UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016.
☐ Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required)
For the transition period from _______ to _______.
Commission file number: 000-53473
Torchlight Energy Resources, Inc.
(Exact name of registrant in its charter)
Nevada
(State or other jurisdiction of incorporation or
Organization)
74-3237581
(I.R.S. Employer Identification No.)
5700 W. Plano Parkway, Suite 3600
Plano, Texas 75093
(Address of principal executive offices)
(214) 432-8002
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock ($0.001 Par Value)
(Title of Each Class)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
Non-accelerated filer
☐
☐
☐ (Do not check if a smaller reporting company) Smaller reporting company ☒
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of the registrant on June 30, 2016, the last business day of the
registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $.55 on the Nasdaq Stock Market, was
approximately $19,404,947.
At March 21, 2017, there were 57,862,004 shares of the registrant’s common stock outstanding (the only class of common stock).
DOCUMENTS INCORPORATED BY REFERENCE
None.
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking
statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” Item 1A “Risk
Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking
statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,”
“projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those
reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those
discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A and those
discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could
cause material adverse effects on our financial condition and results of operations include, but are not limited to, risks associated with the
company's ability to obtain additional capital in the future to fund planned expansion, the demand for oil and natural gas, general economic
factors, competition in the industry and other factors that may cause actual results to be materially different from those described herein as
anticipated, believed, estimated or expected. We undertake no obligation to revise or publicly release the results of any revision to any
forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements.
As used herein, the “Company,” “Torchlight,” “we,” “our,” and similar terms include Torchlight Energy Resources, Inc. and its
subsidiaries, unless the context indicates otherwise.
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Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
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. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
PART III
Item 10. Directors, Executive Officer, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. 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 as Pole Perfect Studios, Inc.
(“PPS”).
On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) between the major
shareholders of PPS and the shareholders of Torchlight Energy, Inc. (“TEI”). As a result of the transactions effected by the Exchange
Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business. TEI is an energy
company, incorporated under the laws of the State of Nevada in June 2010. We are engaged in the acquisition, exploration, exploitation,
and/or development of oil and natural gas properties in the United States. In addition to TEI, we also operate our business through two
other wholly-owned subsidiaries, Torchlight Energy Operating, LLC, a Texas limited liability company, and Hudspeth Oil Corporation, a
Texas corporation.
Effective February 8, 2011, we changed our name to “Torchlight Energy Resources, Inc.” In connection with the name change, our ticker
symbol changed from “PPFT” to “TRCH.”
Business Overview
Our business model is to focus on drilling and working interest programs within the United States, primarily in basins or areas with known
geology such as the Permian Basin in West Texas. We have interests in three oil and gas projects, which projects are described in more
detail below in the section titled “Current Projects.” We anticipate being involved in multiple other oil and gas projects moving forward,
pending adequate funding. We anticipate acquiring exploration and development projects both as a non-operating working interest partner,
participating in drilling activities primarily on a basis proportionate to the working interest, and acquiring properties we can operate. We
intend to spread the risk associated with drilling programs by entering into a variety of programs in different fields with differing
economics.
Salient characteristics of the company include our industry relationships, leverage for prospect selection, anticipated diversity, both
geologically and geographically, cost control, partnering, and protection of capital exposure. Management believes opportunities exist to
identify and pursue relatively low risk projects at very attractive entry prices. These projects may be available from small operators in
financial distress, larger companies that need to share costs, and large producers who are consolidating their activities in other areas.
Management believes attractive entry prices and tight cost control will result in returns that are superior to those achieved by major
companies or small independents. An integral part of this strategy is the partnering of major activities. Such partnering will enable us to
acquire the talents of proven industry veterans, as needed, without affecting our long-term fixed overhead costs.
Key Business Attributes
Experienced People. We build on the expertise and experiences of our management team, including John Brda and Roger Wurtele. We
will also receive guidance from outside advisors as well as our Board of Directors and will align with high quality exploration and technical
partners.
Project Focus. We are focusing primarily on exploitation projects by pursuing resources in areas where commercial production has already
been established but where opportunity for additional and nearby development is indicated. We may pursue high risk exploration prospects
which may appear less favored than low risk exploration. We will, however, consider these high risk-high reward exploration prospects in
connection with exploitation opportunities in a project that would reduce the overall project economic risk. We will consider such high risk-
high reward prospects on their individual merits.
Lower Cost Structure. We will attempt to maintain the lowest possible cost structure, enabling the greatest margins and providing
opportunities for investment that would not be feasible for higher cost competitors.
Limit Capital Risks. Limited capital exposure is planned initially to add value to a project and determine its economic viability. Projects
are staged and have options before additional capital is invested. We will limit our exposure in any one project by participating at reduced
working interest levels, thereby being able to diversify with limited capital. Management has experience in successfully managing risks of
projects, finance, and value.
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ITEM 1. BUSINESS - continued
Project Focus
Generally, we will focus on exploitation projects (primarily for oil, although gas projects will be considered if the economics are
favorable). Projects are first identified, evaluated, and followed by the engagement of third party operating or financial partners. Subject to
overall availability of capital, our interest in large capital projects will be limited. Each opportunity will be investigated on a standalone
basis for both technical and financial merit.
We will be actively seeking quality new investment opportunities to sustain our growth, and we believe we will have access to many new
projects. The sources of these opportunities will vary but all will be evaluated with the same criteria of technical and economic factors. It
is expected that projects will come from the many small producers who find themselves under-funded or over-extended and therefore
vulnerable to price volatility. The financial ability to respond quickly to opportunities will ensure a continuous stream of projects and will
enable us to negotiate from a stronger position to enhance value.
With emphasis on acquisitions and development strategies, the types of projects in which we will be involved vary from increased
production due to simple re-engineering of existing wellbores to step-out drilling, drilling horizontally, and extensions of known fields.
Recompletion of existing wellbores in new zones, development of deeper zones and detailing of structure, and stratigraphic traps with
three-dimensional seismic and utilization of new technologies will all be part of our anticipated program. Our preferred type of projects are
in-fills to existing production with nearly immediate cash flow and/or adjacent or on trend to existing production. We will prefer projects
with moderate to low risk, unrecognized upside potential, and geographic diversity.
Business Processes
We believe there are three principal business processes that we must follow to enable our operations to be profitable. Each major business
process offers the opportunity for a distinct partner or alliance as we grow. These processes are:
·
Investment Evaluation and Review;
· Operations and Field Activities; and
· Administrative and Finance Management.
Investment Evaluation and Review. This process is the key ingredient to our success. Recognition of quality investment opportunities is
the fuel that drives our engine. Broadly, this process includes the following activities: prospect acquisition, regional and local geological
and geophysical evaluations, data processing, economic analysis, lease acquisition and negotiations, permitting, and field supervision. We
expect these evaluation processes to be managed by our management team. Expert or specific technical support will be outsourced as
needed. Only if a project is taken to development, and only then, will additional staff be hired. New personnel will have very specific
responsibilities. We anticipate attractive investment opportunities to be presented from outside companies and from the large informal
community of geoscientists and engineers. Building a network of advisors is key to the pipeline of high quality opportunities.
Operations and Field Activities. This process begins following management approval of an investment. Well site supervision,
construction, drilling, logging, product marketing, and transportation are examples of some activities. We will prefer to be the operator,
but when operations are not possible, we will farm-out sufficient interests to third parties that will be responsible for these operating
activities. We provide personnel to monitor these activities and associated costs.
Administrative and Finance Management. This process coordinates our initial structuring and capitalization, general operations and
accounting, reporting, audit, banking and cash management, regulatory agencies reporting and interaction, timely and accurate payment of
royalties, taxes, leases rentals, vendor accounts and performance management that includes budgeting and maintenance of financial
controls, and interface with legal counsel and tax and other financial and business advisors.
Current Projects
As of December 31, 2016 the Company had interests in three oil and gas projects:, the Orogrande Project in Hudspeth County, Texas, and
the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas, and the Hunton wells in partnership with Husky Ventures in Central
Oklahoma .
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ITEM 1. BUSINESS - continued
Orogrande Project, West Texas
On August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum Corporation
(“MPC”), and Greg McCabe. Mr. McCabe was the sole owner of both Hudspeth and MPC. Under the terms and conditions of the Purchase
Agreement, at closing, we purchased 100% of the capital stock of Hudspeth which holds certain oil and gas assets, including a 100%
working interest in 172,000 mostly contiguous acres in the Orogrande Basin in West Texas. This acreage is in the primary term under five-
year leases that carry additional five-year extension provisions. As consideration, at closing we issued 868,750 shares of our common stock
to Mr. McCabe and paid a total of $100,000 in geologic origination fees to third parties. Additionally, Mr. McCabe has, at his option, a
10% working interest back-in after payout and a reversionary interest if drilling obligations are not met, all under the terms and conditions
of a participation and development agreement. All drilling obligations through December 31, 2016 have been met. Closing of the
transactions occurred on September 23, 2014.
Of the 168,000 acres, 40,154 were scheduled for renewal in December, 2014. The Company renewed the leases for the 40,154 acres
during second quarter, 2015. Prior to March 31, 2015, the Company had the obligation to begin drilling its first well in order to hold the
acreage block. The Rich A-11 well was permitted and spudded and drilling began as required by March 31, 2015.
The Company finalized an agreement to sell a 5% working interest in the Orogrande acreage on June 30, 2015 with an effective date of
April 1, 2015. Sale proceeds were $500,000 which were received in April, 2015. In addition, the Company issued 250,000 three year
warrants with an exercise price of $.50 to the purchaser.
On September 23, 2015, our subsidiary, Hudspeth Oil Corporation (“HOC”), entered into a Farmout Agreement by and between HOC,
Pandora Energy, LP (“Pandora”), Founders Oil & Gas, LLC (“Founders”), McCabe Petroleum Corporation and Greg McCabe (McCabe
Petroleum Corporation and Greg McCabe are parties to the Farmout Agreement for limited purposes) for the entire Orogrande Project in
Hudspeth County, Texas. The Farmout Agreement provides for Founders to earn from HOC and Pandora (collectively, the “Farmor”) an
undivided 50% of the leasehold interest in the Orogrande Project by Founder’s spending a minimum of $45 million on actual drilling
operations on the Orogrande Project in the next two years. Founders is to pay Farmor a total cost reimbursement of $5,000,000 in multiple
installments as follows: (1) $1,000,000 at the signing of the Farmout Agreement, the balance of which was received on September 24,
2015; (2) within 90 days from the closing, Founders will frac and complete the Rich A-11 No. 1 Well; and (3) within five days of the
spudding of each of the next eight wells drilled by Founders, Founders will pay to Farmor $500,000 resulting in the payment of the
remaining amount; provided that, in the event that within 90 days after the fracing of the Rich Well, Founders notifies Farmor of its
election not to drill any additional wells, Founders shall have no further obligation to make further payment.
Upon payment of the first $1,000,000, Farmor assigned to Founders an undivided 50% of the leasehold interest and a 37.5% net revenue
interest in the leases subject to the terms of the Farmout Agreement (including obligations to re-assign to HOC and Pandora if the 50%
interest in the entire Orogrande Project is not earned) and a proportionate share of the McCabe 10% BIAPO (back in after pay out) interest;
provided, however, that for each well that Founders drills prior to earning the acreage, it will be assigned a 50% working interest in the
wellbore and in the lease on which it sits.
Under a joint operating agreement (on A.A.P.L. Form 610 – 1989 Model Form Operating Agreement with COPAS 2005 Accounting
Procedures) (“JOA”) also entered into on September 23, 2015, Founders is designated as operator of the leases. Any variance to the
operating plan will be determined by a Development Committee, which committee is made up of members from Founders and Farmor, or
their designees, to discuss and recommend the location of the drill wells, data to be gathered and the form of same. As contemplated under
the Farmout Agreement, starting within 90 days of the completion of the fracing on the Rich A-11 Well, and at all times subject to the 90
day continuous drilling clause, Founders has the option, but not the obligation, to retain the assigned interest as follows: (1) if Founders
spends a minimum of $45 million on actual drilling operations while maintaining compliance with the continuous drilling clause, subject to
reasonable delays resulting from reasonable Force Majeure conditions, Founders will have fulfilled its farmout obligations and will be
entitled to retain the assigned interests. If Founders does not meet such obligations, it will reassign to Farmor the assigned interest except it
will be entitled to retain its interest in the leases covering all wells drilled by Founders and the sections in which such wells are located.
Additionally, Founders will resign as operator of the JOA as to all lands reassigned; and (2) Farmor will be carried in all drilling operations
during the first two years and/or $45 million in drilling operations, whichever comes last, subject to Founders’ right to recoup certain
expenses on “Gap Wells.” After three years and after Founders has earned its working interest, either party may elect to market the acreage
as an entire block, including operatorship. Should an acceptable bid arise, and both parties agree, the block will be sold 100% working
interest to that third party bidder. However, if only one party wants to accept the outside offer, the other party (the party who wishes not to
sell) has the right to purchase the working interest from the selling party.
The Rich A-11 well that was drilled by Torchlight in second quarter, 2015 was evaluated and numerous scientific tests were performed
to provide key data for the field development thesis. During the testing process a poor cement bond was identified preventing a cost
effective production test for the primary pay zones. Repair to the well bore necessary for a subsequent frac procedure was determined to
be economically unfeasible. With the Rich A-11 designed as a test well rather than commercial target, a decision to begin plans for
drilling the next well(s) with larger casing that utilized for future commercial production was made.
Torchlight Energy and Founders have elected to move forward on planning the next phase of drilling in the Orogrande Project. The project
operator planned to permit three new wells in 2016 starting with the University Founders B-19 #1 well. The new wells would be drilled
vertically for test purposes and would have sufficient casing size to support lateral entry into any pay zone(s) encountered once the well is
tested vertically. Torchlight and the project operator would then run a battery of tests on each well to gain information for future
development of the field. The second test well, the University Founders B-19 #1, was spudded on April 24, 2016 and drilled in second
quarter, 2016. The well successfully pumped down completion fluid in third quarter and indications of hydrocarbons were seen at the
surface on this second Orogrande Project test well. Despite encountering a bedding plane in a small section of the wellbore which required
the installation of a pump to dewater, fluids from the B-19 #1 test well have begun to show an oil cut. The oil samples appear to be to be
very high gravity in the 45° to 47° API range. The well has shown casing pressure measured from 200 psi to 540 psi at various times during
the testing phase. The presence of natural gas is also noted and samples have been taken showing a ~1050 BTU content.
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ITEM 1. BUSINESS - continued
The parties have agreed to amend the drilling schedule for the next well to be no later than April 30, 2017. Future plans are focused on
drilling additional wells in the Orogrande per our Farmout agreement with Founders in which we will be carried on costs for all aspects of
drilling for the foreseeable future.
Hazel Project in the Midland Basin in West Texas
Effective April 1, 2016, Torchlight Energy Inc. acquired from McCabe Petroleum Corporation, a 66.66% working interest in approximately
12,000 acres in the Midland Basin in exchange for 1,500,000 warrants to purchase our common stock with an exercise price of $1.00 for
five years and a back-in after payout of a 25% working interest to the seller.
Initial development of the first well on the property, the Flying B Ranch #1, began July 10, 2016 and development continued through
September 30, 2016. This well was is classified as a test well in the development pursuit of the Hazel Project.
In October, 2016, the holders of the Company's Series C Preferred shares (which were issued in July, 2016) elected to convert into a
33.33% Working Interest in the Company's Hazel Project, reducing Torchlight's ownership from 66.66% to a 33.33% Working Interest.
On December 27, 2016, drilling activities commenced on its next Midland Basin, Hazel Project well, the Flying B Ranch #2. The well will
be a vertical test similar to the Company's first Hazel Project well, the Flying B Ranch #1. We intend to continue to de-risk the Hazel AMI
by continuing to drill evaluation wells. The next scheduled well in the Hazel Project is set for the end of June, 2017. It is intended to be a
horizontal well testing the Wolfcamp formation in order to determine horizontal viability of the play.
In November, 2016, the Company announced that it had entered into a Letter of Intent to increase its ownership across all 12,000 gross
acres in the Hazel Project resulting in 8,880 net acres in its Midland Basin Hazel Project. Upon closing of the transactions in January, 2017
contemplated by the Letter of Intent, Torchlight obtained the additional 40.66% Working Interest from an entity owned and controlled by
its Chairman, Greg McCabe, increasing Torchlight's total ownership to 74%. Reference “Subsequent Events” in Note 11 to the financial
statements included in this report.
Hunton Play, Central Oklahoma
As of December 31, 2016, we were actively producing from one well in the Viking AMI, and one well in Prairie Grove.
Legal Proceeding
As previously disclosed, in May, 2016, Torchlight Energy Resources, Inc. and its subsidiary Torchlight Energy, Inc. filed a lawsuit in the
429th judicial district court in Collin County, Texas against Husky Ventures, Inc., Charles V. Long, April Glidewell, Silverstar of Nevada,
Inc., Maximus Exploration, LLC, Atwood Acquisitions, LLC, Gastar Exploration Inc., J. Russell Porter, Michael A. Gerlich, Jerry R.
Schuyler, and John M. Selser, Sr. Reference is made to Item 3, “Legal Proceedings,” for more information regarding this lawsuit.
Viking AMI
In the fourth quarter of 2013 we entered into an Area of Mutual Interest (AMI) with Husky Ventures, the Viking Prospect. We acquired a
25% interest in 3,945 acres and subsequently acquired an additional 5% in May, 2014. We had an interest in 8,800 total acres as of
December 31, 2016. (Net undeveloped acres = 2,600) Husky drilled the first two wells in the AMI in second quarter, 2014. Detail of
developed and undeveloped acreage positions at December 31, 2016, Drilling Activity, and Cumulative Well Status are presented in Tables
in Item 2 of this filing. Our net cumulative investment through December 31, 2016 in undeveloped acres in the Viking AMI was
$1,387,928. In addition the company has incurred $133,468 as its share of costs related to the early stages of the construction of a gas
pipeline which was to serve the Viking AMI.
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ITEM 1. BUSINESS - continued
Rosedale AMI
In January of 2014 we contracted for a 25% Working Interest in approximately 5,000 acres in the Rosedale AMI consisting of eight
townships in South Central Oklahoma. We subsequently acquired an additional 5% in May, 2014. The Company had an interest in 11,600
total acres as of December 31, 2016 (Net undeveloped acres = 3,500). Detail of developed and undeveloped acreage positions at December
31, 2016 is presented in the Table in Item 2 of this filing. Our cumulative investment through December 31, 2016 in the Rosedale AMI was
$2,833,744.
Prairie Grove – Judy Well
In February of 2014, we acquired a 10% Working Interest in a well in the Prairie Grove AMI from a non-consenting third party who elected
not to participate in the well.
Thunderbird AMI
In July of 2014, we contracted for a 25% Working Interest in the Thunderbird AMI. The total acres in which the Company has an interest at
December 31, 2016 totals 4,300 acres (Net undeveloped acres = 1,100). Detail of developed and undeveloped acreage positions at
December 31, 2016 is presented in the Table in Item 2 of this filing. Our cumulative investment through December 31, 2016 in the T4 AMI
was $949,530.
Industry and Business Environment
Currently, we are experiencing a time of lower oil prices caused by lower demand, higher US Supply, and OPEC’s policies on
production. Unfortunately, this is the cyclical nature of the oil and gas industry. We experience highs and lows that seem to come in
cycles. Fortunately, advances in technology drive the US market and we feel this will drive the development costs down on our exploration
and drilling programs.
Competition
The oil and natural gas industry is intensely competitive, and we will compete with numerous other companies engaged in the exploration
and production of oil and gas. Some of these companies have substantially greater resources than we have. Not only do they explore for
and produce oil and natural gas, but also many carry on midstream and refining operations and market petroleum and other products on a
regional, national, or worldwide basis. The operations of other companies may be able to pay more for exploratory prospects and
productive oil and natural gas properties. They may also have more resources to define, evaluate, bid for, and purchase a greater number of
properties and prospects than our financial or human resources permit.
Our larger or integrated competitors may have the resources to be better able to absorb the burden of current and future federal, state, and
local laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to locate reserves
and acquire interests in properties in the future will be dependent upon our ability and resources to evaluate and select suitable properties
and consummate transactions in this highly competitive environment. In addition, we may be at a disadvantage in producing oil and natural
gas properties and bidding for exploratory prospects because we have fewer financial and human resources than other companies in our
industry. Should a larger and better financed company decide to directly compete with us, and be successful in its efforts, our business
could be adversely affected.
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ITEM 1. BUSINESS - continued
Marketing and Customers
The market for oil and natural gas that we will produce depends on factors beyond our control, including the extent of domestic production
and imports of oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for oil and
natural gas, the marketing of competitive fuels, and the effects of state and federal regulation. The oil and gas industry also competes with
other industries in supplying the energy and fuel requirements of industrial, commercial, and individual consumers.
Our oil production is expected to be sold at prices tied to the spot oil markets. Our natural gas production is expected to be sold under
short-term contracts and priced based on first of the month index prices or on daily spot market prices. We will rely on our operating
partners to market and sell our production.
Governmental Regulation and Environmental Matters
Our operations are subject to various rules, regulations, and limitations impacting the oil and natural gas exploration and production
industry as a whole.
Regulation of Oil and Natural Gas Production
Our oil and natural gas exploration, production, and related operations, when developed, will be subject to extensive rules and regulations
promulgated by federal, state, tribal, and local authorities and agencies. Certain states may also have statutes or regulations addressing
conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum
rates of production from wells, and the regulation of spacing, plugging, and abandonment of such wells. Failure to comply with any such
rules and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry will most likely increase our cost
of doing business and may affect our profitability. Although we believe we are currently in substantial compliance with all applicable laws
and regulations, because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or
impact of complying with such laws. Significant expenditures may be required to comply with governmental laws and regulations and may
have a material adverse effect on our financial condition and results of operations.
Environmental Matters
Our operations and properties are and will be subject to extensive and changing federal, state, and local laws and regulations relating to
environmental protection, including the generation, storage, handling, emission, transportation, and discharge of materials into the
environment, and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter
standards, and this trend will likely continue. These laws and regulations may:
· require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities;
· limit or prohibit construction, drilling, and other activities on certain lands lying within wilderness and other protected areas;
· impose substantial liabilities for pollution resulting from operations; or
· restrict certain areas from fracking and other stimulation techniques.
The permits required for our operations may be subject to revocation, modification, and renewal by issuing authorities. Governmental
authorities have the power to enforce their regulations, and violations are subject to fines or injunctions, or both. In the opinion of
management, we are and will be in substantial compliance with current applicable environmental laws and regulations, and have no material
commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing
environmental laws and regulations or in interpretations thereof could have a significant impact on our company, as well as the oil and
natural gas industry in general.
The Comprehensive Environmental, Response, Compensation, and Liability Act (“CERCLA”) and comparable state statutes impose strict,
joint, and several liability on owners and operators of sites and on persons who disposed of or arranged for the disposal of “hazardous
substances” found at such sites. It is not uncommon for the neighboring landowners and other third parties to file claims for personal injury
and property damage allegedly caused by the hazardous substances released into the environment. The Federal Resource Conservation and
Recovery Act (“RCRA”) and comparable state statutes govern the disposal of “solid waste” and “hazardous waste” and authorize the
imposition of substantial fines and penalties for noncompliance. Although CERCLA currently excludes petroleum from its definition of
“hazardous substance,” state laws affecting our operations may impose clean-up liability relating to petroleum and petroleum related
products. In addition, although RCRA classifies certain oil field wastes as “non-hazardous,” such exploration and production wastes could
be reclassified as hazardous wastes thereby making such wastes subject to more stringent handling and disposal requirements.
10
ITEM 1. BUSINESS - continued
The Endangered Species Act (“ESA”) seeks to ensure that activities do not jeopardize endangered or threatened animal, fish, and plant
species, nor destroy or modify the critical habitat of such species. Under ESA, exploration and production operations, as well as actions by
federal agencies, may not significantly impair or jeopardize the species or its habitat. ESA provides for criminal penalties for willful
violations of the Act. Other statutes that provide protection to animal and plant species and that may apply to our operations include, but
are not necessarily limited to, the Fish and Wildlife Coordination Act, the Fishery Conservation and Management Act, the Migratory Bird
Treaty Act and the National Historic Preservation Act. Although we believe that our operations will be in substantial compliance with such
statutes, any change in these statutes or any reclassification of a species as endangered could subject our company to significant expenses to
modify our operations or could force our company to discontinue certain operations altogether.
Climate Change
Significant studies and research have been devoted to climate change and global warming, and climate change has developed into a major
political issue in the United States and globally. Certain research suggests that greenhouse gas emissions contribute to climate change and
pose a threat to the environment. Recent scientific research and political debate has focused in part on carbon dioxide and methane
incidental to oil and natural gas exploration and production. Many states and the federal government have enacted legislation directed at
controlling greenhouse gas emissions, and future legislation and regulation could impose additional restrictions or requirements in
connection with our drilling and production activities and favor use of alternative energy sources, which could affect operating costs and
demand for oil products. As such, our business could be materially adversely affected by domestic and international legislation targeted at
controlling climate change.
Employees
We currently have four full time employees and no part time employees. We anticipate adding additional employees, when adequate funds
are available, and using independent contractors, consultants, attorneys, and accountants as necessary to complement services rendered by
our employees. We presently have independent technical professionals under consulting agreements who are available to us on an as
needed basis.
Research and Development
We did not spend any funds on research and development activities during years ended December 31, 2016 or 2015.
ITEM 1A. RISK FACTORS
An investment in us involves a high degree of risk and is suitable only for prospective investors with substantial financial means who have
no need for liquidity and can afford the entire loss of their investment in us. Prospective investors should carefully consider the following
risk factors, in addition to the other information contained in this report.
Risks Related to the Company and the Industry
We have a limited operating history relative to larger companies in our industry, and may not be successful in developing
profitable business operations.
We have a limited operating history relative to larger companies in our industry. Our business operations must be considered in light of the
risks, expenses and difficulties frequently encountered in establishing a business in the oil and natural gas industries. As of the date of this
report, we have generated limited revenues and have limited assets. We have an insufficient history at this time on which to base an
assumption that our business operations will prove to be successful in the long-term. Our future operating results will depend on many
factors, including:
·
·
·
·
·
·
our ability to raise adequate working capital;
the success of our development and exploration;
the demand for natural gas and oil;
the level of our competition;
our ability to attract and maintain key management and employees; and
our ability to efficiently explore, develop, produce or acquire sufficient quantities of marketable natural gas or oil in a
highly competitive and speculative environment while maintaining quality and controlling costs.
To achieve profitable operations in the future, we must, alone or with others, successfully manage the factors stated above, as well as
continue to develop ways to enhance our production efforts. Despite our best efforts, we may not be successful in our exploration or
development efforts, or obtain required regulatory approvals. There is a possibility that some, or all, of the wells in which we obtain
interests may never produce oil or natural gas.
11
ITEM 1A. RISK FACTORS - continued
We have limited capital and will need to raise additional capital in the future.
We do not currently have sufficient capital to fund both our continuing operations and our planned growth. We will require additional
capital to continue to grow our business via acquisitions and to further expand our exploration and development programs. We may be
unable to obtain additional capital when required. Future acquisitions and future exploration, development, production and marketing
activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses, as well as legal
compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.
We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects,
debt financing, equity financing, or other means. We may not be successful in identifying suitable financing transactions in the time period
required or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising additional capital, our
resources may not be sufficient to fund our planned operations.
Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both generally and in the oil
and gas industry in particular), our limited operating history, the location of our oil and natural gas properties and prices of oil and natural
gas on the commodities markets (which will impact the amount of asset-based financing available to us, if any) and the departure of key
employees. Further, if oil or natural gas prices on the commodities markets decline, our future revenues, if any, will likely decrease and
such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities,
together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations),
we may be required to cease our operations, divest our assets at unattractive prices or obtain financing on unattractive terms.
Any additional capital raised through the sale of equity may dilute the ownership percentage of our stockholders. Raising any such capital
could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of
outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may
include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity
employee incentive plans, which may have a further dilutive effect.
We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees,
securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses
in connection with certain securities we may issue, which may adversely impact our financial condition.
Our auditor indicated that certain factors raise substantial doubt about our ability to continue as a going concern.
The financial statements included with this report are presented under the assumption that we will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time.
We had a net loss of approximately $7.7 million for the year ended December 31, 2016 and an accumulated deficit in aggregate of
approximately $82.6 million at year end. We are not generating sufficient operating cash flows to support continuing operations, and
expect to incur further losses in the development of our business.
In our financial statements for the year ended December 31, 2016, our auditor indicated that certain factors raised substantial doubt about
our ability to continue as a going concern. These factors included our accumulated deficit, as well as the fact that we were not generating
sufficient cash flows to meet our regular working capital requirements. Our ability to continue as a going concern is dependent upon our
ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities
arising from normal business operations when they come due. Management's plan to address our ability to continue as a going concern
includes: (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtaining loans from financial institutions,
where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to
obtain the necessary funding to allow us to remain a going concern through the methods discussed above, there can be no assurances that
such methods will prove successful. The accompanying financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As a non-operator, our development of successful operations relies extensively on third-parties who, if not successful, could have a
material adverse effect on our results of operation.
We expect to primarily participate in wells operated by third-parties. As a result, we will not control the timing of the development,
exploitation, production and exploration activities relating to leasehold interests we acquire. We do, however, have certain rights as granted
in our Joint Operating Agreements that allow us a certain degree of freedom such as, but not limited to, the ability to propose the drilling of
wells. If our drilling partners are not successful in such activities relating to our leasehold interests, or are unable or unwilling to perform,
our financial condition and results of operation could have an adverse material effect.
12
ITEM 1A. RISK FACTORS - continued
Further, financial risks are inherent in any operation where the cost of drilling, equipping, completing and operating wells is shared by more
than one person. We could be held liable for the joint activity obligations of the operator or other working interest owners such as
nonpayment of costs and liabilities arising from the actions of the working interest owners. In the event the operator or other working
interest owners do not pay their share of such costs, we would likely have to pay those costs. In such situations, if we were unable to pay
those costs, there could be a material adverse effect to our financial position.
Because of the speculative nature of oil and gas exploration, there is risk that we will not find commercially exploitable oil and gas
and that our business will fail.
The search for commercial quantities of oil and natural gas as a business is extremely risky. We cannot provide investors with any
assurance that any properties in which we obtain a mineral interest will contain commercially exploitable quantities of oil and/or gas. The
exploration expenditures to be made by us may not result in the discovery of commercial quantities of oil and/or gas. Problems such as
unusual or unexpected formations or pressures, premature declines of reservoirs, invasion of water into producing formations and other
conditions involved in oil and gas exploration often result in unsuccessful exploration efforts. If we are unable to find commercially
exploitable quantities of oil and gas, and/or we are unable to commercially extract such quantities, we may be forced to abandon or curtail
our business plan, and as a result, any investment in us may become worthless.
Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.
Our ability to successfully acquire oil and gas interests, to build our reserves, to participate in drilling opportunities and to identify and enter
into commercial arrangements with customers will depend on developing and maintaining close working relationships with industry
participants and our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment.
These realities are subject to change and our inability to maintain close working relationships with industry participants or continue to
acquire suitable property may impair our ability to execute our business plan.
To continue to develop our business, we will endeavor to use the business relationships of our management to enter into strategic
relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil and gas
companies, including those that supply equipment and other resources that we will use in our business. We may not be able to establish
these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics of our relationships with
strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our
obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business
prospects may be limited, which could diminish our ability to conduct our operations.
The price of oil and natural gas has historically been volatile. If it were to decrease substantially, our projections, budgets, and
revenues would be adversely affected, potentially forcing us to make changes in our operations.
Our future financial condition, results of operations and the carrying value of any oil and natural gas interests we acquire will depend
primarily upon the prices paid for oil and natural gas production. Oil and natural gas prices historically have been volatile and likely will
continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows from operations are highly
dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flows available for
capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of
additional factors that are beyond our control. These factors include:
·
·
·
the level of consumer demand for oil and natural gas;
the domestic and foreign supply of oil and natural gas;
the ability of the members of the Organization of Petroleum Exporting Countries ("OPEC") to agree to and maintain oil
price and production controls;
the price of foreign oil and natural gas;
domestic governmental regulations and taxes;
the price and availability of alternative fuel sources;
·
·
·
· weather conditions;
· market uncertainty due to political conditions in oil and natural gas producing regions, including the Middle East; and
· worldwide economic conditions.
13
ITEM 1A. RISK FACTORS - continued
These factors as well as the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price
movements with any certainty. Declines in oil and natural gas prices affect our revenues, and could reduce the amount of oil and natural gas
that we can produce economically. Accordingly, such declines could have a material adverse effect on our financial condition, results of
operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties. If the oil and natural gas industry
experiences significant price declines, we may be unable to make planned expenditures, among other things. If this were to happen, we may
be forced to abandon or curtail our business operations, which would cause the value of an investment in us to decline in value, or become
worthless.
If oil or natural gas prices remain depressed or drilling efforts are unsuccessful, we may be required to record additional write
downs of our oil and natural gas properties.
