Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ Annual report
under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31,
2016.
☐ Transition report
under Section 13 or 15(d) of the Securities Exchange Act of 1934
(No fee required)
For the transition period from _______ to _______.
Commission file number:
000-53473
Torchlight Energy Resources, Inc.
(Exact name of registrant in its charter)
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Nevada
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74-3237581
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(State or other jurisdiction of incorporation or
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(I.R.S. Employer Identification No.)
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Organization)
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5700 W. Plano Parkway, Suite 3600
Plano, Texas
75093
(Address
of principal executive offices)
(214)
432-8002
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the Exchange
Act:
Common Stock ($0.001 Par Value)
(Title
of Each Class)
The NASDAQ Stock Market
LLC
(Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Exchange
Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer as defined in Rule 405 of the Securities Act. Yes
☐ No ☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐
No ☒
1
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes
☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or
a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☐ (Do not check if
a smaller reporting company)
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Smaller reporting company
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☒
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ☒
The aggregate market value of the common stock held by
non-affiliates of the registrant on June 30, 2016, the last
business day of the registrant’s most recently completed
second fiscal quarter, based on the closing price on that date of
$.55 on the Nasdaq Stock Market, was approximately
$19,404,947.
At March 21, 2017, there were 57,862,004 shares of the
registrant’s common stock outstanding (the only class of
common stock).
DOCUMENTS INCORPORATED BY REFERENCE
None.
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements include, among other things, statements
regarding plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements, which
are other than statements of historical facts. Forward-looking
statements may appear throughout this report, including without
limitation, the following sections: Item 1 “Business,”
Item 1A “Risk Factors,” and Item 7
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Forward-looking
statements generally can be identified by words such as
“anticipates,” “believes,”
“estimates,” “expects,”
“intends,” “plans,” “predicts,”
“projects,” “will be,” “will
continue,” “will likely result,” and similar
expressions. These forward-looking statements are based on current
expectations and assumptions that are subject to risks and
uncertainties, which could cause our actual results to differ
materially from those reflected in the forward-looking statements.
Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in this Annual Report on
Form 10-K, and in particular, the risks discussed under the caption
“Risk Factors” in Item 1A and those discussed in other
documents we file with the Securities and Exchange Commission
(“SEC”). Important factors that in our view could cause
material adverse effects on our financial condition and results of
operations include, but are not limited to, risks associated with
the company's ability to obtain additional capital in the future to
fund planned expansion, the demand for oil and natural gas, general
economic factors, competition in the industry and other factors
that may cause actual results to be materially different from those
described herein as anticipated, believed, estimated or expected.
We undertake no obligation to revise or publicly release the
results of any revision to any forward-looking statements, except
as required by law. Given these risks and uncertainties, readers
are cautioned not to place undue reliance on such forward-looking
statements.
As used herein, the “Company,”
“Torchlight,” “we,” “our,” and
similar terms include Torchlight Energy Resources, Inc. and its
subsidiaries, unless the context indicates otherwise.
3
TABLE OF CONTENTS
PART I
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Page
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Item 1.
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Business
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5
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Item 1A.
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Risk Factors
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11
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Item 1B.
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Unresolved Staff Comments
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19
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Item 2.
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Properties
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20
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Item 3.
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Legal Proceedings
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30
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Item 4.
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Mine Safety Disclosures
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30
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
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31
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Item 6.
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Selected Financial Data
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32
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Item 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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32
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Item 7A.
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Quantitative and Qualitative Disclosures About Market
Risk
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37
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Item 8.
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Financial Statements and Supplementary Data
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38
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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59
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Item 9A.
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Controls and Procedures
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59
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Item 9B.
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Other Information
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60
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PART III
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Item 10.
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Directors, Executive Officer, and Corporate Governance
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61
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Item 11.
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Executive Compensation
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63
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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66
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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68
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Item 14.
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Principal Accountant Fees and Services
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69
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Item 15.
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Exhibits, Financial Statement Schedules
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70
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Signatures
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72
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4
PART I
ITEM 1. BUSINESS
Corporate History and Background
Torchlight Energy Resources, Inc. was incorporated in October 2007
under the laws of the State of Nevada as Pole Perfect Studios, Inc.
(“PPS”).
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 is an energy company, incorporated under
the laws of the State of Nevada in June 2010. We are
engaged in the acquisition, exploration, exploitation, and/or
development of oil and natural gas properties in the United
States. In addition to TEI, we also operate our business
through two other wholly-owned subsidiaries, Torchlight Energy
Operating, LLC, a Texas limited liability company, and Hudspeth Oil
Corporation, a Texas corporation.
Effective February 8, 2011, we changed our name to
“Torchlight Energy Resources, Inc.” In
connection with the name change, our ticker symbol changed from
“PPFT” to “TRCH.”
Business Overview
Our business model is to focus on drilling and working interest
programs within the United States, primarily in basins or areas
with known geology such as the Permian Basin in West Texas. We have
interests in three oil and gas projects, which projects are
described in more detail below in the section titled “Current
Projects.” We anticipate being involved in multiple
other oil and gas projects moving forward, pending adequate
funding. We anticipate acquiring exploration and development
projects both as a non-operating working interest partner,
participating in drilling activities primarily on a basis
proportionate to the working interest, and acquiring properties we
can operate. We intend to spread the risk associated with
drilling programs by entering into a variety of programs in
different fields with differing economics.
Salient characteristics of the company include our industry
relationships, leverage for prospect selection, anticipated
diversity, both geologically and geographically, cost control,
partnering, and protection of capital exposure. Management
believes opportunities exist to identify and pursue relatively low
risk projects at very attractive entry prices. These projects
may be available from small operators in financial distress, larger
companies that need to share costs, and large producers who are
consolidating their activities in other areas. Management
believes attractive entry prices and tight cost control will result
in returns that are superior to those achieved by major companies
or small independents. An integral part of this strategy is
the partnering of major activities. Such partnering will
enable us to acquire the talents of proven industry veterans, as
needed, without affecting our long-term fixed overhead
costs.
Key Business Attributes
Experienced People. We
build on the expertise and experiences of our management team,
including John Brda and Roger Wurtele. We will also receive
guidance from outside advisors as well as our Board of Directors
and will align with high quality exploration and technical
partners.
Project Focus. We are focusing
primarily on exploitation projects by pursuing resources in areas
where commercial production has already been established but where
opportunity for additional and nearby development is indicated. We
may pursue high risk exploration prospects which may appear less
favored than low risk exploration. We will, however, consider these
high risk-high reward exploration prospects in connection with
exploitation opportunities in a project that would reduce the
overall project economic risk. We will consider such high risk-high
reward prospects on their individual
merits.
Lower Cost Structure. We
will attempt to maintain the lowest possible cost structure,
enabling the greatest margins and providing opportunities for
investment that would not be feasible for higher cost
competitors.
Limit Capital Risks.
Limited capital exposure is planned initially to add value to
a project and determine its economic viability. Projects are staged
and have options before additional capital is invested. We will
limit our exposure in any one project by participating at reduced
working interest levels, thereby being able to diversify with
limited capital. Management has experience in successfully managing
risks of projects, finance, and value.
5
ITEM 1. BUSINESS - continued
Project Focus
Generally, we will focus on exploitation projects (primarily for
oil, although gas projects will be considered if the economics are
favorable). Projects are first identified, evaluated, and
followed by the engagement of third party operating or
financial partners. Subject to overall availability of capital, our
interest in large capital projects will be limited. Each
opportunity will be investigated on a standalone basis for both
technical and financial merit.
We will be actively seeking quality new investment opportunities to
sustain our growth, and we believe we will have access to many new
projects. The sources of these opportunities will vary but all will
be evaluated with the same criteria of technical and economic
factors. It is expected that projects will come from the
many small producers who find themselves under-funded or
over-extended and therefore vulnerable to price volatility. The
financial ability to respond quickly to opportunities will ensure a
continuous stream of projects and will enable us to negotiate from
a stronger position to enhance value.
With emphasis on acquisitions and development strategies, the types
of projects in which we will be involved vary from increased
production due to simple re-engineering of existing wellbores to
step-out drilling, drilling horizontally, and extensions of known
fields. Recompletion of existing wellbores in new zones,
development of deeper zones and detailing of structure, and
stratigraphic traps with three-dimensional seismic and utilization
of new technologies will all be part of our anticipated program.
Our preferred type of projects are in-fills to existing production
with nearly immediate cash flow and/or adjacent or on trend to
existing production. We will prefer projects with moderate to low
risk, unrecognized upside potential, and geographic diversity.
Business Processes
We believe there are three principal business processes that we
must follow to enable our operations to be profitable. Each
major business process offers the opportunity for a distinct
partner or alliance as we grow. These processes are:
·
Investment
Evaluation and Review;
·
Operations
and Field Activities; and
·
Administrative
and Finance Management.
Investment Evaluation and Review. This process is the key ingredient to our
success. Recognition of quality investment opportunities is the
fuel that drives our engine. Broadly, this process includes
the following activities: prospect acquisition, regional and local
geological and geophysical evaluations, data processing, economic
analysis, lease acquisition and negotiations, permitting, and field
supervision. We expect these evaluation processes to be
managed by our management team. Expert or specific technical
support will be outsourced as needed. Only if a project is
taken to development, and only then, will additional staff be
hired. New personnel will have very specific
responsibilities. We anticipate attractive investment
opportunities to be presented from outside companies and from the
large informal community of geoscientists and engineers. Building a
network of advisors is key to the pipeline of high quality
opportunities.
Operations and Field Activities. This process begins following
management approval of an investment. Well site supervision,
construction, drilling, logging, product marketing, and
transportation are examples of some activities. We will
prefer to be the operator, but when operations are not possible, we
will farm-out sufficient interests to third parties that will be
responsible for these operating activities. We provide
personnel to monitor these activities and associated
costs.
Administrative and Finance Management. This process coordinates our initial
structuring and capitalization, general operations and accounting,
reporting, audit, banking and cash management, regulatory agencies
reporting and interaction, timely and accurate payment of
royalties, taxes, leases rentals, vendor accounts and performance
management that includes budgeting and maintenance of financial
controls, and interface with legal counsel and tax and other
financial and business advisors.
Current Projects
As
of December 31, 2016 the Company had interests in three oil and gas
projects:, the Orogrande Project in Hudspeth County, Texas, and the
Hazel Project in Sterling, Tom Green, and Irion Counties, Texas,
and the Hunton wells in partnership with Husky Ventures in Central
Oklahoma .
6
ITEM 1. BUSINESS - continued
Orogrande Project, West Texas
On August 7, 2014, we entered into a Purchase Agreement with
Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum
Corporation (“MPC”), and Greg McCabe. Mr. McCabe was
the sole owner of both Hudspeth and MPC. Under the terms and
conditions of the Purchase Agreement, at closing, we purchased 100%
of the capital stock of Hudspeth which holds certain oil and gas
assets, including a 100% working interest in 172,000 mostly
contiguous acres in the Orogrande Basin in West Texas. This acreage
is in the primary term under five-year leases that carry additional
five-year extension provisions. As consideration, at closing we
issued 868,750 shares of our common stock to Mr. McCabe and paid a
total of $100,000 in geologic origination fees to third
parties. Additionally, Mr. McCabe has, at his option, a 10%
working interest back-in after payout and a reversionary interest
if drilling obligations are not met, all under the terms and
conditions of a participation and development agreement. All
drilling obligations through December 31, 2016 have been met.
Closing of the transactions occurred on September 23,
2014.
Of the 168,000 acres, 40,154 were scheduled for renewal in
December, 2014. The Company renewed the leases for the
40,154 acres during second quarter, 2015. Prior to March 31, 2015,
the Company had the obligation to begin drilling its first well in
order to hold the acreage block. The Rich A-11 well was permitted
and spudded and drilling began as required by March 31,
2015.
The Company finalized an agreement to sell a 5% working interest in
the Orogrande acreage on June 30, 2015 with an effective date of
April 1, 2015. Sale proceeds were $500,000 which were received in
April, 2015. In addition, the Company issued 250,000 three year
warrants with an exercise price of $.50 to the
purchaser.
On September 23, 2015, our subsidiary, Hudspeth Oil Corporation
(“HOC”), entered into a Farmout Agreement by and
between HOC, Pandora Energy, LP (“Pandora”), Founders
Oil & Gas, LLC (“Founders”), McCabe Petroleum
Corporation and Greg McCabe (McCabe Petroleum Corporation and Greg
McCabe are parties to the Farmout Agreement for limited purposes)
for the entire Orogrande Project in Hudspeth County,
Texas. The Farmout Agreement provides for Founders to
earn from HOC and Pandora (collectively, the “Farmor”)
an undivided 50% of the leasehold interest in the Orogrande Project
by Founder’s spending a minimum of $45 million on actual
drilling operations on the Orogrande Project in the next two
years. Founders is to pay Farmor a total cost
reimbursement of $5,000,000 in multiple installments as follows:
(1) $1,000,000 at the signing of the Farmout Agreement, the balance
of which was received on September 24, 2015; (2) within 90 days
from the closing, Founders will frac and complete the Rich A-11 No.
1 Well; and (3) within five days of the spudding of each of the
next eight wells drilled by Founders, Founders will pay to Farmor
$500,000 resulting in the payment of the remaining amount; provided
that, in the event that within 90 days after the fracing of the
Rich Well, Founders notifies Farmor of its election not to drill
any additional wells, Founders shall have no further obligation to
make further payment.
Upon payment of the first $1,000,000, Farmor assigned to Founders
an undivided 50% of the leasehold interest and a 37.5% net revenue
interest in the leases subject to the terms of the Farmout
Agreement (including obligations to re-assign to HOC and Pandora if
the 50% interest in the entire Orogrande Project is not earned) and
a proportionate share of the McCabe 10% BIAPO (back in after pay
out) interest; provided, however, that for each well that Founders
drills prior to earning the acreage, it will be assigned a 50%
working interest in the wellbore and in the lease on which it
sits.
Under a joint operating agreement (on A.A.P.L. Form 610 –
1989 Model Form Operating Agreement with COPAS 2005 Accounting
Procedures) (“JOA”) also entered into on September 23,
2015, Founders is designated as operator of the
leases. Any variance to the operating plan will be
determined by a Development Committee, which committee is made up
of members from Founders and Farmor, or their designees, to discuss
and recommend the location of the drill wells, data to be gathered
and the form of same. As contemplated under the Farmout
Agreement, starting within 90 days of the completion of the fracing
on the Rich A-11 Well, and at all times subject to the 90 day
continuous drilling clause, Founders has the option, but not the
obligation, to retain the assigned interest as follows: (1) if
Founders spends a minimum of $45 million on actual drilling
operations while maintaining compliance with the continuous
drilling clause, subject to reasonable delays resulting from
reasonable Force Majeure conditions, Founders will have fulfilled
its farmout obligations and will be entitled to retain the assigned
interests. If Founders does not meet such obligations, it will
reassign to Farmor the assigned interest except it will be entitled
to retain its interest in the leases covering all wells drilled by
Founders and the sections in which such wells are located.
Additionally, Founders will resign as operator of the JOA as to all
lands reassigned; and (2) Farmor will be carried in all drilling
operations during the first two years and/or $45 million in
drilling operations, whichever comes last, subject to
Founders’ right to recoup certain expenses on “Gap
Wells.” After three years and after Founders has
earned its working interest, either party may elect to market the
acreage as an entire block, including
operatorship. Should an acceptable bid arise, and both
parties agree, the block will be sold 100% working interest to that
third party bidder. However, if only one party wants to
accept the outside offer, the other party (the party who wishes not
to sell) has the right to purchase the working interest from the
selling party.
The Rich A-11 well that was drilled by Torchlight in second
quarter, 2015 was evaluated and numerous scientific tests were
performed to provide key data for the field development thesis.
During the testing process a poor cement bond was identified
preventing a cost effective production test for the primary pay
zones. Repair to the well bore necessary for a subsequent frac
procedure was determined to be economically unfeasible. With the
Rich A-11 designed as a test well rather than commercial target, a
decision to begin plans for drilling the next well(s) with larger
casing that utilized for future commercial production was
made.
Torchlight Energy and Founders have elected to move forward on
planning the next phase of drilling in the Orogrande Project. The
project operator planned to permit three new wells in 2016 starting
with the University Founders B-19 #1 well. The new wells would
be drilled vertically for test purposes and would have
sufficient casing size to support lateral entry into any pay
zone(s) encountered once the well is tested vertically. Torchlight
and the project operator would then run a battery of tests on each
well to gain information for future development of the field. The
second test well, the University Founders B-19 #1, was spudded on
April 24, 2016 and drilled in second quarter, 2016. The well
successfully pumped down completion fluid in third quarter and
indications of hydrocarbons were seen at the surface on this second
Orogrande Project test well. Despite encountering a bedding plane
in a small section of the wellbore which required the installation
of a pump to dewater, fluids from the B-19 #1 test well have begun
to show an oil cut. The oil samples appear to be to be very high
gravity in the 45° to 47° API range. The well has shown
casing pressure measured from 200 psi to 540 psi at various times
during the testing phase. The presence of natural gas is also noted
and samples have been taken showing a ~1050 BTU
content.
7
ITEM 1. BUSINESS - continued
The parties have agreed to amend the drilling schedule for the next
well to be no later than April 30, 2017. Future plans are focused
on drilling additional wells in the Orogrande per our Farmout
agreement with Founders in which we will be carried on costs for
all aspects of drilling for the foreseeable future.
Hazel Project in the Midland Basin in West Texas
Effective April 1, 2016, Torchlight Energy Inc. acquired from
McCabe Petroleum Corporation, a 66.66% working interest in
approximately 12,000 acres in the Midland Basin in exchange for
1,500,000 warrants to purchase our common stock with an exercise
price of $1.00 for five years and a back-in after payout of a 25%
working interest to the seller.
Initial development of the first well on the property, the Flying B
Ranch #1, began July 10, 2016 and development continued through
September 30, 2016. This well was is classified as a test well in
the development pursuit of the Hazel Project.
In October, 2016, the holders of the Company's Series C Preferred
shares (which were issued in July, 2016) elected to convert into a
33.33% Working Interest in the Company's Hazel Project, reducing
Torchlight's ownership from 66.66% to a 33.33% Working
Interest.
On December 27, 2016, drilling activities commenced on its next
Midland Basin, Hazel Project well, the Flying B Ranch #2. The well
will be a vertical test similar to the Company's first Hazel
Project well, the Flying B Ranch #1. We intend to continue to de-risk the Hazel AMI by
continuing to drill evaluation wells. The next scheduled well in
the Hazel Project is set for the end of June, 2017. It is intended
to be a horizontal well testing the Wolfcamp formation in order to
determine horizontal viability of the play.
In November, 2016, the Company announced that it had entered into a
Letter of Intent to increase its ownership across all 12,000 gross
acres in the Hazel Project resulting in 8,880 net acres in its
Midland Basin Hazel Project. Upon closing of the transactions in
January, 2017 contemplated by the Letter of Intent, Torchlight
obtained the additional 40.66% Working Interest from an entity
owned and controlled by its Chairman, Greg McCabe, increasing
Torchlight's total ownership to 74%. Reference “Subsequent Events” in
Note 11 to the financial statements included in this
report.
Hunton
Play, Central Oklahoma
As of December 31, 2016, we were actively producing from one well
in the Viking AMI, and one well in Prairie Grove.
Legal Proceeding
As previously disclosed, in May, 2016, Torchlight Energy Resources,
Inc. and its subsidiary Torchlight Energy, Inc. filed a lawsuit in
the 429th judicial district court in Collin County, Texas against
Husky Ventures, Inc., Charles V. Long, April Glidewell, Silverstar
of Nevada, Inc., Maximus Exploration, LLC, Atwood Acquisitions,
LLC, Gastar Exploration Inc., J. Russell Porter, Michael A.
Gerlich, Jerry R. Schuyler, and John M. Selser, Sr. Reference is
made to Item 3, “Legal Proceedings,” for more
information regarding this lawsuit.
Viking AMI
In the fourth quarter of 2013 we entered into an Area of Mutual
Interest (AMI) with Husky Ventures, the Viking Prospect. We
acquired a 25% interest in 3,945 acres and subsequently acquired an
additional 5% in May, 2014. We had an interest in 8,800 total acres
as of December 31, 2016. (Net undeveloped acres = 2,600) Husky
drilled the first two wells in the AMI in second quarter, 2014.
Detail of developed and undeveloped acreage positions at December
31, 2016, Drilling Activity, and Cumulative Well Status are
presented in Tables in Item 2 of this filing. Our net cumulative
investment through December 31, 2016 in undeveloped acres in the
Viking AMI was $1,387,928. In addition the company has incurred
$133,468 as its share of costs related to the early stages of the
construction of a gas pipeline which was to serve the Viking
AMI.
8
ITEM 1.
BUSINESS - continued
Rosedale AMI
In January of 2014 we contracted for a 25% Working Interest in
approximately 5,000 acres in the Rosedale AMI consisting of eight
townships in South Central Oklahoma. We subsequently acquired an
additional 5% in May, 2014. The Company had an interest in 11,600
total acres as of December 31, 2016 (Net undeveloped acres =
3,500). Detail of developed and undeveloped acreage positions at
December 31, 2016 is presented in the Table in Item 2 of this
filing. Our cumulative investment through December 31, 2016 in the
Rosedale AMI was $2,833,744.
Prairie Grove – Judy Well
In February of 2014, we acquired a 10% Working Interest in a well
in the Prairie Grove AMI from a non-consenting third party who
elected not to participate in the well.
Thunderbird AMI
In July of 2014, we contracted for a 25% Working Interest in the
Thunderbird AMI. The total acres in which the Company has an
interest at December 31, 2016 totals 4,300 acres (Net undeveloped
acres = 1,100). Detail of developed and undeveloped acreage
positions at December 31, 2016 is presented in the Table in Item 2
of this filing. Our cumulative investment through December 31, 2016
in the T4 AMI was $949,530.
Industry and Business Environment
Currently, we are experiencing a time of lower oil prices caused by
lower demand, higher US Supply, and OPEC’s policies on
production. Unfortunately, this is the cyclical
nature of the oil and gas industry. We experience highs
and lows that seem to come in cycles. Fortunately,
advances in technology drive the US market and we feel this will
drive the development costs down on our exploration and drilling
programs.
Competition
The oil and natural gas industry is intensely competitive, and we
will compete with numerous other companies engaged in the
exploration and production of oil and gas. Some of these
companies have substantially greater resources than we have.
Not only do they explore for and produce oil and natural gas,
but also many carry on midstream and refining operations and market
petroleum and other products on a regional, national, or worldwide
basis. The operations of other companies may be able to pay
more for exploratory prospects and productive oil and natural gas
properties. They may also have more resources to define,
evaluate, bid for, and purchase a greater number of properties and
prospects than our financial or human resources
permit.
Our larger or integrated competitors may have the resources to be
better able to absorb the burden of current and future federal,
state, and local laws and regulations more easily than we can,
which would adversely affect our competitive position. Our
ability to locate reserves and acquire interests in properties in
the future will be dependent upon our ability and resources to
evaluate and select suitable properties and consummate transactions
in this highly competitive environment. In addition, we may
be at a disadvantage in producing oil and natural gas properties
and bidding for exploratory prospects because we have fewer
financial and human resources than other companies in our industry.
Should a larger and better financed company decide to
directly compete with us, and be successful in its efforts, our
business could be adversely affected.
9
ITEM 1. BUSINESS - continued
Marketing and Customers
The market for oil and natural gas that we will produce depends on
factors beyond our control, including the extent of domestic
production and imports of oil and natural gas, the proximity and
capacity of natural gas pipelines and other transportation
facilities, demand for oil and natural gas, the marketing of
competitive fuels, and the effects of state and federal regulation.
The oil and gas industry also competes with other industries
in supplying the energy and fuel requirements of industrial,
commercial, and individual consumers.
Our oil production is expected to be sold at prices tied to the
spot oil markets. Our natural gas production is expected to
be sold under short-term contracts and priced based on first of the
month index prices or on daily spot market prices. We will
rely on our operating partners to market and sell our
production.
Governmental Regulation and Environmental Matters
Our operations are subject to various rules, regulations, and
limitations impacting the oil and natural gas exploration and
production industry as a whole.
Regulation of Oil and Natural Gas Production
Our oil and natural gas exploration, production, and related
operations, when developed, will be subject to extensive rules and
regulations promulgated by federal, state, tribal, and local
authorities and agencies. Certain states may also have
statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from
wells, and the regulation of spacing, plugging, and abandonment of
such wells. Failure to comply with any such rules and
regulations can result in substantial penalties. The
regulatory burden on the oil and gas industry will most likely
increase our cost of doing business and may affect our
profitability. Although we believe we are currently in
substantial compliance with all applicable laws and regulations,
because such rules and regulations are frequently amended or
reinterpreted, we are unable to predict the future cost or impact
of complying with such laws. Significant expenditures may be
required to comply with governmental laws and regulations and may
have a material adverse effect on our financial condition and
results of operations.
