Document and Entity Information
Document and Entity Information - shares | 9 Months Ended | |
Sep. 30, 2018 | Nov. 09, 2018 | |
Document and Entity Information | ||
Entity Registrant Name | TORCHLIGHT ENERGY RESOURCES INC | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2018 | |
Amendment Flag | false | |
Entity Central Index Key | 1,431,959 | |
Current Fiscal Year End Date | --12-31 | |
Entity Common Stock, Shares Outstanding | 70,112,376 | |
Entity Filer Category | Accelerated Filer | |
Entity Emerging Growth Company | false | |
Entity Small Business | true | |
Entity Current Reporting Status | Yes | |
Document Fiscal Year Focus | 2,018 | |
Document Fiscal Period Focus | Q3 |
CONSOLIDATED CONDENSED BALANCE
CONSOLIDATED CONDENSED BALANCE SHEETS - USD ($) | Sep. 30, 2018 | Dec. 31, 2017 |
Current assets: | ||
Cash | $ 878,433 | $ 1,051,720 |
Accounts Receivable | 229,853 | 596,141 |
Production revenue receivable | 4,464 | 142,932 |
Prepayments - development costs | 177,064 | 1,335,652 |
Prepaid expenses | 86,988 | 39,506 |
Total current assets | 1,376,802 | 3,165,951 |
Oil and gas properties, net | 34,400,093 | 25,579,279 |
Office equipment, net | 6,986 | 15,716 |
Other assets | 6,362 | 6,362 |
TOTAL ASSETS | 35,790,243 | 28,767,308 |
Current liabilities: | ||
Accounts payable | 488,428 | 762,502 |
Funds received pending settlement | 0 | 520,400 |
Accrued payroll | 771,176 | 695,176 |
Related party payables | 45,000 | 45,000 |
Due to working interest owners | 54,320 | 54,320 |
Accrued interest payable | 285,133 | 202,050 |
Total current liabilities | 1,644,057 | 2,279,448 |
Unsecured promissory notes, net of discount and financing costs of $831,155 at September 30, 2018 and $795,017 at December 31, 2017 | 11,733,142 | 7,269,281 |
Note payable | 3,000,000 | 3,250,000 |
Asset retirement obligations | 9,554 | 9,274 |
Total liabilities | 16,386,753 | 12,808,003 |
Commitments and contingencies | ||
Stockholders' equity: | ||
Preferred stock, par value $0.001, 10,000,000 shares authorized; -0- issued and outstanding at September 30, 2018 and December 31, 2017 | 0 | 0 |
Common stock, par value $0.001 per share; 150,000,000 shares authorized; 70,112,376 issued and outstanding at September 30, 2018, 63,340,034 issued and outstanding at December 31, 2017 | 70,116 | 63,344 |
Additional paid-in capital | 107,142,465 | 99,403,654 |
Accumulated deficit | (87,809,091) | (83,507,693) |
Total stockholders' equity | 19,403,490 | 15,959,305 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ 35,790,243 | $ 28,767,308 |
CONSOLIDATED CONDENSED BALANC_2
CONSOLIDATED CONDENSED BALANCE SHEETS (Parenthetical) - USD ($) | Sep. 30, 2018 | Dec. 31, 2017 |
Assets [Abstract] | ||
Discount of Convertible promissory notes current | $ 831,155 | $ 795,017 |
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 | 70,112,376 | 63,340,034 |
Common Stock, shares outstanding | 70,112,376 | 63,340,034 |
CONSOLIDATED CONDENSED STATEMEN
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - USD ($) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2018 | Sep. 30, 2017 | Sep. 30, 2018 | Sep. 30, 2017 | |
Revenues: | ||||
Oil and gas sales | $ 128,675 | $ 18,296 | $ 893,101 | $ 44,548 |
Cost of revenues | (182,294) | (16,499) | (595,622) | (32,632) |
Gross profit | (53,619) | 1,797 | 297,479 | 11,916 |
Operating expenses: | ||||
General and administrative expenses | (747,357) | (866,131) | (3,330,790) | (2,808,576) |
Depreciation, depletion and amortization | (106,136) | (21,980) | (368,074) | (72,415) |
Loss on settlement | 0 | 0 | 369,439 | 0 |
Impairment loss | 0 | 0 | (139,891) | 0 |
Total operating expenses | (853,493) | (888,111) | (4,208,194) | (2,880,991) |
Other income (expense) | ||||
Interest income | 261 | 145 | 745 | 439 |
Interest expense and accretion of note discounts | (128,226) | (129,302) | (391,428) | (257,849) |
Total expense | (127,965) | (129,157) | (390,683) | (257,410) |
Loss before income taxes | (1,035,077) | (1,015,471) | (4,301,398) | (3,126,485) |
Provision for income taxes | 0 | 0 | 0 | 0 |
Net loss | $ (1,035,077) | $ (1,015,471) | $ (4,301,398) | $ (3,126,485) |
Loss per share: Basic and Diluted | $ (0.01) | $ (0.02) | $ (0.06) | $ (0.08) |
Weighted average shares outstanding: Basic and Diluted | 70,080,854 | 60,208,946 | 67,468,291 | 38,775,843 |
CONSOLIDATED CONDENSED STATEM_2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - USD ($) | 9 Months Ended | |
Sep. 30, 2018 | Sep. 30, 2017 | |
Cash Flows From Operating Activities | ||
Net loss | $ (4,301,398) | $ (3,126,485) |
Adjustments to reconcile net loss to net cash from operations: | ||
Stock based compensation | 1,215,825 | 1,039,679 |
Accrued interest payable in stock | 148,882 | 94,795 |
Accretion of note discounts | 159,441 | 158,486 |
Depreciation, depletion and amortization | 368,074 | 72,415 |
Loss on settlement | 369,439 | 0 |
Impairment loss | 139,891 | 0 |
Change in: | ||
Accounts receivable | (53,551) | (5,813) |
Production revenue receivable | 138,468 | (189) |
Prepayment development costs | 1,158,588 | 583,347 |
Prepaid expenses | (47,482) | (25,313) |
Other assets | 0 | 11,999 |
Accounts payable and accrued expenses | 1,718 | 89,571 |
Accrued interest payable | 14,434 | 54,867 |
Net cash from operating activities | (687,671) | (1,052,641) |
Cash Flows From Investing Activities | ||
Investment in oil and gas properties | (9,319,771) | (5,189,642) |
Net cash from investing activities | (9,319,771) | (5,189,642) |
Cash Flows From Financing Activities | ||
Issuance of common stock, net of $562,766 in offering costs | 6,049,734 | 0 |
