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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2020.

 

o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required)

 

For the transition period from _______ to _______.

 

Commission file number 000-53473

 

Torchlight Energy Resources, Inc.

(Exact name of registrant in its charter)

 

Nevada 74-3237581
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
Organization)  

 

5700 W. Plano Parkway, Suite 3600
Plano, Texas 75093
(Address of principal executive offices)
 
(214) 432-8002
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Common Stock ($0.001 Par Value)
(Title of Each Class)
 
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
 
Securities registered pursuant to Section 12(g) of the Exchange Act:
 
None
 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

1

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

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). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o Accelerated Filer o
Non-accelerated Filer x Smaller Reporting Company x
       
Emerging growth company 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The aggregate market value of the common stock held by non-affiliates of the registrant on June 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $0.3625 on the Nasdaq Stock Market, was approximately $28,337,186.

 

At March 18, 2021, there were 145,313,667 shares of the registrant’s common stock outstanding (the only class of common stock).

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

2

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including without limitation, the following sections: Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”).

 

Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to:

 

  our ability to consummate the proposed Arrangement (as defined below) with Metamaterial Inc., as discussed herein;

 

  risks that the conditions to the closing of the Arrangement are not satisfied, including the risk that required approvals for the Arrangement from governmental authorities or our stockholders or the Meta shareholders are not obtained;

 

  risks related to litigation relating to the Arrangement;

 

  unexpected costs, charges or expenses resulting from the Arrangement;

 

  risks that the proposed Arrangement disrupts our current plans and operations;

 

  our ability to realize anticipated benefits from the Arrangement;

 

  our ability to successfully grow following the closing of the Arrangement;

 

  potential adverse reactions or changes to business relationships resulting from the completion of the Arrangement;

 

  the availability and terms of the financing to be incurred in connection with the Arrangement;

 

  the success of Meta’s business on a going forward basis following the Arrangement;

 

  legislative, regulatory and economic developments, including changing business conditions in the industries in which we operate and the economy in general as well as financial performance and expectations of our existing and prospective customers, our future operating or financial results;

 

  our financial condition and liquidity, including our ability to pay amounts that we owe, obtain additional financing in the future to fund capital expenditures, acquisitions and other general corporate activities;

 

  our ability to continue as a going concern;

 

  the speculative nature of oil and gas exploration;

 

  the volatile price and demand of 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 risk of incurring liability or damages as we conduct business operations due to the inherent dangers involved in oil and gas operations;

     
  risks associated with the company’s ability to obtain additional capital in the future to fund planned expansion; and

 

  other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected.

  

 

We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

As used herein, the “Company,” “Torchlight,” “we,” “our,” and similar terms include Torchlight Energy Resources, Inc. and its subsidiaries, unless the context indicates otherwise.

3

 

TABLE OF CONTENTS

 

PART I

 

      Page
Item 1. Business   5
Item 1A. Risk Factors   11
Item 1B. Unresolved Staff Comments   25
Item 2. Properties   25
Item 3. Legal Proceedings   32
Item 4. Mine Safety Disclosures   32
       
PART II
       
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities   33
Item 6. Selected Financial Data   33
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   38
Item 8. Financial Statements and Supplementary Data   39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   70
Item 9A. Controls and Procedures   70
Item 9B. Other Information   71
       
PART III
       
Item 10. Directors, Executive Officer, and Corporate Governance   72
Item 11. Executive Compensation   74
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   76
Item 13. Certain Relationships and Related Transactions, and Director Independence   77
Item 14. Principal Accountant Fees and Services   78
Item 15. Exhibits, Financial Statement Schedules   79
       
  Signatures   82

4

 

PART I

 

ITEM 1. BUSINESS

 

Business 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. Presently, our primary interests include the Orogrande Project in Hudspeth County, Texas and the Hazel Project in the Midland Basin. In November 2020, we sold our interest in the project in Winkler County, Texas.

 

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 believe that the liquidity that would be provided from selling the Hazel Project could be redeployed into the Orogrande Project. In August 2020, our subsidiaries entered into an option agreement with a third party (which was amended in September 2020), under which, in exchange for satisfying certain drilling obligations, the third party will have the option to purchase the entire Hazel Project by a date no later than May 31, 2021. In January 2021, the third party notified us of its intent to exercise its option to perform operations sufficient to satisfy the remaining drilling obligations. The option to purchase the Hazel Project may never be exercised.

 

We are also currently marketing the Orogrande Project for an outright sale or farm in partner. These efforts are continuing.

 

We operate our business through our wholly owned subsidiaries, including Torchlight Energy, Inc., a Nevada corporation, (“TEI”), Hudspeth Oil Corporation, a Texas corporation, (“Hudspeth”), and Torchlight Hazel, LLC, a Texas limited liability company. We are in the process of winding up our subsidiaries Warwink Properties, LLC and Torchlight Energy Operating, LLC. We currently have four full-time employees and we employ consultants for various roles 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. 

 

Arrangement Agreement with Meta

 

On December 14, 2020, we and our newly formed subsidiaries, Metamaterial Exchangeco Inc. (“Canco”) and 2798831 Ontario Inc. (“Callco”), both Ontario corporations, entered into an arrangement agreement (the “Arrangement Agreement”) with Metamaterial Inc., an Ontario corporation headquartered in Nova Scotia, Canada (“Meta”). Under the Arrangement Agreement, Canco is to acquire all of the outstanding common shares of Meta by way of a statutory plan of arrangement under the Business Corporations Act (Ontario), or the Arrangement, on and subject to the terms and conditions of the Arrangement Agreement. On February 3, 2021, and on March 11, 2020, we and our Ontario subsidiaries entered into an amendment to the Arrangement Agreement with Meta. All references to the Arrangement Agreement in this Annual Report on Form 10-K refer to the Arrangement Agreement as amended.

 

The Arrangement Agreement provides that the Meta shareholders may elect to receive either shares of our common stock or shares of the capital stock of Canco, which are referred to as the Exchangeable Shares, in exchange for such holder’s Meta common shares, in each case based on an exchange ratio (the “Exchange Ratio”) to be determined based on the number of Meta common shares and shares of our common stock outstanding immediately prior to the effective time of the Arrangement (the “Effective Time”). After the Effective Time, each Exchangeable Share will be exchangeable by the holder for one share of the common stock of the combined company (subject to customary adjustments for stock splits or other reorganizations). In addition, we may require all outstanding Exchangeable Shares to be exchanged upon the occurrence of certain events and at any time following the seventh anniversary of the closing of the Arrangement. While outstanding, holders of Exchangeable Shares will be entitled to cast votes on matters for which holders of the common stock of the combined company are entitled to vote, and will be entitled to receive dividends economically equivalent to the dividends declared by the combined company with respect to its common stock. Eligibility to receive Exchangeable Shares will be subject to certain Canadian residency restrictions and tax statuses.

5

 

ITEM 1. BUSINESS - continued

 

The Arrangement Agreement additionally makes provision for the conversion or amendment of other outstanding Meta securities, including options, deferred share units and warrants, such that they will be exercisable for shares of the common stock of the combined company, in each case with adjustments based on the Exchange Ratio.

 

Immediately following the Effective Time, based on the Exchange Ratio, the former shareholders of Meta are anticipated to own approximately 75% of the economic and voting interest of the combined company, with current Torchlight stockholders holding approximately 25% economic and voting interest. Following the Effective Time, the combined company’s board of directors will be comprised of seven directors, with five of such directors to be nominees of Meta, one to be jointly nominated by Meta and Torchlight and one director to be a nominee of Torchlight, subject to the reasonable approval of Meta. Additionally, the current management of Torchlight will resign and be replaced by George Palikaras as Chief Executive Officer and Kenneth Rice as Chief Financial Officer.

 

Under the Arrangement Agreement, Torchlight will also submit to its stockholders a proposal to approve the issuance of stock under the Arrangement Agreement and amend Torchlight’s articles of incorporation to effect a reverse split (the “Reverse Split”), to maintain compliance with the listing standards of Nasdaq. In connection therewith, on February 4, 2021, we filed a preliminary proxy statement (the “Proxy”), with the SEC.

 

Following the Reverse Split, and prior to the Effective Time, Torchlight will declare and issue a dividend, on a pro rata basis, of shares of Series A preferred stock, (the “Series A Preferred Stock”), with the rights set forth in the Series A certificate of designation, (the “Series A Certificate of Designation”) which is attached as Annex H of the Proxy, to the holders of its common stock. Following the Effective Time, the holders of the Series A Preferred Stock will be entitled to a dividend based on the net proceeds of the sale of any assets that are used or held for use in our oil and gas exploration business, (the “O&G Assets”), subject to certain holdbacks. Such asset sales must occur prior to the earlier of (i) December 31, 2021 or (ii) the date which is six months from the closing of the Arrangement, (the “Sale Expiration Date”). Following the Sale Expiration Date, subject to certain conditions, the combined company will effect a spin-off of any remaining O&G Assets with the Series A Preferred Stock holders to receive their pro rata equity interest in the spin-off entity.

 

The transaction has been unanimously approved by the board of directors of Meta, and shareholders representing 48.06% of Meta’s common shares have entered into voting and support agreements in connection with the Arrangement. The transaction has also been unanimously approved by our board of directors, and stockholders representing 19.74% of our common stock have entered into voting and support agreements in connection with the Arrangement.

 

The consummation of the Arrangement is subject to certain closing conditions, including without limitation the requirement that (i) prior to the effective time of the Arrangement, we raise gross proceeds of at least $10 million through the issuance of common stock or securities convertible into or exercisable for common stock, less the aggregate principal amount and accrued interest on certain loans that we have made to Meta (the “Pre-Closing Financing”) which condition has been met (ii) all of our debt is converted into shares of our common stock or repaid in full, with certain exceptions available and (iii) the shares issuable in connection with the arrangement have been approved for listing on Nasdaq. Other closing conditions include without limitation the receipt of all required approvals from our stockholders and Meta’s shareholders and from the Ontario Superior Court of Justice (Commercial List), (the “Court”) and all other required regulatory approvals, as well as other customary closing conditions, including the absence of a material adverse effect with respect to either us or Meta. As of the date of this filing all of our notes payable have been retired.

 

The Arrangement is expected to close in the first half of 2021 and is to be implemented by way of an arrangement under the Business Corporations Act (Ontario). The Arrangement Agreement provides for customary representations, warranties and covenants, including covenants of each party to (i) subject to certain exceptions, carry on its business in the ordinary course of business consistent with past practice during the period between the execution of the Arrangement Agreement and the Effective Time and (ii) not solicit any alternate transactions or, subject to certain exceptions, to engage in any discussions or negotiations with respect thereto. Subject to certain terms and conditions, the Arrangement Agreement may be terminated by either party after May 15, 2021, and if the Arrangement Agreement is terminated prior to that date by either party as a result of obtaining a superior proposal from a third party, such terminating party is required to pay a termination fee of $2 million.

 

Under the Arrangement Agreement, we loaned Meta $500,000 on December 16, 2020, in exchange for an unsecured convertible promissory note in substantially the same form as the 8% unsecured convertible promissory note that evidences our loan to Meta of $500,000 on September 20, 2020. On February 18, 2021, Torchlight loaned to Meta $10,000,000, evidenced by an unsecured convertible promissory note issued by Meta (the “Promissory Note”), substantially in the same form as the previous bridge notes issued by Meta to us, to satisfy Torchlight’s requirement to provide additional bridge financing to Meta pursuant to the Arrangement Agreement. These three bridge loans, including the aggregate principal and unpaid interest, will be included in, and credited against, the funds we are obligated to raise in the Pre-Closing Financing. Upon the closing of the Arrangement, all of the bridge notes will be deemed cancelled and paid in full.

6

 

ITEM 1. BUSINESS - continued

 

Key Torchlight Business Attributes

 

Experienced People. We build on the expertise and experiences of our management team, including John Brda and Roger Wurtele. We will also receive guidance from outside advisors as well as our Board of Directors and will align with high quality exploration and technical partners.

