissory Notes. Principal was 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 had the right to convert principal and interest at any time into common stock
at a conversion price of $1.08 per share. The Company had 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 was not applicable.
On
April 21, 2020, Torchlight Energy Resources, Inc. entered into agreements to amend the two 14% Series D Unsecured Convertible
Promissory Notes that were originally issued on February 11, 2019. Under the amendment agreements, (a) the maturity dates were
extended from May 11, 2020 to November 11, 2021, (b) the conversion price under which the noteholders may convert into our common
stock was changed from $1.08 to $0.43, and (c) the noteholders were provided the right, at each noteholders election, to
convert their notes into either (i) a working interest in the Orogrande Project at the rate of one acre per $1,100 of principal
and unpaid interest converted, or (ii) a working interest in the Hazel Project at the rate of one acre per $1,300 of principal
and unpaid interest converted; provided, that the noteholders right to convert into either such working interest is subject
to approval of the collateral agent of the Note Amendment Agreement with the Straz parties.
Under
the note amendments, the noteholders agreed to forebear demand or collection on all interest payments due and payable under the
Note, including any past due interest payments, for 20 days after the execution of the Note Amendment Agreement. Further, we agreed
to (a) issue each holder 20,000 restricted shares of common stock immediately and (b) pay each holder a fee of $10,000, at the
same time as the payment of past due interest is paid. The past due interest and fee was paid.
These
two promissory notes will continue to provide for monthly payments of interest only at the rate of 14% per annum, with a balloon
payment of the outstanding principal due and payable at maturity.
These
notes payable have been converted into common stock. $1,000,000 was converted in December 2020 and the remaining $1,000,000 was
converted in 2021 and is classified as a long-term liability in our consolidated balance sheet. Reference Subsequent Events in
Note 11.
Convertible
Notes Issued in Third Quarter 2019
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. Principal and 8%
interest were due at maturity on May
21, 2021. The principal and accrued interest on the notes were 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.
TORCHLIGHT ENERGY RESOURCES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
9.
|
PROMISSORY
NOTES - continued
|
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 of $680,072
and $199,972 from the amortization of debt discount from notes for the year ended December 31, 2020 and 2019, respectively.
These
notes payable were retired by conversion into common stock in 2021 and are classified as a long-term liability in our consolidated
balance sheet. Reference Subsequent Events in Note 11.
Convertible
Notes Issued in Fourth Quarter 2019
Effective
October 31, 2019, the Company issued 10% unsecured convertible promissory notes in the amount of $540,000. Principal and interest
were due at maturity on December 3, 2020. The principal and accrued interest on the notes were convertible into shares of common
stock at $0.75 per common share at any time after the original issue date. The notes were alternatively convertible, at the election
of the holders, into an aggregate 0.367% working interest in our Orogrande Project.
These
notes payable were retired by conversion into common stock in December 2020. As an inducement to convert the Company adjusted
the conversion price from $0.75 per share to $0.50 per share. Debt conversion expense of $176,400 related to the inducement was
recorded.
Paycheck
Protection Program Loan
In
response to the COVID-19 pandemic, the U.S. Small Business Administration (the SBA) made available low-interest
rate loans to qualified small businesses, including under its Paycheck Protection Program (the PPP). On April 10,
2020, in order to supplement its cash balance, the Company submitted an application for a loan (SBA loan) in the
amount of $77,477. On May 1, 2020, Companys SBA loan application was approved, and the Company received the loan proceeds.
The SBA loan has an interest rate of 0.98% and matures in April 2022.
Section
1106 of the CARES Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.
The PPP and loan forgiveness are intended to provide economic relief to small businesses, such as the Company, that are adversely
impacted under the COVID-19 Emergency Declaration issued by President Trump on March 13, 2020. The Company has applied for loan
forgiveness which is expected to be processed and approved by the lender in March 2021.
During
fourth quarter 2020, the Company applied to Chase Bank for forgiveness of the amount due on the PPP Loan. The amount of forgiveness
shall be calculated (and may be reduced) in accordance with the requirements of the Paycheck Protection Program, including the
provisions of Section 1106 of the CARES Act. The forgiveness amount will be subject to the Small Business Administrations
review. Any outstanding principal amount under the PPP Loan that is not forgiven shall convert to an amortizing term loan.
