ITEM
1. FINANCIAL STATEMENTS
TORCHLIGHT
ENERGY RESOURCES, INC.
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CONSOLIDATED
BALANCE SHEETS (Unaudited)
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The
accompanying notes are an integral part of these unaudited interim consolidated financial statements.
TORCHLIGHT
ENERGY RESOURCES, INC.
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CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
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The
accompanying notes are an integral part of these unaudited interim consolidated financial statements.
TORCHLIGHT
ENERGY RESOURCES, INC.
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CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
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The
accompanying notes are an integral part of these unaudited interim consolidated financial statements.
TORCHLIGHT
ENERGY RESOURCES, INC.
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CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)
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The
accompanying notes are an integral part of these unaudited interim consolidated financial statements.
TORCHLIGHT
ENERGY RESOURCES, INC.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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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, and
Torchlight Hazel LLC.
At
March 31, 2021, the Company had not yet achieved profitable operations. We had a net loss of $2,055,688 for the three months ended
March 31, 2021 and had accumulated losses of $113,991,285 since our inception. We expect to incur further losses in the development
of our business. 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.
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SIGNIFICANT
ACCOUNTING POLICIES
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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, and Torchlight Hazel LLC. All significant intercompany balances and transactions have been eliminated.
These
interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) regarding interim financial reporting. Certain disclosures have been condensed or omitted
from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles
generally accepted in the United States of America (GAAP) for complete consolidated financial statements, and should
be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2020.
In
the opinion of management, the accompanying unaudited financial condensed consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations
for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions
that affect reported amounts in the condensed financial statements and disclosures of contingencies. Actual results may differ
from those estimates. The results for interim periods are not necessarily indicative of annual results.
TORCHLIGHT
ENERGY RESOURCES, INC.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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3.
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SIGNIFICANT
ACCOUNTING POLICIES - continued
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Risks
and uncertainties – The Companys operations are subject to significant risks and uncertainties, including
financial, operational, technological, and other risks associated with operating an emerging business, including the potential
risk of business failure.
Concentration
of risks – At times the Companys cash balances are in excess of amounts guaranteed by the Federal Deposit
Insurance Corporation. The Companys cash is placed with a highly rated financial institution, and the Company regularly
monitors the credit worthiness of the financial institutions with which it does business.
Fair
value of financial instruments – Financial instruments consist of cash, receivables, 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:
●
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Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
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●
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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.
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●
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Level
3 inputs are unobservable inputs based on managements own assumptions used to measure assets and liabilities at fair
value.
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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 March 31, 2021, and December 31, 2020,
no valuation allowance was considered necessary.
Oil
and gas properties – The Company uses the full cost method of accounting for exploration and development activities
as defined by the Securities and Exchange Commission (SEC). Under this method of accounting, the costs of unsuccessful,
as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal
costs that are directly related to property acquisition, exploration and development activities but does not include any costs
related to production, general corporate overhead or similar activities.
Oil
and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs
excluded represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs
associated with leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition
costs to unevaluated properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated
over the life of the reservoir. Unevaluated properties are reviewed for impairment at least 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.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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3.
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SIGNIFICANT
ACCOUNTING POLICIES - continued
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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 three months ended March 31, 2021 and 2020, the Company capitalized $141,048
and $614,479, 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. No impairment expense was recorded for the three months ended March 31, 2021 and
2020.
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.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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3.
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SIGNIFICANT
ACCOUNTING POLICIES - continued
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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:
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.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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3.
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SIGNIFICANT
ACCOUNTING POLICIES - continued
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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 8,741,060
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 March 31, 2021 and December 31, 2020.
Recently
adopted accounting pronouncements –
Effective
January 1, 2021, we adopted ASU 2019-12 on a prospective basis. The new standard was issued in December 2019 with the intent of
simplifying the accounting for income taxes. The accounting update removes certain exceptions to the general principles in ASC
740 Income Taxes as well as provides simplification by clarifying and amending existing guidance. The adoption of this ASU did
not have a material impact on our consolidated financial statements.
In
October 2020, the FASB issued ASU 2020-09, Debt- Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762
(ASU 2020-09). The amendments in ASU 2020-09 amend rules focused on the provision of material, relevant, and decision-useful
information regarding guarantees and other credit enhancements, and eliminate prescriptive requirements that have imposed unnecessary
burdens and incentivized issuers of securities with guarantees and other credit enhancements to offer and sell those securities
on an unregistered basis. The adopted amendments relate to the financial disclosure requirements for guarantors and issuers of
guaranteed securities registered or being registered in Rule 3-10 of Regulation S-X, and affiliates whose securities collateralize
securities registered or being registered in Rule 3-16 of Regulation S-X. The amendments in ASU 2020-09 are effective for public
business entities for annual periods beginning after December 15, 2020. The Company has evaluated the provisions of ASU 2020-09
and noted no material impact to our consolidated financial statements or disclosures from the adoption of this ASU.
