UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X . Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2010.
. 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)
Nevada
(State or Other Jurisdiction of Incorporation or
Organization)
74-3237581
(I.R.S. Employer Identification No.)
2007 Enterprise Avenue
League City, Texas 77573
(Address of Principal Executive Offices)
(281) 538-5938 (Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock ($0.001 Par Value)
(Title of Each Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes . No X .
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 X .
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 X . 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. .
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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):
Large accelerated filer
Non-accelerated filer
.
. (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
.
X .
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes . No X .
At June 30, 2010, the aggregate market value of shares held by non-affiliates of the Registrant (based upon 701,730 shares held by
non-affiliates on June 30, 2010) was approximately $35,087.
At March 31, 2011, there were 12,811,420 shares of the Registrant’s common stock outstanding (the only class of voting common
stock).
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Business
Item 1.
Item 1A. Risk Factors
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
(Removed and Reserved)
TABLE OF CONTENTS
PART I
PART II
Selected Financial Data
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 10. Directors, Executive Officer and Corporate Governance
Item 11.
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Item 15.
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Signatures
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ITEM 1. BUSINESS
Corporate History and Background
PART I
Torchlight Energy Resources, Inc. was incorporated in October 2007 under the laws of the State of Nevada. Originally, our primary
business objective was to develop and market fitness dance studios that offered an alternative to traditional gyms. From our
incorporation to November 2010, we was primarily engaged in business planning activities, including researching dance studio design
trends, developing economic models and financial forecasts, performing due diligence regarding potential store front locations,
investigating and analyzing income and age demographics for areas surrounding potential locations, evaluating the community’s attitude
toward our business and searching for providers of additional capital to finance the build-out of our first location.
On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) with Tammy Skalko, an
executive officer, director and major stockholder, James Beshara, a director and major stockholder, Harry Stone II, a major stockholder,
Torchlight Energy, Inc. ("TEI"), and the persons owning 100% of the outstanding capital stock of TEI (the “TEI Stockholders”). At
closing, the TEI Stockholders transferred all of their shares of TEI common stock to us in exchange for an aggregate of 9,444,500
newly issued shares of our common stock. Also at closing of the Exchange Agreement, Ms. Skalko, Mr. Beshara and Mr. Stone
transferred to us an aggregate of 14,400,000 shares of our common stock for cancellation in exchange for aggregate consideration of
$270,000. Upon closing of these transactions, we had 12,251,420 shares of common stock issued and outstanding. The 9,444,500
shares issued to the TEI Stockholders at closing represented 77.1% of our voting securities.
As a result of the transactions effected by the Exchange Agreement, at closing (i) TEI became our wholly-owned subsidiary, (ii) we
abandoned all of our previous business plans within the health and fitness industries, including opening and operating dance studios,
and (iii) the business of TEI became our sole business. TEI is an exploration stage energy company, incorporated under the laws of the
State of Nevada in June 2010. It is engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas
properties in the United States. Descriptions of our business hereinafter refer to the business of TEI.
On December 10, 2010, we effected a 4-for-1 forward split of our shares of common stock outstanding. All owners of record at the
close of business on December 10, 2010 (record date) received three additional shares for every one share they owned. The share
amounts reflected throughout this report take into account the 4-for-1 forward split.
Effective February 8, 2011, we changed our name from “Pole Perfect Studios, Inc.” to “Torchlight Energy Resources, Inc.” In
connection with the name change, our ticker symbol changed from “PPFT” to “TRCH,” effective February 10, 2011.
Business Overview
Our business model is to focus on drilling and working interest programs within the United States that have a short window of
payback, a high internal rate of return and proven and bookable reserves. We currently have only one interest in an oil and gas project,
the Marcelina Creek Field Development, as is 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 as a non-operating working interest partner, participating in drilling activities primarily on a basis
proportionate to its working interest. 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.
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Key Business Attributes
Experienced People. We are building on the expertise and experiences of our sole executive officer, Thomas Lapinski. We will also
receive guidance from outside advisors and will align with high quality vendor partners.
Project Focus. We are focusing on exploitation and low risk exploration projects to reduce risk by pursuing resources where
commercial production has already been established but where opportunity for additional and nearby development is indicated.
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 for lower-risk, valuable projects.
Limit Capital Risks. Only enough 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.
Partnering for Excellence. Partnering with highly select and experienced vendors provides ongoing access to external perspectives, new
project opportunities, specialization, networks, operations support, and the ability to test continuously for more effective and cost
efficient services.
Project Focus
Generally, we will focus on low risk exploitation projects (primarily for oil, although gas projects will be considered if the economics
are favorable). Projects are first identified, evaluated, and then we will secure a third party operating or financial partner. Subject to
overall availability of capital, our interest in large capital projects will be limited. Initially, a large percentage of our assets will be
allocated solely to the Marcelina Creek Field Development. After we have raised or generated sufficient capital, we will attempt to
diversify our portfolio so that not greater than 25-30% of our capital is allocated in a particular project, of which there can be no
assurance. An exception for a higher percentage would be an acquisition of a producing property with positive cash flow or smaller
investment opportunities. Each opportunity will be investigated on a stand alone basis for both technical and financial merit. High risk
exploration prospects are less favored than low risk exploration. We will, however, consider high risk-high reward exploration in
connection with exploitation opportunities in a project that would reduce the overall project economic risk. We will consider such
projects on their individual merits, and we expect them to be a minor part of our overall portfolio.
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. With a focus on exploitation rather than higher risk exploration projects, 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.
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Technology and Alliances for Opportunities
Advances in technologies that for many years were only available to the major energy companies are now also available to smaller
companies through outsourcing. With this widespread availability, competition among service providers is keen and cost reduction
impressive. For examples, three-dimensional seismic mapping and horizontal drilling are now commonplace with independents. We
believe that recent increases in production from the Gulf of Mexico are largely based on application of 3-D seismic by independents.
A key to our success will be our ability to use 3-D seismic and other tools profitably to acquire, and if necessary develop, smaller oil
and gas prospects. The supply of these prospects is abundant; they have remained unexploited, despite their high potential, because
their size renders them unattractive for the large companies and small producers with limited resources and limited ability to partner. We
will attempt to take advantage of the niche between the major and small companies.
We are also involved in discussions to form a strategic alliance with JEBCO Seismic L.P. (“Jebco”), a fully independent international
geophysical data acquisition contractor. Jebco’s non-exclusive surveys and third party datasets represent a unique and readily available
source of information for both mature and frontier regions. Jebco has experience in a wide variety of operational environments
including land 3-D, transition zones, ocean bottom cable (OBC), large regional 2-D and 3-D marine programs. Our Chief Executive
Officer and Director, Thomas Lapinski, is on the Board of Directors of Jebco, and Jebco’s Chief Executive Officer, Wayne Turner, is
an outside consultant to Torchlight. If a strategic alliance can be formed with Jebco, we believe that Jebco can provide us with the
ability to review potential acquisitions of producing properties and exploration areas prior to those areas being made available to other
oil and gas companies.
Such technology alliances may be a key component to our value. Through such alliances, we hope to have the ability to review a large
portfolio of opportunities without always having to pay the associated overhead and initial exploration costs.
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:
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Investment Evaluation and Review;
Operations and Field Activities; and
Administrative and Finance Management.
Investment Evaluation and Review. This process is the key ingredient to the 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. 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, such as Jebco,
and from large informal community of geoscientists and engineers. Building a network of management and advisors is key to the
pipeline of high quality opportunities. We believe the company will be well represented and networked.
Operations and Field Activities. This process will begin following management approval of an investment. Well site supervision,
construction, drilling, logging, product marketing and transportation are examples of some activities. The present plan is that we will
rarely be the operator; we will farm-out sufficient interests to third parties that will be responsible for these operating activities. We will
provide personnel to monitor these activities and associated costs.
Administrative and Finance Management. This process will coordinate 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. A single outsourced vendor that provides
all or a majority of these services has not yet been located. Collectively, however, these services are available from a variety of
experienced sources.
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Current Projects
We currently have only one interest in an oil and gas project, the Marcelina Creek Field Development. On July 6, 2010, TEI entered
into an Agreement to Participate in Oil and Gas Development Joint Venture (the “Participation Agreement”) with Bayshore Operating
Corporation, LLC (“Bayshore”). Bayshore is currently the holder of an oil, gas and mineral lease covering approximately 1,045 acres
in Wilson County, Texas, known as the Marcelina Creek Field Development. The Participation Agreement provides for the drilling of
four (4) wells, one of which is within the 280 Johnson Unit and the remaining three at locations to be determined within the existing
lease. TEI is obligated to pay to Bayshore $50,000 at rig move in for the first well (a horizontal re-entry well on Johnson #1). TEI paid
Bayshore an initial $50,000 deposit in July 2010, which amount was credited to the initial $50,000 payment due for the first well. TEI
paid for 100% of total drilling and completion costs for this re-entry well, in return for a 50% working interest. The second, third and
fourth wells are to be vertical development location wells at mutually agreed upon locations. For the second well, TEI will pay
Bayshore $50,000 at rig move in and $200,000 when the well is completed or plugged and abandoned, whichever comes first, which
represents 100% of the total drilling and completion costs for a 75% working interest. For the third and fourth wells, TEI will pay
Bayshore $50,000 at rig move in and $150,000 when the well is completed or plugged and abandoned, whichever comes first, which
represents 100% of the total drilling costs and 75% of the completion costs, for a 75% working interest, with Bayshore to pay 25% of
the completion costs. TEI will receive a 75% working interest on any subsequent wells drilled outside of the Johnson unit, with work
to be done, as and when proposed, on a pro rata basis.
