Document and Entity Information
Document and Entity Information - shares | 6 Months Ended | |
Jun. 30, 2015 | Aug. 11, 2015 | |
Document and Entity Information | ||
Entity Registrant Name | TORCHLIGHT ENERGY RESOURCES INC | |
Document Type | 10-Q | |
Document Period End Date | Jun. 30, 2015 | |
Amendment Flag | false | |
Entity Central Index Key | 1,431,959 | |
Current Fiscal Year End Date | --12-31 | |
Entity Common Stock, Shares Outstanding | 30,041,473 | |
Entity Filer Category | Smaller Reporting Company | |
Entity Current Reporting Status | Yes | |
Entity Voluntary Filers | No | |
Entity Well-known Seasoned Issuer | No | |
Document Fiscal Year Focus | 2,015 | |
Document Fiscal Period Focus | Q2 |
CONSOLIDATED CONDENSED BALANCE
CONSOLIDATED CONDENSED BALANCE SHEETS - USD ($) | Jun. 30, 2015 | Dec. 31, 2014 |
Current assets: | ||
Cash | $ 212,217 | $ 179,787 |
Accounts Receivable | 85,117 | 223,371 |
Production revenue receivable | 374,412 | 210,435 |
Note receivable | 513,121 | 515,748 |
Prepayments - development costs | 10,000 | 20,602 |
Prepaid expenses | 0 | 29,634 |
Total current assets | 1,194,867 | 1,179,577 |
Investment in oil and gas properties, net | 15,492,413 | 34,498,681 |
Office Equipment | 48,594 | 55,150 |
Debt issuance costs, net | 14,829 | 353,733 |
Other Assets | 87,161 | 63,223 |
TOTAL ASSETS | 16,837,864 | 36,150,364 |
Current liabilities: | ||
Accounts payable | 6,825,289 | 4,018,306 |
Accrued liabilities | 240,000 | 240,000 |
Related party payables | 90,000 | 90,000 |
Convertible promissory notes, (Series A), net of discount of $700,178 at December 31, 2014 | 0 | 7,417,420 |
Notes payable within one year | 937,729 | 829,719 |
Due to working interest owners | 43,208 | 73,439 |
Interest payable | 268,332 | 383,741 |
Total current liabilities | 8,404,558 | 13,052,625 |
Convertible promissory notes, (Series B) net of discount of $501,119 at June 30, 2015 and $625,457 at December 31, 2014 | 4,068,381 | 3,944,043 |
Asset retirement obligation | $ 36,725 | $ 35,951 |
Commitments and contingencies | ||
Stockholders' equity: | ||
Preferred stock, par value $.001, 10,000,000 shares authorized, 98,000 shares issued and outstanding | $ 98 | $ 0 |
Common stock, par value $0.001 per share; 75,000,000 shares authorized; 29,852,149 issued and outstanding at March 31, 2015 23,235,441 issued and outstanding at December 31, 2014 | 29,852 | 23,235 |
Additional paid-in capital | 55,823,309 | 43,108,752 |
Warrants outstanding | 13,199,239 | 7,636,320 |
Accumulated deficit | (64,724,298) | (31,650,561) |
Total stockholders' equity | 4,328,200 | 19,117,745 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 16,837,864 | $ 36,150,364 |
CONSOLIDATED CONDENSED BALANCE3
CONSOLIDATED CONDENSED BALANCE SHEETS (Parenthetical) - USD ($) | Jun. 30, 2015 | Dec. 31, 2014 |
Assets [Abstract] | ||
Discount of Convertible promissory notes current | $ 0 | $ 700,178 |
Discount on Convertible promissory notes noncurrent | $ 501,119 | $ 625,457 |
Preferred Stock, par value | $ 0.001 | $ 0.001 |
Preferred Stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred Stock, shares issued | 98,000 | 0 |
Preferred Stock, shares outstanding | 98,000 | 0 |
Common Stock, par or stated value | $ 0.001 | $ 0.001 |
Common Stock, shares authorized | 75,000,000 | 75,000,000 |
Common Stock, shares issued | 29,852,149 | 23,235,441 |
Common Stock, shares outstanding | 29,852,149 | 23,235,441 |
CONSOLIDATED CONDENSED STATEMEN
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - USD ($) | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2015 | Jun. 30, 2014 | Jun. 30, 2015 | Jun. 30, 2014 | |
Revenue: | ||||
Oil and gas sales | $ 508,265 | $ 1,630,035 | $ 1,042,827 | $ 2,273,005 |
SWD and royalties | 374 | 9,799 | 57,070 | 48,964 |
Cost of revenue | (279,646) | (397,184) | (510,544) | (576,235) |
Gross income | 228,993 | 1,242,650 | 589,353 | 1,745,734 |
Operating expenses: | ||||
General and administrative expenses | 8,207,314 | 1,318,179 | 8,896,025 | 7,139,247 |
Impairment expense | 22,438,114 | 0 | 22,438,114 | 0 |
Depreciation, depletion and amortization | 204,330 | 628,372 | 698,805 | 962,703 |
Total operating expenses | 30,849,758 | 1,946,551 | 32,032,944 | 8,101,950 |
Other income (expense) | ||||
Other income | 962 | 0 | 962 | 0 |
Interest income | 0 | 6 | 0 | 56 |
Interest and accretion expense | (239,667) | (2,226,957) | (1,631,109) | (4,136,444) |
