UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

For the Quarter Ended March 31, 2020

 

o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______.

 

Commission file number: 001-36247

 

TORCHLIGHT ENERGY RESOURCES, INC.

 

(Name of registrant in its charter)

 

Nevada 74-3237581
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

 

5700 West Plano Pkwy, 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 Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.001 par value   TRCH   The Nasdaq Stock Market LLC

 

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, a smaller reporting company, or an emerging growth company. Large accelerated filer o Accelerated filer x Non-accelerated filer o 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of June 5, 2020, there were 86,216,424 shares of the registrant’s common stock outstanding (the only class of voting common stock).

1

 

FORM 10-Q

 

TABLE OF CONTENTS

  

Note About Forward-Looking Statements 3
     
PART I FINANCIAL INFORMATION 4
     
Item 1. Consolidated Financial Statements 4
     
  Consolidated Balance Sheets (Unaudited) 4
     
  Consolidated Statements of Operations (Unaudited) 5
     
  Consolidated Statements of Cash Flows (Unaudited) 6
     
  Consolidated Statements of Stockholders’ Equity (Unaudited) 7
     
  Notes to Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
     
Item 4. Controls and Procedures 32
     
PART II OTHER INFORMATION 32
     
Item 1. Legal Proceedings 32
     
Item 1A. Risk Factors 32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
     
Item 6. Exhibits 33
     
  Signatures 34

2

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Forward-looking statements may appear throughout this report, including without limitation, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019 and in particular, the risks discussed in our Form 10-K under the caption “Risk Factors” in Item 1A therein, and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Important factors that in our view could cause material adverse effects on our financial condition and results of operations include, but are not limited to, risks associated with our ability to extend or restructure existing debt, to obtain additional capital in the future to repay outstanding debt and fund planned expansion, the demand for oil and natural gas which demand could be materially affected by the economic impacts of COVID-19 and possible increases in supply from Russia and OPEC, general economic factors, competition in the industry, our ability to regain and maintain compliance with the minimum bid price requirement of the Nasdaq Stock Market and other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. We undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

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

3

 

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)

 

    March 31,     December 31,  
    2020     2019  
ASSETS            
Current assets:                
Cash   $ 82,654     $ 89,730  
Accounts receivable     222,509       199,462  
Production revenue receivable     71,106       100,546  
Subscription receivable     0       250,000  
Prepaid expenses     61,671       96,006  
Total current assets     437,940       735,744  
                 
Oil and gas properties, net     33,947,468       40,182,043  
Office equipment, net     5,867       6,348  
                 
TOTAL ASSETS   $ 34,391,275     $ 40,924,135  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 2,423,626     $ 1,444,002  
12% 2020 Unsecured promissory notes, net of $825 and $127,170  of discount and financing costs, respectively     64,297       8,437,127  
10% 2020 Convertible promissory notes payable     540,000       540,000  
14% 2020 Convertible promissory notes payable     -       2,000,000  
Due to working interest owners     54,320       54,320  
Accrued interest payable     599,742       445,861  
Total current liabilities     3,681,985       12,921,310  
                 
12% 2021 Secured promissory notes, net of $136,704 and $59,297 of discount and financing costs, respectively     12,362,471       3,940,703  
8% 2021 Convertible promissory notes payable, net of  $1,065,619 and $1,186,029 of discount and BCF, respectively     894,381       773,971  
14% 2021 Convertible promissory notes payable     2,000,000       -  
Convertible notes payable and accrued interest     -       7,157,260  
Accrued payroll     1,041,176       996,176  
Related party payables     45,000       45,000  
Asset retirement obligations     23,461       23,319  
                 
Total liabilities     20,048,474       25,857,739  
                 
Commitments and contingencies                
                 
Stockholders’ equity:                
Preferred stock, par value $0.001, 10,000,000 shares authorized; -0- issued and outstanding at March 31,2020 and December 31, 2019     -       -  
Common stock, par value $0.001; 150,000,000 shares authorized; 80,272,757 issued and outstanding at March 31, 2020; 76,222,042 issued and outstanding at December 31, 2019     80,276       76,225  
Additional paid-in capital     117,110,089       114,143,872  
Accumulated deficit     (102,847,564 )     (99,153,701 )
Total stockholders’ equity     14,342,801       15,066,396  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 34,391,275     $ 40,924,135  

 

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

4

 

TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

    Three Months     Three Months  
    Ended     Ended  
    March 31, 2020     March 31, 2019  
Oil and gas sales   $ 84,620     $ 310,837  
                 
Cost of revenues     (67,858 )     (127,622 )
                 
Gross profit     16,762       183,215  
                 
Operating expenses:                
General and administrative     1,047,624       1,042,757  
Depreciation, depletion and amortization     447,405       185,426  
Loss on extinguishment of debt     1,829,651       -  
Impairment loss     -       474,357  
Total operating expenses     3,324,680       1,702,540  
                 
Other income (expense)                
Interest expense and accretion of note discounts     (385,945 )     (158,599 )
Interest income     -       50  
Total (expense), net     (385,945 )     (158,549 )
                 
Loss before income taxes     (3,693,863 )     (1,677,874 )
                 
Provision for income taxes     -       -  
                 
Net loss   $ (3,693,863 )   $ (1,677,874 )
                 
Loss per common share:                
Basic and Diluted   $ (0.05 )   $ (0.02 )
Weighted average number of common shares outstanding:                
Basic and Diluted     79,595,394       70,771,643  

 

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

5

 

TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

    Three Months     Three Months  
    Ended     Ended  
    March 31, 2020     March 31, 2019  
Cash Flows From Operating Activities                
Net loss   $ (3,693,863 )   $ (1,677,874 )
Adjustments to reconcile net loss to net cash from operations:                
Stock based compensation     230,650       397,250  
Stock issued for interest payments on notes payable     -       14,628  
Amortization of debt issuance costs     71,647       71,647  
Accretion of note discounts     57,291       57,291  
Amortization of beneficial conversion on CV notes     120,410       -  
Accrued interest payable in stock     305,202       76,284  
Depreciation, depletion and amortization     447,405       185,426  
Loss on extinguishment of debt     1,829,651       -  
Impairment loss     -       474,357  
Change in:                
Accounts receivable     (23,047 )     (54,700 )
Production revenue receivable     29,440       136,981  
Prepayments - development costs     -       144,062  
Prepaid expenses     34,335       31,605  
Accounts payable and accrued expenses     247,269       (299,965 )
Accrued interest payable     22,268       252,055  
Net cash from operating activities     (321,342 )     (190,953 )
                 
Cash Flows From Investing Activities                
Investment in oil and gas properties     (2,212,852 )     (2,404,783 )
                 
Net cash from investing activities     (2,212,852 )     (2,404,783 )
                 
Cash Flows From Financing Activities                
Issuance of common stock, net of offering costs     2,357,118       1,274,080  
Proceeds from stock subscription receivable     250,000       -  
Proceeds from notes payable     -       2,000,000  
Payment of extension fee on note payable     (80,000 )     -  
Proceeds from exercise of warrants into common stock     -       77,000  
Net cash from financing activities     2,527,118       3,351,080  
                 
Net (decrease) in cash     (7,076 )     755,344  
                 
Cash - beginning of period     89,730       840,163  
                 
Cash - end of period   $ 82,654     $ 1,595,507  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 399,677     $ 371,765  
                 
Cash paid for state franchise tax   $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Debt converted by transfer of working interest   $ 7,330,849     $ -  
Interest in accounts payable for property development costs   $ 839,855     $ 709,006  

 

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

6

 

TORCHLIGHT ENERGY RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

 

    Common     Common     Additional              
    stock     stock     paid-in     Accumulated        
    shares     amount     capital     deficit     Total  
Balance, December 31, 2019     76,222,042     $ 76,225     $ 114,143,872     $ (99,153,701 )   $ 15,066,396  
                                         
Issuance of common stock for services     125,000       125       86,125       -       86,250  
Issuance of common stock to a vendor for delay in payment     40,000       40       25,960       -       26,000  
Issuance of common stock for cash, less underwriting/offering costs     3,885,715       3,886       2,353,232       -       2,357,118  
Warrants issued in conversion of notes payable     -       -       382,500       -       382,500  
Warrants issued for services     -       -       98,900       -       98,900  
Stock options issued for services     -       -       19,500       -       19,500  
Net loss     -       -       -       (3,693,863 )     (3,693,863 )
                                         
Balance, March 31, 2020     80,272,757     $ 80,276     $ 117,110,089     $ (102,847,564 )   $ 14,342,801  

 

    Common     Common     Additional              
    stock     stock     paid-in     Accumulated        
    shares     amount     capital     deficit     Total  
Balance, December 31, 2018     70,112,376     $ 70,116     $ 107,266,965     $ (89,314,305 )   $ 18,022,776  
                                         
Issuance of common stock for services     92,593       92       99,908               100,000  
Issuance of common stock for cash     1,592,600       1,593       1,272,487               1,274,080  
Issuance of common stock for interest     13,546       13       14,615               14,628  
Issuance of common stock for warrant exercise     100,000       100       76,900               77,000  
Warrants issued for services                     186,000               186,000  
Stock options issued for services                     111,250               111,250  
Net loss                             (1,677,874 )     (1,677,874 )
                                         
Balance, March 31, 2019     71,911,115     $ 71,914     $ 109,028,125     $ (90,992,179 )   $ 18,107,860  

  

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

7

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

1. NATURE OF BUSINESS

 

Torchlight Energy Resources, Inc. was incorporated in October 2007 under the laws of the State of Nevada as Pole Perfect Studios, Inc. (“PPS”). From its incorporation to November 2010, the company was primarily engaged in business start-up activities.

 

On November 23, 2010, we entered into and closed a Share Exchange Agreement (the “Exchange Agreement”) between the major shareholders of PPS and the shareholders of Torchlight Energy, Inc. (“TEI”). As a result of the transactions effected by the Exchange Agreement, at closing TEI became our wholly-owned subsidiary, and the business of TEI became our sole business. TEI was incorporated under the laws of the State of Nevada in June 2010. We are engaged in the acquisition, exploitation and/or development of oil and natural gas properties in the United States. We operate our business through our subsidiaries Torchlight Energy Inc., Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC.

 

2. GOING CONCERN

 

At March 31, 2020, the Company had not yet achieved profitable operations. We had a net loss of $3,693,863 for the three months ended March 31, 2020 and had accumulated losses of $102,847,564 since our inception. We expect to incur further losses in the development of our business. The Company had a working capital deficit as of March 31, 2020 of $3,244,045. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s ability to continue as a going concern is dependent on its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management’s plan to address the Company’s ability to continue as a going concern includes: (1) obtaining debt or equity funding from private placement or institutional sources; (2) obtain loans from financial institutions, where possible, or (3) participating in joint venture transactions with third parties. Although management believes that it will be able to obtain the necessary funding to allow the Company to remain a going concern through the methods discussed above, there can be no assurances that such methods will prove successful.

 

These consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classifications of liabilities that may result from the outcome of this uncertainty.

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. Accounting principles followed and the methods of applying those principles, which materially affect the determination of financial position, results of operations and cash flows are summarized below:

 

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and certain assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

 

Basis of presentation – The financial statements are presented on a consolidated basis and include all of the accounts of Torchlight Energy Resources Inc. and its wholly owned subsidiaries, Torchlight Energy, Inc., Torchlight Energy Operating, LLC, Hudspeth Oil Corporation, Torchlight Hazel LLC, and Warwink Properties LLC. All significant intercompany balances and transactions have been eliminated.

 

These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

In the opinion of management, the accompanying unaudited financial condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation.

8

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

3. SIGNIFICANT ACCOUNTING POLICIES - continued

 

Risks and uncertainties – The Company’s operations are subject to significant risks and uncertainties, including financial, operational, technological, and other risks associated with operating an emerging business, including the potential risk of business failure.

 

Concentration of risks – At times the Company’s cash balances are in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. The Company’s cash is placed with a highly rated financial institution, and the Company regularly monitors the credit worthiness of the financial institutions with which it does business.

 

Fair value of financial instruments – Financial instruments consist of cash, receivables, payables and promissory notes, if any. The estimated fair values of cash, receivables, and payables approximate the carrying amount due to the relatively short maturity of these instruments. The carrying amounts of any promissory notes approximate their fair value giving affect for the term of the note and the effective interest rates.

 

For assets and liabilities that require re-measurement to fair value the Company categorizes them in a three-level fair value hierarchy as follows:

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration.

 

Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value.

 

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

Cash and cash equivalents - Cash and cash equivalents include certain investments in highly liquid instruments with original maturities of three months or less.

 

Accounts receivable – Accounts receivable consist of uncollateralized oil and natural gas revenues due under normal trade terms, as well as amounts due from working interest owners of oil and gas properties for their share of expenses paid on their behalf by the Company. Management reviews receivables periodically and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. As of March 31, 2020 and December 31, 2019, no valuation allowance was considered necessary.

 

Oil and gas properties – The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities.

 

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

 

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

9

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

3. SIGNIFICANT ACCOUNTING POLICIES - continued

 

Capitalized interest – The Company capitalizes interest on unevaluated properties during the periods in which they are excluded from costs being depleted or amortized. During the three months ended March 31, 2020 and 2019, the Company capitalized $614,479 and $670,963, respectively, of interest on unevaluated properties.

 

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

 

Ceiling test – Future production volumes from oil and gas properties are a significant factor in determining the full cost ceiling limitation of capitalized costs. Under the full cost method of accounting, the Company is required to periodically perform a “ceiling test” that determines a limit on the book value of oil and gas properties. If the net capitalized cost of proved oil and gas properties, net of related deferred income taxes, plus the cost of unproved oil and gas properties, exceeds the present value of estimated future net cash flows discounted at 10 percent, net of related realizable tax affects, plus the cost of unproved oil and gas properties, the excess is charged to expense and reflected as additional accumulated DD&A. The Company recorded an impairment expense of $-0- and $474,357 for the three months ended March 31, 2020 and 2019, respectively, to recognize the adjustment required by the ceiling test.

 

The ceiling test calculation uses a commodity price assumption which is based on the unweighted arithmetic average of the price on the first day of each month for each month within the prior 12 month period and excludes future cash outflows related to estimated abandonment costs.

 

The determination of oil and gas reserves is a subjective process, and the accuracy of any reserve estimate depends on the quality of available data and the application of engineering and geological interpretation and judgment. Estimates of economically recoverable reserves and future net cash flows depend on a number of variable factors and assumptions that are difficult to predict and may vary considerably from actual results. In particular, reserve estimates for wells with limited or no production history are less reliable than those based on actual production. Subsequent re-evaluation of reserves and cost estimates related to future development of proved oil and gas reserves could result in significant revisions to proved reserves. Other issues, such as changes in regulatory requirements, technological advances, and other factors which are difficult to predict could also affect estimates of proved reserves in the future.

 

Asset retirement obligations – The fair value of a liability for an asset’s retirement obligation (“ARO”) is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, with the corresponding charge capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then-present value each subsequent period, and the capitalized cost is depleted over the useful life of the related asset. Abandonment costs incurred are recorded as a reduction of the ARO liability.

 

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

 

Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.

 

Authoritative guidance for uncertainty in income taxes requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an examination. Management has reviewed the Company’s tax positions and determined there were no uncertain tax positions requiring recognition in the consolidated financial statements. Company tax returns remain subject to Federal and State tax examinations. Generally, the applicable statutes of limitation are three to four years from their respective filings.

 

Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the statements of operation. The Company has not recorded any interest or penalties associated with unrecognized tax benefits for any periods covered by these financial statements.

 

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.

10

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

3. SIGNIFICANT ACCOUNTING POLICIES - continued

 

The Company accounts for stock option awards using the calculated value method. The expected term was derived using the simplified method provided in Securities and Exchange Commission release Staff Accounting Bulletin No. 110, which averages an awards weighted average vesting period and contractual term for “plain vanilla” share options.

 

The Company accounts for any forfeitures of options when they occur. Previously recognized compensation cost for an award is reversed in the period that the award is forfeited.

 

The Company also issues equity awards to non-employees. The fair value of these option awards is estimated when the award recipient completes the contracted professional services. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion.

 

The Company values warrant and option awards using the Black-Scholes option pricing model.

 

Revenue recognition

 

The Company’s revenue is typically generated from contracts to sell natural gas, crude oil or NGLs produced from interests in oil and gas properties owned by the Company. Contracts for the sale of natural gas and crude oil are evidenced by (1) base contracts for the sale and purchase of natural gas or crude oil, which document the general terms and conditions for the sale, and (2) transaction confirmations, which document the terms of each specific sale. The transaction confirmations specify a delivery point which represents the point at which control of the product is transferred to the customer. These contracts frequently meet the definition of a derivative under ASC 815, and are accounted for as derivatives unless the Company elects to treat them as normal sales as permitted under that guidance. The Company elects to treat contracts to sell oil and gas production as normal sales, which are then accounted for as contracts with customers. The Company has determined that these contracts represent multiple performance obligations which are satisfied when control of the commodity transfers to the customer, typically through the delivery of the specified commodity to a designated delivery point.

 

Revenues from oil and gas sales are detailed as follows:

 

    Three Months       Three Months  
    Ended     Ended  
    March 31, 2020     March 31, 2019  
Revenues                
                 
Oil sales   $ 82,113     $ 302,145  
                 
Gas sales     2,507       8,692  
                 
Total   $ 84,620     $ 310,837  

 

Revenue is measured based on consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. The Company recognizes revenue in the amount that reflects the consideration it expects to be entitled to in exchange for transferring control of those goods to the customer. Amounts allocated in the Company’s price contracts are based on the standalone selling price of those products in the context of long-term contracts. Payment is generally received one or two months after the sale has occurred.

11

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

3. SIGNIFICANT ACCOUNTING POLICIES - continued

 

Gain or loss on derivative instruments is outside the scope of ASC 606 and is not considered revenue from contracts with customers subject to ASC 606. The Company may in the future use financial or physical contracts accounted for as derivatives as economic hedges to manage price risk associated with normal sales, or in limited cases may use them for contracts the Company intends to physically settle but do not meet all of the criteria to be treated as normal sales.

 

Producer Gas Imbalances. The Company applies the sales method of accounting for natural gas revenue. Under this method, revenues are recognized based on the actual volume of natural gas sold to purchasers.

 

Basic and diluted earnings (loss) per share Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed in the same way as basic earnings (loss) per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued and if the additional common shares were dilutive. The calculation of diluted earnings per share excludes 13,766,528 shares issuable upon the exercise of outstanding warrants and options because their effect would be anti-dilutive.

 

Environmental laws and regulations – The Company is subject to extensive federal, state, and local environmental laws and regulations. Environmental expenditures are expensed or capitalized depending on their future economic benefit. The Company believes that it is in compliance with existing laws and regulations. The Company accrued no liability as of March 31, 2020 and December 31, 2019.

