UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the Quarter Ended
For the transition period from _______ to _______.
Commission
file number:
(Name
of registrant in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices)
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. Large accelerated filer o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o
As of November 9, 2020, there were shares of the registrant’s common stock outstanding (the only class of voting common stock).
1
FORM 10-Q
TABLE OF CONTENTS
2
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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, Item 2 “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 report and in our Annual Report on Form 10-K for the year ended December 31, 2019 and in particular, the risks discussed in our Form 10-K under the caption “Risk Factors” in Item 1A therein, 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 our ability to extend or restructure existing debt, to obtain additional capital in the future to repay outstanding debt and fund planned expansion, the demand for oil and natural gas which demand could be materially affected by the economic impacts of COVID-19 and possible increases in supply from Russia and OPEC, the proposed business combination transaction with Metamaterial, Inc., general economic factors, competition in the industry, our ability to regain and maintain compliance with the minimum bid price requirement of the Nasdaq Stock Market and other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, the “Company,” “Torchlight,” “we,” “our,” and similar terms include Torchlight Energy Resources, Inc. and its subsidiaries, unless the context indicates otherwise.
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| TORCHLIGHT ENERGY RESOURCES, INC. |
| CONSOLIDATED BALANCE SHEETS (Unaudited) |
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | - | |||||||
| Accounts receivable | ||||||||
| Production revenue receivable | ||||||||
| Subscription receivable | - | |||||||
| Prepayments - development costs | - | |||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Oil and gas properties, net | ||||||||
| Convertible note receivable | - | |||||||
| Office equipment, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| 12% 2021 Secured promissory notes, net of $ | ||||||||
| 6% 2021 Secured convertible promissory note due to related party | ||||||||
| 12% 2020 Unsecured promissory notes, net of $- | ||||||||
| 8% 2021 Convertible promissory notes payable, net of $ | ||||||||
| 10% 2020 Convertible promissory notes payable | ||||||||
| 14% 2020 Convertible promissory notes payable | ||||||||
| PPP note payable | - | |||||||
| Accrued payroll | ||||||||
| Related party payables | ||||||||
| Due to working interest owners | ||||||||
| Accrued interest payable | ||||||||
| Total current liabilities | ||||||||
| 12% 2021 Unsecured promissory notes, net of $- | ||||||||
| 8% 2021 Convertible promissory notes payable, net of $ | ||||||||
| 14% 2021 Convertible promissory notes payable, net of $ | ||||||||
| Convertible notes payable and accrued interest | - | |||||||
| Asset retirement obligations | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value $, shares authorized; -- issued and outstanding September 30, 2020 and December 31, 2019 | - | - | ||||||
| Common stock, par value $; shares authorized; issued and outstanding at September 30, 2020; issued and outstanding at December 31, 2019 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
4
| TORCHLIGHT ENERGY RESOURCES, INC. |
| CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) |
| Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Oil and gas sales | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ( | ) | ||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||
| Loss on extinguishment of debt | - | - | - | |||||||||||||
| Impairment loss | - | - | ||||||||||||||
| Total operating expenses | ||||||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense and accretion of note discounts | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | - | |||||||||||||||
| Total (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share: | ||||||||||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
5
| TORCHLIGHT ENERGY RESOURCES, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| Nine Months | Nine Months | |||||||
| Ended | Ended | |||||||
| September 30, 2020 | September 30, 2019 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash from operations: | ||||||||
| Stock based compensation | ||||||||
| Stock issued for interest payments on notes payable | - | |||||||
| Accrued interest payable in stock | ||||||||
| Amortization of debt issuance costs | ||||||||
| Accretion of note discounts | ||||||||
| Amortization of beneficial conversion on convertible notes | - | |||||||
| Depreciation, depletion and amortization | ||||||||
| Loss on extinguishment of debt | - | |||||||
| Impairment loss | ||||||||
| Change in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Production revenue receivable | ||||||||
| Prepayments - development costs | - | |||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Accrued interest payable | ||||||||
| Net cash from operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Investment in oil and gas properties | ( | ) | ( | ) | ||||
| Purchase of property, plant, and equipment | - | ( | ) | |||||
| Net cash from investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Issuance of common stock, net of offering costs | ||||||||
| Proceeds from stock subscription receivable | - | |||||||
| Proceeds from notes payable | ||||||||
| Payment for extension of debt maturity | ( | ) | - | |||||
| Proceeds from exercise of warrants into common stock | - | |||||||
| Net cash from financing activities | ||||||||
| Net increase (decrease) in cash and restricted cash | ( | ) | ||||||
| Cash and restricted cash - beginning of period | ||||||||
| Cash and restricted cash - end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for state franchise tax | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Debt converted by transfer of working interest | $ | $ | ||||||
| Common stock issued for prepayment of development costs | $ | $ | ||||||
| Common stock issued for payment in kind on notes payable | $ | $ | ||||||
| Common stock issued for note principal and interest conversion | $ | $ | ||||||
| Common stock issued for note extension | $ | $ | ||||||
| Increase (decrease) in accounts payable for property development costs | $ | ( | ) | $ | ||||
| Beneficial conversion feature on convertible notes | $ | $ | ||||||
| Debt discount from fair value of warrants with convertible notes | $ | $ | ||||||
| Note receivable from third party | $ | $ | ||||||
| Account payable relieved in transfer of oil and gas properties | $ | $ | ||||||
| Common stock issued for lease interests | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
6
| TORCHLIGHT ENERGY RESOURCES, INC. |
| CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited) |
| Common | Common | Additional | ||||||||||||||||||
| stock | stock | paid-in | Accumulated | |||||||||||||||||
| shares | amount | capital | deficit | Total | ||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuance of common stock for services | - | |||||||||||||||||||
| Issuance of common stock to a vendor for delay in payment | - | |||||||||||||||||||
| Issuance of common stock for cash, less underwriting/offering costs | - | |||||||||||||||||||
| Warrants issued in conversion of notes payable | - | - | - | |||||||||||||||||
| Warrants issued for services | - | - | - | |||||||||||||||||
| Stock options issued for services | - | - | - | |||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuance of common stock for services | ||||||||||||||||||||
| Issuance of common stock for cash, less underwriting/offering costs | ||||||||||||||||||||
| Warrants issued in connection with common stock offerings | - | |||||||||||||||||||
| Issuance of common stock for promissory note extension | ||||||||||||||||||||
| Common stock issued in payment of accounts payable | ||||||||||||||||||||
| Issuance of common stock for payment in kind on notes payable | ||||||||||||||||||||
| Issuance of common stock for prepayment of development costs | ||||||||||||||||||||
| Stock options issued for services | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuance of common stock for services | ||||||||||||||||||||
| Issuance of common stock for cash, less underwriting/offering costs | ||||||||||||||||||||
| Common stock issued in warrant exercise | ( | ) | ||||||||||||||||||
| Common stock issued in note principal and interest conversion | ||||||||||||||||||||
| Warrants issued for services | - | |||||||||||||||||||
| Stock options issued for services | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
7
| TORCHLIGHT ENERGY RESOURCES, INC. |
| CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited) (Continued) |
| Common | Common | Additional | ||||||||||||||||||
| stock | stock | paid-in | Accumulated | |||||||||||||||||
| shares | amount | capital | deficit | Total | ||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuance of common stock for services | - | |||||||||||||||||||
| Issuance of common stock for cash | - | |||||||||||||||||||
| Issuance of common stock for interest | - | |||||||||||||||||||
| Issuance of common stock for warrant exercise | - | |||||||||||||||||||
| Warrants issued for services | - | - | - | |||||||||||||||||
| Stock options issued for services | - | - | - | |||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance, March 31, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuance of common stock for services | $ | $ | $ | |||||||||||||||||
| Issuance of common stock for cash | $ | $ | $ | |||||||||||||||||
| Issuance of common stock for oil and gas lease extension | $ | $ | $ | |||||||||||||||||
| Issuance of common stock for interest | $ | $ | $ | |||||||||||||||||
| Issuance of common stock for note payment in kind | $ | $ | $ | |||||||||||||||||
| Issuance of common stock for option/warrant exercise | $ | $ | $ | |||||||||||||||||
| Warrants issued for services | - | $ | $ | |||||||||||||||||
| Stock options issued for services | - | $ | $ | |||||||||||||||||
| Net loss | - | ( | ) | $ | ( | ) | ||||||||||||||
| Balance, June 30, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuance of common stock for services | ||||||||||||||||||||
| Issuance of common stock for cash | ||||||||||||||||||||
| Issuance of common stock for interest | ||||||||||||||||||||
| Warrants issued for services | - | |||||||||||||||||||
| Beneficial conversion feature on convertible notes | - | |||||||||||||||||||
| Debt discount from fair value of warrants issued with convertible notes | - | |||||||||||||||||||
| Issuance of common stock for convertible note conversion | ||||||||||||||||||||
| Stock options issued for services | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
8
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 1. | NATURE OF BUSINESS |
Torchlight Energy Resources, Inc. 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.
We are engaged in the acquisition, exploitation and/or development of oil and natural gas properties in the United States. We operate our business through our subsidiaries Torchlight Energy Inc., Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC.
| 2. | GOING CONCERN |
At
September 30, 2020, the Company had not yet achieved profitable operations. We had a net loss of $
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, institutional, or public 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, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC. All significant intercompany balances and transactions have been eliminated.
