Document and Entity Information
Document and Entity Information - USD ($) | 12 Months Ended | ||
Dec. 31, 2019 | Mar. 16, 2020 | Jun. 30, 2019 | |
Document and Entity Information | |||
Entity Registrant Name | TORCHLIGHT ENERGY RESOURCES INC | ||
Document Type | 10-K | ||
Document Period End Date | Dec. 31, 2019 | ||
Amendment Flag | false | ||
Entity Central Index Key | 0001431959 | ||
Current Fiscal Year End Date | --12-31 | ||
Entity Public Float | $ 103,835,962 | ||
Entity Common Stock, Shares Outstanding | 79,968,132 | ||
Entity Filer Category | Accelerated Filer | ||
Entity Emerging Growth Company | false | ||
Entity Small Business | true | ||
Entity Shell Company | false | ||
Entity Current Reporting Status | Yes | ||
Entity Voluntary Filers | No | ||
Entity Well-known Seasoned Issuer | No | ||
Document Fiscal Year Focus | 2019 | ||
Document Fiscal Period Focus | FY | ||
Entity File Number | 000-53473 |
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS - USD ($) | Dec. 31, 2019 | Dec. 31, 2018 |
Current assets: | ||
Cash | $ 89,730 | $ 840,163 |
Accounts receivable | 199,462 | 179,702 |
Production revenue receivable | 100,546 | 294,715 |
Subscription receivable | 250,000 | 0 |
Prepayments - development costs | 0 | 146,422 |
Prepaid expenses | 96,006 | 60,980 |
Total current assets | 735,744 | 1,521,982 |
Oil and gas properties, net | 40,182,043 | 36,565,461 |
Office equipment, net | 6,348 | 4,076 |
Other assets | 0 | 6,362 |
TOTAL ASSETS | 40,924,135 | 38,097,881 |
Current liabilities: | ||
Accounts payable | 1,444,002 | 729,806 |
12% 2020 Unsecured promissory notes, net of $127,170 of discount and financing costs | 8,437,127 | 0 |
10% 2021 Convertible promissory notes payable | 540,000 | 0 |
Notes payable | 2,000,000 | 0 |
Accrued payroll | 996,176 | 816,176 |
Related party payables | 45,000 | 45,000 |
Due to working interest owners | 54,320 | 54,320 |
Accrued interest payable | 445,861 | 553,370 |
Total current liabilities | 13,962,486 | 2,198,672 |
12% 2021 Unsecured promissory notes, net of $59,297 of discount and financing costs | 3,940,703 | 11,862,080 |
8% 2021 Convertible promissory notes payable, net of $1,186,029 of discount and BCF | 773,971 | 0 |
Note payable after and accrued interest | 7,157,260 | 6,000,000 |
Asset retirement obligation | 23,319 | 14,353 |
Total Liabilities | 25,857,739 | 20,075,105 |
Commitments and contingencies | ||
Stockholders' equity: | ||
Preferred stock, par value $0.001, 10,000,000 shares authorized; -0- issued and outstanding at December 30, 2019 and December 31, 2018 | 0 | 0 |
Common stock, par value $0.001 per share; 150,000,000 shares authorized; 76,222,042 issued and outstanding at December 30, 2019 70,112,376 issued and outstanding at December 31, 2018 | 76,225 | 70,116 |
Additional paid-in capital | 114,143,872 | 107,266,965 |
Accumulated deficit | (99,153,701) | (89,314,305) |
Total stockholders' equity | 15,066,396 | 18,022,776 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 40,924,135 | $ 38,097,881 |
CONSOLIDATED BALANCE SHEETS (Pa
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) | Dec. 31, 2019 | Dec. 31, 2018 |
Statement of Financial Position [Abstract] | ||
12% 2020 Unsecured notes discount and financing costs | $ 127,170 | |
12% 2021 Unsecured promissory note discount and financing costs | 59,297 | |
8% 2021 Convertible promissory notes payable, discount and BCF | $ 1,186,029 | |
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, par or stated value | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 150,000,000 | 150,000,000 |
Common stock, shares issued | 76,222,042 | 70,112,376 |
Common stock, shares outstanding | 76,222,042 | 70,112,376 |
CONSOLIDATED STATEMENTS OF OPER
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) | 12 Months Ended | |
Dec. 31, 2019 | Dec. 31, 2018 | |
Revenue | ||
Oil and gas sales | $ 746,263 | $ 1,282,362 |
Cost of revenue | (451,325) | (806,158) |
Gross income | 294,938 | 476,204 |
Operating expenses: | ||
General and administrative expense | 3,273,697 | 4,053,062 |
Depreciation, depletion and amortization | 4,393,160 | 1,173,752 |
Loss on settlement | 0 | 369,439 |
Impairment loss | 1,494,769 | 139,891 |
Total operating expenses | 9,161,626 | 5,736,144 |
Other income (expense) | ||
Interest and accretion expense of note discounts | (968,292) | (547,710) |
Franchise tax | (4,441) | 0 |
Interest income | 25 | 1,038 |
Total other (expense) | (972,708) | (546,672) |
Loss before income taxes | (9,839,396) | (5,806,612) |
Provision for income taxes | 0 | 0 |
Net loss | $ (9,839,396) | $ (5,806,612) |
Loss per share: | ||
Basic and Diluted | $ (0.14) | $ (0.09) |
Weighted average shares outstanding: | ||
Basic and Diluted | 72,857,079 | 68,134,745 |
CONSOLIDATED STATEMENT OF STOCK
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - USD ($) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total |
Begining balance, shares at Dec. 31, 2017 | 63,340,034 | |||
Begining balance, amount at Dec. 31, 2017 | $ 63,344 | $ 99,403,654 | $ (83,507,693) | $ 15,959,305 |
Issuance of common stock for services, shares | 450,000 | 450,000 | ||
Issuance of common stock for services, amount | $ 450 | 544,550 | $ 545,000 | |
Issuance of common stock for cash, less underwriting/offering costs, shares | 5,750,000 | 5,750,000 | ||
Issuance of common stock for cash, less underwriting/offering costs, amount | $ 5,750 | 6,043,984 | $ 6,049,734 | |
Issuance of common stock for subscription, shares | 0 | |||
Issuance of common stock for subscription, amount | $ 0 | |||
Issuance of common stock for interest, shares | 0 | |||
Issuance of common stock for interest, amount | $ 0 | |||
Issuance of common stock for note payment in kind on note payable, shares | 172,342 | 172,342 | ||
Issuance of common stock for note payment in kind on note payable, amount | $ 172 | 220,852 | $ 221,024 | |
Issuance of common stock for oil and gas lease extension, amount | 0 | |||
Beneficial conversion feature on convertible notes | 0 | |||
Debt discount from fair value of warrants issued with convertible notes | $ 0 | |||
Issuance of common stock in warrant exercise, shares | 400,000 | 400,000 | ||
Issuance of common stock in warrant exercise, amount | $ 400 | 199,600 | $ 200,000 | |
Warrants issued for services | 510,575 | 510,575 | ||
Stock options issued for services | 343,750 | 343,750 | ||
Net loss | (5,806,612) | (5,806,612) | ||
Ending balance, shares at Dec. 31, 2018 | 70,112,376 | |||
Ending balance, amount at Dec. 31, 2018 | $ 70,116 | 107,266,965 | (89,314,305) | $ 18,022,776 |
Issuance of common stock for services, shares | 312,593 | 312,593 | ||
Issuance of common stock for services, amount | $ 312 | 365,088 | $ 365,400 | |
Issuance of common stock for cash, less underwriting/offering costs, shares | 4,696,100 | 4,686,100 | ||
Issuance of common stock for cash, less underwriting/offering costs, amount | $ 4,696 | 3,508,221 | $ 3,512,917 | |
Issuance of common stock for subscription, shares | 416,667 | 416,666 | ||
Issuance of common stock for subscription, amount | $ 417 | 183,546 | $ 183,963 | |
Issuance of common stock for interest, shares | 167,845 | 167,845 | ||
Issuance of common stock for interest, amount | $ 169 | 183,545 | $ 183,714 | |
Issuance of common stock for note payment in kind on note payable, shares | 202,316 | 202,316 | ||
Issuance of common stock for note payment in kind on note payable, amount | $ 202 | 313,906 | $ 314,108 | |
Issuance of common stock for oil and gas lease extension, shares | 100,000 | |||
Issuance of common stock for oil and gas lease extension, amount | $ 100 | 124,900 | 125,000 | |
Beneficial conversion feature on convertible notes | 1,145,546 | 1,145,546 | ||
Debt discount from fair value of warrants issued with convertible notes | 240,455 | 240,455 | ||
Issuance of common stock for convertible note conversion, shares | 45,455 | |||
Issuance of common stock for convertible note conversion, amount | $ 45 | 49,955 | $ 50,000 | |
Issuance of common stock in warrant exercise, shares | 168,690 | 168,690 | ||
Issuance of common stock in warrant exercise, amount | $ 168 | 184,675 | $ 184,843 | |
Warrants issued for services | 340,570 | 340,570 | ||
Stock options issued for services | 236,500 | 236,500 | ||
Net loss | (9,839,396) | (9,839,396) | ||
Ending balance, shares at Dec. 31, 2019 | 76,222,042 | |||
Ending balance, amount at Dec. 31, 2019 | $ 76,225 | $ 114,143,872 | $ (99,153,701) | $ 15,066,396 |
CONSOLIDATED STATEMENTS OF CASH
CONSOLIDATED STATEMENTS OF CASH FLOW - USD ($) | 12 Months Ended | |
Dec. 31, 2019 | Dec. 31, 2018 | |
Cash Flows From Operating Activities | ||
Net loss | $ (9,839,396) | $ (5,806,612) |
Adjustments to reconcile net loss to net cash from operations: | ||
Stock based compensation | 942,470 | 1,340,324 |
Stock issued for interest payments on notes payable | 183,714 | 228,057 |
Amortization of debt issuance costs | 286,584 | 268,917 |
Bad debt expense | 34,500 | 0 |
Accretion of note discounts | 429,138 | 216,732 |
Accrued interest payable in stock | 228,057 | 0 |
Depreciation, depletion and amortization | 4,393,160 | 1,173,752 |
Net settlement offset | 0 | (100,561) |
Impairment loss | 1,494,769 | 139,891 |
Change in: | ||
Accounts receivable | (54,260) | (3,400) |
Production revenue receivable | 194,169 | (151,783) |
Prepayments - development costs | 146,422 | 1,189,230 |
Prepaid expenses | (35,026) | (21,474) |
Other assets | 6,362 | 0 |
Accounts payable and accrued expenses | 311,603 | 14,116 |
Accrued interest payable | 1,135,801 | 344,287 |
Net cash from operating activities | (141,933) | (1,168,524) |
Cash Flows From Investing Activities | ||
Investment in oil and gas properties | (8,783,658) | (12,149,916) |
Purchases of property, plant, and equipment | (6,564) | 0 |
Net cash used in investing activities | (8,790,222) | (12,149,916) |
Cash Flows From Financing Activities | ||
Issuance of common stock | 3,446,880 | 6,049,734 |
Proceeds from promissory notes | 539,999 | 4,107,149 |
Repayment of promissory notes | 0 | (3,250,000) |
Proceeds from notes payable | 4,010,000 | 6,000,000 |
Proceeds from warrant exercise of warrants into common stock | 184,843 | 200,000 |
Net cash from financing activities | 8,181,722 | 13,106,883 |
Net decrease in cash | (750,433) | (211,557) |
Cash - beginning of period | 840,163 | 1,051,720 |
Cash - end of period | 89,730 | 840,163 |
Supplemental disclosure of cash flow information: (Non Cash Items | ||
Common stock issued for oil and gas lease extension | 125,000 | 0 |
Common stock issued for partial payment of unpaid compensation | 0 | 59,000 |
Common stock issued for payment in kind on notes payable | 314,108 | 221,024 |
Common stock issued in conversion of convertible note principal | 50,000 | 0 |
Subscription receivable for sale of common stock | 250,000 | 0 |
(Increase) in accounts payable for property development costs | (520,094) | (133,189) |
Beneficial conversion feature on convertible notes | 1,145,546 | 0 |
Debt discount from fair value of warrants issued with convertible notes | 240,455 | 0 |
Cash paid for interest | 1,554,510 | 1,519,573 |
Cash paid for state franchise tax | $ 4,441 | $ 0 |
1. NATURE OF BUSINESS
1. NATURE OF BUSINESS | 12 Months Ended |
Dec. 31, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