Environmental Matters
Our operations and properties are and will be subject to extensive
and changing federal, state, and local laws and regulations
relating to environmental protection, including the generation,
storage, handling, emission, transportation, and discharge of
materials into the environment, and relating to safety and health.
The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely
continue. These laws and regulations may:
· require
the acquisition of a permit or other authorization before
construction or drilling commences and for certain other
activities;
· limit
or prohibit construction, drilling, and other activities on certain
lands lying within wilderness and other protected
areas;
· impose
substantial liabilities for pollution resulting from operations;
or
· restrict
certain areas from fracking and other stimulation
techniques.
The permits required for our operations may be subject to
revocation, modification, and renewal by issuing authorities.
Governmental authorities have the power to enforce their
regulations, and violations are subject to fines or injunctions, or
both. In the opinion of management, we are and will be in
substantial compliance with current applicable environmental laws
and regulations, and have no material commitments for capital
expenditures to comply with existing environmental requirements.
Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant
impact on our company, as well as the oil and natural gas industry
in general.
The Comprehensive Environmental, Response, Compensation, and
Liability Act (“CERCLA”) and comparable state statutes
impose strict, joint, and several liability on owners and operators
of sites and on persons who disposed of or arranged for the
disposal of “hazardous substances” found at such sites.
It is not uncommon for the neighboring landowners and other
third parties to file claims for personal injury and property
damage allegedly caused by the hazardous substances released into
the environment. The Federal Resource Conservation and
Recovery Act (“RCRA”) and comparable state statutes
govern the disposal of “solid waste” and
“hazardous waste” and authorize the imposition of
substantial fines and penalties for noncompliance. Although CERCLA
currently excludes petroleum from its definition of
“hazardous substance,” state laws affecting our
operations may impose clean-up liability relating to petroleum and
petroleum related products. In addition, although RCRA
classifies certain oil field wastes as “non-hazardous,”
such exploration and production wastes could be reclassified as
hazardous wastes thereby making such wastes subject to more
stringent handling and disposal requirements.
10
ITEM 1. BUSINESS - continued
The Endangered Species Act (“ESA”) seeks to ensure that
activities do not jeopardize endangered or threatened animal, fish,
and plant species, nor destroy or modify the critical habitat of
such species. Under ESA, exploration and production
operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat.
ESA provides for criminal penalties for willful violations of
the Act. Other statutes that provide protection to animal and
plant species and that may apply to our operations include, but are
not necessarily limited to, the Fish and Wildlife Coordination Act,
the Fishery Conservation and Management Act, the Migratory Bird
Treaty Act and the National Historic Preservation Act.
Although we believe that our operations will be in
substantial compliance with such statutes, any change in these
statutes or any reclassification of a species as endangered could
subject our company to significant expenses to modify our
operations or could force our company to discontinue certain
operations altogether.
Climate Change
Significant studies and research have been devoted to climate
change and global warming, and climate change has developed into a
major political issue in the United States and globally.
Certain research suggests that greenhouse gas emissions
contribute to climate change and pose a threat to the environment.
Recent scientific research and political debate has focused
in part on carbon dioxide and methane incidental to oil and natural
gas exploration and production. Many states and the federal
government have enacted legislation directed at controlling
greenhouse gas emissions, and future legislation and regulation
could impose additional restrictions or requirements in connection
with our drilling and production activities and favor use of
alternative energy sources, which could affect operating costs and
demand for oil products. As such, our business could be
materially adversely affected by domestic and international
legislation targeted at controlling climate change.
Employees
We currently have four full time employees and no part time
employees. We anticipate adding additional employees, when
adequate funds are available, and using independent contractors,
consultants, attorneys, and accountants as necessary to complement
services rendered by our employees. We presently have
independent technical professionals under consulting agreements who
are available to us on an as needed basis.
Research and Development
We did not spend any funds on research and development activities
during years ended December 31, 2016 or 2015.
ITEM 1A. RISK FACTORS
An investment in us involves a high degree of risk and is suitable
only for prospective investors with substantial financial means who
have no need for liquidity and can afford the entire loss of their
investment in us. Prospective investors should carefully
consider the following risk factors, in addition to the other
information contained in this report.
Risks Related to the Company and the Industry
We have a limited operating history relative to larger companies in
our industry, and may not be successful in developing profitable
business operations.
We have a limited operating history relative to larger companies in
our industry. Our business operations must be considered in
light of the risks, expenses and difficulties frequently
encountered in establishing a business in the oil and natural gas
industries. As of the date of this report, we have generated
limited revenues and have limited assets. We have an
insufficient history at this time on which to base an assumption
that our business operations will prove to be successful in the
long-term. Our future operating results will depend on many
factors, including:
·
our
ability to raise adequate working capital;
·
the
success of our development and exploration;
·
the
demand for natural gas and oil;
·
the
level of our competition;
·
our
ability to attract and maintain key management and employees;
and
·
our
ability to efficiently explore, develop, produce or acquire
sufficient quantities of marketable natural gas or oil in a highly
competitive and speculative environment while maintaining quality
and controlling costs.
To achieve profitable operations in the future, we must, alone or
with others, successfully manage the factors stated above, as well
as continue to develop ways to enhance our production efforts.
Despite our best efforts, we may not be successful in our
exploration or development efforts, or obtain required regulatory
approvals. There is a possibility that some, or all, of the
wells in which we obtain interests may never produce oil or natural
gas.
11
ITEM 1A. RISK FACTORS -
continued
We have limited capital and will need to raise additional capital
in the future.
We do not currently have sufficient capital to fund both our
continuing operations and our planned growth. We will require
additional capital to continue to grow our business via
acquisitions and to further expand our exploration and development
programs. We may be unable to obtain additional capital when
required. Future acquisitions and future exploration,
development, production and marketing activities, as well as our
administrative requirements (such as salaries, insurance expenses
and general overhead expenses, as well as legal compliance costs
and accounting expenses) will require a substantial amount of
additional capital and cash flow.
We may pursue sources of additional capital through various
financing transactions or arrangements, including joint venturing
of projects, debt financing, equity financing, or other means.
We may not be successful in identifying suitable financing
transactions in the time period required or at all, and we may not
obtain the capital we require by other means. If we do not
succeed in raising additional capital, our resources may not be
sufficient to fund our planned operations.
Our ability to obtain financing, if and when necessary, may be
impaired by such factors as the capital markets (both generally and
in the oil and gas industry in particular), our limited operating
history, the location of our oil and natural gas properties and
prices of oil and natural gas on the commodities markets (which
will impact the amount of asset-based financing available to us, if
any) and the departure of key employees. Further, if oil or
natural gas prices on the commodities markets decline, our future
revenues, if any, will likely decrease and such decreased revenues
may increase our requirements for capital. If the amount of
capital we are able to raise from financing activities, together
with our revenues from operations, is not sufficient to satisfy our
capital needs (even to the extent that we reduce our operations),
we may be required to cease our operations, divest our assets at
unattractive prices or obtain financing on unattractive
terms.
Any additional capital raised through the sale of equity may dilute
the ownership percentage of our stockholders. Raising any
such capital could also result in a decrease in the fair market
value of our equity securities because our assets would be owned by
a larger pool of outstanding equity. The terms of securities
we issue in future capital transactions may be more favorable to
our new investors, and may include preferences, superior voting
rights and the issuance of other derivative securities, and
issuances of incentive awards under equity employee incentive
plans, which may have a further dilutive effect.
We may incur substantial costs in pursuing future capital
financing, including investment banking fees, legal fees,
accounting fees, securities law compliance fees, printing and
distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain
securities we may issue, which may adversely impact our financial
condition.
Our auditor indicated that certain factors raise substantial doubt
about our ability to continue as a going concern.
The financial statements included with this report are presented
under the assumption that we will continue as a going concern,
which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business over a reasonable
length of time. We had a net loss of approximately $7.7 million for
the year ended December 31, 2016 and an accumulated deficit in
aggregate of approximately $82.6 million at year end. We
are not generating sufficient operating cash flows to support
continuing operations, and expect to incur further losses in the
development of our business.
In our financial statements for the year ended December 31, 2016,
our auditor indicated that certain factors raised substantial doubt
about our ability to continue as a going concern. These
factors included our accumulated deficit, as well as the fact that
we were not generating sufficient cash flows to meet our regular
working capital requirements. Our ability to continue as
a going concern is dependent upon our ability to generate future
profitable operations and/or to obtain the necessary financing to
meet our obligations and repay our liabilities arising from normal
business operations when they come due. Management's plan to
address our 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 us to
remain a going concern through the methods discussed above, there
can be no assurances that such methods will prove successful. The
accompanying financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
As a non-operator, our development of successful operations relies
extensively on third-parties who, if not successful, could have a
material adverse effect on our results of operation.
We expect to primarily participate in wells operated by
third-parties. As a result, we will not control
the timing of the development, exploitation, production and
exploration activities relating to leasehold interests we
acquire. We do, however, have certain rights as granted
in our Joint Operating Agreements that allow us a certain degree of
freedom such as, but not limited to, the ability to propose the
drilling of wells. If our drilling partners
are not successful in such activities relating to our leasehold
interests, or are unable or unwilling to perform, our financial
condition and results of operation could have an adverse material
effect.
12
ITEM 1A. RISK FACTORS -
continued
Further, financial risks are inherent in any operation where the
cost of drilling, equipping, completing and operating wells is
shared by more than one person. We could be held liable
for the joint activity obligations of the operator or other working
interest owners such as nonpayment of costs and liabilities arising
from the actions of the working interest owners. In the
event the operator or other working interest owners do not pay
their share of such costs, we would likely have to pay those
costs. In such situations, if we were unable to pay
those costs, there could be a material adverse effect to our
financial position.
Because of the speculative nature of oil and gas exploration, there
is risk that we will not find commercially exploitable oil and gas
and that our business will fail.
The search for commercial quantities of oil and natural gas as a
business is extremely risky. We cannot provide investors with any
assurance that any properties in which we obtain a mineral interest
will contain commercially exploitable quantities of oil and/or gas.
The exploration expenditures to be made by us may not result
in the discovery of commercial quantities of oil and/or gas.
Problems such as unusual or unexpected formations or
pressures, premature declines of reservoirs, invasion of water into
producing formations and other conditions involved in oil and gas
exploration often result in unsuccessful exploration efforts. If we
are unable to find commercially exploitable quantities of oil and
gas, and/or we are unable to commercially extract such quantities,
we may be forced to abandon or curtail our business plan, and as a
result, any investment in us may become worthless.
Strategic relationships upon which we may rely are subject to
change, which may diminish our ability to conduct our
operations.
Our ability to successfully acquire oil and gas interests, to build
our reserves, to participate in drilling opportunities and to
identify and enter into commercial arrangements with customers will
depend on developing and maintaining close working relationships
with industry participants and our ability to select and evaluate
suitable properties and to consummate transactions in a highly
competitive environment. These realities are subject to
change and our inability to maintain close working relationships
with industry participants or continue to acquire suitable property
may impair our ability to execute our business plan.
To continue to develop our business, we will endeavor to use the
business relationships of our management to enter into strategic
relationships, which may take the form of joint ventures with other
private parties and contractual arrangements with other oil and gas
companies, including those that supply equipment and other
resources that we will use in our business. We may not be
able to establish these strategic relationships, or if established,
we may not be able to maintain them. In addition, the
dynamics of our relationships with strategic partners may require
us to incur expenses or undertake activities we would not otherwise
be inclined to in order to fulfill our obligations to these
partners or maintain our relationships. If our strategic
relationships are not established or maintained, our business
prospects may be limited, which could diminish our ability to
conduct our operations.
The price of oil and natural gas has historically been volatile.
If it were to decrease substantially, our projections,
budgets, and revenues would be adversely affected, potentially
forcing us to make changes in our operations.
Our future financial condition, results of operations and the
carrying value of any oil and natural gas interests we acquire will
depend primarily upon the prices paid for oil and natural gas
production. Oil and natural gas prices historically have been
volatile and likely will continue to be volatile in the future,
especially given current world geopolitical conditions. Our cash
flows from operations are highly dependent on the prices that we
receive for oil and natural gas. This price volatility also affects
the amount of our cash flows available for capital expenditures and
our ability to borrow money or raise additional capital. The prices
for oil and natural gas are subject to a variety of additional
factors that are beyond our control. These factors
include:
·
the
level of consumer demand for oil and natural gas;
·
the
domestic and foreign supply of oil and natural gas;
·
the
ability of the members of the Organization of Petroleum Exporting
Countries ("OPEC") to agree to and maintain oil price and
production controls;
·
the
price of foreign oil and natural gas;
·
domestic
governmental regulations and taxes;
·
the
price and availability of alternative fuel sources;
·
weather
conditions;
·
market
uncertainty due to political conditions in oil and natural gas
producing regions, including the Middle East; and
·
worldwide
economic conditions.
13
ITEM 1A. RISK FACTORS -
continued
These factors as well as the volatility of the energy markets
generally make it extremely difficult to predict future oil and
natural gas price movements with any certainty. Declines in oil and
natural gas prices affect our revenues, and could reduce the amount
of oil and natural gas that we can produce economically.
Accordingly, such declines could have a material adverse
effect on our financial condition, results of operations, oil and
natural gas reserves and the carrying values of our oil and natural
gas properties. If the oil and natural gas industry experiences
significant price declines, we may be unable to make planned
expenditures, among other things. If this were to happen, we may be
forced to abandon or curtail our business operations, which would
cause the value of an investment in us to decline in value, or
become worthless.
If oil or natural gas prices remain depressed or drilling efforts
are unsuccessful, we may be required to record additional write
downs of our oil and natural gas properties.
If oil or natural gas prices remain depressed or drilling efforts
are unsuccessful, we could be required to write down the carrying
value of certain of our oil and natural gas
properties. Write downs may occur when oil and natural
gas prices are low, or if we have downward adjustments to our
estimated proved reserves, increases in our estimates of operating
or development costs, deterioration in drilling results or
mechanical problems with wells where the cost to re drill or repair
is not supported by the expected economics.
Under the full cost method of accounting, capitalized oil and gas
property costs less accumulated depletion and net of deferred
income taxes may not exceed an amount equal to the present value,
discounted at 10%, of estimated future net revenues from proved oil
and gas reserves plus the cost of unproved properties not subject
to amortization (without regard to estimates of fair value), or
estimated fair value, if lower, of unproved properties that are
subject to amortization. Should capitalized costs exceed
this ceiling, an impairment would be recognized.
The Company recognized impairment of $22,438,114 on its oil and gas
properties at June 30, 2015 and an additional Impairment adjustment
of $3,236,009 was made at December 31, 2015 for a total impairment
charge of $25,674,123 for the year 2015.
During the year ended December 31, 2016 the Company performed
assessments of evaluated and unevaluated costs in the cost pool to
conform the cumulative value of the Full Cost Pool to the combined
amount of Reserve Value of evaluated, producing properties (as
determined by independent analysis at December 31, 2015), plus the
lesser of cumulative historical cost or estimated realizable value
of unevaluated leases and projects expected to commence production
in future operating periods. The results of the assessment was an
additional impairment charge of $70,080 for 2016.
Because of the inherent dangers involved in oil and gas operations,
there is a risk that we may incur liability or damages as we
conduct our business operations, which could force us to expend a
substantial amount of money in connection with litigation and/or a
settlement.
The oil and natural gas business involves a variety of operating
hazards and risks such as well blowouts, pipe failures, casing
collapse, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, spills, pollution, releases of toxic gas and
other environmental hazards and risks. These hazards and risks
could result in substantial losses to us from, among other things,
injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other
environmental damage, cleanup responsibilities, regulatory
investigation and penalties and suspension of operations. In
addition, we may be liable for environmental damages caused by
previous owners of property purchased and leased by us. In recent
years, there has also been increased scrutiny on the environmental
risk associated with hydraulic fracturing, such as underground
migration and surface spillage or mishandling of fracturing fluids
including chemical additives. As a result, substantial liabilities
to third parties or governmental entities may be incurred, the
payment of which could reduce or eliminate the funds available for
exploration, development or acquisitions or result in the loss of
our properties and/or force us to expend substantial monies in
connection with litigation or settlements. We currently have no
insurance to cover such losses and liabilities, and even if
insurance is obtained, there can be no assurance that it will be
adequate to cover any losses or liabilities. We cannot predict the
availability of insurance or the availability of insurance at
premium levels that justify our purchase. The occurrence of a
significant event not fully insured or indemnified against could
materially and adversely affect our financial condition and
operations. We may elect to self-insure if management believes that
the cost of insurance, although available, is excessive relative to
the risks presented. In addition, pollution and environmental risks
generally are not fully insurable. The occurrence of an event not
fully covered by insurance could have a material adverse effect on
our financial condition and results of operations, which could lead
to any investment in us becoming worthless.
The market for oil and gas is intensely competitive, and
competition pressures could force us to abandon or curtail our
business plan.
14
ITEM 1A. RISK FACTORS -
continued
The market for oil and gas exploration services is highly
competitive, and we only expect competition to intensify in the
future. Numerous well-established companies are focusing
significant resources on exploration and are currently competing
with us for oil and gas opportunities. Other oil and gas
companies may seek to acquire oil and gas leases and properties
that we have targeted. Additionally, other companies engaged
in our line of business may compete with us from time to time in
obtaining capital from investors. Competitors include larger
companies which, in particular, may have access to greater
resources, may be more successful in the recruitment and retention
of qualified employees and may conduct their own refining and
petroleum marketing operations, which may give them a competitive
advantage. Actual or potential competitors may be
strengthened through the acquisition of additional assets and
interests. Additionally, there are numerous companies
focusing their resources on creating fuels and/or materials which
serve the same purpose as oil and gas, but are manufactured from
renewable resources.
As a result, there can be no assurance that we will be able to
compete successfully or that competitive pressures will not
adversely affect our business, results of operations, and financial
condition. If we are not able to successfully compete in the
marketplace, we could be forced to curtail or even abandon our
current business plan, which could cause any investment in us to
become worthless.
We may not be able to successfully manage our growth, which could
lead to our inability to implement our business plan.
Our growth may place a significant strain on our managerial,
operational and financial resources, especially considering that we
currently only have a small number of executive officers, employees
and advisors. Further, as we enter into additional contracts, we
will be required to manage multiple relationships with various
consultants, businesses and other third parties. These requirements
will be exacerbated in the event of our further growth or in the
event that the number of our drilling and/or extraction operations
increases. There can be no assurance that our systems, procedures
and/or controls will be adequate to support our operations or that
our management will be able to achieve the rapid execution
necessary to successfully implement our business plan. If we are
unable to manage our growth effectively, our business, results of
operations and financial condition will be adversely affected,
which could lead to us being forced to abandon or curtail our
business plan and operations.
Our operations are heavily dependent on current environmental
regulation, changes in which we cannot predict.
Oil and natural gas activities that we will engage in, including
production, processing, handling and disposal of hazardous
materials, such as hydrocarbons and naturally occurring radioactive
materials (if any), are subject to stringent regulation. We could
incur significant costs, including cleanup costs resulting from a
release of hazardous material, third-party claims for property
damage and personal injuries fines and sanctions, as a result of
any violations or liabilities under environmental or other laws.
Changes in or more stringent enforcement of environmental laws
could force us to expend additional operating costs and capital
expenditures to stay in compliance.
Various federal, state and local laws regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment, directly impact oil and gas
exploration, development and production operations, and
consequently may impact our operations and costs. These regulations
include, among others, (i) regulations by the Environmental
Protection Agency and various state agencies regarding approved
methods of disposal for certain hazardous and non-hazardous wastes;
(ii) the Comprehensive Environmental Response, Compensation, and
Liability Act, Federal Resource Conservation and Recovery Act and
analogous state laws which regulate the removal or remediation of
previously disposed wastes (including wastes disposed of or
released by prior owners or operators), property contamination
(including groundwater contamination), and remedial plugging
operations to prevent future contamination; (iii) the Clean Air Act
and comparable state and local requirements which may result in the
gradual imposition of certain pollution control requirements with
respect to air emissions from our operations; (iv) the Oil
Pollution Act of 1990 which contains numerous requirements relating
to the prevention of and response to oil spills into waters of the
United States; (v) the Resource Conservation and Recovery Act which
is the principal federal statute governing the treatment, storage
and disposal of hazardous wastes; and (vi) state regulations and
statutes governing the handling, treatment, storage and disposal of
naturally occurring radioactive material.
Management believes that we will be in substantial compliance with
applicable environmental laws and regulations. To date, we have not
expended any amounts to comply with such regulations, and
management does not currently anticipate that future compliance
will have a materially adverse effect on our consolidated financial
position, results of operations or cash flows. However, if we are
deemed to not be in compliance with applicable environmental laws,
we could be forced to expend substantial amounts to be in
compliance, which would have a materially adverse effect on our
financial condition. If this were to happen, any investment in us
could be lost.
Government regulatory initiatives relating to hydraulic fracturing
could result in increased costs and additional operating
restrictions or delays.
15
ITEM 1A. RISK FACTORS -
continued
Vast quantities of natural gas, natural gas liquids and oil
deposits exist in deep shale and other unconventional formations.
It is customary in our industry to recover these resources through
the use of hydraulic fracturing, combined with horizontal drilling.
Hydraulic fracturing is the process of creating or expanding
cracks, or fractures, in deep underground formations using water,
sand and other additives pumped under high pressure into the
formation. As with the rest of the industry, our third-party
operating partners use hydraulic fracturing as a means to increase
the productivity of most of the wells they drill and complete.
These formations are generally geologically separated and isolated
from fresh ground water supplies by thousands of feet of
impermeable rock layers.
We believe our third-party operating partners follow applicable
legal requirements for groundwater protection in their operations
that are subject to supervision by state and federal
regulators. Furthermore, we believe our third-party
operating partners’ well construction practices are
specifically designed to protect freshwater aquifers by preventing
the migration of fracturing fluids into aquifers.
Hydraulic fracturing is typically regulated by state oil and gas
commissions. Some states have adopted, and other states are
considering adopting, regulations that could impose more stringent
permitting, public disclosure, and/or well construction
requirements on hydraulic fracturing operations. For
example, Pennsylvania is considering proposed regulations
applicable to surface use at oil and gas well sites, including new
secondary containment requirements and an abandoned and orphaned
well identification program that would require operators to
remediate any such wells that are damaged during current hydraulic
fracturing operations. New York has placed a permit
moratorium on high volume fracturing activities combined with
horizontal drilling pending the results of a study regarding the
safety of hydraulic fracturing. And certain communities in Colorado
have also enacted bans on hydraulic fracturing.
In addition to state laws, some local municipalities have adopted
or are considering adopting land use restrictions, such as city
ordinances, that may restrict or prohibit the performance of well
drilling in general and/or hydraulic fracturing in particular.
There are also certain governmental reviews either underway or
being proposed that focus on deep shale and other formation
completion and production practices, including hydraulic
fracturing. Depending on the outcome of these studies, federal and
state legislatures and agencies may seek to further regulate such
activities. Certain environmental and other groups have also
suggested that additional federal, state and local laws and
regulations may be needed to more closely regulate the hydraulic
fracturing process.
Further, the EPA has asserted federal regulatory authority over
hydraulic fracturing involving “diesel fuels” under the
SWDA’s UIC Program. In February 2014, the EPA released its
final guidance on the use of diesel additives in hydraulic
fracturing operations. The EPA is also engaged in a study of the
potential impacts of hydraulic fracturing activities on drinking
water resources in these states where the EPA is the permitted
authority, including Pennsylvania, with a progress report released
in late 2012 and a draft report released in June 2015. It concluded
that hydraulic fracturing activities have not led to widespread
systematic impacts on drinking water resources in the U.S., but
there are above and below ground mechanisms by which hydraulic
fracturing could affect drinking water resources. In addition, in
March 2015, the Bureau of Land Management (“BLM”)
issued a final rule to regulate hydraulic fracturing on federal and
Indian land; however, enforcement of the rule has been delayed
pending a decision in a legal challenge in the U.S. District Court
of Wyoming. Further, the EPA issued an Advanced Notice of Proposed
Rulemaking in May 2014 seeking comments relating to the information
that should be reported or disclosed for hydraulic fracturing
chemical substances and mixtures and mechanisms for obtaining this
information. These actions, in conjunction with other analyses by
federal and state agencies to assess the impacts of hydraulic
fracturing could spur further action toward federal and/or state
legislation and regulation of hydraulic fracturing
activities.
We cannot predict whether additional federal, state or local laws
or regulations applicable to hydraulic fracturing will be enacted
in the future and, if so, what actions any such laws or regulations
would require or prohibit. Restrictions on hydraulic
fracturing could make it prohibitive for our third-party operating
partners to conduct operations, and also reduce the amount of oil,
natural gas liquids and natural gas that we are ultimately able to
produce in commercial quantities from our properties. If
additional levels of regulation or permitting requirements were
imposed on hydraulic fracturing operations, our business and
operations could be subject to delays, increased operating and
compliance costs and process prohibitions.