If oil or natural gas prices remain depressed or drilling efforts are unsuccessful, we could be required to write down the carrying value of
certain of our oil and natural gas properties. Write downs may occur when oil and natural gas prices are low, or if we have downward
adjustments to our estimated proved reserves, increases in our estimates of operating or development costs, deterioration in drilling results
or mechanical problems with wells where the cost to re drill or repair is not supported by the expected economics.
Under the full cost method of accounting, capitalized oil and gas property costs less accumulated depletion and net of deferred income
taxes may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas
reserves plus the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value,
if lower, of unproved properties that are subject to amortization. Should capitalized costs exceed this ceiling, an impairment would be
recognized.
The Company recognized impairment of $22,438,114 on its oil and gas properties at June 30, 2015 and an additional Impairment
adjustment of $3,236,009 was made at December 31, 2015 for a total impairment charge of $25,674,123 for the year 2015.
During the year ended December 31, 2016 the Company performed assessments of evaluated and unevaluated costs in the cost pool to
conform the cumulative value of the Full Cost Pool to the combined amount of Reserve Value of evaluated, producing properties (as
determined by independent analysis at December 31, 2015), plus the lesser of cumulative historical cost or estimated realizable value of
unevaluated leases and projects expected to commence production in future operating periods. The results of the assessment was an
additional impairment charge of $70,080 for 2016.
Because of the inherent dangers involved in oil and gas operations, there is a risk that we may incur liability or damages as we
conduct our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or
a settlement.
The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other environmental
hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe
damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities,
regulatory investigation and penalties and suspension of operations. In addition, we may be liable for environmental damages caused by
previous owners of property purchased and leased by us. In recent years, there has also been increased scrutiny on the environmental risk
associated with hydraulic fracturing, such as underground migration and surface spillage or mishandling of fracturing fluids including
chemical additives. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could
reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of our properties and/or force us to
expend substantial monies in connection with litigation or settlements. We currently have no insurance to cover such losses and liabilities,
and even if insurance is obtained, there can be no assurance that it will be adequate to cover any losses or liabilities. We cannot predict the
availability of insurance or the availability of insurance at premium levels that justify our purchase. The occurrence of a significant event
not fully insured or indemnified against could materially and adversely affect our financial condition and operations. We may elect to self-
insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. In addition,
pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a
material adverse effect on our financial condition and results of operations, which could lead to any investment in us becoming worthless.
The market for oil and gas is intensely competitive, and competition pressures could force us to abandon or curtail our business
plan.
14
ITEM 1A. RISK FACTORS - continued
The market for oil and gas exploration services is highly competitive, and we only expect competition to intensify in the future. Numerous
well-established companies are focusing significant resources on exploration and are currently competing with us for oil and gas
opportunities. Other oil and gas companies may seek to acquire oil and gas leases and properties that we have targeted. Additionally, other
companies engaged in our line of business may compete with us from time to time in obtaining capital from investors. Competitors include
larger companies which, in particular, may have access to greater resources, may be more successful in the recruitment and retention of
qualified employees and may conduct their own refining and petroleum marketing operations, which may give them a competitive
advantage. Actual or potential competitors may be strengthened through the acquisition of additional assets and interests. Additionally,
there are numerous companies focusing their resources on creating fuels and/or materials which serve the same purpose as oil and gas, but
are manufactured from renewable resources.
As a result, there can be no assurance that we will be able to compete successfully or that competitive pressures will not adversely affect
our business, results of operations, and financial condition. If we are not able to successfully compete in the marketplace, we could be
forced to curtail or even abandon our current business plan, which could cause any investment in us to become worthless.
We may not be able to successfully manage our growth, which could lead to our inability to implement our business plan.
Our growth may place a significant strain on our managerial, operational and financial resources, especially considering that we currently
only have a small number of executive officers, employees and advisors. Further, as we enter into additional contracts, we will be required
to manage multiple relationships with various consultants, businesses and other third parties. These requirements will be exacerbated in the
event of our further growth or in the event that the number of our drilling and/or extraction operations increases. There can be no assurance
that our systems, procedures and/or controls will be adequate to support our operations or that our management will be able to achieve the
rapid execution necessary to successfully implement our business plan. If we are unable to manage our growth effectively, our business,
results of operations and financial condition will be adversely affected, which could lead to us being forced to abandon or curtail our
business plan and operations.
Our operations are heavily dependent on current environmental regulation, changes in which we cannot predict.
Oil and natural gas activities that we will engage in, including production, processing, handling and disposal of hazardous materials, such as
hydrocarbons and naturally occurring radioactive materials (if any), are subject to stringent regulation. We could incur significant costs,
including cleanup costs resulting from a release of hazardous material, third-party claims for property damage and personal injuries fines
and sanctions, as a result of any violations or liabilities under environmental or other laws. Changes in or more stringent enforcement of
environmental laws could force us to expend additional operating costs and capital expenditures to stay in compliance.
Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of
the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact our
operations and costs. These regulations include, among others, (i) regulations by the Environmental Protection Agency and various state
agencies regarding approved methods of disposal for certain hazardous and non-hazardous wastes; (ii) the Comprehensive Environmental
Response, Compensation, and Liability Act, Federal Resource Conservation and Recovery Act and analogous state laws which regulate the
removal or remediation of previously disposed wastes (including wastes disposed of or released by prior owners or operators), property
contamination (including groundwater contamination), and remedial plugging operations to prevent future contamination; (iii) the Clean
Air Act and comparable state and local requirements which may result in the gradual imposition of certain pollution control requirements
with respect to air emissions from our operations; (iv) the Oil Pollution Act of 1990 which contains numerous requirements relating to the
prevention of and response to oil spills into waters of the United States; (v) the Resource Conservation and Recovery Act which is the
principal federal statute governing the treatment, storage and disposal of hazardous wastes; and (vi) state regulations and statutes governing
the handling, treatment, storage and disposal of naturally occurring radioactive material.
Management believes that we will be in substantial compliance with applicable environmental laws and regulations. To date, we have not
expended any amounts to comply with such regulations, and management does not currently anticipate that future compliance will have a
materially adverse effect on our consolidated financial position, results of operations or cash flows. However, if we are deemed to not be in
compliance with applicable environmental laws, we could be forced to expend substantial amounts to be in compliance, which would have a
materially adverse effect on our financial condition. If this were to happen, any investment in us could be lost.
Government regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating
restrictions or delays.
15
ITEM 1A. RISK FACTORS - continued
Vast quantities of natural gas, natural gas liquids and oil deposits exist in deep shale and other unconventional formations. It is customary
in our industry to recover these resources through the use of hydraulic fracturing, combined with horizontal drilling. Hydraulic fracturing is
the process of creating or expanding cracks, or fractures, in deep underground formations using water, sand and other additives pumped
under high pressure into the formation. As with the rest of the industry, our third-party operating partners use hydraulic fracturing as a
means to increase the productivity of most of the wells they drill and complete. These formations are generally geologically separated and
isolated from fresh ground water supplies by thousands of feet of impermeable rock layers.
We believe our third-party operating partners follow applicable legal requirements for groundwater protection in their operations that are
subject to supervision by state and federal regulators. Furthermore, we believe our third-party operating partners’ well construction
practices are specifically designed to protect freshwater aquifers by preventing the migration of fracturing fluids into aquifers.
Hydraulic fracturing is typically regulated by state oil and gas commissions. Some states have adopted, and other states are considering
adopting, regulations that could impose more stringent permitting, public disclosure, and/or well construction requirements on hydraulic
fracturing operations. For example, Pennsylvania is considering proposed regulations applicable to surface use at oil and gas well sites,
including new secondary containment requirements and an abandoned and orphaned well identification program that would require
operators to remediate any such wells that are damaged during current hydraulic fracturing operations. New York has placed a permit
moratorium on high volume fracturing activities combined with horizontal drilling pending the results of a study regarding the safety of
hydraulic fracturing. And certain communities in Colorado have also enacted bans on hydraulic fracturing.
In addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city ordinances,
that may restrict or prohibit the performance of well drilling in general and/or hydraulic fracturing in particular. There are also certain
governmental reviews either underway or being proposed that focus on deep shale and other formation completion and production
practices, including hydraulic fracturing. Depending on the outcome of these studies, federal and state legislatures and agencies may seek to
further regulate such activities. Certain environmental and other groups have also suggested that additional federal, state and local laws and
regulations may be needed to more closely regulate the hydraulic fracturing process.
Further, the EPA has asserted federal regulatory authority over hydraulic fracturing involving “diesel fuels” under the SWDA’s UIC
Program. In February 2014, the EPA released its final guidance on the use of diesel additives in hydraulic fracturing operations. The EPA is
also engaged in a study of the potential impacts of hydraulic fracturing activities on drinking water resources in these states where the EPA
is the permitted authority, including Pennsylvania, with a progress report released in late 2012 and a draft report released in June 2015. It
concluded that hydraulic fracturing activities have not led to widespread systematic impacts on drinking water resources in the U.S., but
there are above and below ground mechanisms by which hydraulic fracturing could affect drinking water resources. In addition, in March
2015, the Bureau of Land Management (“BLM”) issued a final rule to regulate hydraulic fracturing on federal and Indian land; however,
enforcement of the rule has been delayed pending a decision in a legal challenge in the U.S. District Court of Wyoming. Further, the EPA
issued an Advanced Notice of Proposed Rulemaking in May 2014 seeking comments relating to the information that should be reported or
disclosed for hydraulic fracturing chemical substances and mixtures and mechanisms for obtaining this information. These actions, in
conjunction with other analyses by federal and state agencies to assess the impacts of hydraulic fracturing could spur further action toward
federal and/or state legislation and regulation of hydraulic fracturing activities.
We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the
future and, if so, what actions any such laws or regulations would require or prohibit. Restrictions on hydraulic fracturing could make it
prohibitive for our third-party operating partners to conduct operations, and also reduce the amount of oil, natural gas liquids and natural
gas that we are ultimately able to produce in commercial quantities from our properties. If additional levels of regulation or permitting
requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating
and compliance costs and process prohibitions.
Our estimates of the volume of reserves could have flaws, or such reserves could turn out not to be commercially extractable. As a
result, our future revenues and projections could be incorrect.
16
ITEM 1A. RISK FACTORS - continued
Estimates of reserves and of future net revenues prepared by different petroleum engineers may vary substantially depending, in part, on
the assumptions made and may be subject to adjustment either up or down in the future. Our actual amounts of production, revenue, taxes,
development expenditures, operating expenses, and quantities of recoverable oil and gas reserves may vary substantially from the estimates.
Oil and gas reserve estimates are necessarily inexact and involve matters of subjective engineering judgment. In addition, any estimates of
our future net revenues and the present value thereof are based on assumptions derived in part from historical price and cost information,
which may not reflect current and future values, and/or other assumptions made by us that only represent our best estimates. If these
estimates of quantities, prices and costs prove inaccurate, we may be unsuccessful in expanding our oil and gas reserves base with our
acquisitions. Additionally, if declines in and instability of oil and gas prices occur, then write downs in the capitalized costs associated with
any oil and gas assets we obtain may be required. Because of the nature of the estimates of our reserves and estimates in general, we can
provide no assurance that reductions to our estimated proved oil and gas reserves and estimated future net revenues will not be required in
the future, and/or that our estimated reserves will be present and/or commercially extractable. If our reserve estimates are incorrect, the
value of our common stock could decrease and we may be forced to write down the capitalized costs of our oil and gas properties.
Decommissioning costs are unknown and may be substantial. Unplanned costs could divert resources from other projects.
We may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines which we use for
production of oil and natural gas reserves. Abandonment and reclamation of these facilities and the costs associated therewith is often
referred to as “decommissioning.” We accrue a liability for decommissioning costs associated with our wells, but have not established any
cash reserve account for these potential costs in respect of any of our properties. If decommissioning is required before economic depletion
of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to
cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs. The use of other funds to
satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business.
We may have difficulty distributing production, which could harm our financial condition.
In order to sell the oil and natural gas that we are able to produce, if any, the operators of the wells we obtain interests in may have to make
arrangements for storage and distribution to the market. We will rely on local infrastructure and the availability of transportation for
storage and shipment of our products, but infrastructure development and storage and transportation facilities may be insufficient for our
needs at commercially acceptable terms in the localities in which we operate. This situation could be particularly problematic to the extent
that our operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping and/or pipeline
facilities. These factors may affect our and potential partners’ ability to explore and develop properties and to store and transport oil and
natural gas production, increasing our expenses.
Furthermore, weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we will
operate, or labor disputes may impair the distribution of oil and/or natural gas and in turn diminish our financial condition or ability to
maintain our operations.
Our business will suffer if we cannot obtain or maintain necessary licenses.
Our operations will require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities.
Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to change in regulations and policies and to
the discretion of the applicable governments, among other factors. Our inability to obtain, or our loss of or denial of extension of, any of
these licenses or permits could hamper our ability to produce revenues from our operations.
Challenges to our properties may impact our financial condition.
Title to oil and gas interests is often not capable of conclusive determination without incurring substantial expense. While we intend to
make appropriate inquiries into the title of properties and other development rights we acquire, title defects may exist. In addition, we may
be unable to obtain adequate insurance for title defects, on a commercially reasonable basis or at all. If title defects do exist, it is possible
that we may lose all or a portion of our right, title and interests in and to the properties to which the title defects relate. If our property
rights are reduced, our ability to conduct our exploration, development and production activities may be impaired. To mitigate title
problems, common industry practice is to obtain a title opinion from a qualified oil and gas attorney prior to the drilling operations of a
well.
We rely on technology to conduct our business, and our technology could become ineffective or obsolete.
17
ITEM 1A. RISK FACTORS - continued
We rely on technology, including geographic and seismic analysis techniques and economic models, to develop our reserve estimates and
to guide our exploration, development and production activities. We and our operator partners will be required to continually enhance and
update our technology to maintain its efficacy and to avoid obsolescence. The costs of doing so may be substantial and may be higher than
the costs that we anticipate for technology maintenance and development. If we are unable to maintain the efficacy of our technology, our
ability to manage our business and to compete may be impaired. Further, even if we are able to maintain technical effectiveness, our
technology may not be the most efficient means of reaching our objectives, in which case we may incur higher operating costs than we
would were our technology more efficient.
The loss of key personnel would directly affect our efficiency and profitability.
Our future success is dependent, in a large part, on retaining the services of our current management team. Our executive officers possess a
unique and comprehensive knowledge of our industry and related matters that are vital to our success within the industry. The knowledge,
leadership and technical expertise of these individuals would be difficult to replace. The loss of one or more of our officers could have a
material adverse effect on our operating and financial performance, including our ability to develop and execute our long term business
strategy. We do not maintain key-man life insurance with respect to any employees. We do have employment agreements with each of our
executive officers. There can be no assurance, however, that any of our officers will continue to be employed by us.
Our officers and directors control a significant percentage of our current outstanding common stock and their interests may
conflict with those of our stockholders.
As of the date of this report, our executive officers and directors collectively and beneficially own approximately 28.82% of our
outstanding common stock (see Item 12 of this report for an explanation of how this number is computed). This concentration of voting
control gives these affiliates substantial influence over any matters which require a stockholder vote, including without limitation the
election of directors and approval of merger and/or acquisition transactions, even if their interests may conflict with those of other
stockholders. It could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from
attempting to obtain control of us. This could have a material adverse effect on the market price of our common stock or prevent our
stockholders from realizing a premium over the then prevailing market prices for their shares of common stock.
In the future, we may incur significant increased costs as a result of operating as a public company, and our management may be
required to devote substantial time to new compliance initiatives.
In the future, we may incur significant legal, accounting, and other expenses as a result of operating as a public company. The Sarbanes-
Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules subsequently implemented by the SEC, have imposed various
requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel
will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our
legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new
rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be
required to incur substantial costs to maintain the same or similar coverage.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing on the effectiveness
of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In performing this evaluation and
testing, management concluded that our internal control over financial reporting is not effective as of December 31, 2016 because of a
material weaknesses in our internal control over financial reporting. We are, however, addressing the issue and updating of our policies and
procedures. Upon finalizing these policies and procedures and ensuring they are effectively applied, we believe our internal control will be
deemed effective. Correcting this issue, and thereafter our continued compliance with Section 404, will require that we incur substantial
accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to
engage independent professional assistance. Moreover, if we are not able to correct our internal control issues and comply with the
requirements of Section 404 in a timely manner, or if in the future we or our independent registered public accounting firm identifies other
deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could
decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional
financial and management resources.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely
affect our ability to report our financial condition and results of operations in a timely and accurate manner.
18
ITEM 1A. RISK FACTORS - continued
Management, including our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2016 and concluded that we did not maintain effective internal control over financial reporting.
Specifically, management identified material weaknesses over the accounting for stock options issued to employees and nonemployees and
stock warrants issued for services, property and financings—see Item 9A, “Controls and Procedures,” below. This control deficiency
resulted in audit adjustments in preparation of this Annual Report on Form 10-K. The impact on previously issued financial statements was
not determined to be significant. While certain actions have been taken to enhance our internal control over financial reporting relating to
this material weaknesses, we are still in the process of implementing our comprehensive remediation plan. If the material weakness is not
remediated, it could adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner,
which could negatively affect investor confidence in our company, and, as a result, the value of our common stock could be adversely
affected.
Certain Factors Related to Our Common Stock
There presently is a limited market for our common stock, and the price of our common stock may be volatile.
Our common stock is currently quoted on The NASDAQ Stock Market LLC. There could be volatility in the volume and market price of
our common stock moving forward. This volatility may be caused by a variety of factors, including the lack of readily available quotations,
the absence of consistent administrative supervision of “bid” and “ask” quotations, and generally lower trading volume. In addition, factors
such as quarterly variations in our operating results, changes in financial estimates by securities analysts, or our failure to meet our or their
projected financial and operating results, litigation involving us, factors relating to the oil and gas industry, actions by governmental
agencies, national economic and stock market considerations, as well as other events and circumstances beyond our control could have a
significant impact on the future market price of our common stock and the relative volatility of such market price.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to
decline.
Our stockholders could sell substantial amounts of common stock in the public market, including shares sold upon the filing of a
registration statement that registers such shares and/or upon the expiration of any statutory holding period under Rule 144 of the Securities
Act of 1933 (the “Securities Act”), if available, or upon the expiration of trading limitation periods. Such volume could create a
circumstance commonly referred to as a market “overhang” and in anticipation of which the market price of our common stock could fall.
Additionally, we have a large number of warrants that are presently exercisable. The exercise of a large amount of these securities followed
by the subsequent sale of the underlying stock in the market would likely have a negative effect on our common stock’s market price. The
existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for us to secure additional
financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
Our directors and officers have rights to indemnification.
Our Bylaws provide, as permitted by governing Nevada law, that we will indemnify our directors, officers, and employees, whether or not
then in service as such, against all reasonable expenses actually and necessarily incurred by him or her in connection with the defense of
any litigation to which the individual may have been made a party because he or she is or was a director, officer, or employee of the
company. The inclusion of these provisions in the Bylaws may have the effect of reducing the likelihood of derivative litigation against
directors and officers, and may discourage or deter stockholders or management from bringing a lawsuit against directors and officers for
breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our stockholders.
We do not anticipate paying any cash dividends on our common stock.
We do not anticipate paying cash dividends on our common stock for the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends
will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business
strategy; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
19
ITEM 2. PROPERTIES
Our principal executive offices are located at 5700 W. Plano Parkway, Suite 3600, Plano, Texas 75093. We currently lease this office
space which totals approximately 3,181 square feet. We believe that the condition and size of our offices are adequate for our current
needs.
Investment in oil and gas properties during the years ended December 31,2016 and 2015 is detailed as follows:
Property acquisition costs
Development costs
Exploratory costs
$
2016
615,000
1,678,497
-
$
2015
-
4,518,239
-
Totals
$
2,293,497
$
4,518,239
Property acquisition cost relates to the Company’s acquisition of the Hazel Project in West Texas. The development costs include reentry
of the Johnson #4 well in the south Texas Marcelina area (sold in 2016) and development costs in the Orogrande and Hazel projects in west
Texas. No development costs were incurred for Oklahoma properties in 2016.
Oil and Natural Gas Reserves
Reserve Estimates
SEC Case. The following tables sets forth, as of December 31, 2016, our estimated net proved oil and natural gas reserves, the estimated
present value (discounted at an annual rate of 10%) of estimated future net revenues before future income taxes (PV-10) and after future
income taxes (Standardized Measure) of our proved reserves and our estimated net probable oil and natural gas reserves, each prepared
using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with assumptions
prescribed by the Securities and Exchange Commission (“SEC”). All of our reserves are located in the United States.
The PV-10 value is a widely used measure of value of oil and natural gas assets and represents a pre-tax present value of estimated cash
flows discounted at ten percent. PV-10 is considered a non-GAAP financial measure as defined by the SEC. We believe that our PV-10
presentation is relevant and useful to our investors because it presents the estimated discounted future net cash flows attributable to our
proved reserves before taking into account the related future income taxes, as such taxes may differ among various companies. We believe
investors and creditors use PV-10 as a basis for comparison of the relative size and value of our proved reserves to the reserve estimates of
other companies. PV-10 is not a measure of financial or operating performance under GAAP and neither it nor the Standardized Measure is
intended to represent the current market value of our estimated oil and natural gas reserves. PV-10 should not be considered in isolation or
as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP.
The estimates of our proved reserves and the PV-10 set forth herein reflect estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic
conditions at December 31, 2016. For purposes of determining prices, we used the average of prices received for each month within the
12-month period ended December 31, 2016, adjusted for quality and location differences, which was $42.75 per barrel of oil and $2.33 per
MCF of gas. This average historical price is not a prediction of future prices. The amounts shown do not give effect to non-property related
expenses, such as corporate general administrative expenses and debt service, future income taxes or to depreciation, depletion and
amortization.
20
ITEM 2. PROPERTIES – continued
December 31, 2016
Reserves
Category
Oil (Bbls)
Gas (Mcf)
Total (BOE)
December 31, 2016
Future Net Revenue (M$)
Present
Value
Discounted
at 10%
Total
Proved Producing
Proved Nonproducing
Total Proved
1,400
46,800
48,200
23,300
467,600
490,900
5,284
124,733
130,017
$
$
$
31
776
807
$
$
$
29
301
330
Standardized Measure of Future Net Cash Flows
Related to Proved Oil and Gas Properties
$
341
Probable Undeveloped
-
-
-
$
-
$
-
Reserve values as of December 31, 2016 are related to a single producing well in Oklahoma – the Judy well in the Prairie Grove AMI.
December 31, 2015
Reserves
Category
Oil (Bbls)
Gas (Mcf)
Total (BOE)
December 31, 2015
Future Net Revenue (M$)
Present
Value
Discounted
at 10%
Total
Proved Producing
Proved Nonproducing
Total Proved
14,210
40,170
54,380
34,400
0
34,400
19,943
40,170
60,113
$
$
$
322
860
1,182
$
$
$
280
763
1,043
Standardized Measure of Future Net Cash Flows
Related to Proved Oil and Gas Properties
Probable Undeveloped
-
-
-
$
$
$
-
5,935
-
BOE equivalents are determined by combining barrels of oil with MCF of gas divided by six.
21
ITEM 2. PROPERTIES - continued
Standardized Measure of Oil & Gas Quantities - Volume Rollforward
Years Ended December 31, 2016 and 2015
The following table sets forth the Company’s net proved reserves, including changes, and proved developed reserves:
Oil (Bbls)
2016
Gas (Mcf)
BOE
Oil (Bbls)
2015
Gas (Mcf)
BOE
TOTAL PROVED RESERVES:
Beginning of period
Acquisition
Extensions and discoveries
Divestiture of reserves
Revisions of previous estimates
Production
End of period
PROVED DEVELOPED RESERVES
Proved developed producing
Proved nonproducing
Total
34,400
-
-
-
493,013
54,380
-
-
(52,600)
54,908
(8,488)
48,200
(36,513)
60,113
-
-
914,400
-
-
3,790,650
-
-
1,546,175
-
-
(52,600) (394,400) (2,483,950) (808,391)
(437,639) (1,159,071) (630,818)
(46,853)
60,113
(27,981) (113,229)
54,380
(14,574)
34,400
490,900
130,017
137,078
1,400
46,800
48,200
23,300
467,600
490,900
5,284
124,733
130,017
14,210
40,170
54,380
34,400
-
34,400
19,943
40,170
60,113
Total Proved Undeveloped
-
-
-
-
-
-
The decrease attributable to divestiture of reserves is from the sale of Oklahoma properties - the Cimarron properties in second quarter,
2016.
The upward revisions of previous estimates of 54,908 Bbls and 493,013 MCF results primarily from 2016 reserve report calculations for
the Company’s properties driven by industry conditions and the change in the proportional quantities of oil and gas in production from the
Judy well in Oklahoma from 2015 to 2016.
22
ITEM 2. PROPERTIES - continued
Standardized Measure of Oil & Gas Quantities
Year Ended December 31, 2016 and 2015
The standardized measure of discounted future net cash flows relating
to proved oil and natural gas reserves is as follows :
Future cash inflows
Future production costs
Future development costs
Future income tax expense
Future net cash flows
10% annual discount for estimated
timing of cash flows
Standardized measure of discounted future
net cash flows related to proved reserves
A summary of the changes in the standardized measure of discounted
future net cash flows applicable to proved oil and natural gas reserves
is as follows :
Balance, beginning of year
Sales and transfers of oil and gas produced during the period
Net change in sales and transfer prices and in production (lifting) costs related to future production
Net change due to sales of reserves
Net change due to sales of minerals in place
Net change due to extensions and discoveries
Changes in estimated future development costs
Previously estimated development costs incurred during the period
Net change due to revisions in quantity estimates
Other
Accretion of discount
Net change in income taxes
Balance, end of year
2016
2015
$
3,156,970
$
(1,000,410)
(1,350,000)
-
806,560
2,410,202
(1,169,591)
(58,575)
5,818,722
7,000,758
(465,644)
(1,065,570)
$
340,916
$
5,935,188
$
5,935,188
(29,749)
$ 23,018,966
(762,423)
(482,569) (18,010,821)
(14,026,302)
-
-
(791,630) 19,563,576
(191,470)
-
-
58,575
482,272
172,169
80,393
(4,892,263)
$
340,916
357,033
(11,062,826)
(858,606)
2,146,235
5,570,356
5,935,188
$
Due to the inherent uncertainties and the limited nature of reservoir data, both proved and probable reserves are subject to change as
additional information becomes available. The estimates of reserves, future cash flows, and present value are based on various assumptions,
including those prescribed by the SEC, and are inherently imprecise. Although we believe these estimates are reasonable, actual future
production, cash flows, taxes, development expenditures, operating expenses, and quantities of recoverable oil and natural gas reserves may
vary substantially from these estimates.
In estimating probable reserves, it should be noted that those reserve estimates inherently involve greater risk and uncertainty than
estimates of proved reserves. While analysis of geoscience and engineering data provides reasonable certainty that proved reserves can be
economically producible from known formations under existing conditions and within a reasonable time, probable reserves involve less
certainty than reserves with a higher classification due to less data to support their ultimate recovery. Probable reserves have not been
discounted for the additional risk associated with future recovery. Prospective investors should be aware that as the categories of reserves
decrease with certainty, the risk of recovering reserves at the PV-10 calculation increases. The reserves and net present worth discounted at
10% relating to the different categories of proved and probable have not been adjusted for risk due to their uncertainty of recovery and thus
are not comparable and should not be summed into total amounts.
23
ITEM 2. PROPERTIES - continued
Reserve Estimation Process, Controls and Technologies
The reserve estimates, including PV-10 estimates, set forth above were prepared by PeTech Enterprises, Inc. for the Company’s properties
in Oklahoma. A copy of their full reports with regard to our reserves is attached as Exhibit 99.1 to this annual report on Form 10-K. These
calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in
accordance with SEC financial accounting and reporting standards.
We do not have any employees with specific reservoir engineering qualifications in the company. Our Chairman and Chief Executive
Officer worked closely with PeTech Enterprises Inc. in connection with their preparation of our reserve estimates, including assessing the
integrity, accuracy, and timeliness of the methods and assumptions used in this process.
PeTech Enterprises, Inc. (“PeTech”), who provided 2016 reserve estimates for our Oklahoma Properties, is a Texas based profitable,
family owned oil and gas production and Investment Company that provides reservoir engineering, economics and valuation support to
energy banks, energy companies and law firms as an expert witness. PeTech has been in business since 1982. Amiel David is the
President of PeTech and the primary technical person in charge of the estimates of reserves and associated cash flow and economics on
behalf of the company for the results presented in its reserves report to us. He has a PhD in Petroleum Engineering from Stanford
University. He is a registered Professional Engineer in the state of Texas (PE #50970), granted in 1982, a member of the Society of
Petroleum Engineers and a member of the Society of Petroleum Evaluation Engineers.
Proved Nonproducing Reserves
As of December 31, 2016, our proved nonproducing reserves totaled 124,733 barrels of oil equivalents (BOE) compared to 40,170 as of
December 31, 2015, an increase of 84,563 BOE. These proved nonproducing reserves at December 31, 2016 were associated with our
Hunton project Judy well. The change consists of a decrease of 40,170 BOE due to the sale of the Texas Marcelina properties and an
increase of 124,733 BOE from the engineering analysis of the Judy well. These numbers are taken from the third party reserves study
prepared by PeTech for 2016 and 2015 and CREST Engineering Services, Inc for 2015.
The net reserves change associated with these properties is a decrease of approximately 6,630 Bbls of oil and an increase of approximately
467,600 Mcf of gas calculated with a gas-oil equivalency factor of six.
We made investments and progress during 2016 to develop proved producing reserves in the Orogrande and Hazel Projects in the Permian
Basin. As of December 31, 2016 there were no producing wells on these properties.
Our current drilling plans, subject to sufficient capital resources and the periodic evaluation of interim drilling results and other potential
investment opportunities, include drilling additional wells in the Orogrande and Hazel AMI’s to continue to derisk the prospects and obtain
initial production from the development efforts per our Farmout agreement with Founders in which we will be carried on all aspects of
Orogrande drilling for the foreseeable future. In addition, we intend to continue to de-risk the Hazel AMI by continuing to drill evaluation
wells. The next scheduled well in the Hazel Project is set for the end of June. It is intended to be a horizontal well testing the Wolfcamp
formation in order to determine horizontal viability of the play.
Production, Price, and Production Cost History
During the year ended December 31, 2016, we produced and sold 8,488 barrels of oil net to our interest at an average sale price of $34.15
per bbl. We produced and sold 36,513 MCF of gas net to our interest at an average sales price of $1.77 per MCF. Our average production
cost including lease operating expenses and direct production taxes was $22.54 per BOE. Our depreciation, depletion, and amortization
expense was $43.67 per BOE.
During the year ended December 31, 2015, we produced and sold 27,981 barrels of oil net to our interest at an average sale price of $46.03
per bbl. We produced and sold 113,229 MCF of gas net to our interest at an average sales price of $3.00 per MCF. Our average production
cost including lease operating expenses and direct production taxes was $17.38 per bbl. Our depreciation, depletion, and amortization
expense was $19.87 per bbl.
Our production was from properties concentrated in central Oklahoma and in south Texas. Reserves at the beginning of 2016 from each of
these areas comprised more than 15% of total reserves. The Oklahoma Cimarron properties were sold on May 1, 2016 and the Marcelina
properties in south Texas were sold October 1, 2016. For 2016, approximately 4,381 BOE was produced at Marcelina Creek and
approximately 9,151 BOE in Oklahoma, or 30% from Marcelina Creek and 63% from Oklahoma.
