Meta Materials (MMATQ) 10-Q 2014 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended September 30, 2014.

o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required)

For the transition period from _______ to _______.

Commission file number: 001-36247

TORCHLIGHT ENERGY RESOURCES, INC.

(Name of registrant in its charter)

Nevada	74-3237581
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

5700 West Plano Pkwy, Suite 3600

Plano, Texas 75093

(Address of Principal Executive Offices)

 (214) 432-8002

(Issuer's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Common Stock ($0.001 Par Value)

(Title of Each Class)

NASDAQ

(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

As of November 6, 2014, there were 23,202,941 shares of the registrant’s common stock outstanding (the only class of voting common stock).  

1

FORM 10-Q

TABLE OF CONTENTS

Note About Forward-Looking Statements		3
PART I	FINANCIAL INFORMATION	4
Item 1.	Consolidated Financial Statements	4
	Consolidated Balance Sheets (Unaudited)	4
	Consolidated Statements of Operations (Unaudited)	5
	Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	21
PART II	OTHER INFORMATION	22
Item 1.	Legal Proceedings	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	23
	Signatures	24

2

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions, and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including without limitation, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2013, and in particular, the risks discussed in our Form 10-K under the caption “Risk Factors” in Item 1A therein, and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to, risks associated with the company's ability to obtain additional capital in the future to fund planned expansion, the demand for oil and natural gas, general economic factors, competition in the industry, and other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated, or expected. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

As used herein, the “Company,” “Torchlight”, “we,” “our,” and similar terms include Torchlight Energy Resources, Inc. and its subsidiaries, unless the context indicates otherwise.

3

PART I   FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
	September 30,		December 31,
	2014		2013
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash	$	561,329	$	1,811,713
Accounts receivable		205,958		429,699
Production revenue receivable		972,026		-
Note receivable		408,755		-
Prepayments - development costs		636,635		0
Prepaid expenses		24,375		9,144
Total current assets		2,809,078		2,250,556
Investment in oil and gas properties, net		33,288,968		13,038,751
Office Equipment		58,428		11,604
Debt issuance costs, net		553,495		920,947
Goodwill		447,084		447,084
Other Assets		78,850		74,379
TOTAL ASSETS	$	37,235,903	$	16,743,321
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3,777,014	$	985,123
Accrued liabilities		240,000		-
Related party payables		90,000		90,000
Convertible promissory notes, net of discount of $1,495,653
at September 30, 2014		6,621,945		-
Notes payable within one year		67,923		753,904
Due to working interest owners		362,550		580,484
Interest payable		388,113		309,498
Total current liabilities		11,547,545		2,719,009
Convertible promissory notes, net of discount of $688,656 at September 30, 2014   and $5,500,462 at December 31, 2013		3,880,844		4,802,711
Asset retirement obligation		34,455		24,382
Commitments and contingencies		-		-
Stockholders’ equity:
Common stock, par value $0.001 per share; 75,000,000 shares authorized;  23,187,941 issued and outstanding at September 30, 2014 16,141,765 issued and outstanding at December 31, 2013		23,187		16,142
Additional paid-in capital		43,385,949		21,978,616
Warrants outstanding		7,511,820		3,043,420
Accumulated deficit		-29,147,897		-15,840,959
Total stockholders' equity		21,773,059		9,197,219
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	37,235,903	$	16,743,321

The accompanying notes are an integral part of these consolidated financial statements.

4

TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
	THREE MONTHS			THREE MONTHS			NINE MONTHS			NINE MONTHS
	ENDED			ENDED			ENDED			ENDED
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue
Oil and gas sales	$	1,941,715		$	430,782		$	4,214,720		$	837,901
SWD and royalties		12,305			23,774			61,269			33,078
Cost of revenue		(429,353	)		(136,607	)		(1,005,588	)		(314,662	)
Gross income		1,524,667			317,949			3,270,401			556,317
Operating expenses:
General and administrative expense		2,295,901			2,701,062			9,435,148			4,815,712
Depreciation, depletion and amortization		777,016			539,782			1,739,719			894,366
Total operating expenses		3,072,917			3,240,844			11,174,867			5,710,078
Other income (expense)
Income - Cancellation of Debt		-			660,000			-			660,000
Interest income		14			6			70			46
Interest and accretion expense		(1,266,099	)		(1,120,985	)		(5,402,543	)		(1,856,444	)
Total other income (expense)		(1,266,085	)		(460,979	)		(5,402,473	)		(1,196,398	)
Net loss before taxes		(2,814,335	)		(3,383,874	)		(13,306,939	)		(6,350,159	)
Provision for income taxes		-			-			-			-
Net (loss)	$	(2,814,335	)	$	(3,383,874	)	$	(13,306,939	)	$	(6,350,159	)
Loss per share:
Basic and Diluted	$	(0.15	)	$	(0.24	)	$	(0.85	)	$	(0.47	)
Weighted average shares outstanding:
Basic and Diluted		18,231,409			13,858,030			15,687,540			13,655,021

The accompanying notes are an integral part of these consolidated financial statements.

5

TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
	NINE MONTHS			NINE MONTHS
	ENDING			ENDING
	September 30, 2014			September 30, 2013
Cash Flows From Operating Activities
Net (loss)	$	(13,306,939	)	$	(6,350,159	)
Adjustments to reconcile net loss to net cash from operations:
Stock based compensation		5,834,186			3,357,148
Accretion of convertible note discounts		4,676,739			1,451,237
Income - Cancellation of Debt		-			(660,000	)
Depreciation, depletion and amortization		1,739,719			894,366
Change in:
Accounts receivable		96,258			566,511
Note receivable		(294,318	)		-
Production revenue receivable		(972,026	)		-
Prepayment of development costs		(636,635	)		-
Prepaid expenses		(15,231	)		(65,286	)
Debt isssuance costs		(150,000	)		(720,450	)
Other assets		(4,471	)		(21,406	)
Accounts payable and accrued liabilities		2,706,835			(457,835	)
Related party payable		-			(18,648	)
Due to working interest owners		(217,934	)		167,056
Asset retirement obligation		10,073			-
Interest payable		88,885			170,885
Capitalized interest		(260,096	)		-
Net cash used in operating activities		(704,955	)		(1,686,581	)
Cash Flows From Investing Activities
Investment in oil and gas properties		(16,363,979	)		(5,101,434	)
Acquisition of office equipment		(53,960	)		(10,434	)
Proceeds from Sale of Leases		-			86,400
Net cash used in investing activities		(16,417,939	)		(5,025,468	)
Cash Flows From Financing Activities
Proceeds from sale of common stock		10,632,791			-
Proceeds from issuance of convertible notes		4,569,500			8,465,288
Proceeds from warrant exercise		706,782			-
Proceeds from promissory notes		53,695			-
Repayment of promissory notes		(90,258	)		(601,000	)
Net cash provided by financing activities		15,872,510			7,864,288
Net increase (decrease) in cash		(1,250,384	)		1,152,239
Cash - beginning of period		1,811,713			63,252
Cash - end of period	$	561,329		$	1,215,491
Supplemental disclosure of cash flow information:
Non cash transactions:
Common stock issued for services	$	1,249,077		$	-
Warrants issued in connection with promissory notes	$	562,354		$	914,449
Warrants issued for services	$	4,663,865		$	-
Beneficial conversion feature on promissory notes	$	195,466		$	1,827,100
Liabilitities assumed-purchase of properties	$	-		$	1,809,572
Promissory note issued for debt issuance	$	-			(50,000	)
Sale of properties for note receivable	$	-		$	990,000
Common stock issued for mineral interests	$	5,136,879		$	1,233,967
Capitalized interest cost	$	260,096		$	32,335
Common stock issued in conversion of promissory notes	$	2,185,535		$	56,000
Common stock issued in warrant exercises	$	1,240,000		$	-
Asset retirement obligation	$	10,073		$	-
Cash paid for interest	$	855,703		$	244,643