In August 2010, the first well, the Johnson #1 horizontal re-entry, was drilled and encountered good oil and gas shows and extensive
fracturing. We are presently evaluating the well’s productivity.
On or about December 31, 2010, Bayshore and TEI entered into an Addendum to the Participation Agreement. The Addendum extends
the date when drilling must be commenced on the first vertical well and when certain leasehold costs must be paid. As part of the terms
of the Addendum, we paid Bayshore a penalty that included: (i) $50,000 cash on or around January 6, 2011, (ii) $25,000 in shares of
our common stock, and (iii) $25,000 cash payable concurrent with the approval and delivery of the current Authority For Expenditure
for the Johnson #2.
The Marcelina Creek Field Development is located over the Austin Chalk, Buda and Eagleford Formations, which formations are well
known and established producers in central Texas. Their production is controlled by vertical fracturing of the rock with high
productivity in wells which encounter the greatest amount of fractures. With the advent of horizontal drilling technology, numerous
opportunities exist in areas and fields that were only drilled vertically. Based on the work Bayshore has already performed, we believe
the Johnson unit re-entry is one of these opportunities. The original lateral well was drilled out to about 500 feet. The well encountered
a fracture zone and test-at rates of approximately 300 barrels per day. The operator attempted to drill out further when they experienced
a casing collapse, causing the well to fail. We believe sub-paralleling the original well bore will yield a high probability of similar
results, of which there can be no assurance. The negative side is the uncertainty of encountering fractures in the vertical wells.
Horizontal wells will, almost with certainty, encounter some fractures, but the number, and thereby production rates, are difficult to
predict.
Project Prospects
We are in the process of indentifying specific projects that we will consider investing in, pending our ability to obtain adequate funding.
We have not yet conducted thorough due diligence on any project prospect. Below are some of the projects that we are currently
evaluating. There is no assurance we will choose to invest in any of these projects, if and when adequate funding becomes available.
Southwest Nebraska - Denver-Julesberg Basin
The Denver-Julesberg Basin is one of the largest sedimentary basins in the United States. It has been an oil and gas producer for most
of the previous century. We have located a prospective project in the northeastern portion of the basin, primarily within Nebraska. The
potential reservoirs are well known and well established through the basin and in this area. We believe the likelihood of finding
commercial oil production is the area is high, as there are numerous producing wells in the area. Most of the reservoirs in the area are at
a modest depth which should equate to low drilling costs and a short drilling and completion time.
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Fossil Energy, Inc. (“Fossil Energy”), an operator, has been looking for an investor to fund a drilling program for up to 50 wells. The
locations are to be based on relatively inexpensive technologies incorporated in the oil industry, including magnetic impulse, radiometric
and geo-chemical surveys. In September 2010, TEI and Fossil Energy entered into a Technical Services Contract and Working Interest
Agreement. The agreement provides for Fossil Energy to develop prospects for oil and gas development. Should TEI elect to
participate in a project, all capital expenditures are to be provided by TEI, following an advanced outlining of such expenditures by
Fossil Energy. In return for each well funded, TEI will receive a 75% working interest of not-less-than an 80% net revenue interest in
the area of mutual interest identified (with Fossil Energy receiving the 25% working interest). A “net revenue interest” means the
lessee’s share of production after satisfying all royalty, overriding royalty and other non-operating interests. Fossil Energy will be
designated as an operator for all wells drilled. TEI will have the right to replace Fossil Energy as operator on any prospect, but such
replacement would not affect working interests.
We anticipate drilling approximately ten wells, initially, with the option to continue in future well packages of ten to 20 wells per
package. TEI and Fossil Energy are in the process of finalizing an operating agreement. As currently proposed, Fossil Energy would
warrant a minimum of 40 barrels of oil per day per well on the initial ten wells, and warrant that if the ten well program fails to yield
400 barrels per day, it will drill additional wells, up to four, from its own account to attempt to satisfy this threshold. The final terms of
the operating agreement are subject to change.
We believe that the economics of this project are attractive at even low production rates. Additional benefits of the project are that Fossil
Energy would continue as operator and continue marketing of the oil which is presently being sold through Plains Marketing in
Houston, Texas. A negative aspect of this project, however, is that it is not currently ready for drilling, and additional leases will need to
be acquired as the surveys are finalized. Further, there is geological variability with the channel sands of the Muddy Formations D and
J sands. We believe, however, that the surveys and existing geological information from wells should mitigate the uncertainty to some
degree. Based on our analysis, this project provides an attractive opportunity. Short cycle time, inexpensive drilling, established
marketing and operator, and attractive economics with low production are salient characteristics of this project.
Business Environment
Over half of United States’ crude oil is now imported because growth in demand exceeds domestic production, and this ratio is
projected to increase into the foreseeable future. Although crude oil prices have been variable in recent years, longer-term global
demand, especially from Asia and the Asian sub-continent is expected to offset growth in global supply, thus creating a continuous,
although at times volatile, upward pressure on price. Further, new sources of international oil and gas reserves are located either far
inland to existing port facilities or in very deep water. These new discoveries demand large capital investments for pipeline
transportation and facilities. In the case of inland discoveries, agreements among sovereign governments may be required. Long
negotiations result in long lead times from discovery to markets. Similarly for very deep water discoveries, both confirmation drilling
and facilities construction require long lead times.
To complicate the environment even further, the recent BP oil spill in the Gulf of Mexico caused the United States government to place
a moratorium on deep water drilling from May to October 2010. The moratorium’s long-term effect on price is still speculative. The
short-term effect on activity is that companies that had budgeted for capital projects in the offshore area this year and next may need to
invest in other exploration and production activities. Management envisions the companies that were operating offshore to focus some
attention to onshore activities.
For United States natural gas, depressed prices resulted from the past warm winter that reduced heating demand, the ability of the
industry to increase production from shales with horizontal drilling, and increased production from the Gulf of Mexico. Prices will be
volatile and subject to market emotions of early cold winters and other climatic conditions. This situation may offer an opportunity to
acquire producing properties from numerous small producers who are impaired with high fixed overhead and sizable debt loads from
earlier years. We, however, will favor oil projects but will investigate any opportunity on a stand alone basis.
With timely, accessible project finance arrangements, management believes we can profit from the opportunities provided by small
producers that are virtually ignored by the major producers and large independents.
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Industry Overview
The oil and gas industry has undergone a renaissance in both the balance of supply and demand and in technological advances. In
recent years, large petroleum companies have migrated their spending toward exploration and production projects overseas and
offshore, particularly deep water, as well as into downstream ventures. Such companies have consolidated their United States onshore
investments into core geographic areas. The majors and large independents follow the rule that “90% of our revenue comes from 10%
of our properties.”
The majors and large independents are, in varying degrees, burdened with high infrastructure overhead that when allocated to these
properties make the properties unattractive for additional investment. The infrastructure for large companies includes services for
human resources, information technology, accounting, land and division orders, and legal departments. Divesting of these non-core
properties was made to independents and start-up companies. Independents also acquired large areas of leases particularly in the
Haynesville, Marcelius, Bakken and now the Eagleford shale. This required the companies to drill quickly or lose the leases. That
focus may have left some other on-going fields to be without re-investment. We believe this gradual migration of spending has left,
possibly, onshore opportunities for nimble and experienced, lower cost oil and gas producers.
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 to 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.
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.
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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:
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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; and
impose substantial liabilities for pollution resulting from operations.
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.
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.
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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 one full time employee 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 five independent technical professionals under consulting agreements, all of whom are available
to us on an as needed basis.
Research and Development
During the fiscal years ended December 31, 2010 and 2009, respectively, we did not spend any funds on research and development
activities.
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, and may not be successful in developing profitable business operations.
We have a limited operating history. 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
no revenues and have limited assets. There is nothing 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:
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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, when commenced. 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 we
obtain interests in, if any, may never produce oil or natural gas.
11
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.
There is substantial doubt about our ability to continue as a going concern
At December 31, 2010, we had not yet achieved profitable operations, had accumulated losses of $645,302 since our inception, and
expect to incur further losses in the development of our business, all of which casts substantial doubt about our ability to continue as a
going concern. 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.
To date we have not implemented various corporate governance measures, in the absence of which, stockholders may have
more limited protections against interested director transactions, conflicts of interest and similar matters.
As of the date of this report we have not adopted corporate governance measures. Although not required by rules or regulations
applicable to us, corporate governance measures such as the establishment of an audit committee and other independent committees of
our Board of Directors, would be beneficial to our stockholders. We do not presently maintain any of these protections for our
stockholders. It is possible that if we were to adopt corporate governance measures, stockholders would benefit from greater assurance
that decisions were being made with impartiality by directors and that policies had been implemented to define conduct of our
management and board members.
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As a non-operator, our development of successful operations relies extensively on third-parties who, if not successful, could
have a material adverse affect on our results of operation.
We anticipate only participating in wells operated by third-parties. Our ability to develop successful business operations depends on the
success of our consultants and drilling partners. As a result, we will not control the timing or success of the development, exploitation,
production and exploration activities relating to leasehold interests we acquire. If our consultants and drilling partners are not successful
in such activities relating to such leasehold interests, or are unable or unwilling to perform, our financial condition and results of
operation would be materially adversely affected.
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, we could become insolvent.
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.
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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:
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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.
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.
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. 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.
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The market for oil and gas is intensely competitive, and competition pressures could force us to abandon or curtail our
business plan.
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 is expected to 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.
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Our future estimates of the volume of reserves we obtain 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.
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.
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We will rely on technology to conduct our business, and our technology could become ineffective or obsolete.
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 Director and Chief Executive Officer, Thomas Lapinski.
