Document and Entity Information
Document and Entity Information - shares | 3 Months Ended | |
Mar. 31, 2017 | May 08, 2017 | |
Document and Entity Information | ||
Entity Registrant Name | TORCHLIGHT ENERGY RESOURCES INC | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2017 | |
Amendment Flag | false | |
Entity Central Index Key | 1,431,959 | |
Current Fiscal Year End Date | --12-31 | |
Entity Common Stock, Shares Outstanding | 59,226,770 | |
Entity Filer Category | Smaller Reporting Company | |
Entity Current Reporting Status | Yes | |
Entity Voluntary Filers | No | |
Entity Well-known Seasoned Issuer | No | |
Document Fiscal Year Focus | 2,017 | |
Document Fiscal Period Focus | Q1 |
CONSOLIDATED CONDENSED BALANCE
CONSOLIDATED CONDENSED BALANCE SHEETS - USD ($) | Mar. 31, 2017 | Dec. 31, 2016 |
Current assets: | ||
Cash | $ 140,039 | $ 1,769,499 |
Accounts Receivable | 599,320 | 603,446 |
Production revenue receivable | 6,970 | 7,325 |
Prepayments - development costs | 327,468 | 583,347 |
Prepaid expenses | 0 | 26,829 |
Total current assets | 1,073,797 | 2,990,446 |
Oil and gas properties, net | 13,738,014 | 9,392,288 |
Office Equipment | 26,627 | 29,848 |
Other Assets | 7,709 | 21,066 |
TOTAL ASSETS | 14,846,147 | 12,433,648 |
Current liabilities: | ||
Accounts payable | 227,518 | 422,684 |
Funds received pending settlement | 520,400 | 520,400 |
Accrued payroll | 560,176 | 565,176 |
Related party payables | 274,544 | 237,044 |
Convertible promissory notes, (Series B) net of discount of $45,511 at March 31, 2017 and $91,379 at December 31, 2016 | 3,523,989 | 3,478,121 |
Due to working interest owners | 54,320 | 54,320 |
Interest payable | 0 | 6,049 |
Total current liabilities | 5,160,947 | 5,283,794 |
Asset retirement obligation | 7,092 | 7,051 |
Total liabilities | 5,168,039 | 5,290,845 |
Commitments and contingencies | ||
Stockholders' equity: | ||
Preferred stock, par value $.001, 10,000,000 shares authorized, -0- issued and outstanding at March 31, 2017 and December 31, 2016 | 0 | 0 |
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 58,439,564 issued and outstanding at March 31, 2017, 55,096,503 issued and outstanding at December 31, 2016 | 58,443 | 55,100 |
Additional paid-in capital | 93,263,733 | 89,675,488 |
Accumulated deficit | (83,644,068) | (82,587,785) |
Total stockholders' equity | 9,678,108 | 7,142,803 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 14,846,147 | $ 12,433,648 |
CONSOLIDATED CONDENSED BALANCE3
CONSOLIDATED CONDENSED BALANCE SHEETS (Parenthetical) - USD ($) | Mar. 31, 2017 | Dec. 31, 2016 |
Assets [Abstract] | ||
Discount of Convertible promissory notes current | $ 45,511 | $ 91,379 |
Preferred Stock, par value | $ 0.001 | $ 0.001 |
Preferred Stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred Stock, shares issued | 0 | 0 |
Preferred Stock, shares outstanding | 0 | 0 |
Common Stock, par or stated value | $ 0.001 | $ 0.001 |
Common Stock, shares authorized | 100,000,000 | 100,000,000 |
Common Stock, shares issued | 58,439,564 | 55,096,503 |
Common Stock, shares outstanding | 58,439,564 | 55,096,503 |
CONSOLIDATED CONDENSED STATEMEN
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - USD ($) | 3 Months Ended | |
Mar. 31, 2017 | Mar. 31, 2016 | |
Revenue: | ||
Oil and gas sales | $ 12,950 | $ 194,235 |
SWD and royalties | 0 | 78 |
Cost of revenue | (4,157) | (105,998) |
Gross profit | 8,793 | 88,315 |
Operating expenses: | ||
General and administrative expenses | 993,404 | 951,285 |
Depreciation, depletion and amortization | 24,517 | 621,972 |
Total operating expenses | 1,017,921 | 1,573,257 |
Other (income) expense | ||
Interest income | (111) | 0 |
Interest and accretion expense | 47,266 | 122,376 |
Total other income (expense) | 47,155 | 122,376 |
Net loss before taxes | (1,056,283) | (1,607,318) |
Provision for income taxes | 0 | 0 |
Net (loss) | $ (1,056,283) | $ (1,607,318) |
Loss per share: Basic and Diluted | $ (0.02) | $ (0.05) |