Our estimates of the volume of reserves could have flaws, or such
reserves could turn out not to be commercially extractable. As a
result, our future revenues and projections could be
incorrect.
16
ITEM 1A. RISK FACTORS -
continued
Estimates of reserves and of future net revenues prepared by
different petroleum engineers may vary substantially depending, in
part, on the assumptions made and may be subject to adjustment
either up or down in the future. Our actual amounts of production,
revenue, taxes, development expenditures, operating expenses, and
quantities of recoverable oil and gas reserves may vary
substantially from the estimates. Oil and gas reserve
estimates are necessarily inexact and involve matters of subjective
engineering judgment. In addition, any estimates of our future net
revenues and the present value thereof are based on assumptions
derived in part from historical price and cost information, which
may not reflect current and future values, and/or other assumptions
made by us that only represent our best estimates. If these
estimates of quantities, prices and costs prove inaccurate, we may
be unsuccessful in expanding our oil and gas reserves base with our
acquisitions. Additionally, if declines in and instability of oil
and gas prices occur, then write downs in the capitalized costs
associated with any oil and gas assets we obtain may be required.
Because of the nature of the estimates of our reserves and
estimates in general, we can provide no assurance that reductions
to our estimated proved oil and gas reserves and estimated future
net revenues will not be required in the future, and/or that our
estimated reserves will be present and/or commercially extractable.
If our reserve estimates are incorrect, the value of our common
stock could decrease and we may be forced to write down the
capitalized costs of our oil and gas properties.
Decommissioning costs are unknown and may be substantial.
Unplanned costs could divert resources from other
projects.
We may become responsible for costs associated with abandoning and
reclaiming wells, facilities and pipelines which we use for
production of oil and natural gas reserves. Abandonment and
reclamation of these facilities and the costs associated therewith
is often referred to as “decommissioning.” We
accrue a liability for decommissioning costs associated with our
wells, but have not established any cash reserve account for these
potential costs in respect of any of our properties. If
decommissioning is required before economic depletion of our
properties or if our estimates of the costs of decommissioning
exceed the value of the reserves remaining at any particular time
to cover such decommissioning costs, we may have to draw on funds
from other sources to satisfy such costs. The use of other
funds to satisfy such decommissioning costs could impair our
ability to focus capital investment in other areas of our
business.
We may have difficulty distributing production, which could harm
our financial condition.
In order to sell the oil and natural gas that we are able to
produce, if any, the operators of the wells we obtain interests in
may have to make arrangements for storage and distribution to the
market. We will rely on local infrastructure and the
availability of transportation for storage and shipment of our
products, but infrastructure development and storage and
transportation facilities may be insufficient for our needs at
commercially acceptable terms in the localities in which we
operate. This situation could be particularly problematic to
the extent that our operations are conducted in remote areas that
are difficult to access, such as areas that are distant from
shipping and/or pipeline facilities. These factors may affect our
and potential partners’ ability to explore and develop
properties and to store and transport oil and natural gas
production, increasing our expenses.
Furthermore, weather conditions or natural disasters, actions by
companies doing business in one or more of the areas in which we
will operate, or labor disputes may impair the distribution of oil
and/or natural gas and in turn diminish our financial condition or
ability to maintain our operations.
Our business will suffer if we cannot obtain or maintain necessary
licenses.
Our operations will require licenses, permits and in some cases
renewals of licenses and permits from various governmental
authorities. Our ability to obtain, sustain or renew such
licenses and permits on acceptable terms is subject to change in
regulations and policies and to the discretion of the applicable
governments, among other factors. Our inability to obtain, or
our loss of or denial of extension of, any of these licenses or
permits could hamper our ability to produce revenues from our
operations.
Challenges to our properties may impact our financial
condition.
Title to oil and gas interests is often not capable of conclusive
determination without incurring substantial expense. While we
intend to make appropriate inquiries into the title of properties
and other development rights we acquire, title defects may exist.
In addition, we may be unable to obtain adequate insurance
for title defects, on a commercially reasonable basis or at all.
If title defects do exist, it is possible that we may lose
all or a portion of our right, title and interests in and to the
properties to which the title defects relate. If our property
rights are reduced, our ability to conduct our exploration,
development and production activities may be impaired. To
mitigate title problems, common industry practice is to obtain a
title opinion from a qualified oil and gas attorney prior to the
drilling operations of a well.
We rely on technology to conduct our business, and our technology
could become ineffective or obsolete.
17
ITEM 1A. RISK FACTORS -
continued
We rely on technology, including geographic and seismic analysis
techniques and economic models, to develop our reserve estimates
and to guide our exploration, development and production
activities. We and our operator partners will be required to
continually enhance and update our technology to maintain its
efficacy and to avoid obsolescence. The costs of doing so may
be substantial and may be higher than the costs that we anticipate
for technology maintenance and development. If we are unable
to maintain the efficacy of our technology, our ability to manage
our business and to compete may be impaired. Further, even if
we are able to maintain technical effectiveness, our technology may
not be the most efficient means of reaching our objectives, in
which case we may incur higher operating costs than we would were
our technology more efficient.
The loss of key personnel would directly affect our efficiency and
profitability.
Our future success is dependent, in a large part, on retaining the
services of our current management team. Our executive
officers possess a unique and comprehensive knowledge of our
industry and related matters that are vital to our success within
the industry. The knowledge, leadership and technical
expertise of these individuals would be difficult to replace.
The loss of one or more of our officers could have a material
adverse effect on our operating and financial performance,
including our ability to develop and execute our long term business
strategy. We do not maintain key-man life insurance with
respect to any employees. We do have employment agreements
with each of our executive officers. There can be no
assurance, however, that any of our officers will continue to be
employed by us.
Our officers and directors control a significant percentage of our
current outstanding common stock and their interests may conflict
with those of our stockholders.
As of the date of this report, our executive officers and directors
collectively and beneficially own approximately 28.82% of our
outstanding common stock (see Item 12 of this report for an
explanation of how this number is computed). This
concentration of voting control gives these affiliates substantial
influence over any matters which require a stockholder vote,
including without limitation the election of directors and approval
of merger and/or acquisition transactions, even if their interests
may conflict with those of other stockholders. It could have
the effect of delaying or preventing a change in control or
otherwise discouraging a potential acquirer from attempting to
obtain control of us. This could have a material adverse
effect on the market price of our common stock or prevent our
stockholders from realizing a premium over the then prevailing
market prices for their shares of common stock.
In the future, we may incur significant increased costs as a result
of operating as a public company, and our management may be
required to devote substantial time to new compliance
initiatives.
In the future, we may incur significant legal, accounting, and
other expenses as a result of operating as a public company. The
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”),
as well as new rules subsequently implemented by the SEC, have
imposed various requirements on public companies, including
requiring changes in corporate governance practices. Our management
and other personnel will need to devote a substantial amount of
time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs
and will make some activities more time-consuming and costly. For
example, we expect these new rules and regulations to make it more
difficult and more expensive for us to obtain director and officer
liability insurance, and we may be required to incur substantial
costs to maintain the same or similar coverage.
In addition, the Sarbanes-Oxley Act requires, among other things,
that we maintain effective internal controls for financial
reporting and disclosure controls and procedures. In particular, we
are required to perform system and process evaluation and testing
on the effectiveness of our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act. In
performing this evaluation and testing, management concluded that
our internal control over financial reporting is not effective as
of December 31, 2016 because of a material weaknesses in our
internal control over financial reporting. We are,
however, addressing the issue and updating of our policies and
procedures. Upon finalizing these policies and procedures and
ensuring they are effectively applied, we believe our internal
control will be deemed effective. Correcting this issue, and
thereafter our continued compliance with Section 404, will require
that we incur substantial accounting expense and expend significant
management efforts. We currently do not have an internal audit
group, and we will need to engage independent professional
assistance. Moreover, if we are not able to correct our internal
control issues and comply with the requirements of Section 404 in a
timely manner, or if in the future we or our independent registered
public accounting firm identifies other deficiencies in our
internal controls over financial reporting that are deemed to be
material weaknesses, the market price of our stock could decline,
and we could be subject to sanctions or investigations by the SEC
or other regulatory authorities, which would require additional
financial and management resources.
We have identified material weaknesses in our internal control over
financial reporting which could, if not remediated, adversely
affect our ability to report our financial condition and results of
operations in a timely and accurate manner.
18
ITEM 1A. RISK FACTORS -
continued
Management, including our Chief Executive Officer and our Chief
Financial Officer, assessed the effectiveness of our internal
control over financial reporting as of December 31, 2016 and
concluded that we did not maintain effective internal control over
financial reporting. Specifically, management identified material
weaknesses over the accounting for stock options issued to
employees and nonemployees and stock warrants issued for services,
property and financings—see Item 9A, “Controls and
Procedures,” below. This control deficiency resulted in audit
adjustments in preparation of this Annual Report on Form 10-K. The
impact on previously issued financial statements was not determined
to be significant. While certain actions have been taken to enhance
our internal control over financial reporting relating to this
material weaknesses, we are still in the process of implementing
our comprehensive remediation plan. If the material weakness is not
remediated, it could adversely affect our ability to report our
financial condition and results of operations in a timely and
accurate manner, which could negatively affect investor confidence
in our company, and, as a result, the value of our common stock
could be adversely affected.
Certain Factors Related to Our Common Stock
There presently is a limited market for our common stock, and the
price of our common stock may be volatile.
Our common stock is currently quoted on The NASDAQ Stock Market
LLC. There could be volatility in the volume and market price of
our common stock moving forward. This volatility may be
caused by a variety of factors, including the lack of readily
available quotations, the absence of consistent administrative
supervision of “bid” and “ask” quotations,
and generally lower trading volume. In addition, factors such as
quarterly variations in our operating results, changes in financial
estimates by securities analysts, or our failure to meet our or
their projected financial and operating results, litigation
involving us, factors relating to the oil and gas industry, actions
by governmental agencies, national economic and stock market
considerations, as well as other events and circumstances beyond
our control could have a significant impact on the future market
price of our common stock and the relative volatility of such
market price.
Offers or availability for sale of a substantial number of shares
of our common stock may cause the price of our common stock to
decline.
Our stockholders could sell substantial amounts of common stock in
the public market, including shares sold upon the filing of a
registration statement that registers such shares and/or upon the
expiration of any statutory holding period under Rule 144 of the
Securities Act of 1933 (the “Securities Act”), if
available, or upon the expiration of trading limitation
periods. Such volume could create a circumstance
commonly referred to as a market “overhang” and in
anticipation of which the market price of our common stock could
fall. Additionally, we have a large number of warrants that
are presently exercisable. The exercise of a large amount of these
securities followed by the subsequent sale of the underlying stock
in the market would likely have a negative effect on our common
stock’s market price. The
existence of an overhang, whether or not sales have occurred or are
occurring, also could make it more difficult for us to secure
additional financing through the sale of equity or equity-related
securities in the future at a time and price that we deem
reasonable or appropriate.
Our directors and officers have rights to
indemnification.
Our Bylaws provide, as permitted by governing Nevada law, that we
will indemnify our directors, officers, and employees, whether or
not then in service as such, against all reasonable expenses
actually and necessarily incurred by him or her in connection with
the defense of any litigation to which the individual may have been
made a party because he or she is or was a director, officer, or
employee of the company. The inclusion of these provisions in
the Bylaws may have the effect of reducing the likelihood of
derivative litigation against directors and officers, and may
discourage or deter stockholders or management from bringing a
lawsuit against directors and officers for breach of their duty of
care, even though such an action, if successful, might otherwise
have benefited us and our stockholders.
We do not anticipate paying any cash dividends on our common
stock.
We do not anticipate paying cash dividends on our common stock for
the foreseeable future. The payment of dividends, if any,
would be contingent upon our revenues and earnings, if any, capital
requirements, and general financial condition. The payment of
any dividends will be within the discretion of our Board of
Directors. We presently intend to retain all earnings, if
any, to implement our business strategy; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
19
ITEM 2. PROPERTIES
Our principal executive offices are located at 5700 W. Plano
Parkway, Suite 3600, Plano, Texas 75093. We currently lease this
office space which totals approximately 3,181 square
feet. We believe that the condition and size of our
offices are adequate for our current needs.
Investment
in oil and gas properties during the years ended December 31,2016
and 2015 is detailed as follows:
|
|
2016
|
2015
|
|
Property
acquisition costs
|
$615,000
|
$-
|
|
Development
costs
|
1,678,497
|
4,518,239
|
|
Exploratory
costs
|
-
|
-
|
|
|
|
|
|
Totals
|
$2,293,497
|
$4,518,239
|
Property acquisition cost relates to the Company’s
acquisition of the Hazel Project in West Texas. The development
costs include reentry of the Johnson #4 well in the south Texas
Marcelina area (sold in 2016) and development costs in the
Orogrande and Hazel projects in west Texas. No development costs
were incurred for Oklahoma properties in 2016.
Oil and Natural Gas Reserves
Reserve Estimates
SEC Case. The following tables
sets forth, as of December 31, 2016, our estimated net proved oil
and natural gas reserves, the estimated present value (discounted
at an annual rate of 10%) of estimated future net revenues before
future income taxes (PV-10) and after future income taxes
(Standardized Measure) of our proved reserves and our estimated net
probable oil and natural gas reserves, each prepared using standard
geological and engineering methods generally accepted by the
petroleum industry and in accordance with assumptions prescribed by
the Securities and Exchange Commission
(“SEC”). All of our reserves are located in
the United States.
The PV-10 value is a widely used measure of value of oil and
natural gas assets and represents a pre-tax present value of
estimated cash flows discounted at ten percent. PV-10 is considered
a non-GAAP financial measure as defined by the SEC. We believe that
our PV-10 presentation is relevant and useful to our investors
because it presents the estimated discounted future net cash flows
attributable to our proved reserves before taking into account the
related future income taxes, as such taxes may differ among various
companies. We believe investors and creditors use PV-10
as a basis for comparison of the relative size and value of our
proved reserves to the reserve estimates of other companies. PV-10
is not a measure of financial or operating performance under GAAP
and neither it nor the Standardized Measure is intended to
represent the current market value of our estimated oil and natural
gas reserves. PV-10 should not be considered in isolation or as a
substitute for the standardized measure of discounted future net
cash flows as defined under GAAP.
The estimates of our proved reserves and the PV-10 set forth herein
reflect estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and
future development costs, using prices and costs under existing
economic conditions at December 31, 2016. For purposes of
determining prices, we used the average of prices received for each
month within the 12-month period ended December 31, 2016, adjusted
for quality and location differences, which was $42.75 per barrel
of oil and $2.33 per MCF of gas. This average historical
price is not a prediction of future prices. The amounts shown do
not give effect to non-property related expenses, such as corporate
general administrative expenses and debt service, future income
taxes or to depreciation, depletion and amortization.
20
ITEM 2. PROPERTIES – continued
|
|
December 31, 2016
|
December 31, 2016
|
|||
|
|
Reserves
|
Future Net Revenue (M$)
|
|||
|
|
|
|
|
|
Present Value Discounted
|
|
Category
|
Oil (Bbls)
|
Gas (Mcf)
|
Total (BOE)
|
Total
|
at 10%
|
|
|
|
|
|
|
|
|
Proved
Producing
|
1,400
|
23,300
|
5,284
|
$31
|
$29
|
|
Proved
Nonproducing
|
46,800
|
467,600
|
124,733
|
$776
|
$301
|
|
Total
Proved
|
48,200
|
490,900
|
130,017
|
$807
|
$330
|
|
|
|
|
|
|
|
|
Standardized
Measure of Future Net Cash Flows Related to Proved Oil and Gas
Properties
|
|
|
|
|
$341
|
|
|
|
|
|
|
|
|
Probable
Undeveloped
|
-
|
-
|
-
|
$-
|
$-
|
Reserve values as of December 31, 2016 are related to a single
producing well in Oklahoma – the Judy well in the Prairie
Grove AMI.
|
|
December 31, 2015
|
December 31, 2015
|
|||
|
|
Reserves
|
Future
Net Revenue (M$)
|
|||
|
|
|
|
|
|
Present
Value Discounted
|
|
Category
|
Oil
(Bbls)
|
Gas
(Mcf)
|
Total
(BOE)
|
Total
|
at
10%
|
|
|
|
|
|
|
|
|
Proved
Producing
|
14,210
|
34,400
|
19,943
|
$322
|
$280
|
|
Proved
Nonproducing
|
40,170
|
0
|
40,170
|
$860
|
$763
|
|
Total
Proved
|
54,380
|
34,400
|
60,113
|
$1,182
|
$1,043
|
|
|
|
|
|
|
|
|
Standardized Measure of Future Net Cash Flows Related to Proved Oil
and Gas Properties
|
|
|
|
|
$5,935
|
|
Probable
Undeveloped
|
-
|
-
|
-
|
$-
|
$-
|
BOE equivalents are determined by combining barrels of oil with MCF
of gas divided by six.
21
ITEM 2. PROPERTIES - continued
|
Standardized
Measure of Oil & Gas Quantities - Volume
Rollforward
|
||||||
|
Years
Ended December 31, 2016 and 2015
|
||||||
|
|
|
|
|
|
|
|
|
The
following table sets forth the Company’s net proved reserves,
including changes, and proved developed reserves:
|
||||||
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
||||
|
|
Oil
(Bbls)
|
Gas
(Mcf)
|
BOE
|
Oil
(Bbls)
|
Gas
(Mcf)
|
BOE
|
|
TOTAL
PROVED RESERVES:
|
|
|
|
|
|
|
|
Beginning
of period
|
54,380
|
34,400
|
60,113
|
914,400
|
3,790,650
|
1,546,175
|
|
Acquisition
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Extensions
and discoveries
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Divestiture
of reserves
|
(52,600)
|
-
|
(52,600)
|
(394,400)
|
(2,483,950)
|
(808,391)
|
|
Revisions
of previous estimates
|
54,908
|
493,013
|
137,078
|
(437,639)
|
(1,159,071)
|
(630,818)
|
|
Production
|
(8,488)
|
(36,513)
|
(14,574)
|
(27,981)
|
(113,229)
|
(46,853)
|
|
End
of period
|
48,200
|
490,900
|
130,017
|
54,380
|
34,400
|
60,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVED
DEVELOPED RESERVES
|
|
|
|
|
|
|
|
Proved
developed producing
|
1,400
|
23,300
|
5,284
|
14,210
|
34,400
|
19,943
|
|
Proved
nonproducing
|
46,800
|
467,600
|
124,733
|
40,170
|
-
|
40,170
|
|
Total
|
48,200
|
490,900
|
130,017
|
54,380
|
34,400
|
60,113
|
|
|
|
|
|
|
|
|
|
Total
Proved Undeveloped
|
-
|
-
|
-
|
-
|
-
|
-
|
The decrease attributable to divestiture of reserves is from the
sale of Oklahoma properties - the Cimarron properties in second
quarter, 2016.
The upward revisions of previous estimates of 54,908 Bbls and
493,013 MCF results primarily from 2016 reserve report calculations
for the Company’s properties driven by industry conditions
and the change in the proportional quantities of oil and gas in
production from the Judy well in Oklahoma from 2015 to
2016.
22
ITEM 2. PROPERTIES - continued
|
Standardized
Measure of Oil & Gas Quantities
|
|
|
|
Year
Ended December 31, 2016 and 2015
|
|
|
|
|
|
|
|
The
standardized measure of discounted future net cash flows
relating
|
|
|
|
to
proved oil and natural gas reserves is as follows :
|
2016
|
2015
|
|
|
|
|
|
Future
cash inflows
|
$3,156,970
|
$2,410,202
|
|
Future
production costs
|
(1,000,410)
|
(1,169,591)
|
|
Future
development costs
|
(1,350,000)
|
(58,575)
|
|
Future
income tax expense
|
-
|
5,818,722
|
|
Future
net cash flows
|
806,560
|
7,000,758
|
|
10%
annual discount for estimated
|
|
|
|
timing
of cash flows
|
(465,644)
|
(1,065,570)
|
|
Standardized
measure of discounted future
|
|
|
|
net
cash flows related to proved reserves
|
$340,916
|
$5,935,188
|
|
|
|
|
|
A
summary of the changes in the standardized measure of
discounted
|
|
|
|
future
net cash flows applicable to proved oil and natural gas
reserves
|
|
|
|
is
as follows :
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
$5,935,188
|
$23,018,966
|
|
Sales
and transfers of oil and gas produced during the
period
|
(29,749)
|
(762,423)
|
|
Net
change in sales and transfer prices and in production (lifting)
costs related to future production
|
(482,569)
|
(18,010,821)
|
|
Net
change due to sales of reserves
|
-
|
(14,026,302)
|
|
Net
change due to sales of minerals in place
|
(191,470)
|
-
|
|
Net
change due to extensions and discoveries
|
-
|
-
|
|
Changes
in estimated future development costs
|
(791,630)
|
19,563,576
|
|
Previously
estimated development costs incurred during the period
|
58,575
|
357,033
|
|
Net
change due to revisions in quantity estimates
|
482,272
|
(11,062,826)
|
|
Other
|
172,169
|
(858,606)
|
|
Accretion
of discount
|
80,393
|
2,146,235
|
|
Net
change in income taxes
|
(4,892,263)
|
5,570,356
|
|
Balance,
end of year
|
$340,916
|
$5,935,188
|
Due to the inherent uncertainties and the limited nature of
reservoir data, both proved and probable reserves are subject to
change as additional information becomes available. The estimates
of reserves, future cash flows, and present value are based on
various assumptions, including those prescribed by the SEC, and are
inherently imprecise. Although we believe these estimates are
reasonable, actual future production, cash flows, taxes,
development expenditures, operating expenses, and quantities of
recoverable oil and natural gas reserves may vary substantially
from these estimates.
In estimating probable reserves, it should be noted that those
reserve estimates inherently involve greater risk and uncertainty
than estimates of proved reserves. While analysis of geoscience and
engineering data provides reasonable certainty that proved reserves
can be economically producible from known formations under existing
conditions and within a reasonable time, probable reserves involve
less certainty than reserves with a higher classification due to
less data to support their ultimate recovery. Probable reserves
have not been discounted for the additional risk associated with
future recovery. Prospective investors should be aware
that as the categories of reserves decrease with certainty, the
risk of recovering reserves at the PV-10 calculation
increases. The reserves and net present worth discounted
at 10% relating to the different categories of proved and probable
have not been adjusted for risk due to their uncertainty of
recovery and thus are not comparable and should not be summed into
total amounts.
23
ITEM 2. PROPERTIES - continued
Reserve Estimation Process, Controls and Technologies
The reserve estimates, including PV-10 estimates, set forth above
were prepared by PeTech Enterprises, Inc. for the Company’s
properties in Oklahoma. A copy of their full reports
with regard to our reserves is attached as Exhibit 99.1 to this
annual report on Form 10-K. These calculations were
prepared using standard geological and engineering methods
generally accepted by the petroleum industry and in accordance with
SEC financial accounting and reporting standards.
We do not have any employees with specific reservoir engineering
qualifications in the company. Our Chairman and Chief
Executive Officer worked closely with PeTech Enterprises Inc. in
connection with their preparation of our reserve estimates,
including assessing the integrity, accuracy, and timeliness of the
methods and assumptions used in this process.
PeTech Enterprises, Inc. (“PeTech”), who provided 2016
reserve estimates for our Oklahoma Properties, is a Texas based
profitable, family owned oil and gas production and Investment
Company that provides reservoir engineering, economics and
valuation support to energy banks, energy companies and law firms
as an expert witness. PeTech has been in business since
1982. Amiel David is the President of PeTech and the
primary technical person in charge of the estimates of reserves and
associated cash flow and economics on behalf of the company for the
results presented in its reserves report to us. He has a
PhD in Petroleum Engineering from Stanford
University. He is a registered Professional
Engineer in the state of Texas (PE #50970), granted in 1982, a
member of the Society of Petroleum Engineers and a member of the
Society of Petroleum Evaluation Engineers.
Proved Nonproducing Reserves
As of December 31, 2016, our proved nonproducing reserves
totaled 124,733 barrels of oil equivalents (BOE) compared
to 40,170 as of December 31, 2015, an increase of 84,563
BOE. These proved nonproducing reserves at December 31,
2016 were associated with our Hunton project Judy well. The change
consists of a decrease of 40,170 BOE due to the sale of the Texas
Marcelina properties and an increase of 124,733 BOE from the
engineering analysis of the Judy well. These numbers are taken from
the third party reserves study prepared by PeTech for 2016 and 2015
and CREST Engineering Services, Inc for 2015.
The net reserves change associated with these properties is a
decrease of approximately 6,630 Bbls of oil and an increase of
approximately 467,600 Mcf of gas calculated with a gas-oil
equivalency factor of six.
We made investments and progress during 2016 to develop
proved producing reserves in the Orogrande and Hazel Projects in
the Permian Basin. As of December 31, 2016 there were no producing
wells on these properties.