Mr. Lapinski possesses a unique and comprehensive knowledge of our industry. The knowledge, leadership and technical expertise of
Mr. Lapinski would be difficult to replace. While Mr. Lapinski has no plans to leave or retire in the near future, his loss 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 Mr. Lapinski. There is an employment agreement between Mr.
Lapinski and TEI, our wholly owned subsidiary. There can be no assurance, however, that Mr. Lapinski will continue to be employed
by us.
Our affiliates 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, Mr. Lapinski and John Brda, a consultant to us, collectively and beneficially own approximately 55.5% of
our outstanding common stock. This concentration of voting control gives Messrs. Lapinski and Brda 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 new
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. Our testing may
reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our 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 hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a
timely manner, or if we or our independent registered public accounting firm identifies 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.
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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 OTC Bulletin Board. However, our shares are very thinly traded, and we have a very limited
trading history. If a market for our common stock ever develops, there could be volatility in the volume and market price of our
common stock. 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.
The issuance of preferred stock could adversely affect the rights of the holders of common stock.
The Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series, to fix the number of
shares constituting any such series, and to fix the rights and preferences of the shares constituting any series, without any further vote
or action by the stockholders. The issuance of preferred stock by the Board of Directors could adversely affect the rights of the holders
of common stock. For example, such issuance could result in a class of securities outstanding that would have preferences with respect
to voting rights and dividends and in liquidation over the common stock, and could (upon conversion or otherwise) enjoy all of the
rights appurtenant to common stock. The Board's authority to issue preferred stock could discourage potential takeover attempts and
could delay or prevent a change in control of the company through merger, tender offer, proxy contest or otherwise by making such
attempts more difficult to achieve or more costly. There are no issued and outstanding shares of preferred stock; there are no agreements
or understandings for the issuance of preferred stock, and the Board of Directors has no present intention to issue preferred stock.
We may be subject to penny stock regulations and restrictions, and you may have difficulty selling shares of our common
stock.
The SEC has adopted regulations which generally define a “penny stock” as an equity security that has a market price less than $5.00
per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is
subject to Rule 15g-9 under the Exchange Act, or the “Penny Stock Rule.” This rule imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals
with a net worth in excess of $1,000,000, excluding the value of the primary residence of such individuals, or annual incomes
exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a
special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. As a
result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our
securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a
disclosure schedule required by the SEC relating to the penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information
on the limited market of penny stocks.
There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our
common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which
gives the SEC the authority to restrict persons from participating in a distribution of a penny stock, under certain circumstances, if the
SEC finds that such a restriction would be in the public interest.
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 trading limitation periods. Such volume could create a circumstance
commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. 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.
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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.
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 2. PROPERTIES
Our principal executive officers are located at 2007 Enterprise Avenue, League City, Texas 77573. We have never owned any real
property. Our current premises are being provided at no charge by one of our principal shareholders. We believe that the condition and
size of our current premises are satisfactory, suitable and adequate for our current needs.
We currently have only one interest in an oil and gas project, the Marcelina Creek Field Development. See the description under
“Current Projects” above for more information. To date, we have produced no oil and gas and have no proved or probable oil and gas
reserves.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. (REMOVED AND RESERVED)
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 Over-the-Counter Bulletin Board under the symbol, “TRCH.” Trading in our common stock in the
over-the-counter market has been limited and 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, 2009 and
2010, according to Pink OTC Markets Inc., were as follows:
Quarter Ended
December 31, 2010 (1)
September 30, 2010 (1)
June 30, 2010 (1)
March 31, 2010
December 31, 2009
September 30, 2009
June 30, 2009
March 31, 2009
$
$
$
High
Low
3.05 $
0.05 $
0.05 $
N/A
N/A
N/A
N/A
N/A
0.04
0.04
0.05
N/A
N/A
N/A
N/A
N/A
(1) On December 10, 2010, we effected a 4-for-1 forward split of our shares of common stock outstanding. All prices
reflected take into account the 4-for-1 forward split.
19
Record Holders
As of March 31, 2011, there were approximately 79 stockholders of record holding a total of 12,811,420 shares of common stock. 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 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.
Equity Compensation Plan Information
As of December 31, 2010, we do not have any compensation plans (including individual compensation arrangements) under which our
equity securities are authorized for issuance.
Sales of Unregistered Securities
Other than the issuances described 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:
On December 28, 2010, we issued a 10% Convertible Promissory Note and a warrant to purchase 225,000 shares of our common
stock to one investor who paid $250,000 in aggregate consideration for the securities. The 10% Convertible Promissory Note bears
interest at the rate of 10% per annum, had a principal amount of $250,000 and is convertible into shares of our common stock in the
event we undertake a private offering of our securities to one or more third parties. The note is convertible on the identical terms and
conditions offered to such third parties. The warrant is exercisable into 225,000 shares of common stock as of December 28, 2010 at a
price of $2.50 per share and expires on December 28, 2014. The note and warrant qualified for exemption from registration under
Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The issuance of securities did not involve a
“public offering” based upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited
number of securities were issued to a single offeree; (iii) there was no public solicitation; (iv) the offeree was an “accredited investor”;
(v) the investment intent of the offeree; and (vi) the restriction on transferability of the securities issued.
On December 17, 2010, we issued 50,000 shares of common stock to an individual as payment for consulting services to be rendered.
The securities were issued under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules
and regulations promulgated thereunder. The issuance of securities did not involve a “public offering” based upon the following
factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities were issued to a single
offeree; (iii) there was no public solicitation; (iv) the investment intent of the offeree; and (v) the restriction on transferability of the
securities issued.
On December 3, 2010, we issued a total of 400,000 shares of common stock to two different individuals as payment for consulting
services to be rendered. The securities were issued under the exemption from registration provided by Section 4(2) of the Securities
Act of 1933 and the rules and regulations promulgated thereunder. The issuance of securities did not involve a “public offering” based
upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities were
issued to a limited number of offerees; (iii) there was no public solicitation; (iv) the investment intent of the offerees; and (v) the
restriction on transferability of the securities issued.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The information set forth and discussed in this Management’s Discussion and Analysis and Plan of Operations is derived from the
historical financial statements and the related notes thereto of Torchlight Energy, Inc. 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 contains 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 Torchlight Energy, Inc.’s operations, development efforts and business environment, the other risks and
uncertainties described in the section entitled “Cautionary Note Regarding Forward-Looking Statements” at the front of this report, and
our “Risk Factors” section herein. All forward-looking statements included herein are based on information available to the Company as
of the date hereof, and we assume no obligation to update any such forward-looking statement.
Basis of Presentation of Financial Information
On November 23, 2010, the Share Exchange Agreement (the “Exchange Agreement” or “Transaction”) between Pole Perfect and
Torchlight was entered into and closed, through which the former shareholders of Torchlight became shareholders of Pole Perfect. At
closing, Pole Perfect abandoned its previous business. Consequently, as a result of the Transaction, the business of Torchlight Energy,
Inc. commenced. Because Torchlight became the successor business to Pole Perfect and because the operations and assets of
Torchlight represent our entire business and operations from the closing date of the Exchange Agreement, the Management’s
Discussion and Analysis and audited and unaudited financial statements are based on the consolidated financial results of Pole Perfect
Studios, Inc. and its wholly owned subsidiary Torchlight Energy, Inc. for the relevant periods.
Overview
Summary of Key Results
Our Company’s sole business is that of, Torchlight Energy, Inc., an exploration stage company formed as a corporation in the state of
Nevada on June 25, 2010. Torchlight is engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas
properties in the United States.
Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial
statements, 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 Fiscal Year Ended December 31, 2009 and 2008
Pole Perfect had no active operations for the year ended December 31, 2009 and 2008. Due to this fact, comparisons to previous years
are not necessarily indicative of actual operating results. Revenue and expenses listed below reflect the operations of Torchlight Energy,
Inc. which was incorporated in June 2010.
Historical Results for the Period from June 25, 2010 (inception) through December 31, 2010
Revenues and Cost of Revenues
Torchlight Energy, Inc. had no revenue or cost of revenues during the above referenced period.
General and Administrative Expenses
Torchlight Energy, Inc.’s general and administrative expenses consisted of accounting and administrative costs, professional fees and
other general corporate expenses. General and administrative expenses for the above referenced period were $645,302.
21
Liquidity and Capital Resources
As of December 31, 2010, Torchlight’s cash balance was $278,191. Torchlight’s working capital as of December 31, 2010, was a
negative $197,509.
Commitments and Contingencies
Torchlight is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and
regulations applicable to the Torchlight’s operation 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, 2010, no amounts have been recorded because no specific
liability has been identified that is reasonably probable of requiring Torchlight to fund any future material amounts.
In July 2010, Torchlight entered into an Agreement to participate in an Oil and Gas Development Joint Venture (the “Participation
Agreement”) with Bayshore Operating Corporation, LLC (“Bayshore”). Bayshore is currently the holder of an oil, gas and mineral
lease covering approximately 1,045 acres in Wilson County, Texas, known as the Marcelina Creek Field Development. The
Participation Agreement provides for the drilling of four (4) wells. Upon execution of the agreement, Torchlight paid Bayshore an initial
deposit of $50,000, which amount was credited to the initial $50,000 payment due for the first well, in exchange for a 50% working
interest in the first well. Torchlight will pay 100% of total drilling and completion costs.
After mutual agreement as to the location, the second well is to be drilled within six months of the effective date of the Participation
Agreement. For the second well, Torchlight will pay Bayshore $50,000 at rig move-in and $200,000 when the well is completed or
plugged and abandoned, whichever comes first. Further, Torchlight will pay 100% of the total drilling and completion costs for a 75%
working interest.
For the third and fourth wells, Torchlight will pay Bayshore $50,000 at rig move-in and $150,000 when the well is completed or
plugged and abandoned, whichever comes first. Further, Torchlight will pay 100% of the total drilling costs and 75% of the completion
costs for a 75% working interest with Bayshore to pay 25% of the completion costs.