Secured
Convertible Promissory Notes Issued in Third and Fourth Quarter, 2020
On
September 18, 2020, McCabe Petroleum Corporation, a company owned by our chairman Gregory McCabe (MPC), loaned us
$1,500,000, evidenced by a 6% Secured Convertible Promissory Note (the MPC Note). The note bore interest at the
rate of 6% per annum and provided for payment of the principal amount along with all accrued and unpaid interest in one lump sum
payment on its maturity date of May 10, 2021. In connection with the proposed business combination transaction with Metamaterial
Inc. (Metamaterial), the note provided the following requirements on the use of proceeds of the loan as follows:
(i) we will lend $500,000 to Metamaterial pursuant to an 8% Unsecured Convertible Promissory Note (the Metamaterial Note);
(ii) we will retain and use $500,000 for general corporate purposes, including without limitation, expenses incurred by us in
connection with the proposed business combination transaction; and (iii) we will deposit $500,000 into an escrow account, to be
held in escrow. If we and Metamaterial enter into a definitive agreement by the later of November 30, 2020 or such later date
that is agreed to by us and Metamaterial in writing, the $500,000 from this escrow account will be released to us, and we will
lend this amount to Metamaterial pursuant to another convertible promissory note (the Second Metamaterial Note).
If we do not enter into a definitive agreement by the later of November 30, 2020 or such later date that is agreed to in writing,
the $500,000 from this escrow account will be released back to MPC and deducted from the principal amount outstanding under the
MPC Note.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
9.
|
PROMISSORY
NOTES - continued
|
The
MPC Note was secured by our pledge of the Metamaterial Note and the Second Metamaterial Note (if issued). If we and Metamaterial
do not enter into a definitive agreement by the later of November 30, 2020 or such later date that is agreed to in writing, then
promptly after that date, we will assign to MPC the Metamaterial Note in full repayment and discharge of $500,000 (plus accrued
and unpaid interested on the Metamaterial Note) of the principal amount of the MPC Note, and the remaining $500,000 (less accrued
and unpaid interested on the Metamaterial Note) of the principal amount, plus all unpaid interest accrued under the MPC Note,
will remain subject to the MPC Note. If a definitive agreement is entered into by the later of November 30, 2020 or such later
date that is agreed to in writing, but the proposed business combination transaction is terminated prior to closing or otherwise
does not close by the maturity date of the MPC Note, then we will assign to MPC both the Metamaterial Note and Second Metamaterial
Note in full repayment and discharge of $1,000,000 (plus accrued and unpaid interested on the Metamaterial Note and Second Metamaterial
Note) of the principal amount of the MPC Note, and the remaining $500,000 (less accrued and unpaid interested on the Metamaterial
Note and Second Metamaterial Note) of the principal amount, plus all unpaid interest accrued under the MPC Note, will remain subject
to the MPC Note.
The
MPC Note also provided that if (i) we and Metamaterial do not enter into a definitive agreement by the later of November 30, 2020
or such later date that is agreed to in writing, or (ii) we and Metamaterial enter into a definitive agreement but the proposed
transaction is terminated prior to closing or otherwise does not close by the maturity date of the MPC Note, then at such time
and until the maturity date, MPC will have the right, at its option, to convert up to $500,000 of the remaining principal amount
of the MPC Note, plus all unpaid interest accrued under the MPC Note, into shares of our common stock at a conversion price of
$0.375 per share. Additionally, if the proposed transaction with Metamaterial closes, all principal and interest under the MPC
Note will automatically convert into shares of our common stock at $0.375 per share. On January 29, 2021, we and MPC agreed to
amend the MPC note to allow MPC to convert at any time, including prior to closing of the Metamaterial transaction.
In
addition, Greg McCabe loaned the Company $100,000 on December 30, 2020. The Company evaluated the notes for a beneficial conversion
feature (BCF) and derivative accounting criteria and concluded that there was no BCF or derivative accounting treatment
applicable.
Both
of these notes have been paid by conversion into common stock in 2021. Reference Subsequent Events in Note 11.
Loan
to Metamaterial Inc.