Total other income (expense) | (238,705) | (2,226,951) | (1,630,147) | (4,136,388) |
Net loss before taxes | $ (30,859,470) | $ (2,930,852) | $ (33,073,738) | $ (10,492,604) |
Provision for income taxes | ||||
Net (loss) | $ (30,859,470) | $ (2,930,852) | $ (33,073,738) | $ (10,492,604) |
Loss per share:Basic and Diluted | $ (1.44) | $ (0.68) | $ (2.02) | $ (0.61) |
Weighted average shares outstanding: Basic and Diluted | 21,428,769 | 15,334,868 | 16,342,225 | 17,184,891 |
CONSOLIDATED CONDENSED STATEME5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW - USD ($) | 6 Months Ended | |
Jun. 30, 2015 | Jun. 30, 2014 | |
Cash Flows From Operating Activities | ||
Net (loss) | $ (33,073,738) | $ (10,492,604) |
Adjustments to reconcile net loss to net cash from operating activities: | ||
Stock based compensation | 7,078,791 | 4,753,686 |
Accretion of convertible note discounts | 1,163,091 | 3,158,850 |
Impairment expense | 22,438,114 | 0 |
Depreciation, depletion and amortization | 698,805 | 962,703 |
Change in: | ||
Accounts receivable | 49,392 | 85,677 |
Note receivable | 2,627 | (294,318) |
Production revenue receivable | (163,977) | (777,989) |
Prepayment of development costs | 10,602 | (824,383) |
Prepaid expenses | 29,634 | (29,856) |
Other assets | (23,938) | (515) |
Accounts payable and accrued liabilities | 3,165,044 | 2,408,948 |
Due to working interest owners | (30,231) | (52,046) |
Asset retirement obligation | 774 | 1,593 |
Interest payable | 447,014 | (22,900) |
Capitalized interest | (395,738) | 373,732 |
Net cash provided by (used in) operating activities | 1,396,266 | (749,422) |
Cash Flows From Investing Activities | ||
Investment in oil and gas properties | (4,618,743) | (10,789,519) |
Acquisition of office equipment | 0 | (53,960) |
Proceeds from Sale of Leases | 951,918 | 0 |
Net cash used in investing activities | (3,666,825) | (10,843,479) |
Cash Flows From Financing Activities | ||
Proceeds from sale of common stock | 1,300,000 | 7,220,291 |
Proceeds from sale of preferred stock | 9,800,000 | 0 |
Repayment of convertible notes | (8,859,011) | 0 |
Proceeds from warrant exercise | 0 | 379,982 |
Proceeds from promissory notes | 212,000 | 3,234,486 |
Repayment of promissory notes | (150,000) | 0 |
Net cash provided by financing activities | 2,302,989 | 10,834,759 |
Net increase (decrease) in cash | 32,430 | (758,142) |
Cash - beginning of period | 179,787 | 1,811,713 |
Cash - end of period | 212,217 | 1,053,571 |
Non cash transactions: | ||
Common stock issued for services | 1,594,871 | 168,577 |
Common stock issued for mineral interests | 26,400 | 3,225,629 |
Warrants issued for services | 5,562,919 | 4,663,865 |
Capitalized interest cost | 395,738 | 0 |
Asset retirement obligation | 774 | 0 |
Common stock issued in conversion of promissory notes | 0 | 1,995,575 |
Warrants issued in connection with promissory notes | 0 | 405,016 |
Beneficial conversion feature on promissory notes | 0 | 195,466 |
Common stock issued in warrant exercises | 0 | 380,000 |
Cash paid for interest | $ 931,011 | $ 601,384 |
1. NATURE OF BUSINESS
1. NATURE OF BUSINESS | 6 Months Ended |
Jun. 30, 2015 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
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 our wholly-owned subsidiaries Torchlight Energy Operating, LLC, a Texas limited liability company and Hudspeth Oil Corporation, a Texas corporation. 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 Companys success will depend in large part on its ability to obtain and develop profitable oil and gas interests. |
2. GOING CONCERN
2. GOING CONCERN | 6 Months Ended |
Jun. 30, 2015 | |
GOING CONCERN | |
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 June 30, 2015, the Company had not yet achieved profitable operations. We had a net loss of approximately $33.1 million for the six months ended June 30, 2015 and had accumulated losses of $64,724,298 since our inception to June 30, 2015, and expects to incur further losses in the development of our business. Working Capital as of June 30, 2015 was negative $7,209,691. The Companys ability to continue as a going concern is dependent on its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Managements plan to address the Companys ability to continue as a going concern includes: (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtain loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Planned Divestiture of Hunton Project On April 8, 2015, management announced that they are seeking to divest certain of our Hunton assets located in Logan and Kingfisher Counties, Oklahoma. Negotiations for a potential sale are ongoing at this time. |