Weighted average shares outstanding: Basic and Diluted | 57,337,607 | 34,662,567 |
CONSOLIDATED CONDENSED STATEME5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW - USD ($) | 3 Months Ended | |
Mar. 31, 2017 | Mar. 31, 2016 | |
Cash Flows From Operating Activities | ||
Net (loss) | $ (1,056,283) | $ (1,607,318) |
Adjustments to reconcile net loss to net cash from operations: | ||
Stock based compensation | 312,158 | 82,922 |
Accretion of convertible note discounts | 45,868 | 48,498 |
Depreciation, depletion and amortization | 24,517 | 621,972 |
Change in: | ||
Accounts receivable | 4,126 | 241,812 |
Production revenue receivable | 355 | (4,650) |
Prepayment of development costs | 255,879 | (88,614) |
Prepaid expenses | 26,829 | 38,776 |
Other assets | 13,357 | 24,397 |
Accounts payable and accrued liabilities | (150,167) | 1,367,276 |
Accounts payable related party | 37,500 | 0 |
Due to working interest owners | 0 | 5,087 |
Interest payable | (6,049) | 109,783 |
Net cash from operating activities | (491,910) | 839,941 |
Cash Flows From Investing Activities | ||
Investment in oil and gas properties | (1,137,550) | (1,523,419) |
Net cash from investing activities | (1,137,550) | (1,523,419) |
Cash Flows From Financing Activities | ||
Preferred dividends paid in cash | 0 | (112,430) |
Proceeds from promissory notes | 0 | 505,652 |
Repayment of promissory notes | 0 | (109,742) |
Net cash from financing activities | 0 | 283,480 |
Net change in cash | (1,629,460) | (399,998) |
Cash - beginning of period | 1,769,499 | 1,026,600 |
Cash - end of period | 140,039 | 626,602 |
Supplemental disclosure of cash flow information: (Non Cash Items) | ||
Common stock issued for services | 50,000 | 53,173 |
Common stock issued for lease interests | 0 | 971,966 |
Mineral interests received in warrant exercise | 3,229,431 | 0 |
Warrants issued in connection with promissory notes | 0 | 27,750 |
Warrants issued for mineral interests | 0 | 318,761 |
Cash paid for interest | $ 105,618 | $ 34,741 |
1. NATURE OF BUSINESS
1. NATURE OF BUSINESS | 3 Months Ended |
Mar. 31, 2017 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
NATURE OF BUSINESS | Torchlight Energy Resources, Inc. (“Company”) was incorporated in October 2007 under the laws of the State of Nevada as Pole Perfect Studios, Inc. (“PPS”). From its incorporation to November 2010, the company was primarily engaged in business start-up activities. On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) between the major shareholders of PPS and the shareholders of Torchlight Energy, Inc. (“TEI”). As a result of the transactions effected by the Exchange Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business. TEI was incorporated under the laws of the State of Nevada in June 2010. We are engaged in the acquisition, exploitation and/or development of oil and natural gas properties in the United States. We operate our business through our subsidiaries Torchlight Energy Inc., Torchlight Energy Operating, LLC, and Hudspeth Oil Corporation, and Line Drive Energy LLC. |
2. GOING CONCERN
2. GOING CONCERN | 3 Months Ended |
Mar. 31, 2017 | |
GOING CONCERN | |
GOING CONCERN | At March 31, 2017, the Company had not yet achieved profitable operations. We had a net loss of $1,056,283 for the three months ended March 31, 2017 and had accumulated losses of $83,644,068 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, 2017 of $(4,087,150).Negative working capital was exacerbated by the inclusion in current liabilities of the $3,523,989 outstanding balance of subordinated convertible notes however, the notes were paid in full in April, 2017. 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, 2017 | |