These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.
In the opinion of management, the accompanying unaudited financial condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation.
9
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 3. | SIGNIFICANT ACCOUNTING POLICIES - continued |
Risks and uncertainties – The Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological, and other risks associated with operating an emerging business, including the potential risk of business failure.
Concentration of risks – At times the Company’s cash balances are in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. The Company’s cash is placed with a highly rated financial institution, and the Company regularly monitors the credit worthiness of the financial institutions with which it does business.
Fair value of financial instruments – Financial instruments consist of cash, receivables, convertible note receivable, payables and promissory notes, if any. The estimated fair values of cash, receivables, and payables approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of any promissory notes approximate their fair value giving affect for the term of the note and the effective interest rates. The recorded value of the Company’s convertible note receivable reflects the amount which management believes approximates fair value.
For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows:
| ● | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| ● | Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. |
| ● | Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. |
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Cash and cash equivalents - Cash and cash equivalents include certain investments in highly liquid instruments with original maturities of three months or less. Restricted cash consists of funds held in legal escrow at September 30, 2020. (See Note 9)
Accounts receivable – Accounts receivable consist of uncollateralized oil and natural gas revenues due under normal trade terms, as well as amounts due from working interest owners of oil and gas properties for their share of expenses paid on their behalf by the Company. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. As of September 30, 2020 and December 31, 2019, 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.
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.
10
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 3. | SIGNIFICANT ACCOUNTING POLICIES - continued |
Capitalized
interest – The Company capitalizes interest on unevaluated properties during the periods in which they are excluded
from costs being depleted or amortized. During the nine months ended September 30, 2020 and 2019, the Company capitalized $
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 realizable 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
Company recorded an impairment expense of $
The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated abandonment costs.
The determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of proved oil and gas reserves could result in significant revisions to proved reserves. Other issues, such as changes in regulatory requirements, technological advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future.
Asset retirement obligations – The fair value of a liability for an asset’s retirement obligation (“ARO”) is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, with the corresponding charge capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each subsequent period, and the capitalized cost is depleted over the useful life of the related asset. Abandonment costs incurred are recorded as a reduction of the ARO liability.
Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.
Income taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.
Authoritative guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an examination. Management has reviewed the Company’s tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements. Company tax returns remain subject to Federal and State tax examinations. Generally, the applicable statutes of limitation are three to four years from their respective filings.
11
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 3. | SIGNIFICANT ACCOUNTING POLICIES - continued |
Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statements of operation. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements.
The Company accounts for stock option awards using the calculated value method. The expected term was derived using the simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110, which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options.
The Company accounts for any forfeitures of options when they occur. Previously recognized compensation cost for an award is reversed in the period that the award is forfeited.
The Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion.
The Company values warrant and option awards using the Black-Scholes option pricing model.
Revenue recognition – The Company’s revenue is typically generated from contracts to sell natural gas, crude oil or NGLs produced from interests in oil and gas properties owned by the Company. Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale. The transaction confirmations specify a delivery point which represents the point at which control of the product is transferred to the customer. These contracts frequently meet the definition of a derivative under ASC 815, and are accounted for as derivatives unless the Company elects to treat them as normal sales as permitted under that guidance. The Company elects to treat contracts to sell oil and gas production as normal sales, which are then accounted for as contracts with customers. The Company has determined that these contracts represent multiple performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point.
Revenues from oil and gas sales are detailed as follows:
| Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Revenues | ||||||||||||||||
| Oil sales | $ | $ | $ | $ | ||||||||||||
| Gas sales | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. Amounts allocated in the Company’s price contracts are based on the standalone selling price of those products in the context of long-term contracts. Payment is generally received one or two months after the sale has occurred.
12
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 3. | SIGNIFICANT ACCOUNTING POLICIES - continued |
Gain or loss on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers subject to ASC 606. The Company may in the future use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales.
Producer Gas Imbalances. The Company applies the sales method of accounting for natural gas revenue. Under this method, revenues are recognized based on the actual volume of natural gas sold to purchasers.
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. The Company accrued no liability as of September 30, 2020 and December 31, 2019.
Recent adopted accounting pronouncements – In February 2016 the FASB, issued ASU, 2016-02, Leases. The ASU requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 was effective for the Company in the first quarter of 2019. The Company adopted the change which did not have a material impact on its consolidated financial statements.
Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Company’s financial position or results from operations.
Subsequent events – The Company evaluated subsequent events through November 9, 2020, the date of issuance of these financial statements. Subsequent events are disclosed in Note 11.
| 4. | OIL & GAS PROPERTIES |
The following table presents the capitalized costs for oil & gas properties of the Company as of September 30, 2020 and December 31, 2019:
| September 30, 2020 | December 31, 2019 | |||||||
| Evaluated costs subject to amortization | $ | $ | ||||||
| Unevaluated costs | ||||||||
| Total capitalized costs | ||||||||
| Less accumulated depreciation, depletion and amortization | ( | ) | ( | ) | ||||
| Total oil and gas properties | $ | $ | ||||||
Unevaluated costs as of September 30, 2020 include cumulative costs on developing projects including the Orogrande, Hazel, and Winkler projects in West Texas.
The
Company periodically adjusts for the separation of evaluated versus unevaluated costs within its full cost pool to recognize the
value impairment related to the expiration of, or changes in market value, of unevaluated leases. The impact of reclassifications
as they become necessary is to increase the basis for calculation of future period’s depletion, depreciation and amortization
which effectively recognizes the impairment on the consolidated statement of operations over future periods. Reclassified costs
also become evaluated costs for purposes of ceiling tests and which may cause recognition of increased impairment expense in future
periods. The cumulative unevaluated costs which have been reclassified within our full cost pool totals $
13
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 4. | OIL & GAS PROPERTIES - continued |
Due to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that a further write-down could occur. Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions. The independent engineering estimates include only those amounts considered to be proved reserves and do not include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place. Estimated reserves to be developed through secondary or tertiary recovery processes are classified as unevaluated properties.
Current Projects
We are an energy company engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas properties in the United States. We are primarily focused on the acquisition of early stage projects, the development and delineation of these projects, and then the monetization of those assets once these activities are completed.
Since 2010, our primary focus has been the development of interests in oil and gas projects we hold in the Permian Basin in West Texas. We also hold minor interests in certain other oil and gas projects in Central Oklahoma that we are in the process of divesting.
As of September 30, 2020, we had interests in four oil and gas projects: the Orogrande Project in Hudspeth County, Texas, the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas, the Winkler Project in Winkler County, Texas and the wells in Central Oklahoma.
Orogrande Project, West Texas
On
August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum
Corporation (“MPC”), and Gregory McCabe, our Chairman. Mr. McCabe was the sole owner of both Hudspeth and MPC. Under
the terms and conditions of the Purchase Agreement, we purchased
We believe all drilling obligations through September 30, 2020 have been met.
On September 23, 2015, Hudspeth entered into a Farmout Agreement with Pandora Energy, LP (“Pandora”), Founders Oil & Gas, LLC (“Founders”), and for the limited purposes set forth therein, MPC and Mr. McCabe, for the entire Orogrande Project in Hudspeth County, Texas. The Farmout Agreement provided that Hudspeth and Pandora (collectively referred to as “Farmor”) would assign to Founders an undivided 50% of the leasehold interest and a 37.5% net revenue interest in the oil and gas leases and mineral interests in the Orogrande Project, which interests, except for any interests retained by Founders, would be reassigned to Farmor by Founders if Founders did not spend a minimum of $45.0 million on actual drilling operations on the Orogrande Project by September 23, 2017. Under a joint operating agreement also entered into on September 23, 2015, Founders was designated as operator of the leases.
Effective March 27, 2017 the property became subject to a DDU Agreement which allows for all 192 existing leases covering approximately 134,000 net acres leased from University Lands to be combined into one drilling and development unit for development purposes. The term of the DDU Agreement expires on December 31, 2023, and the time to drill on the drilling and development unit continues through December 2023. The DDU Agreement also grants the right to extend the DDU Agreement through December 2028 if compliance with the DDU Agreement is met and the extension fee associated with the additional time is paid.
Our
drilling obligations include
During 2017, we assumed operational control from Founders Oil and Gas Operating LLC on the Orogrande Project. We were joined by Wolfbone Investments, LLC, (“Wolfbone”), a company owned by Mr. McCabe. We, along with Hudspeth, Wolfbone and, for the limited purposes set forth therein, Pandora, entered into an Assignment of Farmout Agreement with Founders, (the “Assignment of Farmout Agreement”), pursuant to which we and Wolfbone will share the remaining commitments under the Farmout Agreement. All original provisions of our carried interest were to remain in place including reimbursement to us on each wellbore. Founders was to remain a 9.5% working interest owner in the Orogrande Project for the $9.5 million it had spent as of the date of the Assignment of Farmout Agreement, and such interests were to be carried until $40.5 million is spent by Wolfbone and us, with each contributing 50% of such capital spend, under the existing agreement.