3. SIGNIFICANT ACCOUNTING POLIC
3. SIGNIFICANT ACCOUNTING POLICIES | 6 Months Ended |
Jun. 30, 2015 | |
Accounting Policies [Abstract] | |
Significant Accounting Policies | The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed and the methods of applying those principles, which materially affect the determination of financial position, results of operations and cash flows are summarized below: Use of estimates Basis of presentation Risks and uncertainties Concentration of risks Fair value of financial instruments For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows: ·Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. ·Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. ·Level 3 inputs are unobservable inputs based on managements own assumptions used to measure assets and liabilities at fair value. A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Accounts receivable and Production revenue receivable Investment in oil and gas properties 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 Depreciation, depletion, and amortization Ceiling test 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 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. Asset retirement obligations 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 Revenue recognition Basic and diluted earnings (loss) per share Environmental laws and regulations Recent accounting pronouncements On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of the Companys ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entitys ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. In May 2014, the FASB issued 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, 2017, 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. In April 2014, the FASB issued ASU 2014-08, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organizations operations and financial results should be presented as discontinued operations. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new standard is effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption would be permitted for any annual or interim period for which an entitys financial statements have not yet been made available for issuance. The adoption of this guidance is not expected to have an impact on the Companys consolidated financial statements. Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Companys financial position or results from operations. Subsequent events |
4. RELATED PARTY PAYABLES
4. RELATED PARTY PAYABLES | 6 Months Ended |
Jun. 30, 2015 | |
RELATED PARTY TRANSACTIONS | |
RELATED PARTY PAYABLES | As of June 30, 2015, related party payables consisted of accrued and unpaid compensation to two of our executive officers totaling $90,000. |
5. COMMITMENTS AND CONTINGENCIE
5. COMMITMENTS AND CONTINGENCIES | 6 Months Ended |
Jun. 30, 2015 | |
COMMITMENTS AND CONTINGENCIES | |
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 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 June 30, 2015, 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
6. STOCKHOLDERS' EQUITY | 6 Months Ended |
Jun. 30, 2015 | |
Stockholders' equity: | |
STOCKHOLDERS' EQUITY | The Company has authorized 10,000,000 shares of preferred stock with par value of $.001. On June 9, 2015, under a Securities Purchase Agreement, we sold to certain accredited investors an aggregate of $9,800,000 in shares of Series A Convertible Preferred Stock, amounting to a total of 98,000 shares of the Series A Convertible Preferred Stock at a purchase price of $100 per share. The designations, preferences, limitations, restrictions and relative rights of the Series A Convertible Preferred Stock are as follows: (i) a stated value of $100 per share; (ii) mandatory conversion one year after issuance (provided no insolvency event has occurred and subject to the restriction described in the following clause (iv)), with each holder having the right to convert at its election any time before that; (iii) a conversion price of $1.15 per shares of common stock; (iv) until stockholder approval is obtained, holders may not convert (and there shall not be any mandatory conversion) if such conversion will