On
September 20, 2020, we loaned Metamaterial $500,000, evidenced by an 8% Unsecured Convertible Promissory Note (the Metamaterial
Note). An additional $500,000 was loaned on December 16, 2020. The notes bear interest at the rate of 8% per annum and
provides for payment of the principal amount along with all accrued and unpaid interest lump sum payments on its maturity date
of September 20, 2022 and December 16, 2022 respectively. Metamaterial has the right to redeem after 120 days. The note is convertible
at the price of $0.35 (CAD) per share at the option of the holder if the definitive agreement for the proposed transaction between
us and Metamaterial is not entered into by November 2, 2020 (unless extended in writing by the parties) or the definitive agreement
is entered but is terminated or expires without closing. The date was extended, and the Definitive Agreement was executed on December
4, 2020. The Company evaluated the notes for a beneficial conversion feature (BCF) and derivative accounting criteria
and concluded that there was no BCF or derivative accounting treatment applicable. Accrued interest of $12,822 was recorded at
December 31, 2020 on the two notes.
|
10.
|
ASSET
RETIREMENT OBLIGATIONS
|
The
following is a reconciliation of the asset retirement obligations liability through December 31, 2020:
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
On
February 3, 2021 and on March 11, 2021, we and our Ontario subsidiaries entered into an Amendment to the Arrangement Agreement
with Meta to, among other things, update the Plan of Arrangement attached to the Arrangement Agreement.
In
connection with the Option Agreement entered into for the Hazel Project with MHP, in January 2021, we were notified by MHP of
its intention to exercise its option to perform operations sufficient to satisfy Torchlights continuous development obligation
on the northern half of the Hazel prospect.
On
February 10, 2021, the Company closed an underwritten public offering of 23,000,000 shares of its common stock at a price of $1.20
per share, which included the full exercise of the underwriters over-allotment option, for gross proceeds to Torchlight of $27.6
million before deducting the underwriting discount and offering expenses payable by Torchlight. In a separate transaction an investor
acquired 300,000 shares of common stock for $240,000 in cash.
On
February 18, 2021, Torchlight loaned to Meta $10,000,000, evidenced by an unsecured convertible promissory note issued by Meta
(the Promissory Note), substantially
in the same form as the previous bridge notes issued by Meta to us, to satisfy Torchlights
requirement to provide additional bridge financing to Meta pursuant to the Arrangement Agreement. These bridge loans,
including the aggregate principal and unpaid interest, will be included in, and credited against, the funds we are obligated to
raise in the Pre-Closing Financing. Upon the closing of the Arrangement, all of the bridge notes will be deemed cancelled and
paid in full.
Subsequent
to December 31, 2020 the Company has issued 16,725,797 shares of common stock valued at $17,263,575 in conversion of notes payable.
In addition the Company issued 186,329 shares of common stock valued at $248,479 for Payment in Kind in connection with conversion
of notes payable. As of the date of this annual report, all promissory note debt has been paid in full or converted to common
stock.
1,295,326
shares of common stock were issued subsequent to December 31, 2020 in exercise of warrants and options for cash and 507,951 shares
of common stock was issued in cashless exercise of warrants and options.
25,000
shares of common stock were issued for services.
The
Company has evaluated subsequent events through March 18, 2021, the date when the financial statements were available to be issued
and no additional events were noted that require adjustments or disclosure.
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, 2020 and 2019 is detailed as follows:
|
|
2020
|
|
|
2019
|
|
Property acquisition costs
|
|
$
|
-
|
|
|
$
|
-
|
|
Development costs
|
|
$
|
3,472,281
|
|
|
$
|
6,641,467
|
|
Exploratory costs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,472,281
|
|
|
$
|
6,641,467
|
|
Property
acquisition costs presented above exclude interest capitalized into the full cost pool of $2,353,700 in 2020 and $2,858,753 in
2019.
Property
acquisition cost relates to the Companys development costs incurred in the Orogrande Project in west Texas. The development
costs include work in the Orogrande and Hazel projects in west Texas. No development costs were incurred for Oklahoma properties
in 2020.
Oil
and Natural Gas Reserves
As
of December 31, 2020, the Company had no proved reserves. At December 31, 2019 we had proved reserves related only to the Warwink
project which was sold on November 11, 2020 (effective November 1, 2020). The Hazel and Orogrande Projects consist only of unevaluated
properties in progress of development for future production. At December 31, 2020 there are no proved nonproducing reserves related
to these properties. The Oklahoma properties are marginal producing wells which are not economic in the context of proved reserve
value. The estimates of our 2019 proved reserves and the PV-10 set forth herein reflect estimated future gross revenue to be generated
from the production of proved reserves, net of estimated production and future development costs, using prices and costs under
existing economic conditions. The amounts shown do not give effect to non-property related expenses, such as corporate general
administrative expenses and debt service, future income taxes or to depreciation, depletion and amortization.