In
October 2020, the FASB issued ASU 2020-10, Codification Improvements, which updated various codification topics by clarifying
or improving disclosure requirements to align with the SECs regulations. The amendments in ASU 2020-10 are effective for annual
periods beginning after December 15, 2020, for public business entities. The Company adopted ASU 2020-10 on January 1, 2021 and
its adoption did not have a material effect on the Companys financial statements and 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 May 14, 2021, the date of issuance of these financial
statements. Subsequent events are disclosed in Note 11.
TORCHLIGHT
ENERGY RESOURCES, INC.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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The
following table presents the capitalized costs for oil & gas properties of the Company as of March 31, 2021 and December 31,
2020:
Unevaluated
costs as of March 31, 2021 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 any
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 any 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 March 31, 2021 and December 31, 2020. As of March 31, 2021, evaluated costs are $-0- since we have no proved reserve value
associated with our properties.
TORCHLIGHT
ENERGY RESOURCES, INC.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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4.
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OIL
& GAS PROPERTIES - continued
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Due
to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that a 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 March 31, 2021, 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 March 31, 2021, leases covering approximately 134,000 acres remain
in effect.
We
believe all drilling obligations through March 31, 2021 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 2021 and five wells per year in years 2022, 2023 and 2024. 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.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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4.
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OIL
& GAS PROPERTIES - continued
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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 March 31, 2021 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 March 31, 2021 is detailed as follows:
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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4.
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OIL
& GAS PROPERTIES - continued
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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.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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4.
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OIL
& GAS PROPERTIES - continued
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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 and in April 2021) MHP now has the
option to purchase the entire Hazel Project no later than September 30, 2021; provided, however, that the Option Price increases
by $500,000 on the first of every calendar month beginning on June 1, 2021, without proration, during the option period. Further,
the option period will expire upon the occurrence of the earlier of following: (1) if MHP fails to, no later than 30 days prior
to the date of any drilling obligation on the Hazel Project, deliver notice of intent to conduct operations sufficient to satisfy
such obligation; or (2) if MHP fails to commence operations sufficient to satisfy any drilling obligation on the Hazel Project
seven days prior to the deadline for satisfying the applicable drilling obligation.
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 (subject to additions as described above) 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%.
Hunton
Play, Central Oklahoma
Presently,
we are producing from one well in the Viking Area of Mutual Interest and one well in Prairie Grove.
Assessment
for Assets Held for Sale Classification
With
respect to marketing oil and natural gas properties, the Company has evaluated the properties being marketed to determine whether
any should be reclassified as held-for-sale at March 31, 2021. The held-for-sale criteria include: management commits to a plan
to sell; the asset is available for immediate sale; an active program to locate a buyer exists; the sale of the asset is probable
and expected to be completed within one year; the asset is being actively marketed for sale; and it is unlikely that significant
changes to the plan will be made. If each of these criteria is met, the property would be reclassified as held-for-sale on the
Companys consolidated balance sheets and measured at the lower of their carrying amount or estimated fair value less costs
to sell. Fair values are estimated using accepted valuation techniques, such as a discounted cash flow model, valuations performed
by third parties, earnings multiples, or indicative bids, when available. Management considers historical experience and all available
information at the time the estimates are made; however, the fair value that is ultimately realized upon the sale of the assets
to be divested may differ from the estimated fair values reflected in the consolidated financial statements. If each of these
criteria is met, DD&A expense would not be recorded on assets to be divested once they are classified as held for sale. Based
on managements assessment, certain criteria have not been met and no assets are classified as held for sale as of March
31, 2021.
5.
|
RELATED
PARTY PAYABLES
|
As
of March 31, 2021 and December 31, 2020, related party payables were $45,000 and $98,805, respectively, due to our executive officers
and directors. Accrued payroll was $-0- and $1,213,779, respectively, consisting of accrued and unpaid compensation due to our
executive officers.
As
of March 31, 2021 and December 31, 2020, there was $99,820 and $92,320, respectively, for an account receivable due from McCabe
Petroleum Corporation for amounts advanced related to the Orogrande development cost sharing agreement.