24
ITEM 2. PROPERTIES - continued
Quarterly Revenue and Production by State for 2016 and 2015 are detailed as follows:
Property
Marcelina (TX)
Oklahoma
Kansas
Total Q1-2016
Marcelina (TX)
Oklahoma
Kansas
Total Q2-2016
Marcelina (TX)
Oklahoma
Kansas
Total Q3-2016
Marcelina (TX)
Oklahoma
Kansas
Total Q4-2016
Quarter
Q1 - 2016
Q1 - 2016
Q1 - 2016
Q2 - 2016
Q2 - 2016
Q2 - 2016
Q3 - 2016
Q3 - 2016
Q3 - 2016
Q4 - 2016
Q4 - 2016
Q4 - 2016
Oil
Production
{BBLS}
Gas
Production
{MCF}
3,000
2,026
312
5,338
917
675
731
2,323
464
180
-
644
-
184
-
184
-
$
21,148
-
21,148
$
-
9,689
-
9,689
-
2,830
-
2,830
-
2,845
-
2,845
$
$
$
$
$
$
Oil
Revenue
92,546
54,289
8,854
155,689
38,812
30,411
28,834
98,057
20,190
7,925
-
28,115
-
8,024
-
8,024
Gas
Revenue
-
38,624
-
38,624
-
11,142
-
11,142
-
6,170
-
6,170
-
8,569
-
8,569
$
$
$
$
$
$
$
$
Total
Revenue
92,546
92,913
8,854
194,313
38,812
41,553
28,834
109,199
20,190
14,095
-
34,285
-
16,593
-
16,593
$
$
$
$
$
$
$
$
Year Ended 12/31/16
8,488
36,513
$
289,885
$
64,505
$
354,390
25
ITEM 2. PROPERTIES - continued
Property
Quarter
Oil
Production
{BBLS}
Gas
Production
{MCF}
Oil
Gas
Revenue
Revenue
Total
Revenue
Marcelina (TX)
Oklahoma
Kansas
Total Q1-2015
Marcelina (TX)
Oklahoma
Kansas
Total Q2-2015
Marcelina (TX)
Oklahoma
Kansas
Total Q3-2015
Marcelina (TX)
Oklahoma
Kansas
Total Q4-2015
Q1 - 2015
Q1 - 2015
Q1 - 2015
Q2 - 2015
Q2 - 2015
Q2 - 2015
Q3 - 2015
Q3 - 2015
Q3 - 2015
Q4 - 2015
Q4 - 2015
Q4 - 2015
2,425
5,931
979
9,335
1,957
5,495
889
8,341
2,177
4,550
370
7,097
1,337
1,624
247
3,208
-
$
37,226
-
37,226
$
-
$
32,348
-
32,348
$
-
$
31,275
-
31,275
$
-
$
12,380
-
12,380
$
98,787
277,574
40,680
417,041
101,291
290,540
19,060
410,891
86,845
212,156
13,238
312,239
44,391
93,864
9,573
147,828
$
$
$
$
$
$
$
$
-
117,521
-
117,521
-
97,374
-
97,374
-
87,791
-
87,791
-
37,349
-
37,349
$
$
$
$
$
$
$
$
98,787
395,095
40,680
534,562
101,291
387,914
19,060
508,265
86,845
299,947
13,238
400,030
44,391
131,213
9,573
185,177
Year Ended 12/31/15
27,981
113,229
$ 1,287,999
$
340,035
$ 1,628,034
Drilling Activity and Productive Wells
Marcelina Creek Project - Texas
As of December 31, 2015, we had three productive wells in the Marcelina Creek Field (2.00 net wells) and one well in the Coulter Field
(.40 net well). Net wells consist of the sum of our fractional working interests in these wells.
During 2016 the Company conducted a reentry project on the Johnson #4. After an analysis of those results and the alternatives for pursuing
continuing development of the Marcelina Project, a decision was made to offer the property for sale. The sale was consummated on
October 1, 2016.
Central Oklahoma Projects
As of December 31, 2014, 10 wells were producing in the Cimarron, 11 wells in the Chisholm Trail, one in Prairie Grove, and one in the
Viking.
During the year ended December 31, 2015, the Company continued to produce the wells in Oklahoma but did not significantly expand
development due to capital constraints and industry conditions. The production and leases in the Chisholm Trail AMI were sold in
November, 2015 and the Company was actively seeking buyers for the Cimarron AMI as well. A sale of the Cimarron AMI closed
effective May 1, 2016.
Having sold the Chisholm Trail and Cimarron wells and acreage, the only remaining producing wells in Oklahoma are the Judy and the
Loki wells as of December 31, 2016. The Company retains ownership of the Viking, Rosedale, and Thunderbird AMI’s at December 31,
2016. Reference the detailed Leasehold Interest table included in this report.
26
ITEM 2. PROPERTIES - continued
Combined Well Status
The following table summarizes drilling activity and Well Status as of December 31, 2016:
Drilling Activity/Well Status
Cumulative Well Status
at 12/31/2016
Wells Acquired
(Sold) 2016
Cumulative Well Status
at 12/31/2015
Gross
Net
Gross
Net
Gross
Net
Development Wells:
Productive -Texas
Productive - Okla
Productive - Kansas
Dry
Exploration Wells:
Productive
Dry
Total Drilled Wells:
Productive -Texas
Productive - Okla
Productive - Kansas
Dry
Acquired Wells:
Productive -Texas
Productive - Okla
Productive - Kansas
Total Wells:
Productive -Texas
Productive - Okla
Productive - Kansas
Total
Well Type:
Oil
Gas
Combination -Oil and Gas
Total
-
2.00
-
-
-
1.00
-
2.00
-
1.00
-
-
-
-
2.00
-
2.00
-
-
2.00
2.00
-
0.20
-
-
-
-
-
0.20
-
-
-
-
-
-
0.20
-
0.20
(3.00)
(7.00)
(2.00)
(2.00)
(1.15)
(1.00)
-
1.00
-
0.33
(3.00)
(7.00)
(2.00)
1.00
(2.00)
(1.15)
(1.00)
0.33
(1.00)
(4.00)
-
(0.50)
(0.25)
-
3.00
9.00
2.00
-
-
-
3.00
9.00
2.00
-
1.00
4.00
-
(4.00)
(11.00)
(2.00)
(2.50)
(1.40)
(1.00)
4.00
13.00
2.00
(17.00)
(4.90)
19.00
(0.00)
-
0.20
(5.00)
(1.00)
(11.00)
(3.00)
(0.50)
(1.40)
5.00
1.00
13.00
0.20
(17.00)
(4.90)
19.00
27
2.00
1.35
1.00
-
-
-
2.00
1.35
1.00
-
0.50
0.25
-
2.50
1.60
1.00
5.09
3.00
0.50
1.60
5.09
ITEM 2. PROPERTIES - continued
Our acreage positions at December 31, 2016 are summarized as follows:
Leasehold Interests - 12/31/2016
Gross
Net
Gross
Net
Total Acres
TRCH Interest
Developed Acres
TRCH Interest
Undeveloped Acres
Net
Gross
Texas -
Orogrande
Hazel Project
Oklahoma -
Viking
Rosedale
Prairie Grove
Thunderbird
163,400
12,000
77,615
4,001
8,800
11,600
640
4,300
2,600
3,500
64
1,100
-
-
640
-
640
-
-
-
163,400
12,000
77,615
4,001
192
-
64
-
8,160
11,600
-
4,300
2,408
3,500
-
1,100
Total
200,740
88,880
1,280
256
199,460
88,624
In January, 2017 the Company increased its working interest in the Hazel Project from 33.33% to 74%. Reference “Subsequent Events” in
Note 11 to the financial statements included in this report.
Orogrande
On August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum Corporation
(“MPC”), and Greg McCabe. Mr. McCabe was the sole owner of both Hudspeth and MPC. Under the terms and conditions of the Purchase
Agreement, at closing, we purchased 100% of the capital stock of Hudspeth which holds certain oil and gas assets, including a 100%
working interest in 172,000 mostly contiguous acres in the Orogrande Basin in West Texas. This acreage is in the primary term under five-
year leases that carry additional five-year extension provisions. As consideration, at closing we issued 868,750 shares of our common stock
to Mr. McCabe and paid a total of $100,000 in geologic origination fees to third parties. Additionally, Mr. McCabe has, at his option, a
10% working interest back-in after payout and a reversionary interest if drilling obligations are not met, all under the terms and conditions
of a participation and development agreement. All drilling obligations through December 31, 2016 have been met. Closing of the
transactions occurred on September 23, 2014.
Of the 168,000 acres, 40,154 were scheduled for renewal in December, 2014. The Company renewed the leases for the 40,154 acres
during second quarter, 2015. Prior to March 31, 2015, the Company had the obligation to begin drilling its first well in order to hold the
acreage block. The Rich A-11 well was permitted and spudded and drilling began as required by March 31, 2015.
The Company finalized an agreement to sell a 5% working interest in the Orogrande acreage on June 30, 2015 with an effective date of
April 1, 2015. Sale proceeds were $500,000 which were received in April, 2015. In addition, the Company issued 250,000 three year
warrants with an exercise price of $.50 to the purchaser.
On September 23, 2015, our subsidiary, Hudspeth Oil Corporation (“HOC”), entered into a Farmout Agreement by and between HOC,
Pandora Energy, LP (“Pandora”), Founders Oil & Gas, LLC (“Founders”), McCabe Petroleum Corporation and Greg McCabe (McCabe
Petroleum Corporation and Greg McCabe are parties to the Farmout Agreement for limited purposes) for the entire Orogrande Project in
Hudspeth County, Texas. The Farmout Agreement provides for Founders to earn from HOC and Pandora (collectively, the “Farmor”) an
undivided 50% of the leasehold interest in the Orogrande Project by Founder’s spending a minimum of $45 million on actual drilling
operations on the Orogrande Project in the next two years. Founders is to pay Farmor a total cost reimbursement of $5,000,000 in multiple
installments as follows: (1) $1,000,000 at the signing of the Farmout Agreement, the balance of which was received on September 24,
2015; (2) within 90 days from the closing, Founders will frac and complete the Rich A-11 No. 1 Well; and (3) within five days of the
spudding of each of the next eight wells drilled by Founders, Founders will pay to Farmor $500,000 resulting in the payment of the
remaining amount; provided that, in the event that within 90 days after the fracing of the Rich Well, Founders notifies Farmor of its
election not to drill any additional wells, Founders shall have no further obligation to make further payment.
28
ITEM 2. PROPERTIES - continued
Upon payment of the first $1,000,000, Farmor assigned to Founders an undivided 50% of the leasehold interest and a 37.5% net revenue
interest in the leases subject to the terms of the Farmout Agreement (including obligations to re-assign to HOC and Pandora if the 50%
interest in the entire Orogrande Project is not earned) and a proportionate share of the McCabe 10% BIAPO (back in after pay out) interest;
provided, however, that for each well that Founders drills prior to earning the acreage, it will be assigned a 50% working interest in the
wellbore and in the lease on which it sits.
Under a joint operating agreement (on A.A.P.L. Form 610 – 1989 Model Form Operating Agreement with COPAS 2005 Accounting
Procedures) (“JOA”) also entered into on September 23, 2015, Founders is designated as operator of the leases. Any variance to the
operating plan will be determined by a Development Committee, which committee is made up of members from Founders and Farmor, or
their designees, to discuss and recommend the location of the drill wells, data to be gathered and the form of same. As contemplated under
the Farmout Agreement, starting within 90 days of the completion of the fracing on the Rich A-11 Well, and at all times subject to the 90
day continuous drilling clause, Founders has the option, but not the obligation, to retain the assigned interest as follows: (1) if Founders
spends a minimum of $45 million on actual drilling operations while maintaining compliance with the continuous drilling clause, subject to
reasonable delays resulting from reasonable Force Majeure conditions, Founders will have fulfilled its farmout obligations and will be
entitled to retain the assigned interests. If Founders does not meet such obligations, it will reassign to Farmor the assigned interest except it
will be entitled to retain its interest in the leases covering all wells drilled by Founders and the sections in which such wells are located.
Additionally, Founders will resign as operator of the JOA as to all lands reassigned; and (2) Farmor will be carried in all drilling operations
during the first two years and/or $45 million in drilling operations, whichever comes last, subject to Founders’ right to recoup certain
expenses on “Gap Wells.” After three years and after Founders has earned its working interest, either party may elect to market the acreage
as an entire block, including operatorship. Should an acceptable bid arise, and both parties agree, the block will be sold 100% working
interest to that third party bidder. However, if only one party wants to accept the outside offer, the other party (the party who wishes not to
sell) has the right to purchase the working interest from the selling party.
The Rich A-11 well that was drilled by Torchlight in second quarter, 2015 was evaluated and numerous scientific tests were performed to
provide key data for the field development thesis. During the testing process a poor cement bond was identified preventing a cost effective
production test for the primary pay zones. Repair to the well bore necessary for a subsequent frac procedure was determined to be
economically unfeasible. With the Rich A-11 designed as a test well rather than commercial target, a decision to begin plans for drilling the
next well(s) with larger casing that utilized for future commercial production was made.
Torchlight Energy and Founders have elected to move forward on planning the next phase of drilling in the Orogrande Project. The project
operator planned to permit three new wells in 2016 starting with the University Founders B-19 #1 well. The new wells would be drilled
vertically for test purposes and would have sufficient casing size to support lateral entry into any pay zone(s) encountered once the well is
tested vertically. Torchlight and the project operator would then run a battery of tests on each well to gain information for future
development of the field. The second test well, the University Founders B-19 #1, was spudded on April 24, 2016 and drilled in second
quarter, 2016. The well successfully pumped down completion fluid in third quarter and indications of hydrocarbons were seen at the
surface on this second Orogrande Project test well. Despite encountering a bedding plane in a small section of the wellbore which required
the installation of a pump to dewater, fluids from the B-19 #1 test well have begun to show an oil cut. The oil samples appear to be to be
very high gravity in the 45° to 47° API range. The well has shown casing pressure measured from 200 psi to 540 psi at various times during
the testing phase. The presence of natural gas is also noted and samples have been taken showing a ~1050 BTU content.
The parties have agreed to amend the drilling schedule for the next well to be no later than April 30, 2017. Future plans are focused on
drilling additional wells in the Orogrande per our Farmout agreement with Founders in which we will be carried on costs for all aspects of
drilling for the foreseeable future.
Hazel Project in the Midland Basin in West Texas
Effective April 1, 2016, Torchlight Energy Inc. acquired from McCabe Petroleum Corporation, a 66.66% working interest in approximately
12,000 acres in the Midland Basin in exchange for 1,500,000 warrants to purchase our common stock with an exercise price of $1.00 for
five years and a back-in after payout of a 25% working interest to the seller.
Initial development of the first well on the property, the Flying B Ranch #1, began July 10, 2016 and development continued through
September 30, 2016. This well was is classified as a test well in the development pursuit of the Hazel Project.
In October, 2016, the holders of the Company's Series C Preferred shares (which were issued in July, 2016) elected to convert into a
33.33% Working Interest in the Company's Hazel Project, reducing Torchlight's ownership from 66.66% to a 33.33% Working Interest.
29
ITEM 2. PROPERTIES - continued
On December 27, 2016, drilling activities commenced on its next Midland Basin, Hazel Project well, the Flying B Ranch #2. The well will
be a vertical test similar to the Company's first Hazel Project well, the Flying B Ranch #1. We intend to continue to de-risk the Hazel AMI
by continuing to drill evaluation wells. The next scheduled well in the Hazel Project is set for the end of June, 2017. It is intended to be a
horizontal well testing the Wolfcamp formation in order to determine horizontal viability of the play.
In November, 2016, the Company announced that it had entered into a Letter of Intent to increase its ownership across all 12,000 gross
acres in the Hazel Project resulting in 8,880 net acres in its Midland Basin Hazel Project. Upon closing of the transactions in January, 2017
contemplated by the Letter of Intent, Torchlight obtained the additional 40.66% Working Interest from an entity owned and controlled by
its Chairman, Greg McCabe, increasing Torchlight's total ownership to 74%. Reference “Subsequent Events” in Note 11 to the financial
statements included in this report.
Central Oklahoma Projects
The production and leases in the Chisholm Trail AMI were sold in November, 2015 and the sale of the Cimarron AMI s closed effective on
May 1, 2016. The Company retains the acreage in the remaining three AMI’s (Viking, Rosedale, and Thunderbird), the Loki well in the
Viking AMI, and the Judy well in the Prairie Grove AMI as of December 31, 2016. The Judy and the Loki wells are producing at
December 31, 2016. Reserve value at December 31, 2016 is only from the Judy well.
ITEM 3. LEGAL PROCEEDINGS
With respect to Oil and Gas properties previously owned by the Company in Central Oklahoma, Torchlight Energy Resources, Inc. and its
subsidiary Torchlight Energy, Inc. (“Torchlight”) has pending in the 429th judicial district court in Collin County, Texas a lawsuit against
Husky Ventures, Inc., Charles V. Long, Silverstar of Nevada, Inc., Gastar Exploration Inc., J. Russell Porter, Michael A. Gerlich, and Jerry
R. Schuyler that was originally filed in May 2016 (previous defendants April Glidewell, Maximus Exploration, LLC, Atwood Acquisitions,
LLC and John M. Selser, Sr have been non-suited without prejudice to re-filing the claims). In the lawsuit, Torchlight alleges, among other
things, that the defendants acted improperly in connection with multiple transactions, and that the defendants misrepresented and omitted
material information to Torchlight with respect to these transactions. The lawsuit seeks damages arising from 15 different causes of action,
including without limitation, violations of the Texas Securities Act, fraud, negligent misrepresentation, breach of fiduciary duty, breach of
contract, unjust enrichment and tortious interference. The lawsuit also seeks a complete accounting as to how Torchight’s investment funds
were used, including all transfers between and among the defendants. Torchlight is seeking the full amount of our damages on $20,000,000
invested.
Defendant Gastar has asserted a breach of contract counterclaim against Torchlight related to a release contained in one of the agreements
between Torchlight and Husky in which Gastar claims to be a third-party beneficiary. Torchlight is claiming that this agreement should be
rescinded, and in any event, that the release is unenforceable.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on The NASDAQ Stock Market LLC under the symbol, “TRCH.” Trading in our common stock in the over-
the-counter market has historically been limited and occasionally sporadic and the quotations set forth below are not necessarily indicative
of actual market conditions. The high and low sales prices for the common stock for each quarter of the fiscal years ended December 31,
2016 and 2015, according to NASDAQ, were as follows:
Quarter Ended High Low
12/31/2016
9/30/2016
6/30/2016
3/31/2016
12/31/2015
9/30/2015
6/30/2015
3/31/2015
$
$
$
$
$
$
$
$
1.48 $
1.75 $
0.94 $
1.13 $
1.87 $
2.44 $
2.40 $
0.83 $
0.66
0.55
0.55
0.42
0.93
0.48
0.25
0.22
Record Holders
As of March 21, 2017, there were approximately 275 stockholders of record of our common stock, and we estimate that there were
approximately 2,600 additional beneficial stockholders who hold their shares in “street name” through a brokerage firm or other institution.
As of March 21, 2017, we have a total of 57,862,004 shares of common stock issued and outstanding.
The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.
Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock.
Dividends
We have not declared any cash dividends on our common stock since inception and do not anticipate paying any dividends in the
foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend on our earnings, capital
requirements, financial condition, and other relevant factors. There are no restrictions that currently limit our ability to pay dividends on
our common stock other than those generally imposed by applicable state law. The Company issued preferred stock in 2016 and 2015 on
which dividends were paid. No preferred stock is outstanding as of December 31, 2016.
Equity Compensation Plan Information
The following table sets forth all equity compensation plans as of December 31, 2016:
Number of
securities
remaining
available
for future
issuance
under
equity
compensation
plans
(excluding
securities
reflected in
column (a))
Number of
securities to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights
6,706,905
$ 1.56
1,290,258
31
Plan Category
Equity compensation plans approved
by security holders
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES - continued
Sales of Unregistered Securities
Other than the sales below, all equity securities that we have sold during the period covered by this report that were not registered under the
Securities Act have previously been included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.
In November 2016, we issued 165,000 shares of common stock in connection with Company owned lease interests.
In November 2016, we issued 221,000 four-year warrants to purchase common stock at an exercise price of $0.70 per share in connection
with Company owned lease interests.
In December 2016, Eunis Shockey (a former director) exercised warrants at an exercise price of $0,50 per share, purchasing 271,901 shares
of common stock.
In December 2016, we issued a total of 70,000 shares of common stock to a consultant as compensation for services.
In November 2016, we issued 120,000 five-year warrants to a consultant as compensation for services at an exercise price of $1.03.
All of the above sales of securities described in this Item 2 were sold under the exemption from registration provided by Section 4(a)(2) of
the Securities Act of 1933 and the rules and regulations promulgated thereunder. The issuances of securities did not involve a “public
offering” based upon the following factors: (i) the issuances of securities were isolated private transactions; (ii) a limited number of
securities were issued to a limited number of purchasers; (iii) there were no public solicitations; (iv) the investment intent of the purchasers;
and (v) the restriction on transferability of the securities issued.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Information set forth and discussed in this Management’s Discussion and Analysis and Results of Operations is derived from our historical
financial statements and the related notes thereto which are included in this Form 10-K. The following information and discussion should
be read in conjunction with such financial statements and notes. Additionally, this Management’s Discussion and Analysis and Plan of
Operations contain certain statements that are not strictly historical and are “forward-looking” statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and involve a high degree of risk and uncertainty. Actual results may differ materially from those
projected in the forward-looking statements due to other risks and uncertainties that exist in our operations, development efforts, and
business environment, and due to other risks and uncertainties relating to our ability to obtain additional capital in the future to fund our
planned expansion, the demand for oil and natural gas, and other general economic factors.
All forward-looking statements included herein are based on information available to us as of the date hereof, and we assume no obligation
to update any such forward-looking statements.
Summary of Key Results
Overview
We are engaged in the acquisition, exploration, exploitation, and/or development of oil and natural gas properties in the United States.
During the quarter ended June 30, 2016 the Board of Directors initiated a review of Company operations in view of the divestiture of its
Oklahoma properties, beginning with the sale of the Chisholm Trail properties in fourth quarter, 2015 and the sale of the Cimarron
properties in second quarter, 2016. During this same time development had continued on the Orogrande Project in West Texas and in April,
2016, the Company acquired the Hazel Project in the Midland Basin also in West Texas. These West Texas properties demonstrate
significant potential and future production capabilities based upon the analysis of scientific data being gathered in the day by day
development activity. Therefore, the Board has determined to focus its efforts and capital on these two projects to maximize shareholder
value for the long run.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
With this new emphasis, remaining projects in other locations were offered for sale. The result was the closing on August 10, 2016 of the
assignment of the Company’s Ring Properties in Kansas to our joint venture partner. Further, the Marcelina properties in South Texas have
been sold effective October 1, 2016. The Company’s remaining assets in Oklahoma consisting of three AMI’s (the Viking, Rosedale, and
the Thunderbird) and four wells (two are producing) are held pending the outcome of the lawsuit filed by Torchlight against the operator,
Husky Ventures, in May, 2016.
The strategy in divesting of projects other than the Orogrande and the Hazel Projects is to refocus on the greatest potential future value for
the Company while systematically eliminating debt as noncore assets are sold and operations are streamlined.
The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial
statements for the years ended December 31, 2016 and 2015 included herewith. This discussion should not be construed to imply that the
results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion represents only the best present assessment by our management.
Historical Results for the Years Ended December 31, 2016 and 2015
For the year ended December 31, 2016, we had a net loss of $7,684,346 compared to a net loss of $43,252,878 for the year ended
December 31, 2015.
Revenues and Cost of Revenues
For the year ended December 31, 2016, we had production revenue of $354,390 compared to $1,628,034 of production revenue for the year
ended December 31, 2015. Refer to the table of production and revenue for 2016 included below. Our cost of revenue, consisting of lease
operating expenses and production taxes, was $328,438, and $814,078 for the years ended December 31, 2016 and 2015, respectively.
Production and Revenue are detailed as follows:
Property
Marcelina (TX)
Oklahoma
Kansas
Total Q1-2016
Marcelina (TX)
Oklahoma
Kansas
Total Q2-2016
Marcelina (TX)
Oklahoma
Kansas
Total Q3-2016
Marcelina (TX)
Oklahoma
Kansas
Total Q4-2016
Quarter
Q1 - 2016
Q1 - 2016
Q1 - 2016
Q2 - 2016
Q2 - 2016
Q2 - 2016
Q3 - 2016
Q3 - 2016
Q3 - 2016
Q4 - 2016
Q4 - 2016
Q4 - 2016
Oil
Production
{BBLS}
Gas
Production
{MCF}
3,000
2,026
312
5,338
917
675
731
2,323
464
180
-
644
-
184
-
184
-
$
21,148
-
21,148
$
-
9,689
-
9,689
-
2,830
-
2,830
-
2,845
-
2,845
$
$
$
$
$
$
Oil
Revenue
92,546
54,289
8,854
155,689
38,812
30,411
28,834
98,057
20,190
7,925
-
28,115
-
8,024
-
8,024
$
$
$
$
$
$
$
$
Gas
Revenue
-
38,624
-
38,624
-
11,142
-
11,142
-
6,170
-
6,170
-
8,569
-
8,569
Total
Revenue
92,546
92,913
8,854
194,313
38,812
41,553
28,834
109,199
20,190
14,095
-
34,285
-
16,593
-
16,593
$
$
$
$
$
$
$
$
Year Ended 12/31/16
8,488
36,513
$
289,885
$
64,505
$
354,390
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
We recorded depreciation, depletion and amortization expense of $636,426 for the year ended December 31, 2016 compared to $930,934
for 2015.
General and Administrative Expenses
Our general and administrative expenses for the years ended December 31, 2016 and 2015 were $6,447,706 and $15,550,145, respectively,
a decrease of $9,102,439. Our general and administrative expenses consisted of consulting and compensation expense, substantially all of
which was non-cash or deferred, accounting and administrative costs, professional consulting fees, and other general corporate expenses.
The decrease in general and administrative expenses for the year ended December 31, 2016 compared to 2015 is detailed as follows:
Increase(decrease) in non cash stock and warrant compensation
Increase(decrease) in consulting expense
Increase(decrease) in professional fees
Increase(decrease) in investor relations
Increase(decrease) in travel expense
Increase(decrease) in salaries and compensation
Increase(decrease) in legal fees
Increase(decrease) in insurance
Increase(decrease) in general corporate expenses
Increase(decrease) in bad debt
$ (7,609,458)
(317,664)
$
(165,489)
$
81,900
$
(39,345)
$
(410,188)
$
44,078
$
(31,029)
$
(100,493)
$
(554,752)
$
Total (Decrease) in General and Administrative Expenses
$ (9,102,439)
The decrease in non cash stock and warrant compensation arises from the change in vested employee stock options expense and a reduction
in outside services compensated with stock and warrants. Employee options were initially issued with 50% immediate vesting of option
valuation at June, 2015. The balance of the vesting was set at 25% in June, 2016 and 25% in June, 2017. The remaining valuation is being
recorded over the periods up to the full vesting date using the straight line method.
The decrease in consulting expense parallels the reduction in outside services compensated with stock and warrants as noted above.
The reduction in salaries and compensation arises from a reduction in staff size due to the resignation of our inside Petroleum Engineer and
the resignation of our COO.
The bad debt expense in 2015 of $554,752 was connected with a terminated transaction with an outside working interest owner in one of
the wells in Oklahoma previously owned by the Company. No bad debt expense was incurred in 2016.
Liquidity and Capital Resources
For the year ended December 31, 2016, we had a net loss of $7,684,346 compared to a net loss of $43,252,878 for the year ended
December 31, 2015.
At December 31, 2016, we had current assets of $2,990,446 and total assets of $12,433,648. As of December 31, 2016, we had current
liabilities of $5,283,794. Negative working capital of $(2,293,348) was exacerbated by the inclusion in current liabilities of the $3,478,121
outstanding balance of subordinated convertible notes which have a maturity date of June 30, 2017. Stockholders’ equity was $7,142,803 at
December 31, 2016.
Cash from operating activities for the year ended December 31, 2016, was $(4,826,089) compared to $(2,408,501) for the year ended
December 31, 2015, a decrease of $2,417,588. Cash from operating activities during 2016 can be attributed to net losses from operations of
$7,684,346. Cash used in operating activities during 2015 can be attributed to net losses from operations of $43,252,878.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Cash from investing activities for year ended December 31, 2016 was $(167,871) compared to $(2,374,021) for the year ended December
31, 2015. Cash from investing activities consists primarily of oil and gas investment properties acquired during the year ended December
31, 2016 combined with proceeds from sale of leases.
Cash from financing activities for the year ended December 31, 2016 was $5,736,859 as compared to $5,629,335 for the year ended
December 31, 2015. Cash from financing activities in 2016 consists primarily of proceeds from common and preferred stock issues and
warrant exercises. We expect to continue to have cash provided by financing activities as we seek new rounds of financing and continue to
develop our oil and gas investments.
Our current assets are insufficient to meet our current obligations or to satisfy our cash needs over the next twelve months and as such we
will require additional debt or equity financing to meet our plans and needs. We face obstacles in continuing to attract new financing due to
our history and current record of net losses and working capital deficits. Despite our efforts, we can provide no assurance that we will be
able to obtain the financing required to meet our stated objectives or even to continue as a going concern.
We do not expect to pay cash dividends on our common stock in the foreseeable future.
Critical Accounting Policies and Estimates
Oil and gas properties – The Company uses the full cost method of accounting for exploration and development activities as defined by
the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful,
exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related
to property acquisition, exploration and development activities but does not include any costs related to production, general corporate
overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss
would significantly alter the relationship between capitalized costs and proved reserves.
Oil and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded
represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs associated with
leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition costs to unevaluated
properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir.
Unevaluated properties are reviewed for impairment at least quarterly and are determined through an evaluation considering, among other
factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan,
and political, economic, and market conditions.
Gains and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly alter
the relationship between capitalized costs and proved reserves. Sales of less than 100% of the Company’s interest in the oil and gas
property are treated as a reduction of the capital cost of the field, with no gain or loss recognized, as long as doing so does not significantly
affect the unit-of-production depletion rate. Costs of retired equipment, net of salvage value, are usually charged to accumulated
depreciation.
Depreciation, depletion, and amortization – The depreciable base for oil and natural gas properties includes the sum of all capitalized costs
net of accumulated depreciation, depletion, and amortization (“DD&A”), estimated future development costs and asset retirement costs not
included in oil and natural gas properties, less costs excluded from amortization. The depreciable base of oil and natural gas properties is
amortized on a unit-of-production method.
Ceiling test – Future production volumes from oil and gas properties are a significant factor in determining the full cost ceiling limitation
of capitalized costs. Under the full cost method of accounting, the Company is required to periodically perform a “ceiling test” that
determines a limit on the book value of oil and gas properties. If the net capitalized cost of proved oil and gas properties, net of related
deferred income taxes, plus the cost of unproved oil and gas properties, exceeds the present value of estimated future net cash flows
discounted at 10 percent, net of related tax affects, plus the cost of unproved oil and gas properties, the excess is charged to expense and
reflected as additional accumulated DD&A. The ceiling test calculation uses a commodity price assumption which is based on the
unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes
future cash outflows related to estimated abandonment costs.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality of
available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable
reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary
considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those
based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of proved oil and gas
reserves could result in significant revisions to proved reserves. Other issues, such as changes in regulatory requirements, technological
advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future.
Asset retirement obligations –The fair value of a liability for an asset’s retirement obligation (“ARO”) is recognized in the period in which
it is incurred if a reasonable estimate of fair value can be made, with the corresponding charge capitalized as part of the carrying amount of
the related long-lived asset. The liability is accreted to its then-present value each subsequent period, and the capitalized cost is depleted
over the useful life of the related asset. Abandonment costs incurred are recorded as a reduction of the ARO liability.
Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts,
inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political
environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a
gain or loss upon settlement.
Share-based compensation – Compensation cost for equity awards is based on the fair value of the equity instrument on the date of grant
and is recognized over the period during which an employee is required to provide service in exchange for the award. Compensation cost
for liability awards is based on the fair value of the vested award at the end of each period.
The Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient
completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the
period from their issuance until performance completion, at which time the estimated expense is adjusted to the final value of the award as
measured at performance completion.
The Company values warrant and option awards using the Black-Scholes option pricing model.
Commitments and Contingencies
Leases
The Company has a noncancelable lease for its office premises that expires on November 30, 2019 and which requires the payment of base
lease amounts and executory costs such as taxes, maintenance and insurance. Rental expense for lease was $81,595 and $87,037 for the
year ended December 31, 2016 and 2015, respectively.
Approximate future minimum rental commitments under the office premises lease are:
For the Year
Ending
December 31,
2017
2018
2019
Amount
79,658
81,248
75,814
236,720
$
$
$
$
We are subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations
applicable to our operations could require substantial capital expenditures or could adversely affect our operations in other ways that cannot
be predicted at this time. As of December 31, 2016 and 2015, no amounts have been recorded because no specific liability has been
identified that is reasonably probable of requiring us to fund any future material amounts.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
As of December 31, 2016, the Company had interests in three oil and gas projects: Hunton wells in partnership with Husky Ventures in
Central Oklahoma, the Orogrande Project in Hudspeth County, Texas, and the Hazel Project in Sterling, Tom Green, and Irion Counties,
Texas.
See the description under “Current Projects” above under “Item 1. Business” for more information and disclosure regarding commitments
and contingencies relating to these projects.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Torchlight Energy Resources, Inc.
Plano, Texas
We have audited the accompanying consolidated balance sheet of Torchlight Energy Resources, Inc. (the “Company”) as of December 31,
2016, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2016, and the results of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring losses from operations and has a net
working capital deficiency which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Briggs & Veselka Co.
Houston, Texas
March 31, 2017
38
Board of Directors and Stockholders
Torchlight Energy Resources, Inc.