 

Project Focus. We are focusing primarily on exploitation projects by pursuing resources in areas where commercial production has already been established but where opportunity for additional and nearby development is indicated. We may pursue high risk exploration prospects which may appear less favored than low risk exploration. We will, however, consider these high risk-high reward exploration prospects in connection with exploitation opportunities in a project that would reduce the overall project economic risk. We will consider such high risk-high reward prospects on their individual merits.

 

Lower Cost Structure. We will attempt to maintain the lowest possible cost structure, enabling the greatest margins and providing opportunities for investment that would not be feasible for higher cost competitors.

 

Limit Capital Risks. Limited capital exposure is planned initially to add value to a project and determine its economic viability. Projects are staged and have options before additional capital is invested. We will limit our exposure in any one project by participating at reduced working interest levels, thereby being able to diversify with limited capital. Management has experience in successfully managing risks of projects, finance, and value.

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ITEM 1. BUSINESS - continued

 

Business Processes

 

We believe there are three principal business processes that we must follow to enable our operations to be profitable. Each major business process offers the opportunity for a distinct partner or alliance as we grow. These processes are:

 

Investment Evaluation and Review;

 

Operations and Field Activities; and

 

Administrative and Finance Management.

 

Investment Evaluation and Review. This process is the key ingredient to our success. Recognition of quality investment opportunities is the fuel that drives our engine. Broadly, this process includes the following activities: prospect acquisition, regional and local geological and geophysical evaluations, data processing, economic analysis, lease acquisition and negotiations, permitting, and field supervision. We expect these evaluation processes to be managed by our management team. Expert or specific technical support will be outsourced as needed. Only if a project is taken to development, and only then, will additional staff be hired. New personnel will have very specific responsibilities. We anticipate attractive investment opportunities to be presented from outside companies and from the large informal community of geoscientists and engineers. Building a network of advisors is key to the pipeline of high-quality opportunities.

 

Operations and Field Activities. This process begins following management approval of an investment. Well site supervision, construction, drilling, logging, product marketing, and transportation are examples of some activities. We will prefer to be the operator, but when operations are not possible, we will farm-out sufficient interests to third parties that will be responsible for these operating activities. We provide personnel to monitor these activities and associated costs.

 

Administrative and Finance Management. This process coordinates our initial structuring and capitalization, general operations and accounting, reporting, audit, banking and cash management, regulatory agencies reporting and interaction, timely and accurate payment of royalties, taxes, leases rentals, vendor accounts and performance management that includes budgeting and maintenance of financial controls, and interface with legal counsel and tax and other financial and business advisors.

 

Current Projects

 

As of December 31, 2020, we had interests in three oil and gas projects: the Orogrande Project in Hudspeth County, Texas, the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas, and the Hunton wells in partnership with Kodiak in Central Oklahoma

 

See the description under “Current Projects” below under Note 4, “Oil & Gas Properties,” of the financial statements included with this report for information and disclosure regarding these projects, which description is incorporated herein by reference.

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ITEM 1. BUSINESS - continued

 

Industry and Business Environment

 

We are experiencing a time of fluctuating oil prices caused by lower demand, higher US Supply, and OPEC’s policies on production. Unfortunately, this is the cyclical nature of the oil and gas industry. We experience highs and lows that seem to come in cycles. Fortunately, advances in technology drive the US market and we feel this will drive the development costs down on our exploration and drilling programs.

 

Competition

 

The oil and natural gas industry is intensely competitive, and we will compete with numerous other companies engaged in the exploration and production of oil and gas. Some of these companies have substantially greater resources than we have. Not only do they explore for and produce oil and natural gas, but also many carry on midstream and refining operations and market petroleum and other products on a regional, national, or worldwide basis. The operations of other companies may be able to pay more for exploratory prospects and productive oil and natural gas properties. They may also have more resources to define, evaluate, bid for, and purchase a greater number of properties and prospects than our financial or human resources permit.

 

Our larger or integrated competitors may have the resources to be better able to absorb the burden of current and future federal, state, and local laws and regulations more easily than we can, which would adversely affect our competitive position. Our ability to locate reserves and acquire interests in properties in the future will be dependent upon our ability and resources to evaluate and select suitable properties and consummate transactions in this highly competitive environment. In addition, we may be at a disadvantage in producing oil and natural gas properties and bidding for exploratory prospects because we have fewer financial and human resources than other companies in our industry. Should a larger and better financed company decide to directly compete with us, and be successful in its efforts, our business could be adversely affected.

 

Marketing and Customers

 

The market for oil and natural gas that we will produce depends on factors beyond our control, including the extent of domestic production and imports of oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for oil and natural gas, the marketing of competitive fuels, and the effects of state and federal regulation. The oil and gas industry also competes with other industries in supplying the energy and fuel requirements of industrial, commercial, and individual consumers.

 

Our oil production is expected to be sold at prices tied to the spot oil markets. Our natural gas production is expected to be sold under short-term contracts and priced based on first of the month index prices or on daily spot market prices. We will rely on our operating partners to market and sell our production.

 

Governmental Regulation and Environmental Matters

 

Our operations are subject to various rules, regulations, and limitations impacting the oil and natural gas exploration and production industry as a whole.

 

Regulation of Oil and Natural Gas Production

 

Our oil and natural gas exploration, production, and related operations, when developed, will be subject to extensive rules and regulations promulgated by federal, state, tribal, and local authorities and agencies. Certain states may also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from wells, and the regulation of spacing, plugging, and abandonment of such wells. Failure to comply with any such rules and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry will most likely increase our cost of doing business and may affect our profitability. Although we believe we are currently in substantial compliance with all applicable laws and regulations, because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws. Significant expenditures may be required to comply with governmental laws and regulations and may have a material adverse effect on our financial condition and results of operations.

 

Environmental Matters

 

Our operations and properties are and will be subject to extensive and changing federal, state, and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation, and discharge of materials into the environment, and relating to safety and health. In the future, environmental legislation and regulation may trend toward stricter standards. These laws and regulations may:

 

require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities;

 

limit or prohibit construction, drilling, and other activities on certain lands lying within wilderness and other protected areas;

 

impose substantial liabilities for pollution resulting from operations; or

 

restrict certain areas from fracking and other stimulation techniques.

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ITEM 1. BUSINESS - continued

 

The permits required for our operations may be subject to revocation, modification, and renewal by issuing authorities. Governmental authorities have the power to enforce their regulations, and violations are subject to fines or injunctions, or both. In the opinion of management, we are and will be in substantial compliance with current applicable environmental laws and regulations and have no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and regulations or in interpretations thereof could have a significant impact on our company, as well as the oil and natural gas industry in general.

 

The Comprehensive Environmental, Response, Compensation, and Liability Act (“CERCLA”) and comparable state statutes impose strict, joint, and several liability on owners and operators of sites and on persons who disposed of or arranged for the disposal of “hazardous substances” found at such sites. It is not uncommon for the neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. The Federal Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes govern the disposal of “solid waste” and “hazardous waste” and authorize the imposition of substantial fines and penalties for noncompliance. Although CERCLA currently excludes petroleum from its definition of “hazardous substance,” state laws affecting our operations may impose clean-up liability relating to petroleum and petroleum related products. In addition, although RCRA classifies certain oil field wastes as “non-hazardous,” such exploration and production wastes could be reclassified as hazardous wastes thereby making such wastes subject to more stringent handling and disposal requirements.

 

The Endangered Species Act (“ESA”) seeks to ensure that activities do not jeopardize endangered or threatened animal, fish, and plant species, nor destroy or modify the critical habitat of such species. Under ESA, exploration and production operations, as well as actions by federal agencies, may not significantly impair or jeopardize the species or its habitat. ESA provides for criminal penalties for willful violations of the Act. Other statutes that provide protection to animal and plant species and that may apply to our operations include, but are not necessarily limited to, the Fish and Wildlife Coordination Act, the Fishery Conservation and Management Act, the Migratory Bird Treaty Act and the National Historic Preservation Act. Although we believe that our operations will be in substantial compliance with such statutes, any change in these statutes or any reclassification of a species as endangered could subject our company to significant expenses to modify our operations or could force our company to discontinue certain operations altogether.

 

Hydraulic fracturing is regulated by state and federal oil and gas regulatory authorities, including specifically the requirement to disclose certain information related to hydraulic fracturing operations. Operators must follow applicable legal requirements for groundwater protection in our operations that are subject to supervision by state and federal regulators (including the Bureau of Land Management on federal acreage). Furthermore, well construction practices require the installation of multiple layers of protective steel casing surrounded by cement that are specifically designed and installed to protect freshwater aquifers by preventing the migration of fracturing fluids into aquifers. Regulatory proposals in some states and local communities have been initiated to require or make more stringent the permitting and compliance requirements for hydraulic fracturing operations. Federal and state agencies have continued to assess the impacts of hydraulic fracturing, which could spur further action toward federal and/or state legislation and regulation of hydraulic fracturing activities. In addition, in light of concerns about seismic activity being triggered by the injection of produced waters into underground wells and hydraulic fracturing, certain regulators are also considering additional requirements related to seismic safety for hydraulic fracturing activities. Further restrictions on hydraulic fracturing could make it prohibitive to conduct our operations, and also reduce the amount of oil and natural gas that we or our operators are ultimately able to produce in commercial quantities from our properties.

 

Climate Change

 

Significant studies and research have been devoted to climate change and global warming, and climate change has developed into a major political issue in the United States and globally. Certain research suggests that greenhouse gas emissions contribute to climate change and pose a threat to the environment. Recent scientific research and political debate has focused in part on carbon dioxide and methane incidental to oil and natural gas exploration and production. Many states and the federal government have enacted legislation directed at controlling greenhouse gas emissions, and future legislation and regulation could impose additional restrictions or requirements in connection with our drilling and production activities and favor use of alternative energy sources, which could affect operating costs and demand for oil products. As such, our business could be materially adversely affected by domestic and international legislation targeted at controlling climate change.

 

Employees

 

We currently have four full time employees and no part time employees. We employ consultants and contract help as needed. We anticipate, as needed, we will add additional employees, and we will continue using independent contractors, consultants, attorneys, and accountants as necessary to complement services rendered by our employees. We presently have independent technical professionals under consulting agreements who are available to us on an as needed basis.

 

Research and Development

 

We did not spend any funds on research and development activities during the years ended December 31, 2020 or 2019.

 

Available Information

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are accessible free of charge on our website at www.torchlightenergy.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

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ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Before investing in our common stock, you should carefully consider the risks described below, together with all of the other information contained in this Annual Report on Form 10-K. Some of these factors relate to the Arrangement as well as to the risks associated with Meta’s business and the industry in which Meta operates and our business and the industry in which we operate. The risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially and adversely affect our business and operations.

 

Risks Related to the COVID-19 Pandemic

 

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, if any, (all notes payable have been paid or converted at the date of this filing) as they come due.

 

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.

 

Risks Related to the Arrangement

 

The Arrangement may not be completed due to failure to obtain the necessary court and/or regulatory approvals.

 

To complete the Arrangement, we and Meta must make certain filings with and obtain certain consents and approvals from various governmental and regulatory authorities including the Court, and the approval of Nasdaq of the listing of the shares of the combined company to be issued pursuant to the Arrangement. We and Meta have not yet obtained these approvals, all of which are required to complete the Arrangement. The regulatory approval processes may take a lengthy period of time to complete which could delay completion of the Arrangement. The approval processes, including the undertakings and conditions that may be required for approval or whether the court and regulatory approvals, may not be obtained.

 

Uncertainty surrounding the Arrangement could adversely affect our retention of strategic partners and personnel and could negatively impact our future business and operations.

 

Because the Arrangement is dependent upon satisfaction of certain conditions, its completion is subject to uncertainty. In response to this uncertainty, our strategic partners may delay or defer decisions concerning our business. Any delay or deferral of those decisions by strategic partners could have a material adverse effect on our business and operations, regardless of whether the Arrangement is ultimately completed.

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ITEM 1A. RISK FACTORS - continued

  

We could fail to complete the Arrangement.

 

The Arrangement may not be completed as there are certain conditions that are outside of our control and the control of Meta. The completion of the Arrangement is subject to the satisfaction of a number of conditions which include, among others, (i) obtaining necessary approvals of securityholders and debtholders, if any, of us and Meta, (ii) that not more than 10% of the Meta shareholders exercise any dissent rights; (iii) the Pre-Closing Financing is completed (which has been satisfied); and (iv) performance by us and Meta of the respective obligations and covenants in the Arrangement Agreement. These conditions may not be satisfied.