Our current drilling plans, subject to sufficient capital resources
and the periodic evaluation of interim drilling results and other
potential investment opportunities, include drilling additional
wells in the Orogrande and Hazel AMI’s to continue to derisk
the prospects and obtain initial production from the development
efforts per our Farmout agreement with Founders in which we will be
carried on all aspects of Orogrande drilling for the foreseeable
future. In addition, we intend to continue to de-risk the Hazel AMI
by continuing to drill evaluation wells. The next scheduled well in
the Hazel Project is set for the end of June. It is intended to be
a horizontal well testing the Wolfcamp formation in order to
determine horizontal viability of the play.
Production, Price, and Production Cost History
During the year ended December 31, 2016, we produced and sold 8,488
barrels of oil net to our interest at an average sale price of
$34.15 per bbl. We produced and sold 36,513 MCF of gas
net to our interest at an average sales price of $1.77 per MCF. Our
average production cost including lease operating expenses and
direct production taxes was $22.54 per BOE. Our
depreciation, depletion, and amortization expense was $43.67 per
BOE.
During the year ended December 31, 2015, we produced and sold
27,981 barrels of oil net to our interest at an average sale price
of $46.03 per bbl. We produced and sold 113,229 MCF of
gas net to our interest at an average sales price of $3.00 per MCF.
Our average production cost including lease operating expenses and
direct production taxes was $17.38 per bbl. Our
depreciation, depletion, and amortization expense was $19.87 per
bbl.
Our production was from properties concentrated in central Oklahoma
and in south Texas. Reserves at the beginning of 2016 from each of
these areas comprised more than 15% of total reserves. The Oklahoma
Cimarron properties were sold on May 1, 2016 and the Marcelina
properties in south Texas were sold October 1, 2016. For 2016,
approximately 4,381 BOE was produced at Marcelina Creek and
approximately 9,151 BOE in Oklahoma, or 30% from Marcelina Creek
and 63% from Oklahoma.
24
ITEM 2. PROPERTIES - continued
Quarterly Revenue and Production by State for 2016 and 2015 are
detailed as follows:
|
Property
|
Quarter
|
Oil Production {BBLS}
|
Gas Production {MCF}
|
Oil Revenue
|
Gas Revenue
|
Total Revenue
|
|
Marcelina
(TX)
|
Q1 - 2016
|
3,000
|
-
|
$92,546
|
$-
|
$92,546
|
|
Oklahoma
|
Q1 - 2016
|
2,026
|
21,148
|
54,289
|
38,624
|
92,913
|
|
Kansas
|
Q1 - 2016
|
312
|
-
|
8,854
|
-
|
8,854
|
|
Total Q1-2016
|
|
5,338
|
21,148
|
$155,689
|
$38,624
|
$194,313
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q2 - 2016
|
917
|
-
|
$38,812
|
$-
|
$38,812
|
|
Oklahoma
|
Q2 - 2016
|
675
|
9,689
|
30,411
|
11,142
|
41,553
|
|
Kansas
|
Q2 - 2016
|
731
|
-
|
28,834
|
-
|
28,834
|
|
Total Q2-2016
|
|
2,323
|
9,689
|
$98,057
|
$11,142
|
$109,199
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q3 - 2016
|
464
|
-
|
$20,190
|
$-
|
$20,190
|
|
Oklahoma
|
Q3 - 2016
|
180
|
2,830
|
7,925
|
6,170
|
14,095
|
|
Kansas
|
Q3 - 2016
|
-
|
-
|
-
|
-
|
-
|
|
Total Q3-2016
|
|
644
|
2,830
|
$28,115
|
$6,170
|
$34,285
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q4 - 2016
|
-
|
-
|
$-
|
$-
|
$-
|
|
Oklahoma
|
Q4 - 2016
|
184
|
2,845
|
8,024
|
8,569
|
16,593
|
|
Kansas
|
Q4 - 2016
|
-
|
-
|
-
|
-
|
-
|
|
Total Q4-2016
|
|
184
|
2,845
|
$8,024
|
$8,569
|
$16,593
|
|
|
|
|
|
|
|
|
|
Year Ended 12/31/16
|
|
8,488
|
36,513
|
$289,885
|
$64,505
|
$354,390
|
|
|
|
|
|
|
|
|
25
ITEM 2. PROPERTIES - continued
|
Property
|
Quarter
|
Oil Production {BBLS}
|
Gas Production {MCF}
|
Oil Revenue
|
Gas Revenue
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q1 - 2015
|
2,425
|
-
|
$98,787
|
$-
|
$98,787
|
|
Oklahoma
|
Q1 - 2015
|
5,931
|
37,226
|
277,574
|
117,521
|
395,095
|
|
Kansas
|
Q1 - 2015
|
979
|
-
|
40,680
|
-
|
40,680
|
|
Total Q1-2015
|
|
9,335
|
37,226
|
$417,041
|
$117,521
|
$534,562
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q2 - 2015
|
1,957
|
-
|
$101,291
|
$-
|
$101,291
|
|
Oklahoma
|
Q2 - 2015
|
5,495
|
32,348
|
290,540
|
97,374
|
387,914
|
|
Kansas
|
Q2 - 2015
|
889
|
-
|
19,060
|
-
|
19,060
|
|
Total Q2-2015
|
|
8,341
|
32,348
|
$410,891
|
$97,374
|
$508,265
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q3 - 2015
|
2,177
|
-
|
$86,845
|
$-
|
$86,845
|
|
Oklahoma
|
Q3 - 2015
|
4,550
|
31,275
|
212,156
|
87,791
|
299,947
|
|
Kansas
|
Q3 - 2015
|
370
|
-
|
13,238
|
-
|
13,238
|
|
Total Q3-2015
|
|
7,097
|
31,275
|
$312,239
|
$87,791
|
$400,030
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q4 - 2015
|
1,337
|
-
|
$44,391
|
$-
|
$44,391
|
|
Oklahoma
|
Q4 - 2015
|
1,624
|
12,380
|
93,864
|
37,349
|
131,213
|
|
Kansas
|
Q4 - 2015
|
247
|
-
|
9,573
|
-
|
9,573
|
|
Total Q4-2015
|
|
3,208
|
12,380
|
$147,828
|
$37,349
|
$185,177
|
|
|
|
|
|
|
|
|
|
Year Ended 12/31/15
|
|
27,981
|
113,229
|
$1,287,999
|
$340,035
|
$1,628,034
|
Drilling Activity and Productive Wells
Marcelina Creek Project - Texas
As of December 31, 2015, we had three productive wells in the
Marcelina Creek Field (2.00 net wells) and one well in the Coulter
Field (.40 net well). Net wells consist of the sum of
our fractional working interests in these wells.
During 2016 the Company conducted a reentry project on the Johnson
#4. After an analysis of those results and the alternatives for
pursuing continuing development of the Marcelina Project, a
decision was made to offer the property for sale. The sale was
consummated on October 1, 2016.
Central Oklahoma Projects
As of December 31, 2014, 10 wells were producing in the Cimarron,
11 wells in the Chisholm Trail, one in Prairie Grove, and one in
the Viking.
During the year ended December 31, 2015, the Company continued to
produce the wells in Oklahoma but did not significantly expand
development due to capital constraints and industry conditions. The
production and leases in the Chisholm Trail AMI were sold in
November, 2015 and the Company was actively seeking buyers for the
Cimarron AMI as well. A sale of the Cimarron AMI closed effective
May 1, 2016.
Having sold the Chisholm Trail and Cimarron wells and acreage, the
only remaining producing wells in Oklahoma are the Judy and the
Loki wells as of December 31, 2016. The Company retains ownership
of the Viking, Rosedale, and Thunderbird AMI’s at December
31, 2016. Reference the detailed Leasehold Interest table included
in this report.
26
ITEM 2. PROPERTIES -
continued
Combined Well Status
The following table summarizes drilling activity and Well Status as
of December 31, 2016:
|
|
Cumulative
Well Status
|
Wells
Acquired
|
Cumulative
Well Status
|
|||
|
Drilling Activity/Well Status
|
at
12/31/2016
|
(Sold)
2016
|
at
12/31/2015
|
|||
|
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
|
|
|
|
|
|
|
|
|
Development
Wells:
|
|
|
|
|
|
|
|
Productive
-Texas
|
-
|
-
|
(3.00)
|
(2.00)
|
3.00
|
2.00
|
|
Productive
- Okla
|
2.00
|
0.20
|
(7.00)
|
(1.15)
|
9.00
|
1.35
|
|
Productive
- Kansas
|
-
|
-
|
(2.00)
|
(1.00)
|
2.00
|
1.00
|
|
Dry
|
-
|
-
|
|
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Exploration
Wells:
|
|
|
|
|
|
|
|
Productive
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Dry
|
1.00
|
-
|
1.00
|
0.33
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Drilled Wells:
|
|
|
|
|
|
|
|
Productive
-Texas
|
-
|
-
|
(3.00)
|
(2.00)
|
3.00
|
2.00
|
|
Productive
- Okla
|
2.00
|
0.20
|
(7.00)
|
(1.15)
|
9.00
|
1.35
|
|
Productive
- Kansas
|
-
|
-
|
(2.00)
|
(1.00)
|
2.00
|
1.00
|
|
Dry
|
1.00
|
-
|
1.00
|
0.33
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
Wells:
|
|
|
|
|
|
|
|
Productive
-Texas
|
-
|
-
|
(1.00)
|
(0.50)
|
1.00
|
0.50
|
|
Productive
- Okla
|
-
|
-
|
(4.00)
|
(0.25)
|
4.00
|
0.25
|
|
Productive
- Kansas
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wells:
|
|
|
|
|
|
|
|
Productive
-Texas
|
-
|
-
|
(4.00)
|
(2.50)
|
4.00
|
2.50
|
|
Productive
- Okla
|
2.00
|
0.20
|
(11.00)
|
(1.40)
|
13.00
|
1.60
|
|
Productive
- Kansas
|
-
|
-
|
(2.00)
|
(1.00)
|
2.00
|
1.00
|
|
|
|
|
|
|
|
|
|
Total
|
2.00
|
0.20
|
(17.00)
|
(4.90)
|
19.00
|
5.09
|
|
|
|
|
|
|
|
|
|
Well Type:
|
|
|
|
|
|
|
|
Oil
|
-
|
(0.00)
|
(5.00)
|
(3.00)
|
5.00
|
3.00
|
|
Gas
|
-
|
-
|
(1.00)
|
(0.50)
|
1.00
|
0.50
|
|
Combination
-Oil and Gas
|
2.00
|
0.20
|
(11.00)
|
(1.40)
|
13.00
|
1.60
|
|
|
|
|
|
|
|
|
|
Total
|
2.00
|
0.20
|
(17.00)
|
(4.90)
|
19.00
|
5.09
|
27
ITEM 2. PROPERTIES - continued
Our acreage positions at December 31, 2016 are summarized as
follows:
|
|
|
|
TRCH
Interest
|
TRCH
Interest
|
||
|
|
Total
Acres
|
Developed
Acres
|
Undeveloped
Acres
|
|||
|
Leasehold Interests - 12/31/2016
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
|
|
|
|
|
|
|
|
|
Texas
-
|
|
|
|
|
|
|
|
Orogrande
|
163,400
|
77,615
|
-
|
-
|
163,400
|
77,615
|
|
Hazel
Project
|
12,000
|
4,001
|
-
|
-
|
12,000
|
4,001
|
|
|
|
|
|
|
|
|
|
Oklahoma
-
|
|
|
|
|
|
|
|
Viking
|
8,800
|
2,600
|
640
|
192
|
8,160
|
2,408
|
|
Rosedale
|
11,600
|
3,500
|
-
|
-
|
11,600
|
3,500
|
|
Prairie
Grove
|
640
|
64
|
640
|
64
|
-
|
-
|
|
Thunderbird
|
4,300
|
1,100
|
-
|
-
|
4,300
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
200,740
|
88,880
|
1,280
|
256
|
199,460
|
88,624
|
In January, 2017 the Company increased its working interest in the
Hazel Project from 33.33% to 74%. Reference “Subsequent
Events” in Note 11 to the financial statements included in
this report.
Orogrande
On August 7, 2014, we entered into a Purchase Agreement with
Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum
Corporation (“MPC”), and Greg McCabe. Mr. McCabe was
the sole owner of both Hudspeth and MPC. Under the terms and
conditions of the Purchase Agreement, at closing, we purchased 100%
of the capital stock of Hudspeth which holds certain oil and gas
assets, including a 100% working interest in 172,000 mostly
contiguous acres in the Orogrande Basin in West Texas. This acreage
is in the primary term under five-year leases that carry additional
five-year extension provisions. As consideration, at closing we
issued 868,750 shares of our common stock to Mr. McCabe and paid a
total of $100,000 in geologic origination fees to third
parties. Additionally, Mr. McCabe has, at his option, a 10%
working interest back-in after payout and a reversionary interest
if drilling obligations are not met, all under the terms and
conditions of a participation and development agreement. All
drilling obligations through December 31, 2016 have been
met. Closing of the transactions occurred on September 23,
2014.
Of the 168,000 acres, 40,154 were scheduled for renewal in
December, 2014. The Company renewed the leases for the
40,154 acres during second quarter, 2015. Prior to March 31, 2015,
the Company had the obligation to begin drilling its first well in
order to hold the acreage block. The Rich A-11 well was permitted
and spudded and drilling began as required by March 31,
2015.
The Company finalized an agreement to sell a 5% working interest in
the Orogrande acreage on June 30, 2015 with an effective date of
April 1, 2015. Sale proceeds were $500,000 which were received in
April, 2015. In addition, the Company issued 250,000 three year
warrants with an exercise price of $.50 to the
purchaser.
On September 23, 2015, our subsidiary, Hudspeth Oil Corporation
(“HOC”), entered into a Farmout Agreement by and
between HOC, Pandora Energy, LP (“Pandora”), Founders
Oil & Gas, LLC (“Founders”), McCabe Petroleum
Corporation and Greg McCabe (McCabe Petroleum Corporation and Greg
McCabe are parties to the Farmout Agreement for limited purposes)
for the entire Orogrande Project in Hudspeth County,
Texas. The Farmout Agreement provides for Founders to
earn from HOC and Pandora (collectively, the “Farmor”)
an undivided 50% of the leasehold interest in the Orogrande Project
by Founder’s spending a minimum of $45 million on actual
drilling operations on the Orogrande Project in the next two
years. Founders is to pay Farmor a total cost
reimbursement of $5,000,000 in multiple installments as follows:
(1) $1,000,000 at the signing of the Farmout Agreement, the balance
of which was received on September 24, 2015; (2) within 90 days
from the closing, Founders will frac and complete the Rich A-11 No.
1 Well; and (3) within five days of the spudding of each of the
next eight wells drilled by Founders, Founders will pay to Farmor
$500,000 resulting in the payment of the remaining amount; provided
that, in the event that within 90 days after the fracing of the
Rich Well, Founders notifies Farmor of its election not to drill
any additional wells, Founders shall have no further obligation to
make further payment.
28
ITEM 2. PROPERTIES - continued
Upon payment of the first $1,000,000, Farmor assigned to Founders
an undivided 50% of the leasehold interest and a 37.5% net revenue
interest in the leases subject to the terms of the Farmout
Agreement (including obligations to re-assign to HOC and Pandora if
the 50% interest in the entire Orogrande Project is not earned) and
a proportionate share of the McCabe 10% BIAPO (back in after pay
out) interest; provided, however, that for each well that Founders
drills prior to earning the acreage, it will be assigned a 50%
working interest in the wellbore and in the lease on which it
sits.
Under a joint operating agreement (on A.A.P.L. Form 610 –
1989 Model Form Operating Agreement with COPAS 2005 Accounting
Procedures) (“JOA”) also entered into on September 23,
2015, Founders is designated as operator of the
leases. Any variance to the operating plan will be
determined by a Development Committee, which committee is made up
of members from Founders and Farmor, or their designees, to discuss
and recommend the location of the drill wells, data to be gathered
and the form of same. As contemplated under the Farmout
Agreement, starting within 90 days of the completion of the fracing
on the Rich A-11 Well, and at all times subject to the 90 day
continuous drilling clause, Founders has the option, but not the
obligation, to retain the assigned interest as follows: (1) if
Founders spends a minimum of $45 million on actual drilling
operations while maintaining compliance with the continuous
drilling clause, subject to reasonable delays resulting from
reasonable Force Majeure conditions, Founders will have fulfilled
its farmout obligations and will be entitled to retain the assigned
interests. If Founders does not meet such obligations, it will
reassign to Farmor the assigned interest except it will be entitled
to retain its interest in the leases covering all wells drilled by
Founders and the sections in which such wells are located.
Additionally, Founders will resign as operator of the JOA as to all
lands reassigned; and (2) Farmor will be carried in all drilling
operations during the first two years and/or $45 million in
drilling operations, whichever comes last, subject to
Founders’ right to recoup certain expenses on “Gap
Wells.” After three years and after Founders has
earned its working interest, either party may elect to market the
acreage as an entire block, including
operatorship. Should an acceptable bid arise, and both
parties agree, the block will be sold 100% working interest to that
third party bidder. However, if only one party wants to
accept the outside offer, the other party (the party who wishes not
to sell) has the right to purchase the working interest from the
selling party.
The Rich A-11 well that was drilled by Torchlight in second
quarter, 2015 was evaluated and numerous scientific tests were
performed to provide key data for the field development thesis.
During the testing process a poor cement bond was identified
preventing a cost effective production test for the primary pay
zones. Repair to the well bore necessary for a subsequent frac
procedure was determined to be economically unfeasible. With the
Rich A-11 designed as a test well rather than commercial target, a
decision to begin plans for drilling the next well(s) with larger
casing that utilized for future commercial production was
made.
Torchlight Energy and Founders have elected to move forward on
planning the next phase of drilling in the Orogrande Project. The
project operator planned to permit three new wells in 2016 starting
with the University Founders B-19 #1 well. The new wells would
be drilled vertically for test purposes and would have
sufficient casing size to support lateral entry into any pay
zone(s) encountered once the well is tested vertically. Torchlight
and the project operator would then run a battery of tests on each
well to gain information for future development of the field. The
second test well, the University Founders B-19 #1, was spudded on
April 24, 2016 and drilled in second quarter, 2016. The well
successfully pumped down completion fluid in third quarter and
indications of hydrocarbons were seen at the surface on this second
Orogrande Project test well. Despite encountering a bedding plane
in a small section of the wellbore which required the installation
of a pump to dewater, fluids from the B-19 #1 test well have begun
to show an oil cut. The oil samples appear to be to be very high
gravity in the 45° to 47° API range. The well has shown
casing pressure measured from 200 psi to 540 psi at various times
during the testing phase. The presence of natural gas is also noted
and samples have been taken showing a ~1050 BTU
content.
The parties have agreed to amend the drilling schedule for the next
well to be no later than April 30, 2017. Future plans are focused
on drilling additional wells in the Orogrande per our Farmout
agreement with Founders in which we will be carried on costs for
all aspects of drilling for the foreseeable future.
Hazel Project in the Midland Basin in West Texas
Effective April 1, 2016, Torchlight Energy Inc. acquired from
McCabe Petroleum Corporation, a 66.66% working interest in
approximately 12,000 acres in the Midland Basin in exchange for
1,500,000 warrants to purchase our common stock with an exercise
price of $1.00 for five years and a back-in after payout of a 25%
working interest to the seller.
Initial development of the first well on the property, the Flying B
Ranch #1, began July 10, 2016 and development continued through
September 30, 2016. This well was is classified as a test well in
the development pursuit of the Hazel Project.
In October, 2016, the holders of the Company's Series C Preferred
shares (which were issued in July, 2016) elected to convert into a
33.33% Working Interest in the Company's Hazel Project, reducing
Torchlight's ownership from 66.66% to a 33.33% Working
Interest.
29
ITEM 2. PROPERTIES - continued
On December 27, 2016, drilling activities commenced on its next
Midland Basin, Hazel Project well, the Flying B Ranch #2. The well
will be a vertical test similar to the Company's first Hazel
Project well, the Flying B Ranch #1. We intend to continue to de-risk the Hazel AMI by
continuing to drill evaluation wells. The next scheduled well in
the Hazel Project is set for the end of June, 2017. It is intended
to be a horizontal well testing the Wolfcamp formation in order to
determine horizontal viability of the play.
In November, 2016, the Company announced that it had entered into a
Letter of Intent to increase its ownership across all 12,000 gross
acres in the Hazel Project resulting in 8,880 net acres in its
Midland Basin Hazel Project. Upon closing of the transactions in
January, 2017 contemplated by the Letter of Intent, Torchlight
obtained the additional 40.66% Working Interest from an entity
owned and controlled by its Chairman, Greg McCabe, increasing
Torchlight's total ownership to 74%. Reference “Subsequent Events” in
Note 11 to the financial statements included in this
report.
Central Oklahoma Projects
The production and leases in the Chisholm Trail AMI were sold in
November, 2015 and the sale of the Cimarron AMI s closed effective
on May 1, 2016. The Company retains the acreage in the remaining
three AMI’s (Viking, Rosedale, and Thunderbird), the Loki
well in the Viking AMI, and the Judy well in the Prairie Grove AMI
as of December 31, 2016. The Judy and the Loki wells are producing
at December 31, 2016. Reserve value at December 31, 2016 is only
from the Judy well.
ITEM 3. LEGAL PROCEEDINGS
With
respect to Oil and Gas properties previously owned by the Company
in Central Oklahoma, Torchlight Energy Resources, Inc. and its
subsidiary Torchlight Energy, Inc. (“Torchlight”) 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, Torchlight alleges, among other things,
that the defendants acted improperly in connection with multiple
transactions, and that the defendants misrepresented and omitted
material information to Torchlight 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. The lawsuit also seeks a complete accounting as to
how Torchight’s investment funds were used, including all
transfers between and among the defendants. Torchlight is seeking
the full amount of our damages on $20,000,000
invested.
Defendant
Gastar has asserted a breach of contract counterclaim against
Torchlight related to a release contained in one of the agreements
between Torchlight and Husky in which Gastar claims to be a
third-party beneficiary. Torchlight is claiming that
this agreement should be rescinded, and in any event, that the
release is unenforceable.
ITEM 4. MINE SAFETY
DISCLOSURES
Not Applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is quoted on The NASDAQ Stock Market LLC under the
symbol, “TRCH.” Trading in our common stock
in the over-the-counter market has historically been limited and
occasionally sporadic and the quotations set forth below are not
necessarily indicative of actual market conditions. The
high and low sales prices for the common stock for each quarter of
the fiscal years ended December 31, 2016 and 2015, according to
NASDAQ, were as follows:
|
Quarter Ended
|
High
|
Low
|
|
|
|
|
|
12/31/2016
|
$1.48
|
$0.66
|
|
9/30/2016
|
$1.75
|
$0.55
|
|
6/30/2016
|
$0.94
|
$0.55
|
|
3/31/2016
|
$1.13
|
$0.42
|
|
12/31/2015
|
$1.87
|
$0.93
|
|
9/30/2015
|
$2.44
|
$0.48
|
|
6/30/2015
|
$2.40
|
$0.25
|
|
3/31/2015
|
$0.83
|
$0.22
|
Record Holders
As of March 21, 2017, there were approximately 275 stockholders of
record of our common stock, and we estimate that there were
approximately 2,600 additional beneficial stockholders who hold
their shares in “street name” through a brokerage firm
or other institution. As of March 21, 2017, we have a total of
57,862,004 shares of common stock issued and
outstanding.
The holders of the common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of
stockholders. Holders of the common stock have no preemptive rights
and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions
applicable to the common stock.
Dividends
We have not declared any cash dividends on our common stock since
inception and do not anticipate paying any dividends in the
foreseeable future. The payment of dividends is within the
discretion of the Board of Directors and will depend on our
earnings, capital requirements, financial condition, and other
relevant factors. There are no restrictions that currently limit
our ability to pay dividends on our common stock other than those
generally imposed by applicable state law. The Company issued
preferred stock in 2016 and 2015 on which dividends were paid. No
preferred stock is outstanding as of December 31,
2016.
Equity Compensation Plan Information
The following table sets forth all equity compensation plans as of
December 31, 2016:
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
remaining
|
|
|
|
|
|
|
|
available
|
|
|
|
|
|
|
|
for future
|
|
|
|
Number of
|
|
|
|
issuance
|
|
|
|
securities to
|
|
Weighted-
|
|
under
|
|
|
|
be issued
|
|
average
|
|
equity
|
|
|
|
upon
|
|
exercise
|
|
compensation
|
|
|
|
exercise of
|
|
price of
|
|
plans
|
|
|
|
outstanding
|
|
outstanding
|
|
(excluding
|
|
|
|
options,
|
|
options,
|
|
securities
|
|
|
|
warrants
|
|
warrants
|
|
reflected in
|
|
Plan Category
|
|
and rights
|
|
and rights
|
|
column (a))
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved
|
|
|
|
|
|
|
|
by security
holders
|
|
6,706,905
|
|
$ 1.56
|
|
1,290,258
|
31
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES -
continued
Sales of Unregistered Securities
Other than the sales below, all equity securities that we have sold
during the period covered by this report that were not registered
under the Securities Act have previously been included in a
Quarterly Report on Form 10-Q or in a Current Report on Form
8-K.