The accompanying notes are an integral part of these consolidated financial statements.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.           NATURE OF BUSINESS

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.

On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) between the major shareholders of PPS and the shareholders of Torchlight Energy, Inc. (“TEI”).  As a result of the transactions effected by the Exchange Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business.  TEI was incorporated under the laws of the State of Nevada in June 2010.  We are engaged in the acquisition, exploitation and/or development of oil and natural gas properties in the United States.  In addition to TEI, we also operate our business through Torchlight Energy Operating, LLC, a Texas limited liability company and wholly-owned subsidiary.

On December 10, 2010, we effected a 4-for-1 forward split of our shares of common stock outstanding.  All owners of record at the close of business on December 10, 2010 (record date) received three additional shares for every one share they owned.  All share amounts reflected throughout this report take into account the 4-for-1 forward split.

Effective February 8, 2011, we changed our name to “Torchlight Energy Resources, Inc.”  In connection with the name change, our ticker symbol changed from “PPFT” to “TRCH.”

The Company is engaged in the acquisition, exploration, development, and production of oil and gas properties within the United States. The Company’s success will depend in large part on its ability to obtain and develop profitable oil and gas interests.

2.           GOING CONCERN

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.

At September 30, 2014, the Company has negative working capital of $8,738,467, had not yet achieved profitable operations, had accumulated losses of $29,147,897 since its inception, and expects to incur further losses in the development of its business, which casts substantial doubt about the Company’s 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.  Management’s plan to address the Company’s ability to continue as a going concern includes:  (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtaining loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties.  Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful.  The accompanying consolidated financial statements do not include any adjustments that might 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. These interim period unaudited financial statements should be read in conjunction with the audited financial statements and footnotes which are included as part of the Company’s Form 10-K, as amended, for the year ended December 31, 2013.  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 subsidiary, Torchlight Energy, Inc. All significant intercompany balances and transactions have been eliminated.

Risks and uncertainties – The Company’s 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.

7

Concentration of risks – The Company’s cash is placed with a highly rated financial institution, and the Company periodically reviews the credit worthiness of the financial institutions with which it does business. At times the Company’s cash balances are in excess of amounts guaranteed by the Federal Deposit Insurance Corporation.

Fair value of financial instruments – Financial instruments consist of cash, accounts receivable, notes receivable, accounts payable, notes payable to related party, and convertible promissory notes. The estimated fair values of cash, accounts receivable, notes receivable, accounts payable, and notes to related party approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of notes receivable and convertible promissory notes approximate their fair value giving affect for the term of the note and the effective interest rates.

For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration.

· Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

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 management’s best estimate of the amount that may not be collectible. As of September 30, 2014 and December 31, 2013 no valuation allowance was considered necessary.

Investment in 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. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves.

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.

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 nine months ended September 30, 2014, the Company capitalized $260,096 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 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 ceiling test calculation uses a commodity price assumption which is based on the weighted 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 Company did not recognize impairment on its oil and gas properties during the quarter ended September 30, 2014, nor any prior period. 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.

8

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.

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.

Gains and losses on the sale of oil and gas properties are not generally reflected in income. Sales of less than 100% of the Company’s 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.

Goodwill – Goodwill represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets of acquired companies. Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist.

Goodwill was $447,084 as of September 30, 2014 and December 31, 2013, and was acquired on November 23, 2010 in connection with the Company’s reverse acquisition (Note 1).

Asset retirement obligations – Accounting principles require that the fair value of a liability for an asset’s retirement obligation (“ARO”) be recorded in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the corresponding cost be 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 cost incurred is recorded as a reduction to 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.

Asset retirement obligation activity is disclosed in Note 10.

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. Compensation cost for liability awards is based on the fair value of the vested award at the end of each period.

Revenue recognition – The Company recognizes oil and gas revenues based on production date. When production is sold at a fixed or determinable price, persuasive evidence of an arrangement exists, delivery has occurred and title has transferred, and collectability is reasonably assured any revenue adjustments for volume variances are recognized.

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 Company has not included potentially dilutive securities in the calculation of loss per share for any periods presented as the effects would be anti-dilutive.

9

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.

Recent accounting pronouncements –

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Company’s financial position or results from operations.

Subsequent events – The Company evaluated subsequent events through November 14, 2014 the date of issuance of the financial statements. Subsequent events are disclosed in Note 11.

4.           RELATED PARTY PAYABLES

As of September 30, 2014, related party payables consisted of accrued and unpaid compensation to two of our executive officers totaling $90,000.

5.           COMMITMENTS AND CONTINGENCIES

The Company is subject to contingencies as a result of environmental laws and regulations.  Present and future environmental laws and regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time.  As of September 30, 2014 and December 31, 2013, 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.

6.           STOCKHOLDERS’ EQUITY

The Company’s Articles of Incorporation do not authorize the Board of Directors to issue any shares of preferred stock. As of September 30, 2014 there were no issued and outstanding shares of preferred stock and there were no agreements or understandings for the issuance of preferred stock.

During the quarter ended September 30, 2014, the Company issued 1,005,000 shares of common stock for cash of $3,412,500.

During the quarter ended September 30, 2014, the Company issued 365,000 shares of common stock as compensation for services valued at $1,080,500.

During the quarter ended September 30, 2014, the Company issued 400,000 shares of common stock for exercise of warrants.

During the quarter ended September 30, 2014 the Company issued 108,549 shares of common stock in conversions of convertible note principal of $189,960 and 432 shares for interest of $756 on convertible notes.

During the quarter ended September 30, 2014, the Company issued 868,750 shares of common stock for mineral interests valued at $1,911,250.