6.
|
COMMITMENTS
AND CONTINGENCIES
|
Leases
The
Company is a subtenant on a month to month basis for the occupancy of its office premises subject to a sublease agreement
through October 31, 2021 for occupancy of its office premises which requires monthly rent payments of $3,512.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
6.
|
COMMITMENTS
AND CONTINGENCIES - continued
|
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, and a hearing
was held on April 13, 2021. As of the date of this filing, the Court has not issued an order granting or denying Goldstone Holding
Company, LLCs request to re-instate its claims. 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 Hudspeth for breach of contract, seeking the same amount as the lien. 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.
On
March 18, 2021, Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies filed a lawsuit in Hudspeth County, Texas seeking to foreclose
its mineral lien against the Orogrande Field in the amount of $104,500.01 and recover related attorneys fees. The foreclosure
action, Datalog LWT Inc. d/b/a Cordax Evaluation Technologies v. Torchlight Energy Resources, Inc., was filed in the 205th
Judicial District Court of Hudspeth County, Texas. We are contesting the lien in good faith and filed a Plea in Abatement on May
10, 2021, seeking a stay in the Hudspeth County lien foreclosure case pending final disposition of the related case currently
pending in 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 March 31, 2021, and December 31, 2020, 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.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
Common
Stock
On
January 13, 2021, the Company sold 300,000 shares of common stock for cash at $0.80 per share for total proceeds of $240,000 in
a private placement.
On
February 10, 2021 the Company closed its underwritten public offering of 23,000,000 shares of its common stock at a public offering
price of $1.20 per share, for total proceeds of $25,689,649 after deducting underwriting discounts and other offering expenses
payable by the Company.
On
February 16, 2021, the Company issued 186,329 shares of common stock in satisfaction of the payment in kind valued at $248,479
in connection with the final conversion into common stock of the promissory notes previously held by the Straz Foundation and
the Straz Trust (see Note 9 below).
During
the three months ended March 31, 2021, the Company issued 25,000 shares of common stock with a fair value of $34,250 as compensation
for services.
During
the three months ended March 31, 2021, the Company issued 16,725,797 shares of common stock to promissory note holders with a
fair value of $17,183,624 in conversion of principal and accrued interest on notes payable.
Warrants
and Options
During
the three months ended March 31, 2021, the Company issued 1,803,277 shares of common stock in warrant and option exercises.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
7.
|
STOCKHOLDERS
EQUITY - continued
|
A
summary of warrants outstanding as of March 31, 2021 by exercise price and year of expiration is presented below:
A
summary of stock options outstanding as of March 31, 2021 by exercise price and year of expiration is presented below:
At
March 31, 2021, the Company had reserved 8,670,324 common shares for future exercise of warrants and options.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
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 during the year ended December 31, 2020 were as follows:
No
warrants or options were issued during the three months ended March 31, 2021.
The
Company recorded no income tax provision at March 31, 2021 and December 31, 2020 because of losses incurred.
The
Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions
in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the
quarter in which they occur. The Company recorded no income tax expense for the three months ended March 31, 2021 because the
Company expects to incur a tax loss in the current year. Similarly, no income tax expense was recognized for the three months
ended March 31, 2020.
The
Company had a net deferred tax asset related to federal net operating loss carryforwards of $78,903,136 and $77,359,811
at March 31, 2021 and December 31, 2020, 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 (UNAUDITED)
|
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 is due and payable on the notes each month at
the rate of 12% per
annum, with a balloon payment of the outstanding principal due and payable at maturity on April
10, 2020. The holders of the notes will also
receive annual payments of common stock at the rate of 2.5% of principal amount outstanding, based on a volume-weighted average
price. Both notes were sold at an original issue discount of 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 notes were amended in April 2020 to, among other thing, extend
the maturity date to April 10, 2021 and provide conversion rights at a conversion price of $1.50 per share of common
stock.
During
the quarter ended March 31, 2021 the notes were retired in full by conversion into the Companys common stock. Unamortized debt
issuance cost related to these notes of $80,040 was transferred to Additional Paid in Capital.
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 will also receive annual payments of common stock at the rate of 2.5% of principal amount
outstanding, based on a volume-weighted average price. We sold the note at an original issue discount of 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 note was amended in April 2020 to, among other thing,
extend the maturity date to April 10, 2021 and provide conversion rights at a conversion price of $1.50 per share of common
stock.
During
the quarter ended March 31, 2021 the note was retired in full by conversion into the Companys common stock.