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: Basis of presentation Risks and uncertainties Concentration of risks Fair value of financial instruments For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows: · Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. · Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. · Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. 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 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. The Company’s tax returns remain subject to Federal and State tax examinations for all tax years since inception as none of the statutes have expired. Generally, the applicable statutes of limitation are three to four years from their respective filings. Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of operation. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements. Share-based compensation 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, at which time the estimated expense is adjusted to the final value of the award as measured at performance completion. The Company values warrant and option awards using the Black-Scholes option pricing model. Revenue recognition Basic and diluted earnings (loss) per share – Environmental laws and regulations Recent accounting pronouncements Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers, In February 2016, the FASB, issued ASU, 2016-02, Leases 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, 2017 | |
Oil Gas Properties | |
OIL & GAS PROPERTIES | The following table presents the capitalized costs for oil & gas properties of the Company as of March 31, 2017 and December 31, 2016: 2017 2016 Evaluated costs subject to amortization $ 2,721,503 $ 1,470,939 Unevaluated costs 16,493,200 13,376,742 Total capitalized costs 19,214,703 14,847,681 Less accumulated depreciation, depletion and amortization (5,476,689 ) (5,455,393 ) Total oil and gas properties $ 13,738,014 $ 9,392,288 Unevaluated costs as of March 31, 2017 include cumulative costs on developing projects including the Orogrande and Hazel Projects in West Texas and adjusted costs of nonproducing leases in Oklahoma. On January 30, 2017, we and our wholly-owned subsidiary, Torchlight Acquisition Corporation, a Texas corporation (“TAC”), entered into and closed an Agreement and Plan of Reorganization and Plan of Merger with Line Drive Energy, LLC, a Texas limited liability company (“Line Drive”), under which agreements TAC merged with and into Line Drive and the separate existence of TAC ceased, with Line Drive being the surviving organization and becoming our wholly-owned subsidiary. Line Drive, which was wholly-owned by Gregory McCabe, our Chairman, owned certain assets and securities, including approximately 40.66% of 12,000 gross acres in the Hazel Project and 521,739 warrants to purchase our common stock (which warrants had been assigned by Mr. McCabe to Line Drive). Under the merger transaction, our shares of common stock of TAC converted into a membership interest of Line Drive, the membership interest in Line Drive held by Mr. McCabe immediately prior to the transaction ceased to exist, and we issued Mr. McCabe 3,301,739 restricted shares of 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. Also on January 30, 2017, our wholly-owned subsidiary, Torchlight Energy, Inc., a Nevada corporation (“TEI”), entered into and closed a Purchase and Sale Agreement with Wolfbone Investments, LLC, a Texas limited liability company (“Wolfbone”) which is wholly-owned by Gregory McCabe. 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 our common stock, including 1,500,000 warrants held by McCabe Petroleum Corporation, an entity owned by Mr. McCabe, 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 McCabe Petroleum Corporation had an exercise price of $1.00 per share and an expiration date of April 4, 2021. The warrants held by Green Hill Minerals 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 Investments, LLC the transactions were combined for accounting purposes. The working interest in the Hazel Project was the only asset held by Line Drive Energy LLC. The warrant cancellation was treated in the aggregate as an exercise of the warrants with the transfer of the working interests as the consideration. The Company 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, the Company’s working interest in the Hazel project increased by 40.66% to a total ownership of 74%. |