NATURE OF BUSINESS | Torchlight Energy Resources, Inc. (“Company”) was incorporated in October 2007 under the laws of the State of Nevada as Pole Perfect Studios, Inc. (“PPS”). From its incorporation to November 2010, the company was primarily engaged in business start-up activities. On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) between the major shareholders of PPS and the shareholders of Torchlight Energy, Inc. (“TEI”). As a result of the transactions effected by the Exchange Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business. TEI was incorporated under the laws of the State of Nevada in June 2010. We are engaged in the acquisition, exploitation and/or development of oil and natural gas properties in the United States. We operate our business through our subsidiaries Torchlight Energy Inc., Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC. |
2. GOING CONCERN
2. GOING CONCERN | 12 Months Ended |
Dec. 31, 2019 | |
Going Concern | |
GOING CONCERN | At December 31, 2019, the Company had not yet achieved profitable operations. We had a net loss of $9,839,396 for the year ended December 31, 2019 and had accumulated losses of $99,153,701 since our inception. We expect to incur further losses in the development of our business. The Company had a working capital deficit as of December 31, 2019 of $13,226,742. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s 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. 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) obtain loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful. These consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classifications of liabilities that may result from the outcome of this uncertainty. |
3. SIGNIFICANT ACCOUNTING POLIC
3. SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended |
Dec. 31, 2019 | |
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 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. Cash and cash equivalents – Accounts receivable 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. Unevaluated properties are reviewed for impairment at least annually and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. Gains and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Sales of less than 100% of the 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. Capitalized interest – Depreciation, depletion, and amortization Ceiling test The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated abandonment costs. The determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of proved oil and gas reserves could result in significant revisions of proved reserves. Other issues, such as changes in regulatory requirements, technological advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future. Asset retirement obligations Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement. Income taxes 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. Company tax returns remain subject to Federal and State tax examinations. Generally, the applicable statutes of limitation are three to four years from their respective filings. Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of operations. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements. Share-based compensation The Company accounts for stock option awards using the calculated value method. The expected term was derived using the simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110, which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options. The Company accounts for any forfeitures of options when they occur. Previously recognized compensation cost for an award is reversed in the period that the award is forfeited. The Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion. In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting The Company values warrant and option awards using the Black-Scholes option pricing model. Revenue recognition The Company’s revenue is typically generated from contracts to sell natural gas, crude oil or NGLs produced from interests in oil and gas properties owned by the Company. Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale. The transaction confirmations specify a delivery point which represents the point at which control of the product is transferred to the customer. These contracts frequently meet the definition of a derivative under ASC 815, and are accounted for as derivatives unless the Company elects to treat them as normal sales as permitted under that guidance. The Company elects to treat contracts to sell oil and gas production as normal sales, which are then accounted for as contracts with customers. The Company has determined that these contracts represent multiple performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point. Revenues from oil and gas sales are detailed as follows: Year Year Ended Ended December 31, December 31, 2019 2018 Revenues Oil sales $ 716,014 $ 1,257,173 Gas sales 30,249 25,189 Total $ 746,263 $ 1,282,362 Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. Amounts allocated in the Company’s price contracts are based on the standalone selling price of those products in the context of long-term contracts. Payment is generally received one or two months after the sale has occurred. Gain or loss on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers subject to ASC 606. The Company may in the future use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. Producer Gas Imbalances. Basic and diluted earnings (loss) per share – Environmental laws and regulations Recent adopted accounting pronouncements 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 – |
4. OIL & GAS PROPERTIES
4. OIL & GAS PROPERTIES | 12 Months Ended |
Dec. 31, 2019 | |
Oil and Gas Property [Abstract] | |
OIL & GAS PROPERTIES | The following table presents the capitalized costs for oil & gas properties of the Company as of December 31, 2019 and 2018: 2019 2018 Evaluated costs subject to amortization $ 13,243,541 $ 11,664,586 Unevaluated costs 39,667,740 31,746,477 Total capitalized costs 52,911,281 43,411,063 Less accumulated depreciation, depletion and amortization (12,729,238 ) (6,845,602 ) Total oil and gas properties $ 40,182,043 $ 36,565,461 Unevaluated costs as of December 31, 2019 include cumulative costs on developing projects including the Orogrande, Hazel, and Winkler projects in West Texas. The Company identified impairment of $2,300,626 in 2017 related to its unevaluated properties. The Company adjusted the separation of evaluated versus unevaluated costs within its full cost pool to recognize the value impairment related to the expiration of unevaluated leases in 2017 in the amount of $2,300,626. The impact of this change was to increase the basis for calculation of future period’s depletion, depreciation and amortization to include $2,300,626 of cost which will effectively recognize the impairment on the consolidated statement of operations over future periods. The $2,300,626 has also become an evaluated cost for purposes of ceiling tests and which may further recognize the impairment expense recognized in future periods. The impact of this cost reclassification at March 31, 2018 was a recognized impairment expense of $139,891. Impairment expense was recognized for the year ended December 31, 2019 of $1,494,769. At December 31, 2019 an additional impairment of unevaluated costs of $756,964 was added to the basis for future period’s depletion. Due to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that a further write-down could occur. Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions. The independent engineering estimates include only those amounts considered to be proved reserves and do not include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place. Estimated reserves to be developed through secondary or tertiary recovery processes are classified as unevaluated properties. Current Projects As of December 31, 2019, we had interests in four oil and gas projects: the Orogrande Project in Hudspeth County, Texas, the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas, the Winkler Project in Winkler County, Texas and the Hunton wells in partnership with Husky Ventures in central Oklahoma. Orogrande Project, West Texas On August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum Corporation (“MPC”), and Gregory McCabe, our Chairman. Mr. McCabe was the sole owner of both Hudspeth and MPC. Under the terms and conditions of the Purchase Agreement, at closing, we purchased 100% of the capital stock of Hudspeth which holds certain oil and gas assets, including a 100% working interest in approximately 172,000 mostly contiguous acres in the Orogrande Basin in West Texas. As of December 31, 2017, leases covering approximately 134,000 acres remain in effect. As consideration, at closing we issued 868,750 restricted shares of our common stock to Mr. McCabe and paid a total of $100,000 in geologic origination fees to third parties. Additionally, Mr. McCabe has, at his option, a 10% working interest back-in after payout and a reversionary interest if drilling obligations are not met, all under the terms and conditions of a participation and development agreement among Hudspeth, MPC and Mr. McCabe. Mr. McCabe also holds a 4.5% overriding royalty interest in the Orogrande acreage, which he obtained prior to, and was not a part of, the August 2014 transaction. We believe all drilling obligations through December 31, 2019 have been met. On September 23, 2015, Hudspeth entered into a Farmout Agreement with Pandora Energy, LP (“Pandora”), Founders Oil & Gas, LLC (“Founders”), and for the limited purposes set forth therein, MPC and Mr. McCabe, for the entire Orogrande Project in Hudspeth County, Texas. The Farmout Agreement provided that Hudspeth and Pandora (collectively referred to as “Farmor”) would assign to Founders an undivided 50% of the leasehold interest and a 37.5% net revenue interest in the oil and gas leases and mineral interests in the Orogrande Project, which interests, except for any interests retained by Founders, would be reassigned to Farmor by Founders if Founders did not spend a minimum of $45.0 million on actual drilling operations on the Orogrande Project by September 23, 2017. Under a joint operating agreement also entered into on September 23, 2015, Founders was designated as operator of the leases. On March 27, 2017, Founders, Founders Oil & Gas Operating, LLC, Founders’ operating partner, Hudspeth and Pandora signed a Drilling and Development Unit Agreement (the “DDU Agreement”), with the Commissioner of the General Land Office, on behalf of the State of Texas, and as approved by the Board for Lease of University Lands, or University Lands, on the Orogrande Project. The DDU Agreement has an effective date of January 1, 2017 and required a payment from Founders, Hudspeth and Pandora, collectively, of $335,323 as the initial consideration fee. The initial consideration fee was paid by Founders in April 2017 and was to be deducted from the required spud fee payable to us at commencement of the next well drilled. The DDU Agreement allows for all 192 existing leases covering approximately 133,000 net acres leased from University Lands to be combined into one drilling and development unit for development purposes. The term of the DDU Agreement expires on December 31, 2023, and the time to drill on the drilling and development unit continues through December 2023. The DDU Agreement also grants the right to extend the DDU Agreement through December 2028 if compliance with the DDU Agreement is met and the extension fee associated with the additional time is paid. Our drilling obligations began with one well to be spudded and drilled on or before September 1, 2017, and increased to two wells in year 2018, three wells in year 2019, four wells in year 2020 and five wells per year in years 2021, 2022 and 2023. The drilling obligations are minimum yearly requirements and may be exceeded if