On December 31, 2011 the company executed an agreement with Bayshore for an extension of its drilling obligation deadline from
January 6, 2011 to April 15, 2011. As a condition for the extension the company will pay to Bayshore $50,000, by January 6, 2011
and 25,000 shares of the company’s stock by January 14, 2011. Further a $25,000 cash payment is to be made concurrent with the
approval of the Authority for Expenditure (AFE) for the Johnson #2 well. As additional consideration Bayshore is no longer obligated
to pay its prfoportionate share of completion costs on the second vertical well.
Going Concern
The financial statements of Torchlight have been prepared in accordance with generally accepted accounting principles applicable to a
going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.
Realization values may be substantially different from carrying values as shown, and these financial statements do not give effect to
adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to
continue as a going concern.
At December 31, 2010, the Company had not yet achieved profitable operations, has accumulated losses of $645,302 since its inception
and expects to incur further losses in the development of its business, all of which casts 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 upon 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) obtaining loans from financial
institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it
will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above,
there can be no assurances that such methods will prove successful. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
22
Significant Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities.
We believe that the estimates, assumptions, and judgments involved in the accounting policies described below have the greatest
potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty
inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of
these critical accounting policies affect working capital account balances, including the policies for revenue recognition, oil and gas
properties, asset retirement obligations and income taxes. These policies require that we make estimates in the preparation of our
financial statements as of a given date.
Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that
would result in materially different amounts being reported.
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 financial statements and
accompanying notes. Actual results could differ from these estimates.
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
The Company’s cash is placed with a highly rated financial institution and the Company conducts ongoing evaluations of the credit
worthiness of the financial institutions with which it does business. At times during the period from June 25, 2010 (inception) to
December 31, 2010, cash balances were in excess of amounts guaranteed by the Federal Deposit Insurance Corporation.
Fair Value of Financial Instruments
The estimated fair values of prepaid expenses and accounts payable approximate the carrying amount due to the relatively short maturity
of these instruments. The carrying amount of the convertible promissory note approximates its fair value giving affect for a discount
relative to the fair value of warrants issued in conjunction with the promissory note.
Unevaluated Oil and Gas Properties
Unevaluated oil and gas properties consist principally of the Company's acquisition costs in undeveloped leases. When leases are
developed, expire or are abandoned, the related costs are transferred from unevaluated oil and gas properties to depletable oil and gas
properties. Additionally, the Company reviews the carrying costs of unevaluated oil and gas properties for the purpose of determining
probable future lease expirations and abandonments, and prospective discounted future economic benefit attributable to the leases. The
Company records an allowance for impairment based on the review with the corresponding charge being made to depletable oil and gas
properties.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas property acquisition, exploration and development activities.
Under this method, all costs associated with property acquisition, exploration, and development activities are capitalized into a cost
center (the amortization base), whether or not the activities to which they apply are successful. Exploration and development costs
include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other
costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the
exploration and development of oil and gas properties as well as other internal costs that can be specifically identified with acquisition,
exploration, and development activities are also capitalized.
23
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 development costs. The Company excludes these costs until the property
has been evaluated. 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.
Depreciation, Depletion and Amortization
The capitalized costs of oil and gas properties, plus estimated future development costs relating to proved reserves are amortized on a
unit–of–production method over estimated total proved oil and gas reserves. 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 unevaluated oil and gas properties,
which are excluded from this calculation. During the period from June 25, 2010 (inception) to December 31, 2010, the Company held
only unevaluated oil and gas properties; therefore, no depreciation, depletion or amortization has been recognized.
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, plus the cost of unproved oil and
gas properties, exceeds the present value of estimated future net cash flows discounted at 10 percent, 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 un-weighted 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 Company did
not recognize an impairment on its oil and gas properties during the period from June 25, 2010 (inception) to December 31, 2010. 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. As of December 31, 2010, the Company does not
have any proved oil or gas reserves.
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 evaluation of the same reserves as well as cost estimates related to future development
costs of proved oil and gas reserves could result in significant revisions due to changes in regulatory requirements, technological
advances and other factors which are difficult to predict.
Gains and losses on the sale of oil and gas properties are generally reflected in income. 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. During the period from June 25, 2010 (inception) to December 31, 2010, there were no gains or
losses recognized from the sale of oil and gas properties.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets of acquired
companies. Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist.
Goodwill was $447,084 as of December 31, 2010 and was acquired on November 23, 2010 in connection with the Company’s reverse
acquisition.
24
Asset Retirement Obligations
Accounting principles require that the fair value of a liability for an asset’s retirement obligation (“ARO”) be recorded in the period in
which it is incurred if a reasonable estimate of fair value can be made, and that the corresponding cost be 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 cost incurred is recorded as a reduction to 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.
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.
Federal and State 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 basis and operating loss and tax credit carryforwards. 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 and 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 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 operations. The Company has not recorded any interest or penalties associated with unrecognized tax
benefits during the period from June 25, 2010 (inception) to December 31, 2010.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements for the fiscal year ended December 31, 2010 are attached hereto.
25
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2010
Consolidated Statement of Operations for the period from June 25, 2010 (inception) to December 31, 2010
Consolidated Statement of Stockholders’ Equity for the period from June 25, 2010 (inception) to December 31, 2010
Consolidated Statement of Cash Flows for the period from June 25, 2010 (inception) to December 31, 2010
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Torchlight Energy Resources, Inc. (An Exploration Stage Company)
Houston, Texas
We have audited the accompanying consolidated balance sheet of Torchlight Energy Resources, Inc. (An Exploration Stage Company)
(the “Company”) as of December 31, 2010 and the related consolidated statements of operations, stockholders’ equity and cash flows
for the period from June 25, 2010 (inception) to December 31, 2010. These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with 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 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, 2010 and the results of its operations and its cash flows for the period from June 25, 2010 (inception) to
December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has incurred losses since inception, has not generated
revenues from operations, and is dependent upon obtaining adequate financing to fulfill its operating activities. Management’s plans
regarding those matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Calvetti, Ferguson & Wagner, P.C.
April 14, 2011
Houston, Texas
F-2
TORCHLIGHT ENERGY RESOURCES, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2010
ASSETS
Current assets:
Cash
Prepaid expenses
Total current assets
Investment in oil and gas properties – unevaluated
Goodwill
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Convertible promissory note, net of discount of $65,250
Total current liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized; no shares issued or outstanding
Common stock, par value $0.001 per share; 70,000,000 shares authorized; 12,701,420 shares
issued and outstanding
Additional paid-in capital
Deficit accumulated during the exploration stage
Total equity
$
$
$
278,191
1,000
279,191
1,114,958
447,084
1,841,233
291,950
184,750
476,700
-
-
3,213
2,006,622
(645,302)
1,364,533
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,841,233
The accompanying notes are an integral part of these financial statements.
F-3
TORCHLIGHT ENERGY RESOURCES, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 25, 2010 (INCEPTION) TO DECEMBER 31,
2010
Revenue
Cost of revenue
Gross profit
Operating expenses:
General and administrative expense
Total operating expenses
Net loss before taxes
Provision for income taxes
Net loss
Loss per share:
Basic and Diluted
Weighted average shares outstanding:
Basic and Diluted
$
$
$
-
-
-
645,302
645,302
645,302
-
645,302
(0.069)
9,402,818
The accompanying notes are an integral part of these financial statements.
F-4
TORCHLIGHT ENERGY RESOURCES, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 25, 2010 (INCEPTION) TO DECEMBER 31, 2010
Preferred
Stock
Common
Stock Shares
Common
Stock
Amount
Additional
Paid-in
Capital
Deficit
accumulated
during the
Exploration
Stage
Total
Balance, June 25, 2010
$
-
-
$
-
$
-
$
-
$
-
Shares issued to
management
Shares issued for private
placement
Reverse merger transaction:
Recapitalization on
reverse merger
Cancellation of common
shares
Issuance of common stock
for services
Forward stock split (4 for
1)
Issuance of common stock
for services
Discount on convertible
promissory note
Net loss
Balance, December 31,
2010
2,000,000
2,000
8,000
361,125
361
1,444,140
4,301,730
4,302
442,782
(3,600,000)
(3,600)
(266,400)
100,000
100
162,900
9,488,565
-
-
50,000
50
149,950
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,000
1,444,501
447,084
(270,000)
163,000
-
150,000
65,250
-
-
-
-
65,250
-
(645,302)
(645,302)
$
-
12,701,420
$
3,213
$
2,006,622
$
(645,302)
$ 1,364,533
The accompanying notes are an integral part of these financial statements.
F-5
TORCHLIGHT ENERGY RESOURCES, INC.
(AN EXPLORATION STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 25, 2010 (INCEPTION ) TO DECEMBER 31, 2010
Cash Flows From Operating Activities
Net loss
Adjustments to reconcile net loss to net cash
from operating activities:
Stock based compensation
Change in:
Prepaid expenses
Accounts payable
Net cash used in operating activities
Cash Flows From Investing Activities
Investment in oil and gas properties - unevaluated
Cash Flows From Financing Activities
Issuance of convertible note
Shares issued to management
Shares issued for private placement
Cancellation of common shares
Net cash provided by financing activities
Net Increase in cash
Cash - beginning of period
Cash - end of period
Supplemental disclosure of cash flow information:
Non cash transactions:
Recapitalization on reverse merger
Discount on warrants issued in conjunction with convertible note
$
(645,302)
313,000
(1,000)
291,950
(41,352)
(1,114,958)
250,000
10,000
1,444,501
(270,000)
1,434,501
278,191
-
278,191
447,084
65,250
$
$
$
The accompanying notes are an integral part of these financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF BUSINESS
Torchlight Energy, Inc. (“TEI”) was formed in the state of Nevada on June 25, 2010. TEI’s operations commenced with initial funding
on July 8, 2010. TEI is an Exploration Stage energy company formed as a corporation to engage in the acquisition, exploration,
exploitation and/or development of oil and natural gas properties in the United States.