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 contain
a conversion right for holders to convert into a working interest in the Orogrande Project of the Company, meet a specific scope
exception to the provisions requiring derivative accounting.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
9.
|
PROMISSORY
NOTES - continued
|
On
March 9, 2020, each of the noteholders entered into a Conversion Agreement with us and our subsidiary Hudspeth Oil Corporation
(Hudspeth), under which the noteholders elected to convert the notes, in accordance with their terms, into an aggregate
6% working interest (of all such holders) in certain oil and gas leases in Hudspeth County, Texas, known as our Orogrande
Project. Principal of $6,000,000 and approximately $1,331,000 of accrued interest were converted at March 9, 2020 to retire
the notes in full.
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
for the three months ended March 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 have the right
to convert principal and interest at any time into common stock at a conversion price of $1.08
per share. The Company has the right to redeem
the notes at any time, provided that the redemption amount must include all interest that would have been earned through maturity.
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.
During
the quarter ended December 31, 2020, $1,000,000 was converted into common stock. During the quarter ended March 31, 2021 the remaining
balance of the notes was retired in full by conversion into the Companys common stock.
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
9.
|
PROMISSORY
NOTES - continued
|
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 are due at maturity on May
21, 2021. The principal and accrued interest
on the notes are convertible into shares of common stock at $1.10
per common share at any time after the original
issue date. Along with the notes, the three year warrants equal to 20% of the number of shares of common stock issuable upon the conversion
of the notes were issued to note holders. The warrants are exercisable at $1.35
per share.
During
the quarter ended March 31, 2021 the notes were retired in full by conversion into the Companys common stock. Unamortized debt issuance costs related to these notes of $505,957 was transferred to interest expense.
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 had an interest rate of 0.98% with a maturity date of 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. On March 31, 2021, the U.S
Small Business Administration notified the Company that the Companys PPP loan was forgiven in full, including all principal
and interest outstanding as of the date of forgiveness and, as such, $77,477 has been recognized as an other income on the Companys
consolidated statement of operations.
Secured
Convertible Promissory Note Issued in Third 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. Under the terms of the note, the $500,000 from this escrow account was released to us, and we lent this amount
to Metamaterial pursuant to another convertible promissory note (the Second Metamaterial Note).
TORCHLIGHT
ENERGY RESOURCES, INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
9.
|
PROMISSORY
NOTES - continued
|
The
MPC Note was secured by our pledge of the Metamaterial Note and the Second Metamaterial 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.
During
the quarter ended March 31, 2021 both the MPC Note and the $100,000 note were retired in full by conversion into the Companys
common stock.
Loans
to Metamaterial Inc.
On
September 20, 2020, we loaned Metamaterial $500,000, evidenced by an 8% Unsecured Convertible Promissory Note. An additional $500,000
was loaned on December 16, 2020. The notes bear interest at the rate of 8% per annum and provide for payment of the principal
amount along with all accrued and unpaid interest in one lump sum payment on its maturity date of September 20, 2022. Metamaterial
has the right to redeem after 120 days. The notes are convertible at the price of $0.35 (CAD) per share at the option of the holder
if the Arrangement Agreement with Metamaterial is terminated or expires without closing.
On
February 18, 2021, Torchlight loaned to Meta $10,000,000, evidenced by a convertible promissory note issued by Meta (the Promissory
Note), to satisfy Torchlights requirement to provide additional bridge financing to Meta pursuant to the Arrangement
Agreement. The Promissory Note is unsecured and bears interest at a rate of 8% per annum. The outstanding principal amount, all
accrued and unpaid interest, and all other amounts accrued under the Promissory Note will be due and payable in one lump sum payment
on February 18, 2022 (the Maturity Date). On or after June 18, 2021, the outstanding principal amount of the Promissory
Note, in whole or in part, plus any accrued and unpaid interest, may be repaid at the option of Meta at any time upon not less
than 10 nor more than 30 days written notice to Torchlight. If the Arrangement Agreement is terminated or expires without the
completion of the Arrangement, Torchlight will have the right to convert all or any portion of the principal amount and any accrued
but unpaid interest under the Promissory Note into Common Shares at a conversion price of CAD$2.80 per Common Share (subject to
adjustment as described in the Promissory Note). Further, if the Arrangement is not completed, Meta will be obligated to repay
to Torchlight the total unpaid balance of the principal and interest under the Promissory Note, to the extent not converted into
Common Shares, on the Maturity Date.
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.
|
10.
|
ASSET
RETIREMENT OBLIGATIONS
|
The
following is a reconciliation of the asset retirement obligations liability through March 31, 2021:
In
May 2021 the company issued 250,000
shares of common stock in exercise of warrants.