acceleration is desired. The DDU Agreement replaces all prior agreements, and will govern future drilling obligations on the drilling and development unit if the DDU Agreement is extended. The Company drilled three wells during fourth quarter of 2019. There are two vertical tests wells in the Orogrande Project, the Orogrande Rich A-11 test well and the University Founders B-19 #1 test well. The Orogrande Rich A-11 test well was spudded on March 31, 2015, drilled in the second quarter of 2015 and was evaluated and numerous scientific tests were performed to provide key data for the field development thesis. We believe that future utility of this well may be conversion to a salt water disposal well in the course of further development of the Orogrande acreage. The University Founders B-19 #1 was spudded on April 24, 2016 and drilled in the second quarter of 2016. The well successfully pumped down completion fluid in the third quarter of 2016 and indications of hydrocarbons were seen at the surface on this second Orogrande Project test well. We believe that future utility of this well may be conversion to a salt water disposal well in the course of further development of the Orogrande acreage. During the fourth quarter of 2017, the Company took back operational control from Founders on the Orogrande Project. We were joined by Wolfbone Investments, LLC, (“Wolfbone”), a company owned by Mr. McCabe. We, along with Hudspeth, Wolfbone and, for the limited purposes set forth therein, Pandora, entered into an Assignment of Farmout Agreement with Founders, (the “Assignment of Farmout Agreement”), pursuant to which we and Wolfbone will share the remaining commitments under the Farmout Agreement. All original provisions of our carried interest were to remain in place including reimbursement to us on each wellbore. Founders was to remain a 9.5% working interest owner in the Orogrande Project for the $9.5 million it had spent as of the date of the Assignment of Farmout Agreement, and such interests were to be carried until $40.5 million is spent by Wolfbone and us, with each contributing 50% of such capital spend, under the existing agreement. The Company estimates that there is still approximately $27.1 million remaining to be spent on the project until such time as the capital expenditures revert back to the percentages of the working interest owners. Our working interest in the Orogrande Project thereby increased by 20.25% to a total of 67.75% and Wolfbone then owned 20.25%. Founders was to operate a newly drilled horizontal well called the University Founders #A25 (at 5,540’ depth in a 1,000’ lateral) with supervision from us and our partners. The University Founders #A25 was spudded on November 28, 2017. During the month of April, 2018, we, MPC and Mr. McCabe were to assume full operational control including managing drilling plans and timing for all future wells drilled in the project. On July 25, 2018, the Company and Hudspeth entered into a Settlement & Purchase Agreement (the “Settlement Agreement”) with Founders (and Founders Oil & Gas Operating, LLC), Wolfbone and MPC, which agreement provides for Hudspeth and Wolfbone to each immediately pay $625,000 and for Hudspeth or the Company and Wolfbone or MPC to each pay another $625,000 on July 20, 2019, as consideration for Founders assigning all of its working interest in the oil and gas leases of the Orogrande Project to Hudspeth and Wolfbone equally. The final payments were made on July 18, 2019. The assignments to Hudspeth and Wolfbone were made in July when the first payments were made. Future well capital spending obligations will require the same 50% contribution from Hudspeth and 50% from Wolfbone until such time as the $40.5 million to be spent on the project (as per our Assignment of Farmout Agreement with Founders) is completed. The Company estimates that there is still approximately $27.1 million remaining to be spent on the project until such time as the capital expenditures revert back to the percentages of the working interest owners. After the assignment by Founders (for which Hudspeth’s total consideration was $1,250,000), Hudspeth’s working interest increased to 72.5%. The Orogrande Project ownership as of December 31, 2019 is detailed as follows: Revenue Working Interest Interest University Lands - Mineral Owner 20.000 % n/a ORRI - Magdalena Royalties, LLC, an entity controlled by Gregory McCabe, Chairman 4.500 % n/a ORRI - Unrelated Party 0.500 % n/a Hudspeth Oil Corporation, a subsidiary of Torchlight Energy Resources Inc. 54.375 % 72.500 % Wolfbone Investments LLC, an entity controlled by Gregory McCabe, Chairman 18.750 % 25.000 % Unrelated Party 1.875 % 2.500 % 100.000 % 100.000 % Reference Note 11 - Subsequent Events for the reduction of 6% in the Company’s working interest as a result of the conversion of notes payable and accrued interest into working interest in the Orogrande. Rich Masterson, our consulting geologist, is credited with originating the Orogrande Project in Hudspeth County in the Orogrande Basin. With Mr. Masterson’s assistance and based on all the science we have gathered to date, we have identified multiple unconventional and conventional target pay zones with depths between 3,000’ and 8,000’ with primary pay, described as the Penn formation, located at depths of 5,300 to 5,900’. Based on our geologic analysis to date, this basin has stacked pay with zones including the Wolfcamp, Penn, Barnett, Woodford, Atoka and more. These potential zones are prospective for oil and gas with a GOR of 1100 expected based on our gathered scientific information and analysis from independent third parties. During the fourth quarter, 2018, the Company drilled three additional test wells in the Orogrande in order to stay in compliance with University Lands D&D Unit Agreement, as well as, to test for potential shallow pay zones and deeper pay zones that may be present on structural plays. Development of these wells continued into the nine months ended September 30, 2019 to further capture and document the scientific base in support of demonstrating the production potential of the property. The Company is currently marketing the project for an outright sale or farm in partner. This marketing process has been long and arduous as the overall market is quite soft. In addition, due to the size and scope of the project, we are dealing with very large companies that have multitudes of people reviewing our material, which in itself is extensive. During the marketing process, the Company and Wolfbone will endeavor to complete the University Maverick A24 #1 as a potential producer in the Atoka formation. In addition, should a farm out partner or sale not occur, the Company and Wolfbone will proceed to drill two additional wells in the play prior to year-end, in order to fulfill the obligations under the DDU Agreement. We drilled to test the two obligation wells described above. The first well, the A35 1H, has been drilled and cased in the Penn Section and tested with positive results of oil and gas production to the surface. This first well is a short horizontal in the proven Penn Section where we will be looking to break through the dual porosity system in place with a larger frac designed to open up the oil bearing pores. We are also drilled and cased the A25 #2 which targeted an identified structure. This well is designed to test both conventional zones and potentially the unconventional Barnett and Woodford Zones ultimately drilling down to the cellar around 7600 feet. Testing is ongoing. Hazel Project in the Midland Basin in West Texas Effective April 4, 2016, TEI acquired from MPC a 66.66% working interest in approximately 12,000 acres in the Midland Basin in exchange for 1,500,000 warrants to purchase shares of our common stock with an exercise price of $1.00 for five years and a back-in after payout of a 25% working interest to MPC. Initial development of the first well on the property, the Flying B Ranch #1, began July 9, 2016 and development continued through September 30, 2016. This well is classified as a test well in the development pursuit of the Hazel Project. We believe that this wellbore will be utilized as a salt water disposal well in support of future development. In October 2016, the holders of all of our then-outstanding shares of Series C Preferred Stock (which were issued in July 2016) elected to convert into a total 33.33% working interest in our Hazel Project, reducing our ownership from 66.66% to a 33.33% working interest. As of December 31, 2019, no shares of our Series C Preferred Stock were outstanding. On December 27, 2016, drilling activities commenced on the second Hazel Project well, the Flying B Ranch #2. The well is a vertical test similar to our first Hazel Project well, the Flying B Ranch #1. Recompletion in an alternative geological formation for this well was performed during the three months ended September 30, 2017; however, we believe that the results were uneconomic for continuing production. We believe that this wellbore will be utilized as a salt water disposal well in support of future development. We commenced planning to drill the Flying B Ranch #3 horizontal well in the Hazel Project in June 2017 in compliance with the continuous drilling obligation. The well was spudded on June 10, 2017. The well was completed and began production in late September 2017. As of December 31, 2019 the well is shut in due to high lease operating expenses as a result of lack of three phase electricity to the property which forced the use of diesel generation equipment to power the production facilities. Acquisition of Additional Interests in Hazel Project On January 30, 2017, we and our then wholly-owned subsidiary, Torchlight Acquisition Corporation, a Texas corporation (“TAC”), entered into and closed an Agreement and Plan of Reorganization and a Plan of Merger with Line Drive Energy, LLC, a Texas limited liability company (“Line Drive”), and Mr. McCabe, under which agreements TAC merged with and into Line Drive and the separate existence of TAC ceased, with Line Drive being the surviving entity and becoming our wholly-owned subsidiary. Line Drive, which was wholly-owned by Mr. McCabe, owned certain assets and securities, including approximately 40.66% of 12,000 gross acres, 9,600 net acres, in the Hazel Project and 521,739 warrants to purchase shares of our common stock (which warrants had been assigned by Mr. McCabe to Line Drive). Upon the closing of the merger, all of the issued and outstanding shares of common stock of TAC automatically converted into a membership interest in Line Drive, constituting all of the issued and outstanding membership interests in Line Drive immediately following the closing of the merger, the membership interest in Line Drive held by Mr. McCabe and outstanding immediately prior to the closing of the merger ceased to exist, and we issued Mr. McCabe 3,301,739 restricted shares of our common stock as consideration therefor. Immediately after closing, the 521,739 warrants held by Line Drive were cancelled, which warrants had an exercise price of $1.40 per share and an expiration date of June 9, 2020. A Certificate of Merger for the merger transaction was filed with the Secretary of State of Texas on January 31, 2017. Subsequent to the closing the name of Line Drive Energy, LLC was changed to Torchlight Hazel, LLC. We are required to drill one well every six months to hold the entire 12,000 acre block for eighteen months, and thereafter two wells every six months starting June 2018. During the year ended December 31, 2019 modifications