 

Recent adopted accounting pronouncements – In February 2016 the FASB, issued ASU, 2016-02, Leases. The ASU requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 was effective for the Company in the first quarter of 2019. The Company adopted the change which did not have a material impact on its consolidated financial statements.

 

Other recently issued or adopted accounting pronouncements are not expected to have, or did not have, a material impact on the Company’s financial position or results from operations.

 

Subsequent events – The Company evaluated subsequent events through June 5, 2020, the date of issuance of these financial statements. Subsequent events are disclosed in Note 11.

 

4. OIL & GAS PROPERTIES

 

The following table presents the capitalized costs for oil & gas properties of the Company as of March 31, 2020 and December 31, 2019:

 

    March 31, 2020     December 31, 2019  
Evaluated costs subject to amortization   $ 13,253,523     $ 13,243,541  
Unevaluated costs     33,870,107       39,667,740  
Total capitalized costs     47,123,630       52,911,281  
Less accumulated depreciation, depletion and amortization     (13,176,162 )     (12,729,238 )
Total oil and gas properties   $ 33,947,468     $ 40,182,043  

 

Unevaluated costs as of March 31, 2020 include cumulative costs on developing projects including the Orogrande, Hazel, and Winkler projects in West Texas.

 

The Company identified impairment of $2,300,626 in 2017 related to its unevaluated properties. The Company adjusted the separation of evaluated versus unevaluated costs within its full cost pool to recognize the value impairment related to the expiration of unevaluated leases in 2017 in the amount of $2,300,626. The impact of this change was to increase the basis for calculation of future period’s depletion, depreciation and amortization to include $2,300,626 of cost which will effectively recognize the impairment on the consolidated statement of operations over future periods. The $2,300,626 has also become an evaluated cost for purposes of ceiling tests and which may cause recognition of increased impairment expense in future periods. An impairment of unevaluated costs in 2019 of $756,964 has also been added to the basis for calculation of depletion, depreciation, and amortization.

 

Due to the volatility of commodity prices, should oil and natural gas prices decline in the future, it is possible that a further write-down could occur. Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions. The independent engineering estimates include only those amounts considered to be proved reserves and do not include additional amounts which may result from new discoveries in the future, or from application of secondary and tertiary recovery processes where facilities are not in place or for which transportation and/or marketing contracts are not in place. Estimated reserves to be developed through secondary or tertiary recovery processes are classified as unevaluated properties.

12

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

4. OIL & GAS PROPERTIES - continued

 

Current Projects

 

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

 

Orogrande Project, West Texas

 

On August 7, 2014, we entered into a Purchase Agreement with Hudspeth Oil Corporation (“Hudspeth”), McCabe Petroleum Corporation (“MPC”), and Gregory McCabe, our Chairman. Mr. McCabe was the sole owner of both Hudspeth and MPC. Under the terms and conditions of the Purchase Agreement, at closing, we purchased 100% of the capital stock of Hudspeth which holds certain oil and gas assets, including a 100% working interest in approximately 172,000 mostly contiguous acres in the Orogrande Basin in West Texas. As of December 31, 2017, leases covering approximately 134,000 acres remain in effect. As consideration, at closing we issued 868,750 restricted shares of our common stock to Mr. McCabe and paid a total of $100,000 in geologic origination fees to third parties. Additionally, Mr. McCabe has, at his option, a 10% working interest back-in after payout and a reversionary interest if drilling obligations are not met, all under the terms and conditions of a participation and development agreement among Hudspeth, MPC and Mr. McCabe. Mr. McCabe also holds a 4.5% overriding royalty interest in the Orogrande acreage, which he obtained prior to, and was not a part of, the August 2014 transaction. We believe all drilling obligations through March 31, 2020 have been met. We have received a waiver of the requirement to develop four wells in 2020.

 

On September 23, 2015, Hudspeth entered into a Farmout Agreement with Pandora Energy, LP (“Pandora”), Founders Oil & Gas, LLC (“Founders”), and for the limited purposes set forth therein, MPC and Mr. McCabe, for the entire Orogrande Project in Hudspeth County, Texas. The Farmout Agreement provided that Hudspeth and Pandora (collectively referred to as “Farmor”) would assign to Founders an undivided 50% of the leasehold interest and a 37.5% net revenue interest in the oil and gas leases and mineral interests in the Orogrande Project, which interests, except for any interests retained by Founders, would be reassigned to Farmor by Founders if Founders did not spend a minimum of $45.0 million on actual drilling operations on the Orogrande Project by September 23, 2017. Under a joint operating agreement also entered into on September 23, 2015, Founders was designated as operator of the leases.

 

On March 22, 2017, Founders, Founders Oil & Gas Operating, LLC, Founders’ operating partner, Hudspeth and Pandora signed a Drilling and Development Unit Agreement (the “DDU Agreement”), with the Commissioner of the General Land Office, on behalf of the State of Texas, and as approved by the Board for Lease of University Lands, or University Lands, on the Orogrande Project. The DDU Agreement has an effective date of January 1, 2017 and required a payment from Founders, Hudspeth and Pandora, collectively, of $335,323 as the initial consideration fee. The initial consideration fee was paid by Founders in April 2017 and was to be deducted from the required spud fee payable to us at commencement of the next well drilled.

 

The DDU Agreement allows for all 192 existing leases covering approximately 134,000 net acres leased from University Lands to be combined into one drilling and development unit for development purposes. The term of the DDU Agreement expires on December 31, 2023, and the time to drill on the drilling and development unit continues through December 2023. The DDU Agreement also grants the right to extend the DDU Agreement through December 2028 if compliance with the DDU Agreement is met and the extension fee associated with the additional time is paid. Our drilling obligations began with one well to be spudded and drilled on or before September 1, 2017, and increased to two wells in year 2018, three wells in year 2019, four wells in year 2020 and five wells per year in years 2021, 2022 and 2023. We have received a waiver of the requirement to develop four wells in 2020. The obligation for 2021 and years following will return to the schedule in the DDU Agreement. The drilling obligations are minimum yearly requirements and may be exceeded if acceleration is desired. The DDU Agreement replaces all prior agreements, and will govern future drilling obligations on the drilling and development unit if the DDU Agreement is extended. The Company drilled three wells during fourth quarter, 2019.

 

The Company has developed vertical tests wells in the Orogrande Project. The Orogrande Rich A-11 test well was spudded on March 31, 2015, drilled in the second quarter of 2015 and was evaluated and numerous scientific tests were performed to provide key data for the field development thesis. We believe that future utility of this well may be conversion to a salt water disposal well in the course of further development of the Orogrande acreage. The University Founders B-19 #1 was spudded on April 24, 2016 and drilled in the second quarter of 2016. The well successfully pumped down completion fluid in the third quarter of 2016 and indications of hydrocarbons were seen at the surface on this second Orogrande Project test well. We believe that future utility of this well may be conversion to a salt water disposal well in the course of further development of the Orogrande acreage.

13

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

4. OIL & GAS PROPERTIES - continued

 

During the fourth quarter of 2017, we took back operational control from Founders on the Orogrande Project. We were joined by Wolfbone Investments, LLC, (“Wolfbone”), a company owned by Mr. McCabe. We, along with Hudspeth, Wolfbone and, for the limited purposes set forth therein, Pandora, entered into an Assignment of Farmout Agreement with Founders, (the “Assignment of Farmout Agreement”), pursuant to which we and Wolfbone will share the remaining commitments under the Farmout Agreement. All original provisions of our carried interest were to remain in place including reimbursement to us on each wellbore. Founders was to remain a 9.5% working interest owner in the Orogrande Project for the $9.5 million it had spent as of the date of the Assignment of Farmout Agreement, and such interests were to be carried until $40.5 million is spent by Wolfbone and us, with each contributing 50% of such capital spend, under the existing agreement. Our working interest in the Orogrande Project thereby increased by 20.25% to a total of 67.75% and Wolfbone then owned 20.25%.

 

Founders was to operate a newly drilled horizontal well called the University Founders #A25 (at 5,540’ depth in a 1,000’ lateral) with supervision from us and our partners. The University Founders #A25 was spudded on November 28, 2017. During the month of April, 2018, we, MPC and Mr. McCabe were to assume full operational control including managing drilling plans and timing for all future wells drilled in the project.

 

On July 25, 2018, we and Hudspeth entered into a Settlement & Purchase Agreement (the “Settlement Agreement”) with Founders (and Founders Oil & Gas Operating, LLC), Wolfbone and MPC, which agreement provides for Hudspeth and Wolfbone to each immediately pay $625,000 and for Hudspeth or the Company and Wolfbone or MPC to each pay another $625,000 on July 20, 2019, as consideration for Founders assigning all of its working interest in the oil and gas leases of the Orogrande Project to Hudspeth and Wolfbone equally. The final payments were made on July 18, 2019. The assignments to Hudspeth and Wolfbone were made in July when the first payments were made. Future well capital spending obligations will require the same 50% contribution from Hudspeth and 50% from Wolfbone until such time as the $40.5 million to be spent on the project (as per our Assignment of Farmout Agreement with Founders) is completed. The Company estimates that there is still approximately $24.8 million remaining to be spent on the project until such time as the capital expenditures revert back to the percentages of the working interest owners. Additionally, the Settlement Agreement provides that the Founders parties will assign to the Company, Hudspeth, Wolfbone and MPC their claims against certain vendors for damages, if any, against such vendors for negligent services or defective equipment. Further, the Settlement Agreement has a mutual release and waivers among the parties.

 

After the assignment by Founders (for which Hudspeth’s total consideration was $1,250,000), Hudspeth’s working interest increased to 72.5%.

 

During the fourth quarter, 2019, the Company drilled three additional test wells in the Orogrande in order to stay in compliance with University Lands D&D Unit Agreement, as well as, to test for potential shallow pay zones and deeper pay zones that may be present on structural plays. Development of these wells continued into the three months ended March 31, 2020 to further capture and document the scientific base in support of demonstrating the production potential of the property. The Company is currently marketing the project for an outright sale or farm in partner. This marketing process has been long and arduous as the overall market is quite soft. Due to the size and scope of the project, we are dealing with very large companies that have multitudes of people reviewing our material, which in itself is extensive. During the marketing process, the Company and Wolfbone will endeavor to complete the University Maverick A24 #1 as a potential producer in the Atoka formation. Should a farm out partner or sale not occur, the Company and Wolfbone will continue to drill additional wells in the play in order to fulfill the obligations under the DDU Agreement.. We drilled to test the two obligation wells described above. The first well, the A35 1H, was drilled and cased in the Penn Section and tested with positive results of oil and gas production to the surface. This first well is a short horizontal in the proven Penn Section where we will be looking to break through the dual porosity system in place with a larger frac designed to open up the oil bearing pores. We also drilled the A25 #2 which was being drilled on an identified structure. This well is designed to test both conventional zones and potentially the unconventional Barnett and Woodford Zones ultimately drilling down to the cellar around 8,000 feet.

 

On March 9, 2020, holders of notes payable by the Company entered into a Conversion Agreement under which the noteholders elected to convert principal of $6,000,000 and approximately $1,331,000 of accrued interest on the notes, in accordance with their terms, into an aggregate 6% working interest (of all such holders) in the Orogrande Project.

 

The Orogrande Project ownership as of March 31, 2020 is detailed as follows:

 

    Revenue     Working  
    Interest       Interest  
University Lands - Mineral Owner     20.000 %     n/a  
                 
ORRI - Magdalena Royalties, LLC, an entity controlled by Gregory McCabe, Chairman     4.500 %     n/a  
                 
ORRI - Unrelated Party     0.500 %     n/a  
                 
Hudspeth Oil Corporation, a subsidiary of Torchlight Energy Resources Inc.     49.875 %     66.500 %
                 
Wolfbone Investments LLC, an entity controlled controlled by Gregory McCabe, Chairman     18.750 %     25.000 %
                 
Conversion by Note Holders in March, 2020     4.500 %     6.000 %
                 
Unrelated Party     1.875 %     2.500 %
                 
      100.000 %     100.000 %

 

Rich Masterson, our consulting geologist, is credited with originating the Orogrande Project in Hudspeth County in the Orogrande Basin. With Mr. Masterson’s assistance and based on all the science we have gathered to date, we have identified multiple unconventional and conventional target pay zones with depths between 3,000’ and 8,000’ with primary pay, described as the Penn formation, located at depths of 5,300 to 5,900’. Based on our geologic analysis to date, this basin has stacked pay with zones including the Wolfcamp, Penn, Barnett, Woodford, Atoka and more. These potential zones are prospective for oil and gas with a GOR of 1100 expected based on our gathered scientific information and analysis from independent third parties.

14

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

4. OIL & GAS PROPERTIES - continued

 

Hazel Project in the Midland Basin in West Texas

 

Effective April 4, 2016, TEI acquired from MPC a 66.66% working interest in approximately 12,000 acres in the Midland Basin in exchange for 1,500,000 warrants to purchase shares of our common stock with an exercise price of $1.00 for five years and a back-in after payout of a 25% working interest to MPC.

 

Initial development of the first well on the property, the Flying B Ranch #1, began July 9, 2016 and development continued through September 30, 2016. This well is classified as a test well in the development pursuit of the Hazel Project. We believe that this wellbore will be utilized as a salt water disposal well in support of future development.

 

In October 2016, the holders of all of our then-outstanding shares of Series C Preferred Stock (which were issued in July 2016) elected to convert into a total 33.33% working interest in our Hazel Project, reducing our ownership from 66.66% to a 33.33% working interest.

 

On December 27, 2016, drilling activities commenced on the second Hazel Project well, the Flying B Ranch #2. The well is a vertical test similar to our first Hazel Project well, the Flying B Ranch #1. Recompletion in an alternative geological formation for this well was performed during the three months ended September 30, 2017; however, we believe that the results were uneconomic for continuing production. We believe that this wellbore will be utilized as a salt water disposal well in support of future development.

 

We commenced planning to drill the Flying B Ranch #3 horizontal well in the Hazel Project in June 2017 in compliance with the continuous drilling obligation. The well was spudded on June 10, 2017. The well was completed and began production in late September 2017. As of March 31, 2020 the well is shut in due to high lease operating expenses as a result of lack of three phase electricity to the property which forced the use of diesel generation equipment to power the production facilities.

 

During the three months ended March 31, 2019 the Company deepened the Flying B #4 and took whole cores through all of the Wolfcamp A and the upper portion of the Wolfcamp B.

 

Acquisition of Additional Interests in Hazel Project

 

On January 30, 2017, we and our then wholly-owned subsidiary, Torchlight Acquisition Corporation, a Texas corporation (“TAC”), entered into and closed an Agreement and Plan of Reorganization and a Plan of Merger with Line Drive Energy, LLC, a Texas limited liability company (“Line Drive”), and Mr. McCabe, under which agreements TAC merged with and into Line Drive and the separate existence of TAC ceased, with Line Drive being the surviving entity and becoming our wholly-owned subsidiary. Line Drive, which was wholly-owned by Mr. McCabe, owned certain assets and securities, including approximately 40.66% of 12,000 gross acres, 9,600 net acres, in the Hazel Project and 521,739 warrants to purchase shares of our common stock (which warrants had been assigned by Mr. McCabe to Line Drive). Upon the closing of the merger, all of the issued and outstanding shares of common stock of TAC automatically converted into a membership interest in Line Drive, constituting all of the issued and outstanding membership interests in Line Drive immediately following the closing of the merger, the membership interest in Line Drive held by Mr. McCabe and outstanding immediately prior to the closing of the merger ceased to exist, and we issued Mr. McCabe 3,301,739 restricted shares of our common stock as consideration therefor. Immediately after closing, the 521,739 warrants held by Line Drive were cancelled, which warrants had an exercise price of $1.40 per share and an expiration date of June 9, 2020. A Certificate of Merger for the merger transaction was filed with the Secretary of State of Texas on January 31, 2017. Subsequent to the closing the name of Line Drive Energy, LLC was changed to Torchlight Hazel, LLC.

 

We were required to drill one well every six months to hold the entire 12,000 acre block for eighteen months until to November 22, 2018, and thereafter two wells every six months. During 2019 and the three months ended March 31, 2020 modifications were completed to mineral owner leases as described below.

 

Lease Modifications

 

In May 2019 we entered into agreements with two of the three mineral owners on the northern section of the leases to keep the entire acreage block as one lease with a one year extension. We issued each of them 50,000 shares of our common stock as consideration for this extension. As of March 31, 2020 we have structured the extension agreement retroactively with the third mineral owner for cash consideration. Due to this extension, our obligation for 2019 reduced to one obligation well. We finished that obligation well targeting a shallow zone that showed oil potential. For the remainder of 2020 the Company must drill one well in June and two wells by the December 31, 2020.

15

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

4. OIL & GAS PROPERTIES - continued

 

Also on January 30, 2017, TEI entered into and closed a Purchase and Sale Agreement with Wolfbone. Under the agreement, TEI acquired certain of Wolfbone’s Hazel Project assets, including its interest in the Flying B Ranch #1 well and the 40 acre unit surrounding the well, for consideration of $415,000, and additionally, Wolfbone caused to be cancelled a total of 2,780,000 warrants to purchase shares of our common stock, including 1,500,000 warrants held by MPC, and 1,280,000 warrants held by Green Hill Minerals, an entity owned by Mr. McCabe’s son, which warrant cancellations were effected through certain Warrant Cancellation Agreements. The 1,500,000 warrants held by MPC that were cancelled had an exercise price of $1.00 per share and an expiration date of April 4, 2021. The warrants held by Green Hill Minerals that were cancelled included 100,000 warrants with an exercise price of $1.73 and an expiration date of September 30, 2018 and 1,180,000 warrants with an exercise price of $0.70 and an expiration date of February 15, 2020.

 

Since Mr. McCabe held the controlling interest in both Line Drive and Wolfbone, the transactions were combined for accounting purposes. The working interest in the Hazel Project was the only asset held by Line Drive. The warrant cancellation was treated in the aggregate as an exercise of the warrants with the transfer of the working interests as the consideration. We recorded the transactions as an increase in its investment in the Hazel Project working interests of $3,644,431, which is equal to the exercise price of the warrants plus the cash paid to Wolfbone.

 

Upon the closing of the transactions, our working interest in the Hazel Project increased by 40.66% to a total ownership of 74%.

 

Effective June 1, 2017, we acquired an additional 6% working interest from unrelated working interest owners in exchange for 268,656 shares of common stock valued at $373,430, increasing our working interest in the Hazel project to 80%, and an overall net revenue interest of 74-75%.

 

Mr. Masterson is credited with originating the Hazel Project in the Midland Basin. With Mr. Masterson’s assistance, we are targeting prospects in the Midland Basin that have 150 to 130 feet of thickness, are likely to require six to eight laterals per bench, have the potential for 12 to 16 horizontal wells per section, and 200 long lateral locations, assuming only two benches.