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| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 4. | OIL & GAS PROPERTIES - continued |
Our working interest in the Orogrande Project thereby increased by 20.25% to a total of 67.75% and Wolfbone then owned 20.25%.
On July 25, 2018, we and Hudspeth entered into a Settlement & Purchase Agreement (the “Settlement Agreement”) with Founders (and Founders Oil & Gas Operating, LLC), Wolfbone and MPC, which agreement provides for Founders assigning all of its working interest in the oil and gas leases of the Orogrande Project to Hudspeth and Wolfbone equally. Future well capital spending obligations remained the same 50% contribution from Hudspeth and 50% from Wolfbone until such time as the $40.5 million to be spent on the project. The Company estimates that there is still approximately $9.0 million remaining to be spent on the project until such time as the capital expenditures revert back to the percentages of the working interest owners.
After the assignment by Founders, Hudspeth’s working interest increased to 72.5%.
The Company has drilled eight test wells in the Orogrande in order to stay in compliance with University Lands D&D Unit Agreement, as well as, to test for potential shallow pay zones and deeper pay zones that may be present on structural plays. Development of the wells continued into the nine months ended September 30, 2020 to further capture and document the scientific base in support of demonstrating the production potential of the property. The Company is currently marketing the project for an outright sale or farm in partner. This marketing process has been long and arduous as the overall market is quite soft. Due to the size and scope of the project, we are dealing with very large companies that have multitudes of people reviewing our material, which in itself is extensive. During the marketing process, the Company and Wolfbone will endeavor to complete the University Maverick A24 #1 as a potential producer in the Atoka formation. Should a farm out partner or sale not occur, the Company and Wolfbone will continue to drill additional wells in the play in order to fulfill the obligations under the DDU Agreement
Rich Masterson, our consulting geologist, is credited with originating the Orogrande Project in Hudspeth County in the Orogrande Basin. With Mr. Masterson’s assistance and based on all the science we have gathered to date, we have identified multiple unconventional and conventional target pay zones with depths between 3,000’ and 8,000’ with primary pay, described as the Penn formation, located at depths of 5,300 to 5,900’. Based on our geologic analysis to date, this basin has stacked pay with zones including the Wolfcamp, Penn, Barnett, Woodford, Atoka and more. These potential zones are prospective for oil and gas with a GOR of 1100 expected based on our gathered scientific information and analysis from independent third parties.
On March 9, 2020, holders of notes payable by the Company entered into a Conversion Agreement under which the noteholders elected to convert principal of $6,000,000 and approximately $1,331,000 of accrued interest on the notes, in accordance with their terms, into an aggregate 6% working interest (of all such holders) in the Orogrande Project.
The Orogrande Project ownership as of September 30, 2020 is detailed as follows:
| Revenue | Working | |||||||
| Interest | Interest | |||||||
| University Lands - Mineral Owner | % | n/a | ||||||
| ORRI - Magdalena Royalties, LLC, an entity controlled by Gregory McCabe, Chairman | % | n/a | ||||||
| ORRI - Unrelated Party | % | n/a | ||||||
| Hudspeth Oil Corporation, a subsidiary of Torchlight Energy Resources Inc. | % | % | ||||||
| Wolfbone Investments LLC, an entity controlled by Gregory McCabe, Chairman | % | % | ||||||
| Conversion by Note Holders in March, 2020 | % | % | ||||||
| Unrelated Party | % | % | ||||||
| % | % | |||||||
15
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 4. | OIL & GAS PROPERTIES - continued |
Hazel Project in the Midland Basin in West Texas
Effective April 4, 2016, TEI acquired from MPC a 66.66% working interest in approximately 12,000 acres in the Midland Basin. A back-in after payout of a 25% working interest was retained by MPC and another unrelated working interest owner.
In October 2016, the holders of all of our then-outstanding shares of Series C Preferred Stock (which were issued in July 2016) elected to convert into a total 33.33% working interest in our Hazel Project, reducing our ownership from 66.66% to a 33.33% working interest.
The Company has drilled six test wells on the Hazel Project to capture and document the scientific base in support of demonstrating the production potential of the property.
Acquisition of Additional Interests in Hazel Project
On January 30, 2017, we entered into and closed an Agreement and Plan of Reorganization and a Plan of Merger with an entity which was wholly-owned by Mr. McCabe, which resulted in the acquisition of approximately 40.66% working interest in the 12,000 gross acres, 9,600 net acres, in the Hazel Project.
Also on January 30, 2017, TEI entered into and closed a Purchase and Sale Agreement with Wolfbone. Under the agreement, TEI acquired certain of Wolfbone’s Hazel Project assets, including its interest in the Flying B Ranch #1 well and the 40 acre unit surrounding the well.
Upon the closing of the transactions, our working interest in the Hazel Project increased by 40.66% to a total ownership of 74%.
Effective June 1, 2017, we acquired an additional 6% working interest from unrelated working interest owners increasing our working interest in the Hazel project to 80%, and an overall net revenue interest of 74-75%.
Mr. Masterson, who assisted with development in our Orogrande project, is also credited with originating the Hazel Project in the Midland Basin.
We were required to drill one well every six months to hold the entire 12,000 acre block for eighteen months until to November 22, 2018, and thereafter two wells every six months. During 2019 and the nine months ended September 30, 2020 modifications were completed to mineral owner leases as described below.
Lease Modifications
In May 2019 we entered into agreements with two of the three mineral owners on the northern section of the leases to keep the entire acreage block as one lease with a one year extension. We issued each of them 50,000 shares of our common stock as consideration for this extension. As of September 30, 2020 we have structured the extension agreement retroactively with the third mineral owner for cash consideration. Due to this extension, our obligation for 2019 reduced to one obligation well. We finished that obligation well targeting a shallow zone that showed oil potential. For the remainder of 2020 the Company must drill one well in June and two wells by the December 31, 2020. Development of the June well was initiated during June, 2020. The December obligation was met under the terms of the Option Agreement. See below.
In April 2018, we announced that we have commenced a process that could result in the monetization of the Hazel Project. We believed the development activity at the Hazel Project, coupled with nearby activities of other oil and gas operators, suggested that this project has achieved a level of value worth monetizing. We anticipate that the liquidity that would be provided from selling the Hazel Project would be used to retire debt with any remainder redeployed into the Orogrande Project.
Option Agreement with Masterson Hazel Partners, LP
On August 13, 2020, our subsidiaries Torchlight Energy, Inc. and Torchlight Hazel, LLC (collectively, “Torchlight”) entered into an option agreement (the “Option Agreement”) with Masterson Hazel Partners, LP (“MHP”) and McCabe Petroleum Corporation. Under the agreement, MHP is obligated to drill and complete, or cause to be drilled and completed, at its sole cost and expense, a new lateral well (the “Well”) on our Hazel Project, sufficient to satisfy Torchlight’s continuous development obligations on the southern half of the prospect no later than September 30, 2020. MHP paid to Torchlight $1,000 as an option fee at the time of execution of the Option Agreement. If MHP fails to meet the September 30, 2020 deadline, then the options granted pursuant to the Option Agreement will automatically terminate, and Torchlight will retain the $1,000 option fee as its sole remedy. MHP is entitled to receive, as its sole recourse for the recoupment of drilling costs, the revenue from production of the Well attributable to Torchlight’s interest until such time as it has recovered its reasonable costs and expenses for drilling, completing, and operating the well.
In exchange for MHP satisfying the above drilling obligations, Torchlight granted to MHP the exclusive right and option to perform operations, at MHP’s sole cost and expense, on the Hazel Project sufficient to satisfy Torchlight’s continuous development obligations on the northern half of the prospect. In the event that MHP exercises this drilling option and satisfies the continuous development obligations on the northern half of the prospect, then MHP will have the option to purchase the entire Hazel Project by March 31, 2021, under the terms of the form of Purchase and Sale Agreement included as an exhibit to the Option Agreement, at an aggregate purchase price of $12,690,704 for approximately 9,762.08 net mineral acres, and not less than 74% net revenue interest (approximately $1,300 per net mineral acre).
MHP must exercise the above options no later than December 1, 2020, subject to extension to March 11, 2021 if MHP drills the Well on the southern half of the prospect, provides notice no later than December 1, 2020 of its intent to conduct operations on the northern half of the prospect and on or before December 15, 2020, conducts operations sufficient to satisfy the drilling obligations regarding the second well on the northern half of the prospect.
In the event MHP exercises its option to purchase the entire Hazel Project, McCabe Petroleum Corporation, which is owned by our chairman Gregory McCabe, has agreed to reduce its reversionary interest in the Hazel Project from 20% to not more than 12.5%.
16
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 4. | OIL & GAS PROPERTIES - continued |
On September 18, 2020, the parties entered into a First Amendment to Option Agreement, under which, the date MHP must exercise its options under the Option Agreement was extended. MHP must now exercise the options no later than February 3, 2021, subject to extension to the earlier of May 31, 2021 or the maturity date of the promissory notes held by the David A. Straz, Jr. Foundation and David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986, if MHP drills the well on the southern half of the prospect, provides notice no later than February 3, 2021 of its intent to conduct operations on the northern half of the prospect and on or before February 17, 2021, conducts operations sufficient to satisfy the drilling obligations regarding the second well on the northern half of the prospect.
