Document and Entity Information
Document and Entity Information - shares | 3 Months Ended | |
Mar. 31, 2020 | Jun. 05, 2020 | |
Document and Entity Information | ||
Entity Registrant Name | TORCHLIGHT ENERGY RESOURCES INC | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2020 | |
Amendment Flag | false | |
Entity Central Index Key | 0001431959 | |
Current Fiscal Year End Date | --12-31 | |
Entity Common Stock, Shares Outstanding | 86,216,424 | |
Entity Filer Category | Accelerated Filer | |
Entity Emerging Growth Company | false | |
Entity Small Business | true | |
Entity Current Reporting Status | Yes | |
Entity Shell Company | false | |
Entity Interactive Data Current | Yes | |
Entity Incorporation, State or Country Code | NV | |
Entity File Number | 001-36247 | |
Document Fiscal Year Focus | 2020 | |
Document Fiscal Period Focus | Q1 |
CONSOLIDATED CONDENSED BALANCE
CONSOLIDATED CONDENSED BALANCE SHEETS - USD ($) | Mar. 31, 2020 | Dec. 31, 2019 |
Current assets: | ||
Cash | $ 82,654 | $ 89,730 |
Accounts receivable | 222,509 | 199,462 |
Production revenue receivable | 71,106 | 100,546 |
Subscription receivable | 0 | 250,000 |
Prepaid expenses | 61,671 | 96,006 |
Total current assets | 437,940 | 735,744 |
Oil and gas properties, net | 33,947,468 | 40,182,043 |
Office equipment, net | 5,867 | 6,348 |
Total assets | 34,391,275 | 40,924,135 |
Current liabilities: | ||
Accounts payable | 2,423,626 | 1,444,002 |
12% 2020 Unsecured promissory notes, net of $825 and $127,170 of discount and financing costs, respectively | 64,297 | 8,437,127 |
10% 2020 Convertible promissory notes payable | 540,000 | 540,000 |
14% 2020 Convertible promissory notes payable | 0 | 2,000,000 |
Due to working interest owners | 54,320 | 54,320 |
Accrued interest payable | 599,742 | 445,861 |
Total current liabilities | 3,681,985 | 12,921,310 |
12% 2021 Secured promissory notes, net of $136,704 and $59,297 of discount and financing costs, respectively | 12,362,471 | 3,940,703 |
8% 2021 Convertible promissory notes payable, net of $1,065,619 and $1,186,029 of discount and BCF, respectively | 894,381 | 773,971 |
14% 2021 Convertible promissory notes payable | 2,000,000 | 0 |
Convertible notes payable and accrued interest | 0 | 7,157,260 |
Accrued payroll | 1,041,176 | 996,176 |
Related party payables | 45,000 | 45,000 |
Asset retirement obligation | 23,461 | 23,319 |
Total liabilities | 20,048,474 | 25,857,739 |
Commitments and contingencies | ||
Stockholders' equity: | ||
Preferred stock, par value $0.001, 10,000,000 shares authorized: -0- issued and outstanding at March 31, 2020 and December 31, 2019 | 0 | 0 |
Common stock, par value $0.001; 150,000,000 shares authorized; 80,272,757 issued and outstanding at March 31, 2020; 76,222,042 issued and outstanding at December 31, 2019 | 80,276 | 76,225 |
Additional paid-in capital | 117,110,089 | 114,143,872 |
Accumulated deficit | (102,847,564) | (99,153,701) |
Total stockholders' equity | 14,342,801 | 15,066,396 |
Total liabilities and stockholders' equity | $ 34,391,275 | $ 40,924,135 |
CONSOLIDATED CONDENSED BALANC_2
CONSOLIDATED CONDENSED BALANCE SHEETS (Parenthetical) - USD ($) | Mar. 31, 2020 | Dec. 31, 2019 |
Statement of Financial Position [Abstract] | ||
12% 2020 Unsecured notes discount and financing costs | $ 825 | $ 127,170 |
12% 2021 Unsecured promissory note discount and financing costs | 136,704 | 59,297 |
8% 2021 Convertible promissory notes payable, discount and BCF | $ 1,065,619 | $ 1,186,029 |
Preferred stock, par value | $ .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 | $ .001 | $ 0.001 |
Common stock, shares authorized | 150,000,000 | 150,000,000 |
Common stock, shares issued | 80,272,757 | 76,222,042 |
Common stock, shares outstanding | 80,272,757 | 76,222,042 |
CONSOLIDATED CONDENSED STATEMEN
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - USD ($) | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Revenues: | ||
Oil and gas sales | $ 84,620 | $ 310,837 |
Cost of revenues | (67,858) | (127,622) |
Gross profit | 16,762 | 183,215 |
Operating expenses: | ||
General and administrative expenses | 1,047,624 | 1,042,757 |
Depreciation, depletion and amortization | 447,405 | 185,426 |
Loss on extinguishment of debt | 1,829,651 | 0 |
Impairment loss | 0 | 474,357 |
Total operating expenses | 3,324,680 | 1,702,540 |
Other income (expense): | ||
Interest expense and accretion of note discounts | (385,945) | (158,599) |
Interest income | 0 | 50 |
Total (expense), net | (385,945) | (158,549) |
Loss before income taxes | (3,693,863) | (1,677,874) |
Provision for income taxes | 0 | 0 |
Net loss | $ (3,693,863) | $ (1,677,874) |
Loss per common share: basic and diluted | $ (0.05) | $ (0.02) |
Weighted average shares outstanding: basic and diluted | 79,595,394 | 70,771,643 |
CONSOLIDATED CONDENSED STATEM_2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - USD ($) | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Cash Flows From Operating Activities | ||
Net loss | $ (3,693,863) | $ (1,677,874) |
Adjustments to reconcile net loss to net cash from operations: | ||
Stock based compensation | 230,650 | 397,250 |
Stock issued for interest payments on notes payable | 0 | 14,628 |
Amortization of debt issuance costs | 71,647 | 71,647 |
Accretion of note discounts | 57,291 | 57,291 |
Amortization of beneficial conversion on CV notes | 120,410 | 0 |
Accrued interest payable in stock | 305,202 | 76,284 |
Depreciation, depletion and amortization | 447,405 | 185,426 |
Loss on extinguishment of debt | 1,829,651 | 0 |
Impairment loss | 0 | 474,357 |
Change in: | ||
Accounts receivable | (23,047) | (54,700) |
Production revenue receivable | 29,440 | 136,981 |
Prepayments - development costs | 0 | 144,062 |
Prepaid expenses | 34,335 | 31,605 |
Accounts payable and accrued expenses | 247,269 | (299,965) |
Accrued interest payable | 22,268 | 252,055 |
Net cash from operating activities | (321,342) | (190,953) |
Cash Flows From Investing Activities | ||
Investment in oil and gas properties | (2,212,852) | (2,404,783) |
Net cash from investing activities | (2,212,852) | (2,404,783) |
Cash Flows From Financing Activities | ||
Issuance of common stock, net of offering costs | 2,357,118 | 1,274,080 |
Proceeds from stock subscription receivable | 250,000 | 0 |
Proceeds from notes payable | 0 | 2,000,000 |
Payment of extension fee on note payable | (80,000) | 0 |
Proceeds from exercise of warrants into common stock | 0 | 77,000 |
Net cash from financing activities | 2,527,118 | 3,351,080 |
Net (decrease) in cash | (7,076) | 755,344 |
Cash - beginning of period | 89,730 | 840,163 |
Cash - end of period | 82,654 | 1,595,507 |
Supplemental disclosure of cash flow information: | ||
Cash paid for interest | 399,677 | 371,765 |
Cash paid for state franchise tax | 0 | 0 |
Supplemental disclosure of non-cash investing and financing activities: | ||
Debt converted by transfer of working interest | 7,330,849 | 0 |
Increase in accounts payable for property development costs | $ 839,855 | $ 709,006 |
CONSOLIDATED STATEMENTS OF STOC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total |
Begining balance, shares at Dec. 31, 2018 | 70,112,376 | |||
Begining balance, amount at Dec. 31, 2018 | $ 70,116 | $ 107,266,965 | $ (89,314,305) | $ 18,022,776 |
Issuance of common stock for services, shares | 92,593 | |||
Issuance of common stock for services, amount | $ 92 | 99,908 | 100,000 | |
Issuance of common stock for cash, less underwriting/offering costs, shares | 1,592,600 | |||