 

In April 2018, we announced that we have commenced a process that could result in the monetization of the Hazel Project. We believe the development activity at the Hazel Project, coupled with nearby activities of other oil and gas operators, suggests that this project has achieved a level of value worth monetizing. We anticipate that the liquidity that would be provided from selling the Hazel Project could be redeployed into the Orogrande Project. While this process is underway, we will take all necessary steps to maintain the leasehold as required. As of this filing, we continue to maintain the leases in good standing and continue to market the acreage in an effort to focus on the Orogrande Project.

 

The marketing process is ongoing for the Hazel project. We continue to encounter, as does the entire industry, a soft market for acquisitions and divestitures transactions. We will continue to look to sell the property or joint venture the property via farm in or a drillco transaction.

 

Winkler Project, Winkler County, Texas

 

On December 1, 2017, the Agreement and Plan of Reorganization that we and our then wholly-owned subsidiary, Torchlight Wolfbone Properties, Inc., a Texas corporation (“TWP”), entered into with MPC and Warwink Properties, LLC (“Warwink Properties”) on November 14, 2017 closed. Under the agreement, TWP merged with and into Warwink Properties and the separate existence of TWP ceased, with Warwink Properties being the surviving entity and becoming our wholly-owned subsidiary. Warwink Properties was wholly owned by MPC. Warwink Properties owns certain assets, including a 10.71875% working interest in approximately 640 acres in Winkler County, Texas. Upon the closing of the merger, all of the issued and outstanding shares of common stock of TWP converted into a membership interest in Warwink Properties, constituting all of the issued and outstanding membership interests in Warwink Properties immediately following the closing of the merger, the membership interest in Warwink Properties held by MPC and outstanding immediately prior to the closing of the merger ceased to exist, and we issued MPC 2,500,000 restricted shares of our common stock as consideration. Also on December 1, 2017, MPC closed its transaction with MECO IV, LLC (” MECO”), for the purchase and sale of certain assets as contemplated by the Purchase and Sale Agreement dated November 9, 2017 among MPC, MECO and additional parties thereto (the “MECO PSA”), to which we are not a party. Under the MECO PSA, Warwink Properties received a carry from MECO (through the tanks) of up to $1,179,076 in the next well drilled on the Winkler County leases. A Certificate of Merger for the merger transaction was filed with the Secretary of State of Texas on December 5, 2017.

 

Also on December 1, 2017, the transactions contemplated by the Purchase Agreement that TEI entered into with MPC closed. Under the Purchase Agreement, which was entered into on November 14, 2017, TEI acquired beneficial ownership of certain of MPC’s assets, including acreage and wellbores located in Ward County, Texas (the “Ward County Assets”). As consideration under the Purchase Agreement, at closing TEI issued to MPC an unsecured promissory note in the principal amount of $3,250,000, payable in monthly installments of interest only beginning on January 1, 2018, at the rate of 5% per annum, with the entire principal amount together with all accrued interest due and payable on January 1, 2021. In connection with TEI’s acquisition of beneficial ownership in the Ward County Assets, MPC sold those same assets, on behalf of TEI, to MECO at closing of the MECO PSA, and accordingly, TEI received $3,250,000 in cash for its beneficial interest in the Ward County Assets. Additionally, at closing of the MECO PSA, MPC paid TEI a performance fee of $2,781,500 in cash as compensation for TEI’s marketing and selling the Winkler County assets of MPC and the Ward County Assets as a package to MECO.

16

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

4. OIL & GAS PROPERTIES - continued

 

Addition to the Winkler Project

 

As of May 7, 2018 our Winkler project in the Delaware Basin had begun the drilling phase of the first Winkler Project well, the UL 21 War-Wink 47 #2H. Our operating partner, MECO had begun the pilot hole on the project. The plan is to evaluate the various potential zones for a lateral leg to be drilled once logging is completed. We expect the most likely target to be the Wolfcamp A interval. The well is on 320 newly acquired acres offsetting the original leasehold we entered into in December, 2017. The additional acreage was leased by our operating partner under the Area of Mutual Interest Agreement (AMI) and we exercised its right to participate for its 12.5% in the additional 1,080 gross acres at a cash cost of $447,847 in July, 2018. Our carried interest in the first well, as outlined in the agreement, was originally planned to be on the first acreage acquired. That carried interest is being applied to this new well and will allow MECO to drill and produce potential revenues sooner than originally planned. The primary leasehold is a 320-acre block directly west of the current position and will allow for 5,000-foot lateral wells to be drilled. The well was completed and began production in October, 2018 and is producing currently.

 

The operator has informed us that there will be no planned additional wells in the acreage in 2020. All acreage is presently held by production.

 

In December 2018, the Company began to take measures on its own to market the Winkler Project in an effort to focus on the Orogrande. This process is ongoing.

 

Hunton Play, Central Oklahoma

 

Presently, we are producing from one well in the Viking Area of Mutual Interest and one well in Prairie Grove.

 

With respect to marketing oil and natural gas properties, the Company has evaluated the properties being marketed to determine whether any should be reclassified as held-for-sale at March 31, 2020. The held-for-sale criteria include: management commits to a plan to sell; the asset is available for immediate sale; an active program to locate a buyer exists; the sale of the asset is probable and expected to be completed within one year; the asset is being actively marketed for sale; and it is unlikely that significant changes to the plan will be made. If each of these criteria is met, the property would be reclassified as held-for-sale on the Company’s consolidated balance sheets and measured at the lower of their carrying amount or estimated fair value less costs to sell. Fair values are estimated using accepted valuation techniques, such as a discounted cash flow model, valuations performed by third parties, earnings multiples, or indicative bids, when available. Management considers historical experience and all available information at the time the estimates are made; however, the fair value that is ultimately realized upon the sale of the assets to be divested may differ from the estimated fair values reflected in the consolidated financial statements. If each of these criteria is met, DD&A expense would not be recorded on assets to be divested once they are classified as held for sale. Based on management’s assessment, these criteria have not been met and no assets are classified as held for sale as of March 31, 2020.

 

5. RELATED PARTY PAYABLES

 

As of March 31, 2020 and December 31, 2019, related party payables of $45,000, and accrued payroll was $1,041,176 and $996,176, respectively, consisting of accrued and unpaid compensation due to our executive officers.

 

6. COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company had a noncancelable lease for its office premises that expired on November 30, 2019 and which requires the payment of base lease amounts and executory costs such as taxes, maintenance and insurance. Effective June 1, 2019 the Company entered into an agreement with a company that had been subleasing a portion of its office space to become the primary obligor on the lease and to assume full responsibility for lease payments after lease expiration on November 30, 2019. The Company has continued after November 30, 2019 as a subtenant on a month to month basis.

 

Legal Matters

 

On January 31, 2020, Torchlight Energy Resources, Inc. and its wholly owned subsidiaries Torchlight Energy, Inc. and Torchlight Energy Operating, LLC were served with a lawsuit brought by Goldstone Holding Company, LLC (Goldstone Holding Company, LLC v. Torchlight Energy, Inc., et al., in the 160th Judicial District Court of Dallas County, Texas). On February 24, 2020, Torchlight Energy Resources, Inc., Torchlight Energy, Inc., and Torchlight Energy Operating, LLC timely filed their answer, affirmative defenses, and requests for disclosure. The suit, which seeks monetary relief over $1 million, makes unspecified allegations of misrepresentations involving a November 2015 participation agreement and a 2016 amendment to the participation agreement. The Company has denied the allegations and has asserted several affirmative defenses including but not limited to, that the suit is barred by the applicable statute of limitations, that the claims have been released, and that the claims are barred because of contractual disclaimers between sophisticated parties.

 

On April 30, 2020, our wholly owned subsidiary, Hudspeth Oil Corporation, filed suit against Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies. The suit seeks the recovery of approximately $1.4 million in costs incurred as a result of a tool failure during drilling activities on the University Founders A25 #2 well that is located in the Orogrande Field.  Working interest owner Wolfbone Investments, LLC, a company owned by our Chairman Gregory Mccabe, is a co-plaintiff in that action. The defendant has been served, and its deadline to respond to the lawsuit is Monday, June 8, 2020. The suit, Hudspeth Oil Corporation and Wolfbone Investments, LLC v. Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies, was filed in the 189th Judicial District Court of Harris County, Texas. 

 

Environmental Matters

 

The Company is subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to the Company’s operations could require substantial capital expenditures or could adversely affect its operations in other ways that cannot be predicted at this time. As of March 31, 2020 and December 31, 2019, no amounts had been recorded because no specific liability has been identified that is reasonably probable of requiring the Company to fund any future material amounts.

17

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

7. STOCKHOLDERS’ EQUITY

 

Common Stock

 

On January 16, 2020, the Company announced the closing of its underwritten public offering of 3,285,715 shares of its common stock at a public offering price of $0.70 per share, for total proceeds of $1,997,118 after deducting underwriting discounts and other offering expenses payable by the Company.

 

The Company sold 600,000 shares of common stock for cash at $0.60 per share for total proceeds of $360,000 in a private placement.

 

During the three months ended March 31, 2020, the Company issued 125,000 shares of common stock with a fair value of $86,250 as compensation for services.

 

During the three months ended March 31, 2020, the Company issued 40,000 shares of common stock to a vendor with a fair value of $26,000 for delay in payment on outstanding account payable.

 

Warrants and Options

 

During the three months ended March 31, 2020, the Company issued 215,000 warrants with total fair value of $98,900 as compensation for services and recorded expense of $19,500 related to options issued in prior periods.

 

During the three months ended March 31, 2020, the Company issued 750,000 warrants valued at $382,500 in connection with the conversion of convertible notes payable into working interest in the Company’s Orogrande Project.

 

During the three months ended March 31, 2020, the Company issued 600,000 warrants in connection with the sale of 600,000 shares of common stock in a private placement.

 

A summary of warrants outstanding as of March 31, 2020 by exercise price and year of expiration is presented below:

 

Exercise     Expiration date In        
Price     2020     2021     2022     2023     2024     2025     Total  
$ 0.70       -       -       -       -       -       965,000       965,000  
$ 0.80       -       -       -       -       -       2,266,667       2,266,667  
$ 1.03       -       120,000       -       -       -       -       120,000  
$ 1.14       -       -       -       600,000       -       -       600,000  
$ 1.21       -       -       -       120,000       -       -       120,000  
$ 1.35       -       -       365,455       -       -       -       365,455  
$ 1.40       321,737       -       -       -       -       -       321,737  
$ 1.63       -       -       -       -       100,000       -       100,000  
$ 1.64       -       200,000       -       -       -       -       200,000  
$ 1.80       1,250,000       -       -       -       -       -       1,250,000  
$ 2.00       -       200,000       -       -       -       -       200,000  
$ 2.23       339,901       -       -       -       -       -       339,901  
          1,911,638       520,000       365,455       720,000       100,000       3,231,667       6,848,760  

18

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

7. STOCKHOLDERS’ EQUITY - continued

 

A summary of stock options outstanding as of March 31, 2020 by exercise price and year of expiration is presented below:

 

Exercise     Expiration Date in          
Price     2020     2021     2022     2023     2024     Total  
$ 0.85       -       -       -       -       600,000       600,000  
$ 0.97       -       259,742       -       -       -       259,742  
$ 1.10       -       -       800,000       -       -       800,000  
$ 1.19       -       -       -       700,000       -       700,000  
$ 1.57       4,500,000       -       -       -       -       4,500,000  
$ 1.63       -       -       58,026       -       -       58,026  
          4,500,000       259,742       858,026       700,000       600,000       6,917,768  

 

At March 31, 2020, the Company had reserved 13,766,528 common shares for future exercise of warrants and options.

 

Warrants and options granted were valued using the Black-Scholes Option Pricing Model. The assumptions used in calculating the fair value of the warrants and options issued were as follows:

 

2020    
Risk-free interest rate   .58% - 1.21%
Expected volatility of common stock   204% - 205%
Dividend yield   0.00%
Discount due to lack of marketability   20%
Expected life of option/warrant   Five Years
     
2019    
Risk-free interest rate   2.40% - 2.46%
Expected volatility of common stock   105% - 107%
Dividend yield   0.00%
Discount due to lack of marketability   20%
Expected life of option/warrant   Five Years

 

8. INCOME TAXES

 

The Company recorded no income tax provision at March 31, 2020 and 2019 because of losses incurred.

 

The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur. The Company recorded no income tax expense for the three months ended March 31, 2020 because the Company expects to incur a tax loss in the current year. Similarly, no income tax expense was recognized for the three months ended March 31, 2019.

 

The Company had a net deferred tax asset related to federal net operating loss carryforwards of $70,061,148 and $66,984,024 at March 31, 2020 and December 31, 2019, respectively. The federal net operating loss carryforward will begin to expire in 2033. Realization of the deferred tax asset is dependent, in part, on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company has placed a 100% valuation allowance against the net deferred tax asset because future realization of these assets is not assured.

19

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9. PROMISSORY NOTES

 

Promissory Notes Issued in 2017

 

On April 10, 2017, the Company sold to investors in a private transaction two 12% unsecured promissory notes with a total of $8,000,000 in principal amount. Interest only is due and payable on the notes each month at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity on April 10, 2020. The holders of the notes will also receive annual payments of common stock at the rate of 2.5% of principal amount outstanding, based on a volume-weighted average price. Both notes were sold at an original issue discount of 94.25% and accordingly, we received total proceeds of $7,540,000 from the investors. We used the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt.

 

These 12% promissory notes allow for early redemption. The notes also contain certain covenants under which we have agreed that, except for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% notes, unless consented to by the holders.

 

The effective interest rate is 16.15%.

 

On April 24, 2017, we used $2,509,500 of the proceeds from this financing to redeem and repay a portion of the outstanding 12% Series B Convertible Unsecured Promissory Notes. Separately, $1,000,000 of the principal amount of the Series B Notes plus accrued interest was converted into 1,007,890 shares of common stock and $64,297 was rolled into the new debt financing.

 

On February 20, 2020, the Company extended the maturity on $4 million of the 12% unsecured promissory notes previously due in April, 2020. The maturity date of the subject promissory note has been extended for one year, from April 10, 2020 to April 10, 2021.

 

As part of the terms of this extension agreement, the Company paid the noteholder a fee of $80,000. The promissory note was originally issued in April 2017, and provides for monthly payments of interest only at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity.

 

Promissory Notes Issued in 2018

 

On February 6, 2018, we sold to an investor in a private transaction a 12% unsecured promissory note with a principal amount of $4,500,000. Interest only is due and payable on the note each month at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity on April 10, 2020. The holder of the note will also receive annual payments of common stock at the rate of 2.5% of principal amount outstanding, based on a volume-weighted average price. We sold the note at an original issue discount of 96.27% and accordingly, we received total proceeds of $4,332,150 from the investor. We used the proceeds for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt.

 

This 12% promissory note allows for early redemption, provided that if we redeem before February 6, 2019, we must pay the holder all unpaid interest and common stock payments on the portion of the note redeemed that would have been earned through February 6, 2019. The note also contains certain covenants under which we have agreed that, except for financing arrangements with established commercial banking or financial institutions and other debts and liabilities incurred in the normal course of business, we will not issue any other notes or debt offerings which have a maturity date prior to the payment in full of the 12% note, unless consented to by the holder.

 

20

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9. PROMISSORY NOTES - continued

 

The effective interest rate is 15.88%.

 

On April 24, 2020, the Company entered into a Note Amendment Agreement with the David A. Straz, Jr. Foundation, as a lender (the “Straz Foundation”), the David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986, as a lender and collateral agent (the “Straz Trust”), and The Northern Trust Company and Christopher M. Straz, as co-trustees of the Straz Trust. Under the Note Amendment Agreement, the parties agreed to amend and restate the two promissory notes issued to the Straz Trust on April 10, 2017 and February 6, 2018 that have total principal outstanding of $8,500,000. Under the Note Amendment Agreement, the maturity dates of the two promissory notes held by the Straz Trust and the Note held by the Foundation were extended to April 10, 2021.

 

Under the Note Amendment Agreements, we and our subsidiaries provided a first priority lien on certain collateral in favor of the collateral agent for the benefit of the lenders. The collateral includes all assets and property held by Hudspeth Oil Corporation and Torchlight Hazel, LLC, which includes without limitation our working interest in certain oil and gas leases in Hudspeth County, Texas, known as the “Orogrande Project” and our working interest in certain oil and gas leases in the Midland Basin in West Texas, known as the “Hazel Project.” Further, these subsidiaries, along with Torchlight Energy, Inc., provided guaranty with respect to payment of the three promissory notes. The Note Amendment Agreements also provide that (a) upon any disposition of less than 100% of Borrower’s right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 75% of the proceeds thereof (up to the outstanding amount due under the notes), unless such disposition results in us owning less than a 45% working interest (on an 8/8ths basis) in the Orogrande Project or the Hazel Project, in which case the prepayment amount is to be equal to 100% of such proceeds (up to the outstanding amount due under the notes); and (b) upon any disposition of 100% of our right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 100% of the proceeds thereof (up to the outstanding amount due under the notes).

 

Additionally, the promissory notes, as amended, now provide conversion rights whereby the lenders will have the right, at each such lender’s option, to convert any portion of principal and interest into shares of common stock of Torchlight Energy Resources, Inc. at a conversion price of $1.50 per share.

 

The Note Amendment Agreements (as further amended) provided that no later than May 25, 2020, we were obligated to pay: (a) to the lenders all past due interest that has accrued on the existing promissory notes, and (b) to the Straz Trust a fee of $170,000 which payments were made. Further, the agreements have certain negative covenants regarding related party transactions, dividends, stock repurchases, grants of liens on other assets, and payment of accrued executive compensation. There are also typical affirmative covenants regarding legal compliance and payment of taxes. The agreements also provide certain notice and disclosure requirements, including notice of material events, such as defaults under other obligations and litigation.

 

All other terms and conditions of the three original promissory notes remain substantially unchanged, including without limitation, monthly payments of interest only at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity, and annual payments of common stock at the rate of 2.5% of the principal amount outstanding, based on a volume-weighted average price.

 

Since the extension of the notes was completed before the date of filing this report, the debt is presented on the balance sheet as noncurrent debt. Reference Note 11 – Subsequent Events.

 

In April 2019 and 2018, respectively, the holders of the notes described above received 202,316 and 172,342 shares of common stock as a payment in kind representing the annual payments of common stock due at the rate of 2.5% of principal amount outstanding as of April 10 based on a volume-weighted average price calculation. In April, 2020 the note holders’ payment in kind required the issuance of 680,377 shares of our common stock.

 

The 12% promissory note transactions through March 31, 2020 are summarized as follows:

 

12% 2020 Unsecured promissory note balance - December 31, 2019   $ 12,377,830  
         
Accretion of discount and amortization of debt issuance costs     128,938  
Debt extension fee paid     (80,000 )
         
12% 2020 and 2021 Promissory note balance - March 31, 2020   $ 12,426,768  
         
As reported on our Balance Sheet:        
Current liabilities - 12% 2020 Unsecured promissory note     64,297  
Other liabilities - 12% 2021 Secured promissory notes     12,362,471  
         
    $ 12,426,768  

 

The 12% unsecured notes payable at December 31, 2019 included $64,297 due to a holder unrelated to the Straz entities. As of March 31, 2020 the amount payable to that holder remains unsecured. The note was due on April 10, 2020. The holder has agreed to extend the repayment date. 