Winkler Project, Winkler County, Texas
On December 1, 2017, an Agreement and Plan of Reorganization was entered into with MPC and Warwink Properties, LLC (“Warwink Properties”) to acquire certain assets, including a 10.71875% working interest in approximately 640 acres in Winkler County, Texas. Also on December 1, 2017, MPC closed its transaction with MECO IV, LLC (” MECO”), for the purchase and sale of certain assets. Warwink Properties received a carry from MECO (through the tanks) of up to $1,179,076 in the next well drilled on the Winkler County leases.
Also on December 1, 2017, the transactions contemplated by the Purchase Agreement that TEI entered into with MPC closed. Under the Purchase Agreement TEI acquired beneficial ownership of certain of MPC’s assets, including acreage and wellbores located in Ward County, Texas (the “Ward County Assets”).
Addition to the Winkler Project
As of May 7, 2018 our Winkler project in the Delaware Basin had begun the drilling phase of the first Winkler Project well, the UL 21 War-Wink 47 #2H. Additional acreage was leased by our operating partner under the Area of Mutual Interest Agreement (AMI) and we exercised its right to participate for its 12.5% in the additional 1,080 gross acres. Our carried interest in the first well was applied to this new well and allowed MECO to drill and produce potential revenues sooner than originally planned. The primary leasehold is a 320-acre block and allows for 5,000-foot lateral wells to be drilled. The first well was completed and began production in October, 2018 and is producing currently.
The operator has informed us that there will be no planned additional wells in the acreage in 2020. All acreage is presently held by production.
During the nine months ended September 30, 2020, the Company transferred a group of marginal unproductive wells (acquired as part of the original Winkler transaction) to the Operator of the properties in exchange for a $7,000 credit against the outstanding account payable due to the Operator. No gain or loss was recognized on the transaction.
In December 2018, the Company began to take measures on its own to market the Winkler Project in an effort to focus on the Orogrande. This process is ongoing.
Hunton Play, Central Oklahoma
Presently, we are producing from one well in the Viking Area of Mutual Interest and one well in Prairie Grove.
Assessment for Assets Held for Sale Classification
With respect to marketing oil and natural gas properties, the Company has evaluated the properties being marketed to determine whether any should be reclassified as held-for-sale at September 30, 2020. The held-for-sale criteria include: management commits to a plan to sell; the asset is available for immediate sale; an active program to locate a buyer exists; the sale of the asset is probable and expected to be completed within one year; the asset is being actively marketed for sale; and it is unlikely that significant changes to the plan will be made. If each of these criteria is met, the property would be reclassified as held-for-sale on the Company’s consolidated balance sheets and measured at the lower of their carrying amount or estimated fair value less costs to sell. Fair values are estimated using accepted valuation techniques, such as a discounted cash flow model, valuations performed by third parties, earnings multiples, or indicative bids, when available. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the sale of the assets to be divested may differ from the estimated fair values reflected in the consolidated financial statements. If each of these criteria is met, DD&A expense would not be recorded on assets to be divested once they are classified as held for sale. Based on management’s assessment, certain criteria have not been met and no assets are classified as held for sale as of September 30, 2020.
| 5. | RELATED PARTY PAYABLES |
As
of September 30, 2020 and December 31, 2019, related party payables was $
On
September 18, 2020, McCabe Petroleum Corporation, an entity owned by Greg McCabe, Torchlight’s Chairman, provided a bridge
loan to Torchlight for $
| 6. | COMMITMENTS AND CONTINGENCIES |
Leases
The Company is a subtenant on a month to month basis for the occupancy of its office premises.
17
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 6. | COMMITMENTS AND CONTINGENCIES - continued |
Legal Matters
On January 31, 2020, Torchlight Energy Resources, Inc. and its wholly owned subsidiaries Torchlight Energy, Inc. and Torchlight Energy Operating, LLC were served with a lawsuit brought by Goldstone Holding Company, LLC (Goldstone Holding Company, LLC v. Torchlight Energy, Inc., et al., in the 160th Judicial District Court of Dallas County, Texas). On February 24, 2020, Torchlight Energy Resources, Inc., Torchlight Energy, Inc., and Torchlight Energy Operating, LLC timely filed their answer, affirmative defenses, and requests for disclosure. The suit, which seeks monetary relief over $1 million, makes unspecified allegations of misrepresentations involving a November 2015 participation agreement and a 2016 amendment to the participation agreement. The Company has denied the allegations and has asserted several affirmative defenses including but not limited to, that the suit is barred by the applicable statute of limitations, that the claims have been released, and that the claims are barred because of contractual disclaimers between sophisticated parties.
On April 30, 2020, our wholly owned subsidiary, Hudspeth Oil Corporation, filed suit against Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies. The suit seeks the recovery of approximately $1.4 million in costs incurred as a result of a tool failure during drilling activities on the University Founders A25 #2 well that is located in the Orogrande Field. Working interest owner Wolfbone Investments, LLC, a company owned by our Chairman Gregory Mccabe, is a co-plaintiff in that action. After the suit was filed, Cordax filed a mineral lien in the amount of $104,500.01 against the Orogrande Field and has sued the operator and counterclaimed against Hudpspeth for breach of contract, seeking the same amount as the lien. We are contesting the lien in good faith. The suit, Hudspeth Oil Corporation and Wolfbone Investments, LLC v. Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies, was filed in the 189th Judicial District Court of Harris County, Texas.
Environmental Matters
The Company is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time. As of September 30, 2020 and December 31, 2019, no amounts had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts.
| 7. | STOCKHOLDERS’ EQUITY |
Common Stock
On January 10, 2020, the Company sold shares of common stock for cash at $ per share for total proceeds of $360,000 in a private placement.
On
January 16, 2020, the Company announced the closing of its underwritten public offering of shares of its common stock
at a public offering price of $ per share, for total proceeds of $
In
May 2020, the Company issued shares of common stock in satisfaction of the payment in kind valued at $
In
May 2020, we issued restricted shares of common stock to an investor for the purchase price of $
On
May 20, 2020, the Company announced the closing of its underwritten public offering of shares of its common stock at
a public offering price of $ per share, for total proceeds of $
18
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 7. | STOCKHOLDERS’ EQUITY - continued |
On
June 16, 2020, the Company announced the closing of its registered direct offering of shares of its common stock at
a public offering price of $ per share, for total proceeds of $
During
the nine months ended September 30, 2020, the Company issued shares of common stock with a fair value of $
During
the nine months ended September 30, 2020, the Company issued shares of common stock to a vendor with a fair value of $
During
the nine months ended September 30, 2020, the Company issued shares of common stock to a note holder with a fair value
of $
During
the nine months ended September 30, 2020, the Company issued shares of common stock to note holders as compensation for
extension of the maturity date of the notes. The fair value of the shares was $
During
the nine months ended September 30, 2020, the Company issued shares of common stock to a vendor with a fair value of $
During
the nine months ended September 30, 2020, the Company issued shares of common stock to the former CEO of the Company with
a fair value of $
On
July 20, 2020, the Company entered into a Sales Agreement to conduct an “at-the-market” equity offering program pursuant
to which the Company may issue and sell, from time to time at its sole discretion, shares of its common stock having an aggregate
offering price of up to $7,000,000. The Sales Agent is entitled to an aggregate fixed commission of 3.0% of the gross proceeds
from shares sold. Gross proceeds from sales of shares under the Sales Agreement through September 30, 2020 totaled $511,966.
Commissions on the sales totaled $
Warrants and Options
During
the nine months ended September 30, 2020, the Company issued 715,000 warrants with total fair value of $
During
the nine months ended September 30, 2020, the Company issued 750,000 warrants valued at $
During the nine months ended September 30, 2020, the Company issued 600,000 warrants in connection with the sale of 600,000 shares of common stock valued at $360,000 in a private placement.
During the nine months ended September 30, 2020, the Company issued 172,500 warrants valued at $36,225 in connection with the offering of common stock on May 20, 2020 as referred to above.
In connection with the registered direct offering closed June 16, 2020, as referenced above, the Company issued 3,157,895 warrants. The warrants were exercised on July 9, 2020 under the cashless provisions in the agreement resulting in the Company issuing 3,157,895 shares of common stock for which no cash was received. Of the total proceeds received from the offering $854,887 was allocated to the warrants using the pro rata percentage of the number of warrants to the total shares ultimately issued under the offering terms.
19
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 7. | STOCKHOLDERS’ EQUITY - continued |
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| $ | ||||||||||||||||||||||||||
On June 11, 2020, 4,500,000 stock options previously granted to officers of the Company in 2015 expired.