were made to mineral owner leases as described below. Also on January 30, 2017, TEI entered into and closed a Purchase and Sale Agreement with Wolfbone. Under the agreement, TEI acquired certain of Wolfbone’s Hazel Project assets, including its interest in the Flying B Ranch #1 well and the 40 acre unit surrounding the well, for consideration of $415,000, and additionally, Wolfbone caused to be cancelled a total of 2,780,000 warrants to purchase shares of our common stock, including 1,500,000 warrants held by MPC, and 1,280,000 warrants held by Green Hill Minerals, an entity owned by Mr. McCabe’s son, which warrant cancellations were effected through certain Warrant Cancellation Agreements. The 1,500,000 warrants held by MPC that were cancelled had an exercise price of $1.00 per share and an expiration date of April 4, 2021. The warrants held by Green Hill Minerals that were cancelled included 100,000 warrants with an exercise price of $1.73 and an expiration date of September 30, 2018 and 1,180,000 warrants with an exercise price of $0.70 and an expiration date of February 15, 2020. Since Mr. McCabe held the controlling interest in both Line Drive and Wolfbone, the transactions were combined for accounting purposes. The working interest in the Hazel Project was the only asset held by Line Drive. The warrant cancellation was treated in the aggregate as an exercise of the warrants with the transfer of the working interests as the consideration. We recorded the transactions as an increase in its investment in the Hazel Project working interests of $3,644,431, which is equal to the exercise price of the warrants plus the cash paid to Wolfbone. Upon the closing of the transactions, our working interest in the Hazel Project increased by 40.66% to a total ownership of 74%. Effective June 1, 2017, we acquired an additional 6% working interest from unrelated working interest owners in exchange for 268,656 shares of common stock valued at $373,430, increasing our working interest in the Hazel project to 80%, and an overall net revenue interest of 74-75%. Mr. Masterson is credited with originating the Hazel Project in the Midland Basin. With Mr. Masterson’s assistance, we are targeting prospects in the Midland Basin that have 150 to 130 feet of thickness, are likely to require six to eight laterals per bench, have the potential for 12 to 16 horizontal wells per section, and 200 long lateral locations, assuming only two benches. In April 2018, we announced that we have commenced a process that could result in the monetization of the Hazel Project. We believe the development activity at the Hazel Project, coupled with nearby activities of other oil and gas operators, suggests that this project has achieved a level of value worth monetizing. We anticipate that the liquidity that would be provided from selling the Hazel Project could be redeployed into the Orogrande Project. While this process is underway, we will take all necessary steps to maintain the leasehold as required. As of this filing, we continue to maintain the leases in good standing and continue to market the acreage in an effort to focus on the Orogrande Project. During the year ended December 31, 2019 the Company deepened the Flying B #4 and took whole cores through all of the Wolfcamp A and the upper portion of the Wolfcamp B. In addition, in May, 2019 we entered into agreements with two of the three mineral owners on the northern section of the leases to keep the entire acreage block as one lease with a one year extension. We issued each of them 50,000 shares of our common stock as consideration for this extension. At December 31, 2019 we were structuring the extension agreement with the third mineral owner for cash consideration. Due to this extension, our obligation in November reduces to one obligation well. We have finished that obligation well and are awaiting results. This well is targeting a shallow zone that is showing oil potential. The marketing process is ongoing for the Hazel project. We continue to encounter, as does the entire industry, a soft market for acquisitions and divestitures transactions. We will continue to look to sell the property or joint venture the property via farm in or a drillco transaction. Winkler Project, Winkler County, Texas On December 1, 2017, the Agreement and Plan of Reorganization that we and our then wholly-owned subsidiary, Torchlight Wolfbone Properties, Inc., a Texas corporation (“TWP”), entered into with MPC and Warwink Properties, LLC (“Warwink Properties”) on November 14, 2017 closed. Under the agreement, TWP merged with and into Warwink Properties and the separate existence of TWP ceased, with Warwink Properties being the surviving entity and becoming our wholly-owned subsidiary. Warwink Properties was wholly owned by MPC. Warwink Properties owns certain assets, including a 10.71875% working interest in approximately 640 acres in Winkler County, Texas. Upon the closing of the merger, all of the issued and outstanding shares of common stock of TWP converted into a membership interest in Warwink Properties, constituting all of the issued and outstanding membership interests in Warwink Properties immediately following the closing of the merger, the membership interest in Warwink Properties held by MPC and outstanding immediately prior to the closing of the merger ceased to exist, and we issued MPC 2,500,000 restricted shares of our common stock as consideration. Also on December 1, 2017, MPC closed its transaction with MECO IV, LLC (” MECO”), for the purchase and sale of certain assets as contemplated by the Purchase and Sale Agreement dated November 9, 2017 among MPC, MECO and additional parties thereto (the “MECO PSA”), to which we are not a party. Under the MECO PSA, Warwink Properties received a carry from MECO (through the tanks) of up to $1,179,076 in the next well drilled on the Winkler County leases. A Certificate of Merger for the merger transaction was filed with the Secretary of State of Texas on December 5, 2017. Also on December 1, 2017, the transactions contemplated by the Purchase Agreement that TEI entered into with MPC closed. Under the Purchase Agreement, which was entered into on November 14, 2017, TEI acquired beneficial ownership of certain of MPC’s assets, including acreage and wellbores located in Ward County, Texas (the “Ward County Assets”). As consideration under the Purchase Agreement, at closing TEI issued to MPC an unsecured promissory note in the principal amount of $3,250,000, payable in monthly installments of interest only beginning on January 1, 2018, at the rate of 5% per annum, with the entire principal amount together with all accrued interest due and payable on January 1, 2021. In connection with TEI’s acquisition of beneficial ownership in the Ward County Assets, MPC sold those same assets, on behalf of TEI, to MECO at closing of the MECO PSA, and accordingly, TEI received $3,250,000 in cash for its beneficial interest in the Ward County Assets. Additionally, at closing of the MECO PSA, MPC paid TEI a performance fee of $2,781,500 in cash as compensation for TEI’s marketing and selling the Winkler County assets of MPC and the Ward County Assets as a package to MECO. Addition to the Winkler Project As of May 7, 2018 our Winkler project in the Delaware Basin had begun the drilling phase of the first Winkler Project well, the UL 21 War-Wink 47 #2H. Our operating partner, MECO had begun the pilot hole on the project. The plan is to evaluate the various potential zones for a lateral leg to be drilled once logging is completed. We expect the most likely target to be the Wolfcamp A interval. The well is on 320 newly acquired acres offsetting the original leasehold we entered into in December, 2017. The additional acreage was leased by our operating partner under the Area of Mutual Interest Agreement (AMI) and we exercised its right to participate for its 12.5% in the additional 1,080 gross acres at a cash cost of $447,847 in July, 2018. Our carried interest in the first well, as outlined in the agreement, was originally planned to be on the first acreage acquired. That carried interest is being applied to this new well and will allow MECO to drill and produce potential revenues sooner than originally planned. The primary leasehold is a 320-acre block directly west of the current position and will allow for 5,000-foot lateral wells to be drilled. The well was completed and began production in October, 2018 and is producing currently. Recently the operator has informed us that there will be no planned additional wells in the acreage this year. All acreage is presently held by production. In December 2018, the Company began to take measures on its own to market the Winkler Project in an effort to focus on the Orogrande. This process is ongoing. Hunton Play, Central Oklahoma Presently, we are producing from one well in the Viking Area of Mutual Interest and one well in Prairie Grove. Assets Held for Sale With respect to marketing oil and natural gas properties, the Company has evaluated the properties being marketed to determine whether any should be reclassified as held-for-sale at December 31, 2019. The held-for-sale criteria include: management commits to a plan to sell; the asset is available for immediate sale; an active program to locate a buyer exists; the sale of the asset is probable and expected to be completed within one year; the asset is being actively marketed for sale; and it is unlikely that significant changes to the plan will be made. If each of these criteria is met, the property would be reclassified as held-for-sale on the Company’s consolidated balance sheets and measured at the lower of their carrying amount or estimated fair value less costs to sell. Fair values are estimated using accepted valuation techniques, such as a discounted cash flow model, valuations performed by third parties, earnings multiples, or indicative bids, when available. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the sale of the assets to be divested may differ from the estimated fair values reflected in the consolidated financial statements. If each of these criteria is met, DD&A expense would not be recorded on assets to be divested once they are classified as held for sale. Based on management’s assessment, these criteria have not been met and no assets are classified as held for sale as of December 31, 2019. |
5. RELATED PARTY PAYABLES
5. RELATED PARTY PAYABLES | 12 Months Ended |
Dec. 31, 2019 | |
Related Party Transactions [Abstract] | |
RELATED PARTY PAYABLES | As of December 31, 2019 and 2018, related party payables of $45,000, and accrued payroll was $996,176 and $816,176, respectively, consisting of accrued and unpaid compensation due to our executive officers. |
6. COMMITMENTS AND CONTINGENCIE
6. COMMITMENTS AND CONTINGENCIES | 12 Months Ended |
Dec. 31, 2019 | |
Commitments and Contingencies Disclosure [Abstract] | |
COMMITMENTS AND CONTINGENCIES | Leases The Company had a noncancelable lease for its office premises that expired on November 30, 2019 and which required the payment of base lease amounts and executory costs such as taxes, maintenance and insurance. Effective June 1, 2019 the Company entered into an agreement with a company that had been subleasing a portion of its office space to become the primary obligor on the lease and to assume full responsibility for lease payments after lease expiration on November 30, 2019. The Company continued after November 30, 2019 as a subtenant on a month to month basis. Legal Matters On January 31, 2020, Torchlight Energy Resources, Inc. and its wholly owned subsidiaries Torchlight Energy, Inc. and Torchlight Energy Operating, LLC were served with a lawsuit brought by Goldstone Holding Company, LLC ( Goldstone Holding Company, LLC v. Torchlight Energy, Inc., et al. Environmental matters The Company is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to the 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 December 31, 2019 and 2018, no amounts had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts. |