5. RELATED PARTY PAYABLES
5. RELATED PARTY PAYABLES | 3 Months Ended |
Mar. 31, 2017 | |
RELATED PARTY TRANSACTIONS | |
RELATED PARTY PAYABLES | As of March 31, 2017, related party payables consisted of accrued and unpaid compensation to one of our executive officers totaling $45,000 and $229,544 in Director Fees payable to our Directors. |
6. COMMITMENTS AND CONTINGENCIE
6. COMMITMENTS AND CONTINGENCIES | 3 Months Ended |
Mar. 31, 2017 | |
COMMITMENTS AND CONTINGENCIES | |
COMMITMENTS AND CONTINGENCIES | Legal Proceeding Torchlight Energy Resources, Inc. and its subsidiary Torchlight Energy, Inc. has pending in the 429th judicial district court in Collin County, Texas a lawsuit against Husky Ventures, Inc., Charles V. Long, Silverstar of Nevada, Inc., Gastar Exploration Inc., J. Russell Porter, Michael A. Gerlich, and Jerry R. Schuyler that was originally filed in May 2016 (previous defendants April Glidewell, Maximus Exploration, LLC, Atwood Acquisitions, LLC and John M. Selser, Sr have been non-suited without prejudice to re-filing the claims). In the lawsuit, we allege, among other things, that the defendants acted improperly in connection with multiple transactions, and that the defendants misrepresented and omitted material information to us with respect to these transactions. The lawsuit seeks damages arising from 15 different causes of action, including without limitation, violations of the Texas SecuritiesAct, fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, unjust enrichment and tortious interference. The lawsuit also seeks a complete accounting as to how our investment funds were used, including all transfers between and among the defendants. We are seeking the full amount of our damages on $20,000,000 invested. At this time we believe our damages to be in excess of $1,000,000, but the precise amount will be determined in the litigation. On April 13, 2017, Husky Ventures, Inc. filed in the above lawsuit a counterclaim against Torchlight Energy Resources, Inc. and its subsidiary Torchlight Energy, Inc., and a third-party petition against John Brda, the Chief Executive Officer of Torchlight Energy Resources, Inc., and Willard McAndrew III, a former officer of Torchlight Energy Resources, Inc. (“Husky Counterclaim”). The Husky Counterclaim asserts breach of contract against Torchlight Energy Resources, Inc. and its subsidiary Torchlight Energy, Inc. and asserts a claim for tortious interference with Husky’s contractual relationship with Torchlight and a claim for conspiracy to tortiously interfere with unspecified Husky business and contractual relationships against Torchlight Energy Resources, Inc. and its subsidiary Torchlight Energy, Inc., John Brda and Willard McAndrew III. We believe the Husky Counterclaim is without merit and intend to vigorously defend against it. Environmental matters We are subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to our operations could require substantial capital expenditures or could adversely affect our operations in other ways that cannot be predicted at this time. As of March 31, 2017 and December 31, 2016, no amounts have been recorded because no specific liability has been identified that is reasonably probable of requiring us to fund any future material amounts. |
7. STOCKHOLDERS' EQUITY
7. STOCKHOLDERS' EQUITY | 3 Months Ended |
Mar. 31, 2017 | |
Stockholders' equity: | |