A summary of warrants and stock options outstanding as of September 30, 2014 by exercise price and year of expiration is presented below:

10

Exercise		Expiration Date in
Price		2014		2015		2016		2017		2018		2019		Total
$	1.75		80,000		855,000		1,135,714		-		-				2,070,714
$	2.00		-		-		1,035,271		126,000		1,696,380				2,857,651
$	2.09										2,800,000				2,800,000
$	2.50		125,000		30,000		100,000		-		-				255,000
$	2.75						250,000								250,000
$	2.82										38,174				38,174
$	3.00						100,000								100,000
$	4.50												700,000		700,000
$	5.00		-		-		25,000		20,000						45,000
$	6.00										577,501		330,341		907,842
$	7.00												700,000		700,000
			205,000		885,000		2,645,985		146,000		5,112,055		1,730,341		10,724,381

At September 30, 2014 the Company had reserved 10,724,381 shares for future exercise of warrants and stock options.

Warrants issued in relation to the promissory notes issued (see note 9) were valued using the Black-Scholes Option Pricing Model. The assumptions used in calculating the fair value of the warrants issued are as follows:

Risk-free interest rate		0.78	%
Expected volatility of common stock		148% - 247	%
Dividend yield		0.00	%
Discount due to lack of marketability	20% to 30		%
Expected life of warrant	3 – 5 years

7.           INVESTMENT IN OIL AND GAS PROPERTIES

The following table presents the investment in oil and gas properties of the Company as of September 30, 2014 and December 31, 2013:

	9/30/2014			12/31/2013
Evaluated costs subject to amortization	$	25,363,838		$	9,484,014
Unevaluated costs		10,861,782			4,758,806
Total capitalized costs		36,225,620			14,242,820
Less accumulated depreciation, depletion  and amortization		(2,936,652	)		(1,204,069	)
Net capitalized costs	$	33,288,968		$	13,038,751

Unevaluated costs as of September 30, 2014 total $10,861,782 including $705,765 associated with the Company’s interest in the Coulter #1 well.  The Coulter #1 wells is undergoing production and test operations with the goal of removing sufficient water from the wellbore to allow production of natural gas. Other unevaluated costs are related to accumulated mineral lease costs in the Cimarron and Chisholm Trail AMI’s in Oklahoma.

In April 2013, we entered into an agreement to acquire certain assets of Xtreme Oil & Gas, Inc. of Plano, Texas (“Xtreme”).  Included in that agreement were the Smokey Hills Prospect in McPherson County, Kansas, the Cimarron Area Hunton Project in Logan County, Oklahoma, and an interest in a salt water disposal facility in Seminole, Oklahoma.  Total consideration for all the properties was $1.6 million.

During the second quarter, 2014 the Company acquired an additional interest in Hunton properties in exchange for 902,845 shares of common stock valued at $3,193,029. This acquisition increased the percentage ownership in leased acreage and working interests in various Hunton wells.

During the third quarter, 2014, the Company acquired an interest in the Orogrande Leases in West Texas in exchange for 868,750 shares of common stock valued at $1,911,250.

11

8.           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.  The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.

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 Company’s tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements.  The Company’s tax returns remain subject to federal and state tax examinations for all tax years since inception as none of the statutes have expired.  Generally, the applicable statutes of limitation are three to four years from their respective filings.

Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of operation.  The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements.

As of December 31, 2013 the Company had federal net operating loss carry forwards of approximately $12.6 million available to offset future taxable income, and has incurred additional taxable losses during 2014.  These loss carry forwards will expire in various years through 2032, if not previously utilized. Utilization of these net operating loss carry forwards is dependent, in part, on generating sufficient taxable income prior to the expiration of such loss carry forwards.  In addition, the Company’s ability to utilize its net operating loss carry forwards may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382.

9.           PROMISSORY NOTES

On December 18, 2012, the Company exchanged $412,500 of outstanding convertible promissory notes for new 12% Series A Secured Convertible Promissory Notes (“12% Notes”) described below.  The 12% Notes were issued as part of a larger offering with senior liens on the Company’s oil and gas properties.  In order to induce the holders of the previously outstanding convertible promissory notes to exchange such promissory notes and to relinquish their priority liens on the Company’s oil and gas properties in favor of all 12% Convertible Promissory Note holders, the Company agreed to grant the note holders a total of 235,714 four year warrants to purchase common stock at $1.75 per share, valued at $240,428, and 235,714 four year warrants to purchase common stock at $2.00 per share, valued at $233,357.  The total of these warrants, $473,785, is reflected as debt issuance costs on the balance sheet, as these costs relate to the larger offering of 12% Convertible Promissory Notes.

On December 18, 2012, the Company issued $690,000 of 12% Notes to new investors.   The 12% Notes are due and payable on March 31, 2015 and provide for conversion into common stock at a price of $1.75 per share and include the issuance of 8,000 warrants for each $70,000 of principal amount purchased.  The warrants carry a five year term and have an exercise price of $2.00 per share.  They were valued at $137,340, which is reflected as a discount on the 12% Notes, to be amortized over the life of the debt under the effective interest method.  Since the conversion price on the 12% Notes was below the market price of the Company’s common stock on the date of issuance, this constitutes a beneficial conversion feature.  The amount is calculated as the difference between the market price of the common stock on the date of closing and the effective conversion price as adjusted by the discount for the warrants issued.  The amount of the beneficial conversion feature was $390,600, and is also reflected as a discount on the 12% Notes.  The fair value of the 12% Notes is determined utilizing Level 2 measurements in the fair value hierarchy.

During the year ended December 31, 2013, the Company issued an additional $10,895,773 in principal value of 12% Notes.  Such notes carry the same terms as described above.  In connection therewith, the Company also issued a total of 1,308,082 five-year warrants to purchase common stock at an exercise price of $2.00 per share.  The value of the warrant shares was $1,917,158 and the amount recorded for the beneficial conversion feature was $5,770,654.  These amounts were recorded as a discount on the 12% Notes.  In addition, the Company engaged a placement agent to source investors for the majority of these additional notes.

12

This placement agent was paid a fee of 10% of the principal amount of the notes plus a non-accountable expense reimbursement of up to 2% of the principal raised by the agent.  The placement agent also received 552,057 warrants to purchase common shares at $2.00 per share for a period of three years, valued at $614,163.  All the amounts paid to the placement agent have been included in debt issuance costs and will be amortized into interest expense over the life of the 12% Notes.  

The 12% Notes described above have a first priority lien on all of the assets of the Company. 

During the quarter ended June 30, 2014, the Company issued an additional $3,197,500 in principal value of 12% Series B Convertible Unsecured Promissory Notes. The 12% Notes are due and payable on June 30, 2017 and provide for conversion into common stock at a price of $4.50 per share and included the issuance of one warrant for each $22.50 of principal amount purchased.  The Company issued a total of 142,111 of these five-year warrants to purchase common stock at an exercise price of $6.00 per share.  The value of the warrant shares was $405,016 and the amount recorded for the beneficial conversion feature was $195,466.  These amounts were recorded as a discount on the 12% Notes.