Issuance of common stock for cash, less underwriting/offering costs, amount | $ 1,593 | 1,272,487 | 1,274,080 | |
Issuance of common stock for interest, shares | 13,546 | |||
Issuance of common stock for interest, amount | $ 13 | 14,615 | 14,628 | |
Issuance of common stock for warrant exercise, shares | 100,000 | |||
Issuance of common stock for warrant exercise, amount | $ 100 | 76,900 | 77,000 | |
Warrants issued for services | 186,000 | 186,000 | ||
Stock options issued for services | 111,250 | 111,250 | ||
Net loss | (1,677,874) | (1,677,874) | ||
Ending balance, shares at Mar. 31, 2019 | 71,911,115 | |||
Ending balance, amount at Mar. 31, 2019 | $ 71,914 | 109,028,125 | (90,992,179) | 18,107,860 |
Begining balance, shares at Dec. 31, 2019 | 76,222,042 | |||
Begining balance, amount at Dec. 31, 2019 | $ 76,225 | 114,143,872 | (99,153,701) | 15,066,396 |
Issuance of common stock for services, shares | 125,000 | |||
Issuance of common stock for services, amount | $ 125 | 86,125 | 86,250 | |
Issuance of common stock to a vendor for delay in payment, shares | 40,000 | |||
Issuance of common stock to a vendor for delay in payment, amount | $ 40 | 25,960 | 26,000 | |
Issuance of common stock for cash, less underwriting/offering costs, shares | 3,885,715 | |||
Issuance of common stock for cash, less underwriting/offering costs, amount | $ 3,886 | 2,353,232 | 2,357,118 | |
Warrants issued in conversion of notes payable | 382,500 | 382,500 | ||
Warrants issued for services | 98,900 | 98,900 | ||
Stock options issued for services | 19,500 | 19,500 | ||
Net loss | (3,693,863) | (3,693,863) | ||
Ending balance, shares at Mar. 31, 2020 | 80,272,757 | |||
Ending balance, amount at Mar. 31, 2020 | $ 80,276 | $ 117,110,089 | $ (102,847,564) | $ 14,342,801 |
1. NATURE OF BUSINESS
1. NATURE OF BUSINESS | 3 Months Ended |
Mar. 31, 2020 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
NATURE OF BUSINESS | Torchlight Energy Resources, Inc. was incorporated in October 2007 under the laws of the State of Nevada as Pole Perfect Studios, Inc. (“PPS”). From its incorporation to November 2010, the company was primarily engaged in business start-up activities. On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) between the major shareholders of PPS and the shareholders of Torchlight Energy, Inc. (“TEI”). As a result of the transactions effected by the Exchange Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business. TEI was incorporated under the laws of the State of Nevada in June 2010. We are engaged in the acquisition, exploitation and/or development of oil and natural gas properties in the United States. 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 | 3 Months Ended |
Mar. 31, 2020 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
GOING CONCERN | At March 31, 2020, the Company had not yet achieved profitable operations. We had a net loss of $3,693,863 for the three months ended March 31, 2020 and had accumulated losses of $102,847,564 since our inception. We expect to incur further losses in the development of our business. The Company had a working capital deficit as of March 31, 2020 of $3,244,045. 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 | 3 Months Ended |
Mar. 31, 2020 | |
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 These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, the accompanying unaudited financial condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period 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 quarterly and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. Gains and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Sales of less than 100% of the 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 to proved reserves. Other issues, such as changes in regulatory requirements, technological advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future. Asset retirement obligations 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 statements of operation. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements. Share-based compensation The Company accounts for stock option awards using the calculated value method. The expected term was derived using the simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110, which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options. The Company accounts for any forfeitures of options when they occur. Previously recognized compensation cost for an award is reversed in the period that the award is forfeited. The Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion. The Company values warrant and option awards using the Black-Scholes option pricing model. Revenue recognition The 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: Three Months Three Months Ended Ended March 31, 2020 March 31, 2019 Revenues Oil sales $ 82,113 $ 302,145 Gas sales 2,507 8,692 Total $ 84,620 $ 310,837 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 | 3 Months Ended |
Mar. 31, 2020 | |
Oil and Gas Property [Abstract] | |
OIL & GAS PROPERTIES | The following table presents the capitalized costs for oil & gas properties of the Company as of March 31, 2020 and December 31, 2019: March 31, 2020 December 31, 2019 Evaluated costs subject to amortization 13,253,523 13,243,541 Unevaluated costs 33,870,107 39,667,740 Total capitalized costs 47,123,630 52,911,281 Less accumulated depreciation, depletion and amortization (13,176,162 ) (12,729,238 ) Total oil and gas properties $ 33,947,468 $ 40,182,043 Unevaluated costs as of March 31, 2020 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 cause recognition of increased impairment expense in future periods. An impairment of unevaluated costs in 2019 of $756,964 has also been added to the basis for calculation of depletion, depreciation, and amortization. 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 March 31, 2020, 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 March 31, 2020 have been met. We have received a waiver of the requirement to develop four wells in 2020. 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 22, 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 134,000 net acres leased from University Lands to be combined into one drilling and development unit for development purposes. The term of the DDU Agreement expires on December 31, 2023, and the time to drill on the drilling and development unit continues through December 2023. The DDU Agreement also grants the right to extend the DDU Agreement through December 2028 if compliance with the DDU Agreement is met and the extension fee associated with the additional time is paid. Our drilling obligations 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. We have received a waiver of the requirement to develop four wells in 2020. The obligation for 2021 and years following will return to the schedule in the DDU Agreement. 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, 2019. The Company has developed vertical tests wells in the Orogrande Project. 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, we 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. 