Plano, Texas
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Torchlight Energy Resources, Inc. (the “Company”) as of December 31,
2015, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2015, and the results of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The 2015 consolidated financial statements were prepared assuming that the entity would continue as a going concern. As discussed in Note
2 to the 2015 consolidated financial statements, the entity had suffered recurring losses from operations and has a net working capital
deficiency which raised substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters
were also described in Note 2 to the 2015 consolidated financial statements. The consolidated financial statements did not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Calvetti Ferguson
Houston, Texas
March 30, 2016
39
TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash
Accounts receivable
Production revenue receivable
Note receivable
Prepayments - development costs
Prepaid expenses
Total current assets
Oil and gas properties, net
Office equipment, net
Other assets
December 31,
December 31,
2016
2015
$
$
1,769,499
603,446
7,325
-
583,347
26,829
2,990,446
9,392,288
29,848
21,066
1,026,600
741,653
199,317
613
-
38,776
2,006,959
7,057,671
43,110
80,306
TOTAL ASSETS
$
12,433,648
$
9,188,046
Current liabilities:
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable
Funds received pending settlement
Accrued payroll
Related party payables
Convertible promissory notes, (Series B) net of discount of
$91,379 at December 31, 2016
Notes payable within one year - related party
Notes payable within one year
Due to working interest owners
Interest payable
Total current liabilities
Convertible promissory notes, (Series B) net of discount of $277,911 at December 31, 2015
Asset retirement obligation
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.001, 10,000,000 shares authorized;
-0- issued and outstanding at December 31, 2016
134,000 issued and outstanding at December 31, 2015
Common stock, par value $0.001 per share; 100,000,000 shares authorized;
55,096,503 issued and outstanding at December 31, 2016
33,166,344 issued and outstanding at December 31, 2015
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
$
$
422,684
520,400
565,176
237,044
3,478,121
-
-
54,320
6,049
5,283,794
-
7,051
1,153,185
-
590,100
130,000
-
205,000
129,741
103,364
173,710
2,485,100
3,291,589
29,083
5,290,845
5,805,772
-
-
55,100
-
134
33,168
89,675,488
(82,587,785)
7,142,803
78,252,411
(74,903,439)
3,382,274
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
12,433,648
$
9,188,046
The accompanying notes are an integral part of these consolidated financial statements.
40
TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenue
Oil and gas sales
SWD and royalties
Cost of revenue
Gross profit
Operating expenses:
General and administrative expense
Depreciation, depletion and amortization
Impairment expense
Loss on sale
Total operating expenses
Other (income) expense
Interest income
Interest and accretion expense
Total other (income) expense
Net loss before taxes
Provision for income taxes
Net loss
Loss per share:
Basic and Diluted
Weighted average shares outstanding:
Basic and Diluted
Year
Ended
December 31,
2016
Year
Ended
December 31,
2015
$
354,390
-
$
1,628,034
6,274
(328,438)
(814,078)
25,952
820,230
6,447,706
636,426
70,080
283,285
7,437,497
(36)
272,837
272,801
15,550,145
930,934
25,674,123
24,479
42,179,681
-
1,893,427
1,893,427
(7,684,346)
(43,252,878)
-
-
$
(7,684,346)
$
(43,252,878)
$
(0.19)
$
(1.58)
43,122,514
27,897,794
The accompanying notes are an integral part of these consolidated financial statements.
41
TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common
stock
shares
Common
stock
amount
Preferred
stock
shares
Pref.
Stock
Amt.
Additional
paid-in
capital
Accumulated
deficit
Total
Balance, December 31, 2014
23,235,441
$
23,237
-
$
-
$50,745,072
$(31,650,561) $19,117,745
4,931,250
-
2,447,696
4,931
-
2,448
-
135,000
-
$
-
135
-
1,295,069
13,499,865
2,649,056
Issuance of common stock for cash
Issuance of preferred stock for cash
Issuance of common stock for services
Issuance of common stock - mineral
interests
Issuance of common stock in warrant
exercise
Issuance of common stock for note
interest
Issuance of common stock for preferred
dividends
Preferred dividends paid in cash
Warrants issued with promissory notes
Common stock issued in conversion of
notes
Common stock issued in part payment of
bonuses
Common stock issued in conversion of
preferred stock
Preferred stock cancelled in conversion
Warrants issued for services
Net loss
30,000
65,000
162,860
577,140
-
-
30
65
163
577
-
-
1,600,000
1,600
30,000
86,957
-
-
-
30
87
-
-
-
-
-
-
-
-
-
-
-
-
(1,000) $
-
-
-
-
-
-
1,300,000
13,500,000
2,651,504
26,400
-
26,370
-
113,685
-
113,750
-
162,697
-
162,860
-
-
-
(577)
(120,427)
467,800
-
-
-
-
(120,427)
467,800
-
1,148,400
-
1,150,000
-
39,870
-
39,900
-
(1)
-
-
99,913
(99,999)
100,000
(100,000)
8,225,619
(43,252,878) (43,252,878)
-
-
-
8,225,619
-
Balance, December 31, 2015
33,166,344
$
33,168
134,000
$
134
$78,252,411
$(74,903,439) $3,382,274
Issuance of common stock for cash
Issuance of preferred stock for cash
Issuance of common stock for services
Issuance of common stock - mineral
interests
Issuance of common stock in warrant
exercise
Issuance of common stock for preferred
dividends
Preferred dividends paid in cash
Warrants issued with lease interests
Warrants and Options issued for services
Lease interest conveyed in conversion of
preferred stock
Common stock issued in conversion of
preferred stock
Warrants issued in connection with
promissory note
Net loss
3,750,000
-
768,832
2,824,881
3,888,745
440,262
-
-
-
-
10,257,439
3,750
-
769
2,825
3,891
440
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10
-
2,996,250
999,990
669,305
-
-
-
3,000,000
1,000,000
670,074
-
1,972,221
-
1,975,046
-
2,539,855
-
2,543,746
-
-
-
-
(440)
(320,724)
1,290,761
2,205,231
-
-
-
-
-
(320,724)
1,290,761
2,205,231
(10) (999,990)
-
(1,000,000)
10,257
(134,000)
(134)
(10,132)
-
(9)
-
-
-
-
-
-
-
-
80,750
-
80,750
(7,684,346) (7,684,346)
-
Balance, December 31, 2016
55,096,503
$
55,100
-
$
-
$89,675,488
$(82,587,785) $7,142,803
The accompanying notes are an integral part of these consolidated financial statements.
42
TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Cash Flows From Operating Activities
Net loss
Adjustments to reconcile net loss to net cash from operations:
Stock based compensation
Accretion of convertible note discounts
Loss on sale of assets
Impairment expense
Depreciation, depletion and amortization
Change in:
Accounts receivable
Note receivable
Production revenue receivable
Prepayment of development costs
Prepaid expenses
Other assets
Accounts payable and accrued liabilities
Due to working interest owners
Funds received pending settlement
Interest payable
Net cash from operating activities
Cash Flows From Investing Activities
Investment in oil and gas properties
Acquisition of office equipment
Proceeds from sale of oil and gas properties
Net cash from investing activities
Cash Flows From Financing Activities
Proceeds from short term advance
Repayment of short term advance
Proceeds from sale of common stock
Proceeds from sale of preferred stock
Preferred dividends paid in cash
Proceeds from warrant exercise
Proceeds from promissory notes
Repayment of convertible notes
Repayment of promissory notes
Net cash from financing activities
Net change in cash
Cash - beginning of period
Cash - end of period
Supplemental disclosure of cash flow information: (Non Cash Items)
Common stock issued for mineral interests
Common stock issued in conversion of promissory notes
Common stock issued for unpaid compensation
Warrants issued for mineral interests
Cash paid for interest
Year
Ended
December 31,
2016
Year
Ended
December 31,
2015
$
(7,684,346)
$
(43,252,878)
2,956,044
186,532
283,285
70,080
636,426
138,207
613
191,992
(1,583,347)
11,946
59,240
(396,456)
(49,044)
520,400
(167,661)
(4,826,089)
(2,293,497)
(1,863)
2,127,489
(167,871)
150,000
(150,000)
3,000,000
1,000,000
(320,724)
1,999,310
708,014
-
(649,741)
5,736,859
742,899
1,026,600
11,265,926
1,395,103
24,479
25,674,123
930,934
(187,305)
515,135
11,118
(290,398)
(9,142)
(8,860)
1,024,098
29,925
-
469,241
(2,408,501)
(5,224,748)
(1,191)
2,851,918
(2,374,021)
-
-
1,300,000
13,500,000
(120,427)
113,750
539,916
(8,859,011)
(844,893)
5,629,335
846,813
179,787
$
1,769,499
$
1,026,600
$
$
$
$
$
1,975,046
-
-
1,290,761
603,157
$
$
$
$
$
26,400
1,150,000
39,900
-
919,272
The accompanying notes are an integral part of these consolidated financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Torchlight Energy Resources, Inc. (“Company”) was incorporated in October 2007 under the laws of the State of Nevada as Pole Perfect
Studios, Inc. (“PPS”). From its incorporation to November 2010, the company was primarily engaged in business start-up activities.
On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) between the major
shareholders of PPS and the shareholders of Torchlight Energy, Inc. (“TEI”). As a result of the transactions effected by the Exchange
Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business. TEI was incorporated
under the laws of the State of Nevada in June 2010. We are engaged in the acquisition, exploitation and/or development of oil and natural
gas properties in the United States. We operate our business through our subsidiaries Torchlight Energy Inc., Torchlight Energy Operating,
LLC, and Hudspeth Oil Corporation.
2. GOING CONCERN
At December 31, 2016, the Company had not yet achieved profitable operations. We had a net loss of $7,684,346 million for the year
ended December 31, 2016 and had accumulated losses of $82,587,785 since our inception. We expect to incur further losses in the
development of our business. The Company had a working capital deficit as of December 31, 2016 of $(2,293,348). Negative working
capital is exacerbated by the inclusion in current liabilities of the $3,478,121 outstanding balance of subordinated convertible notes which
have a maturity date of June 30, 2017. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is dependent on its ability to generate future profitable operations and/or to obtain
the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come
due. Management’s plan to address the Company’s ability to continue as a going concern includes: (1) obtaining debt or equity funding
from private placement or institutional sources; (2) obtain loans from financial institutions, where possible, or (3) participating in joint
venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow the
Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove
successful.
These consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or
the amount and classifications of liabilities that may result from the outcome of this uncertainty.
3. SIGNIFICANT ACCOUNTING POLICIES
The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in
the United States of America. Accounting principles followed and the methods of applying those principles, which materially affect the
determination of financial position, results of operations and cash flows are summarized below:
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and certain assumptions that affect the amounts reported in these consolidated financial
statements and accompanying notes. Actual results could differ from these estimates.
Basis of presentation—The financial statements are presented on a consolidated basis and include all of the accounts of Torchlight Energy
Resources Inc. and its wholly owned subsidiaries, Torchlight Energy, Inc., Torchlight Energy Operating, LLC, and Hudspeth Oil
Corporation. All significant intercompany balances and transactions have been eliminated.
Risks and uncertainties – The Company’s operations are subject to significant risks and uncertainties, including financial, operational,
technological, and other risks associated with operating an emerging business, including the potential risk of business failure.
Concentration of risks – At times the Company’s cash balances are in excess of amounts guaranteed by the Federal Deposit Insurance
Corporation. The Company’s cash is placed with a highly rated financial institution, and the Company regularly monitors the credit
worthiness of the financial institutions with which it does business.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Fair value of financial instruments – Financial instruments consist of cash, accounts receivable, accounts payable, notes payable to related
party, and convertible promissory notes. The estimated fair values of cash, accounts receivable, accounts payable, and related party
payables approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of the
convertible promissory notes approximated their fair value giving affect for the term of the note and the effective interest rates.
For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as
follows:
· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
· Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset
or liability, either directly or indirectly through market corroboration.
· Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at
fair value.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair
value measurement.
Accounts receivable – Accounts receivable consist of uncollateralized oil and natural gas revenues due under normal trade terms, as well as
amounts due from working interest owners of oil and gas properties for their share of expenses paid on their behalf by the Company.
Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best
estimate of the amount that may not be collectible. As of December 31, 2016 and 2015, no valuation allowance was considered necessary.
Oil and gas properties – The Company uses the full cost method of accounting for exploration and development activities as defined by
the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful,
exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related
to property acquisition, exploration and development activities but does not include any costs related to production, general corporate
overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss
would significantly alter the relationship between capitalized costs and proved reserves.
Oil and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded
represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs associated with
leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition costs to unevaluated
properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir.
Unevaluated properties are reviewed for impairment at least quarterly and are determined through an evaluation considering, among other
factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan,
and political, economic, and market conditions.
Gains and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly alter
the relationship between capitalized costs and proved reserves. Sales of less than 100% of the Company’s interest in the oil and gas
property are treated as a reduction of the capital cost of the field, with no gain or loss recognized, as long as doing so does not significantly
affect the unit-of-production depletion rate. Costs of retired equipment, net of salvage value, are usually charged to accumulated
depreciation.
Capitalized interest – The Company capitalizes interest on unevaluated properties during the periods in which they are excluded from costs
being depleted or amortized. During years ended December 31, 2016 and 2015, the Company capitalized $215,938 and $705,561,
respectively, of interest on unevaluated properties net of adjustments with respect to divestiture of properties.
Depreciation, depletion, and amortization – The depreciable base for oil and natural gas properties includes the sum of all capitalized costs
net of accumulated depreciation, depletion, and amortization (“DD&A”), estimated future development costs and asset retirement costs not
included in oil and natural gas properties, less costs excluded from amortization. The depreciable base of oil and natural gas properties is
amortized on a unit-of-production method.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Ceiling test – Future production volumes from oil and gas properties are a significant factor in determining the full cost ceiling limitation
of capitalized costs. Under the full cost method of accounting, the Company is required to periodically perform a “ceiling test” that
determines a limit on the book value of oil and gas properties. If the net capitalized cost of proved oil and gas properties, net of related
deferred income taxes, plus the cost of unproved oil and gas properties, exceeds the present value of estimated future net cash flows
discounted at 10 percent, net of related tax affects, plus the cost of unproved oil and gas properties, the excess is charged to expense and
reflected as additional accumulated DD&A. The ceiling test calculation uses a commodity price assumption which is based on the
unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes
future cash outflows related to estimated abandonment costs.
The determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality of
available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable
reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary
considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those
based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of proved oil and gas
reserves could result in significant revisions to proved reserves. Other issues, such as changes in regulatory requirements, technological
advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future.
Asset retirement obligations –The fair value of a liability for an asset’s retirement obligation (“ARO”) is recognized in the period in which
it is incurred if a reasonable estimate of fair value can be made, with the corresponding charge capitalized as part of the carrying amount of
the related long-lived asset. The liability is accreted to its then-present value each subsequent period, and the capitalized cost is depleted
over the useful life of the related asset. Abandonment costs incurred are recorded as a reduction of the ARO liability.
Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts,
inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political
environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding
adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a
gain or loss upon settlement.
Income taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A
valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.
Authoritative guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position
the position following an
only after determining
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.
tax authority would more
than not sustain
the relevant
likely
that
Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax
expense in the statement of operation. The Company has not recorded any interest or penalties associated with unrecognized tax benefits
for any periods covered by these financial statements.
Share-based compensation – Compensation cost for equity awards is based on the fair value of the equity instrument on the date of grant
and is recognized over the period during which an employee is required to provide service in exchange for the award. Compensation cost
for liability awards is based on the fair value of the vested award at the end of each period.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES - continued
The Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient
completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the
period from their issuance until performance completion, at which time the estimated expense is adjusted to the final value of the award as
measured at performance completion.
The Company values warrant and option awards using the Black-Scholes option pricing model.
Revenue recognition – The Company recognizes oil and gas revenues when production is sold at a fixed or determinable price, persuasive
evidence of an arrangement exists, delivery has occurred and title has transferred, and collectability is reasonably assured.
Basic and diluted earnings (loss) per share – Basic earnings (loss) per common share is computed by dividing net income (loss) available
to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per
common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include
the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional
common shares were dilutive. The calculation of diluted earnings per share excludes 23,131,694 shares issuable upon the exercise of
outstanding warrants and options. The loss available to common shareholders was determined by subtracting preferred dividends totaling
$585,844 for 2016 and $930,169 for 2015 from each year’s respective net loss.
Environmental laws and regulations – The Company is subject to extensive federal, state, and local environmental laws and regulations.
Environmental expenditures are expensed or capitalized depending on their future economic benefit. The Company believes that it is in
compliance with existing laws and regulations.
Recent accounting pronouncements – On August 27, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides
guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires
management to perform interim and annual assessments of the Company’s ability to continue as a going concern within one year of the date
the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the
entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15,
2016, and interim periods thereafter, with early adoption permitted. The Company has adopted ASU 2014-15 and the adoption did not have
a significant impact on the Company’s consolidated financial statements or related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers, that introduces a new five-step revenue
recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also
requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and
changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years
beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new
guidance to determine the impact it will have on its consolidated financial statements.
In February 2016, the FASB, issued ASU, 2016-02, Leases. The ASU requires companies to recognize on the balance sheet the assets and
liabilities for the rights and obligations created by leased assets. ASU 2016-02 will be effective for the Company in the first quarter of
2019, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on the
Company’s consolidated financial statements and related disclosures.
Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Company’s
financial position or results from operations.
Subsequent events – The Company evaluated subsequent events through March 30, 2017, the date of issuance of the financial statements.
Subsequent events are disclosed in Note 11.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. OIL & GAS PROPERTIES
The following table presents the capitalized costs for oil & gas properties of the Company as of December 31, 2016 and 2015:
2016
2015
Evaluated costs subject to amortization
Unevaluated costs
Total capitalized costs
Less accumulated depreciation, depletion and
amortization
Total oil and gas properties
$ 1,470,939
13,376,742
14,847,681
$ 24,177,851
9,677,425
33,855,276
(5,455,393) (26,797,605)
$ 7,057,671
$ 9,392,288
The Company recognized impairment expense of $25,674,123 on its oil and gas properties during 2015. An additional impairment of
$70,080 was expensed in 2016. Due to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is
possible that a write-down could occur. Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids, which
geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic
and operating conditions. The independent engineering estimates include only those amounts considered to be proved reserves and do not
include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary recovery
processes where facilities are not in place or for which transportation and/or marketing contracts are not in place. Estimated reserves to be
developed through secondary or tertiary recovery processes are classified as unevaluated properties.
During 2016 the Company sold its Cimarron and Marcelina properties. Those sales of the Cimarron and the Marcelina properties in 2016
represented substantial percentages of reserves at the time of each sale and are also presented on the Statement of Operations for 2016.
Proceeds from the sale of Cimarron and Marcelina properties were $750,000 and $877,489 respectively. The combined loss on sale for
2016 was $283,285.
5. RELATED PARTY PAYABLES
As of December 31, 2016, related party payables consisted of accrued and unpaid compensation to one of our executive officers totaling
$45,000 and $192,044 in Director Fees payable to our Directors.
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company has a noncancelable lease for its office premises that expires on November 30, 2019 and which requires the payment of base
lease amounts and executory costs such as taxes, maintenance and insurance. Rental expense for lease was $81,595 and $87,037 for the
year ended December 31, 2016 and 2015, respectively.
Approximate future minimum rental commitments under the office premises lease are:
For the Year
Ending
December 31,
2017
2018
2019
Amount
$
$
$
$
79,658
81,248
75,814
236,720
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES - continued
Environmental matters
The Company is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and
regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in
other ways that cannot be predicted at this time. As of December 31, 2016 and 2015, no amounts had been recorded because no specific
liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts.
Litigation
With respect to Oil and Gas properties previously owned by the Company in Central Oklahoma, Torchlight Energy Resources, Inc. and its
subsidiary Torchlight Energy, Inc. (“Torchlight”) has pending in the 429th judicial district court in Collin County, Texas a lawsuit against
Husky Ventures, Inc., Charles V. Long, Silverstar of Nevada, Inc., Gastar Exploration Inc., J. Russell Porter, Michael A. Gerlich, and Jerry
R. Schuyler that was originally filed in May 2016 (previous defendants April Glidewell, Maximus Exploration, LLC, Atwood Acquisitions,
LLC and John M. Selser, Sr have been non-suited without prejudice to re-filing the claims). In the lawsuit, Torchlight alleges, among other
things, that the defendants acted improperly in connection with multiple transactions, and that the defendants misrepresented and omitted
material information to Torchlight with respect to these transactions. The lawsuit seeks damages arising from 15 different causes of action,
including without limitation, violations of the Texas Securities Act, fraud, negligent misrepresentation, breach of fiduciary duty, breach of
contract, unjust enrichment and tortious interference. The lawsuit also seeks a complete accounting as to how Torchight’s investment funds
were used, including all transfers between and among the defendants. Torchlight is seeking the full amount of our damages on $20,000,000
invested.
Defendant Gastar has asserted a breach of contract counterclaim against Torchlight related to a release contained in one of the agreements
between Torchlight and Husky in which Gastar claims to be a third-party beneficiary. Torchlight is claiming that this agreement should be
rescinded, and in any event, that the release is unenforceable.
As of December 31, 2015, the Company had a $419,839 account receivable from Husky Ventures for the estimated balance of the sale
proceeds from the sale of the Chisholm Trail properties in fourth quarter, 2015. The Chisholm Trail properties were sold to Husky Ventures
who then included them with the Husky interests in Chisholm Trail and then entered into a sale agreement with Gastar Exploration Inc. for
the combined Torchlight and Husky interests. Receipt of the balance of the sale proceeds was subject to final determination of mineral
lease classification and was to occur by February 28, 2016.
On June 14, 2016, after the lawsuit was filed regarding the Hunton Play, the Company received and subsequently deposited a check from
Husky Ventures in the amount of $520,400. Husky Ventures designated that the check was in full satisfaction of its obligations under the
transaction in which the Company sold the Chisholm Trail properties as described above. The Company does not believe the check is in
full satisfaction of Husky Ventures’s obligations, including but not limited to that Husky Ventures has provided insufficient information for
the Company regarding this transaction.
7. STOCKHOLDERS’ EQUITY
Common Stock
During the years ended December 31, 2016 and 2015, the Company issued 3,750,000 and 4,931,250 shares of common stock, respectively,
for cash of $3,000,000 and $1,300,000.
During the years ended December 31, 2016 and 2015, the Company issued 768,832 and 2,477,696 shares of common stock with total
values of $670,074 and $2,651,504, respectively, as compensation for services.
During the year ended December 31, 2016 and 2015 the Company issued 10,257,439 and 86,957 shares of common stock, respectively, in
conversions of preferred stock valued at $13,399,992 and $100,000.
During the year ended December 31, 2015 the Company issued 1,600,000 shares of common stock, in conversions of notes payable valued
$1,150,000 and 162,860 shares of common stock, respectively, for interest on notes payable of $162,860.
During the year ended December 31, 2016 and 2015 the Company issued 3,888,745 and 65,000 shares of common stock, respectively,
resulting from warrant exercises for consideration totaling $2,543,746 and $113,750.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS’ EQUITY - continued
Preferred Stock
During the year ended December 31, 2016 the Company issued 10,000 shares of Series C preferred stock for $1,000,000 in cash. The
proceeds were deposited as a prepayment with the operator for development cost of the Flying B #2 well in the Hazel Project. The
preferred holders exercised their option in fourth quarter of 2016 to convert their preferred shares into an aggregate 33.33% working
interest in the Flying “B” #2 whereupon they received credit for the prepayment to their working interest joint interest billing accounts.
During the year ended December 31, 2015, the Company issued 135,000 shares of preferred stock for cash of $13,500,000.
During the year ended December 31, 2016 and 2015, the Company paid dividends on preferred stock in cash, respectively, of $320,724 and
$120,427. In addition during the years 2016 and 2015, 440,262 and 577,140 shares of common stock, respectively, were issued for
dividends on preferred stock.
Warrants and Options
During the years ended December 31, 2016 and 2015, the Company issued/vested 6,437,267 and 7,015,779 warrants and options with total
values of $2,205,231 and $7,797,619, respectively, as compensation for services.
During the year ended December 31, 2016, and 2015, the Company issued 137,500 and 770,000 warrants, respectively, in connection with
financing transactions, with total values of $80,750 and $368,300.
During the year ended December 31, 2015 the Company issued 2,615,676 warrants in connection with the issuance of preferred stock.
During the year ended December 31, 2016 and 2015, the Company issued 3,412,525 and 750,000 warrants and 2,824,881 and 30,000
shares of common stock, respectively, in connection with the acquisition of lease interests, respectively, with total value of $3,265,807 and
$553,900.
A summary of warrants outstanding as of December 31, 2016 by exercise price and year of expiration is presented below:
Exercise
Price
2017
2018
Expiration Date in
2019
2020
2021
Total
$0.50
$0.70
$0.77
$1.00
$1.03
$1.08
$1.40
$1.73
$1.80
$2.00
$2.03
$2.09
$2.23
$2.29
$2.50
$2.82
$3.50
$4.50
$5.00
$5.05
$6.00
$7.00
-
-
-
150,000
-
-
-
-
-
126,000
-
-
-
-
-
-
-
-
170,000
40,000
-
-
486,000
528,099
-
-
-
-
-
-
100,000
-
1,906,249
2,000,000
2,800,000
-
120,000
-
38,174
-
-
-
-
523,123
-
8,015,645
-
-
100,000
54,366
-
37,500
-
-
-
-
-
-
-
-
35,211
-
15,000
700,000
-
-
22,580
700,000
1,664,657
50
-
1,700,000
-
-
-
-
1,643,475
-
500,000
-
-
-
832,512
-
-
-
-
-
-
-
-
-
4,675,987
-
-
-
1,500,000
120,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,620,000
528,099
1,700,000
100,000
1,704,366
120,000
37,500
1,643,475
100,000
500,000
2,032,249
2,000,000
2,800,000
832,512
120,000
35,211
38,174
15,000
700,000
170,000
40,000
545,703
700,000
16,462,289
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STOCKHOLDERS’ EQUITY - continued
A summary of stock options outstanding as of December 31, 2016 by exercise price and year of expiration is presented below:
Exercise
Price
$0.97
$1.57
$1.79
2017
2018
Expiration Date in
2019
2020
2021
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
5,997,163
412,500
6,409,663
259,742
-
-
259,742
259,742
5,997,163
412,500
6,669,405
At December 31, 2016 the Company had reserved 23,131,694 shares for future exercise of warrants and options.
Warrants and options issued were valued using the Black Scholes Option Pricing Model. The assumptions used in calculating the fair value
of the warrants issued were as follows:
2016
Risk-free interest rate
Expected volatility of common stock
Dividend yield
Discount due to lack of marketability
Expected life of warrant
0.78%-1.22%
101% - 189%
0.00%
20-30%
3 years - 5 years
2015
Risk-free interest rate
Expected volatility of common stock
Dividend yield
Discount due to lack of marketability
Expected life of warrant
0.78%
191% - 253%
0.00%
20-30%
3 years - 5 years
8. INCOME TAXES
The Company recorded no income tax provision for 2016 or 2015 because of losses incurred. The Company has placed a full valuation
allowance against net deferred tax assets because future realization of these assets is not assured.
The following is a reconciliation between the federal income tax benefit computed at the statutory federal income tax rate of 34% and
actual income tax provision for the years ended December 31, 2016 and 2015:
Year ended
December
31, 2016
Year ended
December
31, 2015
$ (2,869,293) $(14,705,979)
4,127
3,000
(587,126)
4,096,947
(1,230,654) 15,288,978
-
$
$
-
Federal income tax benefit at statutory rate
Permanent differences
Other
Change in valuation allowance
Provision for income taxes
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES - continued
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at December 31, 2016 and
December 31, 2015 are as follows:
Deferred tax assets:
Net operating loss carryforward
Accruals
Reserves
Deferred tax liabilities:
Intangible drilling and other costs for oil and
gas properties
Net deferred tax assets and liabilities
Less valuation allowance
Total deferred tax assets and liabilities
December
31, 2016
December
31, 2015
$ 16,269,090
15,300
7,156,559
$ 11,443,389
30,600
5,883,263
(74,340) 7,240,011
24,597,263
23,366,609
(23,366,609) (24,597,263)
-
-
$
$
The Company has federal net operating loss carryforwards of $47,850,266 and $39,312,173 at December 31, 2016 and 2015, respectively.
The federal net operating loss carryforwards will begin to expire in 2031. Realization of the deferred tax asset is dependent, in part, on
generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a full valuation allowance
against net deferred tax assets because future realization of these assets is not assured.
9. PROMISSORY NOTES
During 2014, the Company issued $4,569,500 in principal value of 12% Series B Convertible Unsecured Promissory Notes. The 12%
Notes are due and payable on June 30, 2017 and provide for conversion into common stock at a price of $4.50 per share and included the
issuance of one warrant for each $22.50 of principal amount purchased. The Company issued a total of 203,085 of these five-year warrants
to purchase common stock at an exercise price of $6.00 per share. The value of the warrant shares was $562,404 and the amount recorded
for the beneficial conversion feature was $195,466. These amounts were recorded as a discount on the 12% Notes.
During the quarter ended March 31, 2015, the Company amended a note with a holder of a $1,000,000 Series B Convertible Unsecured
Promissory Note to reset the conversion price to $1.00.
During the fourth quarter of 2015, $1 million in note principal was converted into common stock. The total outstanding balance of Series B
Notes at December 31, 2016 was $3,569,500.
10. ASSET RETIREMENT OBLIGATIONS
The following is a reconciliation of the asset retirement obligation liability through December 31, 2016:
Asset retirement obligation – December 31, 2014
$
35,951
Accretion expense
Removal of ARO for wells sold
3,492
(10,360)
Asset retirement obligation – December 31, 2015
$
29,083
Accretion expense
Removal of ARO for wells sold
41
(22,073)
Asset retirement obligation – December 31, 2016
$
7,051
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SUBSEQUENT EVENTS
Acquisition of Additional Interest in the Hazel Project
On January 30, 2017, we and our wholly-owned subsidiary, Torchlight Acquisition Corporation, a Texas corporation (“TAC”), entered into
and closed an Agreement and Plan of Reorganization and Plan of Merger with Line Drive Energy, LLC, a Texas limited liability company
(“Line Drive”), under which agreements TAC merged with and into Line Drive and the separate existence of TAC ceased, with Line Drive
being the surviving organization and becoming our wholly-owned subsidiary. Line Drive, which was wholly-owned by Gregory McCabe,
our Chairman, owned certain assets and securities, including approximately 40.66% of 12,000 gross acres in the Hazel Project and 521,739
warrants to purchase our common stock (which warrants had been assigned by Mr. McCabe to Line Drive). Under the merger transaction,
our shares of common stock of TAC converted into a membership interest of Line Drive, the membership interest in Line Drive held by Mr.
McCabe immediately prior to the transaction ceased to exist, and we issued Mr. McCabe 3,301,739 restricted shares of common stock as
consideration therefor. Immediately after closing, the 521,739 warrants held by Line Drive were cancelled, which warrants had an exercise
price of $1.40 per share and an expiration date of June 9, 2020. A Certificate of Merger for the merger transaction was filed with the
Secretary of State of Texas on January 31, 2017.
Also on January 30, 2017, our wholly-owned subsidiary, Torchlight Energy, Inc., a Nevada corporation (“TEI”), entered into and closed a
Purchase and Sale Agreement with Wolfbone Investments, LLC, a Texas limited liability company (“Wolfbone”) which is wholly-owned
by Gregory McCabe. Under the agreement, TEI acquired certain of Wolfbone’s Hazel Project assets, including its interest in the Flying B
Ranch #1 well and the 40 acre unit surrounding the well, for consideration of $415,000, and additionally, Wolfbone caused to be cancelled
a total of 2,780,000 warrants to purchase our common stock, including 1,500,000 warrants held by McCabe Petroleum Corporation, an
entity owned by Mr. McCabe, and 1,280,000 warrants held by Green Hill Minerals, an entity owned by Mr. McCabe’s son, which warrant
cancellations were effected through certain Warrant Cancellation Agreements. The 1,500,000 warrants held by McCabe Petroleum
Corporation had an exercise price of $1.00 per share and an expiration date of April 4, 2021. The warrants held by Green Hill Minerals
included 100,000 warrants with an exercise price of $1.73 and an expiration date of September 30, 2018 and 1,180,000 warrants with an
exercise price of $0.70 and an expiration date of February 15, 2020.
After the above transactions, our total ownership in the Hazel Project increased to a 74% working interest across all 12,000 gross acres.
53
TORCHLIGHT ENERGY RESOURCES, INC.
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION
AND PRODUCTION ACTIVITIES
(Unaudited)
The unaudited supplemental information on oil and gas exploration and production activities has been presented in accordance with
Financial Accounting Standards Board Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas and the SEC’s
final rule, Modernization of Oil and Gas Reporting.
Investment in oil and gas properties during the years ended December 31, 2016 and 2015 is detailed as follows:
Property acquisition costs
Development costs
Exploratory costs
$
2016
615,000
1,678,497
-
2015
-
$
4,518,239
-
Totals
$ 2,293,497
$ 4,518,239
Property acquisition cost relates to the Company’s acquisition of the Hazel Project in West Texas. The development costs include reentry
of the Johnson #4 well in the south Texas Marcelina area (sold in 2016) and development costs in the Orogrande and Hazel projects in west
Texas. No development costs were incurred for Oklahoma properties in 2016.