 

In addition, we and Meta each have the right to terminate the Arrangement Agreement in certain circumstances. Accordingly, there is no certainty that the Arrangement Agreement will not be terminated by either us or Meta before the completion of the Arrangement. For example, we have the right, in certain circumstances, to terminate the Arrangement Agreement if changes occur that, in the aggregate, have a material adverse effect. Although a material adverse effect excludes certain events that are beyond our control and the control of Meta, a change having a material adverse effect on Meta may occur before the effective date of the Arrangement, in which case we could elect to terminate the Arrangement Agreement and the Arrangement would not proceed. In addition, if the Arrangement is not completed by May 15, 2021, we or Meta may choose to terminate the Arrangement Agreement in accordance with its terms.

 

If the Arrangement is not completed, our ongoing business may be adversely affected as a result of the costs (including opportunity costs) incurred in respect of pursuing the Arrangement, and we could experience negative reactions from the financial markets, which could cause a decrease in the market price of our common stock, particularly if the market price reflects market assumptions that the Arrangement will be completed or completed on certain terms. We may also experience a negative impact on our ability to attract future acquisition opportunities. Failure to complete the Arrangement or a change in the terms of the Arrangement could each have a material adverse effect on our business, financial condition and results of operations.

 

If the Arrangement is not completed and our board of directors decides to seek another merger or business combination, we may not be able to find a party willing to engage in a transaction that is equivalent to, or more attractive than, the Arrangement. In addition, in certain circumstances, we may be required to pay a termination payment of $2 million, or the Termination Payment, to Meta as described in the Proxy.

 

The Termination Payment, if triggered, and the fact that certain of our stockholders have agreed to vote in favor of the Arrangement related proposals at the special meeting of our stockholders to approve the Arrangement, may discourage other parties from attempting to acquire us.

 

Under the Arrangement Agreement, we are required to pay a Termination Payment of $2 million to Meta in the event the Arrangement Agreement is terminated in certain circumstances. The Termination Payment may discourage other parties from attempting to engage in a transaction with us or otherwise make an alternative Acquisition Proposal, even if those parties would otherwise be willing to offer greater value to our stockholders than that offered by Meta under the Arrangement.

 

Furthermore, as noted above, certain of our stockholders have agreed to irrevocably commit the shares to, among other things, vote in favor of the proposals related to the Arrangement at a special meeting of our stockholders. As a result, other parties may be discouraged from attempting to engage in a transaction with us, even if those parties would otherwise be willing to offer greater value to our stockholders than that offered by Meta under the Arrangement.

 

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ITEM 1A. RISK FACTORS - continued

 

We will incur substantial transaction-related costs in connection with the Arrangement even if the Arrangement is not completed.

 

Certain costs related to the Arrangement, such as legal, accounting and certain financial advisor fees must be paid by us even if the Arrangement is not completed, and some of such costs may be unanticipated, or underestimated by our management. Also, if the Arrangement is not completed, we may be required to pay the Termination Payment to Meta in certain circumstances. Such costs may offset any expected cost savings and other synergies from the Arrangement.

 

While the Arrangement is pending, we are restricted from taking certain actions.

 

The Arrangement Agreement restricts us from taking specified actions until the Arrangement is completed without the consent of Meta, which may adversely affect our ability to execute certain business strategies including, but not limited to, the ability in certain cases to enter into or amend contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Arrangement.

 

The pending Arrangement may divert the attention of our management.

 

The pending Arrangement could cause the attention of our management to be diverted from the day-to-day operations. These disruptions could be exacerbated by a delay in the completion of the Arrangement and could have an adverse effect on our business, operating results or prospects, regardless of whether the Arrangement is ultimately completed.

 

Following the completion of the Arrangement, the combined company may issue additional securities.

 

Following the completion of the Arrangement, the combined company may issue additional securities (including equity securities) to finance its activities, including in order to finance acquisitions. If the combined company were to issue additional equity securities, the ownership interest of our existing stockholders may be diluted and some or all of the combined company’s financial measures on a per share basis could be reduced. Moreover, as the combined company’s intention to issue additional equity securities becomes publicly known, the combined company’s share price may be materially adversely affected.

 

Our stockholders may not receive any dividends in respect of the Series A Preferred Stock.

 

In connection with the Arrangement, we will declare a dividend of shares of the Series A Preferred Stock to holders of record of our common stock as of a date to be determined by our board of directors. Such dividend will be paid immediately prior to the closing of the Arrangement. The Series A Certificate of Designation will entitle the holders of Series A Preferred Stock to receive dividends, or Asset Sale Dividends, comprised of the holder’s pro rata portion of the proceeds from the sale of the O&G Assets, (“O&G Asset Sales”) in the event that we or the combined company consummates one or more such transaction prior to the Sale Expiration Date. However, we or the combined company may not be able to consummate any such transaction prior to such date on terms that will permit us or the combined company to pay such dividends, or at all.

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ITEM 1A. RISK FACTORS - continued

 

Holders of Series A Preferred Stock will be entitled to receive Asset Sale Dividends from any O&G Asset Sale that is consummated prior to the Sale Expiration Date. Prior to declaring or paying any dividend, the combined company will deduct from the gross proceeds of an O&G Asset Sale various costs and expenses described in the Series A Certificate of Designation, which include, among others, (i) costs and expenses we or the combined company incurs in connection with the applicable O&G Asset Sale transaction, (ii) costs the combined company incurs following the consummation of the Arrangement with respect to the O&G Assets, (iii) taxes the combined company incurs in connection with the applicable O&G Asset Sale, the payment of dividends to the holders of Series A Preferred Stock, and the O&G Assets, (iv) liabilities the combined company incurs in connection with the applicable O&G Asset Sale and (v) amounts paid or payable with respect to outstanding debt, if any. In addition, the combined company will also withhold an amount of 10% of the proceeds from each O&G Asset Sale, (“the Holdback Amount”) to cover potential post-closing liabilities and obligations that the combined company may incur in respect of such transaction. If, after the deduction and withholding of these amounts, there are no net proceeds available for distribution to the holders of Series A Preferred Stock, then the combined company will not declare or pay a dividend with respect to that transaction unless and until any remaining funds from the Holdback Amount are due to be distributed to the holders of Series A Preferred Stock through a dividend, or the combined company receives additional net proceeds from such O&G Asset Sale (for example, as a result of post-closing payments or the release of escrowed funds).

 

In the event that any O&G Assets have not been sold in an O&G Asset Sale that is consummated prior to the Sale Expiration Date, the combined company will, to the extent permitted by applicable law, declare a spin-off dividend to distribute beneficial ownership of the remaining O&G Assets to the holders of Series A Preferred Stock. However, if the combined company cannot effect such spin-off dividend in a manner that is exempt from registration under all applicable securities laws, the combined company will not declare the spin-off dividend and instead will use good faith, commercially reasonable efforts to preserve the value of the remaining O&G Assets or to distribute or provide the value of the remaining O&G Assets to the holders of Series A Preferred Stock, so long as the combined company is not required to divert the attention of management or incur material expenses in excess of amount required to be reserved under the Arrangement Agreement. Thus, we, or the combined company, ultimately may not be able to deliver the value of any remaining O&G Assets to the holders of Series A Preferred Stock.

 

The Series A Preferred Stock will not be listed or traded on any exchange.

 

The Series A Preferred Stock to be issued by us to holders of record of our common stock as of a record day fixed by our board of directors and will not be listed or traded on any exchange. No market is expected to develop for the Series A Preferred Stock in the foreseeable future and holders of the Series A Preferred Stock may not be able to find a buyer and sell their shares if they desired to do so.

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ITEM 1A. RISK FACTORS - continued

 

Risks Related to Torchlight’s Business and Industry if the Arrangement does not occur

 

We have a limited operating history relative to larger companies in our industry and may not be successful in developing profitable business operations.

 

We have a limited operating history relative to larger companies in our industry. Our business operations must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a business in the oil and natural gas industries. As of the date of this report, we have generated limited revenues and have limited assets. We have an insufficient history at this time on which to base an assumption that our business operations will prove to be successful in the long-term. Our future operating results will depend on many factors, including:

 

our ability to raise adequate working capital;

 

the success of our development and exploration;

 

the demand for natural gas and oil;

 

the level of our competition;

 

our ability to attract and maintain key management and employees; and

 

our ability to efficiently explore, develop, produce or acquire sufficient quantities of marketable natural gas or oil in a highly competitive and speculative environment while maintaining quality and controlling costs.

 

To achieve profitable operations in the future, we must, alone or with others, successfully manage the factors stated above, as well as continue to develop ways to enhance our production efforts. Despite our best efforts, we may not be successful in our exploration or development efforts or obtain required regulatory approvals. There is a possibility that some, or all, of the wells in which we obtain interests may never produce oil or natural gas.

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ITEM 1A. RISK FACTORS - continued

 

We have limited capital and will need to raise additional capital in the future.

 

We do not currently have sufficient capital to fund both our continuing operations and our planned growth should the Arrangement not occur. We will require additional capital to continue to grow our business via acquisitions and to further expand our exploration and development programs. We may be unable to obtain additional capital when required. Future acquisitions and future exploration, development, production and marketing activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.

 

We may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing, or other means. We may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising additional capital, our resources may not be sufficient to fund our planned operations.

 

Our ability to obtain financing, if and when necessary, may be impaired by such factors as the capital markets (both generally and in the oil and gas industry in particular), our limited operating history, the location of our oil and natural gas properties and prices of oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us, if any) and the departure of key employees. Further, if oil or natural gas prices on the commodities markets decline, our future revenues, if any, will likely decrease and such decreased revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we may be required to cease our operations, divest our assets at unattractive prices or obtain financing on unattractive terms.

 

Any additional capital raised through the sale of equity may dilute the ownership percentage of our stockholders. Raising any such capital could also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, which may have a further dilutive effect.

 

We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition.

 

Our auditor indicated that certain factors raise substantial doubt about our ability to continue as a going concern.

 

The financial statements included with this report are presented under the assumption that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. We had a net loss of approximately $12.8 million for the year ended December 31, 2020 and an accumulated deficit in aggregate of approximately $111.9 million at year end. We are not generating sufficient operating cash flows to support continuing operations and expect to incur further losses in the development of our business.

 

In our financial statements for the year ended December 31, 2020, our auditor indicated that certain factors raised substantial doubt about our ability to continue as a going concern. These factors included our accumulated deficit, as well as the fact that we were not generating sufficient operating cash flows to meet our regular working capital requirements. Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management’s plan to address our ability to continue as a going concern includes: (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtaining loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow us to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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ITEM 1A. RISK FACTORS - continued

 

As a non-operator, our development of successful operations relies extensively on third parties who, if not successful, could have a material adverse effect on our results of operation.

 

If the Arrangement does not occur, we expect to primarily participate in wells operated by third parties. As a result, we will not control the timing of the development, exploitation, production and exploration activities relating to leasehold interests we acquire. We do, however, have certain rights as granted in our joint operating agreements that allow us a certain degree of freedom such as, but not limited to, the ability to propose the drilling of wells. If our drilling partners are not successful in such activities relating to our leasehold interests, or are unable or unwilling to perform, our financial condition and results of operation could have an adverse material effect.

 

Further, financial risks are inherent in any operation where the cost of drilling, equipping, completing and operating wells is shared by more than one person. We could be held liable for the joint activity obligations of the operator or other working interest owners such as nonpayment of costs and liabilities arising from the actions of the working interest owners. In the event the operator or other working interest owners do not pay their share of such costs, we would likely have to pay those costs. In such situations, if we were unable to pay those costs, there could be a material adverse effect to our financial position.

 

We are mainly concentrated in one geographic area, which increases our exposure to many of the risks enumerated herein.

 

Operating in a concentrated area increases the potential impact that many of the risks stated herein may have upon our ability to perform. For example, we have greater exposure to regulatory actions impacting Texas, natural disasters in the geographic area, competition for equipment, services and materials available in the area and access to infrastructure and markets. In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil and gas producing areas such as the Permian Basin, which may cause these conditions to occur with greater frequency or magnify the effect of these conditions. Due to the concentrated nature of our portfolio of properties, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our financial condition and results of operations.