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, we 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 $24.8 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. Additionally, the Settlement Agreement provides that the Founders parties will assign to the Company, Hudspeth, Wolfbone and MPC their claims against certain vendors for damages, if any, against such vendors for negligent services or defective equipment. Further, the Settlement Agreement has a mutual release and waivers among the parties. After the assignment by Founders (for which Hudspeth’s total consideration was $1,250,000), Hudspeth’s working interest increased to 72.5%. During the fourth quarter, 2019, 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 three months ended March 31, 2020 to further capture and document the scientific base in support of demonstrating the production potential of the property. The Company is currently marketing the project for an outright sale or farm in partner. This marketing process has been long and arduous as the overall market is quite soft. Due to the size and scope of the project, we are dealing with very large companies that have multitudes of people reviewing our material, which in itself is extensive. Should a farm out partner or sale not occur, the Company and Wolfbone will continue to drill additional wells in the play in order to fulfill the obligations under the DDU Agreement.. The first well, the A35 1H, was drilled and cased in the Penn Section 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 also drilled the A25 #2 which was being drilled on 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 8,000 feet. On March 9, 2020, holders of notes payable by the Company entered into a Conversion Agreement under which the noteholders elected to convert principal of $6,000,000 and approximately $1,331,000 of accrued interest on the notes, in accordance with their terms, into an aggregate 6% working interest (of all such holders) in the Orogrande Project. The Orogrande Project ownership as of March 31, 2020 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. 49.875 % 66.500 % Wolfbone Investments LLC, an entity controlled controlled by Gregory McCabe, Chairman 18.750 % 25.000 % Conversion by Note Holders in March, 2020 4.500 % 6.000 % Unrelated Party 1.875 % 2.500 % 100.000 % 100.000 % 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. 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. 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 March 31, 2020 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. During the three months ended March 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. 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 2019 and the three months ended March 31, 2020 modifications were completed to mineral owner leases as described below. We were required to drill one well every six months to hold the entire 12,000 acre block for eighteen months until to November 22, 2018, and thereafter two wells every six months. During 2019 and the three months ended March 31, 2020 modifications were completed to mineral owner leases as described below. Lease Modifications In May 2019 we entered into agreements with two of the three mineral owners on the northern section of the leases to keep the entire acreage block as one lease with a one year extension. We issued each of them 50,000 shares of our common stock as consideration for this extension. As of March 31, 2020 we have structured the extension agreement retroactively with the third mineral owner for cash consideration. Due to this extension, our obligation for 2019 reduced to one obligation well. We finished that obligation well targeting a shallow zone that showed oil potential. For the remainder of 2020 the Company must drill one well in June and two wells by the December 31, 2020. 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. 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. The operator has informed us that there will be no planned additional wells in the acreage in 2020. 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. With respect to marketing oil and natural gas properties, the Company has evaluated the properties being marketed to determine whether any should be reclassified as held-for-sale at March 31, 2020. 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 March 31, 2020. |
5. RELATED PARTY PAYABLES
5. RELATED PARTY PAYABLES | 3 Months Ended |
Mar. 31, 2020 | |
Due to Related Parties [Abstract] | |
RELATED PARTY PAYABLES | As of March 31, 2020 and December 31, 2019, related party payables of $45,000, and accrued payroll was $1,041,176 and $996,176, respectively, consisting of accrued and unpaid compensation due to our executive officers. |
6. COMMITMENTS AND CONTINGENCIE
6. COMMITMENTS AND CONTINGENCIES | 3 Months Ended |
Mar. 31, 2020 | |
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 requires 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 has 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. On April 30, 2020, our wholly owned subsidiary, Hudspeth Oil Corporation, filed suit against Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies. The suit seeks the recovery of approximately $1.4 million in costs incurred as a result of a tool failure during drilling activities on the University Founders A25 #2 well that is located in the Orogrande Field. Working interest owner Wolfbone Investments, LLC, a company owned by our Chairman Gregory Mccabe, is a co-plaintiff in that action. The defendant has been served, and its deadline to respond to the lawsuit is Monday, June 8, 2020. The suit, Hudspeth Oil Corporation and Wolfbone Investments, LLC v. Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies th 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 March 31, 2020 and December 31, 2019, no amounts had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts. |
7. STOCKHOLDERS' EQUITY
7. STOCKHOLDERS' EQUITY | 3 Months Ended |
Mar. 31, 2020 | |
Stockholders' equity: | |
STOCKHOLDERS' EQUITY | Common Stock On January 16, 2020, the Company announced the closing of its underwritten public offering of 3,285,715 shares of its common stock at a public offering price of $0.70 per share, for total proceeds of $1,997,118 after deducting underwriting discounts and other offering expenses payable by the Company. The Company sold 600,000 shares of common stock for cash at $0.60 per share for total proceeds of $360,000 in a private placement. During the three months ended March 31, 2020, the Company issued 125,000 shares of common stock with a fair value of $86,250 as compensation for services. During the three months ended March 31, 2020, the Company issued 40,000 shares of common stock to a vendor with a fair value of $26,000 for delay in payment on outstanding account payable. Warrants and Options During the three months ended March 31, 2020, the Company issued 215,000 warrants with total fair value of $98,900 as compensation for services and recorded expense of $19,500 related to options issued in prior periods. During the three months ended March 31, 2020, the Company issued 750,000 warrants valued at $382,500 in connection with the conversion of convertible notes payable into working interest in the Company’s Orogrande Project. During the three months ended March 31, 2020, the Company issued 600,000 warrants in connection with the sale of 600,000 shares of common stock in a private placement. A summary of warrants outstanding as of March 31, 2020 by exercise price and year of expiration is presented below: Exercise Expiration date In Price 2020 2021 2022 2023 2024 2025 Total $ 0.70 - - - - - 965,000 965,000 $ 0.80 - - - - - 2,266,667 2,266,667 $ 1.03 - 120,000 - - - - 120,000 $ 1.14 - - - 600,000 - - 600,000 $ 1.21 - - - 120,000 - - 120,000 $ 1.35 - - 365,455 - - - 365,455 $ 1.40 321,737 - - - - - 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 1,911,638 520,000 365,455 720,000 100,000 3,231,667 6,848,760 A summary of stock options outstanding as of March 31, 2020 by exercise price and year of expiration is presented below: Exercise Expiration Date in Price 2020 2021 2022 2023 2024 Total $ 0.85 - - - - 600,000 600,000 $ 0.97 - 259,742 - - - 259,742 $ 1.10 - - 800,000 - - 800,000 $ 1.19 - - - 700,000 - 700,000 $ 1.57 4,500,000 - - - - 4,500,000 $ 1.63 - - 58,026 - - 58,026 4,500,000 259,742 858,026 700,000 600,000 6,917,768 At March 31, 2020, the Company had reserved 13,766,528 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: 2020 Risk-free interest rate .58% - 1.21% Expected volatility of common stock 204% - 205% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant Five Years 2019 Risk-free interest rate 2.40% - 2.46% Expected volatility of common stock 105% - 107% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant Five Years |