On November 23, 2010 Torchlight Energy Resources, Inc. (the “Company”), formerly, Pole Perfect Studios, Inc. (“Pole Perfect”)
entered into a Share Exchange Agreement (the “Exchange Agreement”) with its major stockholders, TEI, and the persons owning
100% of the outstanding capital stock of TEI (the “TEI Stockholders”). At closing, the TEI Stockholders transferred 9,444,501 shares
of TEI common stock, representing 100% of the common stock of TEI, to the Company in exchange for an aggregate of 2,361,125
shares (pre stock split) of newly issued common stock of the Company. Also at closing of the Exchange Agreement, the Pole Perfect
shareholders transferred to the Company an aggregate of 3,600,000 shares of common stock of the Company for cancellation in
exchange for an aggregate consideration of $270,000. This transaction was recorded as a reverse acquisition for accounting purposes
where TEI is the accounting acquirer. The assets and liabilities of Pole Perfect were recorded at a fair value of $0. The Company
recorded $447,084 of goodwill which represents the estimated fair value of the consideration exchanged. In addition, at closing (i) TEI
became its wholly-owned subsidiary, (ii) the company abandoned all of our previous business plans within the health and fitness
industries, including opening and operating dance studios, and (iii) the business of TEI became its sole business. Descriptions of its
business hereinafter refer to the business of TEI.
On December 10, 2010, the Company effected a 4-for-1 forward split of its shares of common stock outstanding. All owners of record
at the close of business on December 10, 2010 (record date) received three additional shares for every one share they owned.
In an Exploration Stage company, management devotes most of its activities to establishing a new business, including raising capital to
acquire interests in oil and gas properties. Planned principle activities have not yet produced any revenues, and the Company has
incurred operating losses as is normal in exploration stage companies.
The Company desires to be engaged in the acquisition, exploration, development and producing of oil and gas properties. The
Company is interested in programs that have a short window of payback, a high internal rate of return and proven and bookable
reserves. The Company’s success will depend in large part on its ability to obtain and develop oil and gas interests within the United
States.
2.
GOING CONCERN
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a
going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.
At December 31, 2010, the Company had not yet achieved profitable operations, has accumulated losses of $645,302 since its inception
and expects to incur further losses in the development of its business, and has negative working capital of $197,509 all of which casts
substantial doubt about the Company’s 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. The accompanying
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
F-7
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 subsidiary Torchlight Energy, Inc. 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 – The Company’s cash is placed with a highly rated financial institution and the Company conducts ongoing
evaluations of the credit worthiness of the financial institutions with which it does business. At times during the period from June 25,
2010 (inception) to December 31, 2010, cash balances were in excess of amounts guaranteed by the Federal Deposit Insurance
Corporation.
Fair value of financial instruments – Financial instruments consist of cash, accounts payable and a convertible promissory note. The
estimated fair values of cash and accounts payable approximate the carrying amount due to the relatively short maturity of these
instruments. The carrying amount of the convertible promissory note approximates its fair value giving affect for a discount relative to
the fair value of warrants issued in conjunction with the promissory note. See note 10.
Unevaluated oil and gas properties – Unevaluated oil and gas properties consist principally of the Company’s acquisition costs in
undeveloped leases. When leases are developed, expire or are abandoned, the related costs are transferred from unevaluated oil and gas
properties to depletable oil and gas properties. Additionally, the Company reviews the carrying costs of unevaluated oil and gas
properties for the purpose of determining probable future lease expirations and abandonments, and prospective discounted future
economic benefit attributable to the leases.
When necessary, the Company records an allowance for impairment based on the review with the corresponding charge being made to
depletable oil and gas properties.
Oil and gas properties – The Company follows the full cost method of accounting for oil and gas property acquisition, exploration and
development activities. Under this method, all costs associated with property acquisition, exploration and development activities are
capitalized into a cost center (the amortization base), whether or not the activities to which they apply are geophysical costs, direct
overhead related to exploration and development activities and other employees directly involved in the exploration and development of
oil and gas properties as well as other internal costs that can be specifically identified with acquisition, exploration, and development
activities are also capitalized.
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 costs until the property has been evaluated. 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.
Depreciation, depletion and amortization – The capitalized costs of oil and gas properties, plus estimated future development costs
relating to proved reserves are amortized on a unit-of-production method over estimated total proved oil and gas reserves. 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 unevaluated oil and gas properties, which are excluded from these calculations. During the period from June 25, 2010 (inception)
to December 31, 2010, the Company held only unevaluated oil and gas properties; therefore, no depreciation, depletion or amortization
has been recognized.
F-8
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, plus the cost
of unproved oil and gas properties, exceeds the present value of estimated future net cash flows discounted at 10 percent, 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 un-weighed 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
Company did not recognize impairment on its oil and gas properties during the period from June 25, 2010 (inception) to December 31,
2010. 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. As of December 31, 2010, the Company does not
have any proved oil or gas reserves.
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 evaluation of the same reserves as well as cost estimates related to future development
costs of proved oil and gas reserves could result in significant revisions due to changes in regulatory requirements, technological
advances and other factors which are difficult to predict.
Gains and losses on the sale of oil and gas properties are generally reflected in income. 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. During the period from Jun 25, 2010 (inception) to December 31, 2010, there were no gains or
losses recognized from the sale of oil and gas properties.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net identifiable tangible and intangible assets
of acquired companies. Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of
impairment exist. Goodwill was $447,084 as of December 31, 2010 and was acquired on November 23, 2010 in connection with the
Company’s reverse acquisition (Note 1).
Asset retirement obligations – Accounting principles require that the fair value of a liability for an asset’s retirement obligation
(“ARO”) be recorded in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the corresponding
cost be 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 cost incurred is recorded as a reduction to 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.
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.
F-9
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 – The Securities Exchange Commission’s rule, Modernization of the Oil and Gas Reporting
Requirements is intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves to help
investors evaluate their investments in oil and gas companies. The amendments are also designed to modernize the oil and gas
disclosure requirements to align them with current practices and changes in technology. Revised requirements in this guidance include,
but are not limited to:
·
·
·
·
·
·
Oil and gas reserves must be reported using the average price over the prior 12-month period, determined as an un-weighted
arithmetic average of the first-day-of-the-month price for each month within such period, rather than year-end prices;
Companies are allowed to report, on an optional basis, probable and possible reserve;
Non-traditional reserves, such as oil and gas extracted from coal and shales, are included in the definitions of “oil and gas
producing activities”;
Companies are permitted to use new technologies to determine proved reserves, as long as those technologies have been
demonstrated empirically to lead to reliable conclusions with respect to reserve volumes;
Companies are required to disclose, in narrative form, additional details on their proved undeveloped reserves (PUDs), including
the total quantity of PUDs at year end, any material changes to PUDs to developed oil and gas reserves and an explanation of
the reasons why material concentrations of PUDs in individual fields or countries have remained undeveloped for five years or
more after disclosure as PUDs;
Companies are required to report the qualifications and measures taken to assure the independence and objectivity of any
business entity or employee primarily responsible for preparing or auditing the reserves estimates.
The Company adopted this guidance effective June 25, 2010 (inception). As of December 31, 2010, the Company did not have any
proved reserves.
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 all subsequent events from December 31, 2010 through April 14, 2011, the date of
issuance of the financial statements. Also see note 11.
4.
RELATED PARTY TRANSACTIONS
In exchange for management services provided to the Company, Opal Marketing & Consulting, Inc. (“Opal”) charges the Company a
management fee of $240,000 per year. The Company’s Chief Executive Officer is the President of Opal. The Company paid Opal
$120,000 for the period from June 25, 2010 (inception) through December 31, 2010.
On December 1, 2010, the Company entered into a Business Consultant Agreement with a former Director and Chief Executive
Officer. The agreement provides that in consideration for consulting services, the Company will pay $4,000 per month for the term of
the agreement (three months) and issue 50,000 restricted shares of common stock. On December 17, 2010, the Company issued the
50,000 shares of common stock which were valued at $150,000 on that date. For the year ended December 31, 2010, the Company
paid the former Director and CEO a total of $4,000 in cash under the agreement. This agreement was cancelled in early 2011.
In connection with the issuance of the convertible promissory note (see note 10) a related party pledged 750,000 shares of Company
common stock as collateral.
5.
COMMITMENTS AND CONTINGENCIES
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, 2010, no amounts have been recorded because no specific
liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts.
F-10
6.
OIL AND GAS PROPERTIES
In July 2010, the Company entered into an Agreement to participate in an Oil and Gas Development Joint Venture (the “Participation
Agreement”) with Bayshore Operating Corporation, LLC (“Bayshore”). Bayshore is currently the holder of an oil, gas and mineral
lease covering approximately 1,045 acres in Wilson County, Texas, known as the Marcelina Creek Field Development. The
Participation Agreement provides for the drilling of four (4) wells. Upon execution of the agreement, the Company paid Bayshore an
initial deposit of $50,000, which was credited by Bayshore to the initial $50,000 payment for the first well in exchange for a 50%
working interest in the first well. The Company will pay 100% of the total drilling and completion costs.