 

We may be unable to monetize the Orogrande and Hazel Projects at an attractive price, if at all, and the disposition of such assets may involve risks and uncertainties.

 

We have commenced a process that could result in the monetization of the Orogrande and Hazel Projects. Such dispositions may result in proceeds to us in an amount less than we expect or less than our assessment of the value of the assets. We do not know if we will be able to successfully complete such disposition on favorable terms or at all. In addition, the sale of these assets involves risks and uncertainties, including disruption to other parts of our business, potential loss of customers or revenue, exposure to unanticipated liabilities or result in ongoing obligations and liabilities to us following any such divestiture.

 

For example, in connection with a disposition, we may enter into transition services agreements or other strategic relationships, which may result in additional expense. In addition, in connection with a disposition, we may be required to make representations about the business and financial affairs of the business or assets. We may also be required to indemnify the purchasers to the extent that our representations turn out to be inaccurate or with respect to certain potential liabilities. These indemnification obligations may require us to pay money to the purchasers as satisfaction of their indemnity claims. It may also take us longer than expected to fully realize the anticipated benefits of this transaction, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. Any of the foregoing could adversely affect our financial condition and results of operations.

 

Because of the speculative nature of oil and gas exploration, there is risk that we will not find commercially exploitable oil and gas and that our business will fail.

 

The search for commercial quantities of oil and natural gas as a business is extremely risky. We cannot provide investors with any assurance that any properties in which we obtain a mineral interest will contain commercially exploitable quantities of oil and/or gas. The exploration expenditures to be made by us may not result in the discovery of commercial quantities of oil and/or gas. Problems such as unusual or unexpected formations or pressures, premature declines of reservoirs, invasion of water into producing formations and other conditions involved in oil and gas exploration often result in unsuccessful exploration efforts. If we are unable to find commercially exploitable quantities of oil and gas, and/or we are unable to commercially extract such quantities, we may be forced to abandon or curtail our business plan, and as a result, any investment in us may become worthless.

 

Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.

 

Should the Arrangement not occur, our ability to successfully acquire oil and gas interests, to build our reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers will depend on developing and maintaining close working relationships with industry participants and our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment. These realities are subject to change and our inability to maintain close working relationships with industry participants or continue to acquire suitable property may impair our ability to execute our business plan.

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ITEM 1A. RISK FACTORS - continued

 

To continue to develop our business should the Arrangement not occur, we will endeavor to use the business relationships of our management to enter into strategic relationships, which may take the form of joint ventures with other private parties and contractual arrangements with other oil and gas companies, including those that supply equipment and other resources that we will use in our business. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.

 

The price of oil and natural gas has historically been volatile. If it were to decrease substantially, our projections, budgets, and revenues would be adversely affected, potentially forcing us to make changes in our operations.

 

Should the Arrangement not occur, our future financial condition, results of operations and the carrying value of any oil and natural gas interests we acquire will depend primarily upon the prices paid for oil and natural gas production. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world geopolitical conditions. Our cash flows from operations are highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flows available for capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:

 

the level of consumer demand for oil and natural gas;

 

the domestic and foreign supply of oil and natural gas;

 

the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to agree to and maintain oil price and production controls;

 

the price of foreign oil and natural gas;

 

domestic governmental regulations and taxes;

 

the price and availability of alternative fuel sources;

 

weather conditions;

 

market uncertainty due to political conditions in oil and natural gas producing regions, including the Middle East; and

 

worldwide economic conditions.

 

These factors as well as the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty. Declines in oil and natural gas prices affect our revenues and could reduce the amount of oil and natural gas that we can produce economically. Accordingly, such declines could have a material adverse effect on our financial condition, results of operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties. If the oil and natural gas industry experiences significant price declines, we may be unable to make planned expenditures, among other things. If this were to happen, we may be forced to abandon or curtail our business operations, which would cause the value of an investment in us to decline or become worthless.

 

In early March of 2020, the market experienced a precipitous decline in oil prices in response to oil demand concerns due to the economic impacts of the a highly transmissible and pathogenic coronavirus known as COVID-19 and anticipated increases in supply from Russia and OPEC, particularly Saudi Arabia. Generally, demand for oil has declined substantially. These trends materially and adversely affect our results of operations, cash flows and financial condition, and, unless conditions in our industry improve, this trend will continue.

 

If oil or natural gas prices remain depressed or drilling efforts are unsuccessful, we may be required to record additional write downs of our oil and natural gas properties.

 

If oil or natural gas prices remain depressed or drilling efforts are unsuccessful, we could be required to write down the carrying value of certain of our oil and natural gas properties. Write downs may occur when oil and natural gas prices are low, or if we have downward adjustments to our estimated proved reserves, increases in our estimates of operating or development costs, deterioration in drilling results or mechanical problems with wells where the cost to redrill or repair is not supported by the expected economics.

 

Under the full cost method of accounting, capitalized oil and gas property costs less accumulated depletion and net of deferred income taxes may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves plus the cost of unproved properties not subject to amortization (without regard to estimates of fair value), or estimated fair value, if lower, of unproved properties that are subject to amortization. Should capitalized costs exceed this ceiling, an impairment would be recognized.

 

The Company recognized an impairment charge of $2,108,301 in 2020 and $1,494,769 in 2019.

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ITEM 1A. RISK FACTORS - continued

 

Because of the inherent dangers involved in oil and gas operations, there is a risk that we may incur liability or damages as we conduct our business operations, which could force us to expend a substantial amount of money in connection with litigation and/or a settlement.

 

The oil and natural gas business involves a variety of operating hazards and risks such as well blowouts, pipe failures, casing collapse, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, spills, pollution, releases of toxic gas and other environmental hazards and risks. These hazards and risks could result in substantial losses to us from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In addition, we may be liable for environmental damages caused by previous owners of property purchased and leased by us. In recent years, there has also been increased scrutiny on the environmental risk associated with hydraulic fracturing, such as underground migration and surface spillage or mishandling of fracturing fluids including chemical additives. This technology has evolved and continues to evolve and become more aggressive. We believe that new techniques can increase estimated ultimate recovery per well to over 1.0 million barrels of oil equivalent and have increased initial production two or three-fold. We believe that recent designs have seen improvement in, among other things, proppant per foot, barrels of water per stage, fracturing stages, and clusters per fracturing stage. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for exploration, development or acquisitions or result in the loss of our properties and/or force us to expend substantial monies in connection with litigation or settlements. In addition, we will need to quickly adapt to the evolving technology, which could take time and divert our attention to other business matters. We currently have no insurance to cover such losses and liabilities, and even if insurance is obtained, it may not be adequate to cover any losses or liabilities. We cannot predict the availability of insurance or the availability of insurance at premium levels that justify our purchase. The occurrence of a significant event not fully insured or indemnified against could materially and adversely affect our financial condition and operations. We may elect to self-insure if management believes that the cost of insurance, although available, is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on our financial condition and results of operations.

 

The market for oil and gas is intensely competitive, and competition pressures could force us to abandon or curtail our business plan.

 

The market for oil and gas exploration services is highly competitive, and we only expect competition to intensify in the future. Numerous well-established companies are focusing significant resources on exploration and are currently competing with us for oil and gas opportunities. Other oil and gas companies may seek to acquire oil and gas leases and properties that we have targeted. Additionally, other companies engaged in our line of business may compete with us from time to time in obtaining capital from investors. Competitors include larger companies which, in particular, may have access to greater resources, may be more successful in the recruitment and retention of qualified employees and may conduct their own refining and petroleum marketing operations, which may give them a competitive advantage. Actual or potential competitors may be strengthened through the acquisition of additional assets and interests. Additionally, there are numerous companies focusing their resources on creating fuels and/or materials which serve the same purpose as oil and gas but are manufactured from renewable resources.

 

As a result, we may not be able to compete successfully and competitive pressures may adversely affect our business, results of operations, and financial condition, should the Arrangement not occur. If we are not able to successfully compete in the marketplace, we could be forced to curtail or even abandon our current business plan, which could cause any investment in us to become worthless.

 

We may not be able to successfully manage growth, which could lead to our inability to implement our business plan.

 

Any growth of the company may place a significant strain on our managerial, operational and financial resources, especially considering that we currently only have a small number of executive officers, employees and advisors. Further, as we enter into additional contracts, we will be required to manage multiple relationships with various consultants, businesses and other third parties. These requirements will be exacerbated in the event of our further growth or in the event that the number of our drilling and/or extraction operations increases. Our systems, procedures and/or controls may not be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to successfully implement our business plan. If we are unable to manage our growth effectively, our business, results of operations and financial condition will be adversely affected, which could lead to us being forced to abandon or curtail our business plan and operations.

 

The due diligence undertaken by us in connection with all of our acquisitions may not have revealed all relevant considerations or liabilities related to those assets, which could have a material adverse effect on our financial condition or results of operations.

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ITEM 1A. RISK FACTORS - continued

 

The due diligence undertaken by us in connection with the acquisition of our properties may not have revealed all relevant facts that may be necessary to evaluate such acquisitions. The information provided to us in connection with our diligence may have been incomplete or inaccurate. As part of the diligence process, we have also made subjective judgments regarding the results of operations and prospects of the assets. If the due diligence investigations have failed to correctly identify material issues and liabilities that may be present, such as title defects or environmental problems, we may incur substantial impairment charges or other losses in the future. In addition, we may be subject to significant, previously undisclosed liabilities that were not identified during the due diligence processes and which may have a material adverse effect on our financial condition or results of operations.

 

Our operations are heavily dependent on current environmental regulation, changes in which we cannot predict.

 

Oil and natural gas activities that we will engage in, including production, processing, handling and disposal of hazardous materials, such as hydrocarbons and naturally occurring radioactive materials (if any), are subject to stringent regulation. We could incur significant costs, including cleanup costs resulting from a release of hazardous material, third-party claims for property damage and personal injuries fines and sanctions, as a result of any violations or liabilities under environmental or other laws. Changes in or more stringent enforcement of environmental laws could force us to expend additional operating costs and capital expenditures to stay in compliance.

 

Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact our operations and costs. These regulations include, among others, (i) regulations by the Environmental Protection Agency and various state agencies regarding approved methods of disposal for certain hazardous and non-hazardous wastes; (ii) the Comprehensive Environmental Response, Compensation, and Liability Act, Federal Resource Conservation and Recovery Act and analogous state laws which regulate the removal or remediation of previously disposed wastes (including wastes disposed of or released by prior owners or operators), property contamination (including groundwater contamination),and remedial plugging operations to prevent future contamination; (iii) the Clean Air Act and comparable state and local requirements which may result in the gradual imposition of certain pollution control requirements with respect to air emissions from our operations; (iv) the Oil Pollution Act of 1990 which contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States; (v) the Resource Conservation and Recovery Act which is the principal federal statute governing the treatment, storage and disposal of hazardous wastes; and (vi) state regulations and statutes governing the handling, treatment, storage and disposal of naturally occurring radioactive material.

 

We believe that we will be in substantial compliance with applicable environmental laws and regulations. To date, we have not expended any amounts to comply with such regulations, and we do not currently anticipate that future compliance will have a materially adverse effect on our consolidated financial position, results of operations or cash flows. However, if we are deemed to not be in compliance with applicable environmental laws, we could be forced to expend substantial amounts to be in compliance, which would have a materially adverse effect on our financial condition.

 

Government regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.

 

Vast quantities of natural gas, natural gas liquids and oil deposits exist in deep shale and other unconventional formations. It is customary in our industry to recover these resources through the use of hydraulic fracturing, combined with horizontal drilling. Hydraulic fracturing is the process of creating or expanding cracks, or fractures, in deep underground formations using water, sand and other additives pumped under high pressure into the formation. As with the rest of the industry, our third-party operating partners use hydraulic fracturing as a means to increase the productivity of most of the wells they drill and complete. These formations are generally geologically separated and isolated from fresh ground water supplies by thousands of feet of impermeable rock layers.