During the quarter ended September 30, 2014, the Company issued an additional $1,372,000 in principal value of 12% Series B Convertible Unsecured Promissory Notes. The 12% Notes are due and payable on June 30, 2017 and provide for conversion into common stock at a price of $4.50 per share and included the issuance of one warrant for each $22.50 of principal amount purchased.  The Company issued a total of 60,974 of these five-year warrants to purchase common stock at an exercise price of $6.00 per share.  The value of the warrant shares was $157,388 and the amount recorded for the beneficial conversion feature was $-0-.  These amounts were recorded as a discount on the 12% Notes.

10.           ASSET RETIREMENT OBLIGATIONS

The following is a reconciliation of the asset retirement obligation liability through September 30, 2014:

Asset retirement obligation – January 1, 2012	$	11,369
Adjustment to estimated liability		693
Accretion expense		552
Asset retirement obligation – December 31, 2012	$	12,614
Estimated liabilities recorded		10,407
Accretion Expense		1,361
Asset retirement obligation – December 31, 2013	$	24,382
Accretion Expense		534
Asset retirement obligation – March 31, 2014	$	24,916
Accretion Expense		1,059
Asset retirement obligation – June 30, 2014	$	25,975
Estimated liabilities recorded		7,390
Accretion Expense		1,090
Asset retirement obligation – September 30, 2014	$	34,455

11.           SUBSEQUENT EVENTS - None

13

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Basis of Presentation of Financial Information

On November 23, 2010, the Share Exchange Agreement (the “Exchange Agreement” or “Transaction”) between Pole Perfect Studios, Inc. (“PPS”) and Torchlight Energy, Inc. (“TEI”) was entered into and closed, through which the former shareholders of TEI became shareholders of PPS. At closing, PPS abandoned its previous business. Consequently, as a result of the Transaction, the business of TEI became our sole business. In addition to TEI, we also operate our business through Torchlight Energy Operating, LLC, a Texas limited liability company and wholly-owned subsidiary.

Summary of Key Results

Overview

We are engaged in the acquisition, exploration, exploitation, and/or development of oil and natural gas properties in the United States.

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited financial statements included herewith and our audited financial statements included with our Form 10-K, as amended, for the year ended December 31, 2013.  This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.  Such discussion represents only the best present assessment by our management.

We had no active operations prior to the inception of TEI on June 25, 2010 and had limited revenues prior to the year ended December 31, 2012.  

Current Projects

We currently have interests in four oil and gas projects, the Marcelina Creek Field Development in Wilson County, Texas, the Ring Energy Joint Venture in Southwest Kansas, the Hunton play in partnership with Husky Ventures in Central Oklahoma, and the Orogrande Project in West Texas. Two additional projects, the Coulter in Waller County Texas and the Smokey Hill Prospect in McPhereson County Kansas, have been suspended pending additional technical review and possible sale of the assets.

The Coulter is a non-core, non-producing asset which we will attempt to monetize by sale of the lease. We presently have approximately 970 acres.

The Smokey Hill prospect is also non-core and we will attempt to sell the remaining leases as well as the well bores we have. We presently have approximately 4,200 acres under lease and four well bores.

Marcelina Creek Field Development.  

On July 6, 2010, TEI entered into a participation agreement with Bayshore Operating Corporation, LLC (“Bayshore”), which is currently the holder of an oil, gas and mineral lease covering approximately 1,045 acres in Wilson County, Texas, known as the Marcelina Creek Field Development.  The Participation Agreement provides for the drilling of four wells. Three of the obligation wells have been drilled.  The first three wells include a horizontal re-entry well known as the Johnson-1-H, a vertical well known as the Johnson #4, and a lateral well known as the Johnson #2-H.  These three wells are presently producing a total of approximately 75 BOPD.  The remaining earning well is to be a vertical development well at a location to be determined within the existing lease.  The company has 1,045 acres in the Project, all held by production.

The Marcelina Creek Field Development is located over the Austin Chalk, Buda and Eagle Ford Formations, which formations are well known and established producers in central Texas.  Their production is controlled by vertical fracturing of the rock with high productivity in wells which encounter the greatest amount of fractures.  With the advent of horizontal drilling technology, numerous opportunities exist in areas and fields that were only drilled vertically.

14

The Ring Energy Joint Venture, Southwest Kansas

In October 2013, we entered into a Joint Venture agreement with Ring Energy. The agreement called for us to provide for $6.2 million in drilling capital to, in effect, match Ring Energy’s expenditures for leasing. In exchange for this commitment, we would receive a 50% interest in each well bore drilled and the acreage unit it held, until we had spent $6.2 million.  At such time, we would then receive a 50% Working Interest in the entire lease block consisting of 17,000 +/- acres.  We were to provide $3.1 million in advance of the program commencing, which would cover approximately 5 wells to be drilled and completed.  Once the initial five wells are completed, we and Ring would evaluate the program and the drilling activity and determine if another five wells are to be drilled.  Should we continue with the program, we would then deposit another $3.1 million with Ring for drilling and completion of the next five wells.

We made the initial $3.1 million deposit and the first five well drilling program is currently underway. Well locations have been selected and drilling operations have commenced in March, 2014. As of September 30, 2014 seven wells have been drilled – three are producing, two were drilling at September 30, one can be converted to a salt water disposal well, and one was not completed. A decision has been made to acquire 3-D seismic data to assist the selection of future drill sites. Daily production at September 30, 2014 was approximately 45 BOPD.

As of September 30, 2014, the Company had invested approximately $4,000,000 in the Ring Joint Venture.

Hunton Play, Central Oklahoma

In our April, 2013 transaction with Xtreme Oil and Gas  we acquired three Hunton wells, the Hancock, Robinson and Lenhart.  The Hancock and Robinson are producing wells but have small working interests of 1% and .25 of 1%, respectively.

The Lenhart well is a 62% working interest and was being prepared for a fracture stimulation when it was previously damaged, prior to our acquisition, by the service contractor.  The well bore at the Hunton level has an irretrievable pipe in the hole and cannot be used to produce from the Hunton.  Although Xtreme won the litigation against the contractor,  the contractor failed to pay for the replacement of the well bore, and Xtreme was responsible for costs primarily to Baker-Hughes for work done on the well.  We took responsibility for those charges and negotiated a settlement of approximately $600,000.

Subsequent to the above, we have identified a shallow sandstone that could potentially be productive.    As of September 30, 2014 our attempt to restart of production of the well has resulted in nominal gas production.

During the second quarter of 2013, Torchlight entered into an agreement with Husky Ventures to participate in the drilling of wells to the Hunton Formation in central Oklahoma. We continue to expand this relationship with Husky Ventures on a monthly basis as we expand our lease acreage in the contracted Areas of Mutual Interest (AMI’s).