21

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9. PROMISSORY NOTES - continued

 

Convertible Notes Issued in October, 2018

 

On October 17, 2018, we sold to certain investors in a private transaction 16% Series C Unsecured Convertible Promissory Notes with a total principal amount of $6,000,000. Interest and principal are due and payable on the notes in one balloon payment at maturity on April 17, 2020. The notes are convertible, at the election of the holders, into an aggregate 6% working interest in certain oil and gas leases in Hudspeth County, Texas, known as our “Orogrande Project.” After an analysis of the transaction and a review of applicable accounting pronouncements, management concluded that the notes issued on October 17, 2018 which contain a conversion right for holders to convert into a working interest in the Orogrande Project of the Company, meet a specific scope exception to the provisions requiring derivative accounting.

 

The notes allow us to redeem them early only upon the event of a fundamental transaction, such as a merger or sale of substantially all our assets. The notes provide that the noteholders may accelerate and declare any and all of the obligations under the notes to be immediately due and payable in the event of default, such as nonpayment, failure to perform required conversions, failure to perform any covenant or agreement under the notes, an insolvency event, or certain defaults or judgments. As part of the sale of the of the notes, the noteholders required that McCabe Petroleum Corporation, a Texas corporation owned by our Chairman Gregory McCabe (“MPC”), provide them a put option whereby they have the right to have MPC purchase from them any unpaid principal amount due on the notes. Additionally, if there is a fundamental transaction, Mr. McCabe will be required to pay a fee to each noteholder that elects not to convert or require MPC to purchase the principal amount under the note, which fee will be equal to such noteholder’s pro-rata share of a total fee amount of $1,500,000.

 

We received total proceeds of $6,000,000 from the sale of the notes, of which $3,000,000 was used to pay back the promissory note issued to MPC on December 1, 2017, which note was due on December 31, 2020. We used the remaining proceeds for working capital and general corporate purposes, which includes, without limitation, drilling and lease acquisition capital.

 

Prior to entering into the above transactions, our Board of Directors formed a special committee composed of independent directors to analyze and authorize the transactions on behalf of Torchlight Energy Resources, Inc. and determine whether the transactions are fair to the company. In this role, the special committee engaged an independent financial consulting firm which rendered a fairness opinion deeming that the transactions were fair to the company, from a financial point of view, and contained terms no less favorable to the company than those that could be obtained in arm’s length transactions.

 

On March 9, 2020, each of the noteholders entered into a Conversion Agreement with us and our subsidiary Hudspeth Oil Corporation (“Hudspeth”), under which the noteholders elected to convert the notes, in accordance with their terms, into an aggregate 6% working interest (of all such holders) in certain oil and gas leases in Hudspeth County, Texas, known as our “Orogrande Project.” Principal of $6,000,000 and approximately $1,331,000 of accrued interest were converted at March 9, 2020.

22

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9. PROMISSORY NOTES - continued

 

The Conversion Agreements also provided additional consideration to the noteholders including a limited carry, a top-off obligation of us and Hudspeth, and warrants to purchase a total of 750,000 restricted shares of our common stock, which warrants will have a term of five years and an exercise price of $0.70 per share. The limited carry provides that for the remainder of the 2020 calendar year, Hudspeth will pay all costs and expenses attributable to the assigned working interests, except where prohibited by law or regulation. The top-off obligation provides that, subject to the terms and conditions of the Conversion Agreements, if (a) we sell our entire working interest in the Orogrande Project, (b) as part of such sale, the holder’s entire working interests are sold, and (c) the gross proceeds received by all the holders in such transaction are equal to less than $9,000,000; then we must pay the holders an amount equal to $9,000,000, (i) less gross proceeds the holders received in the transaction, (ii) less the amount of the carry the holders received under the Conversion Agreements, and (iii) less any gross proceeds the holders received in any farmouts occurring prior to the transaction.

 

The transaction was treated as an extinguishment of debt. The fair value of the working interest transferred in the conversion of the debt was $8,778,000 and the value of warrants issued to the holders was $382,500. The Company recognized a Loss on extinguishment of debt in the amount of $1,829,651.

 

Convertible Notes Issued in First Quarter 2019

 

In February 2019 the Company raised a total of $2,000,000 from investors through the sale of two 14% Series D Unsecured Convertible Promissory Notes. Principal was payable in a lump sum at maturity on May 11, 2020 with payments of interest payable monthly at the rate of 14% per annum. Holders of the notes have the right to convert principal and interest at any time into common stock at a conversion price of $1.08 per share. The Company has the right to redeem the notes at any time, provided that the redemption amount must include all interest that would have been earned through maturity. The Company evaluated the notes for beneficial conversion features and derivative accounting criteria and concluded that derivative accounting treatment is not applicable.

 

On April 21, 2020, Torchlight Energy Resources, Inc. entered into agreements to amend the two 14% Series D Unsecured Convertible Promissory Notes that were originally issued on February 11, 2019 and have a total of $2,000,000 in principal outstanding. Under the amendment agreements, (a) the maturity dates were extended from May 11, 2020 to November 11, 2021, (b) the conversion price under which the noteholders may convert into our common stock was changed from $1.08 to $0.43, and (c) the noteholders were provided the right, at each noteholder’s election, to convert their notes into either (i) a working interest in the Orogrande Project at the rate of one acre per $1,100 of principal and unpaid interest converted, or (ii) a working interest in the Hazel Project at the rate of one acre per $1,300 of principal and unpaid interest converted; provided, that the noteholders’ right to convert into either such working interest is subject to approval of the collateral agent of the Note Amendment Agreement with the Straz parties.

 

Under the note amendments, the noteholders agreed to forebear demand or collection on all interest payments due and payable under the Note, including any past due interest payments, for 20 days after the execution of the Note Amendment Agreement. Further, we agreed to (a) issue each holder 20,000 restricted shares of common stock immediately and (b) pay each holder a fee of $10,000, at the same time as the payment of past due interest is paid. The past due interest was paid.

 

These two promissory notes will continue to provide for monthly payments of interest only at the rate of 14% per annum, with a balloon payment of the outstanding principal due and payable at maturity. Since the extension of the notes was completed before the date of filing this report, the debt is presented on the balance sheet as noncurrent debt. Reference Note 11 – Subsequent Events.

23

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

9. PROMISSORY NOTES - continued

 

Convertible Notes Issued in Third Quarter 2019

 

In July 2019, the Company issued 8% Unsecured Convertible Promissory notes in the amount of $2,010,000 together with warrants to purchase our common stock. Principal and 8% interest are due at maturity on May 21, 2021. The principal and accrued interest on the notes are convertible into shares of common stock at $1.10 per common share at any time after the original issue date. Along with the notes, the three year warrants equal to 20% of the number of shares of common stock issuable upon the conversion of the notes were issued to note holders. The warrants are exercisable at $1.35 per share.

 

Warrants issued along with the notes meet the requirements of the scope exemptions in ASC 815-10-15-74 and are thus classified as equity upon issuance. The Company determined the fair value of the warrants using the Black Scholes pricing formula and is recognized as a discount on the carrying amount of the notes and is credited to additional paid in capital. The fair value of the warrants at the issuance date was determined to be $240,455.

 

A beneficial conversion feature (“BCF”) of a convertible note is normally characterized as the convertible portion feature that provides a rate of conversion that is below market value or “in the money” when issued. The BCF related to the issuance of the notes was recorded at the issuance date. The BCF was measured using the intrinsic value method and is shown as a discount to the carrying amount of the convertible note and is credited to additional paid in capital. The intrinsic value of the BCF at the issuance date of the notes was determined to be $1,145,546.

 

The allocated fair values of the BCF and the warrants was recorded as a debt discount from the face amount of the notes and such discount is being accreted over the expected term of the notes and is charged to interest expense. The Company recognized interest expense of $120,410 from the amortization of debt discount from notes for the three months ended March 31, 2020.

 

The Company evaluated the July, 2019 notes for derivative accounting criteria and concluded that derivative accounting treatment was not applicable.

 

Convertible Notes Issued in Fourth Quarter 2019

 

Effective October 31, 2019, the Company issued 10% Unsecured Convertible Promissory notes in the amount of $540,000. Principal and interest are due at maturity on December 3, 2020. The principal and accrued interest on the notes are convertible into shares of common stock at $0.75 per common share at any time after the original issue date. The notes are convertible, at the election of the holders, into an aggregate 0.367% working interest in our Orogrande Project.

 

The Company evaluated the October 2019 notes for BCF and derivative accounting criteria and concluded that there was no BCF or derivative accounting treatment applicable.

 

10. ASSET RETIREMENT OBLIGATIONS

 

The following is a reconciliation of the asset retirement obligations liability through March 31, 2020:

 

Asset retirement obligations – December 31, 2019   $ 23,319  
Accretion expense     142  
Estimated liabilities recorded     -  
         
Asset retirement obligations – March 31, 2020   $ 23,461  

24

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

11. SUBSEQUENT EVENTS

 

Extension of Promissory Notes

 

On April 24, 2020, Torchlight Energy Resources, Inc., along with its subsidiaries Hudspeth Oil Corporation, Torchlight  Hazel, LLC and Torchlight Energy, Inc., entered into a Note Amendment Agreement with each of the David A. Straz, Jr. Foundation, as a lender (the “Straz Foundation”), and a Note Amendment Agreement with the David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986, as a lender and collateral agent (the “Straz Trust”), and The Northern Trust Company and Christopher M. Straz, as co-trustees of the Straz Trust. Under the Note Amendment Agreements, the parties agreed to amend and restate the two promissory notes issued to the Straz Trust on April 10, 2017 and February 6, 2018 that have a total outstanding principal amount of $8,500,000, along with the promissory note issued to the Straz Foundation on April 10, 2017 which has an outstanding principal amount of $4,000,000. Under the Note Amendment Agreements, the maturity dates of the two promissory notes held by the Straz Trust and the Note held by the Foundation were extended to April 10, 2021. We had previously extended the maturity date of the promissory note held by the Straz Foundation to April 10, 2021.

 

Under the Note Amendment Agreements, we and our subsidiaries provided a first priority lien on certain collateral in favor of the collateral agent for the benefit of the lenders. The collateral includes all assets and property held by Hudspeth Oil Corporation and Torchlight Hazel, LLC, which includes without limitation our working interest in certain oil and gas leases in Hudspeth County, Texas, known as the “Orogrande Project” and our working interest in certain oil and gas leases in the Midland Basin in West Texas, known as the “Hazel Project.” Further, these subsidiaries, along with Torchlight Energy, Inc., provided guaranty with respect to payment of the three promissory notes. The Note Amendment Agreements also provide that (a) upon any disposition of less than 100% of Borrower’s right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 75% of the proceeds thereof (up to the outstanding amount due under the notes), unless such disposition results in us owning less than a 45% working interest (on an 8/8ths basis) in the Orogrande Project or the Hazel Project, in which case the prepayment amount is to be equal to 100% of such proceeds (up to the outstanding amount due under the notes); and (b) upon any disposition of 100% of our right, title and interest in and to the Orogrande Project or the Hazel Project, we must prepay an amount equal to 100% of the proceeds thereof (up to the outstanding amount due under the notes).

 

Additionally, the promissory notes, as amended, now provide conversion rights whereby the lenders will have the right, at each such lender’s option, to convert any portion of principal and interest into shares of common stock of Torchlight Energy Resources, Inc. at a conversion price of $1.50 per share.

 

The Note Amendment Agreements (as further amended) provided that no later than May 25, 2020, we were obligated to pay: (a) to the lenders all past due interest that has accrued on the existing promissory notes, and (b) to the Straz Trust a fee of $170,000 which payments were made. Further, the agreements have certain negative covenants regarding related party transactions, dividends, stock repurchases, grants of liens on other assets, and payment of accrued executive compensation. There are also typical affirmative covenants regarding legal compliance and payment of taxes. The agreements also provide certain notice and disclosure requirements, including notice of material events, such as defaults under other obligations and litigation.

 

All other terms and conditions of the three original promissory notes remain substantially unchanged, including without limitation, monthly payments of interest only at the rate of 12% per annum, with a balloon payment of the outstanding principal due and payable at maturity, and annual payments of common stock at the rate of 2.5% of the principal amount outstanding, based on a volume-weighted average price.

25

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

11. SUBSEQUENT EVENTS - continued

 

Extension of Convertible Promissory Notes

 

On April 21, 2020, Torchlight Energy Resources, Inc. entered into agreements to amend two convertible promissory notes that were originally issued on February 11, 2019, which notes presently have a total of $2,000,000 in principal outstanding. Under the amendment agreements, (a) the maturity dates were extended from May 11, 2020 to November 11, 2021, (b) the conversion price under which the noteholders may convert into our common stock was changed from $1.08 to $0.43, and (c) the noteholders were provided the right, at each noteholder’s election, to convert their notes into either (i) a working interest in the Orogrande Project at the rate of one acre per $1,100 of principal and unpaid interest converted, or (ii) a working interest in the Hazel Project at the rate of one acre per $1,300 of principal and unpaid interest converted; provided, that the noteholders’ right to convert into either such working interest is subject to approval of the collateral agent of the Note Amendment Agreement with the Straz parties.

 

Under the note amendments, the noteholders agreed to forebear demand or collection on all interest payments due and payable under the Note, including any past due interest payments, for 20 days after the execution of the Note Amendment Agreement. Further, we agreed to (a) issue each holder 20,000 restricted shares of common stock immediately and (b) pay each holder a fee of $10,000, at the same time as the payment of past due interest is paid. The past due interest was paid.

 

These two promissory notes will continue to provide for monthly payments of interest only at the rate of 14% per annum, with a balloon payment of the outstanding principal due and payable at maturity. Since the extension of the notes was completed before the date of filing this report, the debt is presented on the balance sheet as noncurrent debt.

 

Common Stock Offering

 

On May 18, 2020, Torchlight Energy Resources, Inc. entered into an Underwriting Agreement with ThinkEquity, a division of Fordham Financial Management, Inc., as underwriter, relating to the issuance and sale in an underwritten public offering of 3,000,000 shares of our common stock, par value $0.001 per share, plus an additional 450,000 shares through the over-allotment option which the underwriter exercised on that same date. The public offering price for each share of common stock was $0.34.

 

The Underwriting Agreement contains customary representations, warranties and agreements by us, customary conditions to closing, indemnification obligations of us and the underwriter, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions. The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement and may be subject to limitations agreed upon by the contracting parties.

 

Pursuant to the Underwriting Agreement, and subject to certain exceptions, for a period of 15 trading days we agreed (i) not to sell capital stock or any securities convertible into or exercisable or exchangeable for shares of capital stock in a public offering, (ii) not to sell capital stock or any securities convertible into or exercisable or exchangeable for shares of capital stock in a non-public offering for consideration less than the public offering price set forth in the Underwriting Agreement, (iii) file a registration statement relating to the offering of any capital stock or securities convertible into or exercisable or exchangeable for shares of capital stock, (iv) complete any offering of debt securities, or (v) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock, whether any such transaction described in clause (i), (ii), (iii), (iv) or (v) above is to be settled by delivery of shares of capital stock or such other securities, in cash or otherwise. Our directors and executive officers agreed to a lock-up period of 90 days.

 

The common stock was offered and sold pursuant to our effective shelf registration statement on Form S-3 (Registration Statement No. 333-220181) filed with the Securities and Exchange Commission (the “SEC”) on August 25, 2017 and declared effective by the SEC on September 28, 2017, the accompanying prospectus contained therein, and preliminary and final prospectus supplements filed with the SEC in connection with our takedown relating to the offering.

26

 

TORCHLIGHT ENERGY RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

11. SUBSEQUENT EVENTS - continued

 

The net proceeds to us from the sale of the shares of common stock were approximately $890,000, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, which includes the underwriter’s exercise of the full amount of the 45-day over-allotment option granted under the terms of the Underwriting Agreement to purchase up to an additional 450,000 shares of common stock to cover over-allotments. The offering closed May 20, 2020.

 

Also under the terms of the Underwriting Agreement, we issued to the underwriter warrants (the “Representative’s Warrants”) to purchase an aggregate of 172,500 shares of common stock (5% of the total shares issued in in the public offering including exercise by the underwriter of the full amount of the over-allotment option). The Representative’s Warrants are exercisable at a per share exercise price of $0.425. The warrants are exercisable for a term of four and one-half years commencing 180 days from May 18, 2020. The warrants also provide for “piggyback” registration rights with respect to the registration of the shares of common stock underlying the warrants, cashless exercise if there is no effective registration statement registering such shares and customary anti-dilution provisions.

 

Shares issued for Payment in Kind

 

In April 2020, the Company issued 680,377 shares of common stock in satisfaction of the payment in kind valued at $314,107 due on April 10, 2020 under the terms of the promissory notes held by the Straz Foundation and the Straz Trust.

 

Other Stock Issued

 

On May 6, 2020, we issued 1,630,434 restricted shares of common stock to an investor for the purchase price of $750,000. The investor, Maverick Oil & Gas Corporation, is the operator for our Orogrande Project. Our subsidiary Hudspeth Oil Corporation owed the investor in excess of $750,000 on unpaid balances and cost overruns on work performed on the Orogrande Project, which amount is due and payable now. The investor agreed to exchange $750,000 in accounts receivable owed to it by Hudspeth Oil as consideration for the purchase of the common stock. Under the terms of the sale, we provided registration rights to the investor .

 

On April 29, 2020, we issued 142,857 restricted shared of common stock to a consultant as consideration for $60,000 in investor relations services.

 

Paycheck Protection Program Loan

 

In response to the COVID-19 pandemic, the U.S. Small Business Administration (the “SBA”) made available low-interest rate loans to qualified small businesses, including under its Paycheck Protection Program (the “PPP”). On April 10, 2020, in order to supplement its cash balance, the Company submitted an application for a loan (“SBA loan”) in the amount of approximately $77,477. On May 1, 2020, Company’s SBA loan application was approved and the Company received the loan proceeds. The SBA loan has an interest rate of 0.98% and matures in April 2022.

 

Section 1106 of the CARES Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP. The PPP and loan forgiveness are intended to provide economic relief to small businesses, such as the Company, that are adversely impacted under the COVID-19 Emergency Declaration issued by President Trump on March 13, 2020. The Company will apply for loan forgiveness when the SBA site for that purpose is available.

27

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are an energy company engaged in the acquisition, exploration, exploitation and/or development of oil and natural gas properties in the United States. We are primarily focused on the acquisition of early stage projects, the development and delineation of these projects, and then the monetization of those assets once these activities are completed.