 

We believe our third-party operating partners follow applicable legal requirements for groundwater protection in their operations that are subject to supervision by state and federal regulators. Furthermore, we believe our third-party operating partners’ well construction practices are specifically designed to protect freshwater aquifers by preventing the migration of fracturing fluids into aquifers.

 

Hydraulic fracturing is typically regulated by state oil and gas commissions. Some states have adopted, and other states are considering adopting, regulations that could impose more stringent permitting, public disclosure, and/or well construction requirements on hydraulic fracturing operations.

 

In addition to state laws, some local municipalities have adopted or are considering adopting land use restrictions, such as city ordinances, that may restrict or prohibit the performance of well drilling in general and/or hydraulic fracturing in particular. There are also certain governmental reviews either underway or being proposed that focus on deep shale and other formation completion and production practices, including hydraulic fracturing. Depending on the outcome of these studies, federal and state legislatures and agencies may seek to further regulate such activities. Certain environmental and other groups have also suggested that additional federal, state and local laws and regulations may be needed to more closely regulate the hydraulic fracturing process.

 

Further, the EPA has asserted federal regulatory authority over hydraulic fracturing involving “diesel fuels” under the Solid Waste Disposal Act’s Underground Injection Control Program. The EPA is also engaged in a study of the potential impacts of hydraulic fracturing activities on drinking water resources in the states where the EPA is the permitting authority. These actions, in conjunction with other analyses by federal and state agencies to assess the impacts of hydraulic fracturing could spur further action toward federal and/or state legislation and regulation of hydraulic fracturing activities.

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ITEM 1A. RISK FACTORS - continued

 

We cannot predict whether additional federal, state or local laws or regulations applicable to hydraulic fracturing will be enacted in the future and, if so, what actions any such laws or regulations would require or prohibit. Restrictions on hydraulic fracturing could make it prohibitive for our third-party operating partners to conduct operations, and also reduce the amount of oil, natural gas liquids and natural gas that we are ultimately able to produce in commercial quantities from our properties. If additional levels of regulation or permitting requirements were imposed on hydraulic fracturing operations, our business and operations could be subject to delays, increased operating and compliance costs and process prohibitions.

 

Our estimates of the volume of reserves could have flaws, or such reserves could turn out not to be commercially extractable. As a result, our future revenues and projections could be incorrect.

 

Estimates of reserves and of future net revenues prepared by different petroleum engineers may vary substantially depending, in part, on the assumptions made and may be subject to adjustment either up or down in the future. Our actual amounts of production, revenue, taxes, development expenditures, operating expenses, and quantities of recoverable oil and gas reserves may vary substantially from the estimates. Oil and gas reserve estimates are necessarily inexact and involve matters of subjective engineering judgment. In addition, any estimates of our future net revenues and the present value thereof are based on assumptions derived in part from historical price and cost information, which may not reflect current and future values, and/or other assumptions made by us that only represent our best estimates. If these estimates of quantities, prices and costs prove inaccurate, we may be unsuccessful in expanding our oil and gas reserves base with our acquisitions. Additionally, if declines in and instability of oil and gas prices occur, then write downs in the capitalized costs associated with any oil and gas assets we obtain may be required. Because of the nature of the estimates of our reserves and estimates in general, reductions to our estimated proved oil and gas reserves and estimated future net revenues may not be required in the future, and/or that our estimated reserves may not present and/or commercially extractable. If our reserve estimates are incorrect, we may be forced to write down the capitalized costs of our oil and gas properties.

 

Decommissioning costs are unknown and may be substantial. Unplanned costs could divert resources from other projects.

 

We may become responsible for costs associated with abandoning and reclaiming wells, facilities and pipelines which we use for production of oil and natural gas reserves. Abandonment and reclamation of these facilities and the costs associated therewith is often referred to as “decommissioning.” We accrue a liability for decommissioning costs associated with our wells but have not established any cash reserve account for these potential costs in respect of any of our properties. If decommissioning is required before economic depletion of our properties or if our estimates of the costs of decommissioning exceed the value of the reserves remaining at any particular time to cover such decommissioning costs, we may have to draw on funds from other sources to satisfy such costs. The use of other funds to satisfy such decommissioning costs could impair our ability to focus capital investment in other areas of our business.

 

We may have difficulty distributing production, which could harm our financial condition.

 

In order to sell the oil and natural gas that we are able to produce, if any, the operators of the wells we obtain interests in may have to make arrangements for storage and distribution to the market. We will rely on local infrastructure and the availability of transportation for storage and shipment of our products, but infrastructure development and storage and transportation facilities may be insufficient for our needs at commercially acceptable terms in the localities in which we operate. This situation could be particularly problematic to the extent that our operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping and/or pipeline facilities. These factors may affect our and potential partners’ ability to explore and develop properties and to store and transport oil and natural gas production, increasing our expenses.

 

Furthermore, weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we will operate, or labor disputes may impair the distribution of oil and/or natural gas and in turn diminish our financial condition or ability to maintain our operations.

 

Our business will suffer if we cannot obtain or maintain necessary licenses.

 

Our operations, should the Arrangement not occur, will require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities. Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to change in regulations and policies and to the discretion of the applicable governments, among other factors. Our inability to obtain, or our loss of or denial of extension of, any of these licenses or permits could hamper our ability to produce revenues from our operations.

 

Challenges to our properties may impact our financial condition.

 

Title to oil and gas interests is often not capable of conclusive determination without incurring substantial expense. While we have made and intend to make appropriate inquiries into the title of properties and other development rights we have acquired and intend to acquire, title defects may exist. In addition, we may be unable to obtain adequate insurance for title defects, on a commercially reasonable basis or at all. If title defects do exist, it is possible that we may lose all or a portion of our right, title and interests in and to the properties to which the title defects relate. If our property rights are reduced, our ability to conduct our exploration, development and production activities may be impaired. To mitigate title problems, common industry practice is to obtain a title opinion from a qualified oil and gas attorney prior to the drilling operations of a well.

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ITEM 1A. RISK FACTORS - continued

 

We rely on technology to conduct our business, and our technology could become ineffective or obsolete.

 

We rely on technology, including geographic and seismic analysis techniques and economic models, to develop our reserve estimates and to guide our exploration, development and production activities. We and our operator partners will be required to continually enhance and update our technology to maintain its efficacy and to avoid obsolescence. The costs of doing so may be substantial and may be higher than the costs that we anticipate for technology maintenance and development. If we are unable to maintain the efficacy of our technology, our ability to manage our business and to compete may be impaired. Further, even if we are able to maintain technical effectiveness, our technology may not be the most efficient means of reaching our objectives, in which case we may incur higher operating costs than we would were our technology more efficient.

 

The loss of key personnel would directly affect our efficiency and profitability.

 

Our future success, should the Arrangement not occur, is dependent, in a large part, on retaining the services of our current management team. Our executive officers possess a unique and comprehensive knowledge of our industry and related matters that are vital to our success within the industry. The knowledge, leadership and technical expertise of these individuals would be difficult to replace. The loss of one or more of our officers could have a material adverse effect on our operating and financial performance, including our ability to develop and execute our long-term business strategy. We do not maintain key-man life insurance with respect to any employees. We do have employment agreements with each of our executive officers.

 

We have limited management and staff and are dependent upon partnering arrangements and third-party service providers.

 

We currently have four full-time employees, including our Chief Executive Officer and Chief Financial Officer. The loss of these individuals would have an adverse effect on our business, as we have very limited personnel. We leverage the services of other independent consultants and contractors to perform various professional services, including engineering, oil and gas well planning and supervision, and land, legal, environmental and tax services. We also pursue alliances with partners in the areas of geological and geophysical services and prospect generation, evaluation and prospect leasing. Our dependence on third-party consultants and service providers create a number of risks, including but not limited to:

 

the possibility that such third parties may not be available to us as and when needed; and

 

the risk that we may not be able to properly control the timing and quality of work conducted with respect to its projects.

 

If we experience significant delays in obtaining the services of such third parties or they perform poorly, our results of operations and stock price could be materially adversely affected.

 

Our officers and directors control a significant percentage of our current outstanding common stock and their interests may conflict with those of our stockholders.

 

As of the date of this report, our executive officers and directors collectively and beneficially own approximately 16.1% of our outstanding common stock (see Item 12 of this report for an explanation of how this number is computed). This concentration of voting control gives these affiliates substantial influence over any matters which require a stockholder vote, including without limitation the election of directors and approval of merger and/or acquisition transactions, even if their interests may conflict with those of other stockholders. It could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us. This could have a material adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the then prevailing market prices for their shares of common stock.

 

In the future, we may incur significant increased costs as a result of operating as a public company, and our management may be required to devote substantial time to new compliance initiatives.

 

In the future, we may incur significant legal, accounting, and other expenses as a result of operating as a public company. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules subsequently implemented by the SEC, have imposed various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

 

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In performing this evaluation and testing, management concluded that our internal control over financial reporting is effective as of December 31, 2020. Our continued compliance with Section 404, will require that we incur substantial accounting expense and expend significant management efforts. We do not have an internal audit group. We have however, engaged independent professional assistance for the evaluation and testing of internal controls.

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ITEM 1A. RISK FACTORS - continued

 

Terrorist attacks or cyber-incidents could result in information theft, data corruption, operational disruption and/or financial loss.

 

Like most companies, we have become increasingly dependent upon digital technologies, including information systems, infrastructure and cloud applications and services, to operate our businesses, to process and record financial and operating data, communicate with our business partners, analyze mine and mining information, estimate quantities of coal reserves, as well as other activities related to our businesses. Strategic targets, such as energy-related assets, may be at greater risk of future terrorist or cyber-attacks than other targets in the United States. Deliberate attacks on, or security breaches in, our systems or infrastructure, or the systems or infrastructure of third parties, or cloud-based applications could lead to corruption or loss of our proprietary data and potentially sensitive data, delays in production or delivery, difficulty in completing and settling transactions, challenges in maintaining our books and records, environmental damage, communication interruptions, other operational disruptions and third-party liability. Our insurance may not protect us against such occurrences. Consequently, it is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Further, as cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents.

 

We have adopted an Information Security Policy and Acceptable Use Statement to address precautions with respect to data security and we have created an Incident Response Plan which outlines appropriate responses in case of a reported breach. These policies and plan have been executed in coordination with our independent Information Technology Service provider.

 

Certain Factors Related to Our Common Stock

 

There presently is a limited market for our common stock, and the price of our common stock may be volatile.

 

Our common stock is currently quoted on The NASDAQ Stock Market LLC. There has been and may continue to be volatility in the volume and market price of our common stock moving forward. This volatility may be caused by a variety of factors, including the lack of readily available quotations, the absence of consistent administrative supervision of “bid” and “ask” quotations, and generally lower trading volume. In addition, factors such as quarterly variations in our operating results, changes in financial estimates by securities analysts, or our failure to meet our or their projected financial and operating results, litigation involving us, factors relating to the oil and gas industry, actions by governmental agencies, national economic and stock market considerations, as well as other events and circumstances beyond our control could have a significant impact on the future market price of our common stock and the relative volatility of such market price.

 

Securities analysts may not initiate coverage or continue to cover our shares of common stock and this may have a negative impact on the market price of our shares of common stock.

 

The trading market for our shares of common stock will depend, in part, on the research and reports that securities analysts publish about our business and our shares of common stock. We do not have any control over these analysts. If securities analysts do not cover our shares of common stock, the lack of research coverage may adversely affect the market price of those shares. If securities analysts do cover our shares of common stock, they could issue reports or recommendations that are unfavorable to the price of our shares of common stock, and they could downgrade a previously favorable report or recommendation, and in either case our share prices could decline as a result of the report. If one or more of these analysts does not initiate coverage, ceases to cover our shares of common stock or fails to publish regular reports on our business, we could lose visibility in the financial markets, which could cause our share prices or trading volume to decline.

 

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

 

Our stockholders could sell substantial amounts of common stock in the public market, including shares sold upon the filing of a registration statement that registers such shares and/or upon the expiration of any statutory holding period under Rule 144 of the Securities Act of 1933 (the “Securities Act”), if available, or upon the expiration of trading limitation periods. Such volume could create a circumstance commonly referred to as a market “overhang” and in anticipation of which the market price of our common stock could fall. Additionally, we have a large number of warrants that are presently exercisable. The exercise of a large amount of these securities followed by the subsequent sale of the underlying stock in the market would likely have a negative effect on our common stock’s market price. The existence of an overhang, whether or not sales have occurred or are occurring, also could make it more difficult for us to secure additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

Our directors and officers have rights to indemnification.