On July 15, 2020, we entered into new one-year employment agreements with John Brda, our President and Chief Executive Officer, and Roger Wurtele, our Chief Financial Officer. As part of their employment compensation, the Compensation Committee granted Mr. Brda an option to purchase a total of up to shares of common stock, including up to shares at an exercise price of $0.50 per share and up to shares at an exercise price of $1.00 per share, and granted Mr. Wurtele an option to purchase a total of up to shares of common stock, including up to shares at an exercise price of $0.50 per share and up to shares at an exercise price of $1.00 per share. The options were granted under our Amended and Restated 2015 Stock Option Plan. The options of both executives will vest upon either (a) the closing of a change of control occurring prior to July 15, 2021, or (b) the Company entering into a letter of intent with a third party prior to July 15, 2021 that contemplates a change of control, and the change of control transaction closes with that third party (or an affiliate(s) of that third party) at a date not later than July 15, 2022; subject, however, to acceleration and earlier vesting of all of the options in the event of (i) the termination of employment by the employee for “good reason” under his employment agreement or (ii) a determination of the Compensation Committee, at its discretion. In the event of the death or disability of the employee prior to vesting or if the Company terminates the employee’s employment for reasons other than for “cause” under the employment agreement prior to vesting, the option will still vest upon the occurrence of the events described under clauses (a) or (b) above. The options, to the extent such options have not been exercised, will terminate and become null and void on July 15, 2025, if and only if the options vest as described above, or on July 15, 2021, if the options do not vest as described above, subject to the occurrence of the events contemplated under clause (b) above whereby the options would not terminate until July 15, 2022. At such time that the options vest, the Black Scholes valuation of the options will be recorded as an expense.
| Exercise | Expiration Date in | |||||||||||||||||||||||||
| Price | 2021 | 2022 | 2023 | 2024 | 2025 | Total | ||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| $ | - | |||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
At
September 30, 2020, the Company had reserved
20
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 7. | STOCKHOLDERS’ EQUITY - continued |
| 2020 | |
| Risk-free interest rate | - |
| Expected volatility of common stock | - |
| Dividend yield | |
| Discount due to lack of marketability | |
| Expected life of option/warrant | to |
| 2019 | |
| Risk-free interest rate | - |
| Expected volatility of common stock | - |
| Dividend yield | |
| Discount due to lack of marketability | |
| Expected life of option/warrant | to |
| 8. | INCOME TAXES |
The Company recorded no income tax provision at September 30, 2020 and December 31, 2019 because of losses incurred.
The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. The Company recorded no income tax expense for the nine months ended September 30, 2020 because the Company expects to incur a tax loss in the current year. Similarly, no income tax expense was recognized for the nine months ended September 30, 2019.
The
Company had a net deferred tax asset related to federal net operating loss carryforwards of $
| 9. | PROMISSORY NOTES |
Promissory Notes Issued in 2017
On
April 10, 2017, we sold two 12% unsecured promissory notes with a total of $
These 12% promissory notes allow for early redemption. The notes also contain certain covenants under which we have agreed that, except for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% notes, unless consented to by the holders.
21
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 9. | PROMISSORY NOTES - continued |
The
effective interest rate is
On
April 24, 2017, we used $
On
February 20, 2020, the Company extended the maturity on $4 million of the 12% unsecured promissory notes previously due in April,
2020. The maturity date of the subject promissory note has been extended for one year, from April 10, 2020 to
As
part of the terms of this extension agreement, the Company paid the noteholder a fee of $
Promissory Notes Issued in 2018
On
February 6, 2018, we sold to the Straz Trust in a private transaction a 12% unsecured promissory note with a principal amount
of $
This 12% promissory note allows for early redemption, provided that if we redeem before February 6, 2019, we must pay the holder all unpaid interest and common stock payments on the portion of the note redeemed that would have been earned through February 6, 2019. The note also contains certain covenants under which we have agreed that, except for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% note, unless consented to by the holder.
The
effective interest rate is
Extension of Promissory Notes
On
April 24, 2020, the Company entered into a Note Amendment Agreement with each of the Straz Foundation, as a lender, the Straz
Trust, as a lender and collateral agent, and The Northern Trust Company and Christopher M. Straz, as co-trustees of the Straz
Trust. Under the Note Amendment Agreement, the parties agreed to amend and restate the two promissory notes issued to the Straz
Trust on April 10, 2017 and February 6, 2018 that have total principal outstanding of $8,500,000, along with the promissory note
issued to the Straz Foundation on April 10, 2017 which had an outstanding principal amount of $
Under the Note Amendment Agreements, we and our subsidiaries provided a first priority lien on certain collateral in favor of the collateral agent for the benefit of the lenders. The collateral includes all assets and property held by Hudspeth Oil Corporation and Torchlight Hazel, LLC, which includes without limitation our working interest in certain oil and gas leases in Hudspeth County, Texas, known as the “Orogrande Project” and our working interest in certain oil and gas leases in the Midland Basin in West Texas, known as the “Hazel Project.” Further, these subsidiaries, along with Torchlight Energy, Inc., provided guaranty with respect to payment of the three promissory notes. The Note Amendment Agreements also provide that (a) upon any disposition of less than 100% of Borrower’s right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 75% of the proceeds thereof (up to the outstanding amount due under the notes), unless such disposition results in us owning less than a 45% working interest (on an 8/8ths basis) in the Orogrande Project or the Hazel Project, in which case the prepayment amount is to be equal to 100% of such proceeds (up to the outstanding amount due under the notes); and (b) upon any disposition of 100% of our right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 100% of the proceeds thereof (up to the outstanding amount due under the notes).
Additionally, the promissory notes, as amended, now provide conversion rights whereby the lenders will have the right, at each such lender’s option, to convert any portion of principal and interest into shares of common stock of Torchlight Energy Resources, Inc. at a conversion price of $1.50 per share.
22
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 9. | PROMISSORY NOTES - continued |
The Note Amendment Agreements (as further amended) provided that no later than May 25, 2020, we were obligated to pay: (a) to the lenders all past due interest that has accrued on the existing promissory notes, and (b) to the Straz Trust a fee of $170,000, which payments were made. Further, the agreements have certain negative covenants regarding related party transactions, dividends, stock repurchases, grants of liens on other assets, and payment of accrued executive compensation. There are also typical affirmative covenants regarding legal compliance and payment of taxes. The agreements also provide certain notice and disclosure requirements, including notice of material events, such as defaults under other obligations and litigation. The $170,000 extension fee was paid on May 22 and the interest payments were made on June 17, 2020 within the terms of a forbearance agreement which provided an extension of the due date of the interest payments.
All other terms and conditions of the three original promissory notes remain substantially unchanged, including without limitation, monthly payments of interest only at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity, and annual payments of common stock at the rate of 2.5% of the principal amount outstanding, based on a volume-weighted average price.
In May 2020 and April 2019, respectively, the holders of the notes described above received and shares of common stock as a payment in kind representing the annual payments of common stock due at the rate of 2.5% of principal amount outstanding as of April 10 based on a volume-weighted average price calculation.
The 12% promissory note transactions through September 30, 2020 are summarized as follows:
| 12% 2020 Unsecured promissory note balance - December 31, 2019 | $ | |||
| Note principal converted to common stock on July 14, 2020 | ( | ) | ||
| Accretion of discount and amortization of debt issuance costs | ||||
| Debt extension fee paid | ( | ) | ||
| 12% 2021 Secured promissory note balance - September 30, 2020 | $ |
Convertible Notes Issued in October, 2018
On
October 17, 2018, we sold to certain investors in a private transaction 16% Series C Unsecured Convertible Promissory Notes with
a total principal amount of $
23
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 9. | PROMISSORY NOTES - continued |
On March 9, 2020, each of the noteholders entered into a Conversion Agreement with us and our subsidiary Hudspeth Oil Corporation (“Hudspeth”), under which the noteholders elected to convert the notes, in accordance with their terms, into an aggregate 6% working interest (of all such holders) in certain oil and gas leases in Hudspeth County, Texas, known as our “Orogrande Project.” Principal of $6,000,000 and approximately $1,331,000 of accrued interest were converted at March 9, 2020.
The Conversion Agreements also provided additional consideration to the noteholders including a limited carry, a top-off obligation of us and Hudspeth, and warrants to purchase a total of 750,000 restricted shares of our common stock, which warrants will have a term of five years and an exercise price of $0.70 per share. The limited carry provides that for the remainder of the 2020 calendar year, Hudspeth will pay all costs and expenses attributable to the assigned working interests, except where prohibited by law or regulation. The top-off obligation provides that, subject to the terms and conditions of the Conversion Agreements, if (a) we sell our entire working interest in the Orogrande Project, (b) as part of such sale, the holder’s entire working interests are sold, and (c) the gross proceeds received by all the holders in such transaction are equal to less than $9,000,000; then we must pay the holders an amount equal to $9,000,000, (i) less gross proceeds the holders received in the transaction, (ii) less the amount of the carry the holders received under the Conversion Agreements, and (iii) less any gross proceeds the holders received in any farmouts occurring prior to the transaction.
The
transaction was treated as an extinguishment of debt. The fair value of the working interest transferred in the conversion of
the debt was $
Convertible Notes Issued in First Quarter 2019
On
February 11, 2019 the Company raised a total of $
On
April 21, 2020, Torchlight Energy Resources, Inc. entered into agreements to amend the two 14% Series D Unsecured Convertible
Promissory Notes that were originally issued on February 11, 2019. Under the amendment agreements, (a) the maturity dates were
extended from May 11, 2020 to
Under the note amendments, the noteholders agreed to forebear demand or collection on all interest payments due and payable under the Note, including any past due interest payments, for 20 days after the execution of the Note Amendment Agreement. Further, we agreed to (a) issue each holder 20,000 restricted shares of common stock immediately and (b) pay each holder a fee of $10,000, at the same time as the payment of past due interest is paid. The past due interest and fee was paid.