When Torchlight executed the agreement Husky had already drilled and completed 18 successful wells in the Hunton.  We estimated that Husky had spent, or caused to be spent, $125 million dollars in what we considered a Research and Development project.  The results of Husky’s initial program lead them to develop certain drilling and completions techniques of which we could participate in and take advantage of.

The terms in our agreement with Husky are that we pay our proportionate costs of leases and operating expenses based on our working interest.  However, for the drilling costs based on the AFE, we carry Husky for 15% based on our working interest participation. This is not a carry on revenue, but rather only a carry on the original AFE.   This is to compensate Husky for the initial program mentioned above and, additionally, the project coordination of the geological, leasing, legal and title opinions, survey and permitting, all drilling, frac design, completion and equipping, day to day operations, and accounting and filing all required monthly and annual reporting to all governmental agencies.

Torchlight believes this is an equitable agreement in that we have the benefit of the initial programs results while participating with a proven operator in areas that continue to provide us with outstanding results in a safe investment environment.

Specifically, we were able to negotiate a 15% working interest in approximately 3,700 acres in the Cimarron Area of Logan County in May 2013.  Leasing continued monthly which resulted in our acreage increasing to 5,061 by December 31, 2013. Within a week, the Boeckman #1-H well was spud and was subsequently completed and fracture stimulated in July.  At September 30, 2014, the Boeckman well continues to produce at a rate of approximately 50 barrels of oil per day and 400 thousand cubic feet of gas per day. We acquired a working interest in the Boeckman #1-H well and subsequently sold part of our ownership in the Boeckman well for $990,000. The purchaser executed a promissory note dated May 1, 2013 for the purchase. We have collected the balance in full. We agreed to a preferential payout to the purchaser equal to 50% of his acquired interest.  The agreement was amended in the first quarter of 2014 to include our agreement to advance funds under a note receivable from the purchaser to be repaid from the purchaser’s revenue preference subsequent to October, 2014.  Revenue payable to the investor based on revenue to September 30, 2014 has been accrued in the accompanying financial statements.

In the third quarter of 2013, we acquired from a third party for stock, a 15.3% working interest in 5011+/- acres in the Chisolm Trail AMI with Husky Ventures Inc. as the operator. Leasing also continued monthly in this AMI increasing our acreage to 8,665 as of December 31, 2013. Our undeveloped acreage position at September 30, 2014 totals 10,535acres. This acquisition will allow us to participate in 60+ gross wells in the coming two years.  This acquisition along with the previous acreage position in the Cimarron Trail will give us 80+ drilling locations in the two AMI’s. It is our intention to continue to increase this position through continuing leasing and forced pooling.

15

In the fourth quarter of 2013 we entered into our 3rd Area of Mutual Interest (AMI) with Husky Ventures, the Viking Prospect.  This AMI covers four townships in size. We acquired a 25% interest in 3,945 acres in the Viking.   Leasing is continuing monthly so that we had an interest in 5,975 acres as of September 30, 2014. In second quarter, 2014 Husky spud the first two wells in the AMI. 

In January of 2014, we elected to expand in the Hunton Play with Husky Ventures.  We contracted for a 25% Working Interest in the R4 AMI consisting of eight townships in Oklahoma.  There is an active ongoing leasing program in this AMI.  Our acreage position at September 30, 2014 totals 9074 acres. Our 2014 cumulative investment through September 30, 2014 in the R4 was $2,191,895.

In February of 2014, we acquired a 10% Working Interest in a Hunton well in the P5 AMI from a non-consenting third party who elected not to participate in the first well. As of June 30, we had invested $819,168 in that first well drilled in this AMI.

During the second quarter, 2014 the Company acquired additional interest in Hunton properties in exchange for 902,845 shares of common stock valued at $3,193,029. This acquisition increased the percentage ownership in leased acreage and working interests in various Hunton wells.

In July of 2014, we elected to further expand in the Hunton Play with Husky Ventures.  We contracted for a 25% Working Interest in the T4 AMI.  There is an active ongoing leasing program in this AMI.  Our acreage position at September 30, 2014 totals 1,690 acres. Our 2014 cumulative investment through September 30 in the R4 was $374,391.

The Company’s relationship with Husky Ventures for participation in the Hunton wells continues to expand as to the number of wells drilling, and increases in the working interest percentages being acquired. Husky moved from a two rig drilling program as of December 31, 2013 to a five rig drilling program in second quarter, 2014. As of September 30, 2014, three rigs are active with a scheduled return to the five rig program early in 2015. This increased activity coupled with the ongoing leasing activity has provided opportunities for the Company to deploy increasing amounts of capital to the Hunton well development opportunities and accounts for the remaining increase in our Investment in Oil and Gas Properties for the nine months ended September 30, 2014.

As of September 30, 2014, we are actively producing from 28 wells and drilling, fracking, or flowing back in an additional ten  wells across all of our AMI’s with Husky Ventures.

Orogrande Project, West Texas

On August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum Corporation (“MPC”), and Greg McCabe.  Mr. McCabe is the sole owner of both Hudspeth and MPC.  Under the terms and conditions of the Purchase Agreement, at closing, we purchased 100% of the capital stock of Hudspeth which  hold certain oil and gas assets, including a 100% working interest in 172,000 mostly contiguous acres in the Orogrande Basin in West Texas.  This acreage is in the primary term under five-year leases that carry additional five-year extension provisions.  As consideration, at closing we issued 868,750 shares of our common stock to Mr. McCabe and paid a total of $100,000 in geologic origination fees to third parties.  Additionally, Mr. McCabe will have an optional 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.  Closing of the transactions contemplated by the Purchase Agreement occurred on September 23, 2014.  

16

Summary of 2014 Acquisition Activity

During the nine months ended September 30, 2014, our additional investment in oil and gas properties totaled $21,500,858.

In January of 2014, we elected to expand in the Hunton Play with Husky Ventures.  We contracted for a 25% Working Interest in the R4 AMI consisting of eight townships in Oklahoma.  There is an active ongoing leasing program in this AMI.  Our acreage position at September 30, 2014 totals 9074 acres. Our 2014 cumulative investment through September 30 in the R4 was $2,191,895.

In February of 2014, we acquired a 10% Working Interest in a Hunton well in the P5 AMI from a non-consenting third party who elected not to participate in the first well. As of September 30, we had invested $819,168 in that first well  drilled in this AMI.

Also in February, 2014 we made an additional payment toward our participation with Ring Energy in the amount of $2,090,301.

During the second quarter, 2014 the Company acquired additional interest in Hunton properties in exchange for 902,845 shares of common stock valued at $3,193,029. This acquisition increased the percentage ownership in leased acreage and working interests in various Hunton wells.