Proceeds from promissory notes, net of $99,375 in offering costs | 4,304,421 | 7,338,969 |
Repayment of promissory notes | (250,000) | (2,509,500) |
Proceeds from warrant exercise | 200,000 | 29,250 |
Cash paid in settlement | (470,000) | 0 |
Net cash from financing activities | 9,834,155 | 4,858,719 |
Net increase (decrease) in cash | (173,287) | (1,383,564) |
Cash - beginning of period | 1,051,720 | 1,769,499 |
Cash - end of period | 878,433 | 385,935 |
Supplemental disclosure of cash flow information: (Non Cash Items) | ||
Mineral interests received in warrant exercise | 0 | 3,229,431 |
Common stock issued for mineral interests | 0 | 579,754 |
Accounts payable increase-investment in oil and gas properties | 0 | 3,057,621 |
Common stock issued for services | 0 | 373,431 |
Common stock issued in conversion of promissory note | 0 | 1,007,890 |
Common stock issued for payment in kind on notes payable | 221,024 | 0 |
Cash paid for interest | 1,124,174 | 576,190 |
Cash paid for income tax | 0 | 0 |
Common stock issued for partial payment of unpaid compensation | $ 59,000 | $ 0 |
CONSOLIDATED STATEMENT OF STOCK
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - 9 months ended Sep. 30, 2018 - USD ($) | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total |
Begining balance, shares at Dec. 31, 2017 | 63,340,034 | |||
Begining balance, amount at Dec. 31, 2017 | $ 63,344 | $ 99,403,654 | $ (83,507,693) | $ 15,959,305 |
Issuance of common stock for services, shares | 450,000 | |||
Issuance of common stock for services, amount | $ 450 | 544,550 | 545,000 | |
Issuance of common stock for cash, shares | 5,750,000 | |||
Issuance of common stock for cash | $ 5,750 | 6,606,750 | 6,612,500 | |
Net of Underwriting/Offering Costs | (562,766) | (562,766) | ||
Issuance of common stock for Note PIK, shares | 172,342 | |||
Issuance of common stock for Note PIK | $ 172 | 220,852 | 221,024 | |
Issuance of stock for warrant exercise, shares | 400,000 | |||
Issuance of stock for warrant exercise | $ 400 | 199,600 | 200,000 | |
Warrants issued for services | 423,575 | 423,575 | ||
Stock options issued for services | 306,250 | 306,250 | ||
Net loss | (4,301,398) | (4,301,398) | ||
Ending balance, shares at Sep. 30, 2018 | 70,112,376 | |||
Ending balance, amount at Sep. 30, 2018 | $ 70,116 | $ 107,142,465 | $ (87,809,091) | $ 19,403,490 |
1. NATURE OF BUSINESS
1. NATURE OF BUSINESS | 9 Months Ended |
Sep. 30, 2018 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
NATURE OF BUSINESS | Torchlight Energy Resources, Inc. (“Company”) was incorporated in October 2007 under the laws of the State of Nevada as Pole Perfect Studios, Inc. (“PPS”). From its incorporation to November 2010, the Company was primarily engaged in business start-up activities. On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) between the major shareholders of PPS and the shareholders of Torchlight Energy, Inc. (“TEI”). As a result of the transactions effected by the Exchange Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business. TEI was incorporated under the laws of the State of Nevada in June, 2010. We are engaged in the acquisition, exploitation and/or development of oil and natural gas properties in the United States. We operate our business through our subsidiaries Torchlight Energy Inc., Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel, LLC, and Warwink Properties LLC. |
2. GOING CONCERN
2. GOING CONCERN | 9 Months Ended |
Sep. 30, 2018 | |
GOING CONCERN | |
GOING CONCERN | At September 30, 2018, the Company had not yet achieved profitable operations. We had a net loss of $4,301,398 for the nine months ended September 30, 2018 and had accumulated losses of $87,809,091 since our inception. The Company had a working capital deficit as of September 30, 2018 of $267,255. We expect to incur further losses in the development of our business. 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 projected development costs 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) obtaining 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 | 9 Months Ended |
Sep. 30, 2018 | |
Accounting Policies [Abstract] | |
SIGNIFICANT ACCOUNTING POLICIES | The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed and the methods of applying those principles, which materially affect the determination of financial position, results of operations and cash flows are summarized below: Use of estimates Basis of presentation These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, the accompanying unaudited financial condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. Risks and uncertainties Concentration of risks Fair value of financial instruments For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows: · Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. · Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. · Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Cash and cash equivalents - Accounts receivable Oil and gas properties Oil and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition costs to unevaluated properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir. Unevaluated properties are reviewed for impairment at least quarterly and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. Gains and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Sales of less than 100% of the Company’s interest in the oil and gas property are treated as a reduction of the capital cost of the field, with no gain or loss recognized, as long as doing so does not significantly affect the unit-of-production depletion rate. Costs of retired equipment, net of salvage value, are usually charged to accumulated depreciation. Capitalized interest – Depreciation, depletion, and amortization Ceiling test The 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. In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting The Company values warrant and option awards using the Black-Scholes option pricing model. Revenue recognition The Company’s revenue is typically generated from contracts to sell natural gas, crude oil or NGLs produced from interests in oil and gas properties owned by the Company. Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale. The transaction confirmations specify a delivery point which represents the point at which control of the product is transferred to the customer. These contracts frequently meet the definition of a derivative under ASC 815, and are accounted for as derivatives unless the Company elects to treat them as normal sales as permitted under that guidance. The Company elects to treat contracts to sell oil and gas production as normal sales, which are then accounted for as contracts with customers. The Company has determined that these contracts represent multiple performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. Amounts allocated in the Company’s price contracts are based on the standalone selling price of those products in the context of long-term contracts. Payment is generally received one or two months after the sale has occurred. Gain or loss on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers subject to ASC 606. The Company may in the future use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. Producer Gas Imbalances. Basic and diluted earnings (loss) per share – Environmental laws and regulations Recent accounting pronouncements Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Company’s financial position or results from operations. Subsequent events – |
4. OIL & GAS PROPERTIES
4. OIL & GAS PROPERTIES | 9 Months Ended |
Sep. 30, 2018 | |
Oil Gas Properties | |
OIL & GAS PROPERTIES | The following table presents the capitalized costs for oil & gas properties of the Company as of September 30, 2018 and December 31, 2017: 2018 2017 Evaluated costs subject to amortization $5,035,285 $5,022,129 Unevaluated costs 35,407,642 26,100,749 Total capitalized costs 40,442,927 31,122,878 Less accumulated depreciation, depletion and amortization (6,042,834) (5,543,599) Total oil and gas properties $34,400,093 $25,579,279 Unevaluated costs as of September 30, 2018 include cumulative costs on developing projects including the Orogrande, Hazel, and Winkler projects in West Texas. The Company identified impairment of $2,300,626 in 2017 related to its unevaluated properties. 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. No impairment adjustment was required at September 30, 2018. 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. Gregory McCabe, our Chairman, 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, our Chairman, owned certain assets and securities, including approximately 40.66% of 12,000 gross acres, 9,600 net acres, in the Hazel Project and 521,739 warrants to purchase shares of our common stock (which warrants had been assigned by Mr. McCabe to Line Drive). Upon the closing of the merger, all of the issued and outstanding shares of common stock of TAC automatically converted into a membership interest in Line Drive, constituting all of the issued and outstanding membership interests in Line Drive immediately following the closing of the merger, the membership interest in Line Drive held by Mr. McCabe and outstanding immediately prior to the closing of the merger ceased to exist, and we issued Mr. McCabe 3,301,739 restricted shares of our common stock as consideration therefor. Immediately after closing, the 521,739 warrants held by Line Drive were cancelled, which warrants had an exercise price of $1.40 per share and an expiration date of June 9, 2020. A Certificate of Merger for the merger transaction was filed with the Secretary of State of Texas on January 31, 2017. Subsequent to the closing, the name of Line Drive Energy, LLC was changed to Torchlight Hazel, LLC. We are required to drill one well every six months to hold the entire 12,000 acre block for eighteen months, and thereafter two wells every six months effective 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 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 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. We believe the development activity at the Hazel Project, coupled with nearby activities of other oil and gas operators, suggests that this project has achieved a level of value worth monetizing. We anticipate that the liquidity that would be provided from selling the Hazel Project could be redeployed into the Orogrande Project. Winkler Project, Winkler County, Texas On December 1, 2017, the Agreement and Plan of Reorganization that we and our then wholly-owned subsidiary, Torchlight Wolfbone Properties, Inc., a Texas corporation (“TWP”), entered into with MPC and Warwink Properties, LLC (“Warwink Properties”) on November 14, 2017 closed. Under the agreement, TWP merged with and into Warwink Properties and the separate existence of TWP ceased, with Warwink Properties being the surviving entity and becoming our wholly-owned subsidiary. Warwink Properties was wholly owned by MPC. Warwink Properties owns certain assets, including a 10.71875% working interest in approximately 640 acres in Winkler County, Texas. Upon the closing of the merger, all of the issued and outstanding shares of common stock of TWP converted into a membership interest in Warwink Properties, constituting all of the