result in such holder beneficially owning in excess of 19.9% of our common stock; (v) a dividend in an annual amount equal to 12% on the outstanding stated value of each share payable in common stock or cash at the holders election; (vi) each holder shall be entitled to the number of votes equal to the number of shares of common stock into which such shares of Series A Convertible Preferred Stock could be converted; (vii) in the event of any voluntary or involuntary liquidation, dissolution or winding up, the holders will be entitled to be paid out of the assets available for distribution to our stockholders, before any payment is be made to the holders of common stock; and (viii) the holders will have the right to participate in up to 100%, in the aggregate, on a pro-rata basis, of any subsequent private placement offerings by us of our equity securities, on identical terms and conditions as set forth in such subsequent offering for so long as the holder owns the Series A Convertible Preferred Stock. The preferred investors were provided 20% warrant coverage. A total of 1,704,346 warrants were issued with a five-year term and an exercise price of $1.40 per share of common stock. The warrants also provide that, until stockholder approval is obtained, holders may not exercise if such exercise will result in such holder beneficially owning in excess of 19.9% of our common stock. At closing of the Securities Purchase Agreement, proceeds from the offering were used to pay off, in full, the holders of the 12% Series A Secured Convertible Promissory Notes (the Senior Notes), subject to the release of all liens and security interests. During the three months ended June 30, 2015 the Company issued 1,412,458 shares of common stock as compensation for services, with a total value of $1,689,371. During the three months ended June 30, 2015, the Company issued 4,931,250 shares of common stock for $1,300,000 in cash. During the three months ended June 30, 2015, the Company issued 30,000 shares of common stock in connection with the modification of mineral leases for the extension of drilling obligations. During the three months ended June 30, 2015, the Company issued 935,750 warrants as compensation for services with a total value of $1,186,919. During the three months ended June 30, 2015, the Company issued 590,000 warrants in connection with short term loans having a total value of $180,500. During the three months ended June 30, 2015, the Company issued 250,000 warrants in connection with the sale of a mineral interest having a total value of $72,500. During the three months ended June 30, 2015, 75,000 warrants vested which were previously issued by the Company as compensation for services, with a total value of $30,750. During the month of June, 2015, the Company issued, subject to shareholder approval, 3,975,000 stock options to employees valued at $4,088,250. A summary of stock options and warrants outstanding as of June 30, 2015 by exercise price and year of expiration is presented below: Exercise Expiration Date in Price 2015 2016 2017 2018 2019 2020 Total $ 0.50 800,000 800,000 $ 1.00 - - 150,000 - - 150,000 $ 1.40 1,704,346 1,704,346 $ 1.57 3,750,000 3,750,000 $ 1.75 705,000 1,135,714 - - - 1,840,714 $ 1.79 225,000 225,000 $ 1.80 850,000 850,000 $ 2.00 - 1,035,271 126,000 1,696,380 - 2,857,651 $ 2.09 - - - 2,800,000 - 2,800,000 $ 2.29 40,000 40,000 $ 2.50 - 100,000 - - 85,750 185,750 $ 2.82 - - - 38,174 - 38,174 $ 3.00 - 100,000 - - - 100,000 $ 4.50 - - - - 700,000 700,000 $ 5.00 - 8,391 190,000 - - 198,391 $ 6.00 - - - 577,501 330,341 907,842 $ 7.00 - - - - 700,000 700,000 705,000 2,379,376 466,000 5,952,055 1,816,091 6,529,346 17,847,868 At June 30, 2015 the Company had reserved 17,847,868 common shares for future exercise of warrants plus 8,521,739 common shares for future conversion of issued preferred stock. 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 191% - 253% Dividend yield 0.00% Discount due to lack of marketability 20-30% Expected life of warrant 3 years - 5 years |
7. CAPITALIZED COSTS
7. CAPITALIZED COSTS | 6 Months Ended |
Jun. 30, 2015 | |
Extractive Industries [Abstract] | |
7. CAPITALIZED COSTS | The following table presents the capitalized costs of the Company as of June 30, 2015 and December 31, 2014: 6/30/2015 12/31/2014 Evaluated costs subject to amortization $ 29,753,862 $ 24,276,483 Unevaluated costs 12,799,131 14,152,415 Impairment expense (22,438,114 ) - Total capitalized costs 20,114,879 38,428,898 Less accumulated depreciation, depletion and amortization (4,622,466 ) (3,930,217 ) Net capitalized costs $ 15,492,413 $ 34,498,681 |