In November 2016, we issued 165,000 shares of common stock in
connection with Company owned lease interests.
In November 2016, we issued 221,000 four-year warrants to purchase
common stock at an exercise price of $0.70 per share in connection
with Company owned lease interests.
In December 2016, Eunis Shockey (a former director) exercised
warrants at an exercise price of $0,50 per share, purchasing
271,901 shares of common stock.
In December 2016, we issued a total of 70,000 shares of common
stock to a consultant as compensation for services.
In November 2016, we issued 120,000 five-year warrants to a
consultant as compensation for services at an exercise price of
$1.03.
All of the above sales of securities described in this Item 2 were
sold under the exemption from registration provided by Section
4(a)(2) of the Securities Act of 1933 and the rules and regulations
promulgated thereunder. The issuances of securities did
not involve a “public offering” based upon the
following factors: (i) the issuances of securities were isolated
private transactions; (ii) a limited number of securities were
issued to a limited number of purchasers; (iii) there were no
public solicitations; (iv) the investment intent of the purchasers;
and (v) the restriction on transferability of the securities
issued.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information set forth and discussed in this Management’s
Discussion and Analysis and Results of Operations is derived from
our historical financial statements and the related notes thereto
which are included in this Form 10-K. The following information and
discussion should be read in conjunction with such financial
statements and notes. Additionally, this Management’s
Discussion and Analysis and Plan of Operations contain certain
statements that are not strictly historical and are
“forward-looking” statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve a high
degree of risk and uncertainty. Actual results may differ
materially from those projected in the forward-looking statements
due to other risks and uncertainties that exist in our operations,
development efforts, and business environment, and due to other
risks and uncertainties relating to our ability to obtain
additional capital in the future to fund our planned expansion, the
demand for oil and natural gas, and other general economic
factors.
All forward-looking statements included herein are based on
information available to us as of the date hereof, and we assume no
obligation to update any such forward-looking
statements.
Summary of Key Results
Overview
We are engaged in the acquisition, exploration, exploitation,
and/or development of oil and natural gas properties in the United
States.
During the quarter ended June 30, 2016 the Board of Directors
initiated a review of Company operations in view of the divestiture
of its Oklahoma properties, beginning with the sale of the Chisholm
Trail properties in fourth quarter, 2015 and the sale of the
Cimarron properties in second quarter, 2016. During this same time
development had continued on the Orogrande Project in West Texas
and in April, 2016, the Company acquired the Hazel Project in the
Midland Basin also in West Texas. These West Texas properties
demonstrate significant potential and future production
capabilities based upon the analysis of scientific data being
gathered in the day by day development activity. Therefore, the
Board has determined to focus its efforts and capital on these two
projects to maximize shareholder value for the long
run.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
With this new emphasis, remaining projects in other locations were
offered for sale. The result was the closing on August 10, 2016 of
the assignment of the Company’s Ring Properties in Kansas to
our joint venture partner. Further, the Marcelina properties in
South Texas have been sold effective October 1, 2016. The
Company’s remaining assets in Oklahoma consisting of three
AMI’s (the Viking, Rosedale, and the Thunderbird) and four
wells (two are producing) are held pending the outcome of the
lawsuit filed by Torchlight against the operator, Husky Ventures,
in May, 2016.
The strategy in divesting of projects other than the Orogrande and
the Hazel Projects is to refocus on the greatest potential future
value for the Company while systematically eliminating debt as
noncore assets are sold and operations are
streamlined.
The following discussion of our financial condition and results of
operations should be read in conjunction with our audited financial
statements for the years ended December 31, 2016 and 2015 included
herewith. This discussion should not be construed to imply
that the results discussed herein will necessarily continue into
the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such
discussion represents only the best present assessment by our
management.
Historical Results for the Years Ended December 31, 2016 and
2015
For the year ended December 31, 2016, we had a net loss of
$7,684,346 compared to a net loss of $43,252,878 for the year ended
December 31, 2015.
Revenues and Cost of Revenues
For the year ended December 31, 2016, we had production revenue of
$354,390 compared to $1,628,034 of production revenue for the year
ended December 31, 2015. Refer to the table of production and
revenue for 2016 included below. Our cost of revenue,
consisting of lease operating expenses and production taxes, was
$328,438, and $814,078 for the years ended December 31, 2016 and
2015, respectively. Production and Revenue are detailed as
follows:
|
Property
|
Quarter
|
Oil Production {BBLS}
|
Gas Production {MCF}
|
Oil Revenue
|
Gas Revenue
|
Total Revenue
|
|
Marcelina
(TX)
|
Q1 - 2016
|
3,000
|
-
|
$92,546
|
$-
|
$92,546
|
|
Oklahoma
|
Q1 - 2016
|
2,026
|
21,148
|
54,289
|
38,624
|
92,913
|
|
Kansas
|
Q1 - 2016
|
312
|
-
|
8,854
|
-
|
8,854
|
|
Total Q1-2016
|
|
5,338
|
21,148
|
$155,689
|
$38,624
|
$194,313
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q2 - 2016
|
917
|
-
|
$38,812
|
$-
|
$38,812
|
|
Oklahoma
|
Q2 - 2016
|
675
|
9,689
|
30,411
|
11,142
|
41,553
|
|
Kansas
|
Q2 - 2016
|
731
|
-
|
28,834
|
-
|
28,834
|
|
Total Q2-2016
|
|
2,323
|
9,689
|
$98,057
|
$11,142
|
$109,199
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q3 - 2016
|
464
|
-
|
$20,190
|
$-
|
$20,190
|
|
Oklahoma
|
Q3 - 2016
|
180
|
2,830
|
7,925
|
6,170
|
14,095
|
|
Kansas
|
Q3 - 2016
|
-
|
-
|
-
|
-
|
-
|
|
Total Q3-2016
|
|
644
|
2,830
|
$28,115
|
$6,170
|
$34,285
|
|
|
|
|
|
|
|
|
|
Marcelina
(TX)
|
Q4 - 2016
|
-
|
-
|
$-
|
$-
|
$-
|
|
Oklahoma
|
Q4 - 2016
|
184
|
2,845
|
8,024
|
8,569
|
16,593
|
|
Kansas
|
Q4 - 2016
|
-
|
-
|
-
|
-
|
-
|
|
Total Q4-2016
|
|
184
|
2,845
|
$8,024
|
$8,569
|
$16,593
|
|
|
|
|
|
|
|
|
|
Year Ended 12/31/16
|
|
8,488
|
36,513
|
$289,885
|
$64,505
|
$354,390
|
33
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
We recorded depreciation, depletion and amortization expense of
$636,426 for the year ended December 31, 2016 compared to $930,934
for 2015.
General and Administrative Expenses
Our general and administrative expenses for the years ended
December 31, 2016 and 2015 were $6,447,706 and $15,550,145,
respectively, a decrease of $9,102,439. Our general and
administrative expenses consisted of consulting and compensation
expense, substantially all of which was non-cash or deferred,
accounting and administrative costs, professional consulting fees,
and other general corporate expenses. The decrease in general
and administrative expenses for the year ended December 31, 2016
compared to 2015 is detailed as follows:
|
Increase(decrease)
in non cash stock and warrant compensation
|
$(7,609,458)
|
|
Increase(decrease)
in consulting expense
|
$(317,664)
|
|
Increase(decrease)
in professional fees
|
$(165,489)
|
|
Increase(decrease)
in investor relations
|
$81,900
|
|
Increase(decrease)
in travel expense
|
$(39,345)
|
|
Increase(decrease)
in salaries and compensation
|
$(410,188)
|
|
Increase(decrease)
in legal fees
|
$44,078
|
|
Increase(decrease)
in insurance
|
$(31,029)
|
|
Increase(decrease)
in general corporate expenses
|
$(100,493)
|
|
Increase(decrease)
in bad debt
|
$(554,752)
|
|
|
|
|
Total
(Decrease) in General and Administrative Expenses
|
$(9,102,439)
|
The decrease in non cash stock and warrant compensation arises from
the change in vested employee stock options expense and a reduction
in outside services compensated with stock and warrants. Employee
options were initially issued with 50% immediate vesting of option
valuation at June, 2015. The balance of the vesting was set at 25%
in June, 2016 and 25% in June, 2017. The remaining valuation is
being recorded over the periods up to the full vesting date using
the straight line method.
The decrease in consulting expense parallels the reduction in
outside services compensated with stock and warrants as noted
above.
The reduction in salaries and compensation arises from a reduction
in staff size due to the resignation of our inside Petroleum
Engineer and the resignation of our COO.
The bad debt expense in 2015 of $554,752 was connected with a
terminated transaction with an outside working interest owner in
one of the wells in Oklahoma previously owned by the Company. No
bad debt expense was incurred in 2016.
Liquidity and Capital Resources
For the year ended December 31, 2016, we had a net loss of
$7,684,346 compared to a net loss of $43,252,878 for the year ended
December 31, 2015.
At December 31, 2016, we had current assets of $2,990,446 and total
assets of $12,433,648. As of December 31, 2016, we had current
liabilities of $5,283,794. Negative working capital of
$(2,293,348) was exacerbated by the inclusion in current
liabilities of the $3,478,121 outstanding balance of subordinated
convertible notes which have a maturity date of June 30, 2017.
Stockholders’ equity was $7,142,803 at December 31,
2016.
Cash from operating activities for the year ended December 31,
2016, was $(4,826,089) compared to $(2,408,501) for the year ended
December 31, 2015, a decrease of $2,417,588. Cash from operating
activities during 2016 can be attributed to net losses from
operations of $7,684,346. Cash used in operating activities during
2015 can be attributed to net losses from operations of
$43,252,878.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
Cash from investing activities for year ended December 31, 2016 was
$(167,871) compared to $(2,374,021) for the year ended December 31,
2015. Cash from investing activities consists primarily of oil and
gas investment properties acquired during the year ended December
31, 2016 combined with proceeds from sale of leases.
Cash from financing activities for the year ended December 31, 2016
was $5,736,859 as compared to $5,629,335 for the year ended
December 31, 2015. Cash from financing activities in 2016 consists
primarily of proceeds from common and preferred stock issues and
warrant exercises. We expect to continue to have cash
provided by financing activities as we seek new rounds of financing
and continue to develop our oil and gas investments.
Our current assets are insufficient to meet our current obligations
or to satisfy our cash needs over the next twelve months and as
such we will require additional debt or equity financing to meet
our plans and needs. We face obstacles in continuing to
attract new financing due to our history and current record of net
losses and working capital deficits. Despite our efforts, we
can provide no assurance that we will be able to obtain the
financing required to meet our stated objectives or even to
continue as a going concern.
We do not expect to pay cash dividends on our common stock in the
foreseeable future.
Critical Accounting Policies and Estimates
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.
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.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
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.
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 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.
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 $81,595 and $87,037 for the
year ended December 31, 2016 and 2015, respectively.
Approximate
future minimum rental commitments under the office premises lease
are:
|
For
the Year Ending
|
|
|
December
31,
|
Amount
|
|
2017
|
$79,658
|
|
2018
|
$81,248
|
|
2019
|
$75,814
|
|
|
$236,720
|
We are subject to contingencies as a result of environmental laws
and regulations. Present and future environmental laws and
regulations applicable to our operations could require substantial
capital expenditures or could adversely affect our operations in
other ways that cannot be predicted at this time. As of
December 31, 2016 and 2015, no amounts have been recorded because
no specific liability has been identified that is reasonably
probable of requiring us to fund any future material
amounts.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
As of December 31, 2016, the Company had interests in three oil and
gas projects: Hunton wells in partnership with Husky Ventures in
Central Oklahoma, the Orogrande Project in Hudspeth County, Texas,
and the Hazel Project in Sterling, Tom Green, and Irion Counties,
Texas.
See the description under “Current Projects” above
under “Item 1. Business” for more
information and disclosure regarding commitments and contingencies
relating to these projects.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not Applicable.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of Directors and Stockholders
Torchlight Energy Resources, Inc.
Plano, Texas
We have audited the accompanying consolidated balance sheet of
Torchlight Energy Resources, Inc. (the “Company”) as of
December 31, 2016, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the year
then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required
to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of the Company as of December 31, 2016, and the results of
its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the entity will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements,
the Company has incurred recurring losses from operations and has a
net working capital deficiency which raises substantial doubt about
its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Houston,
Texas
March 31, 2017
38
Board of Directors and Stockholders
Torchlight Energy Resources, Inc.
Plano, Texas
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We have audited the accompanying consolidated balance sheet of
Torchlight Energy Resources, Inc. (the “Company”) as of
December 31, 2015, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the year
then ended. These consolidated financial statements are the
responsibility of the entity’s management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of the Company as of December 31, 2015, and the results of
its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States of America.
The 2015 consolidated financial statements were prepared assuming
that the entity would continue as a going concern. As discussed in
Note 2 to the 2015 consolidated financial statements, the entity
had suffered recurring losses from operations and has a net working
capital deficiency which raised substantial doubt about its ability
to continue as a going concern. Management's plans in regard to
these matters were also described in Note 2 to the 2015
consolidated financial statements. The consolidated financial
statements did not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Calvetti Ferguson
Houston, Texas
March 30, 2016
39
|
TORCHLIGHT ENERGY RESOURCES, INC.
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
December
31,
|
December
31,
|
|
|
2016
|
2015
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$1,769,499
|
$1,026,600
|
|
Accounts
receivable
|
603,446
|
741,653
|
|
Production
revenue receivable
|
7,325
|
199,317
|
|
Note
receivable
|
-
|
613
|
|
Prepayments
- development costs
|
583,347
|
-
|
|
Prepaid
expenses
|
26,829
|
38,776
|
|
Total
current assets
|
2,990,446
|
2,006,959
|
|
|
|
|
|
Oil
and gas properties, net
|
9,392,288
|
7,057,671
|
|
Office
equipment, net
|
29,848
|
43,110
|
|
Other
assets
|
21,066
|
80,306
|
|
|
|
|
|
TOTAL
ASSETS
|
$12,433,648
|
$9,188,046
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$422,684
|
$1,153,185
|
|
Funds
received pending settlement
|
520,400
|
-
|
|
Accrued
payroll
|
565,176
|
590,100
|
|
Related
party payables
|
237,044
|
130,000
|
|
Convertible
promissory notes, (Series B) net of discount of
|
|
|
|
$91,379
at December 31, 2016
|
3,478,121
|
-
|
|
Notes
payable within one year - related party
|
-
|
205,000
|
|
Notes
payable within one year
|
-
|
129,741
|
|
Due
to working interest owners
|
54,320
|
103,364
|
|
Interest
payable
|
6,049
|
173,710
|
|
Total
current liabilities
|
5,283,794
|
2,485,100
|
|
|
|
|
|
Convertible
promissory notes, (Series B) net of discount of $277,911 at
December 31, 2015
|
-
|
3,291,589
|
|
Asset
retirement obligation
|
7,051
|
29,083
|
|
|
|
|
|
Total
liabilities
|
5,290,845
|
5,805,772
|
|
|
|
|
|
Commitments
and contingencies
|
-
|
-
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
Preferred
stock, par value $.001, 10,000,000 shares authorized;
|
|
|
|
-0-
issued and outstanding at December 31, 2016
|
-
|
134
|
|
134,000
issued and outstanding at December 31, 2015
|
|
|
|
Common
stock, par value $0.001 per share; 100,000,000 shares
authorized;
|
55,100
|
33,168
|
|
55,096,503
issued and outstanding at December 31, 2016
|
|
|
|
33,166,344
issued and outstanding at December 31, 2015
|
|
|
|
Additional
paid-in capital
|
89,675,488
|
78,252,411
|
|
Accumulated
deficit
|
(82,587,785)
|
(74,903,439)
|
|
Total
stockholders' equity
|
7,142,803
|
3,382,274
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$12,433,648
|
$9,188,046
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
40
|
TORCHLIGHT ENERGY RESOURCES, INC.
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
Year
|
|
|
Ended
|
Ended
|
|
|
December 31, 2016
|
December 31, 2015
|
|
Revenue
|
|
|
|
Oil
and gas sales
|
$354,390
|
$1,628,034
|
|
SWD
and royalties
|
-
|
6,274
|
|
|
|
|
|
Cost
of revenue
|
(328,438)
|
(814,078)
|
|
|
|
|
|
Gross
profit
|
25,952
|
820,230
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General
and administrative expense
|
6,447,706
|
15,550,145
|
|
Depreciation,
depletion and amortization
|
636,426
|
930,934
|
|
Impairment
expense
|
70,080
|
25,674,123
|
|
Loss
on sale
|
283,285
|
24,479
|
|
Total
operating expenses
|
7,437,497
|
42,179,681
|
|
|
|
|
|
Other
(income) expense
|
|
|
|
Interest
income
|
(36)
|
-
|
|
Interest
and accretion expense
|
272,837
|
1,893,427
|
|
Total
other (income) expense
|
272,801
|
1,893,427
|
|
|
|
|
|
Net
loss before taxes
|
(7,684,346)
|
(43,252,878)
|
|
|
|
|
|
Provision
for income taxes
|
-
|
-
|
|
|
|
|
|
Net loss
|
$(7,684,346)
|
$(43,252,878)
|
|
|
|
|
|
Loss
per share:
|
|
|
|
Basic
and Diluted
|
$(0.19)
|
$(1.58)
|
|
Weighted
average shares outstanding:
|
|
|
|
Basic
and Diluted
|
43,122,514
|
27,897,794
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
41
TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
Common
|
Common
|
Preferred
|
Pref.
|
Additional
|
|
|
|
|
stock
|
stock
|
stock
|
Stock
|
paid-in
|
Accumulated
|
|
|
|
shares
|
amount
|
shares
|
Amt.
|
capital
|
deficit
|
Total
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
23,235,441
|
$23,237
|
-
|
$-
|
$50,745,072
|
$(31,650,561)
|
$19,117,745
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
4,931,250
|
4,931
|
-
|
-
|
1,295,069
|
-
|
1,300,000
|
|
Issuance
of preferred stock for cash
|
-
|
-
|
135,000
|
$135
|
13,499,865
|
-
|
13,500,000
|
|
Issuance
of common stock for services
|
2,447,696
|
2,448
|
-
|
-
|
2,649,056
|
-
|
2,651,504
|
|
Issuance
of common stock - mineral interests
|
30,000
|
30
|
-
|
-
|
26,370
|
-
|
26,400
|
|
Issuance
of common stock in warrant exercise
|
65,000
|
65
|
-
|
-
|
113,685
|
-
|
113,750
|
|
Issuance
of common stock for note interest
|
162,860
|
163
|
-
|
-
|
162,697
|
-
|
162,860
|
|
Issuance
of common stock for preferred dividends
|
577,140
|
577
|
-
|
-
|
(577)
|
-
|
-
|
|
Preferred
dividends paid in cash
|
-
|
-
|
-
|
-
|
(120,427)
|
-
|
(120,427)
|
|
Warrants
issued with promissory notes
|
-
|
-
|
-
|
-
|
467,800
|
-
|
467,800
|
|
Common
stock issued in conversion of notes
|
1,600,000
|
1,600
|
-
|
-
|
1,148,400
|
-
|
1,150,000
|
|
Common
stock issued in part payment of bonuses
|
30,000
|
30
|
-
|
-
|
39,870
|
-
|
39,900
|
|
Common
stock issued in conversion of preferred stock
|
86,957
|
87
|
-
|
-
|
99,913
|
-
|
100,000
|
|
Preferred
stock cancelled in conversion
|
-
|
-
|
(1,000)
|
$(1)
|
(99,999)
|
-
|
(100,000)
|
|
Warrants
issued for services
|
-
|
-
|
-
|
-
|
8,225,619
|
-
|
8,225,619
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(43,252,878)
|
(43,252,878)
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
33,166,344
|
$33,168
|
134,000
|
$134
|
$78,252,411
|
$(74,903,439)
|
$3,382,274
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
3,750,000
|
3,750
|
-
|
-
|
2,996,250
|
-
|
3,000,000
|
|
Issuance
of preferred stock for cash
|
-
|
-
|
-
|
10
|
999,990
|
-
|
1,000,000
|
|
Issuance
of common stock for services
|
768,832
|
769
|
-
|
-
|
669,305
|
-
|
670,074
|
|
Issuance
of common stock - mineral interests
|
2,824,881
|
2,825
|
-
|
-
|
1,972,221
|
-
|
1,975,046
|
|
Issuance
of common stock in warrant exercise
|
3,888,745
|
3,891
|
-
|
-
|
2,539,855
|
-
|
2,543,746
|
|
Issuance
of common stock for preferred dividends
|
440,262
|
440
|
-
|
-
|
(440)
|
-
|
-
|
|
Preferred
dividends paid in cash
|
-
|
-
|
-
|
-
|
(320,724)
|
-
|
(320,724)
|
|
Warrants
issued with lease interests
|
-
|
-
|
-
|
-
|
1,290,761
|
-
|
1,290,761
|
|
Warrants
and Options issued for services
|
-
|
-
|
-
|
-
|
2,205,231
|
-
|
2,205,231
|
|
Lease
interest conveyed in conversion of preferred stock
|
-
|
-
|
-
|
(10)
|
(999,990)
|
-
|
(1,000,000)
|
|
Common
stock issued in conversion of preferred stock
|
10,257,439
|
10,257
|
(134,000)
|
(134)
|
(10,132)
|
-
|
(9)
|
|
Warrants
issued in connection with promissory note
|
-
|
-
|
-
|
-
|
80,750
|
-
|
80,750
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(7,684,346)
|
(7,684,346)
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
55,096,503
|
$55,100
|
-
|
$-
|
$89,675,488
|
$(82,587,785)
|
$7,142,803
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
42
|
TORCHLIGHT ENERGY RESOURCES, INC.
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
|
|
|
Year
|
Year
|
|
|
Ended
|
Ended
|
|
|
December 31, 2016
|
December 31, 2015
|
|
Cash Flows From Operating Activities
|
|
|
|
Net
loss
|
$(7,684,346)
|
$(43,252,878)
|
|
Adjustments
to reconcile net loss to net cash from operations:
|
|
|
|
Stock
based compensation
|
2,956,044
|
11,265,926
|
|
Accretion
of convertible note discounts
|
186,532
|
1,395,103
|
|
Loss
on sale of assets
|
283,285
|
24,479
|
|
Impairment
expense
|
70,080
|
25,674,123
|
|
Depreciation,
depletion and amortization
|
636,426
|
930,934
|
|
Change
in:
|
|
|
|
Accounts
receivable
|
138,207
|
(187,305)
|
|
Note
receivable
|
613
|
515,135
|
|
Production
revenue receivable
|
191,992
|
11,118
|
|
Prepayment
of development costs
|
(1,583,347)
|
(290,398)
|
|
Prepaid
expenses
|
11,946
|
(9,142)
|
|
Other
assets
|
59,240
|
(8,860)
|
|
Accounts
payable and accrued liabilities
|
(396,456)
|
1,024,098
|
|
Due
to working interest owners
|
(49,044)
|
29,925
|
|
Funds
received pending settlement
|
520,400
|
-
|
|
Interest
payable
|
(167,661)
|
469,241
|
|
Net cash from operating activities
|
(4,826,089)
|
(2,408,501)
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
Investment
in oil and gas properties
|
(2,293,497)
|
(5,224,748)
|
|
Acquisition
of office equipment
|
(1,863)
|
(1,191)
|
|
Proceeds
from sale of oil and gas properties
|
2,127,489
|
2,851,918
|
|
Net cash from investing activities
|
(167,871)
|
(2,374,021)
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
Proceeds
from short term advance
|
150,000
|
-
|
|
Repayment
of short term advance
|
(150,000)
|
-
|
|
Proceeds
from sale of common stock
|
3,000,000
|
1,300,000
|
|
Proceeds
from sale of preferred stock
|
1,000,000
|
13,500,000
|
|
Preferred
dividends paid in cash
|
(320,724)
|
(120,427)
|
|
Proceeds
from warrant exercise
|
1,999,310
|
113,750
|
|
Proceeds
from promissory notes
|
708,014
|
539,916
|
|
Repayment
of convertible notes
|
-
|
(8,859,011)
|
|
Repayment
of promissory notes
|
(649,741)
|
(844,893)
|
|
Net cash from financing activities
|
5,736,859
|
5,629,335
|
|
|
|
|
|
Net change in cash
|
742,899
|
846,813
|
|
Cash - beginning of period
|
1,026,600
|
179,787
|
|
|
|
|
|
Cash - end of period
|
$1,769,499
|
$1,026,600
|
|
|
|
|
|
Supplemental disclosure of cash flow information: (Non Cash
Items)
|
|
|
|
Common
stock issued for mineral interests
|
$1,975,046
|
$26,400
|
|
Common
stock issued in conversion of promissory notes
|
$-
|
$1,150,000
|
|
Common
stock issued for unpaid compensation
|
$-
|
$39,900
|
|
Warrants
issued for mineral interests
|
$1,290,761
|
$-
|
|
Cash
paid for interest
|
$603,157
|
$919,272
|
The accompanying notes are an integral part of these consolidated
financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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.