7. STOCKHOLDERS' EQUITY
7. STOCKHOLDERS' EQUITY | 12 Months Ended |
Dec. 31, 2019 | |
Stockholders' equity: | |
STOCKHOLDERS' EQUITY | Common Stock During the years ended December 31, 2019 and 2018, the Company issued 4,686,100 and 5,750,000 shares of common stock, respectively, for cash of $3,512,917 and $6,049,734. During the years ended December 31, 2019 and 2018, the Company issued 416,667 and -0- shares of common stock, respectively, for a subscription of $183,963 and $-0-. During the years ended December 31, 2019 and 2018, the Company issued 312,593 and 450,000 shares of common stock, respectively, with total fair values of $365,400 and $545,000 as compensation for services. During the years ended December 31, 2019 and 2018, the Company issued 167,845 and -0- shares of common stock respectively, for lease interests with total fair values of $183,714 and $-0-. During the years ended December 31, 2019 and 2018, the Company issued 100,000 and -0- shares of common stock respectively, for lease extensions with total fair values of $125,000 and $-0-. During the years ended December 31, 2019 and 2018, the Company issued 45,455 and -0- shares of common stock respectively, in conversions of notes payable valued at $50,000 and $-0-. During the years ended December 31, 2019 and 2018, the Company issued 202,316 and 172,342 shares of common stock respectively, in payment in kind on notes payable valued at $314,108 and $221,024. During the years ended December 31, 2019 and 2018, the Company issued 168,690 and 400,000 shares of common stock, respectively, resulting from warrant and option exercises for consideration totaling $184,843 and $200,000. Warrants and Options During the years ended December 31, 2019 and 2018, the Company issued and vested 100,000 and 1,220,000 warrants, respectively, with total fair values of $99,000 and $510,575, respectively, as compensation for services and 2,032,122 warrants in connection with financings in 2019. During the years ended December 31, 2019 and 2018, the Company issued 700,000 and 600,000 stock options, respectively. The Company vested 700,000 and 700.000 stock options, respectively, with total fair values of $236,500 and $343,750 respectively, as compensation for services. A summary of warrants outstanding as of December 31, 2019 and 2018 by exercise price and year of expiration is presented below: Exercise Expiration Date In Price 2020 2021 2022 2023 2024 2025 12/31/2019 $ 0.70 420,000 - - - - - 420,000 $ 0.80 - - - - - 1,666,667 1,666,667 $ 1.03 - 120,000 - - - - 120,000 $ 1.14 - - - 600,000 - - 600,000 $ 1.21 - - - 120,000 - - 120,000 $ 1.35 - - 365,455 - - - 365,455 $ 1.40 321,737 - - - - - 321,737 $ 1.63 - - - - 100,000 - 100,000 $ 1.64 - 200,000 - - - - 200,000 $ 1.80 1,250,000 - - - - - 1,250,000 $ 2.00 - 200,000 - - - - 200,000 $ 2.23 339,901 - - - - - 339,901 2,331,638 520,000 365,455 720,000 100,000 1,666,667 5,703,760 Exercise Expiration Date In Price 2019 2020 2021 2022 2023 12/31/2018 $ 0.70 - 420,000 - - - 420,000 $ 0.77 100,000 - - - - 100,000 $ 1.00 25,116 - - - - 25,116 $ 1.03 - - 120,000 - - 120,000 $ 1.08 37,500 - - - - 37,500 $ 1.14 - - - - 600,000 600,000 $ 1.21 - - - - 120,000 120,000 $ 1.40 - 1,121,736 - - 1,121,736 $ 1.50 - 100,000 - - 100,000 $ 1.64 - - 200,000 - - 200,000 $ 1.80 - 1,250,000 - - - 1,250,000 $ 2.00 - - 400,000 - - 400,000 $ 2.23 - 832,512 - - 832,512 $ 2.50 35,211 - - - - 35,211 $ 3.50 15,000 - - - - 15,000 $ 4.50 700,000 - - - - 700,000 $ 6.00 22,580 - - - - 22,580 $ 7.00 700,000 - - - - 700,000 1,635,407 3,624,248 820,000 - 720,000 6,799,655 A summary of stock options outstanding as of December 31, 2019 and 2018 by exercise price and year of expiration is presented below: Exercise Expiration Date In Price 2020 2021 2022 2023 2024 12/31/2019 $ 0.85 - - - - 600,000 600,000 $ 0.97 - 259,742 - - - 259,742 $ 1.10 - - 800,000 - - 800,000 $ 1.19 - - - 700,000 - 700,000 $ 1.57 4,500,000 - - - - 4,500,000 $ 1.63 - - 58,026 - - 58,026 4,500,000 259,742 858,026 700,000 600,000 6,917,768 Exercise Expiration Date In Price 2019 2020 2021 2022 2023 12/31/2018 $ 0.97 - - 259,742 - - 259,742 $ 1.10 - - - 800,000 - 800,000 $ 1.19 - - - - 600,000 600,000 $ 1.57 1,497,163 4,500,000 - - - 5,997,163 $ 1.63 - - - 58,026 - 58,026 $ 1.79 - 300,000 - - - 300,000 1,497,163 4,800,000 259,742 858,026 600,000 8,014,931 At December 31, 2019 and 2018, the Company had reserved 12,621,528 and 14,814,586 common shares for future exercise of warrants and options. Warrants and options granted were valued using the Black-Scholes Option Pricing Model. The assumptions used in calculating the fair value of the warrants and options issued were as follows: 2019 Risk-free interest rate 1.65% - 2.46% Expected volatility of common stock 77% - 107% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant Three to Five Years 2018 Risk-free interest rate 2.15% - 2.83% Expected volatility of common stock 114% - 119% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant 2.75 to Five Years |
8. INCOME TAXES
8. INCOME TAXES | 12 Months Ended |
Dec. 31, 2019 | |
Income Tax Disclosure [Abstract] | |
INCOME TAXES | The Company recorded no income tax provision for 2019 and 2018 because of losses incurred. The Company has placed a full valuation allowance against net deferred tax assets because future realization of these assets is not assured. There are no uncertain tax positions accounted for in this tax provision. The following is a reconciliation between the federal income tax benefit computed at statutory federal income tax rates and actual income tax provision for the years ended December 31, 2019 and 2018: Year ended Year ended December 31, 2019 December 31, 2018 Federal income tax benefit at statutory rate $ (2,066,273 ) $ (1,221,483 ) Permanent Differences 1,336 505 Annual reconciling adjustment 10,949 1,449,429 Change in valuation allowance 2,053,988 (228,451 ) Provision for income taxes $ - $ - The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2019 and 2018 are as follows: December 31, 2019 December 31, 2018 Deferred tax assets: Net operating loss carryforward $ 14,066,645 $ 11,968,500 Stock based compensation 4,688,694 4,490,775 Disallowed interest expense 285,205 69,505 Other 288,030 302,131 Deferred tax liabilities: Investment in oil and gas properties (3,322,760 ) (2,879,086 ) Net deferred tax assets and liabilities 16,005,814 13,951,825 Less valuation allowance (16,005,814 ) (13,951,825 ) Total deferred tax assets and liabilities $ - $ - The Company had a net deferred tax asset related to federal net operating loss carryforwards of $66,984,025 and $63,070,504 at December 31, 2019 and 2018, respectively. The federal net operating loss carryforward will begin to expire in 2034. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured. |
9. PROMISSORY NOTES
9. PROMISSORY NOTES | 12 Months Ended |
Dec. 31, 2019 | |
Debt Disclosure [Abstract] | |
PROMISSORY NOTES | On April 10, 2017, the Company sold to investors in a private transaction two 12% unsecured promissory notes with a total amount of $8,000,000 in principal amount. Interest only is due and payable on these notes each month at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity on April 10, 2020. The holders of these notes will also receive annual payments of common stock at the rate of 2.5% of principal amount outstanding, based on a volume-weighted average price. Both notes were sold at an original issue discount of 5.75% and accordingly, we received total proceeds of $7,540,000 from the investors. We used the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt. These 12% promissory notes allow for early redemption. The notes also contain certain covenants under which we have agreed that, except for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% notes, unless consented to by the holders. The effective interest rate is 16.15%. On April 24, 2017, we used $2,509,500 of the proceeds from this financing to redeem and repay a portion of the outstanding 12% Series B Convertible Unsecured Promissory Notes. Separately, $1,000,000 of the principal amount of the Series B Notes plus accrued interest was converted into 1,007,890 shares of common stock and $64,297 was rolled into the new debt financing. On February 6, 2018, we sold to an investor in a private transaction a 12% unsecured promissory note with a principal amount of $4,500,000. Interest only is due and payable on the note each month at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity on April 10, 2020. The holder of the note will also receive annual payments of common stock at the rate of 2.5% of principal amount outstanding, based on a volume-weighted average price. We sold the note at an original issue discount of 3.73% and accordingly, we received total proceeds of $4,332,150 from the investor. We used the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt. This 12% promissory note allows for early redemption, provided that if we redeem before February 6, 2019, we must pay the holder all unpaid interest and common stock payments on the portion of the note redeemed that would have been earned through February 6, 2019. The note also contains certain covenants under which we have agreed that, except for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% note, unless consented to by the holder. The effective interest rate is 15.88%. In April 2019 and 2018, respectively, the holders of the notes described above received 202,316 and 172,342 shares of common stock as a payment in kind representing the annual payments of common stock due at the rate of 2.5% of principal amount outstanding as of April 10 based on a volume-weighted average price calculation. Unsecured promissory note transactions through December 31, 2019 are summarized as follows: Unsecured promissory note balance - December 31, 2018 $ 11,862,080 Accretion of discount and amortization of debt issuance costs 515,750 Unsecured promissory note balance - December 31, 2019 $ 12,377,830 $8,564,297 of the 2017 and 2018 Note have balloon payments of outstanding principal due and payable at maturity on April 10, 2020. The maturity date of the remaining $4 million in 2017 Notes was extended to April 10, 2021 and is classified as a long term liability in our consolidated balance sheet. On October 17, 2018, we sold to certain investors in a private transaction 16% Series C Unsecured Convertible Promissory Notes with a total principal amount of $6,000,000. Interest and principal were due and payable on the notes in one balloon payment at maturity on April 17, 2020. The notes were convertible, at the election of the holders, into an aggregate 6% working interest in certain oil and gas leases in Hudspeth County, Texas, known as our “Orogrande Project.” After an analysis of the transaction and a review of applicable accounting pronouncements, management concluded that the notes issued on October 17, 2018 which contain a conversion right for holders to convert into a working interest in the Orogrande Project of the Company, meet a specific scope exception to the provisions requiring derivative accounting. The notes allowed us to redeem them early only upon the event of