 

Since 2010, our primary focus has been the development of interests in oil and gas projects we hold in the Permian Basin in West Texas, including the Orogrande Project in Hudspeth County, Texas, the Hazel Project in the Midland Basin and the project in Winkler County, Texas in the Delaware Basin. We also hold interests in certain other oil and gas projects that we are in the process of divesting, including the Hunton wells project as part of a partnership with Husky Ventures, Inc., or Husky, in Central Oklahoma.

 

We employ a private equity model within a public platform, with the goal to (i) enter into a play at favorable valuations, (ii) “prove up” and delineate the play through committed capital and exhaustive geologic and engineering review, and (iii) monetize our position through an exit to public and private independents that can continue full-scale development. Rich Masterson, our consulting geologist, has originated several of our current plays, as discussed below, based on his tenure as a geologist since 1974. He is credited with originating the Wolfbone shale play in the Southern Delaware Basin of West Texas and has prepared prospects totaling over 150,000 acres that have been leased, drilled and are currently being developed by Devon Energy Corp., Occidental Petroleum Corporation, Noble Energy, and Samson Oil & Gas Ltd., among others.

 

In April 2018, we announced that we have commenced a process that could result in the monetization of the Hazel Project. Pursuant to our corporate strategy, in our opinion the development activity at the Hazel Project, coupled with nearby activities of other oil and gas operators, is indicative of this project having achieved a level of value that suggests monetization. We believe that the liquidity that would be provided from selling the Hazel Project could be redeployed into the Orogrande Project.

 

We are also currently marketing the Orogrande Project for an outright sale or farm in partner and are taking measures on our own to market the Winkler Project. These efforts are continuing.

 

We operate our business through five wholly-owned subsidiaries, Torchlight Energy, Inc., a Nevada corporation, Torchlight Energy Operating, LLC, a Texas limited liability company, Hudspeth Oil Corporation, a Texas corporation, Torchlight Hazel, LLC, a Texas limited liability company, and Warwink Properties, LLC, a Texas limited liability company. We currently have two full-time employees and we employ consultants for various tasks as needed.

 

Our principal executive offices are located at 5700 W. Plano Parkway, Suite 3600, Plano, Texas 75093. The telephone number of our principal executive offices is (214) 432-8002.

 

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

28

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

Historical Results for the three months ended March 31, 2020 and 2019:

 

Revenues and Cost of Revenues

 

For the three months ended March 31, 2020, we had production revenue of $84,620 compared to $310,837 for the three months ended March 31, 2019. Refer to the table of production and revenue included below for quarterly changes in revenue. Our cost of revenue, consisting of lease operating expenses and production taxes, was $67,858 and $127,622 for the three months ended March 31, 2020 and 2019, respectively.

 

Property Quarter Oil Production {BBLS} Gas Production {MCF}   Oil Revenue     Gas Revenue     Total Revenue  
Oklahoma Q1 - 2020 181 468   $ 583     $ 1,000     $ 1,583  
Hazel (TX) Q1 - 2020 0 0   $ -     $ -     $ -  
MECO (TX) Q1 - 2020 1,863 1,559   $ 81,530     $ 1,507     $ 83,037  
Total Q1-2020   2,044 2,027   $ 82,113     $ 2,507     $ 84,620  
                               
Oklahoma Q1 - 2019 56 1,072   $ 2,567     $ 2,333     $ 4,900  
Hazel (TX) Q1 - 2019 2,864 0   $ 131,901     $ -     $ 131,901  
MECO (TX) Q1 - 2019 3,525 2,565   $ 167,677     $ 6,359     $ 174,036  
Total Q1-2019   6,445 3,637   $ 302,145     $ 8,692     $ 310,837  
                               
Oklahoma Q2 - 2019 43 1,770   $ 2,477     $ 2,450     $ 4,927  
Hazel (TX) Q2 - 2019 1,123 0   $ 64,302     $ -     $ 64,302  
Meco (TX) Q2 - 2019 2,585 2,623   $ 156,259     $ 11,587     $ 167,846  
Total Q2-2019   3,751 4,393   $ 223,038     $ 14,037     $ 237,075  
                               
Oklahoma Q3 - 2019 0 0   $ -     $ -     $ -  
Hazel (TX) Q3 - 2019 0 0   $ -     $ -     $ -  
Meco (TX) Q3 - 2019 1,320 4,522   $ 71,064     $ 78     $ 71,142  
Total Q3-2019   1,320 4,522   $ 71,064     $ 78     $ 71,142  
                               
Oklahoma Q4 - 2019 166 3,766   $ 8,873     $ 1,895     $ 10,768  
Hazel (TX) Q4 - 2019 0 0   $ -     $ -     $ -  
Meco (TX) Q4 - 2019 2,102 5,890   $ 110,894     $ 5,547     $ 116,441  
Total Q4-2019   2,268 9,656     119,767       7,442       127,209  
                               
2019 Year To Date   13,784 22,208   $ 716,014     $ 30,249     $ 746,263  

 

During the three months ended March 31, 2020, oil production decreased due to down time associated with equipment repair and typical decline in production from the MECO property.

 

29

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

We recorded depreciation, depletion, and amortization expense of $447,405 for the three months ended March 31, 2020 compared to $185,426 for the three months ended March 31, 2019.

 

General and Administrative Expenses

 

Our general and administrative expenses for the three months ended March 31, 2020 and 2019 were $1,047,624 and $1,042,757, respectively, an increase of $4,867. Our general and administrative expenses consisted of consulting and compensation expense, substantially all of which was non-cash or deferred, accounting and administrative costs, professional consulting fees, and other general corporate expenses. The change in general and administrative expenses for the three months ended March 31, 2020 compared to 2019 is detailed as follows:

 

Increase(decrease) in non cash stock and warrant compensation   $ (181,230 )
Increase(decrease) in consulting expense     53,449  
Increase(decrease) in investor relations     90,693  
Increase(decrease) in travel expense     6,934  
Increase(decrease) in salaries and compensation     (12,141 )
Increase(decrease) in legal fees     3,549  
Increase(decrease) in contract labor     20,625  
Increase(decrease) in insurance     11,731  
Increase(decrease) in rent     (5,929 )
Increase(decrease) in accounting and audit fees     43,373  
Increase(decrease) in general corporate expenses     (26,187 )
         
Total Increase in General and Administrative Expenses   $ 4,867  

30

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

Liquidity and Capital Resources

 

At March 31, 2020, we had working capital deficit of $3,244,045 and total assets of $34,391,275. Stockholders’ equity was $14,342,801. The negative working capital is principally due to accumulated accounts payable balances at March 31, 2020 and notes payable.

 

Cash flows from operating activities for the three months ended March 31, 2020 was $(321,342) compared to $(190,953) for the three months ended March 31, 2019, a decrease of $130,389. Cash flows from operating activities for the three months ended March 31, 2020 can be primarily attributed to net loss from operations of $3,693,863, stock based compensation of $230,650, a loss on extinguishment of debt $1,829,651, and other noncash expense adjustments. Cash flows from operating activities for the three months ended March 31, 2019 can be primarily attributed to net loss from operations of $1,677,874 and $397,250, in stock compensation expense, an impairment expense of $474,357 and changes in other noncash expense adjustments. Reference the Consolidated Statements of Cash Flows for additional detail of the components that comprise the net use of cash in operations. We expect to continue to use cash flow in operating activities until such time as we achieve sufficient commercial oil and gas production to cover all of our cash costs.

 

Cash flows from investing activities for the three months ended March 31, 2020 was $(2,212,852) compared to $(2,404,783) for the three months ended March 31, 2019. Cash flows from investing activities principally consists of investment in oil and gas properties in Texas.

 

Cash flows from financing activities for the three months ended March 31, 2020 was $2,527,118 as compared to $3,351,080 for the three months ended March 31, 2019. Cash flows from financing activities consists of proceeds from issuance of our common stock, proceeds from a subscription receivable, and additional borrowings under notes payable. We expect to continue to have cash flow provided by financing activities as we seek new rounds of financing and continue to develop our oil and gas investments.

 

We will require additional debt or equity financing to meet our plans and needs. We face obstacles in continuing to attract new financing due to industry conditions and our history and current record of net losses. Despite our efforts, we can provide no assurance that we will be able to obtain the financing required to meet our stated objectives or even to continue as a going concern.

 

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

 

Commitments and Contingencies-

 

Operating Leases

 

The Company had a noncancelable lease for its office premises that expired on November 30, 2019 and which requires the payment of base lease amounts and executory costs such as taxes, maintenance and insurance. Effective June 1, 2019 the Company entered into an agreement with a company that had been subleasing a portion of its office space to become the primary obligor on the lease and to assume full responsibility for lease payments after lease expiration on November 30, 2019. The Company has continued after November 30, 2019 as a subtenant on a month-to- month basis.

 

Environmental matters

 

We are subject to contingencies as a result of environmental laws and regulations. Present and future environmental laws and regulations applicable to our operations could require substantial capital expenditures or could adversely affect our operations in other ways that cannot be predicted at this time. As of March 31, 2020 and December 31, 2019, no amounts have been recorded because no specific liability has been identified that is reasonably probable of requiring us to fund any future material amounts.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable

31

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, in a manner that allowed for timely decisions regarding disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes during the quarter ended March 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On January 31, 2020, Torchlight Energy Resources, Inc. and its wholly owned subsidiaries Torchlight Energy, Inc. and Torchlight Energy Operating, LLC were served with a lawsuit brought by Goldstone Holding Company, LLC (Goldstone Holding Company, LLC v. Torchlight Energy, Inc., et al., in the 160th Judicial District Court of Dallas County, Texas). On February 24, 2020, Torchlight Energy Resources, Inc., Torchlight Energy, Inc., and Torchlight Energy Operating, LLC timely filed their answer, affirmative defenses, and requests for disclosure. The suit, which seeks monetary relief over $1 million, makes unspecified allegations of misrepresentations involving a November 2015 participation agreement and a 2016 amendment to the participation agreement. We have denied the allegations and have asserted several affirmative defenses including but not limited to, that the suit is barred by the applicable statute of limitations, that the claims have been released, and that the claims are barred because of contractual disclaimers between sophisticated parties.

 

On April 30, 2020, our wholly owned subsidiary, Hudspeth Oil Corporation, filed suit against Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies. The suit seeks the recovery of approximately $1.4 million in costs incurred as a result of a tool failure during drilling activities on the University Founders A25 #2 well that is located in the Orogrande Field.  Working interest owner Wolfbone Investments, LLC, a company owned by our Chairman Gregory Mccabe, is a co-plaintiff in that action. The defendant has been served, and its deadline to respond to the lawsuit is Monday, June 8, 2020. The suit, Hudspeth Oil Corporation and Wolfbone Investments, LLC v. Datalog LWT, Inc. d/b/a Cordax Evaluation Technologies, was filed in the 189th Judicial District Court of Harris County, Texas.  

 

ITEM 1A. RISK FACTORS

 

There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, except for such risks and uncertainties associated with the COVID-19 pandemic, as disclosed below. The risks described in the Annual Report on Form 10-K and in this Form 10-Q are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we deem to be immaterial, also may have a material adverse impact on our business, financial condition or results of operations.

 

An occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to negatively affect, and has to date negatively affected, our operations.

 

The occurrence of an uncontrollable event such as the COVID-19 pandemic is likely to, and has already, negatively affected our operations. A pandemic typically results in social distancing, travel bans and quarantine, and the effects of, and response to, the COVID-19 pandemic has limited access to our facilities, properties, management, support staff and professional advisors. These, in turn, have not only negatively impacted our operations and financial condition, but our overall ability to react timely to mitigate the impact of this event. Further, the COVID-19 pandemic has resulted in declines in the demand for, and the price of, oil and gas, and it is unclear how long this decline will last. The full effect on our business and operation is currently unknown. In the event that the effects of COVID-19 continue in the future and/or the economy continues to deteriorate, we may be forced to curtail our operations and may be unable to pay our debt obligations as they come due.

 

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.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In January 2020, we sold 600,000 restricted shares of common stock to an investor for a total purchase price of $360,000. As part of the sale, we also issued the investor 600,000 five-year warrants to purchase shares of common stock at an exercise price of $0.80 per share.

 

In February 2020, we issued a total of 125,000 restricted shares of common stock at consideration for consulting services.

 

In March 2020, we issued the operator of our Orogrande Project 40,000 restricted shares of common stock for services.

 

All of the above sales of securities were sold under the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder. The issuances of securities did not involve a “public offering” based upon the following factors: (i) the issuances of securities were isolated private transactions; (ii) a limited number of securities were issued to a limited number of purchasers; (iii) there were no public solicitations; (iv) the investment intent of the purchasers; and (v) the restriction on transferability of the securities issued.

32

 

ITEM 6. EXHIBITS

 

Exhibit No.   Description
     
2.1   Share Exchange Agreement dated November 23, 2010. (Incorporated by reference from Form 8-K filed with the SEC on November 24, 2010.) *
     
3.1   Articles of Incorporation. (Incorporated by reference from Form 10-K filed with the SEC on March 18, 2019.) *
     
3.2   Certificate of Amendment to Articles of Incorporation dated December 10, 2014. (Incorporated by reference from Form 10-Q filed with the SEC on May 15, 2015.) *
     
3.3   Certificate of Amendment to Articles of Incorporation dated September 15, 2015. (Incorporated by reference from Form 10-Q filed with the SEC on November 12, 2015.) *
     
3.4   Certificate of Amendment to Articles of Incorporation dated August 18, 2017 (Incorporated by reference from Form 10-Q filed with the SEC on November 9, 2018.) *
     
3.5   Amended and Restated Bylaws (Incorporated by reference from Form 8-K filed with the SEC on October 26, 2016.) *
     
10.1   Employment Agreement (with John A. Brda) (Incorporated by reference from Form 8-K filed with the SEC on June 16, 2015.) *
     
10.2   Employment Agreement (with Roger Wurtele) (Incorporated by reference from Form 8-K filed with the SEC on June 16, 2015.) *
     
10.3   Farmout Agreement between Hudspeth Oil Corporation, Founders Oil & Gas, LLC and certain other parties (Incorporated by reference from Form 8-K filed with the SEC on September 29, 2015) *
     
10.4   Purchase and Sale Agreement with Husky Ventures, Inc. (Incorporated by reference from Form 8-K filed with the SEC on November 12, 2015) *
     
10.5   Purchase Agreement with McCabe Petroleum Corporation for acquisition of “Hazel Project” (Incorporated by reference from Form 10-Q filed with the SEC on August 15, 2016) *
     
10.6   Agreement and Plan of Reorganization and Plan of Merger with Line Drive Energy, LLC (Incorporated by reference from Form 10-K filed with the SEC on March 31, 2017) *
     
10.7   Purchase and Sale Agreement with Wolfbone Investments, LLC (Incorporated by reference from Form 10-K filed with the SEC on March 31, 2017) *
     
10.8   Agreement and Plan of Reorganization and Plan of Merger with McCabe Petroleum Corporation and Warwink Properties, LLC(Incorporated by reference from Form 10-K filed with the SEC on March 16, 2018) *
     
10.9   Purchase Agreement with Torchlight Energy, Inc. and McCabe Petroleum Corporation (Incorporated by reference from Form 10-K filed with the SEC on March 16, 2018) *
     
10.10   Promissory Note for $3,250,000 by Torchlight Energy, Inc. to McCabe Petroleum Corporation (Incorporated by reference from Form 10-K filed with the SEC on March 16, 2018) *
     
10.11   Assignment of Farmout Agreement between Hudspeth Oil Corporation, Founders Oil & Gas, LLC and Wolfbone Investments, LLC (Incorporated by reference from Form 10-K filed with the SEC on March 16, 2018) *
     
10.12   Underwriting Agreement, dated April 19, 2018, between Torchlight Energy Resources, Inc. and Roth Capital Partners, LLC (Incorporated by reference from Form 8-K filed with the SEC on April 19, 2018) *
     
10.13   Purchase & Settlement Agreement, dated July 24, 2018, between Torchlight Energy Resources, Inc., Hudspeth Oil Corporation, Founders Oil & Gas, LLC, Founders Oil & Gas Operating, LLC, Wolfbone Investments, LLC and McCabe Petroleum. Corporation (Incorporated by reference from Form 10-Q filed with the SEC on August 9, 2018) *
     
10.14  

16% Series C Unsecured Convertible Promissory Note (form of) dated October 17, 2018 (Incorporated by reference from Form 8-K filed with the SEC on October 18, 2018)*

     
10.15   Underwriting Agreement, dated January 14, 2020, between Torchlight Energy Resources, Inc. and Aegis Capital Corp. (Incorporated by reference from Form 8-K filed with the SEC on January 14, 2020) *
     
10.16   Conversion Agreement (form of) dated March 9, 2020 between Torchlight Energy Resources, Inc., Hudspeth Oil Corporation and the previous holders of 16% Series C Unsecured Convertible Promissory Notes (Incorporated by reference from Form 10-K filed with the SEC on March 16, 2020) *
     
10.17   Underwriting Agreement, dated May 18, 2020, between Torchlight Energy Resources, Inc. and ThinkEquity, a division of Fordham Financial Management, Inc. (Incorporated by reference from Form 8-K filed with the SEC on May 18, 2020) *
     
10.18   Foundation Note Amendment Agreement dated April 24, 2020 with the David A. Straz, Jr Foundation
     
10.19   Amendment to Foundation Note Amendment Agreement dated May 12, 2020 with David A. Straz, Jr. Foundation
     
10.20   Trust Note Amendment Agreement dated April 24, 2020 with The David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986
     
10.21   Amendment to Trust Note Amendment Agreement dated May 12, 2020 with the David A. Straz Jr. Irrevocable Trust DTD 11/11/1986
     
10.22   Amended and Restated Note dated April 24, 2020 in the amount of $4,000,000 with The David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986
     
10.23   Amended and Restated Note dated April 24, 2020 in the amount of $4,500,000 with THE David A. Straz, Jr. Irrevocable Trust DTD 11/11/1986
     
10.24   Amended and Restated Note dated April 24, 2020 in the amount of $4,000,000 with David A. Straz, Jr. Foundation
     
31.1   Certification of principal executive officer required by Rule 13a 14(1) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of principal financial officer required by Rule 13a 14(1) or Rule 15d 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definitions Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase

 

  * Incorporated by reference from our previous filings with the SEC

33

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Torchlight Energy Resources, Inc.
   
Date: June 5, 2020 /s/ John A. Brda
  By: John A. Brda
  Chief Executive Officer
   
Date: June 5, 2020 /s/ Roger Wurtele
  By: Roger Wurtele
  Chief Financial Officer and Principal Accounting Officer

34

 

 

Exhibit 10.18

 

EXECUTION VERSION

 

FOUNDATION NOTE AMENDMENT AGREEMENT

 

THIS FOUNDATION NOTE AMENDMENT AGREEMENT (the “Agreement”) is made and entered into as of April 24, 2020, by and among TORCHLIGHT ENERGY RESOURCES, INC., a Nevada corporation (the “Borrower”), each of the Subsidiaries of the Borrower identified on the signature pages hereto, and the DAVID A. STRAZ, JR. FOUNDATION (the “Foundation,” and a “Lender”).

