Document and Entity Information
Document and Entity Information - USD ($) | 12 Months Ended | ||
Dec. 31, 2017 | Mar. 15, 2018 | Jun. 30, 2017 | |
Document and Entity Information | |||
Entity Registrant Name | TORCHLIGHT ENERGY RESOURCES INC | ||
Document Type | 10-K | ||
Document Period End Date | Dec. 31, 2017 | ||
Amendment Flag | false | ||
Entity Central Index Key | 1,431,959 | ||
Current Fiscal Year End Date | --12-31 | ||
Entity Public Float | $ 76,874,895 | ||
Entity Common Stock, Shares Outstanding | 63,640,034 | ||
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 | FY |
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Current assets: | ||
Cash | $ 1,051,720 | $ 1,769,499 |
Accounts receivable | 596,141 | 603,446 |
Production revenue receivable | 142,932 | 7,325 |
Prepayments - development costs | 1,335,652 | 583,347 |
Prepaid expenses | 39,506 | 26,829 |
Total current assets | 3,165,951 | 2,990,446 |
Oil and gas properties, net | 25,579,279 | 9,392,288 |
Office equipment, net | 15,716 | 29,848 |
Debt issuance costs, net | 0 | 2,704 |
Other Assets | 6,362 | 18,362 |
TOTAL ASSETS | 28,767,308 | 12,433,648 |
Current liabilities: | ||
Accounts payable | 762,502 | 422,684 |
Funds received pending settlement | 520,400 | 520,400 |
Accrued payroll | 695,176 | 565,176 |
Related party payables | 45,000 | 237,044 |
Convertible promissory notes, (Series B) net of discount of $91,379 at December 31, 2016 | 0 | 3,478,121 |
Due to working interest owners | 54,320 | 54,320 |
Accrued interest payable | 202,050 | 6,049 |
Total current liabilities | 2,279,448 | 5,283,794 |
Unsecured promissory notes, net of discount and financing costs of $795,017 at December 31, 2017 | 7,269,281 | 0 |
Note payable after one year | 3,250,000 | 0 |
Asset retirement obligation | 9,274 | 7,051 |
Total Liabilities | 12,808,003 | 5,290,845 |
Commitments and contingencies | ||
Stockholders' equity: | ||
Preferred stock, par value $.001, 10,000,000 shares authorized; -0- issued and outstanding at December 31, 2017 and 2016 | 0 | 0 |
Common stock, par value $0.001 per share; 150,000,000 shares authorized; 63,340,034 issued and outstanding at December 31, 2017, 55,096,503 issued and outstanding at December 31, 2016 | 63,344 | 55,100 |
Additional paid-in capital | 99,403,654 | 89,675,488 |
Accumulated deficit | (83,507,693) | (82,587,785) |
Total stockholders' equity | 15,959,305 | 7,142,803 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 28,767,308 | $ 12,433,648 |
CONSOLIDATED BALANCE SHEETS (Pa
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
ASSETS | ||
Discount of Convertible promissory notes current | $ 0 | $ 91,379 |
Discount on Convertible promissory notes noncurrent | $ 795,017 | $ 0 |
Preferred Stock, par value | $ 0.001 | $ 0.001 |
Preferred Stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred Stock, shares issued | 0 | 0 |
Preferred Stock, shares outstanding | 0 | 0 |
Common Stock, par or stated value | $ 0.001 | $ 0.001 |
Common Stock, shares authorized | 150,000,000 | 150,000,000 |
Common Stock, shares issued | 63,340,034 | 55,096,503 |
Common Stock, shares outstanding | 63,340,034 | 55,096,503 |
CONSOLIDATED STATEMENTS OF OPER
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Revenue | ||
Oil and gas sales | $ 570,499 | $ 354,390 |
Cost of revenue | (173,187) | (328,438) |
Gross income | 397,312 | 25,952 |
Operating expenses: | ||
General and administrative expense | (3,652,970) | (6,447,706) |
Depreciation, depletion and amortization | (100,156) | (636,426) |
Impairment expense | 0 | (70,080) |
Loss on sale | 0 | (283,285) |
Total operating expenses | (3,753,126) | (7,437,497) |
Other income (expense) | ||
Consulting income | 2,781,500 | 0 |
Interest income | 454 | 36 |
Interest and accretion expense | (346,050) | (272,837) |
Total other income (expense) | 2,435,904 | (272,801) |
Net loss before taxes | (919,910) | (7,684,346) |
Provision for income taxes | 0 | 0 |
Net loss | $ (919,910) | $ (7,684,346) |
Loss per share: | ||
Basic and Diluted | $ (0.02) | $ (0.19) |
Weighted average shares outstanding: | ||
Basic and Diluted | 59,623,105 | 43,122,514 |
CONSOLIDATED STATEMENT OF STOCK
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - USD ($) | Common Stock | Pref. Stock | Additional Paid-in Capital | Accumulated Deficit | Total |
Begining balance, shares at Dec. 31, 2015 | 33,166,344 | 134,000 | |||
Begining balance, amount at Dec. 31, 2015 | $ 33,168 | $ 134 | $ 78,252,411 | $ (74,903,439) | $ 3,382,274 |
Issuance of common stock for cash, shares | 3,750,000 | 3,750,000 | |||
Issuance of common stock for cash, amount | $ 3,750 | 2,996,250 | $ 3,000,000 | ||
Issuance of preferred stock for cash, amount | 10 | 999,990 | $ 1,000,000 | ||
Issuance of common stock for services, shares | 768,832 | 768,832 | |||
Issuance of common stock for services, amount | $ 769 | 669,305 | $ 670,074 | ||
Issuance of common stock - mineral interests, shares | 2,824,881 | 2,824,881 | |||
Issuance of common stock - mineral interests, amount | $ 2,825 | 1,972,221 | $ 1,975,046 | ||
Issuance of common stock in warrant exercise, shares | 3,888,745 | 3,888,745 | |||
Issuance of common stock in warrant exercise, amount | $ 3,891 | 2,539,855 | $ 2,543,746 | ||
Issuance of common stock for preferred dividends, shares | 440,262 | 440,262 | |||
Issuance of common stock for preferred dividends, amount | $ 440 | (440) | $ 0 | ||
Preferred dividends paid in cash | (320,724) | (320,724) | |||
Warrants issued with lease interests | 1,290,761 | 1,290,761 | |||
Warrants issued for services | 2,205,231 | 2,205,231 | |||
Lease interest conveyed in conversion of preferred stock,Amount | (10) | (999,990) | (1,000,000) | ||
Common stock issued in conversion of preferred stock, shares | 10,257,439 | (134,000) | |||
Common stock issued in conversion of preferred stock, amount | $ 10,257 | $ (134) | (10,132) | (9) | |
Net loss | (7,684,346) | (7,684,346) | |||