8. INCOME TAXES
8. INCOME TAXES | 3 Months Ended |
Mar. 31, 2020 | |
Income Tax Disclosure [Abstract] | |
INCOME TAXES | The Company recorded no income tax provision at March 31, 2020 and 2019 because of losses incurred. The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. The Company recorded no income tax expense for the three months ended March 31, 2020 because the Company expects to incur a tax loss in the current year. Similarly, no income tax expense was recognized for the three months ended March 31, 2019. The Company had a net deferred tax asset related to federal net operating loss carryforwards of $70,061,148 and $66,984,024 at March 31, 2020 and December 31, 2019, respectively. The federal net operating loss carryforward will begin to expire in 2033. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured. |
9. PROMISSORY NOTES
9. PROMISSORY NOTES | 3 Months Ended |
Mar. 31, 2020 | |
Debt Disclosure [Abstract] | |
PROMISSORY NOTES | Promissory Notes Issued in 2017 On April 10, 2017, the Company sold to investors in a private transaction two 12% unsecured promissory notes with a total of $8,000,000 in principal amount. Interest only is due and payable on the notes each month at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity on April 10, 2020. The holders of the notes will also receive annual payments of common stock at the rate of 2.5% of principal amount outstanding, based on a volume-weighted average price. Both notes were sold at an original issue discount of 94.25% and accordingly, we received total proceeds of $7,540,000 from the investors. We used the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt. 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 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. As part of the terms of this 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. Promissory Notes Issued in 2018 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 96.27% and accordingly, we received total proceeds of $4,332,150 from the investor. We used the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt. 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%. On April 24, 2020, the Company entered into a Note Amendment Agreement with the David A. Straz, Jr. Foundation, as a lender (the “Straz Foundation”), the David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986, as a lender and collateral agent (the “Straz Trust”), and The Northern Trust Company and Christopher M. Straz, as co-trustees of the Straz Trust. Under the Note Amendment Agreement, the parties agreed to amend and restate the two promissory notes issued to the Straz Trust on April 10, 2017 and February 6, 2018 that have total principal outstanding of $8,500,000. Under the Note Amendment Agreement, the maturity dates of the two promissory notes held by the Straz Trust and the Note held by the Foundation were extended to April 10, 2021. Under the Note Amendment Agreements, we and our subsidiaries provided a first priority lien on certain collateral in favor of the collateral agent for the benefit of the lenders. The collateral includes all assets and property held by Hudspeth Oil Corporation and Torchlight Hazel, LLC, which includes without limitation our working interest in certain oil and gas leases in Hudspeth County, Texas, known as the “Orogrande Project” and our working interest in certain oil and gas leases in the Midland Basin in West Texas, known as the “Hazel Project.” Further, these subsidiaries, along with Torchlight Energy, Inc., provided guaranty with respect to payment of the three promissory notes. The Note Amendment Agreements also provide that (a) upon any disposition of less than 100% of Borrower’s right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 75% of the proceeds thereof (up to the outstanding amount due under the notes), unless such disposition results in us owning less than a 45% working interest (on an 8/8ths basis) in the Orogrande Project or the Hazel Project, in which case the prepayment amount is to be equal to 100% of such proceeds (up to the outstanding amount due under the notes); and (b) upon any disposition of 100% of our right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 100% of the proceeds thereof (up to the outstanding amount due under the notes). Additionally, the promissory notes, as amended, now provide conversion rights whereby the lenders will have the right, at each such lender’s option, to convert any portion of principal and interest into shares of common stock of Torchlight Energy Resources, Inc. at a conversion price of $1.50 per share. The Note Amendment Agreements (as further amended) provided that no later than May 25, 2020, we were obligated to pay: (a) to the lenders all past due interest that has accrued on the existing promissory notes, and (b) to the Straz Trust a fee of $170,000 which payments were made. Further, the agreements have certain negative covenants regarding related party transactions, dividends, stock repurchases, grants of liens on other assets, and payment of accrued executive compensation. There are also typical affirmative covenants regarding legal compliance and payment of taxes. The agreements also provide certain notice and disclosure requirements, including notice of material events, such as defaults under other obligations and litigation. All other terms and conditions of the three original promissory notes remain substantially unchanged, including without limitation, monthly payments of interest only at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity, and annual payments of common stock at the rate of 2.5% of the principal amount outstanding, based on a volume-weighted average price. Since the extension of the notes was completed before the date of filing this report, the debt is presented on the balance sheet as noncurrent debt. Reference Note 11 – Subsequent Events. 