STOCKHOLDERS' EQUITY | During the three months ended March 31, 2017 the Company issued 41,322 shares of common stock as a reduction in compensation payable to an officer, with total value of $50,000. During the three months ended March 31, 2017 the Company issued 3,301,739 shares of common stock in connection with the Line Drive merger transaction in which the Company acquired oil and gas lease related costs valued at $3,229,431. During the three months ended March 31, 2017, the Company issued 200,000 warrants for services which resulted in $24,908 of recognized expense. A summary of warrants outstanding as of March 31, 2017 by exercise price and year of expiration is presented below: Exercise Expiration Date in Price 2017 2018 2019 2020 2021 Total $ 0.50 - 528,099 - - - 528,099 $ 0.70 - - - 1,700,000 - 1,700,000 $ 0.77 - - 100,000 - - 100,000 $ 1.00 150,000 - 54,366 - 1,500,000 1,704,366 $ 1.03 - - - - 120,000 120,000 $ 1.08 - - 37,500 - - 37,500 $ 1.40 - - - 1,643,475 1,643,475 $ 1.64 - - - - 200,000 200,000 $ 1.73 - 100,000 - - - 100,000 $ 1.80 - - - 500,000 - 500,000 $ 2.00 126,000 1,906,249 - - - 2,032,249 $ 2.03 - 2,000,000 - - - 2,000,000 $ 2.09 - 2,800,000 - - - 2,800,000 $ 2.23 - - - 832,512 832,512 $ 2.29 - 120,000 - - - 120,000 $ 2.50 - - 35,211 - - 35,211 $ 2.82 - 38,174 - - - 38,174 $ 3.50 - - 15,000 - - 15,000 $ 4.50 - - 700,000 - - 700,000 $ 5.00 170,000 - - - - 170,000 $ 5.05 40,000 - - - - 40,000 $ 6.00 - 523,123 22,580 - - 545,703 $ 7.00 - - 700,000 - - 700,000 486,000 8,015,645 1,664,657 4,675,987 1,820,000 16,662,28 9 During the three months ended March 31, 2017, the Company recognized $287,250 of expense related to previously issued employee stock options. A summary of stock options outstanding as of March 31, 2017 by exercise price and year of expiration is presented below: Exercise Expiration Date in Price 2017 2018 2019 2020 2021 Total $ 0.97 - - - - 259,742 259,742 $ 1.57 - - - 5,997,163 - 5,997,163 $ 1.79 112,500 - - 300,000 - 412,500 112,500 - - 6,297,163 259,742 6,669,405 At March 31, 2017 the Company had reserved 23,331,694 shares for future exercise of warrants and options. Warrants and options issued were valued using the Black Scholes Option Pricing Model. The assumptions used in calculating the fair value of the warrants issued were as follows: 2017 Risk-free interest rate 1.47% Expected volatility of common stock 113% - 114% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of warrant 3 years - 4 years 2016 Risk-free interest rate 0.78% Expected volatility of common stock 191% - 253% Dividend yield 0.00% Discount due to lack of marketability 20-30% Expected life of warrant 3 years - 5 years |
8. INCOME TAXES
8. INCOME TAXES | 3 Months Ended |
Mar. 31, 2017 | |
Income Taxes | |
INCOME TAXES | 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 quarter ended March 31, 2017 because the Company expects to incur a tax loss in the current year. Similarly, no income tax expense was recognized for the quarter ended March 31, 2016 for this same reason. The Company had a net deferred tax asset related to federal net operating loss carryforwards of $48,604,871 |
9. PROMISSORY NOTES
9. PROMISSORY NOTES | 3 Months Ended |
Mar. 31, 2017 | |
PROMISSORY NOTES | |
PROMISSORY NOTES | During 2014, the Company issued $4,569,500 in principal value of 12% Series B Convertible Unsecured Promissory Notes. The 12% Notes were due and payable on June 30, 2017 and provided for conversion into common stock at a price of $4.50 per share and included the issuance of one warrant for each $22.50 of principal amount purchased. The Company issued a total of 203,085 of these five-year warrants to purchase common stock at an exercise price of $6.00 per share. The value of the warrants was $562,404 and the amount recorded for the beneficial conversion feature was $195,466. These amounts were recorded as a discount on the 12% Notes. During the quarter ended March 31, 2015, the Company amended notes with two holders of its Series B Convertible Unsecured Promissory Notes aggregating $2,000,000 to reset the conversion price to $1.00. During the fourth quarter of 2015, $1 million in note principal was converted into common stock. The total outstanding balance of the Series B Convertible Unsecured Promissory Notes at March 31, 2017 was $3,569,500. On April 24, 2017 we used proceeds from the new debt financing closed subsequent to the date of these financial statements to redeem and repay all of these notes, except for $1,000,000 of note principal that was converted into common stock and $60,000 of note principal that was rolled into the new debt financing. Reference Note 11 below. |