Warrants issued in connection with promissory note | 80,750 | 80,750 | |||
Ending balance, shares at Dec. 31, 2016 | 55,096,503 | 55,100 | |||
Ending balance, amount at Dec. 31, 2016 | $ 55,100 | $ 0 | 89,675,488 | (82,587,785) | $ 7,142,803 |
Issuance of common stock for cash, shares | 0 | ||||
Issuance of common stock for cash, amount | $ 0 | ||||
Issuance of common stock for services, shares | 507,897 | 507,897 | |||
Issuance of common stock for services, amount | $ 508 | 579,246 | $ 579,754 | ||
Issuance of common stock for lease interests, shares | 6,420,395 | ||||
Issuance of common stock for lease interests, amount | $ 6,421 | 6,805,941 | $ 6,812,362 | ||
Issuance of common stock - mineral interests, shares | 6,420,395 | ||||
Issuance of common stock in warrant exercise, shares | 307,349 | 307,349 | |||
Issuance of common stock in warrant exercise, amount | $ 307 | 242,993 | $ 243,300 | ||
Issuance of common stock-conversion of promissory note, shares | 1,007,890 | 1,007,890 | |||
Issuance of common stock-conversion of promissory note, amount | $ 1,008 | 1,006,882 | $ 1,007,890 | ||
Warrants issued for services | 161,560 | 161,560 | |||
Stock Options issued for services | 931,544 | 931,544 | |||
Net loss | (919,910) | (919,910) | |||
Ending balance, shares at Dec. 31, 2017 | 63,340,034 | ||||
Ending balance, amount at Dec. 31, 2017 | $ 63,344 | $ 99,403,654 | $ (83,507,693) | $ 15,959,305 |
CONSOLIDATED STATEMENTS OF CASH
CONSOLIDATED STATEMENTS OF CASH FLOW - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Cash Flows From Operating Activities | ||
Net loss | $ (919,910) | $ (7,684,346) |
Adjustments to reconcile net loss to net cash from operations: | ||
Stock based compensation | 1,151,061 | 2,956,044 |
Accretion of note discounts | 291,386 | 186,532 |
Loss on sale of assets | 0 | 283,285 |
Impairment expense | 0 | 70,080 |
Depreciation, depletion and amortization | 100,156 | 636,426 |
Change in: | ||
Accounts receivable | 7,305 | 138,207 |
Note receivable | 0 | 613 |
Production revenue receivable | (135,607) | 191,992 |
Prepayment of development costs | (752,305) | (1,583,347) |
Prepaid expenses | (12,676) | 11,946 |
Other assets | 12,000 | 59,240 |
Accounts payable and accrued liabilities | 519,818 | (396,456) |
Due to working interest owners | 0 | (49,044) |
Funds received pending settlement | 0 | 520,400 |
Interest payable | 204,364 | (167,661) |
Net cash from operating activities | 465,592 | (4,826,089) |
Cash Flows From Investing Activities | ||
Investment in oil and gas properties | (9,460,830) | (2,293,497) |
Acquisition of office equipment | 2,182 | (1,863) |
Proceeds from sale of leases | 0 | 2,127,489 |
Net cash used in investing activities | (9,458,648) | (167,871) |
Cash Flows From Financing Activities | ||
Proceeds from short term advance | 0 | 150,000 |
Repayment of short term advance | 0 | (150,000) |
Proceeds from sale of common stock | 0 | 3,000,000 |
Proceeds from sale of preferred stock | 0 | 1,000,000 |
Preferred dividends paid in cash | 0 | (320,724) |
Proceeds from warrant exercise | 243,300 | 1,999,310 |
Proceeds from promissory notes | 10,541,475 | 708,014 |
Repayment of convertible notes | (2,509,500) | 0 |
Repayment of promissory notes | 0 | (649,741) |
Net cash from financing activities | 8,275,275 | 5,736,859 |
Net increase (decrease) in cash | (717,781) | 742,899 |
Cash - beginning of period | 1,769,499 | 1,026,600 |
Cash - end of period | 1,051,720 | 1,769,499 |
Supplemental disclosure of cash flow information: (Non Cash Items | ||
Common stock issued for financing costs | 279,754 | 0 |
Common stock issued for mineral interests | 6,812,362 | 1,975,046 |
Common stock issued in conversion of promissory notes | 1,007,890 | 0 |
Accounts payable increase-Investment in oil and gas properties | 375,000 | 0 |
Warrants issued for mineral interests | 0 | 1,290,761 |
Cash paid for interest | $ 813,652 | $ 603,157 |
1. NATURE OF BUSINESS
1. NATURE OF BUSINESS | 12 Months Ended |
Dec. 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, Torchlight Hazel LLC, and Winkler Properties LLC. |
2. GOING CONCERN
2. GOING CONCERN | 12 Months Ended |
Dec. 31, 2017 | |
GOING CONCERN | |
GOING CONCERN | At December 31, 2017, the Company had not yet achieved profitable operations. We had a net loss of $919,910 for the year ended December 31, 2017 and had accumulated losses of $83,507,693 since our inception. We expect to incur further losses in the development of our business. The Company had working capital as of December 31, 2017 of $886,503. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management’s plan to address the Company’s ability to continue as a going concern includes: (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtain loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful. These consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classifications of liabilities that may result from the outcome of this uncertainty. |
3. SIGNIFICANT ACCOUNTING POLIC
3. SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended |
Dec. 31, 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: Use of estimates Basis of presentation Risks and uncertainties Concentration of risks Fair value of financial instruments For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows: · Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. · Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. · Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Cash and cash equivalents Cash and cash equivalents include certain investments in highly liquid instruments with original maturities of three months or less. Accounts receivable As of December 31, 2017 and 2016 accounts receivable included $419,839 the Company computed as being due from Husky Ventures with respect to the sale of Chisholm Trail properties in 2015 and in dispute as part of the Husky legal action in process at those dates. Additionally, a payment of $520,400 made by Husky Ventures which is also disputed by the Company is included in current liabilities captioned “Funds received pending settlement”. 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. Company tax returns remain subject to Federal and State tax examinations. Generally, the applicable statutes of limitation are three to four years from their respective filings. Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of 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, 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 Revenue From Contracts With Customers In February 2016 the FASB, issued ASU, 2016-02, Leases. The ASU requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will be effective for the Company in the first quarter of 2019, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements and related disclosures. Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Company’s financial position or results from operations. Subsequent events – |
4. OIL & GAS PROPERTIES
4. OIL & GAS PROPERTIES | 12 Months Ended |
Dec. 31, 2017 | |
Oil Gas Properties | |
OIL & GAS PROPERTIES | The following table presents the capitalized costs for oil & gas properties of the Company as of December 31, 2017 and 2016: 2017 2016 Evaluated costs subject to amortization $ 5,022,129 $ 1,470,939 Unevaluated costs 26,100,749 13,376,742 Total capitalized costs 31,122,878 14,847,681 Less accumulated depreciation, depletion and amortization (5,543,599) (5,455,393) Total oil and gas properties $ 25,579,279 $ 9,392,288 The Company identified impairment of $2,300,626 in 2017 related to its unevaluated properties. Although we had no recognized impairment expense in 2017, the Company has 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 will be 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 Income over future periods. The $2,300,626 has also become an evaluated cost for purposes of future period’s Ceiling Tests and which may further recognize the impairment expense recognized in future periods. 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. Acquisition of Additional Interests in Hazel Project 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. Subsequent to the closing the name of Line Drive Energy, LLC was changed to Torchlight Hazel, LLC. 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, our Chairman. 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. 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%. Effective June 1, 2017, the Company 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 its working interest in the Hazel project to 80%. Winkler Project, Winkler County, Texas On December 1, 2017, the Agreement and Plan of Reorganization that we and our newly formed wholly-owned subsidiary, Torchlight Wolfbone Properties, Inc., a Texas corporation (“TWP”), entered into with McCabe Petroleum Corporation, a Texas corporation (“MPC”), and Warwink Properties, LLC, a Texas limited liability company (“Warwink Properties”) closed. Under the agreement, which was entered into on November 14, 2017, TWP merged with and into Warwink Properties and the separate existence of TWP ceased, with Warwink Properties becoming the surviving organization and our wholly-owned subsidiary. Warwink Properties was wholly owned by MPC which is wholly owned by Gregory McCabe, our Chairman. Warwink Properties owns certain assets, including a 10.71875% working interest in 640 acres in Winkler County, Texas. At closing of the merger transaction, our shares of common stock of TWP converted into a membership interest of Warwink Properties, the membership interest in Warwink Properties held by MPC ceased to exist, and we issued MPC 2,500,000 restricted shares of 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 (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 $1,475,000 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 our wholly-owned subsidiary, Torchlight Energy, Inc., a Nevada corporation (“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 December 31, 2020. 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. During 2016 the Company sold its Cimarron and Marcelina properties. Those sales of the Cimarron and the Marcelina properties in 2016 represented substantial percentages of reserves at the time of each sale and were presented on the Consolidated Statement of Operations for 2016. Proceeds from the sale of Cimarron and Marcelina properties were $750,000 and $877,489 respectively. The combined loss on sale for 2016 was $283,285. |
5. RELATED PARTY PAYABLES
5. RELATED PARTY PAYABLES | 12 Months Ended |
Dec. 31, 2017 | |
RELATED PARTY PAYABLES. | |
RELATED PARTY PAYABLES | As of December 31, 2017, related party payables consisted of accrued and unpaid compensation to one of our executive officers totaling $45,000. As of December 31, 2016, related party payables consisted of accrued and unpaid compensation to one of our executive officers totaling $45,000 and $192,044 in Director Fees payable to our Directors. |
6. COMMITMENTS AND CONTINGENCIE
6. COMMITMENTS AND CONTINGENCIES | 12 Months Ended |
Dec. 31, 2017 | |
COMMITMENTS AND CONTINGENCIES | |