 

The Borrower has requested that the Lenders agree to the amendment and restatement of the Existing Notes, and the Lenders are willing to do so on the terms and conditions set forth herein. In consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

SECTION 1.01 Defined Terms. As used in this Agreement and the other Loan Documents, as applicable, the following terms have the meanings specified below:

 

Affiliate” means, with respect to a specified Person, another Person that directly or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

 

Amended and Restated Note(s)” or “Note(s)” means the Amended and Restated 12% 2020 Senior Secured Promissory Notes of Borrower in favor of the Lenders dated as of the date hereof, each of which shall be substantially in the form of Exhibit A. The Amended and Restated Note in favor of the Foundation is described in more detail on Schedule 1.

 

Applicable Law” means, as to any Person, all applicable Laws binding upon such Person or to which such a Person is subject.

 

Business Day” means a day other than Saturday or Sunday on which banks are open for business in Plano, Texas.

 

Closing” means the closing of the transactions provided for in this Agreement.

 

Closing Date” means the first date that all of the conditions precedent set forth in Section 4.01 are satisfied.

 

Collateral” means the property of Borrower and its Subsidiaries as described in and made, or intended to be made, subject to the Collateral Documents.

 

Collateral Agent” means the Trust, in its capacity as collateral agent under any of the Loan Documents, or any successor collateral agent.

 

 

Collateral Documents” means (a) the Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Production dated as of the Closing Date from Torchlight Hazel, LLC, as mortgagor, to the Collateral Agent, (b) the Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Production dated as of the Closing Date from Hudspeth Oil Corporation, as mortgagor, to the Collateral Agent, as acknowledged and agreed, as set forth in Section 7.21 only of said agreement, by McCabe Petroleum Corporation and Greg McCabe, in his individual capacity, (c) the Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Production dated as of the Closing Date from Torchlight Energy Resources, Inc., as mortgagor, to the Collateral Agent, (d) any letters in lieu of transfer orders in respect of the forgoing instruments and (e) any and all other security agreements, pledge agreements, mortgages, deeds of trust, financing statements, fixture filing financing statements, deposit account control agreements or any other security instruments entered into by Borrower or any of its Subsidiaries from time to time, in each forgoing case, as amended, amended and restated, supplemented or otherwise modified from time to time.

 

Change of Control” means an event or series of events by which: (any “person” or “group” (as used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) shall have acquired a greater than 50% beneficial ownership in Borrower’s Equity Interests; (b) Borrower disposes of all or substantially all of its assets, or (c) Borrower shall cease to, directly or indirectly, own and control one hundred percent (100%) of each class of the outstanding equity interests of each Subsidiary.

 

Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings analogous thereto.

 

Credit Exposure” means, as to any Lender at any time, the aggregate principal amount at such time of its outstanding Loans pursuant to all Amended and Restated Note(s) payable in favor of or otherwise owned by such Lender.

 

Debtor Relief Laws” means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect.

 

Default” means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would become an Event of Default.

 

Disposition” or “Dispose” means, except as it relates or pertains to the sale of any Equity Interest of the Borrower or as it relates or pertains to any transaction by or with Warwink Properties, LLC, which are specifically excluded herefrom, any single or series of transactions, agreements or arrangements involving any of the following, whether directly or indirectly: (a) any sale, farmout, assignment, transfer, license, lease or other disposition of all or any portion of any property or asset, or any rights and claims associated therewith (including any sale and leaseback); (b) any sale, farmout, assignment, transfer, or other disposition of all or any portion of any Equity Interest of any Person that directly or indirectly owns any property or asset; (c) any joint venture, partnership or similar business venture with any Person pursuant to which any property or asset is commercially exploited or otherwise included in such venture; or (d) any other transaction, agreement or arrangement pursuant to which access to or use of any property or asset is granted or otherwise provided, or from which any Restricted Payments, profits or proceeds related to or arising in connection with any property or asset are derived.

 

Disposition Conditions” means all of the following requirements with respect to any proposed Disposition: (a) all mandatory prepayments required pursuant to Section 2.05 have been paid in full; (b) none of the Borrower, any Subsidiary, or any Affiliate of Borrower or any Subsidiary may be a counterparty to such Disposition; (c) the Disposition may not be for less than fair market value and on commercially reasonable arm’s length terms; (d) no Default or Event of Default shall have occurred and be continuing or would result therefrom; and (e) true, correct, and complete copies of the Disposition Documents shall have been provided to the Collateral Agent no later than five (5) days prior to the Disposition, and the Collateral Agent shall have approved of the terms thereof, such approval not to be unreasonably withheld.

2

 

Disposition Documents” shall mean all material agreements and documents pursuant to which any Disposition shall be consummated, including any purchase agreement, shareholder agreement, operating agreement, partnership agreement, joint venture agreement, and all related material instruments, agreements, and documents executed in connection therewith, in each case, as amended, restated, supplemented, or otherwise modified from time to time.

 

Disqualified Equity” means any Equity Interest that, by its terms (or the terms of any security or other Equity Interests into which it is convertible or for which it is exchangeable), on or before 90 days after the Maturity Date of the Amended and Restated Notes: (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is redeemable at the option of the holder thereof, in whole or in part, (c) provides for scheduled payments of dividends in cash, or (d) is or becomes convertible into or exchangeable for Indebtedness or any other Equity Interests that would constitute Disqualified Equity.

 

Equity Interest” means, as to any Person, all shares of capital stock of (or other ownership interests in) such Person, all warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership interests in) such Person, all securities convertible into or exchangeable for shares of capital stock of (or other ownership interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all other ownership interests in such Person.

 

Existing Note(s)” means the 12% Senior Unsecured Promissory Note(s) of Borrower in favor of the Lenders. The Existing Note in favor of the Foundation is described in more detail on Schedule 1.

 

GAAP” means, subject to Section 1.02, United States generally accepted accounting principles as in effect as of the date of determination thereof.

 

Governmental Authority” means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

 

Hazel Property” has the meaning set forth in the Collateral Documents.

 

Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) all direct or contingent obligations of such Person arising under (i) letters of credit (including standby and commercial), bankers’ acceptances and bank guaranties and (ii) surety bonds, performance bonds and similar instruments issued or created by or for the account of such Person; (c) net obligations of such Person under any swap contract; (d) indebtedness secured by a Lien on property owned or being purchased by such Person; (e) the amount under any capitalized lease or synthetic lease obligation of any Person that would appear on its balance sheet prepared in accordance with GAAP; (f) all Disqualified Equity; and (g) all guarantees of any Person in respect of any of the foregoing.

3

 

Laws” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

 

Lender(s)” means the Foundation, the Trust, and and any other Person that shall have become a Lender pursuant to the terms hereof or pursuant to any other Loan Document.

 

Lien” means any mortgage, pledge, hypothecation, collateral assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as any of the foregoing).

 

Loan” means a loan by a Lender to the Borrower evidenced by an Amended and Restated Note.

 

Loan Documents” means, collectively, this Agreement, all Amended and Restated Notes, all Collateral Documents, and any other documents entered into from time to time in connection herewith and therewith, in each case, as amended, amended and restated, supplemented or otherwise modified from time to time.

 

Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect on, the operations, business, properties, liabilities (actual or contingent), or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole; or (b) a material adverse effect on (i) the ability of the Borrower or any Subsidiary to perform its Obligations, (ii) the legality, validity, binding effect or enforceability against the Borrower or any Subsidiary of any Loan Document to which it is a party or (iii) the rights, remedies and benefits available to, or conferred upon, the Collateral Agent or any Lender under any Loan Documents.

 

Maturity Date” means April 10, 2021.

 

Obligations” means all Amended and Restated Notes, all Loans, all advances to, debts, liabilities, including, without limitation, principal, interest, fees and indemnities, obligations, covenants and duties of, the Borrower and of the Subsidiaries arising under any Loan Document, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against the Borrower, any Subsidiary, or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.

 

Orogrande Property” has the meaning set forth in the Collateral Documents.

 

Permitted Liens” means:

 

(a)       Liens granted under a Collateral Document and securing the Obligations;

 

(b)       Liens existing on the date hereof and listed on Schedule 6.02;

 

(c)       Liens for Taxes not yet due or that are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;

4

 

(d)       easements, rights-of-way, restrictions and other similar encumbrances affecting real property and minor defects in the chain of title that are customarily accepted in the oil and gas financing industry that, in the aggregate, are not substantial in amount, and that do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person, and any zoning or similar law or right reserved to or vested in any Governmental Authority to control or regulate the use of any real property that does not materially interfere with the ordinary conduct of the business of the Borrower and its Subsidiaries;

 

(e)       leases, licenses, subleases or sublicenses granted to others in the ordinary course of business that do not (i) interfere in any material respect with the ordinary conduct of the business of the Borrower and its Subsidiaries, or (ii) secure any Indebtedness.

 

(f)       Liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, suppliers, laborers, construction, or similar Liens arising by operation of law in the ordinary course of business in respect of obligations that are not overdue by more than thirty (30) days or that are being contested in good faith by appropriate proceedings in an aggregate amount not to exceed $1,000,000; provided that such reserve as may be required by GAAP shall have been made therefor, provided further that even if such reserves are made and any such Liens relate to Collateral, such Liens could not be expected to materially impair the use of, or proceeds derived from, the Collateral;

 

(g)       Liens to operators and non-operators under joint operating agreements, unitization and pooling agreements and related orders arising in the ordinary course of the business of Borrower or any of its Subsidiaries to secure amounts owing, which amounts are not overdue by more than thirty (30) days or are being contested in good faith by appropriate proceedings; provided that such reserve as may be required by GAAP shall have been made therefor, provided further that even if such reserves are made and any such Liens relate to Collateral, such Liens could not be expected to materially impair the use of, or proceeds derived from, the Collateral; and

 

(h)       royalties, overriding royalties, net profits interests, production payments, reversionary interests, calls on production, preferential purchase rights and other burdens on or deductions from the proceeds of production, that do not secure Indebtedness for borrowed money and that are taken into account in computing the net revenue interests and working interests of Borrower or any of its Subsidiaries warranted in this Agreement or in any other Loan Document;

 

provided, that Liens described in clauses (b) through (h) above shall not constitute Permitted Liens upon the initiation of any foreclosure or judicial proceedings with regard to the property encumbered by such Liens and; provided further, no intention to subordinate the first priority Lien granted in favor of the Collateral Agent for the ratable benefit of the Lenders is hereby implied or expressed or is to be inferred by the permitted existence of such Permitted Liens.

 

Person” means any natural Person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

 

Pro Rata Share” means, with respect to any Lender, the percentage equal to such Lender’s share of the Loans, based on the then outstanding principal amounts of the Loans. The Foundation’s percentage as of the date of this Agreement is set forth on Schedule 1. The Trust’s percentage as of the date of this Agreement is sixty-eight percent (68%).

 

Related Parties” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors and representatives of such Person and of such Person’s Affiliates.

 

Required Lenders” means, at any time, Lenders having Credit Exposures representing more than 50% of the Credit Exposures of all Lenders.

5

 

Restricted Payment” means any repurchase, dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interest of any Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such Equity Interest, or on account of any return of capital to such Person’s shareholders, partners or members (or the equivalent Persons thereof).

 

SEC” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.

 

Solvent” means, as to any Person as of any date of determination, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person, (b) the present fair saleable value of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute an unreasonably small capital.

 

Subsidiary” of a Person means a corporation, partnership, limited liability company, association or joint venture or other business entity of which a majority of the Equity Interests having ordinary voting power for the election of directors or other governing body are at the time owned or the management of which is controlled, directly, or indirectly through one or more intermediaries, by such Person. Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Borrower, except for Warwink Properties, LLC, which is specifically excluded from the definition of Subsidiary hereof.

 

Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

 

Trust” means The David A. Straz, Jr. Irrevocable Trust dtd 11/11/1986, The Northern Trust Company and Christopher M. Straz, as Co-Trustees.

 

SECTION 1.02 Accounting Terms; Changes in GAAP.

 

(a)       Accounting Terms. Except as otherwise expressly provided herein, all accounting terms not otherwise defined herein shall be construed in conformity with GAAP. Financial statements and other information required to be delivered by the Borrower to the Lenders shall be prepared in accordance with GAAP as in effect at the time of such preparation.

 

(b)       Changes in GAAP. If the Borrower notifies the Collateral Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Collateral Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

6

 

ARTICLE II

 

AMENDMENT AND RESTATEMENT OF NOTES

 

SECTION 2.01 Amendment and Restatement of Notes.

 

(a)       Subject to the terms and conditions set forth herein, the Lender party hereto agrees to the amendment and restatement of the Existing Note(s) held by such Lender and the replacement thereof with the Amended and Restated Note as identified on Schedule 1. The Amended and Restated Note(s) issued to such Lender shall amend, restate, replace and supersede (but not cause a novation of) the Existing Note(s) held by such Lender. Concurrently with the Closing, the Borrower shall execute and deliver such Amended and Restated Note(s) to the Lender party hereto.

 

(b)       The terms and provisions of the Existing Note(s) held by the Lender party hereto shall be and hereby are amended, superseded and restated in their entirety by the terms and provisions of the Amended and Restated Note(s) issued to the Lender party hereto. This Agreement and the Amended and Restated Note(s) are not intended to and shall not constitute a novation, payment and reborrowing or termination of the obligations under the Existing Note(s). All advances made and obligations incurred under the Existing Note(s) held by the Lender party hereto that are outstanding on the Closing Date shall continue as advances and obligations under (and shall be governed by the terms of) this Agreement and the other Loan Documents in favor of or for the benefit of the Lender party hereto. Without limiting the foregoing, on the Closing Date, all obligations constituting “Obligations” owed to the Lender party hereto that are outstanding on the Closing Date shall continue as Obligations under this Agreement and such other Loan Documents.

 

SECTION 2.02 Accrued Interest; Fees. No later than twenty (20) days following the Closing Date, the Borrower shall pay (a) to the Lenders all past due interest that has accrued on the Existing Notes; and (b) to The David A. Straz, Jr. Irrevocable Trust dtd 11/11/1986, The Northern Trust Company and Christopher M. Straz, as Co-Trustees, an extension fee in the amount of One Hundred Seventy Thousand and No/100 Dollars ($170,000). If any of the payments required by this Section 2.02 is not paid on the required date, such nonpayment shall constitute an Event of Default hereunder automatically and without any further action required of any Lender.

 

SECTION 2.03 Loan Payments. Principal and interest on the unpaid principal amount of each Loan shall be paid by Borrower to Lenders in proportion to their respective Pro Rata Shares, and in accordance with the terms of the Amended and Restated Notes, at such interest rate and in such amounts, and on such dates as set forth in the Amended and Restated Notes. Notwithstanding the foregoing, the outstanding principal balance of all Loans shall be paid in full on the Maturity Date, also in proportion to the Lenders’ respective Pro Rata Shares. All payments of principal or interest shall be made by Borrower to the Lenders without setoff, recoupment or counterclaim and in immediately available funds at the office or account specified by the respective Lender.

 

SECTION 2.04 Voluntary Prepayments. Subject to compliance with Section 4 of the Amended and Restated Notes, Borrower may from time to time, on at least ten (10) Business Days’ written notice to Lenders prepay the Loans to the Lenders in accordance with their Pro Rata Shares in whole or in part. Such notice shall specify the date of prepayment and amount of the Loans to be prepaid. The application of such prepayments shall be allocated among such of the Lenders in proportion to their respective Pro Rata Shares. Any partial prepayment shall be subject to the terms of each Amended and Restated Note (including Sections 4 and 5 thereof).

7

 

SECTION 2.05 Mandatory Prepayments.

 

(a)            Borrower shall prepay the Loans to the Lenders in accordance with their Pro Rata Shares at the following times and in the following amounts:

 

(i)       upon any Disposition of less than 100% of Borrower’s right, title and interest (as determined at the time of the Disposition ) in and to the Orogrande Property or the Hazel Property, within three (3) Business Days of any such Disposition, a prepayment amount equal to 75% of the proceeds thereof (up to the outstanding amount due under the Amended and Restated Notes), unless such Disposition results in Borrower directly or indirectly owning less than a 45% working interest ( on an 8/8ths basis) in the Orogrande Property or the Hazel Property, in which case the prepayment amount shall equal 100% of such proceeds (up to the outstanding amount due under the Amended and Restated Notes);

 

(ii)      upon any Disposition of 100% of Borrower’s right, title and interest (as determined at the time of the Disposition ) in and to the Orogrande Property or the Hazel Property, or upon any other Disposition of any other Collateral, within three (3) Business Days of any such Disposition, a prepayment amount equal to 100% of the proceeds thereof (up to the outstanding amount due under the Amended and Restated Notes); and

 

(iii)     within three (3) Business Day of the receipt by Borrower or any Subsidiary of any proceeds from eminent domain or condemnation with respect to any Collateral, a prepayment amount equal to 75% of such proceeds thereof (up to the outstanding amount due under the Amended and Restated Notes).

 

Notwithstanding the foregoing, no Disposition may occur unless the requirements set forth in Section 2.06(b) and Section 6.04 are satisfied.

 

(b)          Borrower shall give written notice to Collateral Agent and Lenders at least one (1) Business Day prior to each mandatory prepayment. All mandatory prepayments of the Loans shall be allocated among such of the Lenders in proportion to their respective Pro Rata Shares.

 

SECTION 2.06 Collateral.

 

(a) Payment of the Loans shall be secured by the Collateral as provided in the Collateral Documents. The Borrower and each Subsidiary hereby authorizes the Collateral Agent to file all such Collateral Documents of public record in any applicable Texas counties and any necessary Uniform Commercial Code financing statements describing the Collateral in such form and in such jurisdictions where the Collateral Agent shall determine. The Borrower and each Subsidiary agree that they shall, from time to time at the request of the Collateral Agent, execute and deliver such documents and do such acts and things as the Collateral Agent may reasonably request in order to provide for or perfect or protect such Liens on the Collateral.

  

(b) Neither Borrower nor any Subsidiary may Dispose of any Collateral except in exchange for cash, unless otherwise permitted by the Required Lenders in their sole discretion. If the Required Lenders permit the Disposition of any Collateral in exchange for any Equity Interest, any such Equity Interest shall constitute Collateral and shall be encumbered by a first priority Lien in favor of the Collateral Agent for the benefit of the Lenders pursuant to the Collateral Documents.

  

(c) In connection with any Disposition of Collateral pursuant to which all Disposition Conditions have been satisfied, in the event any Obligations remain unpaid following application of all required payments pursuant to Section 2.05, the Collateral Agent will release from the Lien of the applicable Collateral Documents such portion of the applicable Collateral that has been Disposed.

8

 

SECTION 2.07 Subsidiary Guarantees.