In December 2010 the Company entered into an Addendum to the Participation Agreement (the “Addendum”) with Bayshore, which
provided for the Company to pay Bayshore a penalty (in addition to other consideration) as consideration for Bayshore agreeing to
certain time extensions under the Participation Agreement. The penalty includes $50,000 of cash on or before January 6, 2011 and
$25,000 in shares of the Company’s common stock and $25,000 cash payable concurrent with the approval and delivery of the
Authority For Expenditure (“AFE”) for the Johnson #2. Upon receipt of the aforementioned penalty described above, the Company
was given until April 15, 2011 to approve the said AFE. At December 31, 2010 the Company accrued a liability of $100,000 in
relation to this Addendum.
After mutual agreement as to the location, the second well is to be drilled within six months of the effective date of the Addendum. For
the second well, the Company will pay Bayshore $50,000 at rig move-in and $200,000 when the well is completed or plugged and
abandoned, whichever comes first. Further, the Company will pay 100% of the total drilling and completion costs for a 75% working
interest.
For the third and fourth wells, the Company will pay Bayshore $50,000 at rig move-in and $150,000 when the well is completed or
plugged and abandoned, whichever comes first. Further, the Company will pay 100% of the total drilling costs and 75% of the
completion costs for a 75% working interest with Bayshore to pay 25% of the completion costs.
7.
STOCKHOLDERS’ EQUITY
On November 22, 2010, the Company effected a reverse merger and recapitalization. See note 1.
On December 3, 2010, the Company issued 100,000 shares (pre stock split) of common stock (par value $.001) as compensation for
work performed by two separate individuals.
On December 10, 2010, the Company effected a 4-for-1 forward split of common stock outstanding. All owners of record at the close
of business on December 10, 2010 received three additional shares for every one share they owned.
On December 17, 2010, the Company issued 50,000 shares (post stock split) of common stock to the former executive officer and
director of Pole Perfect Studios, Inc. as compensation for services.
The Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series, to fix the number of
shares constituting any such series, and to fix the rights and preferences of the shares constituting any series, without any further vote
or action by the stockholders. There are no issued and outstanding shares of preferred stock; there are no agreements or understandings
for the issuance of preferred stock, and the Board of Directors has no present intention to issue preferred stock.
As noted in note 10 the Company issued convertible debt with warrants attached. The warrant is exercisable into 225,000 shares of
common stock. At December 31, 2010 these shares were excluded from the calculation of earnings per share as the stock was anti-
dilutive.
F-11
A summary of warrant activity for the period from June 25, 2010 (inception) through December 31, 2010 is presented below:
Number of
Warrants
Weighted Average
Exercise Price
Weighted Average
Remaining Contract
Outstanding June 25, 2010
Issued
Exercised
Outstanding December 31, 2010
Exercisable, December 31, 2010
-
225,000
-
225,000
225,000
$
$
-
2.50
-
2.50
2.50
4.0 years
4.0 years
At December 31, 2010, the Company has reserved 225,000 shares for future exercise of warrants.
8.
FAIR VALUE MEASUREMENTS
Assets and liabilities that require measurement to fair value on a recurring basis are categorized 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. At December 31, 2010, there were no financial assets or liabilities measured on a recurring or a nonrecurring
basis.
9.
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 carryforwards. 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 during the period from June 25, 2010 (inception) to December 31, 2010.
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 period from June 25, 2010 (inception) to December 31, 2010:
Federal income tax benefit at statutory rate
Less valuation allowance
Provision for income taxes
$
$
(219,403)
219,403
-
F-12
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2010
are as follows:
Deferred tax assets:
Net operating loss carryforward
Accruals
Deferred tax liabilities:
Intangible drilling costs for oil and gas properties
Net deferred tax assets and liabilities
Less valuation allownace
Total deferred tax assets and liabilities
$
$
336,835
7,820
(125,252)
219,403
(219,403)
-
The Company had a net deferred tax asset related to federal net operating loss carryforwards of $990,691 at December 31, 2010. The
federal net operating loss carryforward will begin to expire in 2030. Realization of the deferred tax asset is dependent, in part, on
generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance
against the net deferred tax asset because future realization of these assets is not assured.
10.
CONVERTIBLE PROMISSORY NOTE
On December 28, 2010, the Company issued a 10% Convertible Promissory Note and a warrant to purchase 225,000 shares of
common stock to an accredited investor who paid $250,000 in aggregate consideration for the securities. The 10% Convertible
Promissory Note bears interest at the rate of 10% per annum, had a principal amount of $250,000 and is convertible into shares of
common stock in the event the Company undertakes a private offering of securities to one or more third parties. The note is convertible
on the identical terms and conditions offered to such third parties. The warrant is exercisable into 225,000 shares of common stock as
of December 28, 2010 at a price of $2.50 per share and expires on December 28, 2014. The note is collateralized by 750,000 shares of
pledged securities of a related party. The convertible note was recorded net of discount that includes the relative fair value of the
warrants amounting to $62,250. The discount is amortized over the life of the debt using the effective interest method. The initial value
of the warrants was calculated using the Black Scholes Option Pricing Model.
The assumptions were as follows:
Risk-free interest rate
Expected volatility of common stock
Dividend yield
Discount due to lack of marketability
Expected life of warrant
Weighted average warrant
0.64%
40.00%
0.00%
30.00%
2 years
225,000
11.
SUBSEQUENT EVENT
Effective February 8, 2011 the Company changed its name from “Pole Perfect Studios, Inc.” to “Torchlight Energy Resources, Inc.” In
connection with the name change, the Company’s ticker symbol changed from “PPFT” to “TRCH,” February 10, 2011.
F-13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On November 23, 2010, we dismissed Patrick Rodgers, CPA, PA (“Rodgers”) as our independent registered public accountant and
engaged Calvetti, Ferguson & Wagner, P.C. (“CFW”) as our new independent registered public accounting firm. Rodgers’ report on
our financial statements for fiscal years 2009 and 2008 did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope, or accounting principles, with the exception of a qualification with respect to
uncertainty as to our ability to continue as a going concern. The decision to change accountants was recommended and approved by our
Board of Directors.
During the years ended December 31, 2009 and 2008 and through November 23, 2010, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved
to Rodgers’ satisfaction would have caused Rodgers to make reference thereto in connection with Rodgers reports on our financial
statements for such fiscal years. Additionally, during the years ended December 31, 2009 and 2008 and through November 23, 2010,
we had no reportable events as set forth in paragraph (a)(1)(v) of Item 304 of Regulation S-K.
We engaged CFW as our new independent accountant as of November 23, 2010. During the years ended December 31, 2009 and
2008, and the subsequent interim period through November 23, 2010, we nor anyone on our behalf engaged CFW regarding either the
application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, or any matter that was either the subject of a “disagreement” or a “reportable event,” both as such
terms are defined in Item 304 of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Thomas Lapinski, our President and Chief Executive Officer, is our principal executive officer and principal financial officer.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and 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, 2010. Based on this evaluation, our principal executive officer and
our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures
were effective and adequately designed 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 principal executive officer and principal financial officer, in a manner
that allowed for timely decisions regarding disclosure.
Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and
procedures that:
(i)
(ii)
(iii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements; and
provide reasonable assurance regarding prevention or timely detection of unauthorized transactions.
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 policies or procedures may deteriorate.
In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control – Integrated Framework and Internal Control over Financial Reporting – Guidance for
26
Smaller Public Companies.
We evaluated control deficiencies identified through our test of the design and operating effectiveness of controls over financial
reporting to determine whether the deficiencies, individually or in combination, are significant deficiencies or material weaknesses. In
performing the assessment, our management has identified material weaknesses in internal control over financial reporting existing as of
December 31, 2010. Our evaluation of the significance of each deficiency included both quantitative and qualitative factors. Based on
that evaluation, our management concluded that as of December 31, 2010, and as of the date that the evaluation of the effectiveness of
our internal controls and procedures was completed, our internal controls are not effective, for the reason discussed below:
1.
2.
3.
4.
5.
6.
We do not yet have written documentation of our internal control policies and procedures. Written
documentation of key internal controls over financial reporting is a requirement of Section 404 of the
Sarbanes-Oxley Act and may be applicable to us in future years.
We do not have sufficient segregation of duties within accounting functions, which is a basic internal
control. Due to our extremely small size and the fact that we only had one management employee, whom
is also an executive officer and director, segregation of all conflicting duties may not always be possible
and may not be economically feasible. However, to the extent possible, the initiation of transactions, the
custody of assets and the recording of transactions should be performed by separate individuals.
We do not currently have full-time accounting personnel, which means we lack the requisite expertise in
the key functional areas of finance and accounting. In addition, this means we do not have available
personnel to properly implement control procedures.
We did not have a functioning audit committee or outside independent directors, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and procedures.
We had not established adequate financial reporting monitoring activities to mitigate the risk of
management override, specifically because there are no employees and only one officer and director with
management functions and therefore there is lack of segregation of duties.
There is a strong reliance on the external auditors and contract accountant to review and adjust the annual
and quarterly financial statements, to monitor new accounting principles, and to ensure compliance with
GAAP and SEC disclosure requirements.
7.
There is a strong reliance on the external attorneys to review and edit the annual and quarterly filings and
to ensure compliance with SEC disclosure requirements.
In light of the material weaknesses described above, we performed additional analysis and other post-closing procedures to ensure our
financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the
financial statements included in this Report fairly present, in all material respects, our financial condition, results of operations and cash
flows for the periods presented.
In addition, although our controls are not effective, these significant weaknesses did not result in any material misstatements in our
financial statements. Our management is committed to improving its internal controls and will (1) continue to use third party specialists
to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent
reconciliations of significant accounts which is intended to mitigate the lack of segregation of duties until there are sufficient personnel
and (3) has, subsequent to the evaluation period, appointed outside directors and will establish an audit committee in the future.