a fundamental transaction, such as a merger or sale of substantially all our assets. The notes provided that the noteholders may accelerate and declare any and all of the obligations under the notes to be immediately due and payable in the event of default, such as nonpayment, failure to perform required conversions, failure to perform any covenant or agreement under the notes, an insolvency event, or certain defaults or judgments. As part of the sale of the of the notes, the noteholders required that McCabe Petroleum Corporation, a Texas corporation owned by our Chairman Gregory McCabe (“MPC”), provide them a put option whereby they had the right to have MPC purchase from them any unpaid principal amount due on the notes. Additionally, the notes provided that if there was a fundamental transaction, Mr. McCabe would be required to pay a fee to each noteholder that elects not to convert or require MPC to purchase the principal amount under the note, which fee would be equal to such noteholder’s pro-rata share of a total fee amount of $1,500,000. We received total proceeds of $6,000,000 from the sale of the notes, of which $3,000,000 was used to pay back the promissory note issued to MPC on December 1, 2017, which note was due on December 31, 2020. We used the remaining proceeds for working capital and general corporate purposes, which includes, without limitation, drilling and lease acquisition capital. Prior to entering into the above transactions, our Board of Directors formed a special committee composed of independent directors to analyze and authorize the transactions on behalf of Torchlight Energy Resources, Inc. and determine whether the transactions are fair to the company. In this role, the special committee engaged an independent financial consulting firm which rendered a fairness opinion deeming that the transactions were fair to the company, from a financial point of view, and contained terms no less favorable to the company than those that could be obtained in arm’s length transactions. See “Note 11 – Subsequent Events” below for disclosure of the conversion of the notes which occurred on March 9, 2020. In February and March, 2019 the Company raised a total of $2,000,000 from investors through the sale of 14% Series D Unsecured Convertible Promissory Notes. Principal is payable in a lump sum at maturity on May 11, 2020 with payments of interest payable monthly at the rate of 14% per annum. Holders of the notes have the right to convert principal and interest at any time into common stock at a conversion price of $1.08 per share. The Company has the right to redeem the notes at any time, provided that the redemption amount must include all interest that would have been earned through maturity. The Company evaluated the notes for beneficial conversion features and derivative accounting criteria and concluded that derivative accounting treatment is not applicable. In July 2019, the Company issued 8% Unsecured Convertible Promissory notes in the amount of $2,010,000 together with warrants to purchase our common stock. The principal and accrued interest on the notes are convertible into shares of common stock at $1.10 per common share at any time after the original issue date. Along with the notes, the three year warrants equal to 20% of the number of shares of common stock issuable upon the conversion of the notes were issued to note holders. The warrants are exercisable at $1.35 per share. Warrants issued along with the notes meet the requirements of the scope exemptions in ASC 815-10-15-74 and are thus classified as equity upon issuance. The Company determined the fair value of the warrants using the Black Scholes pricing formula and is recognized as a discount on the carrying amount of the notes and is credited to additional paid in capital. The fair value of the warrants at the issuance date was determined to be $240,455. A beneficial conversion feature (“BCF”) of a convertible note is normally characterized as the convertible portion feature that provides a rate of conversion that is below market value or “in the money” when issued. The BCF related to the issuance of the notes was recorded at the issuance date. The BCF was measured using the intrinsic value method and is shown as a discount to the carrying amount of the convertible note and is credited to additional paid in capital. The intrinsic value of the BCF at the issuance date of the notes was determined to be $1,145,546. The allocated fair values of the BCF and the warrants was recorded as a debt discount from the face amount of the notes and such discount is being accreted over the expected term of the notes and is charged to interest expense. The Company recognized interest expense for 2019 of $199,972 from the amortization of debt discount from these notes. Effective October 31, 2019, the Company issued 10% Unsecured Convertible Promissory notes in the amount of $540.000. Principal and interest are due at maturity on December 3, 2020. The principal and accrued interest on the notes are convertible into shares of common stock at $.75 per common share at any time after the original issue date The Company evaluated the July, 2019 and the October, 2019 notes for beneficial conversion features and derivative accounting criteria and concluded that derivative accounting treatment was not applicable. |
10. ASSET RETIREMENT OBLIGATION
10. ASSET RETIREMENT OBLIGATIONS | 12 Months Ended |
Dec. 31, 2019 | |
Asset Retirement Obligation [Abstract] | |
ASSET RETIREMENT OBLIGATIONS | The following is a reconciliation of the asset retirement obligations liability through December 31, 2019: Asset retirement obligations – December 31, 2018 $ 14,353 Accretion expense 569 Estimated liabilities recorded 8,397 Asset retirement obligations – December 31, 2019 $ 23,319 |
11. SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS | 12 Months Ended |
Dec. 31, 2019 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS | On October 17, 2018, we sold to certain investors in a private transaction 16% Series C Unsecured Convertible Promissory Notes with a total principal amount of $6,000,000, with interest and principal due and payable on the notes in one balloon payment at maturity on April 17, 2020 (at maturity a total of $1,500,000 in interest would be due and payable on the notes). On March 9, 2020, each of the noteholders entered into a Conversion Agreement with us and our subsidiary Hudspeth Oil Corporation (“Hudspeth”), under which the noteholders elected to convert the notes, in accordance with their terms, into an aggregate 6% working interest (of all such holders) in certain oil and gas leases in Hudspeth County, Texas, known as our “Orogrande Project.” Principal of $6,000,000 and approximately $1,339,000 of accrued interest were converted at March 9, 2020. The principal amount converted on March 9, 2020 of $6,000,000 plus interest accrued to December 31, 2019 of $1,157,260 is classified as a long term liability in the accompanying consolidated balance sheet. The Conversion Agreements also provided additional consideration to the noteholders including a limited carry, a top-off obligation of us and Hudspeth, and warrants to purchase a total of 750,000 restricted shares of our common stock, which warrants will have a term of five years and an exercise price of $0.70 per share. The limited carry provides that for the remainder of the 2020 calendar year, Hudspeth will pay all costs and expenses attributable to the assigned working interests, except where prohibited by law or regulation. The top-off obligation provides that, subject to the terms and conditions of the Conversion Agreements, if (a) we sell our entire working interest in the Orogrande Project, (b) as part of such sale, the holder’s entire working interests are sold, and (c) the gross proceeds received by all the holders in such transaction are equal to less than $9,000,000; then we must pay the holders an amount equal to $9,000,000, (i) less gross proceeds the holders received in the transaction, (ii) less the amount of the carry the holders received under the Conversion Agreements, and (iii) less any gross proceeds the holders received in any farmouts occurring prior to the transaction. On February 20, 2020, the Company extended the maturity on $4 million of the 12% unsecured promissory notes previously due in April, 2020. The maturity date of the subject promissory note has been extended for one year, from April 10, 2020 to April 10, 2021 and is classified as a long term liability in the accompanying consolidated balance sheet. As part of the terms of the referenced extension agreement, the Company paid the noteholder a fee of $80,000. The promissory note was originally issued in April 2017, and provides for monthly payments of interest only at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity. The noteholder also receives annual payments of common stock at the rate of 2.5% of the principal amount outstanding, based on a volume-weighted average price. On January 16, 2020, the Company announced the closing of its underwritten public offering of 3,285,715 shares of its common stock at a public offering price of $0.70 per share, for total gross proceeds of approximately $2.3 million, before deducting underwriting discounts and other offering expenses payable by the Company. A shelf registration statement relating to the shares of common stock issued in the offering was filed with the Securities and Exchange Commission (the “SEC”). |
3. SIGNIFICANT ACCOUNTING POL_2
3. SIGNIFICANT ACCOUNTING POLICIES (Policies) | 12 Months Ended |
Dec. 31, 2019 | |
Accounting Policies [Abstract] | |
Use of estimates | The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ from these estimates. |
Basis of presentation | The financial statements are presented on a consolidated basis and include all of the accounts of Torchlight Energy Resources Inc. and its wholly owned subsidiaries, Torchlight Energy, Inc., Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC. All significant intercompany balances and transactions have been eliminated. |
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. |
Concentration of risks | At times the Company’s cash balances are in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. The Company’s cash is placed with a highly rated financial institution, and the Company regularly monitors the credit worthiness of the financial institutions with which it does business. |
Fair value of financial instruments | Financial instruments consist of cash, receivables, payables and promissory notes, if any. The estimated fair values of cash, receivables, and payables approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of any promissory notes approximate their fair value giving affect for the term of the note and the effective interest rates. For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows: ● Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. ● Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. ● Level 3 inputs are unobservable inputs based on 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. |
Cash and cash equivalents | Cash and cash equivalents include certain investments in highly liquid instruments with original maturities of three months or less. |
Accounts receivable | Accounts receivable consist of uncollateralized oil and natural gas revenues due under normal trade terms, as well as amounts due from working interest owners of oil and gas properties for their share of expenses paid on their behalf by the Company. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. As of December 31, 2019 and 2018, no valuation allowance was considered necessary. |