These two promissory notes will continue to provide for monthly payments of interest only at the rate of 14% per annum, with a balloon payment of the outstanding principal due and payable at maturity.
24
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 9. | PROMISSORY NOTES - continued |
Convertible Notes Issued in Third Quarter 2019
In
July 2019, the Company issued 8% Unsecured Convertible Promissory notes in the amount of $
Warrants
issued along with the notes meet the requirements of the scope exemptions in ASC 815-10-15-74 and are thus classified as equity
upon issuance. The Company determined the fair value of the warrants using the Black Scholes pricing formula and is recognized
as a discount on the carrying amount of the notes and is credited to additional paid in capital. The fair value of the warrants
at the issuance date was determined to be $
A
beneficial conversion feature (“BCF”) of a convertible note is normally characterized as the convertible portion feature
that provides a rate of conversion that is below market value or “in the money” when issued. The BCF related to the
issuance of the notes was recorded at the issuance date. The BCF was measured using the intrinsic value method and is shown as
a discount to the carrying amount of the convertible note and is credited to additional paid in capital. The intrinsic value of
the BCF at the issuance date of the notes was determined to be $
The
allocated fair values of the BCF and the warrants was recorded as a debt discount from the face amount of the notes and such discount
is being accreted over the expected term of the notes and is charged to interest expense. The Company recognized interest expense
of $
The Company evaluated the July 2019 notes for derivative accounting criteria and concluded that derivative accounting treatment was not applicable.
Convertible Notes Issued in Fourth Quarter 2019
Effective
October 31, 2019, the Company issued 10% Unsecured Convertible Promissory notes in the amount of $
The Company evaluated the October 2019 notes for BCF and derivative accounting criteria and concluded that there was no BCF or derivative accounting treatment applicable.
Paycheck Protection Program Loan
In
response to the COVID-19 pandemic, the U.S. Small Business Administration (the “SBA”) made available low-interest
rate loans to qualified small businesses, including under its Paycheck Protection Program (the “PPP”). On April 10,
2020, in order to supplement its cash balance, the Company submitted an application for a loan (“SBA loan”) in the
amount of $
Section 1106 of the CARES Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP. The PPP and loan forgiveness are intended to provide economic relief to small businesses, such as the Company, that are adversely impacted under the COVID-19 Emergency Declaration issued by President Trump on March 13, 2020. The Company will apply for loan forgiveness.
Secured Convertible Promissory Note Issued in Third Quarter, 2020
On September 18, 2020, McCabe Petroleum Corporation, a company owned by our chairman Gregory McCabe (“MPC”), loaned us $1,500,000, evidenced by a 6% Secured Convertible Promissory Note (the “MPC Note”). The note bears interest at the rate of 6% per annum and provides for payment of the principal amount along with all accrued and unpaid interest in one lump sum payment on its maturity date of May 10, 2021. In connection with the proposed business combination transaction with Metamaterial Inc. (“Metamaterial”), the note provides the following requirements on the use of proceeds of the loan as follows: (i) we will lend $500,000 to Metamaterial pursuant to an 8% Unsecured Convertible Promissory Note (the “Metamaterial Note”); (ii) we will retain and use $500,000 for general corporate purposes, including without limitation, expenses incurred by us in connection with the proposed business combination transaction; and (iii) we will deposit $500,000 into an escrow account, to be held in escrow. If we and Metamaterial enter into a definitive agreement by the later of November 30, 2020 or such later date that is agreed to by us and Metamaterial in writing, the $500,000 from this escrow account will be released to us, and we will lend this amount to Metamaterial pursuant to another convertible promissory note (the “Second Metamaterial Note”). If we do not enter into a definitive agreement by the later of November 30, 2020 or such later date that is agreed to in writing, the $500,000 from this escrow account will be released back to MPC and deducted from the principal amount outstanding under the MPC Note.
The MPC Note is secured by our pledge of the Metamaterial Note and the Second Metamaterial Note (if issued). If we and Metamaterial do not enter into a definitive agreement by the later of November 30, 2020 or such later date that is agreed to in writing, then promptly after that date, we will assign to MPC the Metamaterial Note in full repayment and discharge of $500,000 (plus accrued and unpaid interested on the Metamaterial Note) of the principal amount of the MPC Note, and the remaining $500,000 (less accrued and unpaid interested on the Metamaterial Note) of the principal amount, plus all unpaid interest accrued under the MPC Note, will remain subject to the MPC Note. If a definitive agreement is entered into by the later of November 30, 2020 or such later date that is agreed to in writing, but the proposed business combination transaction is terminated prior to closing or otherwise does not close by the maturity date of the MPC Note, then we will assign to MPC both the Metamaterial Note and Second Metamaterial Note in full repayment and discharge of $1,000,000 (plus accrued and unpaid interested on the Metamaterial Note and Second Metamaterial Note) of the principal amount of the MPC Note, and the remaining $500,000 (less accrued and unpaid interested on the Metamaterial Note and Second Metamaterial Note) of the principal amount, plus all unpaid interest accrued under the MPC Note, will remain subject to the MPC Note.
25
| TORCHLIGHT ENERGY RESOURCES, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| 9. | PROMISSORY NOTES - continued |
The MPC Note also provides that if (i) we and Metamaterial do not enter into a definitive agreement by the later of November 30, 2020 or such later date that is agreed to in writing, or (ii) we and Metamaterial enter into a definitive agreement but the proposed transaction is terminated prior to closing or otherwise does not close by the maturity date of the MPC Note, then at such time and until the maturity date, MPC will have the right, at its option, to convert up to $500,000 of the remaining principal amount of the MPC Note, plus all unpaid interest accrued under the MPC Note, into shares of our common stock at a conversion price of $0.375 per share. Additionally, if the proposed transaction with Metamaterial closes, all principal and interest under the MPC Note will automatically convert into shares of our common stock at $0.375 per share. The Company evaluated the notes for a beneficial conversion feature (“BCF”) and derivative accounting criteria and concluded that there was no BCF or derivative accounting treatment applicable.
Loan to Metamaterial Inc.
On September 20, 2020, we loaned Metamaterial $500,000, evidenced by an 8% Unsecured Convertible Promissory Note (the “Metamaterial Note”). The note bears interest at the rate of 8% per annum and provides for payment of the principal amount along with all accrued and unpaid interest in one lump sum payment on its maturity date of September 20, 2022. Metamaterial has the right to redeem after 120 days. The note is convertible at the price of $0.35 (CAD) per share at the option of the holder if the definitive agreement for the proposed transaction between us and Metamaterial is not entered into by November 2, 2020 (unless extended in writing by the parties) or the definitive agreement is entered but is terminated or expires without closing. The date was extended to November 30, 2020 on November 2, 2020. The Company evaluated the notes for a beneficial conversion feature (“BCF”) and derivative accounting criteria and concluded that there was no BCF or derivative accounting treatment applicable.
| 10. | ASSET RETIREMENT OBLIGATIONS |
The following is a reconciliation of the asset retirement obligations liability through September 30, 2020:
| Asset retirement obligations – December 31, 2019 | $ | |||
| Accretion expense | ||||
| Estimated liabilities recorded | - | |||
| Asset retirement obligations – March 31, 2020 | $ | |||
| Accretion expense | ||||
| Estimated liabilities recorded | - | |||
| Asset retirement obligations – June 30, 2020 | $ | |||
| Accretion expense | ||||
| Estimated liabilities recorded | - | |||
| Asset retirement obligations – September 30, 2020 | $ |
| 11. | SUBSEQUENT EVENTS |
Hazel Project Option Agreement
In accordance with the terms of the Option Agreement (see Note 4), Masterson Hazel Partners, LP exercised its option on August 17, 2020 to drill the well that was required to meet the Company’s drilling obligation on the southern half of the prospect. The development of that well is in progress at date of this filing.
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are an energy company engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas properties in the United States. We are primarily focused on the acquisition of early stage projects, the development and delineation of these projects, and then the monetization of those assets once these activities are completed.
Since 2010, our primary focus has been the development of interests in oil and gas projects we hold in the Permian Basin in West Texas, including the Orogrande Project in Hudspeth County, Texas, the Hazel Project in the Midland Basin and the project in Winkler County, Texas in the Delaware Basin. We also hold interests in certain other oil and gas projects that we are in the process of divesting, including the Hunton wells project as part of a partnership with Husky Ventures, Inc., or Husky, in Central Oklahoma.
We employ a private equity model within a public platform, with the goal to (i) enter into a play at favorable valuations, (ii) “prove up” and delineate the play through committed capital and exhaustive geologic and engineering review, and (iii) monetize our position through an exit to public and private independents that can continue full-scale development. Rich Masterson, our consulting geologist, has originated several of our current plays, as discussed below, based on his tenure as a geologist since 1974. He is credited with originating the Wolfbone shale play in the Southern Delaware Basin of West Texas and has prepared prospects totaling over 150,000 acres that have been leased, drilled and are currently being developed by Devon Energy Corp., Occidental Petroleum Corporation, Noble Energy, and Samson Oil & Gas Ltd., among others.