8. INCOME TAXES
8. INCOME TAXES | 6 Months Ended |
Jun. 30, 2015 | |
Income Taxes | |
Income Tax Disclosure | 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 Companys tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements. The Companys 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. The Company had a net deferred tax asset related to federal net operating loss carryforwards of $30,014,914 and $24,089,942 at June 30, 2015 and December 31, 2014, respectively. The federal net operating loss carryforward will begin to expire in 2030. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured. |
9. PROMISSORY NOTES
9. PROMISSORY NOTES | 6 Months Ended |
Jun. 30, 2015 | |
PROMISSORY NOTES | |
Promissory Notes | Series A Convertible 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 (Series A Notes) described below. The Series A Notes were issued as part of a larger offering with senior liens on the Companys 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 Companys 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 of December 31, 2012, as these costs relate to the larger offering of 12% Convertible Promissory Notes. During the year ended December 31, 2013, the Company issued an additional $10,895,773 in principal value of Series A 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 Series A Notes. In addition, the Company engaged a placement agent to source investors for the majority of these additional notes. 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 Series A Notes. Series B Convertible Subordinated Promissory Notes During the quarter ended June 30, 2014, the Company issued $3,197,500 in principal value of 12% Series B Convertible Unsecured Promissory Notes. The Series B 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 Series B Notes. During the quarter ended September 30, 2014, the Company issued an additional $1,372,000 in principal value of Series B Convertible Unsecured Promissory Notes. The Series B 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 Series B Notes. The Company previously offered a reset of the conversion price downward to $1.00 to holders of the Series B Notes in exchange for a deferral of payment of accrued interest due on the Notes until December 31, 2015. Holders of notes totaling $2,000,000 of the total outstanding of $4,569,500 participated. Notes Payable within one year The Company is obligated on short term notes payable to third parties totaling $ 937,729 as of June 30, 2015. The total balance due includes a $106,411 note due on April 30, 2015 (the parties are in discussions to extend the note with interest continuing to accrue), $245,515 which was due in December 2014 (but has been extended to December 31, 2015), $154,488 due September 30, 2015, and $431,315 due on December 31, 2015. Notes payable to related parties included in the detail above total $692,214. |
10. ASSET RETIREMENT OBLIGATION
10. ASSET RETIREMENT OBLIGATIONS | 6 Months Ended |
Jun. 30, 2015 | |
ASSET RETIREMENT OBLIGATIONS | |
ASSET RETIREMENT OBLIGATIONS | The following is a reconciliation of the asset retirement obligation liability through June 30, 2015: Asset retirement obligation December 31, 2013 $ 24,382 Estimated liabilities recorded 7,789 Accretion Expense 3,780 Asset retirement obligation December 31, 2014 $ 35,951 Estimated liabilities recorded - Accretion Expense 1,107 Asset retirement obligation March 31, 2015 $ 37,058 Estimated liabilities recorded - Accretion Expense 819 Removal of ARO for wells sold (1,152 ) Asset retirement obligation June 30, 2015 $ 36,725 |
11. SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS | 6 Months Ended |
Jun. 30, 2015 | |
Subsequent Events [Abstract] | |
11. SUBSEQUENT EVENTS | In connection with the sale of the working interest in the Orogrande Project, 500,000 three year warrants to purchase common stock with an exercise price of $2.31 were issued on July 1, 2015. Of the 500,000 warrants, 250,000 are exercisable on September 30, 2015 and the remaining 250,000 are exercisable on December 31, 2015. Loan from Shareholder On August 6, 2015 a shareholder advanced $250,000 to be repaid within 30 days from the proceeds of the sale of the Hunton properties or proceeds of a funding event. If repayment extends beyond 30 days 12% interest will apply retroactively from August 6, 2015. |