issued and outstanding membership interests in Warwink Properties immediately following the closing of the merger, the membership interest in Warwink Properties held by MPC and outstanding immediately prior to the closing of the merger ceased to exist, and we issued MPC 2,500,000 restricted shares of our common stock as consideration. Also on December 1, 2017, MPC closed its transaction with MECO IV, LLC (“MECO”) for the purchase and sale of certain assets as contemplated by the Purchase and Sale Agreement dated November 9, 2017 among MPC, MECO and additional parties thereto, 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, (“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 expects to drill two gross horizontal well in this project in 2018. The first well was spudded on May 7, 2018. Addition to the Winkler Project As of May 7, 2018, our Winkler project in the Delaware Basin has begun the drilling phase of the first Winkler Project well, the UL 21 War-Wink 47 #2H. Our operating partner, MECO had begun the pilot hole on the project. The plan is to evaluate the various potential zones for a lateral leg to be drilled once logging is completed. We expect the most likely target to be the Wolfcamp A interval. The well is on 320 newly acquired acres offsetting the original leasehold we entered into in December, 2017. The additional acreage was leased by our operating partner under the Area of Mutual Interest Agreement (AMI) and we recently exercised our right to participate for its 12.5% in the additional 1,080 gross acres at a cash cost of $447,847. Our carried interest in the first well, as outlined in the agreement, was originally planned to be on the first acreage acquired. That carried interest is being applied to this new well and will allow MECO to drill and produce potential revenues sooner than originally planned. The primary leasehold is a 320-acre block directly west of the current position and will allow for 5,000-foot lateral wells to be drilled. The well is currently producing into the tanks and will generate revenue during the fourth quarter, 2018. Acquisition of Additional Interests in Orogrande Project On July 25, 2018, we and our wholly-owned subsidiary, Hudspeth Oil Corporation, entered into a Settlement & Purchase Agreement (the “Settlement Agreement”) with Founders Oil & Gas, LLC, Founders Oil & Gas Operating, LLC, Wolfbone Investments, LLC (a wholly-owned company of Gregory McCabe, our Chairman) and McCabe Petroleum Corporation (also a wholly-owned company of Mr. McCabe), which agreement provides for Hudspeth Oil and Wolfbone Investments to each immediately pay $625,000 and for Hudspeth Oil or the Company and Wolfbone Investments or McCabe Petroleum to each pay another $625,000 on July 20, 2019, as consideration for Founders Oil & Gas assigning all of its working interest in the oil and gas leases of the Orogrande Project to Hudspeth Oil and Wolfbone Investments equally. The assignments to Hudspeth Oil and Wolfbone Investments were made in July when the first payments were made. The payments to Founders Oil & Gas due in 2019 are not securitized. After this assignment (for which Hudspeth Oil’s total consideration is $1,250,000), Hudspeth Oil’s working interest will increase to 72.5%. Additionally, the Settlement Agreement provides that the Founders parties will assign to the Company, Hudspeth Oil, Wolfbone Investments and McCabe Petroleum their claims against certain vendors for damages, if any, against such vendors for negligent services or defective equipment. Further, the Settlement Agreement has a mutual release and waivers among the parties. |
5. RELATED PARTY PAYABLES
5. RELATED PARTY PAYABLES | 9 Months Ended |
Sep. 30, 2018 | |
RELATED PARTY TRANSACTIONS | |
RELATED PARTY PAYABLES | As of September 30, 2018, related party payables consisted of accrued and unpaid compensation to one of our executive officers totaling $45,000. |
6. COMMITMENTS AND CONTINGENCIE
6. COMMITMENTS AND CONTINGENCIES | 9 Months Ended |
Sep. 30, 2018 | |
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 the lease was $65,387 and $57,469 for the nine months ended September 30, 2018 and 2017, respectively. Approximate future minimum rental commitments under the office premises lease are: Year Ending December 31, Rent 2018 $24,165 To 2019 Expiration 88,605 Total $112,770 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 September 30, 2018 and December 31, 2017, no amounts had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts. |
7. STOCKHOLDERS' EQUITY
7. STOCKHOLDERS' EQUITY | 9 Months Ended |
Sep. 30, 2018 | |
Stockholders' equity: | |
STOCKHOLDERS' EQUITY | On April 19, 2018, we entered into an Underwriting Agreement with Roth Capital Partners, LLC (the “Underwriter”) under which a total of 5,750,000 shares of our common stock were issued and sold in an underwritten public offering, which amount includes the full exercise of the over-allotment option for 750,000 shares. The offering closed on April 23, 2018. The public offering price for each share of common stock was $1.15. The Underwriter purchased the shares of common stock from us at a price of $1.0752 per share, representing a 6.5% discount from the public offering price. The Underwriter acted as the sole manager for the offering. The common stock was offered and sold pursuant to our effective registration statement on Form S-3 (File No. 333220181) filed with the SEC on August 25, 2017 and declared effective by the SEC on September 28, 2017, the accompanying prospectus contained therein, and preliminary and final prospectus supplements filed with the SEC in connection