Oil and gas properties | The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Oil and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition costs to unevaluated properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir. Unevaluated properties are reviewed for impairment at least annually and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. Gains and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Sales of less than 100% of the 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. |
Capitalized interest | The Company capitalizes interest on unevaluated properties during the periods in which they are excluded from costs being depleted or amortized. During the years ended December 31, 2019 and 2018, the Company capitalized $2,858,753 and $2,020,019, respectively, of interest on unevaluated properties. |
Depreciation, depletion and amortization | The depreciable base for oil and natural gas properties includes the sum of all capitalized costs net of accumulated depreciation, depletion, and amortization (“DD&A”), estimated future development costs and asset retirement costs not included in oil and natural gas properties, less costs excluded from amortization. The depreciable base of oil and natural gas properties is amortized on a unit-of-production method. |
Ceiling test | Future production volumes from oil and gas properties are a significant factor in determining the full cost ceiling limitation of capitalized costs. Under the full cost method of accounting, the Company is required to periodically perform a “ceiling test” that determines a limit on the book value of oil and gas properties. If the net capitalized cost of proved oil and gas properties, net of related deferred income taxes, plus the cost of unproved oil and gas properties, exceeds the present value of estimated future net cash flows discounted at 10 percent, net of related realizable tax affects, plus the cost of unproved oil and gas properties, the excess is charged to expense and reflected as additional accumulated DD&A. The Company recorded an impairment expense of $1,494,769 and $139,891 for the years ended December 31, 2019 and 2018, respectively, to recognize the adjustment required by the ceiling test. At December 31, 2019 an additional impairment of unevaluated costs of $756,964 was added to the basis for future period’s depletion. The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated abandonment costs. The determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of proved oil and gas reserves could result in significant revisions of proved reserves. Other issues, such as changes in regulatory requirements, technological advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future. |
Asset retirement obligations | The fair value of a liability for an asset’s retirement obligation (“ARO”) is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, with the corresponding charge capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each subsequent period, and the capitalized cost is depleted over the useful life of the related asset. Abandonment costs incurred are recorded as a reduction of the ARO liability. Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement. |
Income taxes | Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. Authoritative guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an examination. Management has reviewed the Company’s tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements. Company tax returns remain subject to Federal and State tax examinations. Generally, the applicable statutes of limitation are three to four years from their respective filings. Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of operations. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements. |
Share-based compensation | Compensation cost for equity awards is based on the fair value of the equity instrument on the date of grant and is recognized over the period during which an employee is required to provide service in exchange for the award. The Company accounts for stock option awards using the calculated value method. The expected term was derived using the simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110, which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options. The Company accounts for any forfeitures of options when they occur. Previously recognized compensation cost for an award is reversed in the period that the award is forfeited. The Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion. In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting The Company values warrant and option awards using the Black-Scholes option pricing model. |
Revenue recognition | On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, and the related guidance in ASC 340-40 (the new revenue standard), and related guidance on gains and losses on derecognition of nonfinancial assets ASC 610-20, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Under the modified retrospective method, the Company recognizes the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no significant adjustment was required as a result of adopting the new revenue standard. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard. The impact of the adoption of the new revenue standard was immaterial to the Company’s net loss. The Company’s revenue is typically generated from contracts to sell natural gas, crude oil or NGLs produced from interests in oil and gas properties owned by the Company. Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale. The transaction confirmations specify a delivery point which represents the point at which control of the product is transferred to the customer. These contracts frequently meet the definition of a derivative under ASC 815, and are accounted for as derivatives unless the Company elects to treat them as normal sales as permitted under that guidance. The Company elects to treat contracts to sell oil and gas production as normal sales, which are then accounted for as contracts with customers. The Company has determined that these contracts represent multiple performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point. Revenues from oil and gas sales are detailed as follows: Year Year Ended Ended December 31, December 31, 2019 2018 Revenues Oil sales $ 716,014 $ 1,257,173 Gas sales 30,249 25,189 Total $ 746,263 $ 1,282,362 Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. Amounts allocated in the Company’s price contracts are based on the standalone selling price of those products in the context of long-term contracts. Payment is generally received one or two months after the sale has occurred. Gain or loss on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers subject to ASC 606. The Company may in the future use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. Producer Gas Imbalances. |
Basic and diluted earnings (loss) per share | Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive. The calculation of diluted earnings per share excludes 12,621,528 and 14,814,586 shares, respectively for the years ended December 31, 2019 and 2018, issuable upon the exercise of outstanding warrants and options because their effect would be anti-dilutive. |
Environmental laws and regulations | The Company is subject to extensive federal, state, and local environmental laws and regulations. Environmental expenditures are expensed or capitalized depending on their future economic benefit. The Company believes that it is in compliance with existing laws and regulations. The Company accrued no liability as of December 31, 2019 and 2018. |
Recent accounting pronouncements | In February 2016 the FASB, issued ASU, 2016-02, Leases. The ASU requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 was effective for the Company in the first quarter of 2019. The Company adopted the change which did not have a material impact on its consolidated financial statements. Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Company’s financial position or results from operations. |
Subsequent events | The Company evaluated subsequent events through March 16, 2020 the date of issuance of these financial statements. Subsequent events, if any, are disclosed in Note 11. |
4. OIL & GAS PROPERTIES (Tables
4. OIL & GAS PROPERTIES (Tables) | 12 Months Ended |
Dec. 31, 2019 | |
Oil and Gas Property [Abstract] | |
Schedule of oil and gas properties | 2019 2018 Evaluated costs subject to amortization $ 13,243,541 $ 11,664,586 Unevaluated costs 39,667,740 31,746,477 Total capitalized costs 52,911,281 43,411,063 Less accumulated depreciation, depletion and amortization (12,729,238 ) (6,845,602 ) Total oil and gas properties $ 40,182,043 $ 36,565,461 |
Schedule of revenue and working interest | Revenue Working Interest Interest University Lands - Mineral Owner 20.000 % n/a ORRI - Magdalena Royalties, LLC, an entity controlled by Gregory McCabe, Chairman 4.500 % n/a ORRI - Unrelated Party 0.500 % n/a Hudspeth Oil Corporation, a subsidiary of Torchlight Energy Resources Inc. 54.375 % 72.500 % Wolfbone Investments LLC, an entity controlled by Gregory McCabe, Chairman 18.750 % 25.000 % Unrelated Party 1.875 % 2.500 % 100.000 % 100.000 % |
7. STOCKHOLDERS' EQUITY (Tables
7. STOCKHOLDERS' EQUITY (Tables) | 12 Months Ended |
Dec. 31, 2019 | |
Stockholders' equity: | |
Summary of warrant activity | Exercise Expiration Date In Price 2020 2021 2022 2023 2024 2025 12/31/2019 $ 0.70 420,000 - - - - - 420,000 $ 0.80 - - - - - 1,666,667 1,666,667 $ 1.03 - 120,000 - - - - 120,000 $ 1.14 - - - 600,000 - - 600,000 $ 1.21 - - - 120,000 - - 120,000 $ 1.35 - - 365,455 - - - 365,455 $ 1.40 321,737 - - - - - 321,737 $ 1.63 - - - - 100,000 - 100,000 $ 1.64 - 200,000 - - - - 200,000 $ 1.80 1,250,000 - - - - - 1,250,000 $ 2.00 - 200,000 - - - - 200,000 $ 2.23 339,901 - - - - - 339,901 2,331,638 520,000 365,455 720,000 100,000 1,666,667 5,703,760 Exercise Expiration Date In Price 2019 2020 2021 2022 2023 12/31/2018 $ 0.70 - 420,000 - - - 420,000 $ 0.77 100,000 - - - - 100,000 $ 1.00 25,116 - - - - 25,116 $ 1.03 - - 120,000 - - 120,000 $ 1.08 37,500 - - - - 37,500 $ 1.14 - - - - 600,000 600,000 $ 1.21 - - - - 120,000 120,000 $ 1.40 - 1,121,736 - - 1,121,736 $ 1.50 - 100,000 - - 100,000 $ 1.64 - - 200,000 - - 200,000 $ 1.80 - 1,250,000 - - - 1,250,000 $ 2.00 - - 400,000 - - 400,000 $ 2.23 - 832,512 - - 832,512 $ 2.50 35,211 - - - - 35,211 $ 3.50 15,000 - - - - 15,000 $ 4.50 700,000 - - - - 700,000 $ 6.00 22,580 - - - - 22,580 $ 7.00 700,000 - - - - 700,000 1,635,407 3,624,248 820,000 - 720,000 6,799,655 |
Summary of stock options outstanding | Exercise Expiration Date In Price 2020 2021 2022 2023 2024 12/31/2019 $ 0.85 - - - - 600,000 600,000 $ 0.97 - 259,742 - - - 259,742 $ 1.10 - - 800,000 - - 800,000 $ 1.19 - - - 700,000 - 700,000 $ 1.57 4,500,000 - - - - 4,500,000 $ 1.63 - - 58,026 - - 58,026 4,500,000 259,742 858,026 700,000 600,000 6,917,768 Exercise Expiration Date In Price 2019 2020 2021 2022 2023 12/31/2018 $ 0.97 - - 259,742 - - 259,742 $ 1.10 - - - 800,000 - 800,000 $ 1.19 - - - - 600,000 600,000 $ 1.57 1,497,163 4,500,000 - - - 5,997,163 $ 1.63 - - - 58,026 - 58,026 $ 1.79 - 300,000 - - - 300,000 1,497,163 4,800,000 259,742 858,026 600,000 8,014,931 |
Assumptions used in calculating the fair value of the warrants | 2019 Risk-free interest rate 1.65% - 2.46% Expected volatility of common stock 77% - 107% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant Three to Five Years 2018 Risk-free interest rate 2.15% - 2.83% Expected volatility of common stock 114% - 119% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant 2.75 to Five Years |