 

Our Bylaws provide, as permitted by governing Nevada law, that we will indemnify our directors, officers, and employees, whether or not then in service as such, against all reasonable expenses actually and necessarily incurred by him or her in connection with the defense of any litigation to which the individual may have been made a party because he or she is or was a director, officer, or employee of the company. The inclusion of these provisions in the Bylaws may have the effect of reducing the likelihood of derivative litigation against directors and officers, and may discourage or deter stockholders or management from bringing a lawsuit against directors and officers for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our stockholders.

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ITEM 1A. RISK FACTORS - continued

 

We do not anticipate paying any cash dividends on our common stock.

 

We do not anticipate paying cash dividends on our common stock for the foreseeable future. The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, to implement our business strategy; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.

 

NASDAQ may delist our common stock from trading on its exchange, which could limit shareholders’ ability to trade our common stock.

 

As a listed company on NASDAQ, we are required to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our common stock. If we fail to meet these continued listing requirements, our common stock may be subject to delisting. If our common stock is delisted and we are not able to list our common stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our shareholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future.

 

Issuance of our stock in the future could dilute existing shareholders and adversely affect the market price of our common stock.

 

We have the authority to issue up to 150,000,000 shares of common stock and 10,000,000 shares of preferred stock, and to issue options and warrants to purchase shares of our common stock. We are authorized to issue significant amounts of common stock in the future, subject only to the discretion of our board of directors. These future issuances could be at values substantially below the price paid for our common stock by investors. In addition, we could issue large blocks of our stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval. Because the trading volume of our common stock is relatively low, the issuance of our stock may have a disproportionately large impact on its price compared to larger companies.

 

Our stock price has fluctuated in the past, has recently been volatile and may be volatile in the future, and as a result, investors in our common stock could incur substantial losses.

 

Our stock price has fluctuated in the past, has recently been volatile and may be volatile in the future. By way of example, on January 4, 2021, the price of our common stock closed at $0.71 per share while on February 16, 2021, our stock price closed at $4.29 per share.  We may incur rapid and substantial decreases in our stock price in the foreseeable future that are unrelated to our operating performance or prospects. In addition, the recent outbreak of the novel strain of coronavirus (COVID-19) has caused broad stock market and industry fluctuations. The stock market in general and the market for companies such as ours in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may experience losses on their investment in our common stock. The market price for our common stock may be influenced by many factors, including the following:

 

investor reaction to our business strategy;

 

the success of competitive products or technologies;

 

our continued compliance with the NASDAQ listing standards;

 

regulatory or legal developments in the United States and other countries, especially changes in laws or regulations applicable to our products;

 

actions taken by regulatory agencies with respect to our products, manufacturing process or sales and marketing terms;

 

variations in our financial results or those of companies that are perceived to be similar to us;

 

the success of our efforts to acquire or in-license additional products or product candidates;

 

developments concerning our collaborations or partners;

 

developments or disputes concerning patents or other proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our products;

 

our ability or inability to raise additional capital and the terms on which we raise it;

 

declines in the market prices of stocks generally;

 

trading volume of our common stock;

 

actual or purported “short-squeeze” trading activity;

 

sales of our common stock by us or our stockholders;

24

 

ITEM 1A. RISK FACTORS - continued

 

general economic, industry and market conditions; and

 

other events or factors, including those resulting from such events, or the prospect of such events, including war, terrorism and other international conflicts, public health issues including health epidemics or pandemics, such as the recent outbreak of the novel coronavirus (COVID-19), and natural disasters such as fire, hurricanes, earthquakes, tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, could disrupt our operations, disrupt the operations of our suppliers or result in political or economic instability.

 

These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. Further, recent increases are significantly inconsistent with any improvements in actual or expected operating performance, financial condition or other indicators of value. Since the stock price of our common stock has fluctuated in the past, has been recently volatile and may be volatile in the future, investors in our common stock could incur substantial losses. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects. There can be no guarantee that our stock price will remain at current levels or that future sales of our common stock will not be at prices lower than those sold to investors.

 

        Additionally, securities of certain companies have recently experienced significant and extreme volatility in stock price due short sellers of shares of common stock, known as a “short squeeze.”  These short squeezes have caused extreme volatility in both the stock prices of those companies and in the market and have led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value of the company. Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant portion of their original investment, as in many cases the price per share has declined steadily as interest in those stocks have abated. While we have no reason to believe our shares would be the target of a short squeeze, there can be no assurance that we won’t be in the future, and you may lose a significant portion or all of your investment if you purchase our shares at a rate that is significantly disconnected from our underlying value.

 

The issuance of preferred stock in the future could adversely affect the rights of the holders of our common stock.

 

An issuance of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over the common stock and could, upon conversion or otherwise, have all of the rights of our common stock. Our board of directors’ authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2. PROPERTIES

 

Our principal executive offices are located at 5700 W. Plano Parkway, Suite 3600, Plano, Texas 75093. We currently sublease this office space which totals approximately 3,181 square feet. We believe that the condition and size of our offices are adequate for our current needs.

 

Investments in oil and gas properties during the years ended December 31, 2020 and 2019 are detailed as follows:

 

   2020   2019 
Property acquisition costs  $-   $- 
Development costs  $3,472,281   $6,641,467 
Exploratory costs  $-   $- 
           
Totals  $3,472,281   $6,641,467 

 

Property development costs presented above exclude interest capitalized into the full cost pool of $2,353,700 in 2020 and $2,858,753 in 2019.

 

The development costs for 2020 include work in the Orogrande and Hazel projects in west Texas. No development costs were incurred for Oklahoma properties in 2020.

25

 

ITEM 2. PROPERTIES - continued

 

Oil and Natural Gas Reserves

 

As of December 31, 2020, the Company had no proved reserves. At December 31, 2019 we had proved reserves related only to the Warwink project which was sold on November 11, 2020 (effective November 1, 2020). The Hazel and Orogrande Projects consist only of unevaluated properties in progress of development for future production. At December 31, 2020 there are no proved nonproducing reserves related to these properties. The Oklahoma properties are marginal producing wells which are not economic in the context of proved reserve value. The estimates of our 2019 proved reserves and the PV-10 set forth herein reflect estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development costs, using prices and costs under existing economic conditions. The amounts shown do not give effect to non-property related expenses, such as corporate general administrative expenses and debt service, future income taxes or to depreciation, depletion and amortization.

 

   December 31, 2020   December 31, 2020 
   Reserves   Future Net Revenue (M$) 
                   Present Value Discounted 
Category  Oil (Bbls)   Gas (Mcf)   Total (BOE)   Total   at 10% 
                     
Proved Producing   0    0    0   $-   $- 
Proved Undeveloped   0    0    0   $-   $- 
Total Proved   0    0    0   $-   $- 
                          
Standardized Measure of Future Net Cash Flows Related to Proved Oil and Gas Properties                      $- 
                          
Probable Undeveloped   0    0    0   $-   $- 
                          
   December 31, 2019   December 31, 2019 
   Reserves   Future Net Revenue (M$) 
                   Present Value Discounted 
Category  Oil (Bbls)   Gas (Mcf)   Total (BOE)   Total   at 10% 
                     
Proved Producing   14,700    21,100    18,217   $634   $514 
Proved Nonproducing   0    0    0   $-   $- 
Total Proved   14,700    21,100    18,217   $634   $514 
                          
Standardized Measure of Future Net Cash Flows Related to Proved Oil and Gas Properties                      $539 
                          
Probable Undeveloped   0    0    0   $-   $- 

 

The decrease in producing reserves from 2019 to 2020 from 18,217 to -0- BOE is related to the sale of the Winkler properties on November 11, 2020 (effective November 1, 2020).

 

Reserve values as of December 31, 2019 are related to a single producing well in the Warwink Project.

 

BOE equivalents are determined by combining barrels of oil with MCF of gas divided by six.

26

 

ITEM 2. PROPERTIES - continued

 

Standardized Measure of Oil & Gas Quantities - Volume Rollforward
Year Ended December 31, 2020

 

The following table sets forth the Company’s net proved reserves, including the changes therein, and proved developed reserves:

 

   Crude Oil (Bbls)   Natural Gas (Mcf)   BOE 
TOTAL PROVED RESERVES:               
Beginning of period   14,710    21,130    18,232 
Revisions of previous estimates   -    -    - 
Extensions, discoveries and other additions   -    -    - 
Divestiture of Reserves   (9,265)   (16,132)   (11,954)
Acquisition of Reserves   -    -    - 
Production   (5,445)   (4,998)   (6,278)
End of period   -    -    - 

 

Standardized Measure of Oil & Gas Quantities - Volume Rollforward
Year Ended December 31, 2019

 

The following table sets forth the Company’s net proved reserves, including the changes therein, and proved developed reserves:

 

   Crude Oil (Bbls)   Natural Gas (Mcf)   BOE 
TOTAL PROVED RESERVES:               
Beginning of period   974,780    156,940    1,000,937 
Revisions of previous estimates   (944,985)   (121,400)   (965,218)
Extensions, discoveries and other additions   -    -    - 
Divestiture of Reserves   -    -    - 
Acquisition of Reserves   -    -    - 
Production   (15,085)   (14,410)   (17,487)
End of period   14,710    21,130    18,232 

27

 

ITEM 2. PROPERTIES - continued

 

Standardized Measure of Oil & Gas Quantities
Year Ended December 31, 2020 & 2019

 

The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves is as follows :

 

   2020   2019 
         
Future cash inflows  $-   $843,040 
Future production costs   -    (196,670)
Future development costs   -    - 
Future income tax expense   -    - 
Future net cash flows   -    646,370 
10% annual discount for estimated timing of cash flows   -    (107,070)
Standardized measure of discounted future net cash flows related to proved reserves  $-   $539,300 

 

A summary of the changes in the standardized measure of discounted future net cash flows applicable to proved oil and natural gas reserves is as follows:

 

   2020   2019 
Balance, beginning of period  $539,300   $5,341,330 
Net change in sales and transfer prices and in production (lifting) costs related to future production   (632,020)   1,176,090 
Changes in estimated future development costs   -    1,851,760 
Net change due to revisions in quantity estimates   -    (5,896,344)
Accretion of discount   107,070    (868,787)
Other   -    (1,763,161)
           
Net change due to extensions and discoveries   -    - 
Net change due to sales of minerals in place   (9,452)   - 
Sales and transfers of oil and gas produced during the period   (4,898)   (294,912)
Previously estimated development costs incurred during the period   -    993,324 
Net change in income taxes   -    - 
Balance, end of period  $-   $539,300 

 

Due to the inherent uncertainties and the limited nature of reservoir data, both proved and probable reserves are subject to change as additional information becomes available. The estimates of reserves, future cash flows, and present value are based on various assumptions, including those prescribed by the SEC, and are inherently imprecise. Although we believe these estimates are reasonable, actual future production, cash flows, taxes, development expenditures, operating expenses, and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates.

 

In estimating probable reserves, it should be noted that those reserve estimates inherently involve greater risk and uncertainty than estimates of proved reserves. While analysis of geoscience and engineering data provides reasonable certainty that proved reserves can be economically producible from known formations under existing conditions and within a reasonable time, probable reserves involve less certainty than reserves with a higher classification due to less data to support their ultimate recovery. Probable reserves have not been discounted for the additional risk associated with future recovery. Prospective investors should be aware that as the categories of reserves decrease with certainty, the risk of recovering reserves at the PV-10 calculation increases. The reserves and net present worth discounted at 10% relating to the different categories of proved and probable have not been adjusted for risk due to their uncertainty of recovery and thus are not comparable and should not be summed into total amounts.

 

Reserve Estimation Process, Controls and Technologies

 

No reserve report has been prepared for 2020. The only properties that had measurable reserves at December 31, 2019 were sold on November 11, 2020 (effective November 1, 2020). The only other producing properties owned by the Company are those located in Oklahoma which are marginally producing and are uneconomic for reserve calculation purposes.