3. SIGNIFICANT ACCOUNTING POL17
3. SIGNIFICANT ACCOUNTING POLICIES (POLICIES) | 6 Months Ended |
Jun. 30, 2015 | |
SIGNIFICANT ACCOUNTING POLICIES (POLICIES) | |
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, and Hudspeth Oil Corporation. All significant intercompany balances and transactions have been eliminated. |
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 | The Companys 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 Companys 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, accounts payable, notes payable to related party, and convertible promissory notes. The estimated fair values of cash, accounts receivable, accounts payable, and related party payables approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of the 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 managements own assumptions used to measure assets and liabilities at fair value. A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. |
Accounts receivable and Production revenue 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 June 30, 2015 and December 31, 2014 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. 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 periods ended June 30, 2015 and December 31, 2014, the Company capitalized $395,738 and $371,116, 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 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 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 Company recognized impairment of $22,438,114 on its oil and gas properties during the three months ended June 30, 2015. No impairment was recognized at December 31, 2014. Due to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that an additional 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. 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 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. |
Asset retirement obligations | Accounting principles require that the fair value of a liability for an assets 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 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. |
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. |
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 | On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of the Companys ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entitys ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. In May 2014, the FASB issued 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, 2017, 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. In April 2014, the FASB issued ASU 2014-08, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organizations operations and financial results should be presented as discontinued operations. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new standard is effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption would be permitted for any annual or interim period for which an entitys financial statements have not yet been made available for issuance. The adoption of this guidance is not expected to have an impact on the Companys consolidated financial statements. Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Companys financial position or results from operations. |
Subsequent Events | The Company evaluated subsequent events through August 14, 2015, the date of issuance of the financial statements. Subsequent events are disclosed in Note 11. |
6. STOCKHOLDERS' EQUITY (Tables
6. STOCKHOLDERS' EQUITY (Tables) | 6 Months Ended |
Jun. 30, 2015 | |
STOCKHOLDERS' EQUITY (TABLES) | |
Summary of warrant activity | Exercise Expiration Date in Price 2015 2016 2017 2018 2019 2020 Total $ 0.50 800,000 800,000 $ 1.00 - - 150,000 - - 150,000 $ 1.40 1,704,346 1,704,346 $ 1.57 3,750,000 3,750,000 $ 1.75 705,000 1,135,714 - - - 1,840,714 $ 1.79 225,000 225,000 $ 1.80 850,000 850,000 $ 2.00 - 1,035,271 126,000 1,696,380 - 2,857,651 $ 2.09 - - - 2,800,000 - 2,800,000 $ 2.29 40,000 40,000 $ 2.50 - 100,000 - - 85,750 185,750 $ 2.82 - - - 38,174 - 38,174 $ 3.00 - 100,000 - - - 100,000 $ 4.50 - - - - 700,000 700,000 $ 5.00 - 8,391 190,000 - - 198,391 $ 6.00 - - - 577,501 330,341 907,842 $ 7.00 - - - - 700,000 700,000 705,000 2,379,376 466,000 5,952,055 1,816,091 6,529,346 17,847,868 |