8. INCOME TAXES (Tables)
8. INCOME TAXES (Tables) | 12 Months Ended |
Dec. 31, 2019 | |
Income Tax Disclosure [Abstract] | |
Schedule of effective income tax rate reconciliation | Year ended Year ended December 31, 2019 December 31, 2018 Federal income tax benefit at statutory rate $ (2,066,273 ) $ (1,221,483 ) Permanent Differences 1,336 505 Annual reconciling adjustment 10,949 1,449,429 Change in valuation allowance 2,053,988 (228,451 ) Provision for income taxes $ - $ - |
Schedule of deferred tax assets and liabilities | December 31, 2019 December 31, 2018 Deferred tax assets: Net operating loss carryforward $ 14,066,645 $ 11,968,500 Stock based compensation 4,688,694 4,490,775 Disallowed interest expense 285,205 69,505 Other 288,030 302,131 Deferred tax liabilities: Investment in oil and gas properties (3,322,760 ) (2,879,086 ) Net deferred tax assets and liabilities 16,005,814 13,951,825 Less valuation allowance (16,005,814 ) (13,951,825 ) Total deferred tax assets and liabilities $ - $ - |
9. PROMISSORY NOTES (Tables)
9. PROMISSORY NOTES (Tables) | 12 Months Ended |
Dec. 31, 2019 | |
Debt Disclosure [Abstract] | |
Summary of promissory notes | Unsecured promissory note balance - December 31, 2018 $ 11,862,080 Accretion of discount and amortization of debt issuance costs 515,750 Unsecured promissory note balance - December 31, 2019 $ 12,377,830 |
10. ASSET RETIREMENT OBLIGATI_2
10. ASSET RETIREMENT OBLIGATIONS (Tables) | 12 Months Ended |
Dec. 31, 2019 | |
Asset Retirement Obligation [Abstract] | |
Schedule of asset retirement obligation liability | Asset retirement obligations – December 31, 2018 $ 14,353 Accretion expense 569 Estimated liabilities recorded 8,397 Asset retirement obligations – December 31, 2019 $ 23,319 |
2. GOING CONCERN (Details Narra
2. GOING CONCERN (Details Narrative) - USD ($) | Dec. 31, 2019 | Dec. 31, 2018 |
Going Concern | ||
Accumulated deficit | $ (99,153,701) | $ (89,314,305) |
Working capital deficit | $ 13,226,742 |
3. SIGNIFICANT ACCOUNTING POL_3
3. SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2019 | Dec. 31, 2018 | |
Accounting Policies [Abstract] | ||
Capitalized interest on unevaluated properties | $ 2,858,753 | $ 2,020,019 |
Shares issuable exercise of outstanding warrants and options | 12,621,528 | 14,814,586 |
4. OIL & GAS PROPERTIES (Detail
4. OIL & GAS PROPERTIES (Details) - USD ($) | Dec. 31, 2019 | Dec. 31, 2018 |
Oil and Gas Property [Abstract] | ||
Evaluated costs subject to amortization | $ 13,243,541 | $ 11,664,586 |
Unevaluated costs | 39,667,740 | 31,746,477 |
Total capitalized costs | 52,911,281 | 43,411,063 |
Less accumulated depreciation, depletion and amortization | (12,729,238) | (6,845,602) |
Total oil and gas properties | $ 40,182,043 | $ 36,565,461 |
4. OIL & GAS PROPERTIES (Deta_2
4. OIL & GAS PROPERTIES (Details 1) | 12 Months Ended |
Dec. 31, 2019 | |
Revenue interest | 100.00% |
Working interest | 100.00% |
University Lands - Mineral Owner | |
Revenue interest | 20.00% |
Working interest | |
ORRI - Magdalena Royalties, LLC | |
Revenue interest | 4.50% |
Working interest | |
ORRI - Unrelated Party | |
Revenue interest | 0.50% |
Working interest | |
Hudspeth Oil Corporation | |
Revenue interest | 54.375% |
Working interest | 72.50% |
Wolfbone Investments LLC | |
Revenue interest | 18.75% |
Working interest | 25.00% |
Unrelated Party | |
Revenue interest | 1.875% |
Working interest | 2.50% |
4. OIL & GAS PROPERTIES (Deta_3
4. OIL & GAS PROPERTIES (Details Narrative) | 12 Months Ended |
Dec. 31, 2019USD ($) | |
Oil and Gas Property [Abstract] | |
Impairment expense oil and gas properties | $ 1,494,769 |
5. RELATED PARTY PAYABLES (Deta
5. RELATED PARTY PAYABLES (Details Narrative) - USD ($) | Dec. 31, 2019 | Dec. 31, 2018 |
Related Party Transactions [Abstract] | ||
Related party payable accrued and unpaid compensation to one of the executive officers | $ 45,000 | $ 45,000 |
Accrued payroll | $ 996,176 | $ 816,176 |
7. STOCKHOLDERS' EQUITY (Detail
7. STOCKHOLDERS' EQUITY (Details) - shares | Dec. 31, 2019 | Dec. 31, 2018 |
0.70 | ||
Outstanding warrants and stock options | 420,000 | 420,000 |
0.77 | ||
Outstanding warrants and stock options | 100,000 | |
0.80 | ||
Outstanding warrants and stock options | 1,666,667 | |
1.00 | ||
Outstanding warrants and stock options | 25,116 | |
1.03 | ||
Outstanding warrants and stock options | 120,000 | 120,000 |
1.08 | ||
Outstanding warrants and stock options | 37,500 | |
1.14 | ||
Outstanding warrants and stock options | 600,000 | 600,000 |
1.21 | ||
Outstanding warrants and stock options | 120,000 | 120,000 |
1.35 | ||
Outstanding warrants and stock options | 365,455 | |
1.40 | ||
Outstanding warrants and stock options | 321,737 | 1,121,736 |
1.50 | ||
Outstanding warrants and stock options | 100,000 | |
1.63 | ||
Outstanding warrants and stock options | 100,000 | |
1.64 | ||
Outstanding warrants and stock options | 200,000 | 200,000 |
1.80 | ||
Outstanding warrants and stock options | 1,250,000 | 1,250,000 |
2.00 | ||
Outstanding warrants and stock options | 200,000 | 400,000 |
2.23 | ||
Outstanding warrants and stock options | 339,901 | 832,512 |
Total | ||
Outstanding warrants and stock options | 570,360 | 6,799,655 |
Total | Expiring in the year 2020 | ||
Outstanding warrants and stock options | 2,331,638 | 3,624,248 |
Total | Expiring in the year 2021 | ||
Outstanding warrants and stock options | 520,000 | 820,000 |
Total | Expiring in the year 2022 | ||
Outstanding warrants and stock options | 365,455 | |
Total | Expiring in the year 2023 | ||
Outstanding warrants and stock options | 720,000 | 720,000 |
Total | Expiring in the year 2024 | ||
Outstanding warrants and stock options | 100,000 | |
Total | Expiring in the year 2025 | ||
Outstanding warrants and stock options | 1,666,667 | |
Total | Expiring in the year 2019 | ||
Outstanding warrants and stock options | 1,635,407 | |
2.50 | ||
Outstanding warrants and stock options | 35,211 | |
3.50 | ||
Outstanding warrants and stock options | 15,000 | |
4.50 | ||
Outstanding warrants and stock options | 700,000 | |
6.00 | ||
Outstanding warrants and stock options | 22,580 | |
7.00 | ||
Outstanding warrants and stock options | 700,000 |
7. STOCKHOLDERS' EQUITY (Deta_2
7. STOCKHOLDERS' EQUITY (Details 1) - shares | Dec. 31, 2019 | Dec. 31, 2018 |
0.85 | ||
Stock options outstanding | 600,000 | 259,742 |
.97 | ||
Stock options outstanding | 259,742 | 800,000 |
1.10 | ||
Stock options outstanding | 800,000 | 600,000 |
1.19 | ||
Stock options outstanding | 700,000 | 5,997,163 |
1.57 | ||
Stock options outstanding | 4,500,000 | 58,026 |
1.63 | ||
Stock options outstanding | 58,026 | |
Total | ||
Stock options outstanding | 6,917,768 | 8,014,931 |
Total | Expiring in the year 2020 | ||
Stock options outstanding | 4,500,000 | 4,800,000 |
Total | Expiring in the year 2021 | ||
Stock options outstanding | 259,742 | 259,742 |
Total | Expiring in the year 2022 | ||
Stock options outstanding | 858,026 | 858,026 |
Total | Expiring in the year 2023 | ||
Stock options outstanding | 700,000 | 600,000 |
Total | Expiring in the year 2024 | ||
Stock options outstanding | 600,000 | |
Total | Expiring in the year 2019 | ||
Stock options outstanding | 1,497,163 | |
1.79 | ||
Stock options outstanding | 300,000 |
7. STOCKHOLDERS' EQUITY (Deta_3
7. STOCKHOLDERS' EQUITY (Details 2) | 12 Months Ended | |
Dec. 31, 2019 | Dec. 31, 2018 | |
Dividend yield | 0.00% | 0.00% |
Discount due to lack of marketability | 20.00% | 20.00% |
Minimum | ||
Risk-free interest rate | 1.65% | 2.15% |
Expected volatility of common stock | 77.00% | 97.00% |
Expected life of warrant | 2 years 9 months | 2 years 9 months |
Maximum | ||
Risk-free interest rate | 2.46% | 2.83% |
Expected volatility of common stock | 107.00% | 119.00% |
Expected life of warrant | 5 years | 5 years |
7. STOCKHOLDERS' EQUITY (Deta_4
7. STOCKHOLDERS' EQUITY (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2019 | Dec. 31, 2018 | |
Stockholders' equity: | ||
Issuance of common stock for cash, shares | 4,686,100 | 5,750,000 |
Issuance of common stock for cash, amount | $ 3,512,917 | $ 6,049,734 |
Issuance of common stock for subscription, shares | 416,666 | 0 |
Issuance of common stock for subscription, amount | $ 183,963 | $ 0 |
Issuance of common stock for services, shares | 312,593 | 450,000 |
Issuance of common stock for services, amount | $ 365,400 | $ 545,000 |
Issuance of common stock for interest, shares | 167,845 | 0 |
Issuance of common stock for interest, amount | $ 183,714 | $ 0 |
Warrants issued for services, shares | 100,000 | 1,220,000 |
Warrants issued for services, amount | $ 99,000 | $ 510,575 |
Issuance of common stock - lease interests, shares | 100,000 | 0 |
Issuance of common stock - lease interests, amount | $ 125,000 | $ 0 |
Issuance of common stock in warrant exercise, shares | 168,690 | 400,000 |
Issuance of common stock in warrant exercise, amount | $ 184,843 | $ 200,000 |
Reserved Future Exercise of Warrants and options | $ 12,621,528 | $ 14,814,586 |
Warrants issued/vested | 2,032,122 | 0 |
Issuance of common stock for note payment in kind, shares | 202,316 | 172,342 |
Issuance of common stock for note payment in kind, amount | $ 314,108 | $ 221,024 |
Stock options issued for services, shares | 700,000 | 600,000 |
Stock options issued for services, amount | $ 236,500 | $ 343,750 |
8. INCOME TAXES (Details)
8. INCOME TAXES (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2019 | Dec. 31, 2018 | |
Income Tax Disclosure [Abstract] | ||
Federal income tax benefit at statutory rate | $ (2,066,273) | $ (1,221,483) |
Permanent differences | 1,336 | 505 |
Annual reconciling adjustment | 10,949 | 1,449,429 |
Change in valuation allowance | 2,053,988 | (228,451) |
Provision for income taxes | $ 0 | $ 0 |
8. INCOME TAXES (Details 1)
8. INCOME TAXES (Details 1) - USD ($) | Dec. 31, 2019 | Dec. 31, 2018 |
Deferred tax assets: | ||
Net operating loss carryforward | $ 14,066,645 | $ 11,968,500 |
Stock based compensation | 4,688,694 | 4,490,775 |
Disallowed interest expense | 285,205 | 69,505 |
Other | 288,030 | 302,131 |
Deferred tax liabilities: | ||
Investment in oil and gas properties | (3,322,760) | (2,879,086) |
Net deferred tax assets and liabilities | 16,005,814 | 13,951,825 |
Less valuation allowance | (16,005,814) | (13,951,825) |
Total deferred tax assets and liabilities | $ 0 | $ 0 |
8. INCOME TAXES (Details Narrat
8. INCOME TAXES (Details Narrative) - USD ($) | Dec. 31, 2019 | Dec. 31, 2018 |
Income Tax Disclosure [Abstract] | ||
Net deferred tax asset related to federal net operating loss carryforwards | $ 66,984,025 | $ 56,992,857 |
9. PROMISSORY NOTES (Details)
9. PROMISSORY NOTES (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2019 | Dec. 31, 2018 | |
Debt Disclosure [Abstract] | ||
Unsecured promissory note balance, beginning | $ 11,862,080 | $ 7,269,281 |
New borrowing | 4,500,000 | |
Original issue discount | (167,850) | |
Proceeds from borrowing | 4,332,150 | |
New note debt issuance costs | (225,000) | |
Accretion of discount and amortization of debt issuance costs | 515,750 | 485,649 |
Unsecured promissory note balance, ending | $ 12,377,830 | $ 11,862,080 |
10. ASSET RETIREMENT OBLIGATI_3
10. ASSET RETIREMENT OBLIGATIONS (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2019 | Dec. 31, 2018 | |
Asset Retirement Obligation [Abstract] | ||
Asset retirement obligation, beginning | $ 14,353 | $ 9,274 |
Accretion expense | 569 | 4,689 |
Estimated liabilities recorded | 8,397 | 390 |
Asset retirement obligation, ending | $ 23,319 | $ 14,353 |