COMMITMENTS AND CONTINGENCIES | Leases The Company has a noncancelable lease for its office premises that expires on November 30, 2019 and which requires the payment of base lease amounts and executory costs such as taxes, maintenance and insurance. Rental expense for lease was $84,197 and $81,595 for the year ended December 31, 2017 and 2016, respectively. Approximate future minimum rental commitments under the office premises lease are: Year Ending December 31, Rent 2018 $ 96,660 To 2019 Expiration 88,605 Total $ 185,265 Environmental matters The Company is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time. As of December 31, 2017 and 2016, 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. Litigation 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 Securities Act, fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, unjust enrichment and tortious interference. 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. On May 22, 2017, the Court granted Gastar Exploration, Inc., J. Russell Porter, Michael A. Gerlich, and Jerry R. Schuyler’s (“Gastar Defendants”) motion for summary judgment dismissing all of Torchlight’s claims against the Gastar Defendants with prejudice. The only claim remaining related to the Gastar Defendants is a counterclaim against Torchlight by Gastar Exploration, Inc. for Torchlight’s alleged breach of a release that Gastar Exploration, Inc. claims occurred because Torchlight filed this lawsuit against the Gastar Defendants. Torchlight alleges in its lawsuit that this release is unenforceable against all the Defendants including but not limited to Gastar Defendants. On January 12, 2018, the Court heard but has not yet ruled on cross-motions for summary judgment by Gastar and Torchlight to resolve Gastar’s remaining claims against Torchlight. The case is currently set for trial on May 30, 2018. |
7. STOCKHOLDERS' EQUITY
7. STOCKHOLDERS' EQUITY | 12 Months Ended |
Dec. 31, 2017 | |
Stockholders' equity: | |
STOCKHOLDERS' EQUITY | Common Stock During the years ended December 31, 2017 and 2016, the Company issued -0- and 3,750,000 shares of common stock, respectively, for cash of $-0- and $3,000,000. During the years ended December 31, 2017 and 2016, the Company issued 507,897 and 768,832 shares of common stock with total fair values of $579,754 and $670,074, respectively, as compensation for services. During the years ended December 31, 2017 and 2016, the Company issued 6,420,395 and 2,824,881 shares of common stock for lease interests with total fair values of $6,812,362 and $1,975,046, respectively. During the year ended December 31, 2017 and 2016, the Company issued -0- and 10,257,439 shares of common stock, respectively, in conversions of preferred stock valued at $-0- and $13,399,992. During the year ended December 31, 2017 and 2016, the Company issued 307,349 and 3,888,745 shares of common stock, respectively, resulting from warrant exercises for consideration totaling $243,300 and $2,543,749. During the year ended December 31, 2017, the Company issued 1,007,890 shares of common stock in conversion of promissory notes valued at $1,007,890. Preferred Stock During the year ended December 31, 2016, the Company issued 10,000 shares of Series C preferred stock for $1,000,000 in cash. The proceeds were deposited as a prepayment with the operator for development cost of the Flying B #2 well in the Hazel Project. The preferred holders exercised their option in fourth quarter of 2016 to convert their preferred shares into an aggregate 33.33% working interest in the Flying “B” #2 whereupon they received credit for the prepayment to their working interest joint interest billing accounts. During the year ended December 31, 2016 the Company paid dividends on preferred stock in cash of $320,724. In addition, during the year 2016, 440,262 shares of common stock were issued for dividends on preferred stock. There was no outstanding Preferred Stock as of December 31, 2017. Warrants and Options During the years ended December 31, 2017 and 2016, the Company issued/vested 1,808,026 and 6,437,267 warrants and options with total fair values of $1,093,104 and $2,205,231, respectively, as compensation for services. During the years ended December 31, 2017, and 2016, the Company issued -0- and 137,500 warrants, respectively, in connection with financing transactions, with total values of $-0- and $80,750. During the years ended December 31, 2017 and 2016, the Company issued -0- and 3,412,525 warrants and 6,420,395 and 2,824,881 shares of common stock, respectively, in connection with the acquisition of lease interests, respectively, with total value of $6,812,362 and $3,265,807. A summary of warrants outstanding as of December 31, 2017 by exercise price and year of expiration is presented below: Exercise Expiration Date in Price 2018 2019 2020 2021 Total $ 0.50 400,000 - - - 400,000 $ 0.70 - - 420,000 - 420,000 $ 0.77 - 100,000 - - 100,000 $ 1.00 - 25,116 - - 25,116 $ 1.03 - - - 120,000 120,000 $ 1.08 - 37,500 - - 37,500 $ 1.40 - - 1,121,736 1,121,736 $ 1.64 - - - 200,000 200,000 $ 1.73 100,000 - - - 100,000 $ 1.80 - - 1,250,000 - 1,250,000 $ 2.00 1,906,249 - - - 1,906,249 $ 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 $ 6.00 523,123 22,580 - - 545,703 $ 7.00 - 700,000 - - 700,000 7,887,546 1,635,407 3,624,248 320,000 13,467,201 A summary of stock options outstanding as of December 31, 2017 by exercise price and year of expiration is presented below: Exercise Expiration Date in Price 2018 2019 2020 2021 2022 Total $ 0.97 - - - 259,742 - 259,742 $ 1.10 - - - - 800,000 800,000 $ 1.57 - - 5,997,163 - - 5,997,163 $ 1.63 - - - 58,026 - 58,026 $ 1.79 - - 300,000 - - 300,000 - - 6,297,163 317,768 800,000 7,414,931 At December 31, 2017, the Company had reserved 20,882,132 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 issued were as follows: 2017 Risk-free interest rate 1.47% - 2.06% Expected volatility of common stock 106% - 122% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant 2.75 years - 5 years 2016 Risk-free interest rate 0.78%-1.22% Expected volatility of common stock 101% - 189% 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 | 12 Months Ended |
Dec. 31, 2017 | |
Income Taxes | |