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. In April, 2020 the note holders’ payment in kind required the issuance of 680,377 shares of our common stock. The 12% promissory note transactions through March 31, 2020 are summarized as follows: 12% 2020 Unsecured promissory note balance - December 31, 2019 $ 12,377,830 Accretion of discount and amortization of debt issuance costs 128,938 Debt extension fee paid (80,000 ) 12% 2020 and 2021 Promissory note balance - March 31, 2020 $ 12,426,768 As reported on our Balance Sheet Current liabilities - 12% 2020 Unsecured promissory note $ 64,297 Other liabilities - 12% 2021 Secured promissory notes 12,362,471 $ 12,426,768 The 12% unsecured notes payable at December 31, 2019 included $64,297 due to a holder unrelated to the Straz entities. As of March 31, 2020 the amount payable to that holder remains unsecured. The note was due on April 10, 2020. The holder has agreed to extend the repayment date. Convertible Notes Issued in October, 2018 On October 17, 2018, we sold to certain investors in a private transaction 16% Series C Unsecured Convertible Promissory Notes with a total principal amount of $6,000,000. Interest and principal are due and payable on the notes in one balloon payment at maturity on April 17, 2020. The notes are 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 allow 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 provide 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 have the right to have MPC purchase from them any unpaid principal amount due on the notes. Additionally, if there is a fundamental transaction, Mr. McCabe will 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 will 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. On March 9, 2020, each of the noteholders entered into a Conversion Agreement with us and our subsidiary Hudspeth Oil Corporation (“Hudspeth”), under which the noteholders elected to convert the notes, in accordance with their terms, into an aggregate 6% working interest (of all such holders) in certain oil and gas leases in Hudspeth County, Texas, known as our “Orogrande Project.” Principal of $6,000,000 and approximately $1,331,000 of accrued interest were converted at March 9, 2020. 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. The transaction was treated as an extinguishment of debt. The fair value of the working interest transferred in the conversion of the debt was $8,778,000 and the value of warrants issued to the holders was $382,500. The Company recognized a Loss on extinguishment of debt in the amount of $1,829,651. Convertible Notes Issued in First Quarter 2019 In February, 2019 the Company raised a total of $2,000,000 from investors through the sale of two 14% Series D Unsecured Convertible Promissory Notes. Principal was payable in a lump sum at maturity on May 11, 2020 with payments of interest payable monthly at the rate of 14% per annum. Holders of the notes have the right to convert principal and interest at any time into common stock at a conversion price of $1.08 per share. The Company has the right to redeem the notes at any time, provided that the redemption amount must include all interest that would have been earned through maturity. The Company evaluated the notes for beneficial conversion features and derivative accounting criteria and concluded that derivative accounting treatment is not applicable. On April 21, 2020, Torchlight Energy Resources, Inc. entered into agreements to amend the two 14% Series D Unsecured Convertible Promissory Notes that were originally issued on February 11, 2019 and have a total of $2,000,000 in principal outstanding. Under the amendment agreements, (a) the maturity dates were extended from May 11, 2020 to November 11, 2021, (b) the conversion price under which the noteholders may convert into our common stock was changed from $1.08 to $0.43, and (c) the noteholders were provided the right, at each noteholder’s election, to convert their notes into either (i) a working interest in the Orogrande Project at the rate of one acre per $1,100 of principal and unpaid interest converted, or (ii) a working interest in the Hazel Project at the rate of one acre per $1,300 of principal and unpaid interest converted; provided, that the noteholders’ right to convert into either such working interest is subject to approval of the collateral agent of the Note Amendment Agreement with the Straz parties. Under the note amendments, the noteholders agreed to forebear demand or collection on all interest payments due and payable under the Note, including any past due interest payments, for 20 days after the execution of the Note Amendment Agreement. Further, we agreed to (a) issue each holder 20,000 restricted shares of common stock immediately and (b) pay each holder a fee of $10,000, at the same time as the payment of past due interest is paid. The past due interest was paid. These two promissory notes will continue to provide for monthly payments of interest only at the rate of 14% per annum, with a balloon payment of the outstanding principal due and payable at maturity. Since the extension of the notes was completed before the date of filing this report, the debt is presented on the balance sheet as noncurrent debt. Reference Note 11 – Subsequent Events. Convertible Notes Issued in Third Quarter 2019 In July 2019, the Company issued 8% Unsecured Convertible Promissory notes in the amount of $2,010,000 together with warrants to purchase our common stock. Principal and 8% interest are due at maturity on May 21, 2021. The principal and accrued interest on the notes are convertible into shares of common stock at $1.10 per common share at any time after the original issue date. Along with the notes, the three year warrants equal to 20% of the number of shares of common stock issuable upon the conversion of the notes were issued to note holders. The warrants are exercisable at $1.35 per share. 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 of $120,410 from the amortization of debt discount from notes for the three months ended March 31, 2020. The Company evaluated the July, 2019 notes for derivative accounting criteria and concluded that derivative accounting treatment was not applicable. Convertible Notes Issued in Fourth Quarter 2019 Effective October 31, 2019, the Company issued 10% Unsecured Convertible Promissory notes in the amount of $540,000. Principal and interest are due at maturity on December 3, 2020. The principal and accrued interest on the notes are convertible into shares of common stock at $0.75 per common share at any time after the original issue date. The notes are convertible, at the election of the holders, into an aggregate 0.367% working interest in our Orogrande Project. The Company evaluated the October 2019 notes for BCF and derivative accounting criteria and concluded that there was no BCF or derivative accounting treatment applicable. |
10. ASSET RETIREMENT OBLIGATION
10. ASSET RETIREMENT OBLIGATIONS | 3 Months Ended |
Mar. 31, 2020 | |
Asset Retirement Obligation [Abstract] | |
ASSET RETIREMENT OBLIGATIONS | The following is a reconciliation of the asset retirement obligations liability through March 31, 2020: Asset retirement obligations – December 31, 2019 $ 23,319 Accretion expense 142 Estimated liabilities recorded - Asset retirement obligations – March 31, 2020 $ 23,461 |
11. SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS | 3 Months Ended |