 

(a)       Subsidiary Guarantees. Each Subsidiary hereby unconditionally and irrevocably guarantees the punctual payment, performance and observance when due, whether at stated maturity, by acceleration or otherwise, of all of the Obligations owed to the Lender party hereto, now or hereafter existing, whether for principal, interest (including, without limitation, all interest that accrues after the commencement of any insolvency, bankruptcy or reorganization of Borrower or any Subsidiary, whether or not constituting an allowed claim in such proceeding), fees, commissions, expense reimbursements, liquidated damages, indemnifications or otherwise arising under the Loan Documents in favor of or for the benefit of the Lender party hereto (such Obligations collectively, the “Guaranteed Obligations”), and agrees to pay any and all reasonable costs, fees and expenses (including reasonable counsel fees and expenses) incurred by Collateral Agent and the Lenders in enforcing any rights hereunder. Without limiting the generality of the foregoing, the Guaranteed Obligations shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by the Borrower or any Subsidiary to the Collateral Agent or the Lenders, but for the fact that they are unenforceable or not allowable due to the existence of an insolvency, bankruptcy or reorganization involving the Borrower or any of its Subsidiaries.

 

(b)       Obligations Absolute. Each Subsidiary guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement, the Notes and the other Loan Documents, regardless of any Law or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of Lender with respect thereto. The obligations of each Subsidiary under this Section 2.07 are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against each Subsidiary to enforce such obligations, irrespective of whether any action is brought against Borrower or any Subsidiary, or whether any such Person is joined in any such action or actions. The liability of each Subsidiary under this Section 2.07 constitutes a primary obligation, and not a contract of surety, and to the extent permitted by law, shall be irrevocable, absolute and unconditional irrespective of, and each Subsidiary hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, any or all of the following: (i) any lack of validity of any of the Loan Documents; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from the Loan Documents, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to Borrower or otherwise; (iii) any taking, exchange, release, subordination or non-perfection of any Collateral, or any taking, release or amendment or waiver of or consent to departure from any Guaranteed Obligations; (d) any change, restructuring or termination of the corporate, limited liability company or partnership structure or existence of Borrower or any Subsidiary; or (e) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by the Lender that might otherwise constitute a defense available to, or a discharge of, the Borrower or any of its Subsidiaries. The terms of this Section 2.07 shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by the Lenders or any other entity upon the insolvency, bankruptcy or reorganization of Borrower or any Subsidiary or otherwise (and whether as a result of any demand, settlement, litigation or otherwise), all as though such payment had not been made.

 

(c)       Continuing. Each Subsidiary hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and any requirement that the Lenders exhaust any right or take any action against Borrower, any other Subsidiary, any other Person, or any Collateral. Each Subsidiary acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated herein and that the waiver set forth in this Section 2.07 is knowingly made in contemplation of such benefits. Each Subsidiary hereby waives any right to revoke the guaranty provided in this Section 2.07, and acknowledges that this guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. The guaranty provided herein is a continuing guaranty and shall (i) remain in full force and effect until the later of the indefeasible cash or other payment in full of the Guaranteed Obligations, (ii) be binding upon each Subsidiary, its successors and assigns, and (ii) inure to the benefit of and be enforceable by the Lenders and their successors, transferees and assigns.

9

 

SECTION 2.08 Lenders’ Parity. Each Lender shall participate with respect to its Pro Rata Share in all payments made or received from Borrower and its Subsidiaries pursuant to this Article. To the extent either Lender receives more than its Pro Rata Share, that Lender shall promptly on demand from the other Lender, pay over the excess to the other Lender so that the Lenders have cumulatively received all payments under this Article in accordance with their respective Pro Rata Shares.

 

ARTICLE III

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower and each Subsidiary represents and warrants to the Lenders that:

 

SECTION 3.01 Existence; Qualification and Power . The Borrower and each Subsidiary (a) is duly organized or formed, validly existing and, as applicable, in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own or lease its assets and carry on its business and (ii) execute, deliver and perform its obligations under the Loan Documents to which it is a party, and (c) is duly qualified and is licensed and, as applicable, in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license. Each Subsidiary of Borrower is identified on Schedule 3.01. Each Subsidiary is wholly owned by Borrower. The common stock of the Borrower is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”).

 

SECTION 3.02 No Contravention. The execution, delivery and performance by the Borrower or any Subsidiary of each Loan Document to which it is party have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of its Organizational Documents, (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any material contractual obligation to which the Borrower or any Subsidiary is a party or affecting the Borrower, any Subsidiary or the properties of the Borrower or any Subsidiary or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which the Borrower or any Subsidiary or its property is subject or (c) violate any Law.

 

SECTION 3.03 Governmental Authorization; Other Consents. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Borrower or any Subsidiary of this Agreement or any other Loan Document, except for such approvals, consents, exemptions, authorizations, actions or notices that have been duly obtained, taken or made and in full force and effect (other than filings to be made with the SEC).

 

SECTION 3.04 Financial Statements; No Material Adverse Change.

 

(a)       Financial Statements. The Borrower’s financial statements set forth in its Form 10-K report filed with the SEC (the “Annual Report”) for the year ended December 31, 2019 (the “Financial Statements”) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and fairly present in all material respects the financial condition of the Borrower and its Subsidiaries as of the date thereof and their results of operations and cash flows for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein.

 

(b)       No Material Adverse Change. Since the date of the Financial Statements, there has been no event or circumstance that, either individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect.

10

 

SECTION 3.05 Litigation. There are no actions, suits, proceedings, claims, disputes or investigations pending or, to the knowledge of the Borrower or any Subsidiary, threatened, at Law, in equity, in arbitration or before any Governmental Authority, by or against the Borrower or any Subsidiary or against any of their properties or revenues that (a) either individually or in the aggregate could reasonably be expected to have a Material Adverse Effect or (b) purport to affect or pertain to this Agreement or any other Loan Document or any of the transactions contemplated hereby.

 

SECTION 3.06 No Material Adverse Effect; No Default. Neither the Borrower nor any Subsidiary thereof is in default under or with respect to any contractual obligation that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. No Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document.

 

SECTION 3.07 Taxes. The Borrower and its Subsidiaries have filed all federal, state and other tax returns and reports required to be filed, and have paid all federal, state and other taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except (a) Taxes that are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves are being maintained in accordance with GAAP or (b) to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

SECTION 3.08 Disclosure. The Borrower has disclosed to the Lenders, or disclosed in the SEC Documents (as defined below in Section 3.09), all agreements, instruments and corporate or other restrictions to which the Borrower or any of its Subsidiaries is subject, and all other matters known to it, that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The SEC Documents, the Annual Report and the reports, financial statements, certificates and other written information furnished by or on behalf of the Borrower to any Lender in connection herewith, taken as a whole, do not contain any material misstatement of fact or omit to state any material fact necessary to make the statements therein (when taken as a whole), in the light of the circumstances under which they were made, not misleading.

 

SECTION 3.09 Compliance with Laws. Each of the Borrower and its Subsidiaries is in compliance with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to so comply, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. Without limiting the foregoing, the Borrower has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act (collectively, the “SEC Documents”). As of their respective dates, the SEC Documents comply with the Exchange Act and all other requirements of Applicable Law.

 

SECTION 3.10 Margin Regulations. The Borrower is not engaged and will not engage, principally or as one of its important activities, in the business of purchasing or carrying Margin Stock, or extending credit for the purpose of purchasing or carrying Margin Stock, and no part of the proceeds of any Credit Extension hereunder will be used to buy or carry any Margin Stock. Following the application of the proceeds of each Borrowing or drawing under each Letter of Credit, not more than 25% of the value of the assets (either of the Borrower only or of the Borrower and its Subsidiaries on a consolidated basis) will be Margin Stock.

 

SECTION 3.11 Investment Company Act. Neither the Borrower nor any of its Subsidiaries is an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940.

11

 

SECTION 3.12 Sanctions; Anti-Corruption.

 

(a)       None of the Borrower, any of its Subsidiaries or, to the knowledge of the Borrower, any director, officer, employee or agent of the Borrower or any of its Subsidiaries is an individual or entity (“person”) that is, or is owned or controlled by persons that are: (i) the subject of any sanctions administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of State (collectively, “Sanctions”), or (ii) located, organized or resident in a country or territory that is, or whose government is, the subject of Sanctions.

 

(b)       The Borrower, its Subsidiaries and their respective directors, officers and employees and, to the knowledge of the Borrower, the agents of the Borrower and its Subsidiaries, are in compliance with all applicable Sanctions and with the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”) and any other applicable anti-corruption law, in all material respects. The Borrower and its Subsidiaries have instituted and maintain policies and procedures designed to ensure continued compliance with applicable Sanctions, the FCPA and any other applicable anti-corruption laws.

 

SECTION 3.13 Solvency. The Borrower and each Subsidiary is Solvent.

 

SECTION 3.14 Liens. Neither the Borrower nor any Subsidiary has any Liens on any of their respective assets or properties other than Permitted Liens.

 

ARTICLE IV

 

CONDITIONS

 

SECTION 4.01 Closing Date. The obligation of the Lender party hereto is subject to the satisfaction of the following conditions (and, in the case of each document specified in this Section to be received by such Lender, such document shall be in form and substance satisfactory to each Lender):

 

(a)       Executed Counterparts. The Lender shall have received from each party hereto a counterpart of this Agreement, each Amended and Restated Note, and each other Loan Document, signed on behalf of such party (or written evidence satisfactory to the Lender (which may include telecopy transmission of a signed signature page to this Agreement) that such party has signed a counterpart of this Agreement).

 

(b)       Certificates. The Lender shall have received such customary certificates of resolutions or other action, incumbency certificates and/or other certificates of responsible officers of the Borrower and each Subsidiary as the Lender may require evidencing the identity, authority and capacity of each responsible officer thereof authorized to act in connection with the Loan Documents.

 

(c)       Corporate Documents. The Lender shall have received such other documents and certificates (including organizational documents and good standing certificates) as the Lender may reasonably request relating to the organization, existence and good standing of the Borrower and each Subsidiary, and any other legal matters relating to the Borrower, any Subsidiary, the Loan Documents or the transactions contemplated thereby.

 

(d)       Officer’s Certificate. The Lender shall have received a certificate, dated the Closing Date and signed by a responsible officer of the Borrower and each Subsidiary, confirming satisfaction of the conditions set forth in this Section and compliance with the conditions set forth in this Agreement.

12

 

(e)       Other Documents. The Lender shall have received such other documents as the Lender may reasonably request.

 

(f)       Representations and Warranties. The representations and warranties of the Borrower and each Subsidiary set forth in this Agreement and in any other Loan Document shall be true and correct in all respects.

 

(g)       No Default. No Default shall have occurred and be continuing.

 

For purposes of determining satisfaction of the conditions specified in this Section, the Lender party hereto shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender party hereto unless the Borrower shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.

 

ARTICLE V

 

AFFIRMATIVE COVENANTS

 

Until all Obligations shall have been paid in full, the Borrower and each Subsidiary covenants and agrees with the Lender party hereto that:

 

SECTION 5.01 Financial Statements. The Borrower will ensure that the following financial statements are filed with the SEC, or if at any time the Borrower is no longer subject to SEC filing obligations the Borrower will deliver the following to each Lender:

 

(a)       as soon as available, and in any event no later than the date required to be filed with the SEC (including permitted extensions), a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, audited and accompanied by a report and opinion of independent public accountants of nationally recognized standing, which report and opinion shall be prepared in accordance with generally accepted auditing standards to the effect that such consolidated financial statements present fairly in all material respects the financial condition, results of operations, shareholders’ equity and cash flows of the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; and

 

(b)       as soon as available, and in any event no later than the date required to be filed with the SEC (including permitted extensions), a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of each of the first three fiscal quarters of each fiscal year of the Borrower, the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal quarter and for the portion of the Borrower’s fiscal year then ended, in each case setting forth in comparative form, as applicable, the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, certified by a financial officer of the Borrower as fairly presenting in all material respects the financial condition, results of operations, shareholders’ equity and cash flows of the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject only to normal year-end audit adjustments and the absence of notes.

13

 

SECTION 5.02 Certificates; Other Information. The Borrower will deliver to each Lender:

 

(a)       concurrently with the delivery of the financial statements referred to in Sections 5.01(a) and (b), a duly completed certificate signed by a responsible officer of the Borrower certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto;

 

(b)       unless filed with the SEC and publicly available at the SEC’s website, promptly after the same are publicly available, copies of each annual report, proxy or financial statement or other report or communication sent to the shareholders of the Borrower, and copies of all annual, regular, periodic and special reports and registration statements that the Borrower or any Subsidiary may file or be required to file with the SEC or any Governmental Authority succeeding to any or all of the functions of the SEC, or with any national securities exchange, and not otherwise required to be delivered pursuant hereto;

 

(c)       promptly after the furnishing thereof, copies of any material request or notice received by the Borrower or any Subsidiary, or any statement or report furnished by the Borrower or any Subsidiary to any holder of debt securities of the Borrower or any Subsidiary, pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished pursuant hereto;

 

(d)       promptly after receipt thereof by the Borrower or any Subsidiary, copies of each notice or other correspondence received from the SEC concerning any investigation or possible investigation or other inquiry by such agency regarding financial or other operational results of the Borrower or any Subsidiary thereof;

 

(e)       promptly following request therefor, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors (or the audit committee of the board of directors) of the Borrower by independent accountants in connection with the accounts or books of the Borrower or any Subsidiary, or any audit of any of them as any Lender may from time to time reasonably request; and

 

(f)       promptly following any request therefor, such other information regarding the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the Borrower or any Subsidiary, or compliance with the terms of the Loan Documents, as Lender may from time to time reasonably request.

 

SECTION 5.03 Notices. The Borrower will promptly notify each Lender of:

 

(a)       the occurrence of any Default;

 

(b)       the filing or commencement of any action, suit, investigation or proceeding (including any thereof by or before any arbitrator or Governmental Authority) against or affecting the Borrower, any Subsidiary, or any Affiliate thereof, that could reasonably be expected to have a Material Adverse Effect;

 

(c)       any material change in accounting or financial reporting practices by the Borrower or any Subsidiary; and

 

(d)       any matter or development that has had or could reasonably be expected to have a Material Adverse Effect.

 

Each notice delivered under this Section shall be accompanied by a statement of an officer of the Borrower setting forth the details of the occurrence requiring such notice and stating what action the Borrower has taken and proposes to take with respect thereto.

14

 

SECTION 5.04 Preservation of Existence, Etc. The Borrower will, and will cause each of its Subsidiaries to, (a) preserve, renew and maintain in full force and effect its legal existence and good standing under the Laws of the jurisdiction of its organization; (b) take all reasonable action to maintain all rights, licenses, permits, privileges and franchises necessary or desirable in the normal conduct of its business, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (c) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.05 Maintenance of Properties The Borrower will, and will cause each of its Subsidiaries to, (a) maintain, preserve and protect all of its properties and equipment necessary in the operation of its business in good working order and condition (ordinary wear and tear excepted) and (b) make all necessary repairs thereto and renewals and replacements thereof, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.06 Payment of Obligations The Borrower will, and will cause each of its Subsidiaries to, pay, discharge or otherwise satisfy as the same shall become due and payable, all of its obligations and liabilities, including Tax liabilities, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with GAAP are being maintained by the Borrower or such Subsidiary, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.07 Compliance with Laws. The Borrower will, and will cause each of its Subsidiaries to, comply with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its business or property, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.08 Books and Records. The Borrower will, and will cause each of its Subsidiaries to, maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Borrower or such Subsidiary, as the case may be.

 

SECTION 5.09 Sanctions; Anti-Corruption Laws. The Borrower will maintain in effect policies and procedures designed to promote compliance by the Borrower, its Subsidiaries, and their respective directors, officers, employees, and agents with applicable Sanctions and with the FCPA and any other applicable anti-corruption laws.

15

 

ARTICLE VI

 

NEGATIVE COVENANTS

 

Until all Obligations have been paid in full, the Borrower and each Subsidiary covenants and agrees with the Lender party hereto that:

 

SECTION 6.01 Indebtedness. The Borrower will not, nor will it permit any Subsidiary to, create, incur, assume or suffer to exist any Indebtedness, unless all of the following conditions are satisfied: (a) such Indebtedness is not secured by any Lien on any Collateral; (b) other than any existing Indebtedness owed by the Borrower that is described on Schedule 6.01 (provided that no individual note indebtedness in excess of $1,000,000, as reflected on Schedule 6.01, will be prepaid in cash), such Indebtedness does not have a maturity date on or before 90 days after the Maturity Date of the Amended and Restated Notes; and (c) such Indebtedness is incurred with a person that is not an Affiliate of Borrower or any Subsidiary, is negotiated on an arm’s length basis with commercially reasonable terms, and the proceeds of which are used to finance the acquisition, exploration, drilling or improvements of the Borrower or the Subsidiaries’ oil and gas properties or for their other customary general business purposes.

 

SECTION 6.02 Liens. The Borrower will not, nor will it permit any Subsidiary to, create, incur, assume or suffer to exist any Lien upon any of the Collateral, other than Permitted Liens.

 

SECTION 6.03 Fundamental Changes. The Borrower will not, nor will it permit any Subsidiary to, merge, dissolve, liquidate, consolidate with or into another Person, or Dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except in a transaction in which the Notes are fully paid.

 

SECTION 6.04 Dispositions. The Borrower will not, and will not permit any Subsidiary to, make or enter into any transaction involving: (a) any Disposition of or with respect to any Collateral, or enter into any agreement with respect thereto, unless all Disposition Conditions are satisfied; or (b) any other Disposition of any assets or property unless all Disposition Conditions (other than the condition in Subsection (a) of such defined term) are satisfied.

 

SECTION 6.05 Restricted Payments; Compensation. The Borrower will not, and will not permit any Subsidiary to, declare or make, directly or indirectly: (a) any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except that each Subsidiary may make Restricted Payments to the Borrower, so long as no Default shall have occurred and be continuing at the time thereof or would result therefrom; or (b) any compensation of any officer or employee except in the ordinary course of business and consistent with customary past practices (and in any case not any of the past-due compensation outstanding on the Closing Date, other than the conversion of any past due compensation into shares of common stock of the Borrower).

 

SECTION 6.06 Transactions with Affiliates. Other than any existing transaction between the Borrower and an Affiliate, which is described on Schedule 6.06, the Borrower will not, and will not permit any Subsidiary to, enter into any transaction of any kind with any Affiliate of the Borrower of any Subsidiary, whether or not in the ordinary course of business; provided that the foregoing restriction shall not apply to Restricted Payments and compensation permitted by Section 6.05.

 

SECTION 6.07 Changes in Nature of Business . The Borrower will not, and will not permit any Subsidiary to, engage to any material extent in any business other than those businesses conducted by the Borrower and its Subsidiaries on the date hereof or any business reasonably related or incidental thereto or representing a reasonable expansion thereof.