Assumptions used in calculating the fair value of the warrants | Risk-free interest rate 0.78% Expected volatility of common stock 191% - 253% Dividend yield 0.00% Discount due to lack of marketability 20-30% Expected life of warrant 3 years - 5 years |
7. CAPITALIZED COSTS (Tables)
7. CAPITALIZED COSTS (Tables) | 6 Months Ended |
Jun. 30, 2015 | |
Capitalized Costs (Table): | |
Capitalized Costs (Table) | 6/30/2015 12/31/2014 Evaluated costs subject to amortization $ 29,753,862 $ 24,276,483 Unevaluated costs 12,799,131 14,152,415 Impairment expense (22,438,114 ) - Total capitalized costs 20,114,879 38,428,898 Less accumulated depreciation, depletion and amortization (4,622,466 ) (3,930,217 ) Net capitalized costs $ 15,492,413 $ 34,498,681 |
10. ASSET RETIREMENT OBLIGATI20
10. ASSET RETIREMENT OBLIGATIONS (Tables) | 6 Months Ended |
Jun. 30, 2015 | |
ASSET RETIREMENT OBLIGATIONS (Tables) | |
Asset retirement obligation | Asset retirement obligation December 31, 2013 $ 24,382 Estimated liabilities recorded 7,789 Accretion Expense 3,780 Asset retirement obligation December 31, 2014 $ 35,951 Estimated liabilities recorded - Accretion Expense 1,107 Asset retirement obligation March 31, 2015 $ 37,058 Estimated liabilities recorded - Accretion Expense 819 Removal of ARO for wells sold (1,152 ) Asset retirement obligation June 30, 2015 $ 36,725 |
2. Going Concern (Details Narra
2. Going Concern (Details Narrative) - USD ($) | Jun. 30, 2015 | Dec. 31, 2014 |
Going Concern Accumulated Losses | ||
Accumulated deficit | $ (64,724,298) | $ (31,650,561) |
6. STOCKHOLDERS' EQUITY (Detail
6. STOCKHOLDERS' EQUITY (Details) | Jun. 30, 2015shares |
.50 | |
Outstanding warrants and stock options | 800,000 |
1 | |
Outstanding warrants and stock options | 150,000 |
1.40 | |
Outstanding warrants and stock options | 1,704,346 |
1.57 | |
Outstanding warrants and stock options | 3,750,000 |
1.75 | |
Outstanding warrants and stock options | 1,840,714 |
1.79 | |
Outstanding warrants and stock options | 225,000 |
1.80 | |
Outstanding warrants and stock options | 850,000 |
2 | |
Outstanding warrants and stock options | 2,857,651 |
2.09 | |
Outstanding warrants and stock options | 2,800,000 |
2.29 | |
Outstanding warrants and stock options | 40,000 |
2.50 | |
Outstanding warrants and stock options | 185,750 |
2.82 | |
Outstanding warrants and stock options | 38,174 |
3 | |
Outstanding warrants and stock options | 100,000 |
4.50 | |
Outstanding warrants and stock options | 700,000 |
5 | |
Outstanding warrants and stock options | 198,391 |
6 | |
Outstanding warrants and stock options | 907,842 |
7 | |
Outstanding warrants and stock options | 700,000 |
Total | |
Outstanding warrants and stock options | 17,847,868 |
6. STOCKHOLDERS' EQUITY (Deta23
6. STOCKHOLDERS' EQUITY (Details 1) - 6 months ended Jun. 30, 2015 | Total |
Risk-free interest rate | 0.78% |
Expected volatility of common stock Minimum | 191.00% |
Expected volatility of common stock Maximum | 253.00% |
Dividend yield | 0.00% |
Minimum | |
Discount due to lack of marketability | .2 |
Expected life of warrant in years | 3 years |
Maximum | |
Discount due to lack of marketability | .3 |
Expected life of warrant in years | 5 years |
7. CAPITALIZED COSTS (Details)
7. CAPITALIZED COSTS (Details) - USD ($) | Jun. 30, 2015 | Dec. 31, 2014 |
Presents the capitalized costs as follows: | ||
Evaluated costs subject to amortization | $ 29,753,862 | $ 24,276,483 |
Unevaluated costs | 12,799,131 | 14,152,415 |
Impairment expense | (22,438,114) | 0 |
Total capitalized costs | 20,114,879 | 38,428,898 |
Less accumulated depreciation, depletion and amortization | (4,622,466) | (3,930,217) |
Net capitalized costs | $ 15,492,413 | $ 34,498,681 |
8. INCOME TAXES (Details Narrat
8. INCOME TAXES (Details Narrative) - USD ($) | Jun. 30, 2015 | Dec. 31, 2014 |
Income Taxes Operating loss carryforwards | ||
Net operating loss carryforwards | $ 30,014,914 | $ 24,089,942 |
10. ASSET RETIREMENET OBLIGATIO
10. ASSET RETIREMENET OBLIGATION (Details) - USD ($) | 6 Months Ended | 12 Months Ended | |
Jun. 30, 2015 | Dec. 31, 2014 | Dec. 31, 2013 | |
Asset Retiremenet Obligation Details | |||
Asset retirement obligation | $ 37,058 | $ 35,951 | $ 24,382 |
Adjustment to estimated liability | 0 | 0 | 7,789 |
Accretion expense | 819 | 1,107 | 3,780 |
Removal of ARO for wells sold | (1,152) | ||
Asset retirement obligation | $ 36,725 | $ 37,058 | $ 35,951 |