Mar. 31, 2020 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS | Extension of Promissory Notes On April 24, 2020, Torchlight Energy Resources, Inc., along with its subsidiaries Hudspeth Oil Corporation, Torchlight Hazel, LLC and Torchlight Energy, Inc., entered into a Note Amendment Agreement with each of the David A. Straz, Jr. Foundation, as a lender (the “Straz Foundation”), and a Note Amendment Agreement with the David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986, as a lender and collateral agent (the “Straz Trust”), and The Northern Trust Company and Christopher M. Straz, as co-trustees of the Straz Trust. Under the Note Amendment Agreements, the parties agreed to amend and restate the two promissory notes issued to the Straz Trust on April 10, 2017 and February 6, 2018 that have a total outstanding principal amount of $8,500,000, along with the promissory note issued to the Straz Foundation on April 10, 2017 which has an outstanding principal amount of $4,000,000. Under the Note Amendment Agreements, the maturity dates of the two promissory notes held by the Straz Trust and the Note held by the Foundation were extended to April 10, 2021. We had previously extended the maturity date of the promissory note held by the Straz Foundation to April 10, 2021. Under the Note Amendment Agreements, we and our subsidiaries provided a first priority lien on certain collateral in favor of the collateral agent for the benefit of the lenders. The collateral includes all assets and property held by Hudspeth Oil Corporation and Torchlight Hazel, LLC, which includes without limitation our working interest in certain oil and gas leases in Hudspeth County, Texas, known as the “Orogrande Project” and our working interest in certain oil and gas leases in the Midland Basin in West Texas, known as the “Hazel Project.” Further, these subsidiaries, along with Torchlight Energy, Inc., provided guaranty with respect to payment of the three promissory notes. The Note Amendment Agreements also provide that (a) upon any disposition of less than 100% of Borrower’s right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 75% of the proceeds thereof (up to the outstanding amount due under the notes), unless such disposition results in us owning less than a 45% working interest (on an 8/8ths basis) in the Orogrande Project or the Hazel Project, in which case the prepayment amount is to be equal to 100% of such proceeds (up to the outstanding amount due under the notes); and (b) upon any disposition of 100% of our right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 100% of the proceeds thereof (up to the outstanding amount due under the notes). Additionally, the promissory notes, as amended, now provide conversion rights whereby the lenders will have the right, at each such lender’s option, to convert any portion of principal and interest into shares of common stock of Torchlight Energy Resources, Inc. at a conversion price of $1.50 per share. The Note Amendment Agreements (as further amended) provided that no later than May 25, 2020, we were obligated to pay: (a) to the lenders all past due interest that has accrued on the existing promissory notes, and (b) to the Straz Trust a fee of $170,000 which payments were made. Further, the agreements have certain negative covenants regarding related party transactions, dividends, stock repurchases, grants of liens on other assets, and payment of accrued executive compensation. There are also typical affirmative covenants regarding legal compliance and payment of taxes. The agreements also provide certain notice and disclosure requirements, including notice of material events, such as defaults under other obligations and litigation. All other terms and conditions of the three original promissory notes remain substantially unchanged, including without limitation, monthly payments of interest only at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity, and annual payments of common stock at the rate of 2.5% of the principal amount outstanding, based on a volume-weighted average price. Extension of Convertible Promissory Notes On April 21, 2020, Torchlight Energy Resources, Inc. entered into agreements to amend two convertible promissory notes that were originally issued on February 11, 2019, which notes presently have a total of $2,000,000 in principal outstanding. Under the amendment agreements, (a) the maturity dates were extended from May 11, 2020 to November 11, 2021, (b) the conversion price under which the noteholders may convert into our common stock was changed from $1.08 to $0.43, and (c) the noteholders were provided the right, at each noteholder’s election, to convert their notes into either (i) a working interest in the Orogrande Project at the rate of one acre per $1,100 of principal and unpaid interest converted, or (ii) a working interest in the Hazel Project at the rate of one acre per $1,300 of principal and unpaid interest converted; provided, that the noteholders’ right to convert into either such working interest is subject to approval of the collateral agent of the Note Amendment Agreement with the Straz parties. Under the note amendments, the noteholders agreed to forebear demand or collection on all interest payments due and payable under the Note, including any past due interest payments, for 20 days after the execution of the Note Amendment Agreement. Further, we agreed to (a) issue each holder 20,000 restricted shares of common stock immediately and (b) pay each holder a fee of $10,000, at the same time as the payment of past due interest is paid. The past due interest was paid. These two promissory notes will continue to provide for monthly payments of interest only at the rate of 14% per annum, with a balloon payment of the outstanding principal due and payable at maturity. Since the extension of the notes was completed before the date of filing this report, the debt is presented on the balance sheet as noncurrent debt. Common Stock Offering On May 18, 2020, Torchlight Energy Resources, Inc. entered into an Underwriting Agreement with ThinkEquity, a division of Fordham Financial Management, Inc., as underwriter, relating to the issuance and sale in an underwritten public offering of 3,000,000 shares of our common stock, par value $0.001 per share, plus an additional 450,000 shares through the over-allotment option which the underwriter exercised on that same date. The public offering price for each share of common stock was $0.34. The Underwriting Agreement contains customary representations, warranties and agreements by us, customary conditions to closing, indemnification obligations of us and the underwriter, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions. The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement and may be subject to limitations agreed upon by the contracting parties. Pursuant to the Underwriting Agreement, and subject to certain exceptions, for a period of 15 trading days we agreed (i) not to sell capital stock or any securities convertible into or exercisable or exchangeable for shares of capital stock in a public offering, (ii) not to sell capital stock or any securities convertible into or exercisable or exchangeable for shares of capital stock in a non-public offering for consideration less than the public offering price set forth in the Underwriting Agreement, (iii) file a registration statement relating to the offering of any capital stock or securities convertible into or exercisable or exchangeable for shares of capital stock, (iv) complete any offering of debt securities, or (v) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock, whether any such transaction described in clause (i), (ii), (iii), (iv) or (v) above is to be settled by delivery of shares of capital stock or such other securities, in cash or otherwise. Our directors and executive officers agreed to a lock-up period of 90 days. The common stock was offered and sold pursuant to our effective shelf registration statement on Form S-3 (Registration Statement No. 333-220181) filed with the Securities and Exchange Commission (the “SEC”) on August 25, 2017 and declared