In July of 2014, we elected to further expand in the Hunton Play with Husky Ventures.  We contracted for a 25% Working Interest in the T4 AMI.  There is an active ongoing leasing program in this AMI.  Our acreage position at September 30, 2014 totals 1,690 acres. Our 2014 cumulative investment through September 30 in the R4 was $374,391.

On August 7, 2014, we entered into a Purchase Agreement with Hudspeth, MPC, and Greg McCabe, as described above, acquiring  Hudspeth which  holds certain oil and gas assets, including a 100% working interest in 172,000 mostly contiguous acres in the Orogrande Basin in West Texas. 

The Company’s relationship with Husky Ventures for participation in the Hunton wells continues to expand as to the number of wells drilling, and increases in the working interest percentages being acquired. This increased activity coupled with the ongoing leasing activity has provided opportunities for the Company to deploy increasing amounts of capital to the Hunton well development opportunity and accounts for the remaining increase in our Investment in Oil and Gas Properties for the nine months ended September 30, 2014.

Salt Water Disposal Facility

As part of the April, 2013 Xtreme Oil and Gas transaction we acquired a 22.5% net royalty on a salt water disposal facility in Seminole, Oklahoma.  No value was placed on the facility due to operational uncertainty.  The facility which was newly commissioned in January 2013 is a state of the art disposal facility which can handle 20,000 barrels of produced and injected fluids per day.  Oil and gas wells produce large quantities of saltwater that must be trucked and disposed of at a cost to the producer.  During the second quarter, 2014 disposal at the facility averaged 1,583 barrels per day. With increasing activity in the area, we anticipate volume increasing in the future.  In addition to the royalty, we have a small working interest in the Project and the right to a working interest of 37.5% when the original investors in the facility receive payout of their investment.

Historical Results for the nine months ended September 30, 2014 and 2013:

Revenues and Cost of Revenues

For the nine months ended September 30, 2014, we had production revenue of $4,214,720 compared to $837,901 for the nine months ended September 30, 2013.  Our cost of revenue, consisting of lease operating expenses and production taxes, was $1,005,588, and $314,662 for the nine months ended September 30, 2014 and 2013, respectively.  Refer to the table of production and revenue included below for quarterly changes in revenue.  

17

Property	Quarter	Oil Production {BBLS}		Gas Production {MCF}		Oil Revenue		Gas Revenue		Total Revenue
Marcelina	Q1 - 2013		2,255		-	$	229,204	$	-	$	229,204
Oklahoma	Q1 - 2013		-		-	$	-	$	-	$	-
Total Q1			2,255		-	$	229,204	$	-	$	229,204
Marcelina	Q2 - 2013		1,673		-	$	160,823	$	-	$	160,823
Oklahoma	Q2 - 2013		-		-	$	-	$	-	$	-
Total Q2			1,673		-	$	160,823	$	-	$	160,823
Marcelina	Q3 - 2013		3,896		-	$	387,872	$	-	$	387,872
Oklahoma	Q3 - 2013		316		1,321	$	7,064	$	-	$	7,064
Total Q3			4,212		1,321	$	394,936	$	-	$	394,936
Marcelina	Q4 - 2013		4,626		0	$	401,956	$	-	$	401,956
Oklahoma	Q4 - 2013		519		2,220	$	47,793	$	9,286	$	57,079
Total Q4			5,145		2,220	$	449,749	$	9,286	$	459,035
Year ended 12/31/13			13,286		3,541	$	1,234,712	$	9,286	$	1,243,998
Marcelina	Q1 - 2014		3,888		-	$	360,074	$	-	$	360,074
Oklahoma	Q1 - 2014		2,326		7,366	$	233,686	$	49,210	$	282,896
Total Q1-2014			6,214		7,366	$	593,760	$	49,210	$	642,970
Marcelina	Q2 - 2014		4,546		-	$	368,937	$	-		368,937
Oklahoma	Q2 - 2014		9,660		33,584	$	899,709	$	189,073		1,088,782
Kansas	Q2 - 2014		2,059		-	$	172,316	$	-		172,316
Total Q2-2014			16,265		33,584	$	1,440,962	$	189,073	$	1,630,035
Marcelina	Q3 - 2014		3,189		-	$	289,230	$	-	$	289,230
Oklahoma	Q3 - 2014		13,900		35,951	$	1,346,858	$	185,830	$	1,532,688
Kansas	Q3 - 2014		1,257		-	$	119,797	$	-	$	119,797
Total Q3-2014			18,346		35,951	$	1,755,885	$	185,830	$	1,941,715

Depreciation, Depletion and Amortization

We recorded depreciation, depletion, and amortization expense of $1,739,719 and $894,366 for the nine months ended September 30, 2014 and 2013, respectively.

18

General and Administrative Expenses

Our general and administrative expenses for the nine months ended September 30, 2014 and 2013 were $9,435,148 and $4,815,712, respectively. Our general and administrative expenses for the nine months ended September 30, 2014 consisted of noncash stock and warrant compensation expense of $5,834,186, employee compensation expense of $974,717, capital funding costs of $191,946, investor relations costs of $569,426, accounting, auditing, and professional fees of $781,645, and consulting fees and other general corporate expenses of $1,083,237.  The increases in general and administrative expenses for the nine months ended September 30, 2014 compared to 2013 are detailed as follows:

Increase in non cash stock and warrant compensation	$	3,897,677
Increase in capital funding expense	$	70,043
Increase(Decrease) in investor relations expense	$	(874,388	)
Increase in legal, auditing, and professional	$	402,788
Increase in salaries and expenses (staff increased by five)	$	743,169
Increase in general corporate expenses	$	380,147
Total Increase in General and Administrative Expenses	$	4,619,436

Historical Results for the Three Months Ended September 30, 2014 and 2013:

Revenues and Cost of Revenues

For the three months ended September 30, 2014, we had revenue of $1,941,715 compared to $430,782 of revenue for the three months ended September 30, 2013. Our cost of revenue, consisting of lease operating expenses and production taxes, was $429,353 and $136,607 for the three months ended September 30, 2014 and 2013, respectively.

Depreciation, Depletion and Amortization

We recorded depreciation, depletion and amortization expense of $777,016 and $539,782 for the three months ended September 30, 2014 and 2013, respectively.