27
Changes in internal control over financial reporting
Other than the weaknesses identified above, there were no changes in our internal control over financial reporting during the year ended
December 31, 2010 that have materially affected, or are reasonably likely to materially affect our internal control over financial
reporting.
Our management, including our principal executive officer and principal financial officer, does not expect that its 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 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.
28
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our executive officers and directors are as follows:
Name
Thomas Lapinski
Wayne Turner
Gregory Williams
Age Position(s) and Office(s)
66
Director, President, Chief Executive Officer and Interim
Principal Financial Officer
61
56
Director
Director
Currently, Thomas Lapinski is our sole executive officer. We presently rely on the assistance of outside advisors and consultants to
supplement our management. At such time as adequate funding is available, we anticipate adding additional executive officers,
including a Chief Financial Officer. We also anticipate expanding the Board of Directors to five members. Further, additional staff will
be added as projects become successful and a need develops to have focused attention on such projects’ future development.
Below is certain biographical information of our executive officers and directors:
Thomas Lapinski – Mr. Lapinski has served as our Director, President, Chief Executive Officer and Interim Principal Financial
Officer since November 23, 2010. He is the founder of Torchlight Energy, Inc., our wholly owned subsidiary, and has served as its
Chief Executive Officer, President and Director since its incorporation in June 2010. From 2002 to the present, he has engaged in
consulting work on various projects, both international and domestic, including the purchase of energy related businesses, primarily
focusing on evaluating exploration and re-development opportunities in the Rocky Mountain Region, Texas Gulf Coast, Mid-Continent,
the Middle East, and South America. From September 1996 to June 2002, Mr. Lapinski served as President of Stephens Energy
International of The Stephens Group, LLC. While there, he was involved in oil and gas exploration and production project development.
Prior to that, he spent over 30 years in senior positions with Amoco Corporation before retiring. His expertise is in project evaluations,
operations management and strategic planning with experience throughout the Rocky Mountain region, Alaska, U.S. mid-continent, the
U.S. Gulf Coast and numerous international arenas. With Amoco, he has held numerous positions, including Division Geophysicist for
Rocky Mountain Area, Regional Geophysicist for Africa and the Middle East, Exploration Manager for North and West Africa,
President-Amoco Morocco, President-Amoco Turkey, General Manager-Amoco Kenya, Exploration Manager Gulf Coast, Regional
Exploration Manager for Southern and Eastern U.S. and Manager for Resource and Business Development in Southern Rocky
Mountain Area. He also spent time on a special project for the Chairman of Amoco on key strategic planning issues where he was
responsible for long-term monetization of Amoco’s North American asset base. Mr. Lapinski received a degree in Geophysical
Engineering from the Colorado School of Mines in 1966.
Wayne Turner – Mr. Turner has served as one of our Directors since March 2011. He is presently the Managing Partner of, JEBCO
Seismic, LP, a position he has held since 1989, and is the Managing Partner of Big Thicket Oil & Gas, L.P., a position he has held
since 2001. Mr. Turner took over management of JEBCO in 1989, when he bought into the company. JEBCO is a fully independent
international geophysical data acquisition contractor. Jebco’s non-exclusive surveys and third party datasets represent a unique and
readily available source of information for both mature and frontier regions. JEBCO has operated both offshore and onshore in Canada
and the U.S. JEBCO has also conducted surveys in the North Sea, Africa, Asia, and South America. One of JEBCO’s most
significant accomplishments was signing an agreement with the Ministry of Geology in the USSR in 1989. The company was active in
Russia, Kazakhstan, Uzbekistan, and Azerbaijan (before and after the break-up of the USSR). The company provided oil and gas
exploration information to the industry, assisted in license rounds, and assisted in direct negotiations for oil and gas properties in these
countries. Mr. Turner spent significant time in these countries and personally negotiated all relevant agreements involved.
Mr. Turner started Big Thicket Oil & Gas, L.P. in 2001. This company is active in oil and gas exploration in Texas, Louisiana,
Oklahoma, and New Mexico at the present time. Most of the activity is through partnerships, allowing the company to remain small in
staff, but have access to expertise in different areas through these partnerships. Big Thicket does not operate wells, but is involved in
generating and evaluating prospects.
Mr. Turner graduated in 1971 from the University of Houston with a degree in Electrical Engineering. He is active in various charitable
organizations; primarily the Houston Livestock Show and Rodeo and Houston Children’s Charities.
29
Gregory Williams – Mr. Willliams has served as one of our Directors since March 2011. He is presently the Chief Financial Officer
for Oxane Materials, Inc. in Houston, Texas, a position he has held since October 2009. Oxane is a start-up company in the oil and
gas, exploration and production industry making high strength, light weight proppant used in hydraulic fracturing. As Chief Financial
Officer of Oxane, his duties have included corporate secretary responsibilities, equity and debt raising, accounting and control, treasury
and finance, corporate taxes, financial planning, risk exposure analysis, information technology, human resources, contract review and
financial compliance. Mr. Williams retired in 2009 from Ineos/Innovene/bp/Amoco after 32 years of financial management experience.
Mr. Williams has over 10 years of petrochemicals experience as the former CFO for Ineos Olefins & Polymers North America
including financial stewardship and corporate governance for all Ineos North American businesses and as the bp Chemicals Segment
North American Controller.
Mr. Williams has 22 years of exploration and production experience both in the United States and internationally. He has a BBA in
Finance from Sam Houston State University and MIM from the American Graduate School of International Management
(Thunderbird), in Phoenix, Arizona.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 furnished to us, we are aware of three people who, during the fiscal year ended
December 31, 2010 were Directors, officers, or beneficial owners of more than ten percent of our common stock, and who failed to file,
on a timely basis, reports required by Section 16(a) of the Securities Exchange Act of 1934 as follows:
Tammy Skalko, our former Director and Chief Executive Officer, failed to timely file a Form 3 when she became subject to the
reporting requirements of Section 16(a) of the Exchange Act on October 22, 2008. This report, however, was ultimately filed
on June 24, 2010. Additionally, Ms. Skalko failed to timely file a Form 4 when, on November 23, 2010, she transferred
1,200,000 shares of common stock to us for cancellation (representing 100% of her ownership in our equity securities) and
resigned as a Director and officer, thereby becoming no longer subject to the reporting requirements of Section 16(a) of the
Exchange Act. This report, however, was ultimately filed on January 4, 2011.
James Beshara, our former Director and Secretary, failed to timely file a Form 3 when he became subject to the reporting
requirements of Section 16(a) of the Exchange Act on October 22, 2008. This report, however, was ultimately filed on June 24,
2010. Additionally, Mr. Beshara failed to timely file a Form 4 when, on November 23, 2010, he transferred 1,200,000 shares
of common stock to us for cancellation (representing 100% of his ownership in our equity securities) and resigned as a Director
and officer, thereby becoming no longer subject to the reporting requirements of Section 16(a) of the Exchange Act. This
report, however, was ultimately filed on January 4, 2011.
Harry Stone II, a former owner of more than ten percent of our common stock, failed to timely file a Form 3 when he became
subject to the reporting requirements of Section 16(a) of the Exchange Act on October 22, 2008. This report, however, was
ultimately filed on June 22, 2010. Additionally, Mr. Stone failed to timely file a Form 4 when, on November 23, 2010, he
transferred 1,200,000 shares of common stock to us for cancellation (representing 100% of his ownership in our equity
securities), thereby becoming no longer subject to the reporting requirements of Section 16(a) of the Exchange Act. This report,
however, was ultimately filed on January 5, 2011.
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 was filed as Exhibit 14.1 to our S-1 Registration Statement
filed with the SEC on May 2, 2008. 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., 2007 Enterprise Avenue, League
City, Texas 77573.
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 in the Schedule 14f-1 Information Statement we mailed to stockholders on or
around November 9, 2010.
30
Audit Committee
The Board of Directors has not yet established a separately-designated standing audit committee. An audit committee typically reviews,
acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the recommendations
and performance of independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, and internal
accounting and financial control policies and procedures. Certain stock exchanges require listed companies to adopt a formal written
charter that establishes an audit committee that specifies the scope of an audit committee’s responsibilities and the means by which it
carries out those responsibilities. In order to be listed on any of these exchanges, we will be required to establish an audit committee.
There can be no assurances if and when we will establish an audit committee.
ITEM 11. EXECUTIVE COMPENSATION
The following table provides summary information for the years 2010 and 2009 concerning cash and non-cash compensation paid or
accrued to or on behalf of certain executive officers.
Summary Compensation Table
Name and
Principal
Position
Thomas Lapinski
President, CEO and
Director
Tammy Skalko (2)
Former President,
CEO, Treasurer and
Director
James Beshara (3)
Former Secretary and
Director
Salary
($)
Bonus
($)
Year
Stock
Awards
($)
Option
Awards
($)
2010
2009
$104,000(1)
-
2010
2009
2010
2009
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Change in
Pension
Value
and
Nonqualified
Deferred
Compensation
($)
Non-Equity
Incentive
Plan
Compensation
($)
-
-
-
-
-
-
-
-
-
-
-
-
All Other
Compensation
($)
Total
($)
-
-
-
-
-
-
$104,000
-
-
-
-
-
(1) Thomas Lapinski receives no compensation directly from us. He is, however, also an executive officer of our wholly owned
subsidiary, Torchlight Energy, Inc., and is entitled to receive a management fee pursuant to an employment agreement in effect with
TEI. See “Employment Agreements,” below. Mr. Lapinski’s management fee has accrued since August 2010, and accordingly, TEI
owes Mr. Lapinski $104,000 in accrued and unpaid management fees as of December 31, 2010.
(2) Tammy Skalko resigned on November 23, 2010.
(3) James Beshara resigned on November 23, 2010.