effective by the SEC on September 28, 2017, the accompanying prospectus contained therein, and preliminary and final prospectus supplements filed with the SEC in connection with our takedown relating to the offering. The net proceeds to us from the sale of the shares of common stock were approximately $890,000, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, which includes the underwriter’s exercise of the full amount of the 45-day over-allotment option granted under the terms of the Underwriting Agreement to purchase up to an additional 450,000 shares of common stock to cover over-allotments. The offering closed May 20, 2020. Also under the terms of the Underwriting Agreement, we issued to the underwriter warrants (the “Representative’s Warrants”) to purchase an aggregate of 172,500 shares of common stock (5% of the total shares issued in in the public offering including exercise by the underwriter of the full amount of the over-allotment option). The Representative’s Warrants are exercisable at a per share exercise price of $0.425. The warrants are exercisable for a term of four and one-half years commencing 180 days from May 18, 2020. The warrants also provide for “piggyback” registration rights with respect to the registration of the shares of common stock underlying the warrants, cashless exercise if there is no effective registration statement registering such shares and customary anti-dilution provisions. Shares issued for Payment in Kind In April 2020, the Company issued 680,377 shares of common stock in satisfaction of the payment in kind valued at $314,107 due on April 10, 2020 under the terms of the promissory notes held by the Straz Foundation and the Straz Trust. Other Stock Issued On May 6, 2020, we issued 1,630,434 restricted shares of common stock to an investor for the purchase price of $750,000. The investor, Maverick Oil & Gas Corporation, is the operator for our Orogrande Project. Our subsidiary Hudspeth Oil Corporation owed the investor in excess of $750,000 on unpaid balances and cost overruns on work performed on the Orogrande Project, which amount is due and payable now. The investor agreed to exchange $750,000 in accounts receivable owed to it by Hudspeth Oil as consideration for the purchase of the common stock. Under the terms of the sale, we provided registration rights to the investor . On April 29, 2020, we issued 142,857 restricted shared of common stock to a consultant as consideration for $60,000 in investor relations services. Paycheck Protection Program Loan In response to the COVID-19 pandemic, the U.S. Small Business Administration (the “SBA”) made available low-interest rate loans to qualified small businesses, including under its Paycheck Protection Program (the “PPP”). On April 10, 2020, in order to supplement its cash balance, the Company submitted an application for a loan (“SBA loan”) in the amount of approximately $77,477. On May 1, 2020, Company’s SBA loan application was approved and the Company received the loan proceeds. The SBA loan has an interest rate of 0.98% and matures in April 2022. Section 1106 of the CARES Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP. The PPP and loan forgiveness are intended to provide economic relief to small businesses, such as the Company, that are adversely impacted under the COVID-19 Emergency Declaration issued by President Trump on March 13, 2020. The Company will apply for loan forgiveness when the SBA site for that purpose is available. |
3. SIGNIFICANT ACCOUNTING POL_2
3. SIGNIFICANT ACCOUNTING POLICIES (Policies) | 3 Months Ended |
Mar. 31, 2020 | |
Accounting Policies [Abstract] | |
Use of estimates | Use of estimates |
Basis of presentation | Basis of presentation These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, the accompanying unaudited financial condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. |
Risks and uncertainties | Risks and uncertainties |
Concentration of risks | Concentration of risks |
Fair value of financial instruments | 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 | Cash and cash equivalents - |
Accounts receivable | Accounts receivable |
Oil and gas properties | 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 quarterly and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. Gains and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Sales of less than 100% of the 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 | Capitalized interest – |
Depreciation, depletion and amortization | Depreciation, depletion, and amortization |
Ceiling test | Ceiling test The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated abandonment costs. The determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of proved oil and gas reserves could result in significant revisions to proved reserves. Other issues, such as changes in regulatory requirements, technological advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future. |
Asset retirement obligations | 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 | 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 statements of operation. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements. |
Share-based compensation | 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. The Company values warrant and option awards using the Black-Scholes option pricing model. |
Revenue recognition | 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: Three Months Three Months Ended Ended March 31, 2020 March 31, 2019 Revenues Oil sales $ 82,113 $ 302,145 Gas sales 2,507 8,692 Total $ 84,620 $ 310,837 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 and diluted earnings (loss) per share – |
Environmental laws and regulations | Environmental laws and regulations |
Recent adopted accounting pronouncements | 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 | Subsequent events – |
3. SIGNIFICANT ACCOUNTING POL_3
3. SIGNIFICANT ACCOUNTING POLICIES (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Accounting Policies [Abstract] | |
Revenues from oil and gas sales | Three Months Three Months Ended Ended March 31, 2020 March 31, 2019 Revenues Oil sales $ 82,113 $ 302,145 Gas sales 2,507 8,692 Total $ 84,620 $ 310,837 |
4. OIL & GAS PROPERTIES (Tables
4. OIL & GAS PROPERTIES (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Oil and Gas Property [Abstract] | |
Oil and gas properties | March 31, 2020 December 31, 2019 Evaluated costs subject to amortization 13,253,523 13,243,541 Unevaluated costs 33,870,107 39,667,740 Total capitalized costs 47,123,630 52,911,281 Less accumulated depreciation, depletion and amortization (13,176,162 ) (12,729,238 ) Total oil and gas properties $ 33,947,468 $ 40,182,043 |
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. 49.875 % 66.500 % Wolfbone Investments LLC, an entity controlled controlled by Gregory McCabe, Chairman 18.750 % 25.000 % Conversion by Note Holders in March, 2020 4.500 % 6.000 % Unrelated Party 1.875 % 2.500 % 100.000 % 100.000 % |
7. STOCKHOLDERS' EQUITY (Tables
7. STOCKHOLDERS' EQUITY (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Stockholders' equity: | |
Warrants outstanding | Exercise Expiration date In Price 2020 2021 2022 2023 2024 2025 Total $ 0.70 - - - - - 965,000 965,000 $ 0.80 - - - - - 2,266,667 2,266,667 $ 1.03 - 120,000 - - - - 120,000 $ 1.14 - - - 600,000 - - 600,000 $ 1.21 - - - 120,000 - - 120,000 $ 1.35 - - 365,455 - - - 365,455 $ 1.40 321,737 - - - - - 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 1,911,638 520,000 365,455 720,000 100,000 3,231,667 6,848,760 |