INCOME TAXES | The Company recorded no income tax provision for 2017 and 2016 because of losses incurred. The Company has placed a full valuation allowance against net deferred tax assets because future realization of these assets is not assured. The following is a reconciliation between the federal income tax benefit computed at statutory federal income tax rates and actual income tax provision for the years ended December 31, 2017 and 2016: Year ended Year ended December 31, 2017 December 31, 2016 Federal income tax benefit at statutory rate $ (312,769) $ (2,869,293) Permanent Differences 1,640 3,000 Other 719,197 4,096,946 Change in valuation allowance (9,186,334) (1,230,653) Change in federal tax rate 8,778,266 - Provision for income taxes $ - $ - The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2017 and December 31, 2016 are as follows: December 31, 2017 December 31, 2016 Deferred tax assets: Net operating loss carryforward $ 11,116,332 $ 16,269,090 Accruals 9,450 15,300 Reserves 4,501,899 7,156,559 Deferred tax liabilities: Intangible drilling and other costs for oil and gas properties (1,447,405) (74,340) Net deferred tax assets and liabilities 14,180,276 23,366,609 Less valuation allowance (14,180,276) (23,366,609) Total deferred tax assets and liabilities $ - $ - The Company had a net deferred tax asset related to federal net operating loss carryforwards of $52,934,915 and $51,028,330 at December 31, 2017 and December 31, 2016, respectively. The federal net operating loss carryforward will begin to expire in 2032. 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. On December 22, 2017, the U.S. government enacted comprehensive legislation titled the Tax Cuts and Jobs Act. Generally, effective for years 2018 and beyond, it makes broad and complex changes to the Internal Revenue Code, including, but not limited to, reducing the federal corporate income tax rate from 35% to 21%. As of December 31, 2017 we have made a reasonable estimate of the effects on our deferred tax assets and liabilities of the change in the corporate tax rate to be effective in 2018. The estimated amount is included our computation of net deferred tax assets and liabilities and the related valuation allowance. |
9. PROMISSORY NOTES
9. PROMISSORY NOTES | 12 Months Ended |
Dec. 31, 2017 | |
PROMISSORY NOTES | |
PROMISSORY NOTES | The total outstanding balance of the 12% Series B Convertible Unsecured Promissory Notes at December 31, 2016 was $3,569,500. On April 24, 2017 we used $2,509,500 of the proceeds from the financing described below 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 valued at $1,007,890 and $60,000 was rolled into the 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. Debt issuance costs were paid by issuance of 204,574 shares of common stock valued at $279,754. We are using 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, 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. The effective interest rate is 16.15%. In connection with the transaction effective December 5, 2017 for the acquisition of the Warwink properties, the Company borrowed $3.25 million from its Chairman, Greg McCabe on a three-year interest only promissory note bearing interest at 5% per annum. |
10. ASSET RETIREMENT OBLIGATION
10. ASSET RETIREMENT OBLIGATIONS | 12 Months Ended |
Dec. 31, 2017 | |
ASSET RETIREMENT OBLIGATIONS | |
ASSET RETIREMENT OBLIGATIONS | The following is a reconciliation of the asset retirement obligation liability for the period December 31, 2015 through December 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 Estimated liabilities recorded 2,007 Accretion expense 216 Asset retirement obligation – December 31, 2017 $9,274 |
11. SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS | 12 Months Ended |
Dec. 31, 2017 | |
SUBSEQUENT EVENTS | |
SUBSEQUENT EVENTS | 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 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. 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. |
3. SIGNIFICANT ACCOUNTING POL18
3. SIGNIFICANT ACCOUNTING POLICIES (Policies) | 12 Months Ended |
Dec. 31, 2017 | |
Accounting Policies [Abstract] | |
Use of estimates | The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ from these estimates. |
Basis of presentation | The financial statements are presented on a consolidated basis and include all of the accounts of Torchlight Energy Resources Inc. and its wholly owned subsidiaries, Torchlight Energy, Inc., Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC. All significant intercompany balances and transactions have been eliminated. |
Risks and uncertainties | The Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological, and other risks associated with operating an emerging business, including the potential risk of business failure. |
Concentration of risks | At times the Company’s cash balances are in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. The Company’s cash is placed with a highly rated financial institution, and the Company regularly monitors the credit worthiness of the financial institutions with which it does business. |
Fair value of financial instruments | Financial instruments consist of cash, receivables, payables and promissory notes, if any. The estimated fair values of cash, receivables, and payables approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of any promissory notes approximate their fair value giving affect for the term of the note and the effective interest rates. For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows: · Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. · Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. · Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. |
Cash and cash equivalents | Cash and cash equivalents include certain investments in highly liquid instruments with original maturities of three months or less. |
Accounts receivable | Accounts receivable consist of uncollateralized oil and natural gas revenues due under normal trade terms, as well as amounts due from working interest owners of oil and gas properties for their share of expenses paid on their behalf by the Company. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. As of December 31, 2017 and December 31, 2016, no valuation allowance was considered necessary. As of December 31, 2017 and 2016 accounts receivable included $419,839 the Company computed as being due from Husky Ventures with respect to the sale of Chisholm Trail properties in 2015 and in dispute as part of the Husky legal action in process at those dates. Additionally, a payment of $520,400 made by Husky Ventures which is also disputed by the Company is included in current liabilities captioned “Funds received pending settlement”. |