Employment Agreements
In July 2010, Torchlight Energy, Inc., our wholly owned subsidiary (“TEI”), entered into an employment agreement with Opal
Marketing and Consulting, Inc. (“Opal”). Our Chief Executive Officer and Director, Thomas Lapinski, owns and is the President of
Opal. The agreement provides that Opal will provide the services of Mr. Lapinski to serve as TEI’s President and Chairman of the
Board of Directors. The agreement has a term of two years and provides that TEI is to pay Opal a base fee equal to $240,000 per year,
payable monthly. TEI must also pay all applicable federal, state and local employment taxes, as well as social security and such other
amounts, from all amounts paid to Opal. Further, Mr. Lapinski is eligible to receive stock options and an additional annual bonus as
determined by the Board of Directors in its sole discretion in an amount not to exceed 100% of the base fee.
There is currently no employment agreement between Mr. Lapinski and Torchlight Energy Resources, Inc.
31
Outstanding Equity Awards at Fiscal Year End
We do not have any unexercised options, stock that has not vested or equity incentive plan awards for any of our executive officers or
directors outstanding as of the end of our fiscal year ended December 31, 2010.
Compensation of Directors
At present, we do not pay our Directors for attending meetings of the Board of Directors, nor do we have a standard arrangement
pursuant to which Directors are compensated for any services provided as a Director. We may adopt a Director compensation policy in
the future, but we have not yet determined the amount, if any, that we will pay to our Directors for attending meetings. Directors
received no compensation for their services as directors during years ended December 31, 2010 and 2009.
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 certain information at March 31, 2011 with respect to the beneficial ownership of shares of common
stock by (i) each person known to us who owns beneficially more than 5% of the outstanding shares of common stock (based upon
reports which have been filed and other information known to us), (ii) each of our Directors, (iii) each of our executive officers and (v)
all of our executive officers and Directors and Director nominees as a group. Unless otherwise indicated, each stockholder has sole
voting and investment power with respect to the shares shown. As of March 31, 2011, there were 12,811,420 shares of common stock
outstanding.
The table below sets forth the number and percentage of shares of our common stock owned as of March 31, 2011 by the following
persons: (i) stockholders known to us who own 5% or more of our outstanding shares, (ii) each of our executive officers and directors,
and (iii) our executive officers and directors as a group. As of March 31, 2011, there were 12,811,420 shares of our common stock
outstanding.
Name and address of beneficial owner
Amount of beneficial
ownership
Percent of class
Thomas Lapinski
President, CEO and Director
2007 Enterprise Avenue
League City, Texas 77573
Wayne Turner
2450 Fondren, Suite 112
Houston, Texas 77063
Gregory Williams
1105 Pine Hurst Court
Friendswood, Texas 77546
4,600,000 shares
35.9%
0 shares
0%
400,000 shares
3.1%
All directors and executive officers as a
group (1 person)
John A. Brda
1425 Frontenay
Warson Woods, Missouri 63122
5,000,000 shares
2,512,500 shares (1)
39.0%
19.6%
(1) Includes 182,500 shares held individually by John A. Brda and 2,330,000 shares held by Brda & Company LLC, of
which Mr. Brda is the sole owner and Managing Director.
32
Change in Control
On November 23, 2010, we entered into and closed a Share Exchange Agreement, as described in more detail above under “Corporate
History and Background” in “Item 1” of this report. We are aware of no arrangements the operation of which may at a subsequent date
result in a change in control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 1, 2010, we entered into a Business Consultant Agreement with Tammy Skalko, our former Director and Chief
Executive Officer. The agreement provides that in consideration for her consulting services, we will pay her $4,000 per month for the
term of the agreement (three months) and issue her 50,000 restricted shares of common stock. On December 17, 2010, we issued Ms.
Skalko the 50,000 shares of common stock which were valued at $150,000 on that date. For the year ended December 31, 2010, we
paid Ms. Skalko a total of $4000 in cash under the agreement.
Review, Approval or Ratification of Transactions with Related Persons
Currently, we rely on our Board of Directors to review related party transactions on an ongoing basis to prevent conflicts of interest.
Our Board of Directors reviews a transaction in light of the affiliations of the director, officer, or employee and the affiliations of such
person’s immediate family. Our Board of Directors will approve or ratify a transaction if it determines that the transaction is consistent
with our best interests and the best interests of our stockholders. Additionally, to ensure, among other things, that potential conflicts of
interest are avoided or declared, we have adopted a Code of Ethics, setting forth the responsibilities of certain officers and employees.
Director Independence
Currently two of our three Directors are independent. Our independent Directors are Wayne Turner and Gregory Williams. The
definition of “independent” used herein is arbitrarily based on the independence standards of The NASDAQ Stock Market LLC. The
Board performed a review to determine the independence of Wayne Turner and Gregory Williams 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 or to be provided by our principal
independent accountants during the years ended December 31, 2010 and 2009. On November 23, 2010, we dismissed Patrick
Rodgers, CPA, PA (“Rodgers”) as our independent registered public accountant and engaged Calvetti, Ferguson & Wagner, P.C.
(“CFW”) as our new independent registered public accounting firm.
Audit Fees(1)
Audit Related Fees(2)
Tax Fees(3)
All Other Fees
Total Fees
$
2010
2009
23,000 $ 15,000
-
-
-
-
-
-
$
23,000 $ 15,000
(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 the principal
independent accountant 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
accountant for tax compliance, tax advice, and tax planning.
33
Pre-Approval of Audit and Non-Audit Services
We do not have a standing audit committee. Therefore, for the fiscal years ended December 31, 2009 and 2010 all audit services, audit-
related services and tax services, as described above, were provided to us by Rodgers and/or CFW based upon prior approval of the
Board of Directors.
ITEM 15. EXHIBITS
PART IV
Exhibit No. Description
2.1
Share Exchange Agreement dated November 23, 2010. (Incorporated by reference from Form 8-K filed with the SEC
on November 24, 2010.) *
3.1
3.2
Articles of Incorporation. (Incorporated by reference from Form S-1 filed with the SEC on May 2, 2008.) *
Amended and Restated Bylaws (Incorporated by reference from Form 8-K filed with the SEC on January 12, 2011.) *
10.1
Employment Agreement between Thomas Lapinski and Torchlight Energy, Inc. (Incorporated by reference from Form
8-K filed with the SEC on November 24, 2010.) *
10.2
14.1
16.1
21.1
31.1
Agreement to Participate in Oil and Gas Development Joint Venture between Bayshore Operating Corporation, LLC
and Torchlight Energy, Inc. (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010) *
Code of Ethics (Incorporated by reference from Form S-1 filed with the SEC on May 2, 2008.) *
Letter from Patrick Rodgers, CPA, PA to the SEC dated November 23, 2010. (Incorporated by reference from Form 8-
K filed with the SEC on November 24, 2010) *
Subsidiaries. (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010) *
Certification of principal executive officer required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of principal financial officer required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section
1350 of 18 U.S.C. 63.
32.2
Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350
of 18 U.S.C. 63.
* Incorporated by reference from our previous filings with the SEC
34
In accordance with the requirements of Section 13 of 15(d) of the Exchange Act, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on April 14, 2011.
SIGNATURES
Torchlight Energy Resources, Inc.
/s/ Thomas Lapinski
By: Thomas Lapinski
Chief Executive Officer
/s/ Thomas Lapinski
By: Thomas Lapinski
Interim Principal Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons in the capacities
and on the dates indicated:
Signature
/s/ Thomas Lapinski
Thomas Lapinski
/s/ Wayne Turner
Wayne Turner
/s/ Gregory Williams
Gregory Williams
Title
Director
Director
Director
35
Date
April 14, 2011
April 14, 2011
April 14, 2011
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Thomas Lapinski, Chief Executive Officer of Torchlight Energy Resources, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Torchlight Energy Resources, Inc. for the year
ended December 31, 2010;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d- 15 (e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the small business
issuer, including its consolidated subsidiary, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this annual report based on such evaluation; and
d) Disclosed in this annual report any change in the registrant's internal control over financial reporting
that occurred during the registrant's fourth quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over the financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
/s/ Thomas Lapinski
By: Thomas Lapinski, Chief Executive Officer
Date: April 14, 2011
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Thomas Lapinski, Interim Principal Financial Officer of Torchlight Energy Resources, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Torchlight Energy Resources, Inc. for the year ended
December 31, 2010;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d- 15 (e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the small business
issuer, including its consolidated subsidiary, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this annual report based on such evaluation; and
d) Disclosed in this annual report any change in the registrant's internal control over financial reporting
that occurred during the registrant's fourth quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over the financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
/s/ Thomas Lapinski
By: Thomas Lapinski, Interim Principal Financial Officer
Date: April 14, 2011
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-K of Torchlight Energy Resources, Inc. (the "Company")
for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on the date
hereof (the “Covered Report"), I, Thomas Lapinski, Chief Executive Officer of the Company, pursuant to 18
U.S.C. Sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify
that:
The Covered Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
The information contained in the Covered Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this certificate as of this 14th day of April, 2011.
/s/ Thomas Lapinski
By: Thomas Lapinski, Chief Executive Officer
Date: April 14, 2011
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-K of Torchlight Energy Resources, Inc. (the "Company")
for the year ended December 31, 2010, as filed with the Securities and Exchange Commission on the date
hereof (the "Covered Report"), I, Thomas Lapinski, Interim Principal Financial Officer of the Company,
pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
hereby certify that:
The Covered Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
The information contained in the Covered Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
IN WITNESS WHEREOF, I have executed this certificate as of this 14th day of April, 2011.
/s/ Thomas Lapinski
By: Thomas Lapinski, Interim Principal Financial Officer
Date: April 14, 2011