10. ASSET RETIREMENT OBLIGATION
10. ASSET RETIREMENT OBLIGATIONS | 3 Months Ended |
Mar. 31, 2017 | |
ASSET RETIREMENT OBLIGATIONS | |
ASSET RETIREMENT OBLIGATIONS | The following is a reconciliation of the asset retirement obligation liability through March 31, 2017: Asset retirement obligation – December 31, 2015 $ 29,083 Accretion Expense 41 Removal of ARO for wells sold (22,073 ) Asset retirement obligation – December 31, 2016 $ 7,051 Accretion Expense 41 Asset retirement obligation – March 31, 2017 $ 7,092 |
11. SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS | 3 Months Ended |
Mar. 31, 2017 | |
Subsequent Events [Abstract] | |
11. SUBSEQUENT EVENTS | New Debt Financing On April 10, 2017, we 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 intend to use the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt. On April 24, 2017 we used $2,509,500 of the proceeds from this financing to redeem and repay a portion of the outstanding Series B Convertible Unsecured Promissory Notes. Additionally, $1,000,000 of Note principal was converted into common stock and $60,000 was rolled into the new debt financing. These 12% promissory notes allow for early redemption, provided that if we redeem before April 10, 2018, we must pay the holders all unpaid interest and common stock payments on the portion of the notes redeemed that would have been earned through April 10, 2018. 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. Orogrande Drilling and Development Unit Agreement On March 22, 2017, the Company, along with their operating partner Founders Oil and Gas, LLC ("Founders"), signed a Drilling and Development Unit (DDU) Agreement with University Lands on its Orogrande Basin Project. The agreement has an effective date of January 1, 2017 and required a payment from both Torchlight and Founders of $335,323 as part of the extension fee. Torchlight's portion of the fee was paid by Founders in April 2017 and will be deducted from the required spud fee payable to Torchlight at commencement of the next well drilled. The DDU agreement allows for all 192 existing leases covering the 133,000 net acres leased from University Lands to be combined into one lease for development purposes. The time to drill on the unit is extended through April of 2023 on the first extension. The agreement also grants the exclusive right to continue through April of 2028 if compliance with the agreement is met and an extension fee associated with the additional time is paid. The Company's drilling obligations begin with one well in the first year, and increase to five wells per year by year 2023. The drilling obligation set is a minimum requirement and may be exceeded if acceleration is desired. The DDU agreement replaces all prior agreements and will govern future drilling obligations on the lease. |
3. SIGNIFICANT ACCOUNTING POL17
3. SIGNIFICANT ACCOUNTING POLICIES (POLICIES) | 3 Months Ended |
Mar. 31, 2017 | |
SIGNIFICANT ACCOUNTING POLICIES (POLICIES) | |
Basis of presentation | Basis of 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. |
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 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. The Company’s tax returns remain subject to Federal and State tax examinations for all tax years since inception as none of the statutes have expired. Generally, the applicable statutes of limitation are three to four years from their respective filings. Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of operation. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements. |
Share-Based Compensation | Share-based compensation 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, at which time the estimated expense is adjusted to the final value of the award as measured at performance completion. The Company values warrant and option awards using the Black-Scholes option pricing model. |