Oil and Natural Gas Reserves
Reserve Estimates
SEC Case. The following tables sets forth, as of December 31, 2016, our estimated net proved oil and natural gas reserves, the estimated
present value (discounted at an annual rate of 10%) of estimated future net revenues before future income taxes (PV-10) and after future
income taxes (Standardized Measure) of our proved reserves and our estimated net probable oil and natural gas reserves, each prepared
using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with assumptions
prescribed by the Securities and Exchange Commission (“SEC”). All of our reserves are located in the United States.
The PV-10 value is a widely used measure of value of oil and natural gas assets and represents a pre-tax present value of estimated cash
flows discounted at ten percent. PV-10 is considered a non-GAAP financial measure as defined by the SEC. We believe that our PV-10
presentation is relevant and useful to our investors because it presents the estimated discounted future net cash flows attributable to our
proved reserves before taking into account the related future income taxes, as such taxes may differ among various companies. We believe
investors and creditors use PV-10 as a basis for comparison of the relative size and value of our proved reserves to the reserve estimates of
other companies. PV-10 is not a measure of financial or operating performance under GAAP and neither it nor the Standardized Measure is
intended to represent the current market value of our estimated oil and natural gas reserves. PV-10 should not be considered in isolation or
as a substitute for the standardized measure of discounted future net cash flows as defined under GAAP.
The estimates of our proved reserves and the PV-10 set forth herein reflect estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic
conditions at December 31, 2016. For purposes of determining prices, we used the average of prices received for each month within the
12-month period ended December 31, 2016, adjusted for quality and location differences, which was $42.75 per barrel of oil and $2.33 per
MCF of gas. This average historical price is not a prediction of future prices. The amounts shown do not give effect to non-property related
expenses, such as corporate general administrative expenses and debt service, future income taxes or to depreciation, depletion and
amortization.
54
December 31, 2016
Reserves
Category
Oil (Bbls)
Gas (Mcf)
Total (BOE)
December 31, 2016
Future Net Revenue (M$)
Present
Value
Discounted
at 10%
Total
Proved Producing
Proved Nonproducing
Total Proved
1,400
46,800
48,200
23,300
467,600
490,900
5,284
124,733
130,017
$
$
$
31
776
807
$
$
$
29
301
330
Standardized Measure of Future Net Cash Flows
Related to Proved Oil and Gas Properties
$
341
Probable Undeveloped
-
-
-
$
-
$
-
Reserve values as of December 31, 2016 are related to a single producing well in Oklahoma – the Judy well in the Prairie Grove AMI.
December 31, 2015
Reserves
Category
Oil (Bbls)
Gas (Mcf)
Total (BOE)
December 31, 2015
Future Net Revenue (M$)
Present
Value
Discounted
at 10%
Total
Proved Producing
Proved Nonproducing
Total Proved
14,210
40,170
54,380
34,400
-
34,400
19,943
40,170
60,113
$
$
$
322
860
1,182
$
$
$
280
763
1,043
Standardized Measure of Future Net Cash Flows
Related to Proved Oil and Gas Properties
$
5,935
Probable Undeveloped
-
-
-
$
-
$
-
BOE equivalents are determined by combining barrels of oil with MCF of gas divided by six.
55
Standardized Measure of Oil & Gas Quantities - Volume Rollforward
Years Ended December 31, 2016 and 2015
The following table sets forth the Company’s net proved reserves, including changes, and proved developed reserves:
Oil (Bbls)
2016
Gas (Mcf)
BOE
Oil (Bbls)
2015
Gas (Mcf)
BOE
TOTAL PROVED RESERVES:
Beginning of period
Acquisition
Extensions and discoveries
Divestiture of reserves
Revisions of previous estimates
Production
End of period
PROVED DEVELOPED RESERVES
Proved developed producing
Proved nonproducing
Total
54,380
-
-
(52,600)
54,908
(8,488)
48,200
34,400
-
-
-
493,013
(36,513)
490,900
60,113
-
-
(52,600)
137,078
(14,574)
130,017
914,400
-
-
3,790,650
-
-
(394,400) (2,483,950)
(437,639) (1,159,071)
(113,229)
(27,981)
34,400
54,380
1,546,175
-
-
(808,391)
(630,818)
(46,853)
60,113
1,400
46,800
48,200
23,300
467,600
490,900
5,284
124,733
130,017
14,210
40,170
54,380
34,400
-
34,400
19,943
40,170
60,113
Total Proved Undeveloped
-
-
-
-
-
-
The decrease attributable to divestiture of reserves is from the sale of Oklahoma properties - the Cimarron properties in second quarter,
2016.
The upward revisions of previous estimates of 54,908 Bbls and 493,013 MCF results primarily from 2016 reserve report calculations for
the Company’s properties driven by industry conditions and the change in the proportional quantities of oil and gas in production from the
Judy well in Oklahoma from 2015 to 2016.
56
Standardized Measure of Oil & Gas Quantities
Year Ended December 31, 2016 and 2015
The standardized measure of discounted future net cash flows relating
to proved oil and natural gas reserves is as follows :
Future cash inflows
Future production costs
Future development costs
Future income tax expense
Future net cash flows
10% annual discount for estimated
timing of cash flows
Standardized measure of discounted future
net cash flows related to proved reserves
2016
2015
$
3,156,970
$
(1,000,410)
(1,350,000)
-
806,560
2,410,202
(1,169,591)
(58,575)
5,818,722
7,000,758
(465,644)
(1,065,570)
$
340,916
$
5,935,188
A summary of the changes in the standardized measure of discounted
future net cash flows applicable to proved oil and natural gas reserves
is as follows :
Balance, beginning of year
Sales and transfers of oil and gas produced during the period
Net change in sales and transfer prices and in production (lifting) costs related to future production
Net change due to sales of reserves
Net change due to sales of minerals in place
Net change due to extensions and discoveries
Changes in estimated future development costs
Previously estimated development costs incurred during the period
Net change due to revisions in quantity estimates
Other
Accretion of discount
Net change in income taxes
Balance, end of year
$
$
-
-
5,935,188
(29,749)
(191,470)
$ 23,018,966
(762,423)
(482,569) (18,010,821)
(14,026,302)
-
-
(791,630) 19,563,576
357,033
(11,062,826)
(858,606)
2,146,235
5,570,356
5,935,188
58,575
482,272
172,169
80,393
(4,892,263)
$
340,916
Due to the inherent uncertainties and the limited nature of reservoir data, both proved and probable reserves are subject to change as
additional information becomes available. The estimates of reserves, future cash flows, and present value are based on various assumptions,
including those prescribed by the SEC, and are inherently imprecise. Although we believe these estimates are reasonable, actual future
production, cash flows, taxes, development expenditures, operating expenses, and quantities of recoverable oil and natural gas reserves may
vary substantially from these estimates.
In estimating probable reserves, it should be noted that those reserve estimates inherently involve greater risk and uncertainty than
estimates of proved reserves. While analysis of geoscience and engineering data provides reasonable certainty that proved reserves can be
economically producible from known formations under existing conditions and within a reasonable time, probable reserves involve less
certainty than reserves with a higher classification due to less data to support their ultimate recovery. Probable reserves have not been
discounted for the additional risk associated with future recovery. Prospective investors should be aware that as the categories of reserves
decrease with certainty, the risk of recovering reserves at the PV-10 calculation increases. The reserves and net present worth discounted at
10% relating to the different categories of proved and probable have not been adjusted for risk due to their uncertainty of recovery and thus
are not comparable and should not be summed into total amounts.
57
Reserve Estimation Process, Controls and Technologies
The reserve estimates, including PV-10 estimates, set forth above were prepared by PeTech Enterprises, Inc. for the Company’s properties
in Oklahoma. A copy of their full reports with regard to our reserves is attached as Exhibit 99.1 to this annual report on Form 10-K. These
calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in
accordance with SEC financial accounting and reporting standards.
We do not have any employees with specific reservoir engineering qualifications in the company. Our Chairman and Chief Executive
Officer worked closely with PeTech Enterprises Inc. in connection with their preparation of our reserve estimates, including assessing the
integrity, accuracy, and timeliness of the methods and assumptions used in this process.
PeTech Enterprises, Inc. (“PeTech”), who provided 2016 reserve estimates for our Oklahoma Properties, is a Texas based profitable,
family owned oil and gas production and Investment Company that provides reservoir engineering, economics and valuation support to
energy banks, energy companies and law firms as an expert witness. PeTech has been in business since 1982. Amiel David is the
President of PeTech and the primary technical person in charge of the estimates of reserves and associated cash flow and economics on
behalf of the company for the results presented in its reserves report to us. He has a PhD in Petroleum Engineering from Stanford
University. He is a registered Professional Engineer in the state of Texas (PE #50970), granted in 1982, a member of the Society of
Petroleum Engineers and a member of the Society of Petroleum Evaluation Engineers.
Results of Operations for Oil and Gas Producing
Activities
For the Year Ended December 31, 2016
Total
Texas
Oklahoma
Kansas
Oil and Gas revenue
$
354,390
$
151,548
$
165,154
$
37,688
Production costs
Depreciation, depletion, and amortization
Exploration expenses
328,438
623,611
-
952,049
203,735
273,378
-
477,113
101,581
339,170
-
440,751
Income tax expense
-
-
-
23,122
11,063
-
34,185
-
Results of Operations (excluding corporate overhead
and interest costs)
$
(597,659)
$
(325,565)
$
(275,597)
$
3,503
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer)
and Chief Financial Officer (principal financial officer), we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2016. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in the reports we submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms
and that such information was accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, in a manner that
allowed for timely decisions regarding disclosure. This determination is based on the material weaknesses management identified in our
internal control over financial reporting, as described below. Subsequent to December 31, 2016, we have worked at remediating the
material weaknesses (see “Remediation Process” below) which should remedy our disclosure controls and procedures, but we will continue
to monitor this issue.
Notwithstanding the results of the evaluation above, we believe all of our reports submitted under the Exchange Act contain, in all material
respects, the information required to be disclosed by us in such reports.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework (2013). A material
weakness in internal controls is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a
timely basis. Because of its inherent limitations, even appropriate internal control over financial reporting may not prevent or detect
misstatements.
Based on this assessment, management concluded that we did not maintain effective internal control over financial reporting. Specifically,
management identified material weaknesses over the accounting for stock options issued to employees and nonemployees and stock
warrants issued for services, property and financings. We use the Black-Scholes Option Pricing Model (“BSM”) to estimate the value of
stock options and warrants issued. Variables used in the BSM can have a significant impact on calculated values. For the variables used in
the BSM, we did not calculate historical volatility based on a widely used approach, and we did not recognize expense over the service
period.
This control deficiency resulted in audit adjustments in preparation of this Annual Report on Form 10-K. The impact on previously issued
financial statements was not determined to be significant.
Changes in Internal Control over Financial Reporting
Other than as described below under “Remediation Process,” there were no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three months ended December 31, 2016 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
59
ITEM 9A. CONTROLS AND PROCEDURES - continued
Remediation Process
While certain actions have been taken to enhance our internal control over financial reporting relating to the material weaknesses identified
above, we are still in the process of implementing our comprehensive remediation plan. Following the identification of the material
weaknesses described above, and with the oversight of the Audit Committee, we commenced a process to remediate the underlying causes
of those material weaknesses, enhance the control environment and strengthen our internal control over financial reporting. Those steps
include review and implementation of equity compensation controls, policies and plan documentation to ensure those terms are accounted
for and require timely review by our Chief Financial Officer, or an appropriate designee, of all compensation arrangements for proper
accounting treatment, with prior approval required for any revision to or deviation from any pre-defined equity compensation plans.
The status of our remediation plan is being, and will continue to be, reported by management to the Audit Committee of the Board of
Directors on a regular basis. In addition, we have assigned personnel to oversee the remedial changes to the overall design of our internal
control environment and to address the root causes of our material weaknesses. Remediation generally requires making changes to how
controls are designed and then adhering to those changes for a sufficient period of time such that the operating effectiveness of those
changes is demonstrated through testing.
As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address
these control deficiencies or modify our remediation plan. We cannot make assurances, however, of when we will remediate such
weaknesses, nor can we be certain of whether additional actions will be required. See above under Item 1A. Risk Factors, the risk factor
titled, We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely
affect our ability to report our financial condition and results of operations in a timely and accurate manner.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls or internal
controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a
company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s
override of the control. The design of any systems of controls is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over
time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not
be detected. Individual persons may perform multiple tasks which normally would be allocated to separate persons and therefore extra
diligence must be exercised during the period these tasks are combined.
ITEM 9B. OTHER INFORMATION
Not applicable.
60
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our executive officers and directors are as follows:
PART III
Name
John A. Brda
Roger N. Wurtele
Greg McCabe, Sr.
Alexandre Zyngier
R. David Newton
E. Scott Kimbrough
Age
52
70
55
47
62
66
Position(s) and Office(s)
Chief Executive Officer, Secretary and Director
Chief Financial Officer
Director
Director
Director
Director
Below is certain biographical information of our executive officers and directors:
John A. Brda – Mr. Brda has been our Chief Executive Officer since December 2014 and our President and Secretary and a member of the
Board of Director since January 2012. He has been the Managing Member of Brda & Company, LLC since 2002, which provided
consulting services to public companies—with a focus in the oil and gas sector—on investor relations, equity and debt financings, strategic
business development and securities regulation matters, prior to him becoming President of the company.
We believe Mr. Brda is an excellent fit to our Board of Directors and management team based on his extensive experience in transaction
negotiation and business development, particularly in the oil and gas sector as well as other non-related industries. He has consulted with
many public companies in the last ten years, and we believe that his extensive network of industry professionals and finance firms will
contribute to our success.
Roger N. Wurtele – Mr. Wurtele has served as our Chief Financial Officer since September 2013. He is a versatile, experienced finance
executive that has served as Chief Financial Officer for several public and private companies. He has a broad range of experience in public
accounting, corporate finance and executive management. Mr. Wurtele previously served as CFO of Xtreme Oil & Gas, Inc. from February
2010 to September 2013. From May 2013 to September 2013 he worked as a financial consultant for us. From November 2007 to January
2010, Mr. Wurtele served as CFO of Lang and Company LLC, a developer of commercial real estate projects. He graduated from the
University of Nebraska and has been a Certified Public Accountant for 40 years.
Gregory McCabe – Mr. McCabe has been a member of our Board of Directors since July 2016 and was appointed Chairman of the Board
in October 2016. He is an experienced geologist who brings over 32 years of oil and gas experience to our company. He is a principal of
numerous oil and gas focused entities including McCabe Petroleum Corporation, Manix Royalty, Masterson Royalty Fund and GMc
Exploration. He has been the President of McCabe Petroleum Corporation from 1986 to the present. Mr. McCabe has been involved in
numerous oil and gas ventures throughout his career and has a vast experience in technical evaluation, operations and acquisitions and
divestitures. Mr. McCabe is also our largest stockholder and provided entry for us into our two largest assets, the Hazel Project in the
Midland Basin and the Orogrande Project in Hudspeth County, Texas.
We believe that Mr. McCabe’s background in geology and his many years in the oil and gas industry compliments the Board of
Directors.
E. Scott Kimbrough - Mr. Kimbrough has served on our Board of Directors since October 2016. He is the owner of multiple independent
oil and gas related companies, which he has managed for more than 20 years, including serving as the President of Maverick Oil & Gas
Corporation for the last 22 years. His diverse oil and gas background spans 39 years and includes roles ranging from field operations to
senior corporate management. Mr. Kimbrough began his career with Arco Oil & Gas Company, followed by work with independents
including Quintana Petroleum Corporation, Lasmo Energy, and Nearburg Producing Company. His focus has been in domestic U.S. fields
including the Permian Basin in West Texas and Southeast New Mexico, on and offshore Gulf Coast, Midcontinent, Rocky Mountain area
and onshore California. Mr. Kimbrough received a Bachelor of Science in Personnel Management (Business) from Louisiana Tech
University and a Bachelor of Science in Mechanical Engineering from Texas A&M University. He is a Registered Petroleum Engineer in
the State of Texas.
We believe Mr. Kimbrough’s wide ranging experience in operating E&P (exploration and production) companies make him an excellent fit
to the Board of Directors.
61
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE - continued
R. David Newton - Mr. Newton has been a member of our Board of Directors since October 2016. He has more than 25 years of
experience in management consulting from various positions he has held with U.S. based investment firms. Additionally, he has been active
in farming, ranching and oil and gas exploration for over 30 years. Since 1994 he has owned and managed R. David Newton and
Associates, a management consulting and investment firm, through which he has focused on funding venture capital, channel distribution,
startups, second and third stage financings, and corporate turnarounds. He holds a Bachelor of Science degree from the University of Texas
at Austin.
Mr. Newton brings a depth of relationships developed through decades of participation in corporate finance and operational skills obtained
while focused on helping growth stage entities involved in oil and natural gas, aerospace, timber and various other industries, and
accordingly can make a substantial contribution to the Board.
Alexandre Zyngier - Mr. Zyngier has served on our Board of Directors since June 2016. He has been the Managing Director of
Batuta Advisors since founding it in August 2013. The firm pursues high return investment and advisory opportunities in the distressed and
turnaround sectors. Mr. Zyngier has over 20 years of investment, strategy, and operating experience. He is currently a director of Atari SA,
AudioEye Inc. and GT Advanced Technologies, Inc. Before starting Batuta Advisors, Mr. Zyngier was a portfolio manager at Alden Global
Capital from February 2009 until August 2013, investing in public and private opportunities. He has also worked as a portfolio manager at
Goldman Sachs & Co. and Deutsche Bank Co. Additionally, he was a strategy consultant at McKinsey & Company and a technical brand
manager at Procter & Gamble. Mr. Zyngier holds an MBA in Finance and Accounting from the University of Chicago and a BS in
Chemical Engineering from UNICAMP in Brazil.
We believe that Mr. Zyngier’s investment experience and his experience in overseeing a broad range of companies will greatly benefit the
Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own beneficially more
than ten percent of our common stock, to file reports of ownership and changes of ownership with the Securities and Exchange
Commission. Based solely upon a review of Forms 3, 4 and 5 furnished to us during the fiscal year ended December 31, 2016, we believe
that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements
during the fiscal year ended December 31, 2016, with the exception of (i) a Form 4 filed late by E. Scott Kimbrough, (ii) a Form 4 filed late
by R. David Newton, (iii) a Form 4 filed late by Gregory McCabe, and (iv) a Form 3 filed late by Alexandre Zyngier.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The Code of Ethics is available at our website at torchlightenergy.com. Further, we
undertake to provide by mail to any person without charge, upon request, a copy of such code of ethics if we receive the request in writing
by mail to: Torchlight Energy Resources, Inc., 5700 W. Plano Parkway, Suite 3600, Plano, Texas 75093.
Procedures for Stockholders to Recommend Nominees to the Board
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since
we last provided disclosure regarding this process.
Audit Committee
We maintain a separately-designated standing audit committee. The Audit Committee currently consists of our three independent directors,
Alexandre Zyngier, E. Scott Kimbrough, and R. David Newton. Mr. Zyngier is the Chairman of the Audit Committee, and the Board of
Directors has determined that he is an audit committee financial expert as defined in Item 5(d)(5) of Regulation S-K. The primary purpose
of the Audit Committee is to oversee our accounting and financial reporting processes and audits of our financial statements on behalf of
the Board of Directors. The Audit Committee meets privately with our management and with our independent registered public accounting
firm and evaluates the responses by our management both to the facts presented and to the judgments made by our outside independent
registered public accounting firm.
62
ITEM 11. EXECUTIVE COMPENSATION
The following table provides summary information for the years 2016 and 2015 concerning cash and non-cash compensation paid or
accrued to or on behalf of certain executive officers.
Summary Executive Compensation Table
Year Salary Bonus Stock
Option
($)
($)
Awards
($)
Awards
($)
(A)
Name and
Principal
Position
John A. Brda
2016 $375,000
President and CEO 2015 $337,500
Willard G.
McAndrew III
Former COO (2)
2016 $310,526
2015 $337,500
Roger Wurtele
CFO
2016 $225,000
2015 $202,500
-
-
-
-
-
-
-
-
$712,500 (1)
$1,530,000 (1)
(1)
(2)
$356,250
$1,530,000 (1)
$356,250 (1)
$765,000 (1)
-
-
-
-
(A) Stock Value as applicable is determined using the Black Scholes Method.
Non-
Equity
Change in
All Other Total
Compensation
($)
($)
Incentive
Plan
Compensation
($)
Pension
Value
and
Nonqualified
Deferred
Compensation
($)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$1,087,500
$1,867,500
$400,512 (3) $1,067,288
$1,867,500
-
-
-
$581,250
$967,500
(1) On June 11, 2015, we granted new stock option awards to our executive officers, as follows: (i) 3,000,000 stock options to John Brda,
President and Chief Executive Officer; (ii) 3,000,000 stock options to Willard G. McAndrew, then Chief Operating Officer; and (iii)
1,500,000 stock options to Roger Wurtele, Chief Financial Officer. The options were granted under our 2015 Stock Option Plan
which plan was approved by stockholders on September 9, 2015. The options are subject to a two-year vesting schedule with one-half
vesting September 9, 2015, one-fourth vesting after one year of the grant date, and the remaining one-fourth vesting after the second
year, provided however that the options will be subject to earlier vesting under certain events set forth in the 2015 Stock Option Plan,
including without limitation a change in control.
(2) Willard G. McAndrew resigned as Chief Operating Officer and director on October 6, 2016. In connection with his resignation, on
September 28, 2016 we entered into a Resignation and Settlement Agreement (the “Resignation Agreement”) with Mr. McAndrew,
which agreement became effective on October 5, 2016 (the “Effective Date”). Under the terms and conditions of the agreement, on
the Effective Date (i) the entire unvested portion of Mr. McAndrew’s stock options granted pursuant to his Stock Option Agreement
dated June 11, 2015 (the “Stock Options”) did not vest and became null and void, amounting to the termination of 750,000 unvested
Stock Options, and Mr. McAndrew surrendered for cancellation a total of 250,000 vested Stock Options (valued at $255,000), leaving
Mr. McAndrew with 2,000,000 Stock Options at an exercise price of $1.57 per share that he was granted pursuant to the Stock Option
Agreement, (ii) the Stock Options were modified to expire on June 11, 2019, and (iii) we owed Mr. McAndrew a total amount of cash
compensation of $789,454, all of which was used to exercise a portion of the Stock Options, and accordingly, he was issued a total of
502,837 shares of common stock pursuant to the exercise of the Stock Options, leaving him with 1,497,163 of those Stock Options.
(3) Of the $789,454 in cash compensation owed to Mr. McAndrew under the Resignation Agreement (see footnote 2 above), $388,942
was for accrued and unpaid salary and bonuses and $400,512 was a severance payment equal to one year of salary plus the cash value
of health benefits owed pursuant to his employment agreement.
Setting Executive Compensation
We fix executive base compensation at a level we believe enables us to hire and retain individuals in a competitive environment and to
reward satisfactory individual performance and a satisfactory level of contribution to our overall business goals. We also take into account
the compensation that is paid by companies that we believe to be our competitors and by other companies with which we believe we
generally compete for executives.
63
ITEM 11. EXECUTIVE COMPENSATION - continued
In establishing compensation packages for executive officers, numerous factors are considered, including the particular executive’s
experience, expertise, and performance, our company’s overall performance, and compensation packages available in the marketplace for
similar positions. In arriving at amounts for each component of compensation, our Compensation Committee strives to strike an appropriate
balance between base compensation and incentive compensation. The Compensation Committee also endeavors to properly allocate
between cash and non-cash compensation (including without limitation stock and stock option awards) and between annual and long-term
compensation.
Employment Agreements
On June 16, 2015, we entered into new five-year employment agreements with each of John Brda, our President and Chief Executive
Officer; Willard G. McAndrew, our then Chief Operating Officer; and Roger Wurtele, our Chief Financial Officer. Under the new
agreements, which replace and supersede their prior employment agreements, each individual’s salary was increased by 25%, so that the
salaries of Messrs. Brda, McAndrew and Wurtele were $375,000, $375,000 and $225,000, respectively, provided these salary increases
will accrue unpaid until such time as management believes there is adequate cash for such increases. Also under the new agreements, each
individual was eligible for a bonus, at the Compensation Committee’s discretion, of up to two times his salary and be eligible for any
additional stock options, as deemed appropriate by the Compensation Committee. Each agreement also provided that if we (or our
successor) terminate the employee upon the occurrence of a change in control, the employee will be paid in one lump sum his salary and
any bonus or other amounts due through the end of the term of the agreement. Each employment agreement also has a covenant not to
compete.
Willard G. McAndrew resigned as Chief Operating Officer and director on October 6, 2016. In connection with his resignation, on
September 28, 2016 we entered into a Resignation and Settlement Agreement (the “Resignation Agreement”) under the terms of which his
employment agreement terminated—see footnotes 2 and 3 to the “Summary Executive Compensation Table” above. Under the Resignation
Agreement, Mr. McAndrew continues to be bound by confidentiality and non-compete provisions (subject to certain modifications) of his
terminated employment agreement. Also pursuant to the Resignation Agreement, we agreed to file a registration statement covering the
resale of 1,500,000 shares underlying certain outstanding stock options and 900,000 shares underlying warrants he beneficially owns, for a
total of 2,400,000 shares—all of which have an exercise price of $2.09. The Resignation Agreement provides mutual release and
indemnification provisions, as well as an arbitration provision.
Outstanding Equity Awards at Fiscal Year End
The following table details all outstanding equity awards held by our named executive officers at December 31, 2016:
Option Awards
Number of
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
245,000
2,250,000 (1)
-
750,000 (1)
Name
John A. Brda
Willard G. McAndrew III
900,000
1,500,000 (2)(3)
1,497,163 (1)(4)
Roger Wurtele
300,000 (5)(6)
-
-
-
-
1,125,000 (1)
375,000 (1)
64
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
Option
Exercise
Price
($)
2.00
1.57
2.09
2.09
1.57
2.09
1.57
-
-
-
-
-
-
-
$
$
$
$
$
$
$
Option
Expiration
Date
9/4/2018
6/11/2020
4/15/2018
9/9/2018
6/11/2019
10/10/2018
6/11/2020
ITEM 11. EXECUTIVE COMPENSATION - continued
(1) The options were awarded on June 11, 2015. The options were granted under our 2015 Stock Option Plan which plan was approved
by stockholders on September 9, 2015. The options are subject to a two-year vesting schedule with one-half vesting on September 9,
2015, one-fourth vesting after one year of the grant date, and the remaining one-fourth vesting after the second year, provided
however that the options will be subject to earlier vesting under certain events set forth in the 2015 Stock Option Plan, including
without limitation a change in control.
(2) Mr. McAndrew gifted these options to WMDM Family, Ltd. The general partner and 1% owner of WMDM Family, Ltd. is a limited
liability company which is owned by a trust of which Mr. McAndrew is a beneficiary.
(3) These options were awarded to Mr. McAndrew in September 2013, and vested on January 2, 2014.
(4) In connection with his resignation in October 2016, (i) the entire unvested portion of Mr. McAndrew’s stock options granted on June
11, 2015 did not vest and became null and void, amounting to the termination of 750,000 unvested stock options, (ii) Mr. McAndrew
surrendered for cancellation a total of 250,000 vested stock options, and (iii) the remaining stock options were modified to expire on
June 11, 2019.
(5) Mr. Wurtele gifted these options to Birch Glen Investments Ltd. Mr. Wurtele and his wife together hold a 98% interest in the general
partner of Birch Glen Investments Ltd.
(6) These options were awarded to Mr. Wurtele in October 2013. 100,000 options vested in October 2013 and the remaining 200,000
options vested on January 2, 2014.
Compensation of Directors
We have no standard arrangement pursuant to which directors are compensated for any services they provide or for committee
participation or special assignments. We anticipate, however, implementing more standardized director compensation arrangements in the
near future.
Summary Director Compensation Table
Compensation to directors during the year ended December 31, 2016 was as follows:
Fees
Earned
Paid
Option Awards
Nonqualified
Deferred
All
in
Cash
($)
Stock
Awards
($) (A)
Option
Awards
($)
Compensation
Earnings
($)
Other
Compensation
($)
Total
($)
Non-Equity
Incentive
Plan
Compensation
($)
-
-
-
100,000 (1)
100,000 (1)
- 137,500 (2)
-
-
-
-
-
-
-
-
-
-
$ 100,000
$ 100,000
$ 137,500
Name
E. Scott Kimbrough
R. David Newton
Alexandre Zyngier
(A) Stock Value as applicable is determined using the Black Scholes Method.
(1) On November 3, 2016, this director was granted $72,728 worth of director compensation payable, at his election, in either (i) stock
options under the 2015 Stock Option Plan with an exercise price of $0.97 with the amount of options granted based upon the Black-
Scholes pricing model or (ii) shares of common stock at $0.97 per share, which stock issuance would be subject to shareholder
approval. The director elected to receive the stock options. The $27,272 balance of the Director Fees was accrued at December 31,
2016.
65
ITEM 11. EXECUTIVE COMPENSATION - continued
(2) In connection with the appointment of Mr. Zyngier on June 15, 2016, the Board of Directors approved paying Mr. Zyngier $100,000
as director compensation, payable, at the election of Mr. Zyngier, either (i) in shares of our common stock, based on a price $0.73 per
share, (ii) in cash when funds are deemed available, or (iii) in a combination thereof. It was provided that if Mr. Zyngier elected for us
to pay him in common stock, the issuance of such shares would be subject to stockholder approval. Mr. Zyngier elected to receive the
entire $100,000 in common stock (amounting to 136,986 shares). Stockholders approved the issuance on December 8, 2016.
Additionally, in October 2016, our Board of Directors formed a special committee called the “Litigation Committee,” appointed Mr.
Zyngier to that committee, and approved compensating Mr. Zyngier for his role with the Litigation Committee by paying him up to
$150,000 over four quarters, with the first quarterly payment of $37,500 being made on October 11, 2016 and $37,500 being payable
at the beginning of each three months thereafter that certain litigation is not settled or otherwise resolved, up to a maximum amount
of $150,000. Each payment was to either be paid in cash or common stock at our election. For a stock payment, the amount of shares
of common stock issued would be based on the closing price of our common stock on the day of the payment. On December 8, 2016,
stockholders approved giving the Company authority to make these payments in stock. Immediately after the December 8, 2016
meeting of stockholders, the Board of Directors held a meeting, at which Mr. Zyngier and the Board discussed placing vesting
restrictions on all the above shares described in this footnote, and accordingly such shares were not immediately issued. Subsequently
in January 2017, the Board and Mr. Zyngier agreed on what the vesting restrictions would be and we issued him the 136,986 shares in
connection with his directorship and 47,504 shares in lieu of the cash payment of $37,500 that was payable to Mr. Zyngier on October
11, 2016 in connection with his role on the Litigation Committee. As of the date of this report, none of these shares have vested.
Compensation Policies and Practices as they Relate to Risk Management
We attempt to make our compensation programs discretionary, balanced and focused on the long term. We believe goals and objectives of
our compensation programs reflect a balanced mix of quantitative and qualitative performance measures to avoid excessive weight on a
single performance measure. Our approach to compensation practices and policies applicable to employees and consultants is consistent
with that followed for its executives. Based on these factors, we believe that our compensation policies and practices do not create risks
that are reasonably likely to have a material adverse effect on us.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 21, 2017, concerning, except as indicated by the footnotes below, (i) each person
whom we know beneficially owns more than 5% of our common stock, (ii) each of our directors, (iii) each of our named executive officers,
and (iv) all of our directors and executive officers as a group. The table includes these persons’ beneficial ownership of common stock.
Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o Torchlight Energy Resources, Inc., 5700 W.
Plano Parkway, Suite 3600, Plano, Texas 75093. We have determined beneficial ownership in accordance with the rules of the SEC.
Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the
table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to
applicable community property laws. Applicable percentage ownership is based on 57,862,004 shares of common stock outstanding at
March 21, 2017. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that
person, we deemed outstanding shares of common stock subject to stock options or warrants held by that person that are currently
exercisable or exercisable within 60 days of March 21, 2017 and shares of common stock issuable upon conversion of other securities held
by that person that are currently convertible or convertible within 60 days of March 21, 2017. We did not deem these shares outstanding,
however, for the purpose of computing the percentage ownership of any other person. Unless otherwise noted, stock options and warrants
referenced in the footnotes below are currently fully vested and exercisable. Beneficial ownership representing less than 1% is denoted with
an asterisk (*).