In April 2018, we announced that we have commenced a process that could result in the monetization of the Hazel Project. Pursuant to our corporate strategy, in our opinion the development activity at the Hazel Project, coupled with nearby activities of other oil and gas operators, is indicative of this project having achieved a level of value that suggests monetization. We believed that the liquidity that would be provided from selling the Hazel Project would be used for debt retirement with any remainder being redeployed into the Orogrande Project. The Hazel Project is currently subject to an Option Agreement, as described above under Note 4.
We are also currently marketing the Orogrande Project for an outright sale or farm in partner and are taking measures on our own to market the Winkler Project. These efforts are continuing.
On September 21, 2020, we announced that we entered into a non-binding letter of intent with Metamaterial Inc. for a proposed business combination transaction. See subsection titled “Recent Developments” below.
We operate our business through five wholly-owned subsidiaries, Torchlight Energy, Inc., a Nevada corporation, Torchlight Energy Operating, LLC, a Texas limited liability company, Hudspeth Oil Corporation, a Texas corporation, Torchlight Hazel, LLC, a Texas limited liability company, and Warwink Properties, LLC, a Texas limited liability company. We currently have four full-time employees and we employ consultants for various tasks as needed.
Our principal executive offices are located at 5700 W. Plano Parkway, Suite 3600, Plano, Texas 75093. The telephone number of our principal executive offices is (214) 432-8002.
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited financial statements included herewith and our audited financial statements for the year ended December 31, 2019. 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.
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Historical Results for the nine months ended September 30, 2020 and 2019:
Revenues and Cost of Revenues
For the nine months ended September 30, 2020, we had production revenue of $191,819 compared to $619,054 for the nine months ended September 30, 2019. Refer to the table of production and revenue included below for quarterly changes in revenue. Our cost of revenue, consisting of lease operating expenses and production taxes, was $171,664 and $358,424 for the nine months ended September 30, 2020 and 2019, respectively.
| Property | Quarter | Oil Production {BBLS} | Gas Production {MCF} | Oil Revenue | Gas Revenue | Total Revenue | ||||||||||||
| Oklahoma | Q1 - 2020 | 181 | 468 | $ | 583 | $ | 1,000 | $ | 1,583 | |||||||||
| Hazel (TX) | Q1 - 2020 | 0 | 0 | $ | - | $ | - | $ | - | |||||||||
| MECO (TX) | Q1 - 2020 | 1,863 | 1,559 | $ | 81,530 | $ | 1,507 | $ | 83,037 | |||||||||
| Total Q1-2020 | 2,044 | 2,027 | $ | 82,113 | $ | 2,507 | $ | 84,620 | ||||||||||
| Oklahoma | Q2 - 2020 | 28 | 448 | $ | 774 | $ | 156 | $ | 930 | |||||||||
| Hazel (TX) | Q2 - 2020 | 0 | 0 | $ | - | $ | - | $ | - | |||||||||
| MECO (TX) | Q2 - 2020 | 1,389 | 747 | $ | 44,223 | $ | 324 | $ | 44,547 | |||||||||
| Total Q2-2020 | 1,417 | 1,195 | $ | 44,997 | $ | 480 | $ | 45,477 | ||||||||||
| Oklahoma | Q3 - 2020 | 69 | 1,096 | $ | 2,084 | $ | 494 | $ | 2,578 | |||||||||
| Hazel (TX) | Q3 - 2020 | 0 | 0 | $ | - | $ | - | $ | - | |||||||||
| MECO (TX) | Q3 - 2020 | 1,480 | 680 | $ | 57,774 | $ | 1,370 | $ | 59,144 | |||||||||
| Total Q3-2020 | 1,549 | 1,776 | $ | 59,858 | $ | 1,864 | $ | 61,722 | ||||||||||
| 2020 Year To Date | 5,010 | 4,998 | $ | 186,968 | $ | 4,851 | $ | 191,819 | ||||||||||
| Oklahoma | Q1 - 2019 | 56 | 1,072 | $ | 2,567 | $ | 2,333 | $ | 4,900 | |||||||||
| Hazel (TX) | Q1 - 2019 | 2,864 | 0 | $ | 131,901 | $ | - | $ | 131,901 | |||||||||
| MECO (TX) | Q1 - 2019 | 3,525 | 2,565 | $ | 167,677 | $ | 6,359 | $ | 174,036 | |||||||||
| Total Q1-2019 | 6,445 | 3,637 | $ | 302,145 | $ | 8,692 | $ | 310,837 | ||||||||||
| Oklahoma | Q2 - 2019 | 43 | 1,770 | $ | 2,477 | $ | 2,450 | $ | 4,927 | |||||||||
| Hazel (TX) | Q2 - 2019 | 1,123 | 0 | $ | 64,302 | $ | - | $ | 64,302 | |||||||||
| Meco (TX) | Q2 - 2019 | 2,585 | 2,623 | $ | 156,259 | $ | 11,587 | $ | 167,846 | |||||||||
| Total Q2-2019 | 3,751 | 4,393 | $ | 223,038 | $ | 14,037 | $ | 237,075 | ||||||||||
| Oklahoma | Q3 - 2019 | 0 | 0 | $ | - | $ | - | $ | - | |||||||||
| Hazel (TX) | Q3 - 2019 | 0 | 0 | $ | - | $ | - | $ | - | |||||||||
| Meco (TX) | Q3 - 2019 | 1,320 | 4,522 | $ | 71,064 | $ | 78 | $ | 71,142 | |||||||||
| Total Q3-2019 | 1,320 | 4,522 | $ | 71,064 | $ | 78 | $ | 71,142 | ||||||||||
| Oklahoma | Q4 - 2019 | 166 | 3,766 | $ | 8,873 | $ | 1,895 | $ | 10,768 | |||||||||
| Hazel (TX) | Q4 - 2019 | 0 | 0 | $ | - | $ | - | $ | - | |||||||||
| Meco (TX) | Q4 - 2019 | 2,102 | 5,890 | $ | 110,894 | $ | 5,547 | $ | 116,441 | |||||||||
| Total Q4-2019 | 2,268 | 9,656 | $ | 119,767 | $ | 7,442 | $ | 127,209 | ||||||||||
| 2019 Year To Date | 13,784 | 22,208 | $ | 716,014 | $ | 30,249 | $ | 746,263 | ||||||||||
During the nine months ended September 30, 2020, oil production decreased due to down time associated with equipment repair and typical decline in production from the MECO property.
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
We recorded depreciation, depletion, and amortization expense of $802,316 for the nine months ended September 30, 2020 compared to $355,050 for the nine months ended September 30, 2019.
General and Administrative Expenses
Our general and administrative expenses for the nine months ended September 30, 2020 and 2019 were $2,244,804 and $2,557,343, respectively, a decrease of $312,539. 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 fees, and other general corporate expenses. The change in general and administrative expenses for the nine months ended September 30, 2020 compared to 2019 is detailed as follows:
| Increase(decrease) in non cash stock and warrant compensation | $ | (475,072 | ) | |
| Increase(decrease) in consulting expense | (64,561 | ) | ||
| Increase(decrease) in professional fees | (82,178 | ) | ||
| Increase(decrease) in investor relations | 131,231 | |||
| Increase(decrease) in travel expense | (7,787 | ) | ||
| Increase(decrease) in salaries and compensation | 34,875 | |||
| Increase(decrease) in legal fees | 69,793 | |||
| Increase(decrease) in insurance | 72,082 | |||
| Increase(decrease) in rent | (14,622 | ) | ||
| Increase(decrease) in accounting and audit fees | 13,803 | |||
| Increase(decrease) in general corporate expenses | 9,897 | |||
| Total Decrease in General and Administrative Expenses | $ | (312,539 | ) |
Historical Results for the three months ended September 30, 2020 and 2019:
Revenues and Cost of Revenues
For the three months ended September 30, 2020, we had production revenue of $61,722 compared to $71,142 for the three months ended September 30, 2019. Refer to the table of production and revenue presented above for quarterly changes in revenue. Our cost of revenue, consisting of lease operating expenses and production taxes, was $23,644 and $117,104 for the three months ended September 30, 2020 and 2019, respectively.
We recorded depreciation, depletion, and amortization expense of $77,118 for the three months ended September 30, 2020 compared to $27,355 for the three months ended September 30, 2019.
General and Administrative Expenses
Our general and administrative expenses for the three months ended September 30, 2020 and 2019 were $590,369 and $849,425 respectively, a decrease of $259,056. 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 change in general and administrative expenses for the three months ended September 30, 2020 compared to 2019 is detailed as follows:
| Increase(decrease) in non cash stock and warrant compensation | $ | (112,342 | ) | |
| Increase(decrease) in consulting expense | (125,000 | ) | ||
| Increase(decrease) in professional fees | (73,069 | ) | ||
| Increase(decrease) in investor relations | (7,624 | ) | ||
| Increase(decrease) in travel expense | (4,420 | ) | ||
| Increase(decrease) in salaries and compensation | 58,295 | |||
| Increase(decrease) in legal fees | 33,471 | |||
| Increase(decrease) in insurance | 14,233 | |||
| Increase(decrease) in rent | (4,918 | ) | ||
| Increase(decrease) in accounting and audit fees | (22,823 | ) | ||
| Increase(decrease) in general corporate expenses | (14,859 | ) | ||
| Total Decrease in General and Administrative Expenses | $ | (259,056 | ) |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Liquidity and Capital Resources
At September 30, 2020, we had working capital deficit of $16,259,366 and total assets of $35,973,118. Stockholders’ equity was $15,713,135. The negative working capital is principally due to accumulated accounts payable balances at September 30, 2020 and notes payable which are payable within one year.