with our takedown relating to the offering. The net proceeds to us from the sale of the shares of common stock in the offering was $6,049,734, after deducting underwriting discounts and commissions and our other offering expenses. During the nine months ended September 30, 2018, the Company issued 450,000 shares of common stock as compensation for services, with total fair value of $545,000. During the nine months ended September 30, 2018, the Company issued 172,342 shares of common stock in satisfaction of the payment in kind due on April 10, 2018 to the holders of notes payable by the Company, with total fair value of $221,024. During the nine months ended September 30, 2018, the Company issued 1,220,000, warrants for consulting services which resulted in $423,575 of recognized expense. During the nine months ended September 30, 2018, the Company issued 600,000 options recognizing $168,750 of stock based compensation expense and recognized $137,500 of stock based compensation of expense related to 800,000 stock options issued in third quarter of 2017. During the nine months ended September 30, 2018, the Company issued 400,000 shares of common stock for exercise of warrants, with total fair value of $200,000. A summary of warrants outstanding as of September 30, 2018 by exercise price and year of expiration is presented below: Exercise Expiration Date in Price 2018 2019 2020 2021 2022 2023 Total $0.70 - - 420,000 - - - 420,000 $0.77 - 100,000 - - - - 100,000 $1.00 - 25,116 - - - - 25,116 $1.03 - - - 120,000 - - 120,000 $1.08 - 37,500 - - - - 37,500 $1.14 - - - - - 600,000 600,000 $1.21 - - - - - 120,000 120,000 $1.40 - - 1,121,736 - - 1,121,736 $1.50 - - 100,000 - - 100,000 $1.64 - - - 200,000 - - 200,000 $1.80 - - 1,250,000 - - - 1,250,000 $2.00 296,054 - - 400,000 - - 696,054 $2.03 1,250,000 - - - - - 1,250,000 $2.23 - - 832,512 - - 832,512 $2.29 40,000 - - - - - 40,000 $2.50 - 35,211 - - - - 35,211 $3.50 - 15,000 - - - - 15,000 $4.50 - 700,000 - - - - 700,000 $6.00 60,000 22,580 - - - - 82,580 $7.00 - 700,000 - - - - 700,000 1,646,054 1,635,407 3,624,248 820,000 - 720,000 8,445,709 A summary of stock options outstanding as of September 30, 2018 by exercise price and year of expiration is presented below: Exercise Expiration Date in Price 2019 2020 2021 2022 2023 Total $0.97 - - 259,742 - - 259,742 $1.10 - - - 800,000 - 800,000 $1.19 - - - - 600,000 600,000 $1.57 1,497,163 4,500,000 - - - 5,997,163 $1.63 - - - 58,026 - 58,026 $1.79 - 300,000 - - - 300,000 1,497,163 4,800,000 259,742 858,026 600,000 8,014,931 At September 30, 2018, the Company had reserved 16,460,640 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 and options issued during the nine months ended September 30, 2018 and 2017 were as follows: 2018 Risk-free interest rate 2.15% - 2.83% Expected volatility of common stock 97.2% - 119% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant 2.75 years - 5 years 2017 Risk-free interest rate 1.47% - 1.94% 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 |
8. INCOME TAXES
8. INCOME TAXES | 9 Months Ended |
Sep. 30, 2018 | |
Income Taxes | |
INCOME TAXES | On December 22, 2017, the U.S. enacted tax legislation referred to as the Tax Cuts and Jobs Act (the Tax Act) which significantly changes U.S. corporate income tax laws beginning, generally, in 2018. These changes include, among others, (i) a permanent reduction of the U.S. corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, (ii) elimination of the corporate alternative minimum tax, (iii) immediate deductions for certain new investments instead of deductions for depreciation expense over time, (iv) limitation on the tax deduction for interest expense to 30% of adjusted taxable income, (v) limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, and (vi) elimination of many business deductions and credits, including the domestic production activities deduction, the deduction for entertainment expenditures, and the deduction for certain executive compensation in excess of $1 million. Additional impacts from the enactment of the Tax Act will be recorded as they are identified during the measurement period as provided for in SAB No. 118, which extends up to one year from the enactment date. 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 nine months ended September 30, 2018 because the Company expects to incur a tax loss in the current year. Similarly, no income tax expense was recognized for the nine months ended September 30, 2017 for this same reason. The Company had a net deferred tax asset related to federal net operating loss carryforwards of $54,307,241 and $52,934,916 at September 30, 2018 and December 31, 2017, respectively. The federal net operating loss carryforward will begin to expire in 2033. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured. |
9. PROMISSORY NOTES
9. PROMISSORY NOTES | 9 Months Ended |
Sep. 30, 2018 | |
PROMISSORY NOTES | |