Oil and gas properties | The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Oil and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition costs to unevaluated properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir. 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 | The Company capitalizes interest on unevaluated properties during the periods in which they are excluded from costs being depleted or amortized. During the years ended December 31, 2017 and 2016, the Company capitalized $1,010,868 and $215,938, respectively, of interest on unevaluated properties. |
Depreciation, depletion and amortization | The depreciable base for oil and natural gas properties includes the sum of all capitalized costs net of accumulated depreciation, depletion, and amortization (“DD&A”), estimated future development costs and asset retirement costs not included in oil and natural gas properties, less costs excluded from amortization. The depreciable base of oil and natural gas properties is amortized on a unit-of-production method. |
Ceiling test | Future production volumes from oil and gas properties are a significant factor in determining the full cost ceiling limitation of capitalized costs. Under the full cost method of accounting, the Company is required to periodically perform a “ceiling test” that determines a limit on the book value of oil and gas properties. If the net capitalized cost of proved oil and gas properties, net of related deferred income taxes, plus the cost of unproved oil and gas properties, exceeds the present value of estimated future net cash flows discounted at 10 percent, net of related tax affects, plus the cost of unproved oil and gas properties, the excess is charged to expense and reflected as additional accumulated DD&A. The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated abandonment costs. The 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 | The fair value of a liability for an asset’s retirement obligation (“ARO”) is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, with the corresponding charge capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each subsequent period, and the capitalized cost is depleted over the useful life of the related asset. Abandonment costs incurred are recorded as a reduction of the ARO liability. Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement. |
Income taxes | Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. Authoritative guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an examination. Management has reviewed the Company’s tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements. Company tax returns remain subject to Federal and State tax examinations. Generally, the applicable statutes of limitation are three to four years from their respective filings. Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statement of 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 | Compensation cost for equity awards is based on the fair value of the equity instrument on the date of grant and is recognized over the period during which an employee is required to provide service in exchange for the award. Compensation cost for liability awards is based on the fair value of the vested award at the end of each period. 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, 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 | The Company recognizes oil and gas revenues when production is sold at a fixed or determinable price, persuasive evidence of an arrangement exists, delivery has occurred and title has transferred, and collectability is reasonably assured. |
Basic and diluted earnings (loss) per share | Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive. The calculation of diluted earnings per share excludes 20,882,132 shares issuable upon the exercise of outstanding warrants and options because their effect would be anti-dilutive. |
Environmental laws and regulations | The Company is subject to extensive federal, state, and local environmental laws and regulations. Environmental expenditures are expensed or capitalized depending on their future economic benefit. The Company believes that it is in compliance with existing laws and regulations. |
Recent accounting pronouncements | In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers In February 2016 the FASB, issued ASU, 2016-02, Leases. The ASU requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will be effective for the Company in the first quarter of 2019, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements and related disclosures. Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Company’s financial position or results from operations. |
Subsequent events | The Company evaluated subsequent events through March 15, 2018, the date of issuance of these financial statements. Subsequent events are disclosed in Note 11. |
4. OIL & GAS PROPERTIES (Tables
4. OIL & GAS PROPERTIES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Oil Gas Properties Tables | |
Schedule of Oil and Gas Properties | 2017 2016 Evaluated costs subject to amortization $ 5,022,129 $ 1,470,939 Unevaluated costs 26,100,749 13,376,742 Total capitalized costs 31,122,878 14,847,681 Less accumulated depreciation, depletion and amortization (5,543,599) (5,455,393) Total oil and gas properties $ 25,579,279 $ 9,392,288 |
6. COMMITMENTS AND CONTINGENC20
6. COMMITMENTS AND CONTINGENCIES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Commitments And Contingencies Tables | |
COMMITMENTS AND CONTINGENCIES | Year Ending December 31, Rent 2018 $ 96,660 To 2019 Expiration 88,605 Total $ 185,265 |