Revenue Recognition | Revenue recognition |
Basic and Diluted Earnings (Loss) Per Share | Basic and diluted earnings (loss) per share – |
Environmental laws and regulations | Environmental laws and regulations |
Recent accounting pronouncements | Recent accounting pronouncements Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers, In February 2016, the FASB, issued ASU, 2016-02, Leases 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 – |
4. OIL & GAS PROPERTIES (Tables
4. OIL & GAS PROPERTIES (Tables) | 3 Months Ended |
Mar. 31, 2017 | |
Oil Gas Properties Tables | |
Schedule of Oil and Gas Properties | 2017 2016 Evaluated costs subject to amortization $ 2,721,503 $ 1,470,939 Unevaluated costs 16,493,200 13,376,742 Total capitalized costs 19,214,703 14,847,681 Less accumulated depreciation, depletion and amortization (5,476,689 ) (5,455,393 ) Total oil and gas properties $ 13,738,014 $ 9,392,288 |
7. STOCKHOLDERS' EQUITY (Tables
7. STOCKHOLDERS' EQUITY (Tables) | 3 Months Ended |
Mar. 31, 2017 | |
STOCKHOLDERS' EQUITY (TABLES) | |
Summary of warrant activity | Exercise Expiration Date in Price 2017 2018 2019 2020 2021 Total $ 0.50 - 528,099 - - - 528,099 $ 0.70 - - - 1,700,000 - 1,700,000 $ 0.77 - - 100,000 - - 100,000 $ 1.00 150,000 - 54,366 - 1,500,000 1,704,366 $ 1.03 - - - - 120,000 120,000 $ 1.08 - - 37,500 - - 37,500 $ 1.40 - - - 1,643,475 1,643,475 $ 1.64 - - - - 200,000 200,000 $ 1.73 - 100,000 - - - 100,000 $ 1.80 - - - 500,000 - 500,000 $ 2.00 126,000 1,906,249 - - - 2,032,249 $ 2.03 - 2,000,000 - - - 2,000,000 $ 2.09 - 2,800,000 - - - 2,800,000 $ 2.23 - - - 832,512 832,512 $ 2.29 - 120,000 - - - 120,000 $ 2.50 - - 35,211 - - 35,211 $ 2.82 - 38,174 - - - 38,174 $ 3.50 - - 15,000 - - 15,000 $ 4.50 - - 700,000 - - 700,000 $ 5.00 170,000 - - - - 170,000 $ 5.05 40,000 - - - - 40,000 $ 6.00 - 523,123 22,580 - - 545,703 $ 7.00 - - 700,000 - - 700,000 486,000 8,015,645 1,664,657 4,675,987 1,820,000 16,662,28 9 |
Summary of stock options outstanding | Exercise Expiration Date in Price 2017 2018 2019 2020 2021 Total $ 0.97 - - - - 259,742 259,742 $ 1.57 - - - 5,997,163 - 5,997,163 $ 1.79 112,500 - - 300,000 - 412,500 112,500 - - 6,297,163 259,742 6,669,405 |
Assumptions used in calculating the fair value of the warrants | 2017 Risk-free interest rate 1.47% Expected volatility of common stock 113% - 114% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of warrant 3 years - 4 years 2016 Risk-free interest rate 0.78% Expected volatility of common stock 191% - 253% Dividend yield 0.00% Discount due to lack of marketability 20-30% Expected life of warrant 3 years - 5 years |
10. ASSET RETIREMENT OBLIGATI20
10. ASSET RETIREMENT OBLIGATIONS (Tables) | 3 Months Ended |
Mar. 31, 2017 | |
ASSET RETIREMENT OBLIGATIONS (Tables) | |
Asset retirement obligation | Asset retirement obligation – December 31, 2015 $ 29,083 Accretion Expense 41 Removal of ARO for wells sold (22,073 ) Asset retirement obligation – December 31, 2016 $ 7,051 Accretion Expense 41 Asset retirement obligation – March 31, 2017 $ 7,092 |
2. GOING CONCERN (Details Narra
2. GOING CONCERN (Details Narrative) - USD ($) | 3 Months Ended | ||
Mar. 31, 2017 | Mar. 31, 2016 | Dec. 31, 2016 | |
Going Concern Accumulated Losses | |||
Net loss | $ 1,056,283 | $ 1,607,318 | |
Accumulated deficit | $ (83,644,068) | $ (82,587,785) |
3. SIGNIFICANT ACCOUNTING POL22
3. SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) | Mar. 31, 2017 | Dec. 31, 2016 |
Significant Accounting Policies Details Narrative | ||
Capitalized interest | $ 105,618 | $ 41,912 |
4. OIL & GAS PROPERTIES (Detail
4. OIL & GAS PROPERTIES (Details) - USD ($) | Mar. 31, 2017 | Dec. 31, 2016 |
Oil Gas Properties Details | ||
Evaluated costs subject to amortization | $ 2,721,503 | $ 1,470,939 |
Unevaluated costs | 16,493,200 | 13,376,742 |
Total capitalized costs | 19,214,703 | 14,847,681 |