66
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - continued
Shares Beneficially Owned
Name of beneficial owner
John A. Brda
President, CEO, Secretary and Director
Gregory McCabe
Director (Chairman of the Board)
Roger N. Wurtele
Chief Financial Officer
E. Scott Kimbrough
Director
R. David Newton
Director
Alexandre Zyngier
Director
Common Stock
% of Class
5,063,322 (1)
8.39
11,148,390 (2)
19.24
1,435,000 (3)
2.42
129,871 (4)
129,871 (5)
-
*
*
*
All directors and executive officers as a group (9 persons)
17,906,454
28.82
Robert Kenneth Dulin (6)
Willard G. McAndrew III
4,351,381 (6)
7.30
3,993,046 (7)
6.47
(1)
(2)
(3)
Includes 2,568,322 shares of common stock held by the John A. Brda Trust (the “Trust”). Mr. Brda is the settlor of the Trust and
reserves the right to revoke the Trust without the consent of another person. Further, he is the trustee of the Trust and exercises
investment control over the securities held by the Trust. Also includes stock options that are exercisable into 2,495,000 shares of
common stock, held individually by Mr. Brda.
Includes (a) 10,264,335 shares of common stock held individually Mr. McCabe; and (b) securities held by G Mc Exploration,
LLC (“GME”), including (i) 797,099 shares of common stock and (ii) 86,956 shares issuable upon exercise of warrants. Mr.
McCabe may be deemed to hold beneficial ownership of securities held by GME as a result of his ownership of 50% of the
outstanding membership interests of GME.
Includes 10,000 shares of common stock and stock options that are exercisable into 1,125,000 shares of common stock held
individually by Mr. Wurtele. Also includes stock options held by Birch Glen Investments Ltd. that are exercisable into 300,000
shares of common stock. Mr. Wurtele and his wife together hold a 98% interest in the general partner of Birch Glen Investments
Ltd., and Mr. Wurtele shares voting and investment authority over the shares held by Birch Glen Investments Ltd. Additionally,
the general partner and 1% owner of WMDM Family, Ltd. (see footnote “(7)” below) is a limited liability company which is
owned by a trust of which Mr. Wurtele is the trustee. Securities held by WMDM Family, Ltd. are not included, however, because
Mr. Wurtele is not deemed to have voting or investment authority over the shares held by WMDM Family, Ltd. Mr. Wurtele
disclaims beneficial ownership of shares held by WMDM Family, Ltd.
(4)
Includes stock options that are exercisable into 129,871 shares of common stock held individually by Mr. Kimbrough.
(5)
Includes stock options that are exercisable into 129,871 shares of common stock held individually by Mr. Newton.
67
(6)
Includes (a) securities held individually by Robert Kenneth Dulin, including (i) 27,000 shares of common stock and (ii) warrants
that are exercisable into 150,000 shares of common stock; (b) 243,360 shares of common stock held in trust for the benefit of
immediate family members of Mr. Dulin; (c) securities held by Sawtooth Properties, LLLP (“Sawtooth”), including (i) 892,258
shares of common stock and (ii) warrants that are exercisable into 234,745 shares of common stock; (d) securities held by Black
Hills Properties, LLLP (“Black Hills”), including (i) 612,099 shares of common stock, and (ii) warrants that are exercisable into
189,956 shares of common stock; (e) securities held by Pine River Ranch, LLC (“Pine River”), including (i) 801,939 shares of
common stock and (ii) warrants that are exercisable into 450,024 shares of common stock; and (f) securities held by Pandora
Energy, LP (“Pandora”), including warrants that are exercisable into 750,000 shares of common stock. Mr. Dulin is
trustee/custodian of each of the trusts and/or accounts referenced in “(b)” above and has voting and investment authority over the
shares held by them. Mr. Dulin is the Managing Partner of Sawtooth Properties, LLLP, the Managing Partner of Black Hills, the
Managing Member of Pine River, and the General Partner of Pandora, and he has voting and investment authority over the shares
held by each entity. Each holder of shares of Series A Preferred Stock is entitled to the number of votes equal to the number of
shares of common stock into which such shares of Series A Preferred could be converted. Presently, all issued and outstanding
shares of Series A Preferred are convertible at the election of the holder. Mr. Dulin’s address is 8449 Greenwood Drive, Niwot,
Colorado, 80503.
(7)
Includes 95,883 shares of common stock and stock options that are exercisable into 1,497,163 shares of common stock held
individually by Mr. McAndrew. Also includes securities held by WMDM Family, Ltd., including warrants that are exercisable
into 900,000 shares of common stock and stock options that are exercisable into 1,500,000 shares of common stock. The general
partner and 1% owner of WMDM Family, Ltd. is a limited liability company of which Mr. McAndrew is the manager. He has
voting and investment authority over the shares held by WMDM Family, Ltd.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 1, 2015, Sawtooth Properties, LLLP (“Sawtooth”), lent us $150,000 pursuant to a convertible promissory note due September 30,
2015. Robert Kenneth Dulin is the Managing Partner and majority owner of Sawtooth. The Sawtooth note bearing interest at the rate of
12% per annum, with all principal and interest due in one lump-sum. At Sawtooth’s election, outstanding principal on the note is
convertible into shares of our common stock at a conversion price of $0.25 per share. Accordingly, the principal on the note is convertible
into up to 600,000 shares of common stock. As part of the transaction, we also issued Sawtooth 150,000 three-year warrants to purchase
common stock at an exercise price of $0.50 per share. Sawtooth converted the note into common stock in September 2015.
In April 2015, Pandora Energy, LP ("Pandora"), an entity of which Mr. Dulin is the General Partner and holds a 50% pecuniary interest,
paid $500,000 towards a proposed purchase of a working interest in certain of our oil and gas properties. As part of the transaction, on May
4, 2015 we issued Pandora 250,000 three-year warrants with an exercise price of $0.50 per share. As part of the final terms and conditions
of Pandora’s purchase of the working interest, on July 1, 2015 we issued Pandora 500,000 three-year warrants with an exercise price of
$2.31 per share. Of these 500,000 warrants, 250,000 are exercisable on September 30, 2015 and the remaining 250,000 are exercisable on
December 31, 2015.
On August 6, 2015, Green Hill Minerals, LLC (“Green Hill Minerals”) loaned us $250,000, which was repaid with $4,521 in interest on
September 30, 2015. Green Hill Minerals is owned by sons of Gregory McCabe, our Chairman. In connection with the loan, we issued
Green Hill Minerals a three-year warrant to purchase 100,000 shares of common stock at an exercise price of $1.73 per share.
On February 15, 2016, we entered into a consulting service agreement with Green Hill Minerals, LLC. As compensation for the consulting
services provided under the agreement, we agreed to issue Green Hill Minerals 115,000 shares of common stock at signing, 115,000 shares
of common stock 90 days from signing, 115,000 shares of common stock 180 days from signing and 115,000 shares of common stock 270
days from signing. Also under the agreement, we issued Green Hill Minerals 1,700,000 four-year warrants to purchase shares of common
stock at an exercise price of $0.70 per share, vesting as follows: 425,000 warrants at signing, 425,000 warrants 90 days from signing,
425,000 warrants 180 days from signing and 425,000 warrants 270 days from signing.
On March 31, 2016, Mr. McCabe made a short term, non-interest bearing loan to us of $500,000. We repaid the loan in full on April 29,
2016.
Effective April 4, 2016, our subsidiary, Torchlight Energy Inc., acquired from McCabe Petroleum Corporation (“MPC”) a 66.66% working
interest in approximately 12,000 acres in the Midland Basin in exchange for 1,500,000 warrants to purchase our common stock at an
exercise price of $1.00 for five years, and a back-in after payout of a 25% working interest to MPC. Gregory McCabe is the sole owner of
MPC.
68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - continued
On January 30, 2017, we and our wholly-owned subsidiary, Torchlight Acquisition Corporation, a Texas corporation (“TAC”), entered into
and closed an Agreement and Plan of Reorganization and Plan of Merger with Line Drive Energy, LLC, a Texas limited liability company
(“Line Drive”), under which agreements TAC merged with and into Line Drive and the separate existence of TAC ceased, with Line Drive
being the surviving organization and becoming our wholly-owned subsidiary. Line Drive, which was wholly-owned by Gregory McCabe,
owned certain assets and securities, including approximately 40.66% of 12,000 gross acres in the Hazel Project and 521,739 warrants to
purchase our common stock (which warrants had been assigned by Mr. McCabe to Line Drive). Under the merger transaction, our shares of
common stock of TAC converted into a membership interest of Line Drive, the membership interest in Line Drive held by Mr. McCabe
immediately prior to the transaction ceased to exist, and we issued Mr. McCabe 3,301,739 restricted shares of common stock as
consideration therefor. Immediately after closing, the 521,739 warrants held by Line Drive were cancelled, which warrants had an exercise
price of $1.40 per share and an expiration date of June 9, 2020. A Certificate of Merger for the merger transaction was filed with the
Secretary of State of Texas on January 31, 2017.
Also on January 30, 2017, our wholly-owned subsidiary, Torchlight Energy, Inc., a Nevada corporation (“TEI”), entered into and closed a
Purchase and Sale Agreement with Wolfbone Investments, LLC, a Texas limited liability company (“Wolfbone”) which is wholly-owned
by Gregory McCabe. Under the agreement, TEI acquired certain of Wolfbone’s Hazel Project assets, including its interest in the Flying B
Ranch #1 well and the 40 acre unit surrounding the well, for consideration of $415,000, and additionally, Wolfbone caused to be cancelled
a total of 2,780,000 warrants to purchase our common stock, including 1,500,000 warrants held by McCabe Petroleum Corporation, an
entity owned by Mr. McCabe, and 1,280,000 warrants held by Green Hill Minerals, an entity owned by Mr. McCabe’s son, which warrant
cancellations were effected through certain Warrant Cancellation Agreements. The 1,500,000 warrants held by McCabe Petroleum
Corporation had an exercise price of $1.00 per share and an expiration date of April 4, 2021. The warrants held by Green Hill Minerals
included 100,000 warrants with an exercise price of $1.73 and an expiration date of September 30, 2018 and 1,180,000 warrants with an
exercise price of $0.70 and an expiration date of February 15, 2020.
After the above transactions, our total ownership in the Hazel Project increased to a 74% working interest across all 12,000 gross acres.
Director Independence
We currently have three independent directors on our Board, Alexandre Zyngier, E. Scott Kimbrough, and R. David Newton. The
definition of “independent” used herein is based on the independence standards of The NASDAQ Stock Market LLC. The Board
performed a review to determine the independence of Alexandre Zyngier, E. Scott Kimbrough, and R. David Newton and made a subjective
determination as to each of these directors that no transactions, relationships, or arrangements exist that, in the opinion of the Board, would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director of Torchlight Energy Resources,
Inc. In making these determinations, the Board reviewed information provided by these directors with regard to each Director’s business
and personal activities as they may relate to us and our management.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees paid or accrued by us for the audit and other services provided by our former auditor, Calvetti
Ferguson, during the years ended December 31, 2016 and 2015. Briggs & Veselka Co. were engaged in 2017 for our year end December
31, 2016 audit. No payments were made to Briggs & Veselka Co. before December 31, 2016.
Audit Fees(1)
Audit Related Fees(2)
Tax Fees(3)
All Other Fees
$
2016
73,968
26,280
22,035
450
2015
$ 101,758
-
39,680
-
Total Fees
$ 122,733
$ 141,438
(1)
(2)
(3)
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.
Audit Related Fees: This category consists of the aggregate fees billed for assurance and related services by our independent
consultant that are reasonably related to the performance of the audit or review of our financial statements and are not reported
under “Audit Fees.”
Tax Fees: This category consists of the aggregate fees billed for professional services rendered by the principal independent
consultant for tax compliance, tax advice, and tax planning.
69
ITEM 15. EXHIBITS
Exhibit
No.
Description
PART IV
2.1
3.1
3.2
3.3
3.4
4.1
4.2
4.3
Share Exchange Agreement dated November 23, 2010. (Incorporated by reference from Form 8-K filed with the SEC on
November 24, 2010.) *
Articles of Incorporation. (Incorporated by reference from Form S-1 filed with the SEC on May 2, 2008.) *
Certificate of Amendment to Articles of Incorporation dated December 10, 2014. (Incorporated by reference from Form 10-Q
filed with the SEC on May 15, 2015.) *
Certificate of Amendment to Articles of Incorporation dated September 15, 2015. (Incorporated by reference from Form 10-
Q filed with the SEC on November 12, 2015.) *
Amended and Restated Bylaws (Incorporated by reference from Form 8-K filed with the SEC on October 26, 2016.) *
Certificate of Designation for Series A Convertible Preferred Stock (Incorporated by reference from Form 8-K filed with the
SEC on June 9, 2015.) *
Certificate of Designation for Series B Convertible Preferred Stock (Incorporated by reference from Form 8-K filed with the
SEC on September 30, 2015.) *
Certificate of Designation for Series C Convertible Preferred Stock (Incorporated by reference from Form 8-K filed with the
SEC on July 11, 2016.) *
10.1
12% Series B Unsecured Convertible Promissory Note (form of) (Incorporated by reference from Form 10-Q filed with the
SEC on August 14, 2015.) *
10.2
Securities Purchase Agreement (for Series A Convertible Preferred Stock) (Incorporated by reference from Form 10-Q filed
with the SEC on August 14, 2015.) *
10.3
Employment Agreement (with John A. Brda) (Incorporated by reference from Form 8-K filed with the SEC on June 16,
2015.) *
10.4
Employment Agreement (with Roger Wurtele) (Incorporated by reference from Form 8-K filed with the SEC on June 16,
2015.) *
10.5
Loan documentation and warrants with Eunis L. Shockey (Incorporated by reference from Form 10-Q filed with the SEC on
August 14, 2015.) *
10.6
Farmout Agreement between Hudspeth Oil Corporation, Founders Oil & Gas, LLC and certain other parties (Incorporated by
reference from Form 8-K filed with the SEC on September 29, 2015) *
10.7
Securities Purchase Agreement and Amendment to Securities Purchase Agreement (for Series B Convertible Preferred Stock)
(Incorporated by reference from Form 10-Q filed with the SEC on November 12, 2015) *
10.8
Purchase and Sale Agreement with Husky Ventures, Inc. (Incorporated by reference from Form 8-K filed with the SEC on
November 12, 2015) *
10.10
Purchase Agreement with McCabe Petroleum Corporation for acquisition of “Hazel Project” (Incorporated by reference from
Form 10-Q filed with the SEC on August 15, 2016) *
10.11
Resignation and Settlement Agreement with Willard G. McAndrew (Incorporated by reference from Form 10-Q filed with
the SEC on November 10, 2016) *
10.12
Agreement and Plan of Reorganization and Plan of Merger with Line Drive Energy, LLC
70
ITEM 15. EXHIBITS - continued
10.13
Purchase and Sale Agreement with Wolfbone Investments, LLC
14.1
Code of Ethics (Incorporated by reference from Form S-1 filed with the SEC on May 2, 2008.) *
16.01
Letter from Calvetti Ferguson to the Securities and Exchange Commission (Incorporated by reference from Form 8-K filed
21.1
23.1
23.2
23.3
31.1
with the SEC on December 19, 2016) *
Subsidiaries
Consent of Briggs & Veselka Co.
Consent of Calvetti Fergusson
Consent of PeTech Enterprises, Inc.
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 and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and Section 1350 of 18 U.S.C. 63.
99.1
Report of PeTech Enterprises, Inc.
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definitions Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
* Incorporated by reference from our previous filings with the SEC
71
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Torchlight Energy Resources, Inc.
/s/ John A. Brda
By: John A. Brda
Chief Executive Officer
Date: March 31, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
Signature
/s/ John A. Brda
John A. Brda
/s/ Gregory McCabe
Gregory McCabe
/s/ Roger N. Wurtele
Roger N. Wurtele
/s/ E. Scott Kimbrough
E. Scott Kimbrough
/s/ R. David Newton
R. David Newton
/s/ Alexandre Zyngier
Alexandre Zyngier
Title
Director, Chief Executive Officer, President and
Secretary
Date
March 31, 2017
Director (Chairman of the Board)
March 31, 2017
Chief Financial Officer and Principal Accounting
Officer
March 31, 2017
Director
Director
Director
March 31, 2017
March 31, 2017
March 31, 2017
72
AGREEMENT AND
PLAN OF REORGANIZATION
EXHIBIT 10.12
This Agreement and Plan of Reorganization (the “Agreement”) is made and entered into effective this 30th day of January, 2017
(the “Effective Date”), by and among Line Drive Energy, LLC, a Texas limited liability company (the “Company”), Greg McCabe, Sr., an
individual (the “Seller”), Torchlight Energy Resources, Inc., a Nevada corporation (the “Purchaser”), and Torchlight Acquisition
Corporation, a Texas corporation (the “Merger Sub”). The Company, the Seller, the Purchaser, and the Merger Sub are sometimes
hereinafter collectively referred to as the “Parties.”
WHEREAS, the respective Boards of Directors of Purchaser and Merger Sub and the Seller, as both the Manager and sole
Member of the Company, have each determined that the merger of the Merger Sub with and into the Company (the “Merger”) upon the
terms and subject to the conditions set forth in this Agreement is advisable, fair to and in the best interests of the Company and Merger Sub,
as the “Parties to the Merger” and their respective owners and have approved the Merger pursuant to the Plan of Merger attached hereto
as Exhibit A (the “Plan of Merger”);
NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements and the respective representations
and warranties herein contained, and on the terms and subject to the conditions herein set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to the terms and conditions of this Agreement
and the Plan of Merger, Merger Sub shall be merged with and into the Company and the separate existence of Merger Sub shall thereupon
cease, in accordance with the applicable provisions of the Texas Business Organizations Code (the “ Act”). the Company shall be the
surviving organization in the Merger (sometimes referred to herein as the “Surviving Organization”) and will continue to be governed by
the laws of the State of Texas, and the existence of the Company will continue. The Merger will have the effects specified by the Act.
1 . 2 Closing and Effective Time of the Merger. The closing (the “Closing”) will take place at the Purchaser’s offices or at
such other place as agreed upon among the Parties on the later of (a) the Effective Date or (b) as soon as practicable following fulfillment
or waiver of the conditions specified in Article VII of this Agreement (the “ Closing Date”). In addition to the other actions contemplated
hereunder, the Parties to the Merger will cause a Certificate of Merger (the “Certificate of Merger”) to be filed with the office of the
Secretary of State of the State of Texas as provided in Section 10.151 of the Act, and will cause this Plan of Merger to be on file at the
principal place of business of the Company. Subject to and in accordance with the laws of the State of Texas, the Merger will become
effective upon the filing of the Certificate of Merger with the office of the Secretary of State of the State of Texas, or such later time or date
as may be specified in the Certificate of Merger (the “Effective Time”).
1
ARTICLE II
THE SURVIVING ORGANIZATION
2 . 1 Certificate of Formation. The Certificate of Formation of the Company, as in effect immediately prior to the Effective
Time shall be the Certificate of Formation of the Surviving Organization until the same shall be altered or amended.
2 . 2 . Company Agreement. The Company Agreement of the Company, as in effect immediately prior to the Effective Time
shall be the Company Agreement of the Surviving Organization until the same shall be altered or amended.
2 . 3 . Manager. The Manager of the Company, as the Surviving Organization, immediately after the Effective Time shall be
John Brda.
ARTICLE III
CONVERSION OF SECURITIES
3.1 Conversion of Capital Stock of Merger Sub. As of the Effective Time, by virtue of the Merger and without any action on
the part of Purchaser, Merger Sub, the Company or the respective shareholders of members thereof, each share of the capital stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall be automatically converted into and become one (1)
validly issued membership interest in the Surviving Organization, and such membership interest in the Surviving Organization shall
constitute all of the issued and outstanding membership interests in the Surviving Organization immediately following the Effective Time.
3.2 Conversion of Membership Interest in the Company.
(
a
) Aggregate Merger Consideration. The aggregate merger consideration payable for the issued and outstanding
membership interest in the Company (the “Merger Consideration”) shall be 3,301,739 restricted shares of common stock, par value
$0.001 per share, of Purchaser (the “Purchaser Common Stock”). The issuance of the Purchaser Common Stock will not be registered.
( b ) Cancellation of the Company Membership Interest . As of the Effective Time, by virtue of the Merger and without any
action on the part of Purchaser, Merger Sub, the Company or the respective shareholders of members thereof, the membership interest in
the Company issued and outstanding immediately prior to the Effective Time (the “Company Membership Interest”) shall cease to exist;
provided, however, that the holder of the Company Membership Interest shall be entitled to the Merger Consideration in the form of
Purchaser Common Stock.
( c ) Payment of Merger Consideration. At the Closing, Purchaser will deliver to Seller stock certificates evidencing the
Purchaser Common Stock.
2
3 . 3 Tax Consequences . The Parties intend for the Merger to constitute a reorganization within the meaning of Sections
368(a)(1)(A) and (a)(2)(E) of the Internal Revenue Code of 1986, as amended (the “Code”). The Parties adopt this Agreement as a plan of
reorganization with the meaning of Treasury Regulations Section 1.368-2(g). “Treasury Regulations” shall mean the temporary and final
Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding
provisions of succeeding Treasury Regulations). The Parties agree to satisfy the tax return reporting requirements of Treasury Regulations
§1.368-3.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE SELLER
The Company and the Seller, jointly and severally, hereby represent and warrant to Purchaser as follows:
Section 4.1. Organization, Good Standing and Qualification of the Company.
(i) The Company is a Texas limited liability company, duly organized and validly existing under the laws of the state of
Texas, (ii) has all requisite power and authority to carry on its business, and (iii) is duly qualified to transact business and is in good
standing in all jurisdictions where its ownership, lease or operation of property or the conduct of its business requires such qualification,
except where the failure to do so would not have a material adverse effect to the Company.
(ii) The Company Membership Interest is the sole ownership interest in the Company. There is no other class of equity
interest authorized or issued by the Company. The Company Membership Interest is owned beneficially and of record by the Seller free
and clear of any liens, claims, equities, charges, options, rights of first refusal or encumbrances. The Company has no obligation to
repurchase, reacquire, or redeem any of its outstanding equity interests. There are no outstanding securities convertible into or evidencing
the right to purchase or subscribe for any equity interests of the Company, there are no outstanding or authorized options, warrants, calls,
subscriptions, rights, commitments or any other agreements of any character obligating the Company to issue any securities convertible into
or evidencing the right to purchase or subscribe for any security of the Company, and there are no agreements or understandings with
respect to the voting, sale, transfer or registration of any equity interests of the Company.
Section 4.2 Subsidiaries. The Company does not own any subsidiaries.
Section 4.3 Ownership of the Assets. Subject to that certain Participation Agreement set forth in Schedule 4.16, at Closing,
the Company will own all of the assets listed in Schedule 4.3 (“Assets”).
Section 4.4 Ownership of the Company Membership Interest . The Seller has the unrestricted right and power to transfer,
convey and deliver full ownership of the Company Membership Interest without the consent or agreement of any other person and without
any designation, declaration or filing with any governmental authority. Upon the transfer of the Company Membership Interest to Purchaser
as contemplated herein, Purchaser will receive good and valid title thereto, free and clear of any liens, claims, equities, charges, options,
rights of first refusal, encumbrances or other restrictions.
3
Section 4.5 Authorization.
(i) All action on the part of the Company necessary for the authorization, execution, delivery and performance of this
Agreement and all documents related to consummate the transactions contemplated herein have been taken by the Company. The
Company has the requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby. This Agreement, when duly executed and delivered in accordance with its terms, will
constitute a valid and binding obligation of the Company, enforceable against each in accordance with its terms, except as may be limited
by bankruptcy, insolvency, reorganization, and other similar laws of general application relating to or affecting creditors’ rights and to
general equitable principles.
(ii) The Seller represents that he is a person of full age of majority, with full power, capacity, and authority to enter into this
Agreement and perform the obligations contemplated hereby by and for himself. All action on the part of the Seller necessary for the
authorization, execution, delivery and performance of this Agreement by him has been taken, or will be taken by them prior to the Closing
Date. This Agreement, when duly executed and delivered in accordance with its terms, will constitute legal, valid and binding obligation of
the Seller enforceable against him in accordance with the terms, except as may be limited by bankruptcy, insolvency, reorganization and
other similar laws of general application affecting creditors’ rights generally or by general equitable principles.
Section 4.6 No Breaches or Defaults. The execution, delivery, and performance of this Agreement by the Company and
the Seller does not: (i) conflict with, violate, or constitute a breach of or a default under any other outstanding agreements or the constituent
documents of the Company, (ii) result in the creation or imposition of any lien, claim, or encumbrance of any kind upon the Company or
the Assets or (iii) require any authorization, consent, approval, exemption, or other action by or filing with any third party or Governmental
Authority (as defined below) under any provision of: (a) any applicable Legal Requirement (as defined below), or (b) any credit or loan
agreement, promissory note, or any other agreement or instrument to which the Seller or the Company is a party or by which the Company
or the Assets may be bound or affected. For purposes of this Agreement, “ Governmental Authority ” means any foreign governmental
authority, the United States of America, any state of the United States, and any political subdivision of any of the foregoing, and any
agency, department, commission, board, bureau, court, or similar entity, having jurisdiction over the parties hereto or their respective assets
or properties. For purposes of this Agreement, “Legal Requirement” means any law, statute, injunction, decree, order or judgment (or
interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority.
Section
4.7 Consents. No permit, consent, approval or authorization of, or designation, declaration or filing with, any
Governmental Authority or any other person or entity is required on the part of the Seller or the Company in connection with the execution
and delivery by the Seller or the Company of this Agreement or the consummation and performance of the transactions contemplated
hereby.
4
Section
4.8 Pending Claims. There is no claim, suit, arbitration, investigation, action, litigation or other proceeding,
whether judicial, administrative or otherwise, now pending or, to the Seller’s or the Company’s knowledge, contemplated or threatened
against the Seller, the Company or the Assets before any court, arbitration, administrative or regulatory body or any governmental agency
which may result in any judgment, order, award, decree, liability or other determination which will or could reasonably be expected to have
any material effect upon the Seller, the Company, or the Assets, and there is no basis known to the Seller or the Company for any such
action. No litigation is pending, or, to the Seller’s or the Company’s knowledge, threatened against the Seller or the Company, or the
Assets which seeks to restrain or enjoin the execution and delivery of this Agreement or any of the documents referred to herein or the
consummation of any of the transactions contemplated thereby or hereby. Neither the Seller nor the Company is subject to any judicial
injunction or mandate or any quasi-judicial or administrative order or restriction directed to or against them or which would affect the
Company or the Assets.
Section
4.9 Taxes. Tthe Company has timely and accurately prepared and filed all federal, state, foreign and local tax
returns and reports required to be filed prior to such dates and has timely paid all taxes shown on such returns as owed for the periods of
such returns, including all sales taxes and withholding or other payroll related taxes shown on such returns. The Company is not delinquent
in the payment of any tax or governmental charge of any nature. Neither the Company nor the Seller have any knowledge of any liability
for any tax to be imposed by any taxing authorities upon the Company as of the Effective Date and as of the Closing that is not adequately
provided for. No assessments or notices of deficiency or other communications have been received by the Seller or the Company with
respect to any tax return which has not been paid, discharged or fully reserved against and no amendments or applications for refund have
been filed or are planned with respect to any such return. None of the federal, state, foreign and local tax returns of the Company have been
audited by any taxing authority. Neither the Seller nor the Company have any knowledge of any additional assessments, adjustments or
contingent tax liability (whether federal or state) of any nature whatsoever, whether pending or threatened against the Company for any
period, nor of any basis for any such assessment, adjustment or contingency. There are no agreements between the Company and any
taxing authority, including, without limitation, the Internal Revenue Service, waiving or extending any statute of limitations with respect to
any tax return.
Section 4.10 Acquisition of Stock for Investment. The Seller understands that the issuance of the Purchaser Common Stock
(as referenced in Section 3.2 herein) will not have been registered under the Securities Act of 1933, as amended (the “ Securities Act”), or
any state securities acts, and accordingly, are restricted securities, and the Seller represents and warrants to the Purchaser that the present
intention of the Seller is to receive and hold the Purchaser Common Stock for investment only and not with a view to the distribution or
resale thereof. Additionally, the Seller understands that any sale of any of the issued Purchaser Common Stock will require, under current
law, either (a) the registration of the such Purchaser Common Stock under the Securities Act and applicable state securities acts; (b)
compliance with Rule 144 of the Securities Act; or (c) the availability of an exemption from the registration requirements of the Securities
Act and applicable state securities acts.
5
To assist in implementing the above provisions, the Seller hereby consents to the placement of the legend, or a substantially
similar legend, set forth below, on all certificates representing ownership of the Purchaser Common Stock acquired hereby until the
Purchaser Common Stock have been sold, transferred, or otherwise disposed of, pursuant to the requirements hereof. The legend shall read
substantially as follows:
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES ACTS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT, ARE RESTRICTED AS TO TRANSFERABILITY, AND MAY NOT BE
SOLD, HYPOTHECATED, OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE WITH THE
REGISTRATION AND QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE
SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.”
Section 4.11 Access to Information. The Seller hereby confirms and represents that he (a) has access to and has reviewed all
current information about the Purchaser filed with the Securities and Exchange Commission (the “SEC”) (which filings can be accessed by
going to www.sec.gov/edgar/searchedgar/companysearch.html, typing “Torchlight Energy Resources” in the “Company name” field, and
clicking the “Search” button) (collectively, the “SEC Reports”); (b) has been afforded the opportunity to ask questions of and receive
answers from representatives of the Purchaser concerning the business and financial condition, properties, operations and prospects of the
Purchaser and all such questions have been answered to the full satisfaction of the Seller; (c) has such knowledge and experience in
financial and business matters so as to be capable of evaluating the relative merits and risks of the transactions contemplated hereby; (d)
has had an opportunity to engage and is represented by an attorney of his choice; (e) has had an opportunity to negotiate the terms and
conditions of this Agreement; (f) has been given adequate time to evaluate the merits and risks of the transactions contemplated hereby;
and (g) has been provided with and given an opportunity to review all current information about the Purchaser.
Section 4.12 Purchase for Investment – Accredited Investor. The Seller is acquiring the Purchaser Common Stock for his
own account, for investment purposes only and not with view to any public resale or other distribution thereof. The Seller represents and
warrants that it is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D of the Securities Act. The Seller and/or his
representatives have received, or have had access to, and have had sufficient opportunity to review, all books, records, financial
information and other information which each of them consider necessary or advisable to enable them to make a decision concerning its
acquisition of the Purchaser Common Stock, and that each of them possesses such knowledge and experience in financial and business
matters that each is capable of evaluating the merits and risks of his investment hereunder.
Section 4.13 Labor Matters. The Company is not a party or otherwise subject to any collective bargaining agreement with
any labor union or association. There are no discussions, negotiations, demands or proposals that are pending or have been conducted or
made with or by any labor union or association, and there are not pending or threatened against the Company any labor disputes, strikes or
work stoppages. To the Company’s and the Seller’s knowledge, the Company is in compliance with all federal and state laws respecting
employment and employment practices, terms and conditions of employment and wages and hours, and, to their knowledge, is not engaged
in any unfair labor practices. The Company is not a party to any written or oral contract, agreement or understanding for the employment of
any officer, director or employee of the Company.
6
Section 4.14 Compliance with Laws. To Sellers knowledge, the Company is in compliance with all statutes, orders, rules,
ordinances and regulations applicable to it or to the ownership of its assets or the operation of its businesses. Neither the Seller nor the
Company has any basis to expect, nor have they received, any order or notice of any such violation or claim of violation of any such statute,
order, rule, ordinance or regulation by the Company. The Company owns, holds, possesses or lawfully uses in the operation of its business
all permits and licenses which are in any manner necessary or required for it to conduct its operation and business as now being conducted.
Section 4.15 No Conflicts. The execution and delivery of this Agreement by the Company does not, and the performance
and consummation of the transactions contemplated hereby by the Company, will not (i) conflict with the articles of organization or
regulations of the Company as appropriate; (ii) conflict with or result in a breach or violation of, or default under, or give rise to any right
of acceleration or termination of, any of the terms, conditions or provisions of any note, bond, lease, license, agreement or other instrument
or obligation to which the Company is a party or by which the Company’s assets or properties are bound; or (iii) result in the creation of
any encumbrance on any of the assets or properties of the Company.
Section
4.16 Title to Properties; Encumbrances. At Closing, to Seller’s knowledge, the Assets are free and clear of all
mortgages, claims, liens, security interests, charges, leases, encumbrances and other restrictions of any kind and nature, except (i) as
disclosed in Schedule 4.16, (ii) statutory liens not yet delinquent, and (iii) such liens consisting of zoning or planning restrictions,
imperfections of title, easements and encumbrances, if any, as do not materially detract from the value or materially interfere with the
present use of the property or assets subject thereto or affected thereby.
Section 4.17 No Liabilities. As of the Closing Date, the Company does not and shall not have any obligation or liability
(contingent or otherwise) or unpaid bill to any third party, except as set forth herein in Schedule 4.17.