General and Administrative Expenses

Our general and administrative expenses for the three months ended September 30, 2014 and 2013 were $2,295,901 and $2,701,062, respectively. Our general and administrative expenses for the three months ended September 30, 2014 consisted of noncash stock and warrant compensation expense of $1,080,500, employee compensation expense of $365,535, capital funding costs of $45,818, investor relations costs of $53,596, accounting, auditing, and professional fees of $450,661, and consulting fees and other general corporate expenses of $299,791.  The increases (decreases) in general and administrative expenses for the three months ended September 30, 2014 compared to 2013 are detailed as follows:

Increase in non cash stock and warrant compensation	$	190,000
Increase (decrease)in capital funding expense	$	(37,603	)
Increase(decrease) in investor relations expense	$	(1,001,004	)
Increase in legal, auditing, and professional	$	284,897
Increase in salaries and expenses	$	133,987
Increase in general corporate expenses	$	24,562
Total Decrease in General and Administrative Expenses	$	(405,161	)

19

Liquidity and Capital Resources

As September 30, 2014, we had negative working capital of $8,738,467, current assets of $2,809,078, consisting of cash, accounts receivable, notes receivable, and prepaid costs and expenses, and total assets of $37,235,903 consisting of current assets, investments in oil and gas properties, and goodwill and other assets. As of September 30, 2014, we had current liabilities of $11,547,545, consisting of accounts payable (principally for development costs), payables to related parties, notes payable and accrued interest. The remaining balance of convertible notes payable (which mature on March 15, 2015) has been reclassified from long term liabilities to current liabilities as of March 31, 2014 which accounts for $6,621,945 of negative working capital at September 30, 2014. Stockholders’ equity was $21,773,059.

Cash flow used in operating activities for the nine months ended September 30, 2014 was $704,955 compared to $1,686,581 for the nine months ended September 30, 2013. Cash flow used in operating activities can be primarily attributed to net losses from operations of $13,306,939, which consists primarily of $9,435,148 of general and administrative expenses, $5,834,177 of which is non-cash stock based compensation, depreciation, depletion, and amortization of $1,739,719, and accretion of convertible note discounts of $4,676,739.

 We expect to continue to use cash flow in operating activities until such time as we achieve sufficient commercial oil and gas production to cover all of our cash costs.

Cash flow used in investing activities for nine months ended September 30, 2014 was $16,417,939 compared to $5,025,468 for the nine months ended September 30, 2013.  Cash flow used in investing activities consists primarily of oil and gas investments in Oklahoma and Kansas properties acquired during the nine months ended September 30, 2014.

Cash flow provided by financing activities for the nine months ended September 30, 2014 was $15,872,510 as compared to $7,864,288 for the nine months ended September 30, 2013.  Cash flow provided by financing activities consists primarily of proceeds from issuance of convertible notes payable, common stock issues and warrant exercises.  

We expect to continue to have cash flow provided by financing activities as we seek new rounds of financing and continue to develop our oil and gas investments.

Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the next twelve months and as such we will require additional debt or equity financing.  We will seek additional financing to meet our drilling plans and needs.  We face obstacles in continuing to attract new financing due to our history and current record of net losses and working capital deficits. Therefore, despite our efforts we can provide no assurance that we will be able to obtain the financing required to meet our stated objectives or even to continue as a going concern.

We are currently in negotiations with a group of lenders for a debt financing transaction.  If definitive agreements for the transaction are finalized and close, of which there can be no assurance, we anticipate obtaining adequate financing to meet our capital expenditure needs for the remainder of 2014 and 2015.

We do not expect to pay cash dividends in the foreseeable future.

Commitments and Contingencies

We are subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to our operations could require substantial capital expenditures or could adversely affect our operations in other ways that cannot be predicted at this time.  As of September 30, 2014 and September 30, 2013, no amounts have been recorded because no specific liability has been identified that is reasonably probable of requiring us to fund any future material amounts.

We currently have interests in six oil and gas projects, the Marcelina Creek Field Development in Wilson County, Texas, the Coulter Field in Waller County, Texas, projects in Logan and Kingfisher counties, Oklahoma,  projects in McPherson and Gray and Finney counties in Kansas, and a project in Hudspeth County, Texas.  See the description under “Current Projects” above under “Overview” for more information and disclosure regarding commitments and contingencies relating to these projects.  

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

20

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of September 30, 2014. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our principal executive officer and principal financial officer, in a manner that allowed for timely decisions regarding disclosure.   On October 21, 2014 we filed  Amendment No. 1 to our Form 10-K for the year ended December 31, 2013 which contains revisions to several areas of the original Form 10-K, and management believes that the need to make these revisions is an indication that our disclosure controls and procedures were not effective as of September 30, 2014.  During 2014, we have worked at remedying the deficiencies in our disclosure controls and procedures by implementing additional controls and procedures, including without limitation the addition of additional staff, including a new operations manager in February 2014 and a new assistant controller in April 2014, improved information sharing with our engineers and additional consulting and assistance from an outside accounting firm.

 We are continuing to monitor the effects of the abovementioned improvements to our disclosure controls and procedures.  Notwithstanding the results of the evaluation above, we believe all of our reports submitted under the Exchange Act contain, in all material respects, the information required to be disclosed by us in such reports.

Changes in Internal Control over Financial Reporting

Our principal executive officer and principal financial officer have indicated that, upon evaluation, there were no changes in our internal control over financial reporting or other factors during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

21

PART II   OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On February 16, 2012, we filed a lawsuit against Hockley Energy, Inc. and Frank O. Snortheim in the District Court of Harris County, Texas in connection with farmout agreements we entered into with Hockley Energy in November 2011 for the Marcelina Creek prospect and the East Stockdale prospect.  We allege that Hockley Energy did not perform its obligations under the agreements, which obligations included providing the agreed upon funding, and we seek damages against both Hockley and Mr. Snortheim (who is a shareholder of Hockley Energy) for breach of contract, fraudulent inducement, and promissory estoppel.  Each defendant has answered our original petition with a general denial, and we have filed a motion for default judgment. A trial date is set for the two weeks following January 20, 2015, but we have refiled for summary judgment, which will be heard before the trial date.  If the motion is granted, it will dispose of the case in Torchlight’s favor without a trial. We have also had discussions with the defendants regarding resolving this matter out of court, but we have not reached an agreement to date.

On April 1, 2014, a former member of our Board of Directors, Greg Williams, filed a lawsuit in the 122nd District Court of Galveston County, Texas against us in connection with Mr. Williams’ sale of 300,000 shares of our common stock to certain third parties in April 2013.  The suit names as defendants the third parties, Torchlight Energy Resources, Inc., Torchlight Energy, Inc., our Chief Executive Officer, Thomas Lapinski, and our President, John Brda. On October 28, 2014, all parties to the suit agreed to a mutual release and settlement, and agreed to a dismissal of the case. Under the agreement, we will issue Mr. Williams 32,500 restricted shares of common stock, which shares are subject to a leak-out agreement.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended September 30, 2014, we issued 365,000 restricted shares of common stock to consultants as compensation for services.  The securities were issued under the exemption from registration provided by Section 4(a) (2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.  The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of securities was an isolated private transaction; (ii) a limited number of securities were issued to a limited number of purchasers; (iii) there were no public solicitations; (iv) the investment intent of the purchasers; and (v) the restriction on transferability of the securities issued.