Cash flows from operating activities for the nine months ended September 30, 2020 was $(1,304,309) compared to $(178,588) for the nine months ended September 30, 2019, a decrease of $1,125,721. Cash flows from operating activities for the nine months ended September 30, 2020 can be primarily attributed to net loss from operations of $7,878,064, stock based compensation of $395,150, a loss on extinguishment of debt $1,829,651, a $2,108,301 impairment loss, and other noncash expense adjustments. Cash flows from operating activities for the nine months ended September 30, 2019 can be primarily attributed to net loss from operations of $3,820,145 and $854,720, in stock compensation expense, an impairment expense of $474,357 and changes in other noncash expense adjustments. Reference the Consolidated Statements of Cash Flows for additional detail of the components that comprise the net use of cash in operations. We expect to continue to use cash flow in operating activities until such time as we achieve sufficient commercial oil and gas production to cover all of our cash costs.
Cash flows from investing activities for the nine months ended September 30, 2020 was $(5,570,495) compared to $(6,612,843) for the nine months ended September 30, 2019. Cash flows from investing activities principally consists of investment in oil and gas properties in Texas.
Cash flows from financing activities for the nine months ended September 30, 2020 was $7,543,877 as compared to $6,711,723 for the nine months ended September 30, 2019. Cash flows from financing activities consists of proceeds from issuance of our common stock, proceeds from a subscription receivable, and additional borrowings under notes payable. We expect to continue to have cash flow provided by financing activities as we seek new rounds of financing and continue to develop our oil and gas investments.
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 industry conditions and our history and current record of net losses. 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.
Commitments and Contingencies-
Operating Leases
Effective June 1, 2019 the Company entered into an agreement with a company that had been subleasing a portion of its office space to become the primary obligor on the lease and to assume full responsibility for lease payments after lease expiration on November 30, 2019. The Company has continued after November 30, 2019 as a subtenant on a month-to-month basis.
Environmental matters
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 September 30, 2020 and December 31, 2019, 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.
Recent Developments
On September 21, 2020, we announced that we entered into a non-binding letter of intent with Metamaterial Inc., an Ontario business corporation headquartered in Nova Scotia, Canada (“Metamaterial”), for a proposed business combination transaction. On November 2, 2020, the letter of intent was extended. See our current reports on Form 8-K filed on September 23, 2020 and November 2, 2020 for a description of the proposed parameters of the transaction.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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ITEM 4. CONTROLS AND PROCEDURES
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 September 30, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were 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.
Changes in Internal Control over Financial Reporting
There were no changes during the quarter ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 31, 2020, Torchlight Energy Resources, Inc. and its wholly owned subsidiaries Torchlight Energy, Inc. and Torchlight Energy Operating, LLC were served with a lawsuit brought by Goldstone Holding Company, LLC (Goldstone Holding Company, LLC v. Torchlight Energy, Inc., et al., in the 160th Judicial District Court of Dallas County, Texas). On February 24, 2020, Torchlight Energy Resources, Inc., Torchlight Energy, Inc., and Torchlight Energy Operating, LLC timely filed their answer, affirmative defenses, and requests for disclosure. The suit, which seeks monetary relief over $1 million, makes unspecified allegations of misrepresentations involving a November 2015 participation agreement and a 2016 amendment to the participation agreement. We have denied the allegations and have asserted several affirmative defenses including but not limited to, that the suit is barred by the applicable statute of limitations, that the claims have been released, and that the claims are barred because of contractual disclaimers between sophisticated parties.
On April 30, 2020, our wholly owned subsidiary, Hudspeth Oil Corporation, filed suit against Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies. The suit seeks the recovery of approximately $1.4 million in costs incurred as a result of a tool failure during drilling activities on the University Founders A25 #2 well that is located in the Orogrande Field. Working interest owner Wolfbone Investments, LLC, a company owned by our Chairman Gregory Mccabe, is a co-plaintiff in that action. After suit was filed, Cordax filed a mineral lien in the amount of $104,500.01 against the Orogrande Field and has sued the operator and counterclaimed against Hudpspeth for breach of contract, seeking the same amount as the lien. We are contesting the lien in good faith. The suit, Hudspeth Oil Corporation and Wolfbone Investments, LLC v. Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies, was filed in the 189th Judicial District Court of Harris County, Texas.
ITEM 1A. RISK FACTORS
There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, except for such risks and uncertainties associated with the COVID-19 pandemic, as disclosed below. The risks described in the Annual Report on Form 10-K and in this Form 10-Q are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we deem to be immaterial, also may have a material adverse impact on our business, financial condition or results of operations.
An occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to negatively affect, and has to date negatively affected, our operations.
The occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to, and has already, negatively affected our operations. A pandemic typically results in social distancing, travel bans and quarantine, and the effects of, and response to, the COVID-19 pandemic has limited access to our facilities, properties, management, support staff and professional advisors. These, in turn, have not only negatively impacted our operations and financial condition, but our overall ability to react timely to mitigate the impact of this event. Further, the COVID-19 pandemic has resulted in declines in the demand for, and the price of, oil and gas, and it is unclear how long this decline will last. The full effect on our business and operation is currently unknown. In the event that the effects of COVID-19 continue in the future and/or the economy continues to deteriorate, we may be forced to curtail our operations and may be unable to pay our debt obligations as they come due.
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ITEM 1A. RISK FACTORS - continued
The coronavirus/COVID-19 pandemic has had a negative effect on oil and gas prices, and depending on the severity and longevity of the pandemic, it may result in a major economic recession which will continue to depress oil and gas prices and cause our business and results of operations to suffer.
The inability and/or unwillingness of individuals to congregate in large groups, travel and/or visit retail businesses or travel outside of their homes will, and has to date, had a negative effect on the demand for, and the current prices of, oil and gas. Additionally, the demand for oil and gas is based partially on global economic conditions. If the COVID-19 pandemic results in a global economic recession, there will be a continued negative effect on the demand for oil and gas and this will have a negative effect on our operating results. All of the above may be exacerbated in the future as the COVID-19 outbreak and the governmental responses thereto continue. Concerns about global economic growth have had a significant adverse impact on global financial markets and commodity prices. If the economic climate in the United States or abroad continues to deteriorate, demand for petroleum products could further diminish, which will impact the price at which we can sell our oil and gas, impact the value of our working interests and other oil and gas assets, affect the ability of our vendors, suppliers and customers to continue operations, affect our operations and ultimately adversely impact our results of operations, liquidity and financial condition.
The proposed business combination transaction with Metamaterial may not be completed on the terms or timeline currently contemplated, or at all, and we will incur significant expenses in connection with the steps we will take to pursue the business combination transaction.
The consummation of the proposed business combination transaction with Metamaterial is subject to numerous conditions, including (i) entry into a definitive arrangement agreement, which is subject to our and Metamaterial’s satisfactory completion of due diligence and the negotiation of the final terms and conditions of the business combination transaction, (ii) the absence of certain legal impediments to the consummation of the proposed business combination transaction, (iii) the approval of the business combination transaction by our stockholders and Metamaterial’s stockholders, and (iv) the satisfaction of certain customary and deal-specific conditions to closing that will be contemplated under the final arrangement agreement. We cannot assure you that the proposed business combination will be consummated on the terms or timeline currently contemplated, or at all.
Further, we have expended, and will continue to expend, significant management time and resources and have incurred, and will continue to incur, significant expenses due to legal, advisory and financial services fees related to the proposed business combination transaction. These expenses must be paid regardless of whether the proposed business combination is consummated. Our management’s focus on the proposed business combination could reduce their ability to adequately manage our operations, and the financial expenses associated with the proposed business combination transaction may harm our cash position, both of which may negatively impact our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2020, we issued 198,926 shares of common stock to a noteholder in the conversion of $65,646 in principal and accrued interest on his promissory note.
In August 2020, we issued 50,000 restricted shares of common stock to a consultant as consideration for services.
In August 2020, we issued warrants to purchase a total of 500,000 shares of common stock at an exercise price of $0.50 per share to certain consultants as consideration for services. The warrants are exercisable for a term of three years.
All of the above sales of securities 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.
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ITEM 6. EXHIBITS
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| 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. | |
| 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 |
| * | Incorporated by reference from our previous filings with the SEC |
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SIGNATURES
Pursuant to the requirements 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.
| Torchlight Energy Resources, Inc. | |
| Date: November 9, 2020 | /s/ John A. Brda |
| By: John A. Brda | |
| Chief Executive Officer | |
| Date: November 9, 2020 | /s/ Roger Wurtele |
| By: Roger Wurtele | |
| Chief Financial Officer and Principal Accounting Officer |
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