Less accumulated depreciation, depletion and amortization | (5,476,689) | (5,455,393) |
Total oil and gas properties | $ 13,738,014 | $ 9,392,288 |
7. STOCKHOLDERS' EQUITY (Detail
7. STOCKHOLDERS' EQUITY (Details) | Mar. 31, 2017shares |
0.50 | |
Outstanding warrants and stock options | 528,099 |
0.70 | |
Outstanding warrants and stock options | 1,700,000 |
0.77 | |
Outstanding warrants and stock options | 100,000 |
1 | |
Outstanding warrants and stock options | 1,704,366 |
1.03 | |
Outstanding warrants and stock options | 120,000 |
1.08 | |
Outstanding warrants and stock options | 37,500 |
1.40 | |
Outstanding warrants and stock options | 1,643,475 |
1.64 | |
Outstanding warrants and stock options | 200,000 |
1.73 | |
Outstanding warrants and stock options | 100,000 |
1.80 | |
Outstanding warrants and stock options | 500,000 |
2 | |
Outstanding warrants and stock options | 2,032,249 |
2.03 | |
Outstanding warrants and stock options | 2,000,000 |
2.09 | |
Outstanding warrants and stock options | 2,800,000 |
2.23 | |
Outstanding warrants and stock options | 832,512 |
2.29 | |
Outstanding warrants and stock options | 120,000 |
2.50 | |
Outstanding warrants and stock options | 35,211 |
2.82 | |
Outstanding warrants and stock options | 38,174 |
3.50 | |
Outstanding warrants and stock options | 15,000 |
4.50 | |
Outstanding warrants and stock options | 700,000 |
5 | |
Outstanding warrants and stock options | 170,000 |
5.05 | |
Outstanding warrants and stock options | 40,000 |
6 | |
Outstanding warrants and stock options | 545,703 |
7 | |
Outstanding warrants and stock options | 700,000 |
Total | |
Outstanding warrants and stock options | 16,662,289 |
Total | Expiring in the year 2017 | |
Outstanding warrants and stock options | 486,000 |
Total | Expiring in the year 2018 | |
Outstanding warrants and stock options | 8,015,645 |
Total | Expiring in the year 2019 | |
Outstanding warrants and stock options | 1,664,657 |
Total | Expiring in the year 2020 | |
Outstanding warrants and stock options | 4,675,987 |
Total | Expiring in the year 2021 | |
Outstanding warrants and stock options | 1,820,000 |
7. STOCKHOLDERS' EQUITY (Deta25
7. STOCKHOLDERS' EQUITY (Details 1) | Mar. 31, 2017shares |
0.97 | |
Stock Options Outstanding | 259,742 |
1.57 | |
Stock Options Outstanding | 5,997,163 |
1.79 | |
Stock Options Outstanding | 412,500 |
Total | |
Stock Options Outstanding | 6,669,405 |
Total | Expiring in the year 2017 | |
Stock Options Outstanding | 112,500 |
Total | Expiring in the year 2018 | |
Stock Options Outstanding | 0 |
Total | Expiring in the year 2019 | |
Stock Options Outstanding | 0 |
Total | Expiring in the year 2020 | |
Stock Options Outstanding | 6,297,163 |
Total | Expiring in the year 2021 | |
Stock Options Outstanding | 259,742 |
7. STOCKHOLDERS' EQUITY (Deta26
7. STOCKHOLDERS' EQUITY (Details 2) | 3 Months Ended | |
Mar. 31, 2017 | Mar. 31, 2016 | |
Risk-free interest rate | 1.47% | 0.78% |
Dividend yield | 0.00% | 0.00% |
Discount due to lack of marketability | 20.00% | |
Minimum | ||
Expected volatility of common stock | 113.00% | 191.00% |
Discount due to lack of marketability | 20.00% | |
Expected life of warrant in years | 3 years | 3 years |
Maximum | ||
Expected volatility of common stock | 114.00% | 253.00% |
Discount due to lack of marketability | 30.00% | |
Expected life of warrant in years | 4 years | 5 years |
8. INCOME TAXES (Details Narrat
8. INCOME TAXES (Details Narrative) - USD ($) | Mar. 31, 2017 | Dec. 31, 2016 |
Income Taxes Operating loss carryforwards | ||
Net operating loss carryforwards | $ 48,604,871 | $ 47,850,266 |
10. ASSET RETIREMENET OBLIGATIO
10. ASSET RETIREMENET OBLIGATION (Details) - USD ($) | 3 Months Ended | 12 Months Ended |
Mar. 31, 2017 | Dec. 31, 2016 | |
Asset Retiremenet Obligation Details | ||
Asset retirement obligation | $ 7,051 | $ 29,083 |
Accretion expense | 41 | 41 |
Removal of ARO for wells sold | (22,073) | |
Asset retirement obligation | $ 7,092 | $ 7,051 |