PROMISSORY NOTES | 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 used the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt. These 12% promissory notes allow for early redemption. The notes also contain certain covenants under which we have agreed that, except for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% notes, unless consented to by the holders. The effective interest rate is 16.15%. On April 24, 2017, we used $2,509,500 of the proceeds from this financing to redeem and repay a portion of the outstanding 12% Series B Convertible Unsecured Promissory Notes. Separately, $1,000,000 of the principal amount of the Series B Notes plus accrued interest was converted into 1,007,890 shares of common stock and $60,000 was rolled into the new debt financing. On February 6, 2018, we sold to an investor in a private transaction a 12% unsecured promissory note with a principal amount of $4,500,000. Interest only is due and payable on the note each month at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity on April 10, 2020. The holder of the note will also receive annual payments of common stock at the rate of 2.5% of principal amount outstanding, based on a volume-weighted average price. We sold the note at an original issue discount of 96.27% and accordingly, we received total proceeds of $4,332,150 from the investor. We used the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt. This 12% promissory note allows for early redemption, provided that if we redeem before February 6, 2019, we must pay the holder all unpaid interest and common stock payments on the portion of the note redeemed that would have been earned through February 6, 2019. The note also contains certain covenants under which we have agreed that, except for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% note, unless consented to by the holder. The effective interest rate is 15.88%. On April 12, 2018, the holders of the notes described above received 172,342 shares of common stock as a payment in kind representing the annual payments of common stock due at the rate of 2.5% of principal amount outstanding as of April 10, 2018 based on a volume-weighted average price calculation. Promissory note transactions for the nine months ended September 30, 2018 are summarized as follows: Unsecured promissory note balance - December 31, 2017 $7,269,281 New borrowing 4,500,000 Original issue discount (167,850) Proceeds from borrowing 4,332,150 New note debt issuance costs (225,000) Accretion of discount and amortization of debt issuance costs 356,711 Unsecured promissory note balance - September 30, 2018 $11,733,142 In connection with the transaction for the acquisition of Warwink Properties effective December 5, 2017, 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. The Company paid $250,000 as a principal payment on June 20, 2018 and paid the remaining principal balance of $3,000,000 on October 19, 2018. |
10. ASSET RETIREMENT OBLIGATION
10. ASSET RETIREMENT OBLIGATIONS | 9 Months Ended |
Sep. 30, 2018 | |
ASSET RETIREMENT OBLIGATIONS | |
ASSET RETIREMENT OBLIGATIONS | The following is a reconciliation of the asset retirement obligations liability for the nine months ended September 30, 2018: Asset retirement obligation – December 31, 2017 $9,274 Accretion expense 280 Asset retirement obligation – September 30, 2018 $9,554 |
11. SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS | 9 Months Ended |
Sep. 30, 2018 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS | On October 17, 2018, we sold to certain investors in a private transaction 16% Series C Unsecured Convertible Promissory Notes with a total principal amount of $6,000,000. Interest and principal are due and payable on the notes in one balloon payment at maturity on April 17, 2020. The notes are convertible, at the election of the holders, into an aggregate 6% working interest in certain oil and gas leases in Hudspeth County, Texas, known as our “Orogrande Project.” The notes allow us to redeem them early only upon the event of a fundamental transaction, such as a merger or sale of substantially all our assets. The notes provide that the noteholders may accelerate and declare any and all of the obligations under the notes to be immediately due and payable in the event of default, such as nonpayment, failure to perform required conversions, failure to perform any covenant or agreement under the notes, an insolvency event, or certain defaults or judgments. As part of the sale of the notes, the noteholders required that McCabe Petroleum Corporation, a Texas corporation owned by our Chairman Gregory McCabe (“MPC”), provide them a put option whereby they have the right to have MPC purchase from them any unpaid principal amount due on the notes. Additionally, if there is a fundamental transaction, Mr. McCabe will be required to pay a fee to each noteholder that elects not to convert or require MPC to purchase the principal amount under the note, which fee will be equal to such noteholder’s pro-rata share of a total fee amount of $1,500,000. We received total proceeds of $6,000,000 from the sale of the notes, of which $3,000,000 was used to pay back the promissory note issued to MPC on December 1, 2017, which note was due on December 31, 2020. We intend to use the remaining proceeds for working capital and general corporate purposes, which includes, without limitation, drilling and lease acquisition capital. |
3. SIGNIFICANT ACCOUNTING POL_2
3. SIGNIFICANT ACCOUNTING POLICIES (POLICIES) | 9 Months Ended |
Sep. 30, 2018 | |
SIGNIFICANT ACCOUNTING POLICIES (POLICIES) | |
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. These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, the accompanying unaudited financial condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. |
Risks and uncertainties | 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 effect 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 September 30, 2018 and December 31, 2017, no valuation allowance was considered necessary. |