In September, 2014, we issued 70,000 shares of restricted common stock for cash of $140,000.  The securities were issued under the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.  The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of securities was an isolated private transaction; (ii) a limited number of securities were issued to a single purchaser; (iii) there were no public solicitations; (iv) the investment intent of the purchaser; and (v) the restriction on transferability of the securities issued.

In September 2014, we sold securities to certain investors, including 75,000 restricted shares of common stock at a purchase price of $3.50 per share and (ii) five year warrants to purchase: (a) 61,045 shares of common stock at an exercise price of $4.50 per share, and (b) 61,045 shares of common stock at an exercise price of $7.00 per share, all under the terms and conditions contained in a Securities Purchase Agreement and warrant agreement.  We received total consideration of $262,500 for the securities.  Additionally, the Securities Purchase Agreement provides “piggyback” registration rights for the shares of stock sold and shares of stock underlying the warrants sold.  The securities in the offering were issued under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder, including Rule 506 of Regulation D.  The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities was issued to a limited number of purchasers; (iii) there were no public solicitations; (iv) each purchaser represented that it was an “accredited investor”; (v) the investment intent of the purchasers; and (vi) the restriction on transferability of the securities issued.

In September 2014, we acquired an interest in the Orogrande Leases in West Texas in exchange for 868,750 restricted shares of common stock.  The securities were issued under the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.  The issuances of securities did not involve a “public offering” based upon the following factors: (i) the issuances of securities were an isolated private transaction; (ii) a limited number of securities were issued to a single purchaser; (iii) there were no public solicitations; (iv) the purchaser represented that it was an “accredited investor”; (v) the investment intent of the purchaser; and (vi) the restriction on transferability of the securities issued.

During the quarter ended September 30, 2014, investors exercised warrant agreements to purchase a total of 400,000 shares of common stock at prices from $2.00 to 2.50 per share.  The securities were issued under the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.  The issuances of securities did not involve a “public offering” based upon the following factors: (i) each issuance of securities was an isolated private transaction; (ii) a limited number of securities were issued to a limited number of purchasers; (iii) there were no public solicitations; (iv) each purchaser previously represented that it was an “accredited investor”; (v) the investment intent of each purchaser; and (vi) the restriction on transferability of the securities issued.

During the quarter ended September 30, 2014, we sold 12% Series B Unsecured Convertible Promissory Notes to investors, which notes have an aggregate principal amount of $1,372,000. The notes are due and payable on June 30, 2017 and have a conversion price of $4.50 per share.  We also issued these investors a total of 60,974 of five-year warrants exercisable at $6.00 per share.  We received total consideration of $1,372,000.  We also issued 2,500 warrants to a placement agent in connection with the sale of the notes. The securities were issued under the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder.  The issuances of securities did not involve a “public offering” based upon the following factors: (i) the issuances of securities were an isolated private transaction; (ii) a limited number of securities were issued to a limited number of purchasers; (iii) there were no public solicitations; (iv) each purchaser represented that it was an “accredited investor”; (v) the investment intent of each purchaser; and (vi) the restriction on transferability of the securities issued.

22

ITEM 6.  EXHIBITS

Exhibit No. Description

2.1	Share Exchange Agreement dated November 23, 2010.  (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010.) *
3.1	Articles of Incorporation.  (Incorporated by reference from Form S-1 filed with the SEC on May 2, 2008.) *
3.2	Amended and Restated Bylaws (Incorporated by reference from Form 8-K filed with the SEC on January 12, 2011.) *
10.1	Agreement to Participate in Oil and Gas Development Joint Venture between Bayshore Operating Corporation, LLC and Torchlight Energy, Inc. (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010) *
10.2	Purchase and Sale Agreement between Torchlight Energy, Inc. and Xtreme Oil and Gas, Inc. effective April 1, 2013. (Incorporated by reference from Form 10-Q filed with the SEC on May 15, 2013.) *
10.3	Employment Agreement with Thomas Lapinski (Incorporated by reference from Form 8-K filed with the SEC on October 15, 2013.) *
10.4	Employment Agreement with John A. Brda (Incorporated by reference from Form 8-K filed with the SEC on October 15, 2013.) *
10.5	Amendment to Employment Agreement with John A. Brda (Incorporated by reference from Form 10-K filed with the SEC on June 30, 2014.) *
10.6	Employment Agreement with Roger Wurtele (Incorporated by reference from Form 8-K filed with the SEC on October 15, 2013.) *
10.7	Amendment to Employment Agreement with Roger Wurtele (Incorporated by reference from Form 10-K filed with the SEC on June 30, 2014.) *
10.8	Employment Agreement with Willard McAndrew III (Incorporated by reference from Form 8-K filed with the SEC on October 15, 2013.) *
10.9	Amendment to Employment Agreement with Willard McAndrew III (Incorporated by reference from Form 8-K filed with the SEC on October 15, 2013.) *
10.10	Second Amendment to Employment Agreement with Willard McAndrew III (Incorporated by reference from Form 10-K filed with the SEC on June 30, 2014.) *
10.11	Development Agreement between Ring Energy, Inc. and Torchlight Energy Resources, Inc. (Incorporated by reference from Form 8-K filed with the SEC on October 22, 2013.) *
10.12	Coulter Limited Partnership Agreement dated January 10, 2012 (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
10.13	Promissory Note with Boeckman Well LLC dated May 1, 2013 and amendments thereto  (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
10.14	12% Series A Secured Convertible Promissory Note (form of) (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
10.15	Securities Purchase Agreement (form of), January 2014 (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
10.16	Registration Rights Agreement (form of), January 2014 (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
10.17	Purchase Agreement with Hudspeth Oil Corporation, McCabe Petroleum Corporation and Greg McCabe dated August 7, 2014 (Incorporated by reference from Form 10-Q/A filed with the SEC on October 21, 2014) *
10.18	Purchase and Sale Agreement between Torchlight Energy, Inc. and Zenith Petroleum Corporation (Incorporated by reference from Form 8-K filed with the SEC on June 10, 2014) *
10.19	Securities Purchase Agreement with Castleton Commodities Opportunities Master Fund, L.P. (Incorporated by reference from Form 8-K filed with the SEC on August 20, 2014) *
31.1	Certification of principal executive officer required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of principal financial officer required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
101.INS	XBRL Instance Document (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
101.SCH	XBRL Taxonomy Extension Schema (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
101.DEF	XBRL Taxonomy Extension Definitions Linkbase (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
101.LAB	XBRL Taxonomy Extension Label Linkbase (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase (Incorporated by reference from Form 10-Q filed with the SEC on August 14, 2014.) *

* Incorporated by reference from our previous filings with the SEC

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Torchlight Energy Resources, Inc.
Date: November 14, 2014	/s/ Thomas Lapinski
	By: Thomas Lapinski
	Chief Executive Officer

Date: November 14, 2014	/s/ Roger Wurtele
	By: Roger Wurtele
	Chief Financial Officer and Principal Accounting Officer

24