Stock options outstanding | Exercise Expiration Date in Price 2020 2021 2022 2023 2024 Total $ 0.85 - - - - 600,000 600,000 $ 0.97 - 259,742 - - - 259,742 $ 1.10 - - 800,000 - - 800,000 $ 1.19 - - - 700,000 - 700,000 $ 1.57 4,500,000 - - - - 4,500,000 $ 1.63 - - 58,026 - - 58,026 4,500,000 259,742 858,026 700,000 600,000 6,917,768 |
Assumptions used in calculating the fair value of the warrants | 2020 Risk-free interest rate .58% - 1.21% Expected volatility of common stock 204% - 205% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant Five Years 2019 Risk-free interest rate 2.40% - 2.46% Expected volatility of common stock 105% - 107% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant Five Years |
9. PROMISSORY NOTES (Tables)
9. PROMISSORY NOTES (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Debt Disclosure [Abstract] | |
Unsecured promissory note transactions | 12% 2020 Unsecured promissory note balance - December 31, 2019 $ 12,377,830 Accretion of discount and amortization of debt issuance costs 128,938 Debt extension fee paid (80,000 ) 12% 2020 and 2021 Promissory note balance - March 31, 2020 $ 12,426,768 As reported on our Balance Sheet Current liabilities - 12% 2020 Unsecured promissory note $ 64,297 Other liabilities - 12% 2021 Secured promissory notes 12,362,471 $ 12,426,768 |
10. ASSET RETIREMENT OBLIGATI_2
10. ASSET RETIREMENT OBLIGATIONS (Tables) | 3 Months Ended |
Mar. 31, 2020 | |
Asset Retirement Obligation [Abstract] | |
Asset retirement obligations | Asset retirement obligations – December 31, 2019 $ 23,319 Accretion expense 142 Estimated liabilities recorded - Asset retirement obligations – March 31, 2020 $ 23,461 |
2. GOING CONCERN (Details Narra
2. GOING CONCERN (Details Narrative) - USD ($) | 3 Months Ended | ||
Mar. 31, 2020 | Mar. 31, 2019 | Dec. 31, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||
Net loss | $ (3,693,863) | $ (1,677,874) | |
Accumulated deficit | (102,847,564) | $ (99,153,701) | |
Working capital deficit | $ (3,244,045) |
3. SIGNIFICANT ACCOUNTING POL_4
3. SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($) | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Revenues | $ 84,620 | $ 310,837 |
Oil Sales | ||
Revenues | 82,113 | 302,145 |
Gas Sales | ||
Revenues | $ 2,507 | $ 8,692 |
3. SIGNIFICANT ACCOUNTING POL_5
3. SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Accounting Policies [Abstract] | ||
Capitalized interest | $ 614,479 | $ 670,963 |
Impairment expense | $ 0 | $ 474,357 |
4. OIL & GAS PROPERTIES (Detail
4. OIL & GAS PROPERTIES (Details) - USD ($) | Mar. 31, 2020 | Dec. 31, 2019 |
Oil and Gas Property [Abstract] | ||
Evaluated costs subject to amortization | $ 13,253,523 | $ 13,243,541 |
Unevaluated costs | 33,870,107 | 39,667,740 |
Total capitalized costs | 47,123,630 | 52,911,281 |
Less accumulated depreciation, depletion and amortization | (13,176,162) | (12,729,238) |
Total oil and gas properties | $ 33,947,468 | $ 40,182,043 |
4. OIL & GAS PROPERTIES (Deta_2
4. OIL & GAS PROPERTIES (Details 1) | 3 Months Ended |
Mar. 31, 2020 | |
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 | 49.875% |
Working interest | 66.50% |
Wolfbone Investments LLC | |
Revenue interest | 18.75% |
Working interest | 25.00% |
Conversion by Note Holders | |
Revenue interest | 4.50% |
Working interest | 6.00% |
Unrelated Party | |
Revenue interest | 1.875% |
Working interest | 2.50% |
5. RELATED PARTY PAYABLES (Deta
5. RELATED PARTY PAYABLES (Details Narrative) - USD ($) | Mar. 31, 2020 | Dec. 31, 2019 |
Due to Related Parties [Abstract] | ||
Related party payable accrued and unpaid compensation to one of the executive officers | $ 45,000 | $ 45,000 |
Accrued payroll | $ 1,041,176 | $ 996,176 |
7. STOCKHOLDERS' EQUITY (Detail
7. STOCKHOLDERS' EQUITY (Details) | Mar. 31, 2020shares |
0.70 | |
Outstanding warrants and stock options | 965,000 |
0.80 | |
Outstanding warrants and stock options | 2,266,667 |
1.03 | |
Outstanding warrants and stock options | 120,000 |
1.14 | |
Outstanding warrants and stock options | 600,000 |
1.21 | |
Outstanding warrants and stock options | 120,000 |
1.35 | |
Outstanding warrants and stock options | 365,455 |
1.40 | |
Outstanding warrants and stock options | 321,737 |
1.63 | |
Outstanding warrants and stock options | 100,000 |
1.64 | |
Outstanding warrants and stock options | 200,000 |
1.80 | |
Outstanding warrants and stock options | 1,250,000 |
2.00 | |
Outstanding warrants and stock options | 200,000 |
2.23 | |
Outstanding warrants and stock options | 339,901 |
Total | |
Outstanding warrants and stock options | 6,848,760 |
Total | Expiring in the year 2020 | |
Outstanding warrants and stock options | 1,911,638 |
Total | Expiring in the year 2021 | |
Outstanding warrants and stock options | 520,000 |
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 |
Total | Expiring in the year 2024 | |
Outstanding warrants and stock options | 100,000 |
Total | Expiring in the year 2025 | |
Outstanding warrants and stock options | 3,231,667 |
7. STOCKHOLDERS' EQUITY (Deta_2
7. STOCKHOLDERS' EQUITY (Details 1) | Mar. 31, 2020shares |
0.85 | |
Stock options outstanding | 600,000 |
0.97 | |
Stock options outstanding | 259,742 |
1.10 | |
Stock options outstanding | 800,000 |
1.19 | |
Stock options outstanding | 700,000 |
1.57 | |
Stock options outstanding | 4,500,000 |
1.63 | |
Stock options outstanding | 58,026,000 |
Total | |
Stock options outstanding | 6,917,768 |
Total | Expiring in the year 2020 | |
Stock options outstanding | 4,500,000 |
Total | Expiring in the year 2021 | |
Stock options outstanding | 259,742 |
Total | Expiring in the year 2022 | |
Stock options outstanding | 858,026 |
Total | Expiring in the year 2023 | |
Stock options outstanding | 700,000 |
Total | Expiring in the year 2024 | |
Stock options outstanding | 600,000 |
7. STOCKHOLDERS' EQUITY (Deta_3
7. STOCKHOLDERS' EQUITY (Details 2) | 3 Months Ended | |
Mar. 31, 2020 | Mar. 31, 2019 | |
Dividend yield | 0.00% | 0.00% |
Discount due to lack of marketability | 20.00% | 20.00% |
Expected life of warrant in years | 5 years | 5 years |
Minimum | ||
Risk-free interest rate | 0.58% | 2.40% |
Expected volatility of common stock | 204.00% | 105.00% |
Maximum | ||
Risk-free interest rate | 1.21% | 2.46% |
Expected volatility of common stock | 205.00% | 107.00% |
8. INCOME TAXES (Details Narrat
8. INCOME TAXES (Details Narrative) - USD ($) | Mar. 31, 2020 | Dec. 31, 2019 |
Income Tax Disclosure [Abstract] | ||
Net operating loss carryforwards | $ 70,061,148 | $ 66,984,024 |
9. PROMISSORY NOTES (Details)
9. PROMISSORY NOTES (Details) - USD ($) | 3 Months Ended | ||
Mar. 31, 2020 | Mar. 31, 2019 | Dec. 31, 2019 | |
Debt Disclosure [Abstract] | |||
Unsecured promissory note, beginning | $ 12,377,830 | ||
Accretion of discount and amortization of debt issuance costs | 128,938 | ||
Debt extension fee paid | (80,000) | $ 0 | |
Unsecured promissory note, ending | 12,426,768 | ||
As reported on balance sheet | |||
12% 2020 Unsecured promissory notes | 64,297 | $ 8,437,127 | |
12% 2021 Secured promissory notes | $ 12,362,471 | $ 3,940,703 |
10. ASSET RETIREMENET OBLIGATIO
10. ASSET RETIREMENET OBLIGATION (Details) | 3 Months Ended |
Mar. 31, 2020USD ($) | |
Asset Retirement Obligation [Abstract] | |
Asset retirement obligations, beginning | $ 23,319 |
Accretion expense | 142 |
Estimated liabilities recorded | 0 |
Asset retirement obligations, ending | $ 23,461 |