2. GOING CONCERN
At December 31, 2016, the Company had not yet achieved profitable
operations. We had a net loss of $7,684,346 million for the year
ended December 31, 2016 and had accumulated losses of $82,587,785
since our inception. We expect to incur further losses in the
development of our business. The Company had a working
capital deficit as of December 31, 2016 of $(2,293,348).
Negative working capital is
exacerbated by the inclusion in current liabilities of the
$3,478,121
outstanding balance of subordinated
convertible notes which have a maturity date of June 30,
2017. These
conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
The Company’s ability to continue as a going concern is
dependent on its ability to generate future profitable operations
and/or to obtain the necessary financing to meet its obligations
and repay its liabilities arising from normal business operations
when they come due. Management’s plan to address
the Company’s ability to continue as a going concern
includes: (1) obtaining debt or equity funding from
private placement or institutional sources; (2) obtain loans from
financial institutions, where possible, or (3) participating in
joint venture transactions with third parties. Although
management believes that it will be able to obtain the necessary
funding to allow the Company to remain a going concern through the
methods discussed above, there can be no assurances that such
methods will prove successful.
These
consolidated financial statements have been prepared assuming that
the Company will continue as a going concern and therefore, the
financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of
assets or the amount and classifications of liabilities that may
result from the outcome of this uncertainty.
3. SIGNIFICANT ACCOUNTING 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 – 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, and Hudspeth Oil Corporation. 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.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Fair value of financial instruments – Financial instruments consist of cash,
accounts receivable, accounts payable, notes payable to related
party, and convertible promissory notes. The estimated fair values
of cash, accounts receivable, accounts payable, and related party
payables approximate the carrying amount due to the relatively
short maturity of these instruments. The carrying amounts of the
convertible promissory notes approximated 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.
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, 2016
and 2015, 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 years ended December
31, 2016 and 2015, the Company capitalized $215,938 and $705,561,
respectively, of interest on unevaluated properties net of
adjustments with respect to divestiture of
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.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES - continued
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. The Company’s tax returns remain
subject to Federal and State tax examinations for all tax years
since inception as none of the statutes have
expired. Generally, the applicable statutes of
limitation are three to four years from their respective
filings.
Estimated interest and penalties related to potential underpayment
on any unrecognized tax benefits are classified as a component of
tax expense in the statement of operation. The Company
has not recorded any interest or penalties associated with
unrecognized tax benefits for any periods covered by these
financial statements.
Share-based compensation – 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.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES - continued
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 23,131,694 shares issuable upon the exercise of
outstanding warrants and options. The loss available
to common shareholders was determined by subtracting preferred
dividends totaling $585,844 for 2016 and $930,169 for 2015 from
each year’s respective net loss.
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 – On August 27, 2014, the
Financial Accounting
Standards Board (“FASB”)issued Accounting Standards Update
(“ASU”) 2014-15, Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern, which provides guidance on determining when and
how to disclose going-concern uncertainties in the financial
statements. The new standard requires management to perform interim
and annual assessments of the Company’s ability to continue
as a going concern within one year of the date the financial
statements are issued. An entity must provide certain disclosures
if conditions or events raise substantial doubt about the
entity’s ability to continue as a going concern. The ASU
applies to all entities and is effective for annual periods ending
after December 15, 2016, and interim periods thereafter, with early
adoption permitted. The Company has adopted ASU 2014-15
and the adoption did not have a significant impact on the
Company’s consolidated financial statements or related
disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue From
Contracts With Customers, that
introduces a new five-step revenue recognition model in which an
entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. This ASU also requires
disclosures sufficient to enable users to understand the nature,
amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers, including qualitative and
quantitative disclosures about contracts with customers,
significant judgments and changes in judgments, and assets
recognized from the costs to obtain or fulfill a contract. This
standard is effective for fiscal years beginning after December 15,
2017, including interim periods within that reporting period. The
Company is currently evaluating the new guidance to determine the
impact it will have on its consolidated financial
statements.
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 30, 2017, the
date of issuance of the financial statements. Subsequent events are
disclosed in Note 11.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. OIL & GAS PROPERTIES
The following table presents the capitalized costs for oil &
gas properties of the Company as of December 31, 2016 and
2015:
|
|
2016
|
2015
|
|
|
|
|
|
Evaluated
costs subject to amortization
|
$1,470,939
|
$24,177,851
|
|
Unevaluated
costs
|
13,376,742
|
9,677,425
|
|
Total
capitalized costs
|
14,847,681
|
33,855,276
|
|
Less
accumulated depreciation, depletion and amortization
|
(5,455,393)
|
(26,797,605)
|
|
Total
oil and gas properties
|
$9,392,288
|
$7,057,671
|
The Company recognized impairment expense of $25,674,123 on its oil
and gas properties during 2015. An additional impairment of $70,080
was expensed in 2016. Due to the volatility of commodity prices,
should oil and natural gas prices decline in the future, it is
possible that a 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.
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 are also presented on the 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
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 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 $81,595 and $87,037 for the
year ended December 31, 2016 and 2015, respectively.
Approximate
future minimum rental commitments under the office premises lease
are:
|
For
the Year Ending
|
|
|
December
31,
|
Amount
|
|
2017
|
$79,658
|
|
2018
|
$81,248
|
|
2019
|
$75,814
|
|
|
$236,720
|
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.
COMMITMENTS AND CONTINGENCIES - continued
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, 2016 and 2015, 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
With
respect to Oil and Gas properties previously owned by the Company
in Central Oklahoma, Torchlight Energy Resources, Inc. and its
subsidiary Torchlight Energy, Inc. (“Torchlight”) 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, Torchlight alleges, among other things,
that the defendants acted improperly in connection with multiple
transactions, and that the defendants misrepresented and omitted
material information to Torchlight 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. The lawsuit also seeks a complete accounting as to
how Torchight’s investment funds were used, including all
transfers between and among the defendants. Torchlight is seeking
the full amount of our damages on $20,000,000
invested.
Defendant
Gastar has asserted a breach of contract counterclaim against
Torchlight related to a release contained in one of the agreements
between Torchlight and Husky in which Gastar claims to be a
third-party beneficiary. Torchlight is claiming that
this agreement should be rescinded, and in any event, that the
release is unenforceable.
As of December 31, 2015, the Company had a $419,839 account
receivable from Husky Ventures for the estimated balance of the
sale proceeds from the sale of the Chisholm Trail properties in
fourth quarter, 2015. The Chisholm Trail properties were sold to
Husky Ventures who then included them with the Husky interests in
Chisholm Trail and then entered into a sale agreement with Gastar
Exploration Inc. for the combined Torchlight and Husky interests.
Receipt of the balance of the sale proceeds was subject to final
determination of mineral lease classification and was to occur by
February 28, 2016.
On June
14, 2016, after the lawsuit was filed regarding the Hunton Play,
the Company received and subsequently deposited a check from Husky
Ventures in the amount of $520,400. Husky Ventures designated that
the check was in full satisfaction of its obligations under the
transaction in which the Company sold the Chisholm Trail properties
as described above. The Company does not believe the check is in
full satisfaction of Husky Ventures’s obligations, including
but not limited to that Husky Ventures has provided insufficient
information for the Company regarding this
transaction.
7. STOCKHOLDERS’ EQUITY
Common
Stock
During the years ended December 31, 2016 and 2015, the Company
issued 3,750,000 and 4,931,250 shares of common stock,
respectively, for cash of $3,000,000 and $1,300,000.
During the years ended December 31, 2016 and 2015, the Company
issued 768,832 and 2,477,696 shares of common stock with total
values of $670,074 and $2,651,504, respectively, as compensation
for services.
During the year ended December 31, 2016 and 2015 the Company issued
10,257,439 and 86,957 shares of common stock, respectively, in
conversions of preferred stock valued at $13,399,992 and
$100,000.
During the year ended December 31, 2015 the Company issued
1,600,000 shares of common stock, in conversions of notes payable
valued $1,150,000 and 162,860 shares of common stock, respectively,
for interest on notes payable of $162,860.
During the year ended December 31, 2016 and 2015 the Company issued
3,888,745 and 65,000 shares of common stock, respectively,
resulting from warrant exercises for consideration totaling
$2,543,746 and $113,750.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS’ EQUITY -
continued
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, 2015, the Company issued 135,000
shares of preferred stock for cash of $13,500,000.
During the year ended December 31, 2016 and 2015, the Company paid
dividends on preferred stock in cash, respectively, of $320,724 and
$120,427. In addition during the years 2016 and 2015, 440,262 and
577,140 shares of common stock, respectively, were issued for
dividends on preferred stock.
Warrants and Options
During the years ended December 31, 2016 and 2015, the Company
issued/vested 6,437,267 and 7,015,779 warrants and options with
total values of $2,205,231 and $7,797,619, respectively, as
compensation for services.
During the year ended December 31, 2016, and 2015, the Company
issued 137,500 and 770,000 warrants, respectively, in connection
with financing transactions, with total values of $80,750 and
$368,300.
During the year ended December 31, 2015 the Company issued
2,615,676 warrants in connection with the issuance of preferred
stock.
During the year ended December 31, 2016 and 2015, the Company
issued 3,412,525 and 750,000 warrants and 2,824,881 and 30,000
shares of common stock, respectively, in connection with the
acquisition of lease interests, respectively, with total value of
$3,265,807 and $553,900.
A summary of warrants outstanding as of December 31, 2016 by
exercise price and year of expiration is presented
below:
|
Exercise
|
Expiration
Date in
|
|
||||
|
Price
|
2017
|
2018
|
2019
|
2020
|
2021
|
Total
|
|
|
|
|
|
|
|
|
|
$0.50
|
-
|
528,099
|
-
|
-
|
-
|
528,099
|
|
$0.70
|
-
|
-
|
-
|
1,700,000
|
-
|
1,700,000
|
|
$0.77
|
-
|
-
|
100,000
|
-
|
-
|
100,000
|
|
$1.00
|
150,000
|
-
|
54,366
|
-
|
1,500,000
|
1,704,366
|
|
$1.03
|
-
|
-
|
-
|
-
|
120,000
|
120,000
|
|
$1.08
|
-
|
-
|
37,500
|
-
|
-
|
37,500
|
|
$1.40
|
-
|
-
|
-
|
1,643,475
|
-
|
1,643,475
|
|
$1.73
|
-
|
100,000
|
-
|
-
|
-
|
100,000
|
|
$1.80
|
-
|
-
|
-
|
500,000
|
-
|
500,000
|
|
$2.00
|
126,000
|
1,906,249
|
-
|
-
|
-
|
2,032,249
|
|
$2.03
|
-
|
2,000,000
|
-
|
-
|
-
|
2,000,000
|
|
$2.09
|
-
|
2,800,000
|
-
|
-
|
-
|
2,800,000
|
|
$2.23
|
-
|
-
|
-
|
832,512
|
-
|
832,512
|
|
$2.29
|
-
|
120,000
|
-
|
-
|
-
|
120,000
|
|
$2.50
|
-
|
-
|
35,211
|
-
|
-
|
35,211
|
|
$2.82
|
-
|
38,174
|
-
|
-
|
-
|
38,174
|
|
$3.50
|
-
|
-
|
15,000
|
-
|
-
|
15,000
|
|
$4.50
|
-
|
-
|
700,000
|
-
|
-
|
700,000
|
|
$5.00
|
170,000
|
-
|
-
|
-
|
-
|
170,000
|
|
$5.05
|
40,000
|
-
|
-
|
-
|
-
|
40,000
|
|
$6.00
|
-
|
523,123
|
22,580
|
-
|
-
|
545,703
|
|
$7.00
|
-
|
-
|
700,000
|
-
|
-
|
700,000
|
|
|
486,000
|
8,015,645
|
1,664,657
|
4,675,987
|
1,620,000
|
16,462,289
|
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS’ EQUITY -
continued
A summary of stock options outstanding as of December 31, 2016 by
exercise price and year of expiration is presented
below:
|
Exercise
|
Expiration Date in
|
|
||||
|
Price
|
2017
|
2018
|
2019
|
2020
|
2021
|
Total
|
|
|
|
|
|
|
|
|
|
$0.97
|
-
|
-
|
-
|
-
|
259,742
|
259,742
|
|
$1.57
|
-
|
-
|
-
|
5,997,163
|
-
|
5,997,163
|
|
$1.79
|
-
|
-
|
-
|
412,500
|
-
|
412,500
|
|
|
-
|
-
|
-
|
6,409,663
|
259,742
|
6,669,405
|
At December 31, 2016 the Company had reserved 23,131,694 shares for
future exercise of warrants and options.
Warrants and options issued were valued using the Black Scholes
Option Pricing Model. The assumptions used in calculating the fair
value of the warrants issued were as follows:
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
|
2015
|
Risk-free interest rate
|
0.78%
|
|
Expected volatility of common stock
|
191% - 253%
|
|
Dividend yield
|
0.00%
|
|
Discount due to lack of marketability
|
20-30%
|
|
Expected life of warrant
|
3 years - 5 years
|
8. INCOME TAXES
The Company recorded no income tax provision for 2016 or 2015
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 the statutory federal income tax rate of 34%
and actual income tax provision for the years ended December 31,
2016 and 2015:
|
|
Year
ended
|
Year
ended
|
|
|
December
31, 2016
|
December
31, 2015
|
|
Federal
income tax benefit at statutory rate
|
$(2,869,293)
|
$(14,705,979)
|
|
Permanent
differences
|
3,000
|
4,127
|
|
Other
|
4,096,947
|
(587,126)
|
|
Change
in valuation allowance
|
(1,230,654)
|
15,288,978
|
|
Provision
for income taxes
|
$-
|
$-
|
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES -
continued
The tax effects of temporary differences that gave rise to
significant portions of deferred tax assets and liabilities at
December 31, 2016 and December 31, 2015 are as
follows:
|
|
December
31, 2016
|
December
31, 2015
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss carryforward
|
$16,269,090
|
$11,443,389
|
|
Accruals
|
15,300
|
30,600
|
|
Reserves
|
7,156,559
|
5,883,263
|
|
Deferred
tax liabilities:
|
|
|
|
Intangible
drilling and other costs for oil and gas properties
|
(74,340)
|
7,240,011
|
|
Net
deferred tax assets and liabilities
|
23,366,609
|
24,597,263
|
|
Less
valuation allowance
|
(23,366,609)
|
(24,597,263)
|
|
Total
deferred tax assets and liabilities
|
$-
|
$-
|
The
Company has federal net operating loss carryforwards of $47,850,266
and $39,312,173 at December 31, 2016 and 2015, respectively. The
federal net operating loss carryforwards will begin to expire in
2031. 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 full valuation
allowance against net deferred tax assets because future
realization of these assets is not assured.
9. PROMISSORY NOTES
During 2014, the Company issued $4,569,500 in principal value of
12% Series B Convertible Unsecured Promissory Notes. The 12% Notes
are due and payable on June 30, 2017 and provide for conversion
into common stock at a price of $4.50 per share and included the
issuance of one warrant for each $22.50 of principal amount
purchased. The Company issued a total of 203,085 of these five-year
warrants to purchase common stock at an exercise price of $6.00 per
share. The value of the warrant shares was $562,404 and the amount
recorded for the beneficial conversion feature was $195,466. These
amounts were recorded as a discount on the 12% Notes.
During the quarter ended March 31, 2015, the Company amended a note
with a holder of a $1,000,000 Series B Convertible Unsecured
Promissory Note to reset the conversion price to
$1.00.
During the fourth quarter of 2015, $1 million in note principal was
converted into common stock. The total outstanding balance of
Series B Notes at December 31, 2016 was $3,569,500.
10. ASSET RETIREMENT OBLIGATIONS
The following is a reconciliation of the asset retirement
obligation liability through December 31, 2016:
|
Asset
retirement obligation – December 31, 2014
|
$35,951
|
|
|
|
|
Accretion
expense
|
3,492
|
|
Removal
of ARO for wells sold
|
(10,360)
|
|
|
|
|
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
|
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SUBSEQUENT EVENTS
Acquisition of Additional Interest in the 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.
Also on
January 30, 2017, our wholly-owned subsidiary, Torchlight Energy,
Inc., a Nevada corporation (“TEI”), entered into and
closed a Purchase and Sale Agreement with Wolfbone Investments,
LLC, a Texas limited liability company (“Wolfbone”)
which is wholly-owned by Gregory McCabe. Under the agreement, TEI
acquired certain of Wolfbone’s Hazel Project assets,
including its interest in the Flying B Ranch #1 well and the 40
acre unit surrounding the well, for consideration of $415,000, and
additionally, Wolfbone caused to be cancelled a total of 2,780,000
warrants to purchase our common stock, including 1,500,000 warrants
held by McCabe Petroleum Corporation, an entity owned by Mr.
McCabe, and 1,280,000 warrants held by Green Hill Minerals, an
entity owned by Mr. McCabe’s son, which warrant cancellations
were effected through certain Warrant Cancellation Agreements. The
1,500,000 warrants held by McCabe Petroleum Corporation had an
exercise price of $1.00 per share and an expiration date of April
4, 2021. The warrants held by Green Hill Minerals included 100,000
warrants with an exercise price of $1.73 and an expiration date of
September 30, 2018 and 1,180,000 warrants with an exercise price of
$0.70 and an expiration date of February 15, 2020.
After
the above transactions, our total ownership in the Hazel Project
increased to a 74% working interest across all 12,000 gross
acres.
53
TORCHLIGHT ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
The
unaudited supplemental information on oil and gas exploration and
production activities has been presented in accordance with
Financial Accounting Standards Board Accounting Standards
Codification Topic 932, Extractive
Activities—Oil and Gas and the SEC’s final rule,
Modernization of Oil and Gas
Reporting.
Investment in oil and gas properties during the years ended
December 31, 2016 and 2015 is detailed as follows:
|
|
2016
|
2015
|
|
Property
acquisition costs
|
$615,000
|
$-
|
|
Development
costs
|
1,678,497
|
4,518,239
|
|
Exploratory
costs
|
-
|
-
|
|
|
|
|
|
Totals
|
$2,293,497
|
$4,518,239
|
Property acquisition cost relates to the Company’s
acquisition of the Hazel Project in West Texas. The development
costs include reentry of the Johnson #4 well in the south Texas
Marcelina area (sold in 2016) and development costs in the
Orogrande and Hazel projects in west Texas. No development costs
were incurred for Oklahoma properties in 2016.
Oil and Natural Gas Reserves
Reserve Estimates
SEC Case. The following tables
sets forth, as of December 31, 2016, our estimated net proved oil
and natural gas reserves, the estimated present value (discounted
at an annual rate of 10%) of estimated future net revenues before
future income taxes (PV-10) and after future income taxes
(Standardized Measure) of our proved reserves and our estimated net
probable oil and natural gas reserves, each prepared using standard
geological and engineering methods generally accepted by the
petroleum industry and in accordance with assumptions prescribed by
the Securities and Exchange Commission
(“SEC”). All of our reserves are located in
the United States.
The PV-10 value is a widely used measure of value of oil and
natural gas assets and represents a pre-tax present value of
estimated cash flows discounted at ten percent. PV-10 is considered
a non-GAAP financial measure as defined by the SEC. We believe that
our PV-10 presentation is relevant and useful to our investors
because it presents the estimated discounted future net cash flows
attributable to our proved reserves before taking into account the
related future income taxes, as such taxes may differ among various
companies. We believe investors and creditors use PV-10
as a basis for comparison of the relative size and value of our
proved reserves to the reserve estimates of other companies. PV-10
is not a measure of financial or operating performance under GAAP
and neither it nor the Standardized Measure is intended to
represent the current market value of our estimated oil and natural
gas reserves. PV-10 should not be considered in isolation or as a
substitute for the standardized measure of discounted future net
cash flows as defined under GAAP.
The estimates of our proved reserves and the PV-10 set forth herein
reflect estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and
future development costs, using prices and costs under existing
economic conditions at December 31, 2016. For purposes of
determining prices, we used the average of prices received for each
month within the 12-month period ended December 31, 2016, adjusted
for quality and location differences, which was $42.75 per barrel
of oil and $2.33 per MCF of gas. This average historical
price is not a prediction of future prices. The amounts shown do
not give effect to non-property related expenses, such as corporate
general administrative expenses and debt service, future income
taxes or to depreciation, depletion and amortization.
54
|
|
December 31, 2016
|
December 31, 2016
|
|||
|
|
Reserves
|
Future Net Revenue (M$)
|
|||
|
|
|
|
|
|
Present Value Discounted
|
|
Category
|
Oil (Bbls)
|
Gas (Mcf)
|
Total (BOE)
|
Total
|
at 10%
|
|
|
|
|
|
|
|
|
Proved
Producing
|
1,400
|
23,300
|
5,284
|
$31
|
$29
|
|
Proved
Nonproducing
|
46,800
|
467,600
|
124,733
|
$776
|
$301
|
|
Total
Proved
|
48,200
|
490,900
|
130,017
|
$807
|
$330
|
|
|
|
|
|
|
|
|
Standardized
Measure of Future Net Cash Flows Related to Proved Oil and Gas
Properties
|
|
|
|
|
$341
|
|
|
|
|
|
|
|
|
Probable
Undeveloped
|
-
|
-
|
-
|
$-
|
$-
|
Reserve values as of December 31, 2016 are related to a single
producing well in Oklahoma – the Judy well in the Prairie
Grove AMI.
|
|
December 31, 2015
|
December 31, 2015
|
|||
|
|
Reserves
|
Future
Net Revenue (M$)
|
|||
|
|
|
|
|
|
Present
Value Discounted
|
|
Category
|
Oil
(Bbls)
|
Gas
(Mcf)
|
Total
(BOE)
|
Total
|
at
10%
|
|
|
|
|
|
|
|
|
Proved
Producing
|
14,210
|
34,400
|
19,943
|
$322
|
$280
|
|
Proved
Nonproducing
|
40,170
|
-
|
40,170
|
$860
|
$763
|
|
Total
Proved
|
54,380
|
34,400
|
60,113
|
$1,182
|
$1,043
|
|
|
|
|
|
|
|
|
Standardized Measure of Future Net Cash Flows Related to Proved Oil
and Gas Properties
|
|
|
|
|
$5,935
|
|
|
|
|
|
|
|
|
Probable
Undeveloped
|
-
|
-
|
-
|
$-
|
$-
|
BOE equivalents are determined by combining barrels of oil with MCF
of gas divided by six.
55
|
Standardized
Measure of Oil & Gas Quantities - Volume
Rollforward
|
||||||
|
Years Ended December 31, 2016 and
2015
|
||||||
|
|
|
|
|
|
|
|
|
The
following table sets forth the Company’s net proved reserves,
including changes, and proved developed reserves:
|
||||||
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
||||
|
|
Oil
(Bbls)
|
Gas
(Mcf)
|
BOE
|
Oil
(Bbls)
|
Gas
(Mcf)
|
BOE
|
|
TOTAL
PROVED RESERVES:
|
|
|
|
|
|
|
|
Beginning
of period
|
54,380
|
34,400
|
60,113
|
914,400
|
3,790,650
|
1,546,175
|
|
Acquisition
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Extensions
and discoveries
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Divestiture
of reserves
|
(52,600)
|
-
|
(52,600)
|
(394,400)
|
(2,483,950)
|
(808,391)
|
|
Revisions
of previous estimates
|
54,908
|
493,013
|
137,078
|
(437,639)
|
(1,159,071)
|
(630,818)
|
|
Production
|
(8,488)
|
(36,513)
|
(14,574)
|
(27,981)
|
(113,229)
|
(46,853)
|
|
End
of period
|
48,200
|
490,900
|
130,017
|
54,380
|
34,400
|
60,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVED
DEVELOPED RESERVES
|
|
|
|
|
|
|
|
Proved
developed producing
|
1,400
|
23,300
|
5,284
|
14,210
|
34,400
|
19,943
|
|
Proved
nonproducing
|
46,800
|
467,600
|
124,733
|
40,170
|
-
|
40,170
|
|
Total
|
48,200
|
490,900
|
130,017
|
54,380
|
34,400
|
60,113
|
|
|
|
|
|
|
|
|
|
Total
Proved Undeveloped
|
-
|
-
|
-
|
-
|
-
|
-
|
The decrease attributable to divestiture of reserves is from the
sale of Oklahoma properties - the Cimarron properties in second
quarter, 2016.
The upward revisions of previous estimates of 54,908 Bbls and
493,013 MCF results primarily from 2016 reserve report calculations
for the Company’s properties driven by industry conditions
and the change in the proportional quantities of oil and gas in
production from the Judy well in Oklahoma from 2015 to
2016.