Section
4.18 Contracts and Leases. Except as shown on Exhibit 4.18, the Company does not (i) have any leases of
personal property relating to the Assets, whether as lessor or lessee; (ii) have any contractual or other obligations relating to the Assets,
whether written or oral; and (iii) have given any power of attorney to any person or organization for any purpose relating to the Assets. The
Company shall provide to Purchaser prior to the Closing Date each and every contract, lease or other document relating to the Assets to
which it is subject or is a party or a beneficiary. To the Company’s and the Seller’s knowledge, such contracts, leases or other documents
are valid and in full force and effect according to their terms and constitute legal, valid and binding obligations of the Company and the
other respective parties thereto and are enforceable in accordance with their terms. The Seller and the Company have no knowledge of any
default or breach under such contracts, leases or other documents or of any pending or threatened claims under any such contracts, leases or
other documents. Neither the execution of this Agreement, nor the consummation of all or any of the transactions contemplated under this
Agreement, will constitute a breach or default under any such contracts, leases or other documents which would have a material adverse
effect on the financial condition of the Company or the Assets after the Closing.
7
Section 4.19 No Pending Transactions. Except for the transactions contemplated by this Agreement, the Company is not a
party to or bound by or the subject of any agreement, undertaking, commitment or discussions or negotiations with any person that could
result in: (i) the sale, merger, consolidation or recapitalization of the Company; (ii) the sale of any of the Assets; (iii) the sale of any
outstanding equity interest of the Company; (iv) the acquisition by the Company of any operating business or the capital stock of any other
person or entity; (v) the borrowing of money; (vi) any agreement with any of the respective officers, managers or affiliates of the
Company; or (vii) any expenditures or the performance by the Company extending for a period more than one year from the date hereof.
Section 4.20 Material Agreements; Action. Except for the transactions contemplated by this Agreement and as set forth in
Schedule 4.16, there are no contracts, agreements, commitments, understandings or proposed transactions, whether written or oral, to which
the Company is a party or by which it is bound that involve or relate to (i) any of the respective officers, directors, stockholder or partners
of the Company or (ii) covenants of the Seller or the Company not to compete in any line of business or with any person in any
geographical area or covenants of any other person not to compete with the Company in any line of business or in any geographical area.
Section 4.21 Insurance Policies. Copies of all insurance policies maintained by the Company have been or will be
delivered or made available to Purchaser. The policies of insurance held by the Company are in such amounts, and insure against such
losses and risks, as the Company reasonably deems appropriate for their property and business operations. All such insurance policies are
in full force and effect and all premiums due thereon have been paid and will be paid through the Closing.
Section
4.22 No Default. The Company is not in default under any term or condition of any instrument evidencing,
creating or securing any indebtedness of the Company, and there has been no default in any material obligation to be performed by the
Company under any other contract, lease, agreement, commitment or undertaking to which the Company is a party or by which it or its
assets or properties are bound, nor has the Company waived any material right under any such contract, lease, agreement, commitment or
undertaking.
Section
4.23 Books and Records. The books of account, minute books, stock record books and other records of the
Company, all of which have been made available to Purchaser, are accurate and complete and have been maintained in accordance with
sound business practices.
Section
4.24 Environmental. To Seller’s knowledge, the Company is not in violation of any state, local or federal
statutes, laws, regulations, ordinances, or rules pertaining to health or the environment requirements affecting the Assets. Neither the
Company nor the Seller have received any citation, directive, letter or other communication, written or oral, or any notice of any
proceeding, claim or lawsuit relating to any environmental issue arising out of the ownership of any of the Assets, and there is no basis
known to the Company or the Seller for any such action.
8
Section
4.25 Disclosure. No representation or warranty of the Seller or the Company contained in this Agreement
(including the exhibits hereto) contains any untrue statement or omits to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which they were made, not misleading.
Section 4.26 Employee Benefit Plans. The Company is not a party to any employee-benefit plan.
Section
4.27 Brokerage Commission. No broker or finder has acted on behalf of the Seller or the Company in
connection with this Agreement or the transactions contemplated hereby and no person is entitled to any brokerage or finder’s fee or
compensation in respect thereto based in any way on agreements, arrangements or understandings made by or on behalf of the Seller or the
Company.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND MERGER SUB
The Purchaser and Merger Sub hereby represent and warrant to the Company and the Seller as follows:
Section 5.1 Organization, Good Standing and Qualification.
(a) The Purchaser (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of
Nevada, (ii) has all requisite power and authority to carry on its business, and (iii) is duly qualified to transact business and is in good
standing in all jurisdictions where its ownership, lease or operation of property or the conduct of its business requires such qualification,
except where the failure to do so would not have a material adverse effect to the Purchaser.
(b) The Merger Sub (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of
Texas, (ii) has all requisite power and authority to carry on its business, and (iii) is duly qualified to transact business and is in good
standing in all jurisdictions where its ownership, lease or operation of property or the conduct of its business requires such qualification,
except where the failure to do so would not have a material adverse effect to the Merger Sub.
Section 5.2 Authorization. All action on the part of the Purchaser and the Merger Sub necessary for the authorization,
execution, delivery and performance of this Agreement and all documents related to consummate the transactions contemplated herein has
been taken by the respective corporation. Each of the Purchaser and the Merger Sub has the requisite power and authority to execute and
deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. This Agreement,
when duly executed and delivered in accordance with its terms, will constitute a valid and binding obligation of each of the Purchaser and
the Merger Sub, enforceable against such corporation in accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization, and other similar laws of general application relating to or affecting creditors’ rights and to general equitable principles.
9
Section 5.3 No Breaches or Defaults. The execution, delivery, and performance of this Agreement by each of Purchaser
and Merger Sub does not: (i) conflict with, violate, or constitute a breach of or a default under or (ii) require any authorization, consent,
approval, exemption, or other action by or filing with any third party or Governmental Authority under any provision of: (a) any applicable
Legal Requirement, or (b) any credit or loan agreement, promissory note, or any other agreement or instrument to which any of Purchaser
and Merger Sub is a party.
Section
5.4 Consents. No permit, consent, approval or authorization of, or designation, declaration or filing with, any
Governmental Authority or any other person or entity is required on the part of any of Purchaser and Merger Sub in connection with the
execution and delivery by Purchaser and Merger Sub of this Agreement or the consummation and performance of the transactions
contemplated hereby.
Section
5.5 Disclosure. No representation or warranty of Purchaser and Merger Sub contained in this Agreement
(including the exhibits hereto) contains any untrue statement or omits to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances under which they were made, not misleading.
Section
5.6 Brokerage Commission. No broker or finder has acted on behalf of any of Purchaser and Merger Sub in
connection with this Agreement or the transactions contemplated hereby and no person is entitled to any brokerage or finder’s fee or
compensation in respect thereto based in any way on agreements, arrangements or understandings made by or on behalf of any of Purchaser
and Merger Sub.
ARTICLE VI
[INTENTIONALLY OMITTED]
ARTICLE VII
CONDITIONS TO CLOSING OF
THE SELLER AND THE COMPANY
Each obligation of the Seller and the Company to be performed on the Closing Date shall be subject to the satisfaction of each of
the conditions stated in this Article VII, except to the extent that such satisfaction is waived by the Seller and the Company in writing:
Section 7.1 Payment of Merger Consideration. Purchaser shall have tendered the Merger Consideration as referenced in
Section 3.2 hereof to the Company concurrently with the Closing, in the form of certificates evidencing the Purchaser Common Stock duly
endorsed to Seller or accompanied by duly executed stock powers in form and substance satisfactory to the Seller.
Section 7.2 Corporate Resolutions. Purchaser and Merger Sub shall provide a corporate resolution of its respective Board of
Directors which approves the transactions contemplated herein and authorizes the execution, delivery and performance of this Agreement
and the documents referred to herein to which it is or is to be a party dated as of the Closing Date.
10
Section 7.3 Absence of Proceedings. No action, suit or proceeding by or before any court or any governmental or regulatory
authority shall have been commenced and no investigation by any governmental or regulatory authority shall have been commenced
seeking to restrain, prevent or challenge the transactions contemplated hereby or seeking judgments against Purchaser.
ARTICLE VIII
CONDITIONS TO CLOSING OF
THE PURCHASER AND MERGER SUB
Each obligation of Purchaser and Merger Sub to be performed on the Closing Date will be subject to the satisfaction of each of the
conditions stated in this Article VIII, except to the extent that such satisfaction is waived by Purchaser in writing.
Section 8.1 Delivery of Purchaser Warrants. The Company shall have delivered certificates evidencing the Warrants to
acquire shares of common stock of the Purchaser held by the Company and listed on Schedule 4.3 duly endorsed to the Company.
Section 8.2 Company Resolutions. The Company shall provide to Purchaser resolutions of its sole Member and Manager,
the Seller, which approves all of the transactions contemplated herein and authorizes the execution, delivery and performance of this
Agreement and the documents referred to herein to which it is or is to be a party dated as of the Closing Date.
Section
8.3 No Assumption of Liabilities . The Purchaser will not assume any liabilities of the Company as of the
Closing Date.
Section
8.4 Absence of Proceedings. No action, suit or proceeding by or before any court or any governmental or
regulatory authority will have been commenced and no investigation by any governmental or regulatory authority will have been
commenced seeking to restrain, prevent or challenge the transactions contemplated hereby or seeking judgments against the Company or
any of the Assets.
ARTICLE IX
INDEMNIFICATION
Section
9.1 Indemnification from the Seller. Seller hereby agrees to and shall indemnify, defend (with legal counsel
reasonably acceptable to Purchaser), and hold Purchaser, its officers, directors, shareholders, employees, affiliates, parent, agents, legal
counsel, successors and assigns (collectively, the “Purchaser Group”) harmless at all times after the date of this Agreement, from and
against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs, expenses, penalties or injury
(including reasonable attorneys’ fees and costs of any suit related thereto) suffered or incurred by any of the Purchaser Group arising from:
(a) any misrepresentation by, or breach of any covenant or warranty of the Seller or the Company contained in this Agreement, or any
exhibit, certificate, or other instrument furnished or to be furnished by the Seller or the Company hereunder; (b) any nonfulfillment of any
agreement on the part of the Seller under this Agreement; or (c) any suit, action, proceeding, claim or investigation against Purchaser Group
which arises from or which is based upon or pertaining to the Seller’s or the Company’s conduct or the operation or liabilities of the
business of the Company or the Assets prior to the Closing Date.
11
Section
9.2 Indemnification from Purchaser. Purchaser agrees to and shall indemnify, defend (with legal counsel
reasonably acceptable to the Seller) and hold the Seller and its officers, directors, affiliates, agents, legal counsel, successors and assigns
(collectively, the “Seller Group”) harmless at all times after the date of the Agreement from and against any and all actions, suits, claims,
demands, debts, liabilities, obligations, losses, damages, costs, expenses, penalties or injury (including reasonable attorney’s fees and costs
of any suit related thereto) suffered or incurred by any of Seller Group, arising from (a) any misrepresentation by, or breach of any covenant
or warranty of Purchaser contained in this Agreement or any exhibit, certificate, or other agreement or instrument furnished or to be
furnished by Purchaser hereunder or; (b) any nonfulfillment of any agreement on the part of Purchaser under this Agreement.;
Section 9.3 Defense of Claims. If any lawsuit enforcement action or any attempt to collect on an alleged liability is filed
against any party entitled to the benefit of indemnity hereunder, written notice thereof shall be given to the indemnifying party within ten
(10) business days after receipt of notice or other date by which action must be taken; provided that the failure of any indemnified party to
give timely notice shall not affect rights to indemnification hereunder except to the extent that the indemnifying party demonstrates damage
caused by such failure. After such notice, the indemnifying party shall be entitled, if it so elects, to take control of the defense and
investigation of such lawsuit or action and to employ and engage attorneys of its own choice to handle and defend the same, at the
indemnifying party's cost, risk and expense; and such indemnified party shall cooperate in all reasonable respects, at its cost, risk and
expense, with the indemnifying party and such attorneys in the investigation, trial and defense of such lawsuit or action and any appeal
arising therefrom; provided, however, that the indemnified party may, at its own cost, participate in such investigation, trial and defense of
such lawsuit or action and any appeal arising therefrom. The indemnifying party shall not, without the prior written consent of the
indemnified party, effect any settlement of any proceeding in respect of which any indemnified party is a party and indemnity has been
sought hereunder unless such settlement of a claim, investigation, suit, or other proceeding only involves a remedy for the payment of
money by the indemnifying party and includes an unconditional release of such indemnified party from all liability on claims that are the
subject matter of such proceeding.
Section 9.4 Default of Indemnification Obligation. If an entity or individual having an indemnification, defense and hold
harmless obligation, as above provided, shall fail to assume such obligation, then the party or entities or both, as the case may be, to whom
such indemnification, defense and hold harmless obligation is due shall have the right, but not the obligation, to assume and maintain such
defense (including reasonable counsel fees and costs of any suit related thereto) and to make any settlement or pay any judgment or verdict
as the individual or entities deem necessary or appropriate in such individuals or entities absolute sole discretion and to charge the cost of
any such settlement, payment, expense and costs, including reasonable attorneys’ fees, to the entity or individual that had the obligation to
provide such indemnification, defense and hold harmless obligation and same shall constitute an additional obligation of the entity or of the
individual or both, as the case may be.
12
Section
9.5 Survival of Representations and Warranties . The respective representations, warranties and indemnities
given by the parties to each other pursuant to this Agreement shall survive the Closing for a period ending twelve (12) months from the
Closing Date (“Survival Date”). Notwithstanding anything to the contrary contained herein, no claim for indemnification may be made
against the party required to indemnify (the “Indemnitor”) under this Agreement unless the party entitled to indemnification (the
“Indemnitee”) shall have given the Indemnitor written notice of such claim as provided herein on or before the Survival Date. Any claim
for which notice has been given prior to the expiration of the Survival Date shall not be barred hereunder.
ARTICLE X
MISCELLANEOUS
Section
10.1 Amendment; Waiver. Neither this Agreement nor any provision hereof may be amended, modified or
supplemented unless in writing, executed by all the parties hereto. Except as otherwise expressly provided herein, no waiver with respect to
this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought. Except as otherwise
expressly provided herein, no failure to exercise, delay in exercising, or single or partial exercise of any right, power or remedy by any
party, and no course of dealing between or among any of the parties, shall constitute a waiver of, or shall preclude any other or further
exercise of, any right, power or remedy.
Section 10.2 Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if
in writing and delivered in Person or sent by registered or certified mail (return receipt requested) or nationally recognized overnight
delivery service, postage pre-paid, addressed as follows, or to such other address has such party may notify to the other parties in writing:
(a) If to the Seller
or the Company:
with a copy to:
(b) If to the Purchaser
or Merger Sub:
with a copy to:
Greg McCabe
500 W. Texas, Suite 890
Midland, Texas 79701
Michael J. Dawson
Dawson Parrish, PC
309 W. 7th St, Ste. 915
Fort Worth, Texas 76102
Torchlight Energy Resources, Inc.
Attn: John Brda, President
5700 W. Plano Parkway, Suite 3600
Plano, Texas 75093
Robert D. Axelrod
Axelrod, Smith & Kirshbaum
5300 Memorial Drive, Suite 1000
Houston, Texas 77007
13
A notice or communication will be effective (i) if delivered in Person or by overnight courier, on the business day it is delivered
and (ii) if sent by registered or certified mail, three (3) business days after dispatch.
Section 10.3 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable
law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this
Agreement.
Section
10.4 Assignment; Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall
inure to the benefit of, and be binding upon, the successors and permitted assigns of the parties hereto. No party hereto may assign its rights
or delegate its obligations under this Agreement without the prior written consent of the other parties hereto, which consent will not be
unreasonably withheld.
Section
10.5 Public Announcements . The parties hereto agree that prior to making any public announcement or
statement with respect to the transactions contemplated by this Agreement, the party desiring to make such public announcement or
statement shall consult with the other parties hereto and exercise their best efforts to agree upon the text of a public announcement or
statement to be made by the party desiring to make such public announcement; provided, however, that if any party hereto is required by
law to make such public announcement or statement, then such announcement or statement may be made without the approval of the other
parties. Provided, however, that this section shall not apply post-Closing to Purchaser or Company.
Section 10.6 Entire Agreement. This Agreement, the Plan of Merger and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and thereof and
supersede and cancel all prior representations, alleged warranties, statements, negotiations, undertakings, letters, acceptances,
understandings, contracts and communications, whether verbal or written among the parties hereto and thereto or their respective agents
with respect to or in connection with the subject matter hereof.
Section 10.7 Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the
State of Texas without regard to principles of conflict of laws. In any action between or among any of the parties, whether arising out of
this Agreement or otherwise, each of the parties irrevocably consents to the exclusive jurisdiction and venue of the federal and state courts
located in Collin County, Texas.
14
Section 10.8 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together
shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and
delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or
“.pdf” signature page were an original thereof.
Section 10.9 Costs and Expenses. Each party shall pay their own respective fees, costs and disbursements incurred in
connection with this Agreement.
Section 10.10 Section Headings. The section and subsection headings in this Agreement are used solely for convenience
of reference, do not constitute a part of this Agreement, and shall not affect its interpretation.
Section 10.11 No Third-Party Beneficiaries. Nothing in this Agreement will confer any third party beneficiary or other
rights upon any person (specifically including any employees of The Company) or any entity that is not a party to this Agreement.
Section 10.12 Further Assurances. Each party covenants that at any time, and from time to time, after the Closing Date, it
will execute such additional instruments and take such actions as may be reasonably be requested by the other parties to confirm or perfect
or otherwise to carry out the intent and purposes of this Agreement.
Section 10.13 Exhibits Not Attached. Any exhibits not attached hereto on the date of execution of this Agreement shall
be deemed to be and shall become a part of this Agreement as if executed on the date hereof upon each of the parties initialing and dating
each such exhibit, upon their respective acceptance of its terms, conditions and/or form.
Section 10.14 Attorney Review - Construction. In connection with the negotiation and drafting of this Agreement, the
parties represent and warrant to each other that they have had the opportunity to be advised by attorneys of their own choice and, therefore,
the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the
interpretation of this Agreement or any amendments hereto.
Section 10.15 Gender. All personal pronouns used in this Agreement shall include the other genders, whether used in the
masculine, feminine or neuter gender and the singular shall include the plural and vice versa, wherever appropriate.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE.]
15
IN WITNESS WHEREOF, the undersigned have executed this Agreement and Plan of Reorganization to become effective as of
the Effective Date.
COMPANY
LINE DRIVE ENERGY, LLC, a Texas limited
liability company
By: /s/ Greg McCabe, Sr.
Greg McCabe, Sr., Manager
SELLER
By: /s/ Greg McCabe, Sr.
GREG MCCABE, SR.
PARENT
TORCHLIGHT ENERGY RESOURCES, INC., a
Nevada corporation
By: /s/ John Brda
John Brda, CEO
MERGER SUB
TORCHLIGHT ACQUISITION CORPORATION, a
Texas corporation
By: /s/ John Brda
John Brda, President
Agreement and Plan of Reorganization
16
EXHIBIT A
PLAN OF MERGER
This PLAN OF MERGER (the "Plan of Merger") is made as of the 30th day of January, 2017 by and among TORCHLIGHT
ENERGY RESOURCES, INC., a Nevada corporation (“Purchaser”), TORCHLIGHT ACQUISITION CORPORATION , a Texas
corporation (“Merger Sub”), and LINE DRIVE ENERGY, LLC, a Texas limited liability company (“Target”) (Merger Sub and Target
being hereinafter collectively referred to as the “Parties to the Merger”).
RECITALS
A. Prior to the execution of this Plan of Merger, Purchaser, Merger Sub, and Target have entered into an Agreement and Plan
of Reorganization dated as of January 30, 2017 (the “Plan of Reorganization”) providing for certain representations, warranties, and
agreements in connection with the transaction contemplated.
B. The Boards of Directors of Purchaser and Merger Sub and the Manager and Member of Target have approved the
acquisition of Target by Parent.
C. The Boards of Directors of Purchaser and Merger Sub and the Manager and Member of Target have approved the merger
of Merger Sub into Target (the “Merger”) upon the terms and subject to the conditions set forth herein and in the Plan of Reorganization.
D. For federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”).
Now, therefore, in consideration of the premises and the mutual promises and covenants contained herein, and subject to the
conditions hereinafter set forth, the parties agree as follows:
WITNESSETH
ARTICLE I
THE MERGER
1 . 1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to the terms and conditions of this Plan of
Merger and the Plan of Reorganization, Merger Sub shall be merged with and into Target and the separate existence of Merger Sub shall
thereupon cease, in accordance with the applicable provisions of the Texas Business Organizations Code (the “Act”). Target shall be the
surviving organization in the Merger (sometimes referred to herein as the “Surviving Entity”) and will continue to be governed by the laws
of the State of Texas, and the existence of Target will continue. The Merger will have the effects specified by the Act.
17
1 . 2 Effective Time. As soon as practicable following fulfillment or waiver of the conditions specified in Article VII of the
Plan of Reorganization and provided that this Plan of Merger has not been terminated or abandoned pursuant to Article IV hereof, the
Parties to the Merger will cause a Certificate of Merger (the “Certificate of Merger”) to be filed with the office of the Secretary of State of
the State of Texas as provided in Section 10.151 of the Act, and will cause this Plan of Merger to be on file at the principal place of
business of the Target. Subject to and in accordance with the laws of the State of Texas, the Merger will become effective upon the filing of
the Certificate of Merger with the office of the Secretary of State of the State of Texas , or such later time or date as may be specified in the
Certificate of Merger (the “Effective Time”).
ARTICLE II
THE SURVIVING ORGANIZATION
2 . 1 Certificate of Formation. The Certificate of Formation of Target, as in effect immediately prior to the Effective Time
shall be the Certificate of Formation of the Surviving Organization until the same shall be altered or amended.
2.2. Company Agreement. The Company Agreement of Target, as in effect immediately prior to the Effective Time shall be
the Company Agreement of the Surviving Organization until the same shall be altered or amended.
2 . 3 . Manager. The Manager of Target, as the Surviving Organization, immediately after the Effective Time shall be John
Brda.
ARTICLE III
CONVERSION OF SECURITIES
3.1 Conversion of Capital Stock of Merger Sub. As of the Effective Time, by virtue of the Merger and without any action on
the part of Purchaser, Merger Sub, Target or the respective shareholders or members thereof, each share of the capital stock of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be automatically converted into and become one (1) validly issued
membership interest in the Surviving Organization, and such membership interest in the Surviving Organization shall constitute all of the
issued and outstanding membership interests in the Surviving Organization immediately following the Effective Time.
3.2 Conversion of Membership Interest in Target.
(
a
) Aggregate Merger Consideration. The aggregate merger consideration payable for the issued and outstanding
membership interest in Target (the “Merger Consideration”) shall be 3,301,739 restricted shares of common stock, par value $0.0001 per
share, of Purchaser (“Purchaser Common Stock”). The issuance of the Purchaser Common Stock will be made without registration under
the Securities Act of 1933, as amended, or any securities “blue sky” or other similar laws of any state.
18
(b) Cancellation of Target Membership Interest. As of the Effective Time, by virtue of the Merger and without any action on
the part of Purchaser, Merger Sub, Target or the respective shareholders of members thereof, the membership interest in Target issued and
outstanding immediately prior to the Effective Time (the “Target Membership Interest”) shall cease to exist; provided, however, that the
holder of the Target Membership Interest shall be entitled to the Merger Consideration in the form of Purchaser Common Stock.
( c ) Payment of Merger Consideration. At the Closing (as defined in the Plan of Reorganization), Purchaser will deliver
stock certificates evidencing the Purchaser Common Stock.
ARTICLE IV
TERMINATION AND AMENDMENT
4.1 Termination. This Plan of Merger shall terminate in the event of and upon termination of the Plan of Reorganization.
4.2 Amendment. This Plan of Merger may not be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
4 . 3 Severability. Whenever possible, each provision of this Plan of Merger shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Plan of Merger is held to be prohibited by or invalid under applicable
law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Plan of
Merger.
4 . 4 Assignment, Successors and Assigns. The provisions hereof shall inure to the benefit of, and be binding upon, the
successors and permitted assigns of the parties hereto. No party hereto may assign its rights or delegate its obligations under this Plan of
Merger without the prior written consent of the other parties hereto, which consent will not be unreasonably withheld.
4 . 5 Entire Agreement. This Agreement and the Plan of Reorganization constitute the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and thereof and supersede and cancel all prior representations,
alleged warranties, statements, negotiations, undertakings, letters, acceptances, understandings, contracts and communications, whether
verbal or written among the parties hereto and thereto or their respective agents with respect to or in connection with the subject matter
hereof.
4 . 6 Choice of Law. This Plan of Merger shall be governed by, and construed in accordance with, the laws of the State of
Texas without regard to principles of conflict of laws. In any action between or among any of the parties, whether arising out of this Plan of
Merger or otherwise, each of the parties irrevocably consents to the exclusive jurisdiction and venue of the federal and state courts located
in Collin County, Texas.
4.7 Execution. This Plan of Merger may be executed in two or more counterparts, all of which when taken together shall be
considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page
were an original thereof.
19
4 . 8 Section Headings. The section and subsection headings in this Plan of Merger are used solely for convenience of
reference, do not constitute a part of this Plan of Merger, and may not affect its interpretation.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
20
IN WITNESS WHEREOF, the parties, by and through their respective authorized representatives, have executed this Plan of
Merger effective as of the day first written above.
TORCHLIGHT ENERGY RESOURCES, INC., a
Nevada corporation
/s/ John Brda
By:
Name: John Brda
Title: President
TORCHLIGHT ACQUISITION CORPORATION,
a Texas corporation
By: /s/ John Brda
John Brda, President
LINE DRIVE ENERGY, LLC, a Texas limited
liability company
By:
/s/ Greg McCabe, Sr.
Name: Greg McCabe, Sr., Manager
21
Schedules
Schedule 4.3 -- Assets
Warrant to Purchase 521,739 shares of common stock of Torchlight Energy Resources, Inc., warrant certificate number W-SAP-004
Lessor: Cotten Resources, LTD
Lessee: Torchlight Energy, Inc.
Date: June 8, 2016
V/P: Unknown
Legal Description:
All of Section 73 Block 6, Abstract 1005, Tom Green County, 640 acres.
All of Section 41, Block 7, Abstract 950(TG) & 237(S), Tom Green and Sterling County, 640 acres
All of Section 86, Block 6, Abstract 8472(TG) & 1119(S), Tom Green and Sterling County, 640 acres
All of Section 87, Block 6, Abstract 1012(TG) & 191(S), Tom Green and Sterling County, 640 acres
All of Section 88, Block 6, Abstract 8345(TG) & 1076(S), Tom Green and Sterling County, 640 acres**
All of Section 90, Block 6, Abstract 1075, Sterling County, 640 acres
All of Section 91, Block 6, Abstract 193, Sterling County, 640 acres
Total acres: 4,480 gross acres
** Save and Except 40 acres in the form of a square around the wellbore of the EXCO PNR-Harris Heirs “88” #1 Well (API No. 42-431-
33263) located 850 feet FNL and 1320 feet FWL of Section 88, as to depths from the surface down to 5,482 feet.
Lessor: Cotten Resources, LTD
Lessee: Oxy USA, Inc.
Date: 4/12/13
V/P: 71/345
Legal Description:
All of Section 73 Block 6, Abstract 1005, Tom Green County, 640 acres.
All of Section 41, Block 7, Abstract 950(TG) & 237(S), Tom Green and Sterling County, 640 acres
All of Section 86, Block 6, Abstract 8472(TG) & 1119(S), Tom Green and Sterling County, 640 acres
All of Section 87, Block 6, Abstract 1012(TG) & 191(S), Tom Green and Sterling County, 640 acres
All of Section 88, Block 6, Abstract 8345(TG) & 1076(S), Tom Green and Sterling County, 640 acres**
All of Section 90, Block 6, Abstract 1075, Sterling County, 640 acres
All of Section 91, Block 6, Abstract 193, Sterling County, 640 acres
22
Total acres: 4,480 gross acres
** Save and Except 40 acres in the form of a square around the wellbore of the EXCO PNR-Harris Heirs “88” #1 Well (API No. 42-431-
33263) located 850 feet FNL and 1320 feet FWL of Section 88, as to depths from the surface down to 5,482 feet.
Lessor: Judson Properties, LTD, & Judson Investment Corporation
Lessee: Oxy USA, Inc.
Date: 4/12/13
V/P: 71/360
Legal Description:
All of Section 70, Block 6, Abstract 8592(TG) & 1187(I), Irion and Tom Green County, 644.20 acres
All of Section 71, Block 6, Abstract 1004(TG) & 347(I), Irion and Tom Green County, 640 acres
All of Section 72, Block 6, Abstract 8662(TG) & 1214(I), Irion and Tom Green County, 644.20 acres
All of Section 73 Block 6, Abstract 1005, Tom Green County, 640 acres
All of Section 74, Block 6, Abstract 8344, Tom Green County, 645.9 acres
All of Section 75, Block6, Abstract 1006, Tom Green County, 640 acres
All of Section 41, Block 7, Abstract 950(TG) & 237(S), Tom Green and Sterling County, 640 acres
All of Section 86, Block 6, Abstract 8472(TG) & 1119(S), Tom Green and Sterling County, 640 acres
All of Section 87, Block 6, Abstract 1012(TG) & 191(S), Tom Green and Sterling County, 640 acres
All of Section 88, Block 6, Abstract 8345(TG) & 1076(S), Tom Green and Sterling County, 640 acres**
Total acres: 6,414.3
All of Section 89, Block 6, Abstract 192, Sterling County, 640 acres
All of Section 90, Block 6, Abstract 1075, Sterling County, 640 acres
All of Section 91, Block 6, Abstract 193, Sterling County, 640 acres
All of Section 102, Block 6, Abstract 1170, Sterling County, 649 acres
All of Section 103, Block 6, Abstract 199, Sterling County, 640 acres
All of Section 104, Block 6, Abstract 1169, Sterling County, 649.3 acres
All of Section 105, Block 6, Abstract 201, Sterling County, 640 acres
All of Section 106, Block 6, Abstract 1072, Sterling County, 650 acres
All of Section 107, Block 6, Abstract 202, Sterling County, 640 acres
Total acres: 5,788.30 gross acres
** Save and Except 40 acres in the form of a square around the wellbore of the EXCO PNR-Harris Heirs “88” #1 Well (API No. 42-431-
33263) located 850 feet FNL and 1320 feet FWL of Section 88, as to depths from the surface down to 5,482 feet.
Lessor: LAJ Corporation
Lessee: Oxy USA, Inc.
Date: 4/11/13
V/P: 71/366
23
Legal Description:
All of Section 70, Block 6, Abstract 8592(TG) & 1187(I), Irion and Tom Green County, 644.20 acres
All of Section 71, Block 6, Abstract 1004(TG) & 347(I), Irion and Tom Green County, 640 acres
All of Section 72, Block 6, Abstract 8662(TG) & 1214(I), Irion and Tom Green County, 644.20 acres
All of Section 73 Block 6, Abstract 1005, Tom Green County, 640 acres
All of Section 74, Block 6, Abstract 8344, Tom Green County, 645.9 acres
All of Section 75, Block6, Abstract 1006, Tom Green County, 640 acres
All of Section 41, Block 7, Abstract 950(TG) & 237(S), Tom Green and Sterling County, 640 acres
All of Section 86, Block 6, Abstract 8472(TG) & 1119(S), Tom Green and Sterling County, 640 acres
All of Section 87, Block 6, Abstract 1012(TG) & 191(S), Tom Green and Sterling County, 640 acres
All of Section 88, Block 6, Abstract 8345(TG) & 1076(S), Tom Green and Sterling County, 640 acres**
Total acres: 6,414.3
All of Section 89, Block 6, Abstract 192, Sterling County, 640 acres
All of Section 90, Block 6, Abstract 1075, Sterling County, 640 acres
All of Section 91, Block 6, Abstract 193, Sterling County, 640 acres
All of Section 102, Block 6, Abstract 1170, Sterling County, 649 acres
All of Section 103, Block 6, Abstract 199, Sterling County, 640 acres
All of Section 104, Block 6, Abstract 1169, Sterling County, 649.3 acres
All of Section 105, Block 6, Abstract 201, Sterling County, 640 acres
All of Section 106, Block 6, Abstract 1072, Sterling County, 650 acres
All of Section 107, Block 6, Abstract 202, Sterling County, 640 acres
Total acres: 5,788.30 gross acres
** Save and Except 40 acres in the form of a square around the wellbore of the EXCO PNR-Harris Heirs “88” #1 Well (API No. 42-431-
33263) located 850 feet FNL and 1320 feet FWL of Section 88, as to depths from the surface down to 5,482 feet.
Lessor: Sigmar, Inc.
Lessee: Oxy USA, Inc.