7. STOCKHOLDERS' EQUITY (Tables
7. STOCKHOLDERS' EQUITY (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
STOCKHOLDERS' EQUITY (TABLES) | |
Summary of warrant activity | Exercise Expiration Date in Price 2018 2019 2020 2021 Total $ 0.50 400,000 - - - 400,000 $ 0.70 - - 420,000 - 420,000 $ 0.77 - 100,000 - - 100,000 $ 1.00 - 25,116 - - 25,116 $ 1.03 - - - 120,000 120,000 $ 1.08 - 37,500 - - 37,500 $ 1.40 - - 1,121,736 1,121,736 $ 1.64 - - - 200,000 200,000 $ 1.73 100,000 - - - 100,000 $ 1.80 - - 1,250,000 - 1,250,000 $ 2.00 1,906,249 - - - 1,906,249 $ 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 $ 6.00 523,123 22,580 - - 545,703 $ 7.00 - 700,000 - - 700,000 7,887,546 1,635,407 3,624,248 320,000 13,467,201 |
Summary of stock options outstanding | Exercise Expiration Date in Price 2018 2019 2020 2021 2022 Total $ 0.97 - - - 259,742 - 259,742 $ 1.10 - - - - 800,000 800,000 $ 1.57 - - 5,997,163 - - 5,997,163 $ 1.63 - - - 58,026 - 58,026 $ 1.79 - - 300,000 - - 300,000 - - 6,297,163 317,768 800,000 7,414,931 |
Assumptions used in calculating the fair value of the warrants | 2017 Risk-free interest rate 1.47% - 2.06% Expected volatility of common stock 106% - 122% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant 2.75 years - 5 years 2016 Risk-free interest rate 0.78%-1.22% Expected volatility of common stock 101% - 189% Dividend yield 0.00% Discount due to lack of marketability 20-30% Expected life of warrant 3 years - 5 years |
8. INCOME TAXES (Tables)
8. INCOME TAXES (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
Schedule of Income Taxes: | |
Schedule of Effective Income Tax Rate Reconciliation | Year ended Year ended December 31, 2017 December 31, 2016 Federal income tax benefit at statutory rate $ (312,769) $ (2,869,293) Permanent Differences 1,640 3,000 Other 719,197 4,096,946 Change in valuation allowance (9,186,334) (1,230,653) Change in federal tax rate 8,778,266 - Provision for income taxes $ - $ - |
Schedule of Deferred Tax Assets and Liabilities | December 31, 2017 December 31, 2016 Deferred tax assets: Net operating loss carryforward $ 11,116,332 $ 16,269,090 Accruals 9,450 15,300 Reserves 4,501,899 7,156,559 Deferred tax liabilities: Intangible drilling and other costs for oil and gas properties (1,447,405) (74,340) Net deferred tax assets and liabilities 14,180,276 23,366,609 Less valuation allowance (14,180,276) (23,366,609) Total deferred tax assets and liabilities $ - $ - |
10. ASSET RETIREMENT OBLIGATI23
10. ASSET RETIREMENT OBLIGATIONS (Tables) | 12 Months Ended |
Dec. 31, 2017 | |
ASSET RETIREMENT OBLIGATIONS (Tables) | |
Schedule of asset retirement obligation liability | 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 Estimated liabilities recorded 2,007 Accretion expense 216 Asset retirement obligation – December 31, 2017 $9,274 |
2. GOING CONCERN (Details Narra
2. GOING CONCERN (Details Narrative) | Dec. 31, 2017USD ($) |
Going Concern Accumulated Losses | |
Accumulated deficit | $ (83,507,693) |
Accumulated Losses since inception | (83,507,693) |
Working Capital deficit | $ (886,503) |
3. SIGNIFICANT ACCOUNTING POL25
3. SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Significant Accounting Policies {1} | ||
Capitalized interest on unevaluated properties | $ 1,010,868 | $ 215,938 |
Shares issuable exercise of outstanding warrants and options | 20,882,132 |
4. OIL & GAS PROPERTIES (Detail
4. OIL & GAS PROPERTIES (Details) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Oil Gas Properties Details | ||
Evaluated costs subject to amortization | $ 5,022,129 | $ 1,470,939 |
Unevaluated costs | 26,100,749 | 13,376,742 |
Total capitalized costs | 31,122,878 | 14,847,681 |
Less accumulated depreciation, depletion and amortization | (5,543,599) | (5,455,393) |
Total oil and gas properties | $ 25,579,279 | $ 9,392,288 |
4. OIL & GAS PROPERTIES (Deta27
4. OIL & GAS PROPERTIES (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Oil Gas Properties Details Narrative | ||
Impairment expense oil and gas properties | $ 2,300,626 | |
Proceeds from sale | $ 750,000 | |
Combined loss on sale | $ 283,285 |
5. RELATED PARTY PAYABLES (Deta
5. RELATED PARTY PAYABLES (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2016 | Dec. 31, 2017 | |
Related Party Transactions payments due to related party | ||
Related party payable accrued and unpaid compensation to one of the executive officers | $ 45,000 | $ 45,000 |
Director Fees | $ 192,044 |
6. COMMITMENTS AND CONTINGENC29
6. COMMITMENTS AND CONTINGENCIES (Details) | Dec. 31, 2017USD ($) |
Commitments And Contingencies Details | |
2,018 | $ 96,660 |
2,019 | $ 88,605 |
6. COMMITMENTS AND CONTINGENC30
6. COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Commitments And Contingencies Details Narrative | ||
Rental expense | $ 84,197 | $ 81,595 |
7. STOCKHOLDERS' EQUITY (Detail
7. STOCKHOLDERS' EQUITY (Details) | Dec. 31, 2017shares |
0.50 | |
Outstanding warrants and stock options | 400,000 |
0.70 | |
Outstanding warrants and stock options | 420,000 |
0.77 | |
Outstanding warrants and stock options | 100,000 |
1 | |
Outstanding warrants and stock options | 25,116 |
1.03 | |
Outstanding warrants and stock options | 120,000 |
1.08 | |
Outstanding warrants and stock options | 37,500 |
1.4 | |
Outstanding warrants and stock options | 1,121,736 |
1.64 | |
Outstanding warrants and stock options | 200,000 |
1.73 | |
Outstanding warrants and stock options | 100,000 |
1.8 | |
Outstanding warrants and stock options | 1,250,000 |
2 | |
Outstanding warrants and stock options | 1,906,249 |
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 |
2.5 | |
Outstanding warrants and stock options | 35,211 |
2.82 | |
Outstanding warrants and stock options | 38,174 |
3.5 | |
Outstanding warrants and stock options | 15,000 |
4.5 | |
Outstanding warrants and stock options | 700,000 |
6 | |
Outstanding warrants and stock options | 545,703 |