|
|
December 31, 2020
|
|
|
December 31, 2020
|
|
|
|
Reserves
|
|
|
Future Net Revenue (M$)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Present Value
Discounted
|
|
Category
|
|
Oil (Bbls)
|
|
|
Gas (Mcf)
|
|
|
(BOE)
|
|
|
Total
|
|
|
at 10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved Producing
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Proved Undeveloped
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total Proved
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized Measure of Future Net Cash Flows Related to Proved Oil and Gas Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Probable Undeveloped
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
|
|
Reserves
|
|
|
Future Net Revenue (M$)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Present Value
Discounted
|
|
Category
|
|
Oil (Bbls)
|
|
|
Gas (Mcf)
|
|
|
(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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
decrease in producing reserves from 2019 to 2020 from 18,217 to -0- BOE is related to the sale of the Winkler properties on November
11, 2020 (effective November 1, 2020) and the decline in production in the Oklahoma properties.
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, 2020
|
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
|
|
|
14,710
|
|
|
|
21,130
|
|
|
|
18,232
|
|
Revisions of previous estimates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Extensions, discoveries and other additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Divestiture of Reserves
|
|
|
(9,265
|
)
|
|
|
(16,132
|
)
|
|
|
(11,954
|
)
|
Acquisition of Reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Production
|
|
|
(5,445
|
)
|
|
|
(4,998
|
)
|
|
|
(6,278
|
)
|
End of period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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
|
|
|
|
18,232
|
|
Standardized
Measure of Oil & Gas Quantities
|
Year
Ended December 31, 2020 & 2019
|
The
standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves is as follows:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Future cash inflows
|
|
$
|
-
|
|
|
$
|
843,040
|
|
Future production costs
|
|
|
-
|
|
|
|
(196,670
|
)
|
Future development costs
|
|
|
-
|
|
|
|
-
|
|
Future income tax expense
|
|
|
-
|
|
|
|
-
|
|
Future net cash flows
|
|
|
-
|
|
|
|
646,370
|
|
10% annual discount for estimated timing of cash flows
|
|
|
-
|
|
|
|
(107,070
|
)
|
Standardized measure of discounted future net cash flows related to proved reserves
|
|
$
|
-
|
|
|
$
|
539,300
|
|
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:
|
|
2020
|
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
539,300
|
|
|
$
|
5,341,330
|
|
Net change in sales and transfer prices and in production (lifting) costs related to future production
|
|
|
(632,020
|
)
|
|
|
1,176,090
|
|
Changes in estimated future development costs
|
|
|
-
|
|
|
|
1,851,760
|
|
Net change due to revisions in quantity estimates
|
|
|
-
|
|
|
|
(5,896,344
|
)
|
Accretion of discount
|
|
|
107,070
|
|
|
|
(868,787
|
)
|
Other
|
|
|
-
|
|
|
|
(1,763,161
|
)
|
|
|
|
|
|
|
|
|
|
Net change due to extensions and discoveries
|
|
|
-
|
|
|
|
-
|
|
Net change due to sales of minerals in place
|
|
|
(9,452
|
)
|
|
|
-
|
|
Sales and transfers of oil and gas produced during the period
|
|
|
(4,898
|
)
|
|
|
(294,912
|
)
|
Previously estimated development costs incurred during the period
|
|
|
-
|
|
|
|
993,324
|
|
Net change in income taxes
|
|
|
-
|
|
|
|
-
|
|
Balance, end of period
|
|
$
|
-
|
|
|
$
|
539,300
|
|
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, for 2019 as set forth above were prepared by PeTech Enterprises, Inc. for the Companys
Properties in Oklahoma. 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, 2020
|
|
Total
|
|
|
Texas
|
|
|
Oklahoma
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Gas revenue
|
|
$
|
193,379
|
|
|
$
|
186,473
|
|
|
$
|
6,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
$
|
188,481
|
|
|
$
|
176,114
|
|
|
$
|
12,367
|
|
Depreciation, depletion, and amortization
|
|
$
|
820,441
|
|
|
$
|
746,601
|
|
|
$
|
73,840
|
|
Exploration expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
1,008,922
|
|
|
$
|
922,715
|
|
|
$
|
86,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations (excluding corporate overhead and interest costs)
|
|
$
|
(815,543
|
)
|
|
$
|
(736,242
|
)
|
|
$
|
(79,301
|
)
|