56
|
Standardized Measure of Oil & Gas Quantities
|
||
|
Year Ended December 31, 2016 and 2015
|
||
|
|
|
|
|
The
standardized measure of discounted future net cash flows
relating
|
|
|
|
to
proved oil and natural gas reserves is as follows :
|
2016
|
2015
|
|
|
|
|
|
Future
cash inflows
|
$3,156,970
|
$2,410,202
|
|
Future
production costs
|
(1,000,410)
|
(1,169,591)
|
|
Future
development costs
|
(1,350,000)
|
(58,575)
|
|
Future
income tax expense
|
-
|
5,818,722
|
|
Future
net cash flows
|
806,560
|
7,000,758
|
|
10%
annual discount for estimated
|
|
|
|
timing
of cash flows
|
(465,644)
|
(1,065,570)
|
|
Standardized
measure of discounted future
|
|
|
|
net
cash flows related to proved reserves
|
$340,916
|
$5,935,188
|
|
|
|
|
|
A
summary of the changes in the standardized measure of
discounted
|
|
|
|
future
net cash flows applicable to proved oil and natural gas
reserves
|
|
|
|
is
as follows :
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
$5,935,188
|
$23,018,966
|
|
Sales
and transfers of oil and gas produced during the
period
|
(29,749)
|
(762,423)
|
|
Net
change in sales and transfer prices and in production (lifting)
costs related to future production
|
(482,569)
|
(18,010,821)
|
|
Net
change due to sales of reserves
|
-
|
(14,026,302)
|
|
Net
change due to sales of minerals in place
|
(191,470)
|
-
|
|
Net
change due to extensions and discoveries
|
-
|
-
|
|
Changes
in estimated future development costs
|
(791,630)
|
19,563,576
|
|
Previously
estimated development costs incurred during the period
|
58,575
|
357,033
|
|
Net
change due to revisions in quantity estimates
|
482,272
|
(11,062,826)
|
|
Other
|
172,169
|
(858,606)
|
|
Accretion
of discount
|
80,393
|
2,146,235
|
|
Net
change in income taxes
|
(4,892,263)
|
5,570,356
|
|
Balance,
end of year
|
$340,916
|
$5,935,188
|
Due to the inherent uncertainties and the limited nature of
reservoir data, both proved and probable reserves are subject to
change as additional information becomes available. The estimates
of reserves, future cash flows, and present value are based on
various assumptions, including those prescribed by the SEC, and are
inherently imprecise. Although we believe these estimates are
reasonable, actual future production, cash flows, taxes,
development expenditures, operating expenses, and quantities of
recoverable oil and natural gas reserves may vary substantially
from these estimates.
In estimating probable reserves, it should be noted that those
reserve estimates inherently involve greater risk and uncertainty
than estimates of proved reserves. While analysis of geoscience and
engineering data provides reasonable certainty that proved reserves
can be economically producible from known formations under existing
conditions and within a reasonable time, probable reserves involve
less certainty than reserves with a higher classification due to
less data to support their ultimate recovery. Probable reserves
have not been discounted for the additional risk associated with
future recovery. Prospective investors should be aware
that as the categories of reserves decrease with certainty, the
risk of recovering reserves at the PV-10 calculation
increases. The reserves and net present worth discounted
at 10% relating to the different categories of proved and probable
have not been adjusted for risk due to their uncertainty of
recovery and thus are not comparable and should not be summed into
total amounts.
57
Reserve Estimation Process, Controls and Technologies
The reserve estimates, including PV-10 estimates, set forth above
were prepared by PeTech Enterprises, Inc. for the Company’s
properties in Oklahoma. A copy of their full reports
with regard to our reserves is attached as Exhibit 99.1 to this
annual report on Form 10-K. These calculations were
prepared using standard geological and engineering methods
generally accepted by the petroleum industry and in accordance with
SEC financial accounting and reporting standards.
We do not have any employees with specific reservoir engineering
qualifications in the company. Our Chairman and Chief
Executive Officer worked closely with PeTech Enterprises Inc. in
connection with their preparation of our reserve estimates,
including assessing the integrity, accuracy, and timeliness of the
methods and assumptions used in this process.
PeTech Enterprises, Inc. (“PeTech”), who provided 2016
reserve estimates for our Oklahoma Properties, is a Texas based
profitable, family owned oil and gas production and Investment
Company that provides reservoir engineering, economics and
valuation support to energy banks, energy companies and law firms
as an expert witness. PeTech has been in business since
1982. Amiel David is the President of PeTech and the
primary technical person in charge of the estimates of reserves and
associated cash flow and economics on behalf of the company for the
results presented in its reserves report to us. He has a
PhD in Petroleum Engineering from Stanford
University. He is a registered Professional
Engineer in the state of Texas (PE #50970), granted in 1982, a
member of the Society of Petroleum Engineers and a member of the
Society of Petroleum Evaluation Engineers.
|
Results of Operations for Oil and Gas Producing
Activities
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
Total
|
Texas
|
Oklahoma
|
Kansas
|
|
|
|
|
|
|
|
Oil
and Gas revenue
|
$354,390
|
$151,548
|
$165,154
|
$37,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
costs
|
328,438
|
203,735
|
101,581
|
23,122
|
|
Depreciation,
depletion, and amortization
|
623,611
|
273,378
|
339,170
|
11,063
|
|
Exploration
expenses
|
-
|
-
|
-
|
-
|
|
|
952,049
|
477,113
|
440,751
|
34,185
|
|
|
|
|
|
|
|
Income
tax expense
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations (excluding corporate overhead
|
|
|
|
|
|
and
interest costs)
|
$(597,659)
|
$(325,565)
|
$(275,597)
|
$3,503
|
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer (principal executive officer)
and Chief Financial Officer (principal financial officer), we
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act, as of December 31, 2016.
Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were
not effective to ensure that the information required to be
disclosed by us in the reports we submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the applicable rules and forms and that such
information was accumulated and communicated to our Chief Executive
Officer and Chief Financial Officer, in a manner that allowed for
timely decisions regarding disclosure. This determination is based
on the material weaknesses management identified in our internal
control over financial reporting, as described below. Subsequent to
December 31, 2016, we have worked at remediating the material
weaknesses (see “Remediation Process” below) which
should remedy our disclosure controls and procedures, but we will
continue to monitor this issue.
Notwithstanding the results of the evaluation above, we believe all
of our reports submitted under the Exchange Act contain, in all
material respects, the information required to be disclosed by us
in such reports.
Management’s Annual Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management,
including our Chief Executive Officer and our Chief Financial
Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2016. In making this
assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control — Integrated
Framework (2013). A material weakness in internal controls is
a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely
basis. Because of its inherent limitations, even appropriate
internal control over financial reporting may not prevent or detect
misstatements.
Based
on this assessment, management concluded that we did not maintain
effective internal control over financial reporting.
Specifically, management identified material weaknesses over the
accounting for stock options issued to employees and nonemployees
and stock warrants issued for services, property and financings. We
use the Black-Scholes Option Pricing Model (“BSM”) to
estimate the value of stock options and warrants issued. Variables
used in the BSM can have a significant impact on calculated values.
For the variables used in the BSM, we did not calculate historical
volatility based on a widely used approach, and we did not
recognize expense over the service period.
This
control deficiency resulted in audit adjustments in preparation of
this Annual Report on Form 10-K. The impact on previously issued
financial statements was not determined to be
significant.
Changes in Internal Control over Financial Reporting
Other
than as described below under “Remediation Process,”
there were no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the
Exchange Act) that occurred during the three months ended December
31, 2016 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
59
ITEM 9A. CONTROLS AND PROCEDURES -
continued
Remediation Process
While
certain actions have been taken to enhance our internal control
over financial reporting relating to the material weaknesses
identified above, we are still in the process of implementing our
comprehensive remediation plan. Following the identification of the
material weaknesses described above, and with the oversight of the
Audit Committee, we commenced a process to remediate the underlying
causes of those material weaknesses, enhance the control
environment and strengthen our internal control over financial
reporting. Those steps include review and implementation of equity
compensation controls, policies and plan documentation to ensure
those terms are accounted for and require timely review by our
Chief Financial Officer, or an appropriate designee, of all
compensation arrangements for proper accounting treatment, with
prior approval required for any revision to or deviation from any
pre-defined equity compensation plans.
The
status of our remediation plan is being, and will continue to be,
reported by management to the Audit Committee of the Board of
Directors on a regular basis. In addition, we have assigned
personnel to oversee the remedial changes to the overall design of
our internal control environment and to address the root causes of
our material weaknesses. Remediation generally requires making
changes to how controls are designed and then adhering to those
changes for a sufficient period of time such that the operating
effectiveness of those changes is demonstrated through
testing.
As we continue to evaluate and work to improve our internal control
over financial reporting, we may take additional measures to
address these control deficiencies or modify our remediation plan.
We cannot make assurances, however, of when we will remediate such
weaknesses, nor can we be certain of whether additional actions
will be required. See above under Item 1A. Risk Factors, the risk
factor titled, We have identified
material weaknesses in our internal control over financial
reporting which could, if not remediated, adversely affect our
ability to report our financial condition and results of operations
in a timely and accurate manner.
Limitations on Effectiveness of Controls and
Procedures
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that disclosure controls or
internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system
must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company
have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake.
Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people or by
management’s override of the control. The design
of any systems of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time,
control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud
may occur and not be detected. Individual persons may
perform multiple tasks which normally would be allocated to
separate persons and therefore extra diligence must be exercised
during the period these tasks are combined.
ITEM 9B. OTHER INFORMATION
Not applicable.
60
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Our executive officers and directors are as follows:
|
Name
|
|
Age
|
|
Position(s) and Office(s)
|
|
John A. Brda
|
|
52
|
|
Chief Executive Officer, Secretary and Director
|
|
Roger N. Wurtele
|
|
70
|
|
Chief Financial Officer
|
|
Greg McCabe, Sr.
|
|
55
|
|
Director
|
|
Alexandre Zyngier
|
|
47
|
|
Director
|
|
R. David Newton
|
|
62
|
|
Director
|
|
E. Scott Kimbrough
|
|
66
|
|
Director
|
Below is certain biographical information of our executive officers
and directors:
John A. Brda – Mr. Brda
has been our Chief Executive Officer since December 2014 and our
President and Secretary and a member of the Board of Director since
January 2012. He has been the Managing Member of Brda
& Company, LLC since 2002, which provided consulting services
to public companies—with a focus in the oil and gas
sector—on investor relations, equity and debt financings,
strategic business development and securities regulation matters,
prior to him becoming President of the company.
We believe Mr. Brda is an excellent fit to our Board of Directors
and management team based on his extensive experience in
transaction negotiation and business development, particularly in
the oil and gas sector as well as other non-related
industries. He has consulted with many public companies
in the last ten years, and we believe that his extensive network of
industry professionals and finance firms will contribute to our
success.
Roger N. Wurtele – Mr.
Wurtele has served as our Chief Financial Officer since September
2013. He is a versatile, experienced finance executive
that has served as Chief Financial Officer for several public and
private companies. He has a broad range of experience in public
accounting, corporate finance and executive
management. Mr. Wurtele previously served as CFO of
Xtreme Oil & Gas, Inc. from February 2010 to September
2013. From May 2013 to September 2013 he worked as a
financial consultant for us. From November 2007 to
January 2010, Mr. Wurtele served as CFO of Lang and Company LLC, a
developer of commercial real estate projects. He
graduated from the University of Nebraska and has been a Certified
Public Accountant for 40 years.
Gregory McCabe – Mr. McCabe has been a member of our
Board of Directors since July 2016 and was appointed Chairman
of the Board in
October 2016. He is an experienced geologist who brings over 32
years of oil and gas experience to our company. He is a principal
of numerous oil and gas focused entities including McCabe Petroleum
Corporation, Manix Royalty, Masterson Royalty Fund and GMc
Exploration. He has been the President of McCabe Petroleum
Corporation from 1986 to the present. Mr. McCabe has been involved
in numerous oil and gas ventures throughout his career and has a
vast experience in technical evaluation, operations and
acquisitions and divestitures. Mr. McCabe is also our largest
stockholder and provided entry for us into our two largest assets,
the Hazel Project in the Midland Basin and the Orogrande Project in
Hudspeth County, Texas.
We
believe that Mr. McCabe’s background in geology and his many
years in the oil and gas industry compliments the Board
of
Directors.
E. Scott Kimbrough - Mr. Kimbrough has served on our Board
of Directors since October 2016. He is the owner of multiple
independent oil and gas related companies, which he has managed for
more than 20 years, including serving as the President of Maverick
Oil & Gas Corporation for the last 22 years. His diverse oil
and gas background spans 39 years and includes roles ranging from
field operations to senior corporate management. Mr. Kimbrough
began his career with Arco Oil & Gas Company, followed by work
with independents including Quintana Petroleum Corporation, Lasmo
Energy, and Nearburg Producing Company. His focus has been in
domestic U.S. fields including the Permian Basin in West Texas and
Southeast New Mexico, on and offshore Gulf Coast, Midcontinent,
Rocky Mountain area and onshore California. Mr. Kimbrough received
a Bachelor of Science in Personnel Management (Business) from
Louisiana Tech University and a Bachelor of Science in Mechanical
Engineering from Texas A&M University. He is a Registered
Petroleum Engineer in the State of Texas.
We
believe Mr. Kimbrough’s wide ranging experience in operating
E&P (exploration and production) companies make him an
excellent fit to the Board of Directors.
61
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE -
continued
R. David Newton - Mr. Newton has been a member of our Board
of Directors since October 2016. He has more than 25 years of
experience in management consulting from various positions he has
held with U.S. based investment firms. Additionally, he has been
active in farming, ranching and oil and gas exploration for over 30
years. Since 1994 he has owned and managed R. David Newton and
Associates, a management consulting and investment firm, through
which he has focused on funding venture capital, channel
distribution, startups, second and third stage financings, and
corporate turnarounds. He holds a Bachelor of Science degree from
the University of Texas at Austin.
Mr.
Newton brings a depth of relationships developed through decades of
participation in corporate finance and operational skills obtained
while focused on helping growth stage entities involved in oil and
natural gas, aerospace, timber and various other industries, and
accordingly can make a substantial contribution to the
Board.
Alexandre Zyngier - Mr. Zyngier has served on our Board of
Directors since June 2016. He has been the Managing Director
of
Batuta
Advisors since founding it in August 2013. The firm pursues high
return investment and advisory opportunities in the distressed and
turnaround sectors. Mr. Zyngier has over 20 years of investment,
strategy, and operating experience. He is currently a director of
Atari SA, AudioEye Inc. and GT Advanced Technologies, Inc. Before
starting Batuta Advisors, Mr. Zyngier was a portfolio manager at
Alden Global Capital from February 2009 until August 2013,
investing in public and private opportunities. He has also worked
as a portfolio manager at Goldman Sachs & Co. and Deutsche Bank
Co. Additionally, he was a strategy consultant at McKinsey &
Company and a technical brand manager at Procter & Gamble. Mr.
Zyngier holds an MBA in Finance and Accounting from the University
of Chicago and a BS in Chemical Engineering from UNICAMP in
Brazil.
We
believe that Mr. Zyngier’s investment experience and his
experience in overseeing a broad range of companies will greatly
benefit the Board of Directors.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own beneficially
more than ten percent of our common stock, to file reports of
ownership and changes of ownership with the Securities and Exchange
Commission. Based solely upon a review of Forms 3, 4 and 5
furnished to us during the fiscal year ended December 31, 2016, we
believe that the directors, executive officers, and greater than
ten percent beneficial owners have complied with all applicable
filing requirements during the fiscal year ended December 31, 2016,
with the exception of (i) a Form 4 filed late by E. Scott
Kimbrough, (ii) a Form 4 filed late by R. David Newton, (iii) a
Form 4 filed late by Gregory McCabe, and (iv) a Form 3 filed late
by Alexandre Zyngier.
Code of Ethics
We have adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions. The Code of Ethics is available at our
website at torchlightenergy.com. Further, we undertake
to provide by mail to any person without charge, upon request, a
copy of such code of ethics if we receive the request in writing by
mail to: Torchlight Energy Resources, Inc., 5700 W. Plano Parkway,
Suite 3600, Plano, Texas 75093.
Procedures for Stockholders to Recommend Nominees to the
Board
There have been no material changes to the procedures by which
stockholders may recommend nominees to our Board of Directors since
we last provided disclosure regarding this process.
Audit Committee
We maintain a separately-designated standing audit
committee. The Audit Committee currently consists of our
three independent directors, Alexandre Zyngier, E. Scott Kimbrough,
and R. David Newton. Mr. Zyngier is the Chairman of the Audit
Committee, and the Board of Directors has determined that he is an
audit committee financial expert as defined in Item 5(d)(5) of
Regulation S-K. The primary purpose of the Audit Committee is to
oversee our accounting and financial reporting processes and audits
of our financial statements on behalf of the Board of Directors.
The Audit Committee meets privately with our management and with
our independent registered public accounting firm and evaluates the
responses by our management both to the facts presented and to the
judgments made by our outside independent registered public
accounting firm.
62
ITEM 11. EXECUTIVE COMPENSATION
The following table provides summary information for the years 2016
and 2015 concerning cash and non-cash compensation paid or accrued
to or on behalf of certain executive officers.
Summary Executive Compensation Table
|
|
Year
|
Salary
|
Bonus
|
Stock
|
Option
|
Non-Equity
|
Change in
|
All Other
|
Total
|
||
|
|
|
($)
|
($)
|
Awards
|
Awards
|
Incentive
|
Pension
|
Compensation
|
($)
|
||
|
|
|
|
|
($)
|
($)
|
Plan
|
Value
|
($)
|
|
||
|
|
|
|
|
|
(A)
|
Compensation
|
and
|
|
|
|
|
|
Name and
|
|
|
|
|
|
($)
|
Nonqualified
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Position
|
|
|
|
|
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
($)
|
|
|
||
|
John A. Brda
|
2016
|
$375,000
|
-
|
-
|
$712,500
|
(1)
|
-
|
-
|
-
|
|
$1,087,500
|
|
President and CEO
|
2015
|
$337,500
|
-
|
-
|
$1,530,000
|
(1)
|
-
|
-
|
-
|
|
$1,867,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Willard G. McAndrew III
|
2016
|
$310,526
|
-
|
-
|
$356,250
|
(1)(2)
|
-
|
-
|
$400,512
|
(3)
|
$1,067,288
|
|
Former COO (2)
|
2015
|
$337,500
|
-
|
-
|
$1,530,000
|
(1)
|
-
|
-
|
-
|
|
$1,867,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger Wurtele
|
2016
|
$225,000
|
-
|
-
|
$356,250
|
(1)
|
-
|
-
|
-
|
|
$581,250
|
|
CFO
|
2015
|
$202,500
|
-
|
-
|
$765,000
|
(1)
|
-
|
-
|
-
|
|
$967,500
|
|
(A)
|
Stock Value as applicable is determined using the Black Scholes
Method.
|
|
(1)
|
On June 11, 2015, we granted new stock option awards to our
executive officers, as follows: (i) 3,000,000 stock options to John
Brda, President and Chief Executive Officer; (ii) 3,000,000 stock
options to Willard G. McAndrew, then Chief Operating Officer; and
(iii) 1,500,000 stock options to Roger Wurtele, Chief Financial
Officer. The options were granted under our 2015 Stock Option Plan
which plan was approved by stockholders on September 9, 2015. The
options are subject to a two-year vesting schedule with one-half
vesting September 9, 2015, one-fourth vesting after one year of the
grant date, and the remaining one-fourth vesting after the second
year, provided however that the options will be subject to earlier
vesting under certain events set forth in the 2015 Stock Option
Plan, including without limitation a change in
control.
|
|
(2)
|
Willard G. McAndrew resigned as Chief Operating Officer and
director on October 6, 2016. In connection with his resignation, on
September 28, 2016 we entered into a Resignation and Settlement
Agreement (the “Resignation Agreement”) with Mr.
McAndrew, which agreement became effective on October 5, 2016 (the
“Effective Date”). Under the terms and conditions of
the agreement, on the Effective Date (i) the entire unvested
portion of Mr. McAndrew’s stock options granted pursuant to
his Stock Option Agreement dated June 11, 2015 (the “Stock
Options”) did not vest and became null and void, amounting to
the termination of 750,000 unvested Stock Options, and Mr. McAndrew
surrendered for cancellation a total of 250,000 vested Stock
Options (valued at $255,000), leaving Mr. McAndrew with 2,000,000
Stock Options at an exercise price of $1.57 per share that he was
granted pursuant to the Stock Option Agreement, (ii) the Stock
Options were modified to expire on June 11, 2019, and (iii) we owed
Mr. McAndrew a total amount of cash compensation of $789,454, all
of which was used to exercise a portion of the Stock Options, and
accordingly, he was issued a total of 502,837 shares of common
stock pursuant to the exercise of the Stock Options, leaving him
with 1,497,163 of those Stock Options.
|
|
(3)
|
Of the $789,454 in cash compensation owed to Mr. McAndrew under the
Resignation Agreement (see footnote 2 above), $388,942 was for
accrued and unpaid salary and bonuses and $400,512 was a severance
payment equal to one year of salary plus the cash value of health
benefits owed pursuant to his employment agreement.
|
Setting Executive Compensation
We fix executive base compensation at a level we believe enables us
to hire and retain individuals in a competitive environment and to
reward satisfactory individual performance and a satisfactory level
of contribution to our overall business goals. We also take into
account the compensation that is paid by companies that we believe
to be our competitors and by other companies with which we believe
we generally compete for executives.
63
ITEM 11. EXECUTIVE COMPENSATION -
continued
In establishing compensation packages for executive officers,
numerous factors are considered, including the particular
executive’s experience, expertise, and performance, our
company’s overall performance, and compensation packages
available in the marketplace for similar positions. In arriving at
amounts for each component of compensation, our Compensation
Committee strives to strike an appropriate balance between base
compensation and incentive compensation. The Compensation Committee
also endeavors to properly allocate between cash and non-cash
compensation (including without limitation stock and stock option
awards) and between annual and long-term compensation.
Employment Agreements
On June 16, 2015, we entered into new five-year employment
agreements with each of John Brda, our President and Chief
Executive Officer; Willard G. McAndrew, our then Chief Operating
Officer; and Roger Wurtele, our Chief Financial Officer. Under the
new agreements, which replace and supersede their prior employment
agreements, each individual’s salary was increased by 25%, so
that the salaries of Messrs. Brda, McAndrew and Wurtele were
$375,000, $375,000 and $225,000, respectively, provided these
salary increases will accrue unpaid until such time as management
believes there is adequate cash for such increases. Also under the
new agreements, each individual was eligible for a bonus, at the
Compensation Committee’s discretion, of up to two times his
salary and be eligible for any additional stock options, as deemed
appropriate by the Compensation Committee. Each agreement also
provided that if we (or our successor) terminate the employee upon
the occurrence of a change in control, the employee will be paid in
one lump sum his salary and any bonus or other amounts due through
the end of the term of the agreement. Each employment agreement
also has a covenant not to compete.
Willard G. McAndrew resigned as Chief Operating Officer and
director on October 6, 2016. In connection with his resignation, on
September 28, 2016 we entered into a Resignation and Settlement
Agreement (the “Resignation Agreement”) under the terms
of which his employment agreement terminated—see footnotes 2
and 3 to the “Summary Executive Compensation Table”
above. Under the Resignation Agreement, Mr. McAndrew continues to
be bound by confidentiality and non-compete provisions (subject to
certain modifications) of his terminated employment agreement. Also
pursuant to the Resignation Agreement, we agreed to file a
registration statement covering the resale of 1,500,000 shares
underlying certain outstanding stock options and 900,000 shares
underlying warrants he beneficially owns, for a total of 2,400,000
shares—all of which have an exercise price of $2.09. The
Resignation Agreement provides mutual release and indemnification
provisions, as well as an arbitration provision.