Date: 4/11/13
V/P: 71/354
Legal Description:
All of Section 70, Block 6, Abstract 8592(TG) & 1187(I), Irion and Tom Green County, 644.20 acres
All of Section 71, Block 6, Abstract 1004(TG) & 347(I), Irion and Tom Green County, 640 acres
All of Section 72, Block 6, Abstract 8662(TG) & 1214(I), Irion and Tom Green County, 644.20 acres
All of Section 73 Block 6, Abstract 1005, Tom Green County, 640 acres
All of Section 74, Block 6, Abstract 8344, Tom Green County, 645.9 acres
All of Section 75, Block6, Abstract 1006, Tom Green County, 640 acres
24
All of Section 41, Block 7, Abstract 950(TG) & 237(S), Tom Green and Sterling County, 640 acres
All of Section 86, Block 6, Abstract 8472(TG) & 1119(S), Tom Green and Sterling County, 640 acres
All of Section 87, Block 6, Abstract 1012(TG) & 191(S), Tom Green and Sterling County, 640 acres
All of Section 88, Block 6, Abstract 8345(TG) & 1076(S), Tom Green and Sterling County, 640 acres**
Total acres: 6,414.3
All of Section 89, Block 6, Abstract 192, Sterling County, 640 acres
All of Section 90, Block 6, Abstract 1075, Sterling County, 640 acres
All of Section 91, Block 6, Abstract 193, Sterling County, 640 acres
All of Section 102, Block 6, Abstract 1170, Sterling County, 649 acres
All of Section 103, Block 6, Abstract 199, Sterling County, 640 acres
All of Section 104, Block 6, Abstract 1169, Sterling County, 649.3 acres
All of Section 105, Block 6, Abstract 201, Sterling County, 640 acres
All of Section 106, Block 6, Abstract 1072, Sterling County, 650 acres
All of Section 107, Block 6, Abstract 202, Sterling County, 640 acres
Total acres: 5,788.30 gross acres
** Save and Except 40 acres in the form of a square around the wellbore of the EXCO PNR-Harris Heirs “88” #1 Well (API No. 42-431-
33263) located 850 feet FNL and 1320 feet FWL of Section 88, as to depths from the surface down to 5,482 feet.
Lessor: Wayne H. Bellows; Marilyn L. Bellows; Andrew Paul Smith and wife, Bonnie Smith; Andrew P. Smith, Trustee; Andrew P.
Smith, JR., Trustee of the Andrew P. Smith, Jr., Mineral Trust dated September 19, 2008; Clayton H. Smith, Trustee of the Clayton H.
Smith Mineral Trust dated September 19, 2008; Shannon Fraser Smith Stephens, Successor Trustee of the David M. Smith Family Trust
U/W/O of David Malcolm Smith, Deceased; Frank Harris Smith and wife, Gloria Grubb Smith, Wells Fargo Bank N.A., Successor Trustee
of the Keith French Ellwanger Trust; Stephen Martin Samuel; Daniel H. Barrow, Kenneth H. Wanamaker, Trustee of the Townes Trust;
Robin Mourning and Deborah Jeanne Crownover, Trustee of the Crownover Revocable Trust dated October 7, 1993, as Amended and
Restated in Restated Declaration of Trust dated May 22, 2012
Lessee: Oxy USA, Inc.
Date: 7/12/12
V/P: 63/350
Legal Description:
All of Section 70, Block 6, Abstract 8592(TG) & 1187(I), Irion and Tom Green County, 644.20 acres
All of Section 71, Block 6, Abstract 1004(TG) & 347(I), Irion and Tom Green County, 640 acres
All of Section 72, Block 6, Abstract 8662(TG) & 1214(I), Irion and Tom Green County, 644.20 acres
All of Section 73 Block 6, Abstract 1005, Tom Green County, 640 acres
All of Section 74, Block 6, Abstract 8344, Tom Green County, 645.9 acres
25
All of Section 75, Block6, Abstract 1006, Tom Green County, 640 acres
All of Section 41, Block 7, Abstract 950(TG) & 237(S), Tom Green and Sterling County, 640 acres
All of Section 86, Block 6, Abstract 8472(TG) & 1119(S), Tom Green and Sterling County, 640 acres
All of Section 87, Block 6, Abstract 1012(TG) & 191(S), Tom Green and Sterling County, 640 acres
All of Section 88, Block 6, Abstract 8345(TG) & 1076(S), Tom Green and Sterling County, 640 acres**
Total acres: 6,414.3
All of Section 89, Block 6, Abstract 192, Sterling County, 640 acres
All of Section 90, Block 6, Abstract 1075, Sterling County, 640 acres
All of Section 91, Block 6, Abstract 193, Sterling County, 640 acres
All of Section 102, Block 6, Abstract 1170, Sterling County, 649 acres
All of Section 103, Block 6, Abstract 199, Sterling County, 640 acres
All of Section 104, Block 6, Abstract 1169, Sterling County, 649.3 acres
All of Section 105, Block 6, Abstract 201, Sterling County, 640 acres
All of Section 106, Block 6, Abstract 1072, Sterling County, 650 acres
All of Section 107, Block 6, Abstract 202, Sterling County, 640 acres
Total acres: 5,788.30 gross acres
** Save and Except 40 acres in the form of a square around the wellbore of the EXCO PNR-Harris Heirs “88” #1 Well (API No. 42-431-
33263) located 850 feet FNL and 1320 feet FWL of Section 88, as to depths from the surface down to 5,482 feet.
Lessor: Wesley Z. Hodges and wife, Karen G. Hodges
Lessee: Oxy USA, Inc.
Date: 7/18/13
V/P: 73/355
Legal Description:
33.96 acres, more or less, situated in Sterling County, TX out of what is known and designated as Survey No 1H out of the J.E. Beavers
Survey No 1, described in Warranty Deed dated January 28, 1942 from W.B. Atkinson to L.F. Hodges, recorded in Volume 35, Page 101,
Deed Records of Sterling County, TX and more particularly described as follows:
Beginning at a rock mound made for the S. Common corner of Sections 37 and 38, G.C.&S.F.Ry. Co. for N.E. Corner of this survey and
N.W. Corner of Sur. 1-A in name of W.B. Atkinson.
Thence South 87°41’W. with the S. line of said Section38, 1903 vrs. to an old rock mound at a fence corner for the S. common corner of
Sections 38 and 39 for N.W. Corner of this survey:
Thence South 4°45’E, with a division fence 89 vrs. to a stake for S.W. corner of this survey and N.W. corner of Survey N. 2A in the name
of W.B Atkinson;
Thence East with the N. line of Section 136, Block 6, H. & T.C. Ry. Co. 1896 vrs. to a point in the N. line of said Section 136, for the SE
corner of this survey and S.W. corner of Survey No. 1-A, W.B. Atkinson;
Thence North 130 vrs. to the place of the beginning.
Lessor: James Clinton Hodges and wife, Joyce G. Hodges
26
Lessee: Oxy USA, Inc.
Date: 7/25/13
V/P: 73/667
Legal Description:
52.52 acres more or less, situated in Sterling County, TX out of what is known and designated as Survey No. 2H out of the J.E. Beavers
Survey No. 1, described in Warranty Deed dated January 28, 1942 from W.B. Atkinson to L.F. Hodges, recorded in Volume 35, Page 101,
deed records of Sterling County, Tx and more particularly described as follows:
Beginning at an old rock mound made for the S. Common corner of Sections 38 and 39, G.C.&S.F. Ry. Co. for the Northerly corner of this
survey.
Thence South 4°41’E, with the division fence 1947 vrs. a rock mound for the SW corner of Section136, Blk 6, H.&T.C. Ry. Co., a mesquite
stump brs. S, 27-1/2° E 79 vrs. DO. Brs. S. 41-1/2° E, ff-1/2° vrs.
Thence West at 1915 vrs. a rock mound for the N common corner of Section 7 and 8, Blk 7, .&T.C. Ry. Co., at 3828 vrs. a rock mound for
N common corner of Section 6 and 7 in said Blk 7. A mesquite 8” brs. S 33° E, 55 vrs. at 4048 vrs. a stake in the N line of Section6 in said
Blk 7, At a point 220 vrs, West of its NE corner for SW corner of this survey;
Thence North 33vrs. to the S common corner of Sections 41 and 44, G.C.&S.F. Ry Co. for NW corner of this survey;
Thence North 89° 40’E 1937 vrs. to SE corner of Section 40, G.C.&S.F. Ry Co., which is 159 vrs. W and 40 vrs. N of the SW corner of
said Section 136.
Thence North 1900 vrs. to the place of beginning.
Lessor: Hudson Management, Ltd.
Lessee: Oxy USA, Inc.
Date: 1/25/13
V/P: 203/624
Legal Description:
510 acre portion of Section 70, Block 6, Abstract 8592(TG) & 1187(I), Irion and Tom Green County
400 acre portion of Section 71, Block 6, Abstract 1004(TG) & 347(I), Irion and Tom Green County
All of Section 74, Block 6, Abstract 8344, Tom Green County, 645.9 acres
All of Section 75, Block 6, Abstract 1006, Tom Green County, 640 acres
Schedule 4.16 – Encumbrances
The Assets are specifically subject to that certain Participation Agreement, dated effective May 1, 2016, by and between McCabe
Petroleum Corporation, Imperial Exploration, LLC, and Torchlight Energy, Inc., and all amendments and modifications thereto. The
Participation Agreement also includes a joint operating agreement that is binding on the assets.
Schedule 4.17 -- Liabilities
27
1. The Assets are specifically subject to that certain Participation Agreement, dated effective May 1, 2016, by and between McCabe
Petroleum Corporation, Imperial Exploration, LLC, and Torchlight Energy, Inc., and all amendments and modifications thereto. The
Participation Agreement also includes a joint operating agreement that is binding on the assets.
2.
Its proportionate share of the costs incurred in drilling the Flying B Ranch #2 Well (API Number 42-451-32852).
Schedule 4.18 – Contracts and Leases
The Assets are specifically subject to that certain Participation Agreement, dated effective May 1, 2016, by and between McCabe
Petroleum Corporation, Imperial Exploration, LLC, and Torchlight Energy, Inc., and all amendments and modifications thereto. The
Participation Agreement also includes a joint operating agreement that is binding on the assets.
28
PURCHASE AND SALE AGREEMENT
EXHIBIT 10.13
This PURCHASE AND SALE AGREEMENT (this “ Agreement”), dated effective January 30, 2017, (the “Effective Date”), is
entered into by Wolfbone Investments, LLC (“Seller”), and Torchlight Energy, Inc. , a Nevada corporation, 5700 W. Plano Pkwy., Ste.
3600, Plano, Texas 75093, (“Purchaser” or “Buyer”). Seller and Purchaser are sometimes collectively referred to as the “Parties” and each is
referred to individually as a “Party.”
RECITALS
WHEREAS, Seller owns an undivided 40.66% of 8/8ths working interest in an oil/gas well, the Flying B Ranch #1 (API 451-
32847) located in Tom Green County, Texas, and the personal property associated with the well, along with an undivided 40.66% of 8/8ths
working interest in an oil and gas leases covering forty acres around such well.
WHEREAS, Seller desires to sell, and Purchaser desires to purchase, all of Seller’s right, title and interest in the above referenced
well, oil and gas leases, and related assets, which constitute the Assets, as more fully described and defined below, on the terms and
conditions set forth in this Agreement.
WHEREAS, Seller and Buyer are bound by that certain Participation Agreement (the “Participation Agreement”), dated effective
May 1, 2016, among McCabe Petroleum Corporation, Imperial Exploration, LLC, and Torchlight Energy, Inc., and all amendments and
modifications thereto, which is applicable to the Assets; and
WHEREAS, Seller and Purchaser intend that the purchase price for the Assets shall be based on fair market value under current
prices for oil and gas.
“Assets” means
DEFINITIONS
(a) All of Seller’s working interest in the oil and gas leases, described in the Assignment of Oil & Gas Interests (“Assignment”)
attached as Exhibit A (the “Leases”) and the lands covered by such Leases or otherwise pooled or unitized therewith (the
“Lands”).
(b) The working interests assigned in Exhibit A include a proportionate undivided interest in the following (to the extent that such
exists or is accessible to Seller):
1. The oil and gas wells now located on the Lands or lands pooled or unitized therewith, whether producing or non-
producing (the “Wells”), and all Hydrocarbons that may be produced from the Wells after the Closing.
1
2. Subject to all rights of offset or withholding under the Participation Agreement, all Hydrocarbon sales, purchase,
gathering, compression, treating, transportation, storage and processing agreements and all other contracts, operating
agreements, balancing agreements, joint venture agreements, partnership agreements, farmout agreements and other
contracts, agreements and instruments insofar and only insofar as they cover or relate to the Leases and Lands,
excluding any insurance contracts.
3. The geological and geophysical data, studies, surveys, evaluations, maps, plats and information of every form and
nature and in every form and manner record, stored or transmitted, pertaining to the Leases and Lands.
4. The permits, licenses, approvals, servitudes, rights-of-way, easements, surface use agreements, and other surface
rights that are used or held primarily for use in connection with the operation of the Leases and Lands (or lands
pooled, communitized or unitized therewith) (collectively, the “Easements”).
5. The personal property, equipment, machinery, fixtures and improvements, operational or nonoperational, known or
unknown, located on the Lands (or lands pooled, communitized or unitized therewith) or the Easements, including
pipelines, gathering systems, manifolds, well equipment, casing, tubing, pumps, motors, compression equipment, flow
lines, processing and separation facilities, pads, and structures that, as of the date of this Agreement, are located on the
Lands (or lands pooled, communitized or unitized therewith), and to the degree such are used or held for use primarily
in connection with the operation of the Assigned Interest in the Wells or Lands (or lands pooled, communitized or
unitized therewith) (collectively, the “Equipment”).
6. The rights to any fee surface property, and the surface leases used for Seller yards for operation of the Leases and
Lands.
7. The pipes, tubulars, fittings, and other materials used or specifically held for use as operating inventory in connection
with the operation of the Leases and Lands in the Wells or the Equipment.
“Closing” means the execution of all documents necessary to effectuate the sale and transfers of the Assets contemplated under
this Agreement, which shall occur contemporaneously with the execution of this Agreement, at Buyer’s offices.
“Hydrocarbons” means all oil, gas, natural gas liquids and other hydrocarbons and products produced in association therewith.
“Net Revenue Interest” means the share of production after all burdens, royalties, and overriding royalties, have been deducted
from the working interest.
In this Agreement, unless expressly stated otherwise, the singular includes the plural, and vice versa; likewise, the disjunctive
includes the conjunctive, and vice versa.
2
AGREEMENT
For and in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:
A. Sale and Purchase. At the Closing, upon the terms and conditions hereinafter set forth, Seller agrees to sell, assign and convey to
Purchaser all of its right, title and interest in the Assets, respectively, effective as of the Effective Time, and Purchaser agrees to buy and
accept such right, title and interest in such Assets from Seller at such Closing, effective as of the Effective Time.
B. Cancelation of Warrants. As part of the transaction contemplated by this Agreement, Seller will cause the following warrants to be
canceled:
a.
a Purchase Warrant giving Green Hill Minerals, LLC the right to purchase 100,000 Warrant Shares, which has a warrant
number of “SEPT-100-2015”, a date of issuance of September 30, 2015 and an expiration date of September 30, 2018 (the
“100,000 Warrant”), and (ii) a Purchase Warrant giving it the right to purchase 1,700,000 Warrant Shares, which has a
warrant number of “FEB-100-2016-A”, a date of issuance of February 15, 2016 and an expiration date of February 15,
2020. Such cancellation will be effected through the Warrant Cancellation Agreement attached hereto as Exhibit B-1,
which will be executed by Green Hill Minerals and Torchlight Energy Resources, Inc. at Closing; and
b. Seller shall additionally cause McCabe Petroleum Corporation to deliver to Purchaser for cancellation a total of 1,500,000
warrants to purchase common stock of Torchlight Energy Resources, Inc., which warrants are held in the name of McCabe
Petroleum Corporation, a warrant number of “APRIL-04-2016,” a date of issuance of April 4, 2016 and an expiration date
of April 4, 2021. Such cancellation will be effected through the Warrant Cancellation Agreement attached hereto as Exhibit
B-2, which will be executed by McCabe Petroleum Corporation and Torchlight Energy Resources, Inc. at Closing.
C. Purchase Price for Assets. Subject to the terms and conditions in this Agreement:
1.
Purchaser will purchase the Assets by a cash payment of FOUR HUNDRED FIFTEEN THOUSAND AND 92/100THS US
DOLLARS ($415,000.00) (the “Purchase Price”) at the Closing.
D. Acquisition of Assets and Conditions of Closing.
As conditions to the Closing:
1.
On or before the Closing, Seller will deliver the Assets to Purchaser as is, where is, with all faults.
3
2.
3.
4.
5.
6.
The Parties will execute and deliver the Assignment attached and incorporated herein as Exhibit A to effectuate transfer the
Assets.
Seller and Purchaser shall execute and deliver all necessary letters in lieu of transfer orders directing all purchasers of
production to pay operator the proceeds attributable to production, which will distribute the net proceeds from production from
the Assets from and after the Effective Time to Purchaser.
Torchlight Energy Resources, Inc. shall have acquired all the right, title and interest in all membership interest Line Drive
Energy, LLC, as outlined in the Purchase Agreement among Torchlight Energy Resources, Inc., Greg McCabe, and Line Drive
Energy, LLC, dated effective November 1, 2016.
Green Hill Minerals and Torchlight Energy Resources, Inc. will execute and deliver the Warrant Cancellation Agreement
attached hereto as Exhibit B-1.
McCabe Petroleum Corporation and Torchlight Energy Resources, Inc. will execute and deliver the Warrant Cancellation
Agreement attached hereto as Exhibit B-2.
E. Taxes. Seller shall pay all taxes on the Assets that are accrued as of the Effective Time.
F. Responsibility for Recordation. Purchaser’s counsel shall record the Assignment Agreement in the appropriate real property records,
and provide copies of the file-stamped originals of those documents to the Parties as soon as practicable after each Closing.
G. Representations, Warranties and Covenants.
1.
Seller’s Representations, Warranties and Covenants . Each of the Sellers hereby, jointly and severally, make the following
representations and warranties to the Purchaser as of the date of the Agreement:
(a) Seller has all requisite power and authority to carry on his business as presently conducted, to enter into this Agreement and to
perform his obligations hereunder. The consummation of the transactions contemplated by this Agreement will not violate or be
in conflict with any provision of any material agreement or instrument to which Seller is a party or by which Seller is bound, or
any judgment, decree, order, statute, rule or regulation applicable to Seller.
(b) Seller warrants and represents to Purchaser that Seller is authorized to enter into this Agreement, all third-party consents
required have been obtained, and that the person executing this Agreement on its behalf has the authority to do so.
(c) This Agreement constitutes, and all documents and instruments required hereunder to be executed and delivered by Seller at
each Closing will, when duly executed and delivered for value constitute, valid, legal and binding obligations of Seller,
enforceable against Seller, in accordance with their respective terms, subject to applicable bankruptcy and other similar laws of
general application with respect to creditors as well as the general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4
(d) Seller further warrants and represents to Purchaser that it is the owner of all the Assets covered by this Agreement, that there
are no other parties with an interest in the Assets.
(e) Seller shall convey title to the Assets to Purchaser with a special warranty of title, by through and under Seller, but not
otherwise.
(f) Seller warrants and represents to Purchaser that it has not transferred, sold, assigned conveyed, encumbered, pledged or
hypothecated any rights, title or interest in or to the Assets, nor is such transfer, sale, assignment, conveyance, encumbrance,
pledging or hypothecation pending.
2.
Purchaser’s Representations and Warranties.
(a) Purchaser warrants and represents to Seller that Purchaser is authorized to enter into this Agreement, and that the person
executing this Agreement on its behalf has the authority to do so.
(b) Purchaser has all requisite company powers and authority to carry on its business as presently conducted, to enter into this
Agreement, to purchase the Assets on the terms and conditions described in this Agreement, and to perform its other obligations
under this Agreement. The consummation of the transactions contemplated by this Agreement will not violate nor be in conflict
with any provision of Purchaser’s governing documents or any material agreement or instrument to which Purchaser is a party
or by which Purchaser is bound, or any judgment, decree, order, statute, rule or regulation applicable to Purchaser.
(c) This Agreement and all documents and instruments required or contemplated hereunder to be executed and delivered by
Purchaser on each Closing Date will, when duly executed and delivered for value, constitute valid, legal and binding
obligations of Purchaser, enforceable against Purchaser, in accordance with their respective terms, subject only to applicable
bankruptcy and other similar laws of general application with respect to creditors.
(d) Purchaser has had sufficient time to examine the Seller’s records regarding the Assets and believes that the Purchase Price is a
fair price to pay for the Assets.
H. Assumption. From and after a Closing, Purchaser shall be deemed to have assumed and shall have proportionate responsibility and
liability for the following, but only insofar as attributable to the Assets acquired under this Agreement, and prior to such Closing shall
have assumed none such responsibility or liability:
1.
Assumed Environmental Liabilities. The normal and customary pro rata environmental liabilities of a working interest owner.
(“Assumed Environmental Liabilities”).
5
2.
General Assumption. Except to the extent covered by Seller’s limited indemnification of Purchaser, upon such Closing,
Purchaser shall assume and pay all normal and customary costs, expenses and liabilities assumed by a working interest owner
that arise after the Effective Date (the “Assumed Liabilities”).
I. Non-Reliance. The Parties hereby declare and represent that in making this Agreement, they rely wholly upon their respective
judgment, belief, and knowledge of their respective liabilities, the subject Leases, and that this Agreement is executed and made without
any reliance upon any statement or representation of any other party or of any other party’s representative and Seller acknowledges that
it had access to all information and data it deems necessary to evaluate this transaction, including the Purchase Price to be paid by
Purchaser and the other terms and conditions herein.
J. Notices. All notices contemplated under this Agreement shall be made to the following, unless modified by written notice via U.S. mail,
fax, or email to the other party(ies):
1.
Seller:
Greg McCabe
Wolfbone Investments, LLC
500 W. Texas, Suite 890
Midland, Texas 79701
2.
Purchaser:
John Brda
Torchlight Energy, Inc.
5700 W. Plano Pkwy., Ste. 3600
Plano, Texas 75093
K. Relationship of Parties. It is not the purpose or intention of this Agreement to create any joint venture, partnership, mining partnership,
or association, and neither this Agreement (including any exhibit attached to this Agreement) nor the operations hereunder shall be
construed or considered as creating any such legal relationship. The liabilities of the Parties shall be several and not joint or collective.
Furthermore, nothing in this Agreement shall be construed as providing directly or indirectly for any joint or cooperative refining or
marketing or sale of any Party’s interest in oil and gas or the products therefrom.
L. Controlling Law. The Parties agree that this Agreement shall be governed, construed, and applied in accordance with the laws of the
State of Texas applicable to contracts between Texas residents that are to be wholly performed in Texas, without regard to choice of law
or conflicts of law principles of Texas or any other jurisdiction.
6
M. Forum Selection Clause. The Parties agree that all disputes arising under this Agreement shall be brought exclusively in the Judicial
District Courts of Collin County, Texas.
N. Entire Agreement . This Agreement constitutes the entire, final agreement of the Parties on all matters that are the subject of this
Agreement, and this Agreement fully supersedes and replaces any and all prior agreements or understandings, written or oral, between
the Parties relating to the Assets.
O. Multiple Counterparts. This Agreement may be executed in counterparts by the undersigned and all such counterparts so executed
shall together be deemed to constitute one final agreement, as if one document had been signed by all parties hereto; and each such
counterpart shall be deemed to be an original, binding the party subscribed thereto, and multiple signature pages (including faxes or other
electronic delivery of signature pages) affixed to a single copy of this Agreement shall be deemed to be a fully executed original
Agreement. It shall be sufficient in making proof of this Agreement to produce or account for a facsimile or pdf copy of an executed
counterpart of this Agreement.
P. Fees & Costs. Each Party will pay its own legal fees and costs associated with this transaction.
Q. Joint Drafting. The Parties agree that this Agreement was drafted jointly and that this Agreement shall not be construed against the
other because of their involvement in drafting this Agreement.
R. Non-Waiver. No exercise or failure to exercise or delay by any Party in exercising any right or remedy under this Agreement shall
constitute a waiver by such Party of such right or remedy in any other instance or any other right or remedy.
S. Amendment & Modification. Any amendment or modification to this Agreement must be in writing and executed by the Parties.
T. No Assignments. No obligation or right arising under this Agreement may be assigned or delegated by any Party without the express
written consent of the other Parties, which consent shall not be unreasonably withheld. Any assignment made without prior written
consent is void ab initio. Provided, however, that Purchaser may assign all of its rights and obligations under this Agreement without the
consent of the other parties, as long as that assignment is made in furtherance of the acquisition of the Assets.
U. Future Documents. The Parties shall perform any and all acts and execute and deliver any and all documents that may be or become
necessary and proper to give effect to and carry out the terms hereof.
V. No Third-Party Beneficiary . Any agreement to perform any obligations herein contained, express or implied, shall be only for the
benefit of the Parties and their respective heirs, successors, assigns and legal representatives, and such agreements and obligations shall
not inure to the benefit of any indebtedness or any other party, whatsoever, it being the intention of the Parties that no one shall be
deemed to be a third-party beneficiary of this Agreement.
7
W. Binding Effect. The Parties may plead this Agreement as a full and complete defense to, and may use this Agreement as the basis for,
an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted by the other Party, or by the
other Party’s respective representatives, agents, executors, decedents, trustees, beneficiaries, successors, heirs, attorneys and assigns, in
contravention or breach of this Agreement.
X. Severability. Each part of this Agreement is intended to be several. If any term, covenant, condition or provision violates any applicable
law or is declared illegal, invalid or unenforceable, in whole or in part, by a court of last resort, such provision shall be enforced to the
greatest extent permitted by law, and such a declaration shall not affect the legality, validity or enforceability of the remaining parts of
this Agreement, all of which shall remain in full force and effect.
Y. Review by Counsel. The Parties have had sufficient opportunity to read this Agreement and to consult with legal counsel of their
choosing regarding the meaning and effect of this Agreement and its rights and liabilities under it. Accordingly, each Party and signatory
to this Agreement has entered into it freely, voluntarily and without duress.
Z. Disclaimers. THE PARTIES AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE LAW TO BE OPERATIVE, THE
DISCLAIMERS OF WARRANTIES CONTAINED IN THIS SECTION ARE “CONSPICUOUS” DISCLAIMERS FOR THE
PURPOSES OF ANY APPLICABLE LAW, RULE OR ORDER. THE EXPRESS REPRESENTATIONS AND WARRANTIES OF
SELLER CONTAINED IN THIS AGREEMENT, AND THE TITLE WARRANTIES IN THE CONVEYANCES OF THE
CONVEYED INTERESTS TO BE DELIVERED AT EACH CLOSING, (COLLECTIVELY “SELLER’S’ WARRANTIES”) ARE
EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED,
STATUTORY OR OTHERWISE. SELLER EXPRESSLY DISCLAIMS ANY AND ALL SUCH OTHER REPRESENTATIONS AND
WARRANTIES. WITHOUT LIMITATION OF THE FOREGOING AND EXCEPT FOR SELLER’S WARRANTIES, THE
CONVEYED INTERESTS SHALL BE CONVEYED PURSUANT HERETO WITHOUT (A) ANY WARRANTY OR
REPRESENTATION, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, RELATING TO (I) TITLE TO THE
CONVEYED INTERESTS, THE CONDITION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE,
CONFORMITY TO THE MODELS OR SAMPLES OF MATERIALS OR MERCHANTABILITY OF ANY EQUIPMENT OR ITS
FITNESS FOR ANY PURPOSE, (II) THE ACCURACY OR COMPLETENESS OF ANY DATA, REPORTS, RECORDS,
PROJECTIONS, INFORMATION OR MATERIALS NOW, HERETOFORE OR HEREAFTER FURNISHED OR MADE
AVAILABLE TO PURCHASER IN CONNECTION WITH THIS AGREEMENT, (III) PRICING ASSUMPTIONS, OR QUALITY
OR QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE CONVEYED INTERESTS OR THE
ABILITY OR POTENTIAL OF THE CONVEYED INTERESTS TO PRODUCE HYDROCARBONS, (IV) THE ENVIRONMENTAL
CONDITION OF THE CONVEYED INTERESTS, BOTH SURFACE AND SUBSURFACE, (V) ANY IMPLIED OR EXPRESS
WARRANTY OF NON-INFRINGEMENT, OR (VI) ANY OTHER MATTERS CONTAINED IN ANY MATERIALS FURNISHED
OR MADE AVAILABLE TO PURCHASER BY SELLER OR BY SELLER’S AGENTS OR REPRESENTATIVES, OR (B) ANY
OTHER EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION WHATSOEVER. PURCHASER
SHALL HAVE INSPECTED, OR WAIVED (AND UPON EACH CLOSING SHALL BE DEEMED TO HAVE WAIVED) ITS
RIGHT TO INSPECT, THE CONVEYED INTERESTS FOR ALL PURPOSES AND SATISFIED ITSELF AS TO THEIR PHYSICAL
AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, INCLUDING BUT NOT LIMITED TO
CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE, RELEASE OR DISPOSAL OF HAZARDOUS SUBSTANCES,
SOLID WASTES, ASBESTOS AND OTHER MAN MADE FIBERS. PURCHASER IS RELYING SOLELY UPON THE TERMS OF
THIS AGREEMENT AND ITS OWN INSPECTION OF THE CONVEYED INTERESTS, AND PURCHASER SHALL ACCEPT
ALL OF THE SAME IN THEIR “AS IS, WHERE IS” CONDITION.
8
AA.Subject to and Conflicting Terms. This Agreement and the Assets assigned herein shall be specifically subject to the Participation
Agreement. In the case of any conflict between this Agreement and the Purchase Agreement, the Purchase Agreement shall control in all
cases.
INTENTIONALLY BLANK—SIGNATURE PAGES FOLLOW
9
AGREED AND EXECUTED as of the Effective Date:
Torchlight Energy, Inc.
By:/s/ John A. Brda
John A. Brda, CEO
AND:
Wolfbone Investments, LLC
By:/s/ Greg McCabe
Greg McCabe, Managing Member
10
EXHIBIT 21.1
Subsidiaries of the Registrant
Name
Torchlight Energy, Inc.
Torchlight Energy Operating, LLC
Hudspeth Oil Corporation
Line Drive Energy, LLC
State of
Organization
Nevada
Texas
Texas
Texas
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-1 (File Nos. 333-215586, 333-213732 and
333-208467) and on Form S-8 (File No. 333-210812) of Torchlight Energy Resources, Inc. of our report dated March 31, 2017 relating to
the financial statements for the year ended December 31, 2016 which appear in this Annual Report on Form 10-K for the year ended
December 31, 2016.
EXHIBIT 23.1
/s/ Briggs & Veselka Co.
Houston, Texas
March 31, 2017
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-1 (File Nos. 333-215586, 333-213732 and
333-208467) and on Form S-8 (File No. 333-210812) of Torchlight Energy Resources, Inc. of our report dated March 30, 2016 relating to
the financial statements for the year ended December 31, 2015 which appear in this Annual Report on Form 10-K for the year ended
December 31, 2016.
EXHIBIT 23.2
/s/ Calvetti Ferguson
Houston, Texas
March 30, 2017
CONSENT OF PETECH ENTERPRISES, INC.
EXHIBIT 23.3
We hereby consent to the references to our firm in the form and context in which they appear in the Annual Report on Form 10-K of
Torchlight Energy Resources, Inc. for the year ended December 31, 2016 (the “Annual Report”). We hereby further consent to the
inclusion in the Annual Report of estimated oil and gas reserves as of December 31, 2016, contained in our report dated, February 2, 2017,
and to the inclusion of such report as an exhibit to the Annual Report. We further consent to the incorporation by reference thereof into
Torchlight Energy Resources, Inc.’s Registration Statements on Form S-1 (File Nos. 333-215586, 333-213732 and 333-208467) and on
Form S-8 (File No. 333-210812).
PETECH ENTERPRISES, INC.
By:
/s/ Amiel David, PE
Amiel David, PE
Houston, Texas
March 29, 2017
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, John A. Brda, certify that:
1. I have reviewed this annual report on Form 10-K of Torchlight Energy Resources, Inc. for the year ended December 31, 2016;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant’s other certifying officer and I are 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 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 report based on such evaluation; and
d) Disclosed in this 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/ John A. Brda
John A. Brda
Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 2017
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Roger Wurtele, certify that:
1. I have reviewed this annual report on Form 10-K of Torchlight Energy Resources, Inc. for the year ended December 31, 2016;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant’s other certifying officer and I are 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 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 report based on such evaluation; and
d) Disclosed in this 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/ Roger Wurtele
Roger Wurtele,
Chief Financial Officer
(Principal Financial Officer)
Date: March 31, 2017
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
I, John A. Brda, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
annual report on Form 10-K of Torchlight Energy Resources, Inc. for the year ended December 31, 2016, fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such annual report on
Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Torchlight Energy Resources, Inc.
/s/ John A. Brda
John A. Brda,
Chief Executive Officer (Principal Executive Officer)
Date: March 31, 2017
I, Roger Wurtele, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the annual report on Form 10-K of Torchlight Energy Resources, Inc. for the year ended December 31, 2016, fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such annual report on
Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Torchlight Energy Resources, Inc.
/s/ Roger Wurtele
Roger Wurtele,
Chief Financial Officer (Principal Financial Officer)
Date: March 31, 2017
The foregoing certification is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended (“Exchange Act”), and is not to be incorporated by reference into any filing of Torchlight Energy
Resources, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof,
regardless of any general incorporation language in such filing.
EXHIBIT 99.1