7 | |
Outstanding warrants and stock options | 700,000 |
Total | |
Outstanding warrants and stock options | 13,467,201 |
Total | Expiring in the year 2018 | |
Outstanding warrants and stock options | 7,887,546 |
Total | Expiring in the year 2019 | |
Outstanding warrants and stock options | 1,635,407 |
Total | Expiring in the year 2020 | |
Outstanding warrants and stock options | 3,624,248 |
Total | Expiring in the year 2021 | |
Outstanding warrants and stock options | 320,000 |
7. STOCKHOLDERS' EQUITY (Deta32
7. STOCKHOLDERS' EQUITY (Details 1) | Dec. 31, 2017shares |
Stock Options Outstanding | 7,414,931 |
0.97 | |
Stock Options Outstanding | 259,742 |
1.10 | |
Stock Options Outstanding | 800,000 |
1.57 | |
Stock Options Outstanding | 5,997,163 |
1.63 | |
Stock Options Outstanding | 58,026 |
0.50 | |
Stock Options Outstanding | 300,000 |
Total | |
Stock Options Outstanding | 7,414,931 |
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 | 317,768 |
Total | Expiring in the year 2022 | |
Stock Options Outstanding | 800,000 |
7. STOCKHOLDERS' EQUITY (Deta33
7. STOCKHOLDERS' EQUITY (Details 2) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Dividend yield | 0.00% | |
Discount due to lack of marketability | 20.00% | |
Minimum [Member] | ||
Risk-free interest rate | 1.47% | 0.78% |
Expected volatility of common stock | 106.00% | 101.00% |
Dividend yield | 0.00% | |
Discount due to lack of marketability | 20.00% | |
Expected life of warrant | 2 years 9 months | 3 years |
Maximum [Member] | ||
Risk-free interest rate | 2.06% | 1.22% |
Expected volatility of common stock | 122.00% | 189.00% |
Discount due to lack of marketability | 30.00% | |
Expected life of warrant | 5 years | 5 years |
7. STOCKHOLDERS' EQUITY (Deta34
7. STOCKHOLDERS' EQUITY (Details Narrative) | 12 Months Ended | |
Dec. 31, 2017USD ($)shares | Dec. 31, 2016USD ($)shares | |
Assumptions used in calculating the fair value of the warrants issued are as follows: | ||
Issuance of common stock for cash, shares | shares | 0 | 3,750,000 |
Issuance of common stock for cash, amount | $ 0 | $ 3,000,000 |
Issuance of preferred stock for cash, amount | 1,000,000 | |
Preferred dividends paid in cash | $ 320,724 | |
Issuance of common stock for preferred dividends, shares | shares | 440,262 | |
Issuance of common stock for services, shares | shares | 507,897 | 768,832 |
Issuance of common stock for services, amount | $ 579,754 | $ 670,074 |
Warrants issued for services, shares | shares | 1,808,026 | 6,437,267 |
Warrants issued for services, amount | $ 1,093,104 | $ 2,205,231 |
warrants issued in connection with financing transactions, shares | shares | 0 | 137,500 |
warrants issued in connection with financing transactions, amount | $ 0 | $ 80,750 |
Warrants issued in connection with the acquisition of lease, shares | shares | 0 | 3,412,525 |
Warrants issued in connection with the acquisition of lease, amount | $ 1,290,761 | |
Issuance of common stock - mineral interests, shares | shares | 6,420,395 | 2,824,881 |
Issuance of common stock - mineral interests, amount | $ 1,975,046 | |
Issuance of common stock in warrant exercise, shares | shares | 307,349 | 3,888,745 |
Issuance of common stock in warrant exercise, amount | $ 243,300 | $ 2,543,746 |
Preferred Shares Working Interest | 0.3333 | |
Reserved Future Exercise of Warrants and options | $ 20,882,132 | $ 23,131,694 |
Warrants issued/vested | shares | 0 | 3,412,525 |
Common stock issued/vested | shares | 6,420,395 | 2,824,881 |
Warrants issued/vested Total Value | $ 1,093,104 | $ 1,290,761 |
Issuance of common stock-conversion of promissory note, shares | shares | 1,007,890 | |
Issuance of common stock-conversion of promissory note, amount | $ 1,007,890 | |
Issuance of common stock conversion of preferred stock, shares | shares | 0 | 10,257,439 |
Issuance of common stock conversion of preferred stock, amount | $ 0 | $ 13,399,992 |
Issuance of common stock for lease interests, amount | $ 6,812,362 |
8. INCOME TAXES (Details)
8. INCOME TAXES (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
Tax Reconciliation and provision for income taxes | ||
Federal income tax benefit at statutory rate | $ (312,769) | $ (2,869,293) |
Permanent Differences | 1,640 | 3,000 |
Other | 719,197 | 4,096,946 |
Change in valuation allowance | (9,186,334) | (1,230,653) |
Change in federal tax rate | 8,778,266 | 0 |
Provision for income taxes | $ 0 | $ 0 |
8. INCOME TAXES (Details 1)
8. INCOME TAXES (Details 1) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Deferred tax assets: | ||
Net operating loss carryforward | $ 11,116,332 | $ 16,269,090 |
Accruals | 9,450 | 15,300 |
Reserves | 4,501,899 | 7,156,559 |
Deferred tax liabilities: | ||
Intangible drilling and other costs for oil and gas properties | (1,447,405) | (74,340) |
Net deferred tax assets and liabilities | 14,180,276 | 23,366,609 |
Less valuation allowance | (14,180,276) | (23,366,609) |
Total deferred tax assets and liabilities | $ 0 | $ 0 |
8. INCOME TAXES (Details Narrat
8. INCOME TAXES (Details Narrative) - USD ($) | Dec. 31, 2017 | Dec. 31, 2016 |
Income Taxes Operating loss carryforwards | ||
Net deferred tax asset related to federal net operating loss carryforwards of | $ 52,934,915 | $ 51,028,330 |
9. PROMISSORY NOTES (Details Na
9. PROMISSORY NOTES (Details Narrative) | 12 Months Ended |
Dec. 31, 2016USD ($) | |
Promissory Notes Details Narrative | |
Converted common stock | $ 3,569,500 |
10. ASSET RETIREMENT OBLIGATI39
10. ASSET RETIREMENT OBLIGATIONS (Details) - USD ($) | 12 Months Ended | |
Dec. 31, 2017 | Dec. 31, 2016 | |
ASSET RETIREMENT OBLIGATIONS RECONCILIATION | ||
Asset Retirement Obligation, Begining | $ 7,051 | $ 29,083 |
Asset retirement obligation | 29,083 | |
Estimated liabilities recorded | 2,007 | |
Accretion Expense | 216 | 41 |
Removal of ARO for wells sold | (22,073) | |
Asset Retirement Obligation, Ending | $ 9,274 | $ 7,051 |