| OIL & GAS PROPERTIES | The
following table presents the capitalized costs for oil & gas properties of the Company as of March 31, 2018 and December 31,
2017:
2018 2017
Evaluated
costs subject to amortization $ 5,035,284 $ 5,022,129
Unevaluated
costs 30,750,705 26,100,749
Total
capitalized costs 35,785,989 31,122,878
Less
accumulated depreciation, depletion and amortization (5,787,713 ) (5,543,599 )
Total
oil and gas properties $ 29,998,276 $ 25,579,279 Unevaluated
costs as of March 31, 2018 include cumulative costs on developing projects including the Orogrande, Hazel, and Warwink projects
in West Texas and adjusted costs of nonproducing leases in Oklahoma. 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 Operations 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. The impact of this cost reclassification at March 31, 2018 was a recognized impairment expense
of $139,891. 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 then wholly-owned subsidiary, Torchlight Acquisition Corporation, a Texas corporation (“TAC”),
entered into and closed an Agreement and Plan of Reorganization and a Plan of Merger with Line Drive Energy, LLC, a Texas limited
liability company (“Line Drive”), and Mr. McCabe, under which agreements TAC merged with and into Line Drive and the
separate existence of TAC ceased, with Line Drive being the surviving entity and becoming our wholly-owned subsidiary. Line Drive,
which was wholly-owned by Mr. McCabe, owned certain assets and securities, including approximately 40.66% of 12,000 gross acres,
9,600 net acres, in the Hazel Project and 521,739 warrants to purchase shares of our common stock (which warrants had been assigned
by Mr. McCabe to Line Drive). Upon the closing of the merger, all of the issued and outstanding shares of common stock of TAC
automatically converted into a membership interest in Line Drive, constituting all of the issued and outstanding membership interests
in Line Drive immediately following the closing of the merger, the membership interest in Line Drive held by Mr. McCabe and outstanding
immediately prior to the closing of the merger ceased to exist, and we issued Mr. McCabe 3,301,739 restricted shares of our common
stock as consideration therefor. Immediately after closing, the 521,739 warrants held by Line Drive were cancelled, which warrants
had an exercise price of $1.40 per share and an expiration date of June 9, 2020. A Certificate of Merger for the merger transaction
was filed with the Secretary of State of Texas on January 31, 2017. Subsequent to the closing the name of Line Drive Energy, LLC
was changed to Torchlight Hazel, LLC. We are required to drill one well every six months to hold the entire 12,000 acre block
for eighteen months, and thereafter two wells every six month starting June 2018. Also
on January 30, 2017, TEI entered into and closed a Purchase and Sale Agreement with Wolfbone. Under the agreement, TEI acquired
certain of Wolfbone’s Hazel Project assets, including its interest in the Flying B Ranch #1 well and the 40 acre unit surrounding
the well, for consideration of $415,000, and additionally, Wolfbone caused to be cancelled a total of 2,780,000 warrants to purchase
shares of our common stock, including 1,500,000 warrants held by MPC, and 1,280,000 warrants held by Green Hill Minerals, an entity
owned by Mr. McCabe’s son, which warrant cancellations were effected through certain Warrant Cancellation Agreements. The
1,500,000 warrants held by MPC that were cancelled had an exercise price of $1.00 per share and an expiration date of April 4,
2021. The warrants held by Green Hill Minerals that were cancelled included 100,000 warrants with an exercise price of $1.73 and
an expiration date of September 30, 2018 and 1,180,000 warrants with an exercise price of $0.70 and an expiration date of February
15, 2020. Since
Mr. McCabe held the controlling interest in both Line Drive and Wolfbone, the transactions were combined for accounting purposes.
The working interest in the Hazel Project was the only asset held by Line Drive. The warrant cancellation was treated in the aggregate
as an exercise of the warrants with the transfer of the working interests as the consideration. We recorded the transactions as
an increase in its investment in the Hazel Project working interests of $3,644,431, which is equal to the exercise price of the
warrants plus the cash paid to Wolfbone. Upon
the closing of the transactions, our working interest in the Hazel Project increased by 40.66% to a total ownership of 74%. Effective
June 1, 2017, we acquired an additional 6% working interest from unrelated working interest owners in exchange for 268,656 shares
of common stock valued at $373,430, increasing our working interest in the Hazel project to 80%, and an overall net revenue interest
of 74-75%. In April 2018, we announced that we have commenced
a process that could result in the monetization of the Hazel Project. Pursuant to our corporate strategy, in our opinion between
the development activity at the Hazel Project, coupled with nearby activities of other oil and gas operators, this project has
achieved a level of value that suggests monetization. We believe that the liquidity that would be provided from selling the Hazel
Project could be redeployed into the Orogrande Project. Winkler
Project, Winkler County, Texas On
December 1, 2017, the Agreement and Plan of Reorganization that we and our then wholly-owned subsidiary, Torchlight Wolfbone Properties,
Inc., a Texas corporation (“TWP”), entered into with MPC and Warwink Properties on November 14, 2017 closed. Under
the agreement, TWP merged with and into Warwink Properties and the separate existence of TWP ceased, with Warwink Properties being
the surviving entity and becoming our wholly-owned subsidiary. Warwink Properties was wholly owned by MPC. Warwink Properties
owns certain assets, including a 10.71875% working interest in approximately 640 acres in Winkler County, Texas. Upon the closing
of the merger, all of the issued and outstanding shares of common stock of TWP converted into a membership interest in Warwink
Properties, constituting all of the issued and outstanding membership interests in Warwink Properties immediately following the
closing of the merger, the membership interest in Warwink Properties held by MPC and outstanding immediately prior to the closing
of the merger ceased to exist, and we issued MPC 2,500,000 restricted shares of our common stock as consideration. Also on December
1, 2017, MPC closed its transaction with MECO IV, LLC, or MECO, for the purchase and sale of certain assets as contemplated by
the Purchase and Sale Agreement dated November 9, 2017 among MPC, MECO and additional parties thereto, or 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 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, or the Ward County Assets. As consideration under the Purchase
Agreement, at closing TEI issued to MPC an unsecured promissory note in the principal amount of $3,250,000, payable in monthly
installments of interest only beginning on January 1, 2018, at the rate of 5% per annum, with the entire principal amount together
with all accrued interest due and payable on January 1, 2021. In connection with TEI’s acquisition of beneficial ownership
in the Ward County Assets, MPC sold those same assets, on behalf of TEI, to MECO at closing of the MECO PSA, and accordingly,
TEI received $3,250,000 in cash for its beneficial interest in the Ward County Assets. Additionally, at closing of the MECO PSA,
MPC paid TEI a performance fee of $2,781,500 in cash as compensation for TEI’s marketing and selling the Winkler County
assets of MPC and the Ward County Assets as a package to MECO. MECO
IV expects to drill two gross horizontal well in this project in 2018, with the first well expected to spud in the second
quarter of 2018. Reference Note 11: Subsequent Events regarding the acquisition of additional acreage in the Warwink Project
with updates to the drilling obligations. |