 

The reserve estimates for 2019, including PV-10 estimates, set forth above were prepared by PeTech Enterprises, Inc. for the Company’s properties in Oklahoma and Texas. The calculations were prepared using standard geological and engineering methods generally accepted by the petroleum industry and in accordance with SEC financial accounting and reporting standards.

28

 

ITEM 2. PROPERTIES - continued

 

We do not have any employees with specific reservoir engineering qualifications in the company. Our Chairman and Chief Executive Officer worked closely with PeTech Enterprises Inc. in connection with their preparation of our reserve estimates for 2019, including assessing the integrity, accuracy, and timeliness of the methods and assumptions used in this process.

 

PeTech Enterprises, Inc. (“PeTech”), who provided 2019 reserve estimates for our properties, is a Texas based family owned oil and gas production and investment company that provides reservoir engineering, economics and valuation support to energy banks, energy companies and law firms as an expert witness. PeTech has been in business since 1982. Amiel David is the President of PeTech and the primary technical person in charge of the estimates of reserves and associated cash flow and economics on behalf of the company for the results presented in its reserves report to us. He has a PhD in Petroleum Engineering from Stanford University. He is a registered Professional Engineer in the state of Texas (PE #50970), granted in 1982, a member of the Society of Petroleum Engineers and a member of the Society of Petroleum Evaluation Engineers.

 

Proved Nonproducing Reserves

 

As of December 31, 2020, our proved nonproducing reserves totaled -0- barrels of oil equivalents (BOE) compared to -0- as of December 31, 2019.

 

At the end of 2020 and 2019 reserves did not include any value for proved undeveloped properties. This was due to the lack of intent to drill additional wells in the Hazel area by the Company which reflects the decision to focus capital and attention to development in the Orogrande area. Provision has been made to maintain the Hazel leases in effect through renegotiation of the terms of the mineral leases.

 

We made investments and development progress during 2020 to develop proved producing reserves in the Orogrande and Hazel Projects in the Permian Basin in West Texas. As of December 31, 2020, nine test wells have been developed in the Orogrande Project and six test wells have been developed in the Hazel Project.

 

As of December 31, 2020, the Hazel project was subject to an option agreement.

 

The Warwink project was sold on November 11, 2020 (effective November 1, 2020).

 

Our current drilling plans, subject to sufficient capital resources and the periodic evaluation of interim drilling results and other potential investment opportunities, include drilling additional evaluation wells in the Orogrande AMI to continue to derisk the prospect and obtain initial production from the development efforts.

 

Production, Price, and Production Cost History

 

During the year ended December 31, 2020, we produced and sold 5,445 barrels of oil net to our interest at an average sale price of $34.48 per bbl. We produced and sold 4,998 MCF of gas net to our interest at an average sales price of $1.13 per MCF. Our average production cost including lease operating expenses and direct production taxes was $30.02 per BOE. Our depreciation, depletion, and amortization expense was $130.68 per BOE.

 

During the year ended December 31, 2019, we produced and sold 13,784 barrels of oil net to our interest at an average sale price of $51.95 per bbl. We produced and sold 22,208 MCF of gas net to our interest at an average sales price of $1.36 per MCF. Our average production cost including lease operating expenses and direct production taxes was $25.81 per BOE. Our depreciation, depletion, and amortization expense was $251.25 per BOE.

 

Our 2020 production was from properties located in central Oklahoma and in west Texas. Reserves at the end of 2019 were 100% from the Warwink properties in west Texas. For 2020, approximately 614 BOE was produced in Oklahoma and 5,664 BOE produced in Texas, or 10% from Oklahoma and 90% from wells in west Texas.

29

 

ITEM 2. PROPERTIES - continued

 

Quarterly Revenue and Production by State for 2020 and 2019 are detailed as follows:

 

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 
                         
Oklahoma  Q4 - 2020  0  0  $1,042   $773   $1,815 
Hazel (TX)  Q4 - 2020  0  0  $-   $-   $- 
MECO (TX)  Q4 - 2020  435  0  $9,837   $5,519   $15,356 
MECO (Sold 11/1/20)  YTD ADJ  0  0  $(10,092)  $(5,519)  $(15,611)
Total Q4-2020     435  0  $787   $773   $1,560 
                         
2020 Year To Date  5,445  4,998  $187,755   $5,624   $193,379 
                         
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 

30

 

ITEM 2. PROPERTIES - continued

 

Drilling Activity and Productive Wells

 

Combined Well Status

 

The following table summarizes development activity and Well Status as of December 31, 2020:

 

   Cumulative Well Status   Developed (Sold)   Cumulative Well Status 
Drilling Activity/Well Status  at 12/31/2020   2020   at 12/31/2019 
   Gross   Net   Gross   Net   Gross   Net 
                         
Development Wells:                              
Productive -Texas (Hazel)   1.00    0.80    -    -    1.00    0.80 
Productive -Texas (Warwink)   -    -    (1.00)   (0.13)   1.00    0.13 
Productive - Okla   2.00    0.40    -    -    2.00    0.40 
Test Wells  - Orogrande   9.00    5.69    -    -    9.00    5.69 
Test Wells  - Hazel   6.00    4.80    -    -    6.00    4.80 
                               
Exploration Wells:                              
Productive   -    -    -    -    -    - 
Dry   -    -    -    -    -    - 
                               
                               
Total Drilled Wells:                              
Productive -Texas   1.00    0.80    (1.00)   (0.13)   2.00    0.93 
Productive - Okla   2.00    0.40    -    -    2.00    0.40 
Test Wells   15.00    10.49    -    -    15.00    10.49 
                               
                               
Acquired Wells:                              
Productive -Texas   -    -    -    -    -    - 
Productive - Okla   -    -    -    -    -    - 
                               
                               
Total Wells:                              
Productive -Texas   1.00    0.80    (1.00)   (0.13)   2.00    0.93 
Productive - Okla   2.00    0.40    -    -    2.00    0.40 
Test Wells   15.00    10.49    -    -    15.00    10.49 
                               
Total   18.00    11.69    (1.00)   (0.13)   19.00    11.82 
                               
Well Type:                              
Oil   -    -    -    -    -    - 
Gas   -    -    -    -    -    - 
Combination - Oil and Gas   3.00    1.20    (1.00)   (0.13)   4.00    1.33 
Test Wells   15.00    10.49    -    -    15.00    10.49 
                               
Total   18.00    11.69    (1.00)   (0.13)   19.00    11.82 

31

 

ITEM 2. PROPERTIES - continued

 

Our acreage positions at December 31, 2020 are summarized as follows:

 

           TRCH Interest   TRCH Interest 
   Total Acres   Developed  Acres   Undeveloped Acres 
Leasehold Interests - 12/31/2020  Gross   Net    Gross   Net   Gross   Net 
                         
Texas - Orogrande   134,000    89,110    -    -    134,000    89,110 
Hazel Project   12,203    9,762    320    256    11,883    9,506 
                               
Oklahoma - Viking   640    192    640    192    -    - 
                               
Total   146,843    99,064    960    448    145,883    98,616 

 

Current Projects

 

As of December 31, 2020, we had interests in three oil and gas projects: the Orogrande Project in Hudspeth County, Texas, the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas, and the Hunton wells in partnership with Kodiak Ventures in central Oklahoma.

 

See the description under “Current Projects” below under Note 4, “Oil & Gas Properties,” of the financial statements included with this report for information and disclosure regarding these projects, which description is incorporated herein by reference.

 

ITEM 3. 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. Torchlight 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. Torchlight has also asserted counterclaims for attorney fees. On January 14, 2021, Goldstone Holding Company, LLC dismissed its claims without prejudice, leaving Torchlight’s counterclaims for attorney fees as the only pending claim in the case. On February 26, 2021, Torchlight filed a non-suit without prejudice on its counterclaims for attorney fees, leaving no claims in the case. However, Goldstone Holding Company, LLC asked the court to re-instate its claims. That matter is set for hearing on March 25, 2021. If the court does reinstate the case, Torchlight intends to re-assert its attorney fees claim and to contest Goldstone’s claims.

 

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. We have added the manufacturer of one of the tool components that we contend was a cause of the tool failure. 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 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

32

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is quoted on The NASDAQ Stock Market LLC under the symbol, “TRCH.” Trading in our common stock has historically been limited and occasionally sporadic and the quotations set forth below are not necessarily indicative of actual market conditions.

 

Record Holders

 

As of March 18, 2021, there were approximately 207 stockholders of record of our common stock, and we estimate that there were approximately 103,000 additional beneficial stockholders who hold their shares in “street name” through a brokerage firm or other institution. As of March 18, 2021, we have a total of 145,313,667 shares of common stock issued and outstanding.

 

The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.

 

Equity Compensation Plan Information

 

The following table sets forth all equity compensation plans as of December 31, 2020:

 

           Number of 
           securities 
           remaining 
           available 
           for future 
   Number of       issuance 
   securities to   Weighted-   under 
   be issued   average   equity 
   upon   exercise   compensation 
   exercise of   price of   plans 
   outstanding   outstanding   (excluding 
   options,   options,   securities 
   warrants   warrants   reflected in 
Plan Category  and rights   and rights   column (a)) 
Equity compensation plans approved by security holders   5,417,768   $.96    4,582,232 

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not Applicable.

33

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Information set forth and discussed in this Management’s Discussion and Analysis and Results of Operations is derived from our historical financial statements and the related notes thereto which are included in this Form 10-K. The following information and discussion should be read in conjunction with such financial statements and notes. Additionally, this Management’s Discussion and Analysis and Plan of Operations contain certain statements that are not strictly historical and are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a high degree of risk and uncertainty. Actual results may differ materially from those projected in the forward-looking statements due to other risks and uncertainties that exist in our operations, development efforts, and business environment, and due to other risks and uncertainties relating to our ability to obtain additional capital in the future to fund our planned expansion, the demand for oil and natural gas, and other general economic factors.

 

All forward-looking statements included herein are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements.

 

Summary of Key Results

 

Overview

 

We are engaged in the acquisition, exploration, exploitation, and/or development of oil and natural gas properties in the United States, principally in West Texas.

 

The West Texas properties demonstrate significant potential and future production capabilities based upon the analysis of scientific data being gathered in the day by day development activity. Therefore, the Board has determined to focus its efforts and capital on these projects to maximize shareholder value for the long run.

 

During 2019 and 2020 the Company continued development in the Orogrande Project. Additional development of test wells was continued to capture additional science data to support lease value. Our Warwink project was sold in 2020 and an Option Agreement was executed in 2020 for the proposed sale of our Hazel project.

 

In August 2020, our subsidiaries entered into an option agreement with a third party (which was amended in September 2020), under which, in exchange for satisfying certain drilling obligations, the third party will have the option to purchase the entire Hazel Project by a date no later than May 31, 2021. In January 2021, the third party notified us of its intent to exercise its option to perform operations sufficient to satisfy the remaining drilling obligations.

 

Our strategy in divesting of projects other than the Orogrande Project has been to refocus on the greatest potential future value for the Company while systematically eliminating debt as noncore assets are sold and operations are streamlined.

 

Arrangement Agreement with Metamaterial

 

On December 14, 2020, we and our newly formed subsidiaries, Canco and Callco, entered into an arrangement agreement, or the Arrangement Agreement, with Metamaterial Inc., an Ontario corporation headquartered in Nova Scotia, Canada, or Meta. Under the Arrangement Agreement, Canco is to acquire all of the outstanding common shares of Meta by way of a statutory plan of arrangement under the Business Corporations Act (Ontario), or the Arrangement, on and subject to the terms and conditions of the Arrangement Agreement. On February 3, 2021, we and our Ontario subsidiaries entered into an amendment to the Arrangement Agreement with Meta.

 

The disclosure under “Item 1. Business” is incorporated herein by reference, including the sections titled “Arrangement Agreement with Metamaterial.”

 

The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements for the years ended December 31, 2020 and 2019 included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management.

 

Historical Results for the Years Ended December 31, 2020 and 2019

 

For the year ended December 31, 2020, we had a net loss of $12,781,896 compared to a net loss of $9,839,396 for the year ended December 31, 2019. The difference is primarily due to a decrease in revenues, increased general and administrative expenses, an impairment loss, a loss on sale of oil and gas property and extinguishment of debt.