Oil and gas properties | The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. 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 nine months ended September 30, 2018 and 2017, the Company capitalized $1,382,820 and $703,740, 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. The Company accounts for stock option awards using the calculated value method. The expected term was derived using the simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110, which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options. The Company accounts for any forfeitures of options when they occur. Previously recognized compensation cost for an award is reversed in the period that the award is forfeited. The Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion. In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting The Company values warrant and option awards using the Black-Scholes option pricing model. |
Revenue Recognition | On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, and the related guidance in ASC 340-40 (the new revenue standard), and related guidance on gains and losses on derecognition of nonfinancial assets ASC 610-20, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Under the modified retrospective method, the Company recognizes the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings; however, no significant adjustment was required as a result of adopting the new revenue standard. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods. The impact of the adoption of the new revenue standard is expected to be immaterial to the Company’s net income on an ongoing basis. The Company’s revenue is typically generated from contracts to sell natural gas, crude oil or NGLs produced from interests in oil and gas properties owned by the Company. Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale. The transaction confirmations specify a delivery point which represents the point at which control of the product is transferred to the customer. These contracts frequently meet the definition of a derivative under ASC 815, and are accounted for as derivatives unless the Company elects to treat them as normal sales as permitted under that guidance. The Company elects to treat contracts to sell oil and gas production as normal sales, which are then accounted for as contracts with customers. The Company has determined that these contracts represent multiple performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point. Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. Amounts allocated in the Company’s price contracts are based on the standalone selling price of those products in the context of long-term contracts. Payment is generally received one or two months after the sale has occurred. Gain or loss on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers subject to ASC 606. The Company may in the future use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales. Producer Gas Imbalances. |
Basic and Diluted Earnings (Loss) Per Share | |
Environmental laws and regulations | 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 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 November 9, 2018, the date of issuance of the financial statements. Subsequent events are disclosed in Note 11. |
4. OIL & GAS PROPERTIES (Tables
4. OIL & GAS PROPERTIES (Tables) | 9 Months Ended |
Sep. 30, 2018 | |
Oil Gas Properties Tables Abstract | |
Schedule of Oil and Gas Properties | 2018 2017 Evaluated costs subject to amortization $5,035,285 $5,022,129 Unevaluated costs 35,407,642 26,100,749 Total capitalized costs 40,442,927 31,122,878 Less accumulated depreciation, depletion and amortization (6,042,834) (5,543,599) Total oil and gas properties $34,400,093 $25,579,279 |
6. COMMITMENTS AND CONTINGENC_2
6. COMMITMENTS AND CONTINGENCIES (Tables) | 9 Months Ended |
Sep. 30, 2018 | |
Commitments And Contingencies | |
Future minimum rental commitments | Year Ending December 31, Rent 2018 $24,165 To 2019 Expiration 88,605 Total $112,770 |
7. STOCKHOLDERS' EQUITY (Tables
7. STOCKHOLDERS' EQUITY (Tables) | 9 Months Ended |
Sep. 30, 2018 | |
STOCKHOLDERS' EQUITY (TABLES) | |
Summary of warrant activity | Exercise Expiration Date in Price 2018 2019 2020 2021 2022 2023 Total $0.70 - - 420,000 - - - 420,000 $0.77 - 100,000 - - - - 100,000 $1.00 - 25,116 - - - - 25,116 $1.03 - - - 120,000 - - 120,000 $1.08 - 37,500 - - - - 37,500 $1.14 - - - - - 600,000 600,000 $1.21 - - - - - 120,000 120,000 $1.40 - - 1,121,736 - - 1,121,736 $1.50 - - 100,000 - - 100,000 $1.64 - - - 200,000 - - 200,000 $1.80 - - 1,250,000 - - - 1,250,000 $2.00 296,054 - - 400,000 - - 696,054 $2.03 1,250,000 - - - - - 1,250,000 $2.23 - - 832,512 - - 832,512 $2.29 40,000 - - - - - 40,000 $2.50 - 35,211 - - - - 35,211 $3.50 - 15,000 - - - - 15,000 $4.50 - 700,000 - - - - 700,000 $6.00 60,000 22,580 - - - - 82,580 $7.00 - 700,000 - - - - 700,000 1,646,054 1,635,407 3,624,248 820,000 - 720,000 8,445,709 |
Summary of stock options outstanding | Exercise Expiration Date in Price 2019 2020 2021 2022 2023 Total $0.97 - - 259,742 - - 259,742 $1.10 - - - 800,000 - 800,000 $1.19 - - - - 600,000 600,000 $1.57 1,497,163 4,500,000 - - - 5,997,163 $1.63 - - - 58,026 - 58,026 $1.79 - 300,000 - - - 300,000 1,497,163 4,800,000 259,742 858,026 600,000 8,014,931 |
Assumptions used in calculating the fair value of the warrants | 2018 Risk-free interest rate 2.15% - 2.83% Expected volatility of common stock 97.2% - 119% Dividend yield 0.00% Discount due to lack of marketability 20% Expected life of option/warrant 2.75 years - 5 years 2017 Risk-free interest rate 1.47% - 1.94% 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 |
9. PROMISSORY NOTES (Tables)
9. PROMISSORY NOTES (Tables) | 9 Months Ended |
Sep. 30, 2018 | |
Promissory Notes | |