Outstanding Equity Awards at Fiscal Year End
The following table details all outstanding equity awards held by
our named executive officers at December 31, 2016:
|
|
Option Awards
|
|
|
|
|
||
|
|
Number of
|
Number of
|
Equity Incentive
|
|
|
||
|
|
Securities
|
Securities
|
Plan Awards: Number of
|
|
|
||
|
|
Underlying
|
Underlying
|
Securities
|
|
|
||
|
|
Unexercised
|
Unexercised
|
Underlying
|
Option
|
|
||
|
|
Options
|
Options
|
Unexercised
|
Exercise
|
Option
|
||
|
|
(#)
|
(#)
|
Unearned Options
|
Price
|
Expiration
|
||
|
Name
|
Exercisable
|
Unexercisable
|
(#)
|
($)
|
Date
|
||
|
|
|
|
|
|
|
|
|
|
John
A. Brda
|
245,000
|
|
-
|
|
-
|
$2.00
|
9/4/2018
|
|
|
2,250,000
|
(1)
|
750,000
|
(1)
|
-
|
$1.57
|
6/11/2020
|
|
|
|
|
|
|
|
|
|
|
Willard
G. McAndrew III
|
900,000
|
|
-
|
|
-
|
$2.09
|
4/15/2018
|
|
|
1,500,000
|
(2)(3)
|
-
|
|
-
|
$2.09
|
9/9/2018
|
|
|
1,497,163
|
(1)(4)
|
-
|
|
-
|
$1.57
|
6/11/2019
|
|
|
|
|
|
|
|
|
|
|
Roger
Wurtele
|
300,000
|
(5)(6)
|
-
|
|
-
|
$2.09
|
10/10/2018
|
|
|
1,125,000
|
(1)
|
375,000
|
(1)
|
-
|
$1.57
|
6/11/2020
|
64
ITEM 11. EXECUTIVE COMPENSATION -
continued
|
(1)
|
The options were awarded on June 11, 2015. The options were granted
under our 2015 Stock Option Plan which plan was approved by
stockholders on September 9, 2015. The options are subject to a
two-year vesting schedule with one-half vesting on September 9,
2015, one-fourth vesting after one year of the grant date, and the
remaining one-fourth vesting after the second year, provided
however that the options will be subject to earlier vesting under
certain events set forth in the 2015 Stock Option Plan, including
without limitation a change in control.
|
|
(2)
|
Mr. McAndrew gifted these options to WMDM Family, Ltd. The general
partner and 1% owner of WMDM Family, Ltd. is a limited liability
company which is owned by a trust of which Mr. McAndrew is a
beneficiary.
|
|
(3)
|
These options were awarded to Mr. McAndrew in September 2013, and
vested on January 2, 2014.
|
|
(4)
|
In connection with his resignation in October 2016, (i) the entire
unvested portion of Mr. McAndrew’s stock options granted on
June 11, 2015 did not vest and became null and void, amounting to
the termination of 750,000 unvested stock options, (ii)
Mr. McAndrew surrendered for
cancellation a total of 250,000 vested stock options, and (iii) the
remaining stock options were modified to expire on June 11,
2019.
|
|
(5)
|
Mr. Wurtele gifted these options to Birch Glen Investments Ltd. Mr.
Wurtele and his wife together hold a 98% interest in the general
partner of Birch Glen Investments Ltd.
|
|
(6)
|
These options were awarded to Mr. Wurtele in October 2013. 100,000
options vested in October 2013 and the remaining 200,000 options
vested on January 2, 2014.
|
Compensation of Directors
We have no standard arrangement pursuant to which directors are
compensated for any services they provide or for committee
participation or special assignments. We anticipate, however,
implementing more standardized director compensation arrangements
in the near future.
Summary Director Compensation Table
Compensation to directors during the year ended December 31, 2016
was as follows:
|
|
Fees Earned
|
|
|
Option Awards
|
|
Nonqualified
|
|
|
|
|
|
Paid
|
|
|
|
|
Non-Equity
|
Deferred
|
All
|
|
|
|
in
|
Stock
|
Option
|
Incentive Plan
|
Compensation
|
Other
|
|
||
|
|
Cash
|
Awards
|
Awards
|
Compensation
|
Earnings
|
Compensation
|
Total
|
||
|
Name
|
($)
|
($)
(A)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||
|
|
|
|
|
|
|
|
|
||
|
E.
Scott Kimbrough
|
-
|
-
|
|
100,000
|
(1)
|
-
|
-
|
-
|
$100,000
|
|
R.
David Newton
|
|
-
|
|
100,000
|
(1)
|
-
|
-
|
-
|
$100,000
|
|
Alexandre
Zyngier
|
-
|
137,500
|
(2)
|
-
|
|
-
|
-
|
-
|
$137,500
|
|
(A)
|
Stock Value as applicable is determined using the Black Scholes
Method.
|
|
(1)
|
On November 3, 2016, this director was granted $72,728 worth of
director compensation payable, at his election, in either (i) stock
options under the 2015 Stock Option Plan with an exercise price of
$0.97 with the amount of options granted based upon the
Black-Scholes pricing model or (ii) shares of common stock at $0.97
per share, which stock issuance would be subject to shareholder
approval. The director elected to receive the stock options. The
$27,272 balance of the Director Fees was accrued at December 31,
2016.
|
65
ITEM
11. EXECUTIVE COMPENSATION -
continued
|
(2)
|
In connection with the appointment of Mr. Zyngier on June 15, 2016,
the Board of Directors approved paying Mr. Zyngier $100,000 as
director compensation, payable, at the election of Mr. Zyngier,
either (i) in shares of our common stock, based on a price $0.73
per share, (ii) in cash when funds are deemed available, or (iii)
in a combination thereof. It was provided that if Mr. Zyngier
elected for us to pay him in common stock, the issuance of such
shares would be subject to stockholder approval. Mr. Zyngier
elected to receive the entire $100,000 in common stock (amounting
to 136,986 shares). Stockholders approved the issuance on December
8, 2016. Additionally, in October 2016, our Board of Directors
formed a special committee called the “Litigation
Committee,” appointed Mr. Zyngier to that committee, and
approved compensating Mr. Zyngier for his role with the Litigation
Committee by paying him up to $150,000 over four quarters, with the
first quarterly payment of $37,500 being made on October 11, 2016
and $37,500 being payable at the beginning of each three months
thereafter that certain litigation is not settled or otherwise
resolved, up to a maximum amount of $150,000. Each payment was to
either be paid in cash or common stock at our election. For a stock
payment, the amount of shares of common stock issued would be based
on the closing price of our common stock on the day of the payment.
On December 8, 2016, stockholders approved giving the Company
authority to make these payments in stock. Immediately after the
December 8, 2016 meeting of stockholders, the Board of Directors
held a meeting, at which Mr. Zyngier and the Board discussed
placing vesting restrictions on all the above shares described in
this footnote, and accordingly such shares were not immediately
issued. Subsequently in January 2017, the Board and Mr. Zyngier
agreed on what the vesting restrictions would be and we issued him
the 136,986 shares in connection with his directorship and 47,504
shares in lieu of the cash payment of $37,500 that was payable to
Mr. Zyngier on October 11, 2016 in connection with his role on the
Litigation Committee. As of the date of this report, none of these
shares have vested.
|
Compensation Policies and Practices as they Relate to Risk
Management
We attempt to make our compensation programs discretionary,
balanced and focused on the long term. We believe goals and
objectives of our compensation programs reflect a balanced mix of
quantitative and qualitative performance measures to avoid
excessive weight on a single performance measure. Our approach to
compensation practices and policies applicable to employees and
consultants is consistent with that followed for its executives.
Based on these factors, we believe that our compensation policies
and practices do not create risks that are reasonably likely to
have a material adverse effect on us.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information, as of March 21, 2017,
concerning, except as indicated by the footnotes below, (i) each
person whom we know beneficially owns more than 5% of our common
stock, (ii) each of our directors, (iii) each of our named
executive officers, and (iv) all of our directors and executive
officers as a group. The table includes these persons’
beneficial ownership of common stock. Unless otherwise noted below,
the address of each beneficial owner listed in the table is c/o
Torchlight Energy Resources, Inc., 5700 W. Plano Parkway, Suite
3600, Plano, Texas 75093. We have determined beneficial
ownership in accordance with the rules of the SEC. Except as
indicated by the footnotes below, we believe, based on the
information furnished to us, that the persons and entities named in
the table below have sole voting and investment power with respect
to all shares of common stock that they beneficially own, subject
to applicable community property laws. Applicable percentage
ownership is based on 57,862,004 shares of common stock outstanding
at March 21, 2017. In computing the number of shares of common
stock beneficially owned by a person and the percentage ownership
of that person, we deemed outstanding shares of common stock
subject to stock options or warrants held by that person that are
currently exercisable or exercisable within 60 days of March 21,
2017 and shares of common stock issuable upon conversion of other
securities held by that person that are currently convertible or
convertible within 60 days of March 21, 2017. We did not deem these
shares outstanding, however, for the purpose of computing the
percentage ownership of any other person. Unless otherwise noted,
stock options and warrants referenced in the footnotes below are
currently fully vested and exercisable. Beneficial ownership
representing less than 1% is denoted with an asterisk
(*).
66
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT -
continued
|
Shares Beneficially Owned
|
||||
|
|
||||
|
|
Common Stock
|
|||
|
Name of beneficial owner
|
|
|
% of Class
|
|
|
|
|
|
|
|
|
John A. Brda
|
|
5,063,322
|
(1)
|
8.39
|
|
President, CEO, Secretary and Director
|
|
|
|
|
|
|
|
|
|
|
|
Gregory McCabe
|
|
11,148,390
|
(2)
|
19.24
|
|
Director (Chairman of the Board)
|
|
|
|
|
|
|
|
|
|
|
|
Roger N. Wurtele
|
|
1,435,000
|
(3)
|
2.42
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
E. Scott Kimbrough
|
|
129,871
|
(4)
|
*
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
R. David Newton
|
|
129,871
|
(5)
|
*
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
Alexandre Zyngier
|
|
-
|
|
*
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (9
persons)
|
|
17,906,454
|
|
28.82
|
|
|
|
|
|
|
|
Robert Kenneth Dulin (6)
|
|
4,351,381
|
(6)
|
7.30
|
|
|
|
|
|
|
|
Willard G. McAndrew III
|
|
3,993,046
|
(7)
|
6.47
|
|
|
(1)
|
Includes 2,568,322 shares of common stock held by the John A. Brda
Trust (the “Trust”). Mr. Brda is the settlor of the
Trust and reserves the right to revoke the Trust without the
consent of another person. Further, he is the trustee of the Trust
and exercises investment control over the securities held by the
Trust. Also includes stock options that are exercisable into
2,495,000 shares of common stock, held individually by Mr.
Brda.
|
|
|
(2)
|
Includes (a) 10,264,335 shares of common stock held individually
Mr. McCabe; and (b) securities held by G Mc Exploration, LLC
(“GME”), including (i) 797,099 shares of common stock
and (ii) 86,956 shares issuable upon exercise of warrants. Mr.
McCabe may be deemed to hold beneficial ownership of securities
held by GME as a result of his ownership of 50% of the outstanding
membership interests of GME.
|
|
|
(3)
|
Includes 10,000 shares of common stock and stock options that are
exercisable into 1,125,000 shares of common stock held individually
by Mr. Wurtele. Also includes stock options held by Birch Glen
Investments Ltd. that are exercisable into 300,000 shares of common
stock. Mr. Wurtele and his wife together hold a
98% interest in the general partner of Birch Glen Investments Ltd.,
and Mr. Wurtele shares voting and investment authority over the
shares held by Birch Glen Investments Ltd. Additionally,
the general partner and 1% owner of WMDM Family, Ltd. (see footnote
“(7)” below) is a limited liability company which is
owned by a trust of which Mr. Wurtele is the
trustee. Securities held by WMDM Family, Ltd. are not
included, however, because Mr. Wurtele is not deemed to have voting
or investment authority over the shares held by WMDM Family, Ltd.
Mr. Wurtele disclaims beneficial ownership of shares held by WMDM
Family, Ltd.
|
|
|
|
|
|
|
(4)
|
Includes stock options that are exercisable into 129,871 shares of
common stock held individually by Mr. Kimbrough.
|
|
|
|
|
|
|
(5)
|
Includes stock options that are exercisable into 129,871 shares of
common stock held individually by Mr. Newton.
|
67
|
|
(6)
|
Includes (a) securities held individually by Robert Kenneth Dulin,
including (i) 27,000 shares of common stock and (ii) warrants that
are exercisable into 150,000 shares of common stock; (b) 243,360
shares of common stock held in trust for the benefit of immediate
family members of Mr. Dulin; (c) securities held by Sawtooth
Properties, LLLP (“Sawtooth”), including (i) 892,258
shares of common stock and (ii) warrants that are exercisable into
234,745 shares of common stock; (d) securities held by Black Hills
Properties, LLLP (“Black Hills”), including (i) 612,099
shares of common stock, and (ii) warrants that are exercisable into
189,956 shares of common stock; (e) securities held by Pine River
Ranch, LLC (“Pine River”), including (i) 801,939 shares
of common stock and (ii) warrants that are exercisable into 450,024
shares of common stock; and (f) securities held by Pandora Energy,
LP (“Pandora”), including warrants that are exercisable
into 750,000 shares of common stock. Mr. Dulin is
trustee/custodian of each of the trusts and/or accounts referenced
in “(b)” above and has voting and investment authority
over the shares held by them. Mr. Dulin is the Managing Partner of
Sawtooth Properties, LLLP, the Managing Partner of Black Hills, the
Managing Member of Pine River, and the General Partner of Pandora,
and he has voting and investment authority over the shares held by
each entity. Each holder of shares of Series A Preferred
Stock is entitled to the number of votes equal to the number of
shares of common stock into which such shares of Series A Preferred
could be converted. Presently, all issued and
outstanding shares of Series A Preferred are convertible at the
election of the holder. Mr. Dulin’s address is 8449 Greenwood
Drive, Niwot, Colorado, 80503.
|
|
|
(7)
|
Includes 95,883 shares of common stock and stock options that are
exercisable into 1,497,163 shares of common stock held individually
by Mr. McAndrew. Also includes securities held by WMDM Family,
Ltd., including warrants that are exercisable into 900,000 shares
of common stock and stock options that are exercisable into
1,500,000 shares of common stock. The general partner and 1% owner
of WMDM Family, Ltd. is a limited liability company of which Mr.
McAndrew is the manager. He has voting and investment authority
over the shares held by WMDM Family, Ltd.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
On April 1, 2015, Sawtooth Properties, LLLP
(“Sawtooth”), lent us $150,000 pursuant to a
convertible promissory note due September 30, 2015. Robert Kenneth
Dulin is the Managing Partner and majority owner of Sawtooth. The
Sawtooth note bearing interest at the rate of 12% per annum, with
all principal and interest due in one lump-sum. At Sawtooth’s
election, outstanding principal on the note is convertible into
shares of our common stock at a conversion price of $0.25 per
share. Accordingly, the principal on the note is convertible into
up to 600,000 shares of common stock. As part of the transaction,
we also issued Sawtooth 150,000 three-year warrants to purchase
common stock at an exercise price of $0.50 per share. Sawtooth
converted the note into common stock in September
2015.
In April 2015, Pandora Energy, LP ("Pandora"), an entity of which
Mr. Dulin is the General Partner and holds a 50% pecuniary
interest, paid $500,000 towards a proposed purchase of a working
interest in certain of our oil and gas properties. As part of the
transaction, on May 4, 2015 we issued Pandora 250,000 three-year
warrants with an exercise price of $0.50 per share. As part of the
final terms and conditions of Pandora’s purchase of the
working interest, on July 1, 2015 we issued Pandora 500,000
three-year warrants with an exercise price of $2.31 per share. Of
these 500,000 warrants, 250,000 are exercisable on September 30,
2015 and the remaining 250,000 are exercisable on December 31,
2015.
On August 6, 2015, Green Hill Minerals, LLC (“Green Hill
Minerals”) loaned us $250,000, which was repaid with $4,521
in interest on September 30, 2015. Green Hill Minerals is owned by
sons of Gregory McCabe, our Chairman. In connection with the loan,
we issued Green Hill Minerals a three-year warrant to purchase
100,000 shares of common stock at an exercise price of $1.73 per
share.
On February 15, 2016, we entered into a consulting service
agreement with Green Hill Minerals, LLC. As compensation for the
consulting services provided under the agreement, we agreed to
issue Green Hill Minerals 115,000 shares of common stock at
signing, 115,000 shares of common stock 90 days from signing,
115,000 shares of common stock 180 days from signing and 115,000
shares of common stock 270 days from signing. Also under the
agreement, we issued Green Hill Minerals 1,700,000 four-year
warrants to purchase shares of common stock at an exercise price of
$0.70 per share, vesting as follows: 425,000 warrants at signing,
425,000 warrants 90 days from signing, 425,000 warrants 180 days
from signing and 425,000 warrants 270 days from
signing.
On March 31, 2016, Mr. McCabe made a short term, non-interest
bearing loan to us of $500,000. We repaid the loan in full on April
29, 2016.
Effective April 4, 2016, our subsidiary, Torchlight Energy Inc.,
acquired from McCabe Petroleum Corporation (“MPC”) a
66.66% working interest in approximately 12,000 acres in the
Midland Basin in exchange for 1,500,000 warrants to purchase our
common stock at an exercise price of $1.00 for five years, and a
back-in after payout of a 25% working interest to MPC. Gregory
McCabe is the sole owner of MPC.
68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-
continued
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, owned certain assets and
securities, including approximately 40.66% of 12,000 gross acres in
the Hazel Project and 521,739 warrants to purchase our common stock
(which warrants had been assigned by Mr. McCabe to Line Drive).
Under the merger transaction, our shares of common stock of TAC
converted into a membership interest of Line Drive, the membership
interest in Line Drive held by Mr. McCabe immediately prior to the
transaction ceased to exist, and we issued Mr. McCabe 3,301,739
restricted shares of common stock as consideration therefor.
Immediately after closing, the 521,739 warrants held by Line Drive
were cancelled, which warrants had an exercise price of $1.40 per
share and an expiration date of June 9, 2020. A Certificate of
Merger for the merger transaction was filed with the Secretary of
State of Texas on January 31, 2017.
Also on January 30, 2017, our wholly-owned subsidiary, Torchlight
Energy, Inc., a Nevada corporation (“TEI”), entered
into and closed a Purchase and Sale Agreement with Wolfbone
Investments, LLC, a Texas limited liability company
(“Wolfbone”) which is wholly-owned by Gregory McCabe.
Under the agreement, TEI acquired certain of Wolfbone’s Hazel
Project assets, including its interest in the Flying B Ranch #1
well and the 40 acre unit surrounding the well, for consideration
of $415,000, and additionally, Wolfbone caused to be cancelled a
total of 2,780,000 warrants to purchase our common stock, including
1,500,000 warrants held by McCabe Petroleum Corporation, an entity
owned by Mr. McCabe, and 1,280,000 warrants held by Green Hill
Minerals, an entity owned by Mr. McCabe’s son, which warrant
cancellations were effected through certain Warrant Cancellation
Agreements. The 1,500,000 warrants held by McCabe Petroleum
Corporation had an exercise price of $1.00 per share and an
expiration date of April 4, 2021. The warrants held by Green Hill
Minerals included 100,000 warrants with an exercise price of $1.73
and an expiration date of September 30, 2018 and 1,180,000 warrants
with an exercise price of $0.70 and an expiration date of February
15, 2020.
After the above transactions, our total ownership in the Hazel
Project increased to a 74% working interest across all 12,000 gross
acres.
Director Independence
We currently have three independent directors on our Board,
Alexandre Zyngier, E. Scott Kimbrough, and R. David
Newton. The definition of “independent” used
herein is based on the independence standards of The NASDAQ Stock
Market LLC. The Board performed a review to determine
the independence of Alexandre Zyngier, E. Scott Kimbrough, and R.
David Newton and made a subjective determination as to each of
these directors that no transactions, relationships, or
arrangements exist that, in the opinion of the Board, would
interfere with the exercise of independent judgment in carrying out
the responsibilities of a director of Torchlight Energy Resources,
Inc. In making these determinations, the Board reviewed
information provided by these directors with regard to each
Director’s business and personal activities as they may
relate to us and our management.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees paid or accrued by us for
the audit and other services provided by our former auditor,
Calvetti Ferguson, during the years ended December 31, 2016 and
2015. Briggs & Veselka Co. were engaged in 2017 for our year
end December 31, 2016 audit. No payments were made to Briggs &
Veselka Co. before December 31, 2016.
|
|
2016
|
2015
|
|
Audit
Fees(1)
|
$73,968
|
$101,758
|
|
Audit
Related Fees(2)
|
26,280
|
-
|
|
Tax
Fees(3)
|
22,035
|
39,680
|
|
All
Other Fees
|
450
|
-
|
|
|
|
|
|
Total
Fees
|
$122,733
|
$141,438
|
(1)
Audit
Fees: This category represents the aggregate fees billed for
professional services rendered by the principal independent
accountant for the audit of our annual financial statements and
review of financial statements included in our Form 10-K and
services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for the fiscal
years.
(2)
Audit
Related Fees: This category consists of the aggregate fees
billed for assurance and related services by our independent
consultant that are reasonably related to the performance of the
audit or review of our financial statements and are not reported
under “Audit Fees.”
(3)
Tax Fees: This category consists of the
aggregate fees billed for professional services rendered by the
principal independent consultant for tax compliance, tax advice,
and tax planning.
69
PART IV
ITEM 15. EXHIBITS
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Exhibit No.
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Description
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2.1
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Share Exchange Agreement dated November 23,
2010. (Incorporated by reference from Form 8-K filed
with the SEC on November 24, 2010.) *
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3.1
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Articles of Incorporation. (Incorporated by reference
from Form S-1 filed with the SEC on May 2, 2008.) *
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3.2
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Certificate of Amendment to Articles of Incorporation dated
December 10, 2014. (Incorporated by reference from Form 10-Q filed
with the SEC on May 15, 2015.) *
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3.3
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Certificate of Amendment to Articles of Incorporation dated
September 15, 2015. (Incorporated by reference from Form 10-Q filed
with the SEC on November 12, 2015.) *
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3.4
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Amended and Restated Bylaws (Incorporated by reference from Form
8-K filed with the SEC on October 26, 2016.) *
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4.1
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Certificate of Designation for Series A Convertible Preferred Stock
(Incorporated by reference from Form 8-K filed with the SEC on June
9, 2015.) *
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4.2
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Certificate of Designation for Series B Convertible Preferred Stock
(Incorporated by reference from Form 8-K filed with the SEC on
September 30, 2015.) *
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4.3
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Certificate of Designation for Series C Convertible Preferred Stock
(Incorporated by reference from Form 8-K filed with the SEC on July
11, 2016.) *
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10.1
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12% Series B Unsecured Convertible Promissory Note (form
of) (Incorporated by reference from Form 10-Q filed with the
SEC on August 14, 2015.) *
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10.2
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Securities Purchase Agreement (for Series A Convertible Preferred
Stock) (Incorporated by reference from Form 10-Q filed with
the SEC on August 14, 2015.) *
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10.3
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Employment Agreement (with John A. Brda) (Incorporated by reference
from Form 8-K filed with the SEC on June 16, 2015.) *
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10.4
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Employment Agreement (with Roger Wurtele) (Incorporated by
reference from Form 8-K filed with the SEC on June 16, 2015.)
*
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10.5
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Loan documentation and warrants with Eunis L. Shockey (Incorporated
by reference from Form 10-Q filed with the SEC on August 14, 2015.)
*
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10.6
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Farmout Agreement between Hudspeth Oil Corporation, Founders Oil
& Gas, LLC and certain other parties (Incorporated by reference
from Form 8-K filed with the SEC on September 29, 2015)
*
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||
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10.7
|
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Securities Purchase Agreement and Amendment to Securities Purchase
Agreement (for Series B Convertible Preferred Stock) (Incorporated
by reference from Form 10-Q filed with the SEC on November 12,
2015) *
|
||
|
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|
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10.8
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Purchase and Sale Agreement with Husky Ventures, Inc. (Incorporated
by reference from Form 8-K filed with the SEC on November 12, 2015)
*
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||
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10.10
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Purchase Agreement with McCabe Petroleum Corporation for
acquisition of “Hazel Project” (Incorporated by
reference from Form 10-Q filed with the SEC on August 15, 2016)
*
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||
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||
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10.11
|
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Resignation and Settlement Agreement with Willard G. McAndrew
(Incorporated by reference from Form 10-Q filed with the SEC on
November 10, 2016) *
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||
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||||
70
ITEM 15. EXHIBITS
-
continued
|
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||||
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14.1
|
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Code of Ethics (Incorporated by reference from Form S-1 filed with
the SEC on May 2, 2008.) *
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16.01
|
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Letter from Calvetti Ferguson to the Securities and Exchange
Commission (Incorporated by reference from Form 8-K filed with the
SEC on December 19, 2016) *
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||||
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||||
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||||
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||||
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|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definitions Linkbase
|
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101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
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101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
* Incorporated by reference from our previous filings with the
SEC
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
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Torchlight Energy Resources, Inc.
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/s/ John A.
Brda
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By: John A. Brda
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Chief Executive Officer
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Date:
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March 31, 2017
|
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Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated:
|
Signature
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Title
|
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Date
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/s/ John A. Brda
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John A. Brda
|
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Director, Chief Executive Officer, President and
Secretary
|
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March 31, 2017
|
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/s/ Gregory McCabe
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Gregory McCabe
|
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Director (Chairman of the Board)
|
|
March 31, 2017
|
|
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/s/ Roger N. Wurtele
|
|
|
|
|
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Roger N. Wurtele
|
|
Chief Financial Officer and Principal Accounting
Officer
|
|
March 31, 2017
|
|
|
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|
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/s/ E. Scott Kimbrough
|
|
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|
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E. Scott Kimbrough
|
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Director
|
|
March 31, 2017
|
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/s/ R. David Newton
|
|
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|
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R. David Newton
|
|
Director
|
|
March 31, 2017
|
|
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|
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/s/ Alexandre Zyngier
|
|
|
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|
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Alexandre Zyngier
|
|
Director
|
|
March 31, 2017
|
72