34

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

Revenues and Cost of Revenues

 

For the year ended December 31, 2020, we had production revenue of $193,379 compared to $746,263 of production revenue for the year ended December 31, 2019. Refer to the table of production and revenue for 2020 and 2019 included below. Our cost of revenue, consisting of lease operating expenses and production taxes, was $188,481, and $451,325 for the years ended December 31, 2020 and 2019, respectively.

 

The change in revenue was primarily impacted by the suspension of production from the Flying B #3 well in the Hazel Project in May 2019 and the sale of our Warwink Project in November 2020.

 

Production and Revenue are detailed as follows:

 

Property+A2:G124  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 
                         
Oklahoma  Q4 - 2020  0  0  $1,042   $773   $1,815 
Hazel (TX)  Q4 - 2020  0  0  $-   $-   $- 
MECO (TX)  Q4 - 2020  435  0  $9,837   $5,519   $15,356 
MECO (Sold 11/1/20)  YTD ADJ  0  0  $(10,092)  $(5,519)  $(15,611)
Total Q4-2020     435  0  $787   $773   $1,560 
                         
2020 Year To Date     5,445  4,998  $187,755   $5,624   $193,379 
                         
                         
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 

35

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

We recorded depreciation, depletion and amortization expense of $820,441 for the year ended December 31, 2020 compared to $4,393,160 for 2019. Impairment expense recognized was $2,108,301 in 2020 compared to $1,494,769 for 2019. An impairment of unevaluated costs of $756,964 was recorded at December 31, 2019 which became an addition to the basis for future depreciation, depletion, and amortization expense for 2020.

 

General and Administrative Expenses

 

Our general and administrative expenses for the years ended December 31, 2020 and 2019 were $3,526,700 and $3,273,697, respectively, an increase of $253,003. Our general and administrative expenses consisted of consulting and compensation expense, substantially all of which were non-cash or deferred, accounting and administrative costs, professional consulting fees, and other general corporate expenses. The increase in general and administrative expenses for the year ended December 31, 2020 compared to 2019 is detailed as follows:

 

Increase(decrease) in non cash stock and warrant compensation  $(537,572)
Increase(decrease) in consulting expense   (132,512)
Increase(decrease) in professional fees   (85,729)
Increase(decrease) in investor relations   148,814 
Increase(decrease) in travel expense   (37,560)
Increase(decrease) in salaries and compensation   131,920 
Increase(decrease) in legal fees   662,121 
Increase(decrease) in insurance   85,501 
Increase(decrease) in rent   (17,175)
Increase(decrease) in accounting and audit fees   8,557 
Increase(decrease) in general corporate expenses   26,638 
      
Total Increase in General and Administrative Expenses  $253,003 

 

Liquidity and Capital Resources

 

For the year ended December 31, 2020, we had a net loss of $12,781,896 compared to a net loss of $9,839,396 for the year ended December 31, 2019.

 

At December 31, 2020, we had current assets of $521,574 and total assets of $32,396,904. As of December 31, 2020, we had current liabilities of $2,897,083. Stockholders’ equity was $12,643,418 at December 31, 2020.

 

Cash from operating activities for the year ended December 31, 2020, was $(1,345,273) compared to $(141,933) for the year ended December 31, 2019, a decrease of $1,203,340. Cash from operating activities during 2020 can be attributed principally to net loss from operations of $12,781,896 adjusted for noncash stock based compensation of $404,900, for $820,441 in depreciation, depletion and amortization expense, for $1,999,866 in loss on extinguishment of debt, for $2,928,276 in loss from sale of oil and gas property and $2,108,301 in impairment expense.

 

Cash used in operating activities during 2019 can be attributed principally to net losses from operations of $9,839,396 adjusted for noncash stock-based compensation of $942,470, depreciation, depletion and amortization expense of $4,393,160, and impairment expense of $1,494,769.

 

Cash used in investing activities for year ended December 31, 2020 was $5,804,023 compared to $8,790,222 for the year ended December 31, 2019. Cash used in investing activities consisted primarily of investments in oil and gas properties during the year ended December 31, 2020 and 2019.

36

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

Cash from financing activities for the year ended December 31, 2020 was $7,190,893 as compared to $8,181,722 for the year ended December 31, 2019. Cash from financing activities in 2020 and 2019 consisted primarily of proceeds from common stock issuances and debt financing. We expect to continue to have cash provided by financing activities as we seek new rounds of financing and continue to develop our oil and gas investments. Reference Note 11 to the Financial Statements regarding additional funding closed subsequent to December 31, 2020.

 

Our current assets are insufficient to satisfy our cash needs over the next twelve months and as such we will require additional debt or equity financing to meet our plans and needs. We face obstacles in continuing to attract new financing due to our history and current record of net losses and past working capital deficits. Despite our efforts, we can provide no assurance that we will be able to obtain the financing required to meet our stated objectives or even to continue as a going concern.

 

We do not expect to pay cash dividends on our common stock in the foreseeable future.

 

Critical Accounting Policies and Estimates

 

Oil and gas properties – The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves.

 

Oil and gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unevaluated properties and include non-producing leasehold, geological, and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. The Company allocates a portion of its acquisition costs to unevaluated properties based on relative value. Costs are transferred to the full cost pool as the properties are evaluated over the life of the reservoir. Unevaluated properties are reviewed for impairment at least annually and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions.

 

Gains and losses on the sale of oil and gas properties are not generally reflected in income unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Sales of less than 100% of the Company’s interest in the oil and gas property are treated as a reduction of the capital cost of the field, with no gain or loss recognized, as long as doing so does not significantly affect the unit-of-production depletion rate. Costs of retired equipment, net of salvage value, are usually charged to accumulated depreciation.

 

Depreciation, depletion, and amortization – The depreciable base for oil and natural gas properties includes the sum of all capitalized costs net of accumulated depreciation, depletion, and amortization (“DD&A”), estimated future development costs and asset retirement costs not included in oil and natural gas properties, less costs excluded from amortization. The depreciable base of oil and natural gas properties is amortized on a unit-of-production method.

 

Ceiling test – Future production volumes from oil and gas properties are a significant factor in determining the full cost ceiling limitation of capitalized costs. Under the full cost method of accounting, the Company is required to periodically perform a “ceiling test” that determines a limit on the book value of oil and gas properties. If the net capitalized cost of proved oil and gas properties, net of related deferred income taxes, plus the cost of unproved oil and gas properties, exceeds the present value of estimated future net cash flows discounted at 10 percent, net of related tax affects, plus the cost of unproved oil and gas properties, the excess is charged to expense and reflected as additional accumulated DD&A. The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12-month period and excludes future cash outflows related to estimated abandonment costs.

 

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.

37

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.

 

Share-based compensation – Compensation cost for equity awards is based on the fair value of the equity instrument on the date of grant and is recognized over the period during which an employee is required to provide service in exchange for the award.

 

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.

 

Commitments and Contingencies

 

Leases

 

The Company is subject to a sublease agreement through October 31, 2021 for occupancy of its office premises which requires monthly rent payments of $3,512.

 

As of December 31, 2020, the Company had interests in three oil and gas projects: the Orogrande Project in Hudspeth County, Texas, the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas, and Hunton wells in Central Oklahoma.

 

See the description under “Current Projects” below under Note 4, “Oil & Gas Properties,” of the financial statements included with this report for information and disclosure regarding these projects, which description is incorporated herein by reference.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

38

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of
Torchlight Energy Resources, Inc

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Torchlight Energy Resources, Inc (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring losses from its operations, has negative working capital, and a significant accumulated deficit, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

39

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Depletion and Impairment of Oil and Gas Properties

 

As described in Note 3 to the consolidated financial statements, depletion, and impairment of proved oil and gas properties involve judgments and estimates related to the Company’s oil and gas reserve quantities and associated future net cash flows. In addition, impairment assessment of unevaluated oil and gas properties involves the consideration of factors that include, among others, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, and remaining capital plan. We identified depletion and impairment of oil and gas properties as a critical audit matter.

 

The principal considerations for our determination that performing procedures relating to depletion and impairment of oil and gas properties is a critical audit matter are the presence of significant judgment by management, including the use of management’s specialists, when developing the estimates of proved oil and gas reserves and in assessing the impairment of unevaluated oil and gas properties, which in turn, led to a high degree of auditor judgment, effort, and subjectivity in performing procedures to evaluate management’s estimated future cash flows and significant assumptions, and testing the completeness and accuracy of lease records, including leasehold expiration and evaluating plans to develop certain properties.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, understanding the design of controls relating to depletion and the impairment assessment of oil and gas properties, evaluating the completeness and accuracy of ownership records, including inputs of interest and net revenue interests, testing the Company’s depletion calculations, evaluating the key inputs and significant assumptions used in the Company’s impairment analysis of oil and gas properties, and understanding the specialists’ qualifications and objectivity, as well as the methods and assumptions used by the specialists.

 

/s/ Briggs & Veselka Co.

 

We have served as the Company’s auditor since 2016

 

Houston Texas

 

March 18, 2021

40

 

TORCHLIGHT ENERGY RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31,   December 31, 
   2020   2019 
ASSETS          
Current assets:          
Cash  $131,327   $89,730 
Accounts receivable   137,801    137,769 
Accounts receivable, related party   92,320    61,693 
Production revenue receivable   21,182    100,546 
Subscription receivable   -    250,000 
Prepayments - development costs   35,272    - 
Prepaid expenses   103,672    96,006 
Total current assets   521,574    735,744 
           
Oil and gas properties, net   30,857,959    40,182,043 
Convertible note receivable   1,012,822    - 
Office equipment, net   4,549    6,348 
           
TOTAL ASSETS  $32,396,904   $40,924,135 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $1,026,950   $1,444,002 
12% 2020 Unsecured promissory notes, net of  $-0- and $127,170
discount and financing costs, respectively
   -    8,437,127 
10% 2020 Convertible promissory notes payable   -    540,000 
14% 2021 Convertible promissory notes payable   -    2,000,000 
Accrued payroll   1,213,779    996,176 
Related party payables   98,805    45,000 
Due to working interest owners   54,320    54,320 
Accrued interest payable   503,229    445,861 
Total current liabilities   2,897,083    13,962,486 
           
12% 2021 Secured convertible promissory notes, net of $69,179
and $59,297 discount and financing costs, respectively
   12,430,821    3,940,703 
8% 2021 Convertible promissory notes payable, net of $505,957 and
$1,186,029 discount and BCF, respectively
   1,454,043    773,971 
6% 2021 Secured convertible promissory note due to related party   1,600,000    - 
14% 2021 Convertible promissory notes payable, net of $10,862
financing costs
   989,138    - 
Convertible notes payable and accrued interest   -    7,157,260 
PPP note payable   77,477    - 
Interest payable, net of current portion   283,080      
Asset retirement obligations   21,844    23,319 
Total liabilities   19,753,486    25,857,739 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Preferred stock, par value $0.001, 10,000,000 shares authorized; -0- issued and outstanding December 31, 2020 and December 31, 2019   -    - 
Common stock, par value $0.001; 150,000,000 shares authorized;
103,273,264 issued and outstanding at December 31, 2020;
76,222,042 issued and outstanding at December 31, 2019
   103,276    76,225 
Additional paid-in capital   124,475,739    114,143,872 
Accumulated deficit   (111,935,597)   (99,153,701)
Total stockholders’ equity   12,643,418    15,066,396 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $32,396,904   $40,924,135 

 

The accompanying notes are an integral part of these consolidated financial statements.

41

 

TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year   Year 
   Ended   Ended 
   December 31, 2020   December 31, 2019 
         
Oil and gas sales  $193,379   $746,263 
           
Cost of revenues   (188,481)   (451,325)
           
Gross profit   4,898    294,938 
Operating expenses:          
General and administrative   3,526,700    3,273,697 
Depreciation, depletion and amortization   820,441    4,393,160 
Loss on sale of oil and gas property   2,928,276    - 
Impairment loss   2,108,301    1,494,769 
Total operating expenses   9,383,718    9,161,626 
           
Other income (expense)    <