Summary of promissory note transactions | Unsecured promissory note balance - December 31, 2017 $7,269,281 New borrowing 4,500,000 Original issue discount (167,850) Proceeds from borrowing 4,332,150 New note debt issuance costs (225,000) Accretion of discount and amortization of debt issuance costs 356,711 Unsecured promissory note balance - September 30, 2018 $11,733,142 |
10. ASSET RETIREMENT OBLIGATI_2
10. ASSET RETIREMENT OBLIGATIONS (Tables) | 9 Months Ended |
Sep. 30, 2018 | |
ASSET RETIREMENT OBLIGATIONS (Tables) | |
Asset retirement obligation | Asset retirement obligation – December 31, 2017 $9,274 Accretion expense 280 Asset retirement obligation – September 30, 2018 $9,554 |
2. GOING CONCERN (Details Narra
2. GOING CONCERN (Details Narrative) - USD ($) | 3 Months Ended | 9 Months Ended | |||
Sep. 30, 2018 | Sep. 30, 2017 | Sep. 30, 2018 | Sep. 30, 2017 | Dec. 31, 2017 | |
Going Concern Accumulated Losses | |||||
Net loss | $ (1,035,077) | $ (1,015,471) | $ (4,301,398) | $ (3,126,485) | |
Accumulated deficit | $ (87,809,091) | $ (87,809,091) | $ (83,507,693) |
3. SIGNIFICANT ACCOUNTING POL_3
3. SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) | Sep. 30, 2018 | Sep. 30, 2017 |
Significant Accounting Policies | ||
Capitalized interest | $ 1,382,820 | $ 703,740 |
4. OIL & GAS PROPERTIES (Detail
4. OIL & GAS PROPERTIES (Details) - USD ($) | Sep. 30, 2018 | Dec. 31, 2017 |
Oil Gas Properties Details Abstract | ||
Evaluated costs subject to amortization | $ 5,035,285 | $ 5,022,129 |
Unevaluated costs | 35,407,642 | 26,100,749 |
Total capitalized costs | 40,442,927 | 31,122,878 |
Less accumulated depreciation, depletion and amortization | (6,042,834) | (5,543,599) |
Total oil and gas properties | $ 34,400,093 | $ 25,579,279 |
6. COMMITMENTS AND CONTINGENC_3
6. COMMITMENTS AND CONTINGENCIES (Details) | Sep. 30, 2018USD ($) |
Commitments And Contingencies Details Abstract | |
2,018 | $ 24,165 |
To 2019 Expiration | 88,605 |
Total | $ 112,770 |
7. STOCKHOLDERS' EQUITY (Detail
7. STOCKHOLDERS' EQUITY (Details) | Sep. 30, 2018shares |
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 |
1.14 | |
Outstanding warrants and stock options | 600,000 |
1.21 | |
Outstanding warrants and stock options | 120,000 |
1.40 | |
Outstanding warrants and stock options | 1,121,736 |
1.50 | |
Outstanding warrants and stock options | 100,000 |
1.64 | |
Outstanding warrants and stock options | 200,000 |
1.80 | |
Outstanding warrants and stock options | 1,250,000 |
2 | |
Outstanding warrants and stock options | 696,054 |
2.03 | |
Outstanding warrants and stock options | 1,250,000 |
2.23 | |
Outstanding warrants and stock options | 832,512 |
2.29 | |
Outstanding warrants and stock options | 40,000 |
2.50 | |
Outstanding warrants and stock options | 35,211 |
3.50 | |
Outstanding warrants and stock options | 15,000 |
4.50 | |
Outstanding warrants and stock options | 700,000 |
6 | |
Outstanding warrants and stock options | 82,580 |
7 | |
Outstanding warrants and stock options | 700,000 |
Total | |
Outstanding warrants and stock options | 8,445,709 |
Total | Expiring in the year 2018 | |
Outstanding warrants and stock options | 1,646,054 |
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 | 820,000 |
Total | Expiring in the year 2022 | |
Outstanding warrants and stock options | 0 |
Total | Expiring in the year 2023 | |
Outstanding warrants and stock options | 720,000 |
7. STOCKHOLDERS' EQUITY (Deta_2
7. STOCKHOLDERS' EQUITY (Details 1) | Sep. 30, 2018shares |
0.97 | |
Stock Options Outstanding | 259,742 |
1.10 | |
Stock Options Outstanding | 800,000 |
1.19 | |
Stock Options Outstanding | 600,000 |
1.57 | |
Stock Options Outstanding | 5,997,163 |
1.63 | |
Stock Options Outstanding | 58,026 |
1.79 | |
Stock Options Outstanding | 300,000 |
Total | |
Stock Options Outstanding | 8,014,931 |
Total | Expiring in the year 2019 | |
Stock Options Outstanding | 1,497,163 |
Total | Expiring in the year 2020 | |
Stock Options Outstanding | 4,800,000 |
Total | Expiring in the year 2021 | |
Stock Options Outstanding | 259,742 |
Total | Expiring in the year 2022 | |
Stock Options Outstanding | 858,026 |
Total | Expiring in the year 2023 | |
Stock Options Outstanding | 600,000 |
7. STOCKHOLDERS' EQUITY (Deta_3
7. STOCKHOLDERS' EQUITY (Details 2) | 9 Months Ended | |
Sep. 30, 2018 | Sep. 30, 2017 | |
Dividend yield | 0.00% | 0.00% |
Discount due to lack of marketability | 20.00% | 20.00% |
Minimum | ||
Risk-free interest rate | 2.15% | 1.47% |
Expected volatility of common stock | 97.20% | 106.00% |
Expected life of warrant in years | 2 years 9 months | 2 years 9 months |
Maximum | ||
Risk-free interest rate | 2.83% | 1.94% |
Expected volatility of common stock | 119.00% | 122.00% |
Expected life of warrant in years | 5 years | 5 years |
8. INCOME TAXES (Details Narrat
8. INCOME TAXES (Details Narrative) - USD ($) | Sep. 30, 2018 | Dec. 31, 2017 |
Income Taxes Operating loss carryforwards | ||
Net operating loss carryforwards | $ 54,307,241 | $ 52,934,916 |
9. PROMISSORY NOTES (Details)
9. PROMISSORY NOTES (Details) | 9 Months Ended |
Sep. 30, 2018USD ($) | |
Promissory Notes | |
Unsecured promissory note balance - December 31, 2017 | $ 7,269,281 |
New borrowing | 4,500,000 |
Original issue discount | (167,850) |
Proceeds from borrowing | 4,332,150 |
New note debt issuance costs | (225,000) |
Accretion of discount and amortization of debt issuance costs | 356,711 |
Unsecured promissory note balance - September 30, 2018 | $ 11,733,142 |
10. ASSET RETIREMENET OBLIGATIO
10. ASSET RETIREMENET OBLIGATION (Details) | 9 Months Ended |
Sep. 30, 2018USD ($) | |
Asset Retiremenet Obligation | |
Asset retirement obligation | $ 9,274 |
Accretion expense | 280 |
Asset retirement obligation | $ 9,554 |