 

SECTION 6.08 Sanctions; Anti-Corruption Use of Proceeds. The Borrower will not, directly or indirectly, use the proceeds of the Loans, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person, (i) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of the FCPA or any other applicable anti-corruption law, or (ii) (A) to fund any activities or business of or with any Person, or in any country or territory, that, at the time of such funding, is, or whose government is, the subject of Sanctions, or (B) in any other manner that would result in a violation of Sanctions by any Person.

16

 

ARTICLE VII

 

EVENTS OF DEFAULT

 

SECTION 7.01 Events of Default. If any of the following events (each, an “Event of Default”) shall occur:

 

(a)       the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

 

(b)       the Borrower shall fail to pay any interest on any Loan, or any fee or any other amount (other than an amount referred to in clause (a) of this Section) payable under this Agreement or under any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of ten (10) days;

 

(c)       any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries in or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof, or any waiver hereunder or thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof, or any waiver hereunder or thereunder, shall prove to have been incorrect in any material respect (or, in the case of any such representation or warranty under this Agreement or any other Loan Document already qualified by materiality, such representation or warranty shall prove to have been incorrect) when made or deemed made;

 

(d)       the Borrower or any of its Subsidiaries shall fail to observe or perform any covenant, condition or agreement contained in Section 2.02, Section 5.03 or 5.04, or in Article VI;

 

(e)       the Borrower or any of its Subsidiaries shall fail to observe or perform any covenant, condition or agreement contained in this Agreement or any other Loan Document (other than those specified in clause (a), (b) or (d) of this Section) and such failure shall continue unremedied for a period of 30 or more days after notice thereof by the Collateral Agent to the Borrower;

 

(f)       (i) the Borrower or any Subsidiary shall fail to make any payment when due in respect of any Indebtedness (other than Indebtedness under the Loan Documents); or (ii) the Borrower or any Subsidiary shall fail to observe or perform any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which default or other event is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such Indebtedness to cause such Indebtedness to become due or to be repurchased, or redeemed prior to its stated maturity;

 

(g)       an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any of its Subsidiaries or its debts, or of a substantial part of its assets, under any Debtor Relief Law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any of its Subsidiaries or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for a period of 60 or more days or an order or decree approving or ordering any of the foregoing shall be entered;

17

 

(h)       the Borrower or any of its Subsidiaries shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Debtor Relief Law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (g) of this Section, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any of its Subsidiaries or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) take any action for the purpose of effecting any of the foregoing, or (vii) become unable, admit in writing its inability or fail generally to pay its debts as they become due;

 

(i)       there is entered against the Borrower or any Subsidiary (i) a final judgment or order for the payment of money in an aggregate amount (as to all such judgments and orders) exceeding $300,000, or (ii) a non-monetary final judgment or order that, either individually or in the aggregate, has or could reasonably be expected to have a Material Adverse Effect;

 

(j)       a Change of Control shall occur;

 

(k)       any material provision of any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all Obligations, ceases to be in full force and effect; or the Borrower or any other Person contests in writing the validity or enforceability of any provision of any Loan Document; or the Borrower or any of its Subsidiaries denies in writing that it has any or further liability or obligation under any Loan Document, or purports in writing to revoke, terminate or rescind any Loan Document;

 

(l)       the title to any material part of the Collateral shall become the subject matter of litigation before any Governmental Authority or arbitrator that has resulted in or could reasonably be expected to result in a Material Adverse Effect with respect to Borrower or of its Subsidiaries; or

 

(m)       (i) the Collateral Agent fails to have a perfected Lien in any portion of the Collateral (other than Collateral released in accordance with the Loan Documents), or (ii) any Collateral Document shall at any time and for any reason cease to create the Lien on the Collateral purported to be subject to such instrument in accordance with the terms of such instrument (except to the extent that (x) any loss of perfection or priority is permitted by the terms of the Loan Document or (y) any such loss of validity, perfection or priority is the result of any failure by the Collateral Agent to take any action necessary to secure the validity, perfection or priority of the Liens; or

 

(n)       The occurrence of a Material Adverse Effect, as determined by Lender in good faith;

 

then, and in every such event, the Loans shall be in Default and the Lender party hereto may, by notice to the Borrower, take any or all of the following actions, at the same or different times:

 

(i)       declare the Loans owed to such Lender then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans owed to such Lender so declared to be due and payable, together with accrued interest thereon and all fees and other Obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and

18

 

(ii)       exercise all rights and remedies available to the Lender party hereto under the Loan Documents in favor of or for the benefit of the Lender party hereto, and under Applicable Law;

 

provided that, in case of any event with respect to the Borrower described in clause (g) or (h) of this Section, the principal of the Loans owed to such Lender then outstanding, together with accrued interest thereon and all fees and other Obligations accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. In addition, at any time thereafter, the Collateral Agent may enforce the rights of the Lenders under the Collateral Documents.

 

SECTION 7.02 Application of Payments. Notwithstanding anything herein to the contrary, following the occurrence and during the continuance of an Event of Default, and notice thereof to the Collateral Agent by the Borrower or the Required Lenders, all payments received on account of the Obligations shall be applied as follows:

 

(i)       first, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (other than principal) payable to the Lenders arising under the Loan Documents, pro rata to the Lenders based on each Lender’s Pro Rata Share thereof, until paid in full;

 

(ii)      second, to payment of that portion of the Obligations constituting accrued unpaid interest on the Loans, pro rata to the Lenders based on each Lender’s Pro Rata Share thereof, until paid in full;

 

(iii)      third, to payment of that portion of the Obligations constituting outstanding principal of the Loans, pro rata to the Lenders based on each Lender’s Pro Rata Share thereof, until paid in full;

 

(iv)      fourth, to payment of all other Obligations owing to each Lender, pro rata to the Lenders based on each Lender’s Pro Rata Share thereof, until paid in full; and

 

(v)      finally, the balance, if any, after all Obligations have been indefeasibly paid in full, to the Borrower or as otherwise required by Law.

 

ARTICLE VIII

 

AGENCY

 

SECTION 8.01 Appointment and Authority. The Lender party hereto hereby irrevocably appoints The David A. Straz, Jr. Irrevocable Trust dtd 11/11/1986, The Northern Trust Company and Christopher M. Straz, as Co-Trustees, to act on its behalf as the Collateral Agent hereunder and under the other Loan Documents and authorizes the Collateral Agent to take such actions on its behalf and to exercise such powers as are delegated to the Collateral Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Collateral Agent and the Lenders and the Collateral Agent may fully rely on these provisions as a third party beneficiary. The Borrower shall not have rights as a third-party beneficiary of any of such provisions. Use of the term “agent” herein or in any other Loan Documents with reference to the Collateral Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any Applicable Law. Instead such term is used as a matter of lending market custom, and is intended to create or reflect only an administrative relationship between Lenders and the Collateral Agent.

19

 

SECTION 8.02 Rights as a Lender. The Person serving as the Collateral Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Collateral Agent, and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Collateral Agent hereunder in its individual capacity. Such Person and its Affiliates may generally engage in any kind of business with the Borrower or any Affiliate thereof as if such Person were not the Collateral Agent hereunder and without any duty to account therefor to the Lenders.

 

SECTION 8.03 Exculpatory Provisions.

 

(a)         The Collateral Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents, and its duties hereunder shall be administrative in nature. Without limiting the foregoing, the Collateral Agent shall not, by virtue of the agency relationship created hereunder:

 

(i)       be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

 

(ii)       have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Collateral Agent is required to exercise as directed in writing by the Required Lenders; provided that the Collateral Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Collateral Agent to liability or that is contrary to any Loan Document or Applicable Law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law; and

 

(iii)      except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Collateral Agent or any of its Affiliates in any capacity.

 

(b)         The Collateral Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Collateral Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 7.01 and 9.02), or (ii) in the absence of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction by final and nonappealable judgment. The Collateral Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Collateral Agent in writing by the Borrower or a Lender.

 

(c)         The Collateral Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, or (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document.

 

SECTION 8.04 Reliance by Collateral Agent. The Collateral Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Collateral Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

20

 

SECTION 8.05 Delegation of Duties. The Collateral Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Collateral Agent. The Collateral Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties.

 

SECTION 8.06 Resignation of Collateral Agent.

 

(a)       The Collateral Agent may at any time give notice of its resignation to the Lenders and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Collateral Agent gives notice of its resignation (or such earlier day as shall be agreed by the Required Lenders) (the “Resignation Effective Date”), then the retiring Collateral Agent may (but shall not be obligated to), on behalf of the Lenders, appoint a successor Collateral Agent meeting the qualifications set forth above. Whether or not a successor has been appointed, such resignation shall become effective in accordance with such notice on the Resignation Effective Date.

 

(b)       With effect from the Resignation Effective Date: (i) the retiring Collateral Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents and (ii) except for any indemnity payments owed to the retiring Collateral Agent, all payments, communications and determinations provided to be made by, to or through the Collateral Agent shall instead be made by or to each Lender directly, until such time, if any, as the Required Lenders appoint a successor Collateral Agent as provided for above. Upon the acceptance of a successor’s appointment as Collateral Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring Collateral Agent (other than any rights to indemnity payments owed to the retiring Collateral Agent), and the retiring Collateral Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents. After the retiring Collateral Agent’s resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Collateral Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Collateral Agent was acting as Collateral Agent.

 

SECTION 8.07 Non-Reliance on Agents and Other Lenders. The Lender party hereto acknowledges that it has, independently and without reliance upon the Collateral Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. The Lender party hereto also acknowledges that it will, independently and without reliance upon the Collateral Agent or any other Lender, and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.

 

SECTION 8.08 Collateral Agent May File Proofs of Claim. In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relative to the Borrower or any Subsidiary, the Collateral Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Collateral Agent shall have made any demand on the Borrower) shall be entitled and empowered (but not obligated) by intervention in such proceeding or otherwise:

21

 

(a)       to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Collateral Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Collateral Agent and their respective agents and counsel and all other amounts due the Lenders and the Collateral Agent under Section 9.03) allowed in such judicial proceeding; and

 

(b)       to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

 

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by the Lender party hereto to make such payments to the Collateral Agent and, in the event that the Collateral Agent shall consent to the making of such payments directly to the Lenders to pay to the Collateral Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Collateral Agent and its agents and counsel, and any other amounts due the Collateral Agent under Section 9.03.

 

ARTICLE IX

 

MISCELLANEOUS

 

SECTION 9.01 Notices; Public Information.(a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by email as follows:

 

(i)       if to the Borrower, to the following address: 5700 Plano Parkway, Suite 3600, Plano, Texas 75093; Attention of John Brda (Telephone No. 314-920-0890; Email: john@torchlightenergy.com);

 

(ii)      if to the Collateral Agent, to the following address: The Northern Trust Company, 1515 Ringling Blvd., Suite 1100, Sarasota, Florida 34236; Attention: Thomas M. Lara (Telephone No.(941) 329-2624; Email: tl1@ntrs.com);

 

(iii)     with a copy to the following address: Hill Ward Henderson, 101 E. Kennedy Blvd., Suite 3700, Tampa, Florida; Attention: David S. Felman (Telephone No. 813-227-8483; Email: david.felman@hwhlaw.com);

 

(iv)     if to the Lender party hereto, to it at its address (or email address) set forth in the Amended and Restated Note held by the Lender party hereto or such other address as the Lender party hereto may designate.

 

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received. Notices delivered through electronic communications, to the extent provided in Section 9.06(b) below, shall be effective as provided in said Section 9.06(b).

22

 

SECTION 9.02 Waivers; Amendments.

 

(a)       No Waiver; Remedies Cumulative; Enforcement. The execution of this Agreement and the new Loan Documents shall not constitute a waiver of any Default or Event of Default in the Existing Note(s) or any other Loan Document existing on the date hereof, other than the waiver by the Lender of the payment of interest, when due, on April 1, 2020, nor shall it eliminate any right which any Lender may otherwise have to exercise any remedies by virtue of any Default or Event of Default. No failure or delay by the Collateral Agent or any Lender in exercising any right, remedy, power or privilege hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege, or any abandonment or discontinuance of steps to enforce such a right remedy, power or privilege, preclude any other or further exercise thereof or the exercise of any other right remedy, power or privilege. The rights, remedies, powers and privileges of the Collateral Agent and the Lender party hereto and under the Loan Documents are cumulative and are not exclusive of any rights, remedies, powers or privileges that any such Person would otherwise have.

 

Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Collateral Documents against the Borrower and the Subsidiaries shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, the Collateral Agent in accordance with Section 7.01 for the benefit of all the Lenders; provided that the foregoing shall not prohibit (i) the Collateral Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Collateral Agent) hereunder and under the other Loan Documents, or (ii) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to the Borrower under any Debtor Relief Law; provided, further, that if at any time there is no Person acting as Collateral Agent hereunder and under the other Loan Documents, then (x) the Required Lenders shall have the rights otherwise provided to the Collateral Agent pursuant to Section 7.01 and (y) in addition to the matters set forth in clause (ii) of the preceding proviso and subject to the terms of Article II hereof and Section 7.01, in such case any Lender may, with the consent of the Required Lenders, enforce any rights or remedies available to it and as authorized by the Required Lenders.

 

(b)       Amendments, etc. Except as otherwise expressly set forth in this Agreement, no amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower therefrom, shall be effective unless in writing executed by the Borrower and the Required Lenders, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no such amendment, waiver or consent shall:

 

(i)       extend or increase any Loan commitment of any Lender without the written consent of such Lender;

 

(ii)       reduce the principal of, or rate of interest specified herein on, any Loan, or any fees or other amounts payable hereunder or under any other Loan Document, without the written consent of each Lender directly and adversely affected thereby;

 

(iii)       postpone any date scheduled for any payment of principal of, or interest on, any Loan, or any fees or other amounts payable hereunder or under any other Loan Document, or reduce the amount of, waive or excuse any such payment, without the written consent of each Lender directly and adversely affected thereby;

 

(iv)       change Section 2.04, Section 2.05, or Section 7.01 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender directly and adversely affected thereby;

23

 

(v)       waive any condition set forth in Section 4.01 without the written consent of each Lender; or

 

(vi)       change any provision of this Section or the percentage in the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender;

 

provided, further, that no such amendment, waiver or consent shall amend, modify or otherwise affect the rights or duties hereunder or under any other Loan Document of the Collateral Agent, unless in writing executed by the Collateral Agent, in addition to the Borrower and the Lenders required above.

 

Notwithstanding anything in this Section to the contrary, if the Collateral Agent and the Borrower shall have jointly identified an obvious error or any error or omission of a technical nature, in each case, in any provision of the Loan Documents, then the Collateral Agent and the Borrower shall be permitted to amend such provision, and, in each case, such amendment shall become effective without any further action or consent of any other party to any Loan Document if the same is not objected to in writing by the Required Lenders to the Collateral Agent within ten Business Days following receipt of notice thereof.

 

SECTION 9.03 Expenses; Indemnity; Waiver.

 

(a)       Costs and Expenses. The Borrower and each of its Subsidiaries shall pay all out-of-pocket expenses (collectively, the “Enforcement Expenses”) incurred by the Collateral Agent and any Lender (including the fees, charges and disbursements of any counsel for the Collateral Agent and any Lender) in connection with the enforcement or protection of its rights (i) in connection with this Agreement and the other Loan Documents, including its rights under this Section, or (ii) in connection with the Loans, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans. In the absence of payment by the Borrower such Enforcement Expenses incurred by the Collateral Agent, each Lender shall reimburse the Collateral Agent for its Pro Rata Share of the Enforcement Expenses. Notwithstanding the preceding, all parties are responsible for their own costs and expenses with respect to the negotiation and creation of the Loan Documents.

 

(b)       Indemnification by the Borrower. THE BORROWER AND EACH OF ITS SUBSIDIARIES SHALL INDEMNIFY THE COLLATERAL AGENT, EACH LENDER, AND EACH RELATED PARTY OF ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN “INDEMNITEE”) AGAINST, AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATED EXPENSES (INCLUDING THE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE) INCURRED BY ANY INDEMNITEE OR ASSERTED AGAINST ANY INDEMNITEE BY ANY PERSON (INCLUDING THE BORROWER AND EACH OF ITS SUBSIDIARIES) ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (I) THE EXECUTION OR DELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE PARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER OR THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, (II) ANY LOAN OR THE USE OR PROPOSED USE OF THE PROCEEDS THEREFROM, (III) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY, WHETHER BROUGHT BY A THIRD PARTY OR BY THE BORROWER OR ANY OF ITS SUBSIDIARIES, AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO; PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES (X) ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE, (Y) RESULT FROM A CLAIM BROUGHT BY THE BORROWER OR ANY OF ITS SUBSIDIARIES AGAINST AN INDEMNITEE FOR BREACH IN BAD FAITH OF SUCH INDEMNITEE’S OBLIGATIONS HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT, IF THE BORROWER OR ANY OF ITS SUBSIDIARIES HAS OBTAINED A FINAL AND NONAPPEALABLE JUDGMENT IN ITS FAVOR ON SUCH CLAIM AS DETERMINED BY A COURT OF COMPETENT JURISDICTION OR (Z) RESULT FROM A CLAIM NOT INVOLVING AN ACT OR OMISSION OF THE BORROWER OR ANY OF ITS SUBSIDIARIES AND THAT IS BROUGHT BY AN INDEMNITEE AGAINST ANOTHER INDEMNITEE (OTHER THAN AGAINST THE ARRANGER OR THE COLLATERAL AGENT IN THEIR CAPACITIES AS SUCH). Paragraph (b) of this Section shall not apply with respect to Taxes other than any Taxes that represent losses, claims, damages, etc. arising from any non-Tax claim.

24

 

(c)       Estoppel and Release. Each of the Borrower and the Subsidiaries hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim, claim, or objection in favor of such party as against the Collateral Agent or any Lender with respect to the Existing Note(s) or any other aspect of the transactions contemplated thereby, or alternatively, that any such right of offset, defense, counterclaim, claim, or objection is hereby expressly waived. In connection with the foregoing, and in consideration of the Lenders’ agreement to accept the Amended and Restated Notes and to enter into this Agreement, each of the Borrower and the Subsidiaries for itself and all of its respective heirs, personal representatives, predecessors, successors, and assigns (the “Releasors”), hereby jointly and severally releases, remises, and forever discharges the Collateral Agent and each Lender, and each of their Subsidiaries, Affiliates, Related Parties, successors and assigns (the “Releasees”) from any and all rights, claims, demands, actions, causes of action, suits, proceedings, agreements, contracts, judgments, damages, debts, duties, liens, offsets, liabilities, or obligations, of any kind or character, including without limitation such claims and defenses as fraud, mistake, duress, and usury, whether in law or in equity, known or unknown, choate or inchoate, (collectively, the “Claims”) which any Releasor it has had, now has, or hereafter may have, arising under or in any manner relating to, whether directly or indirectly, Existing Notes or any other aspect of the transactions contemplated thereby, from the beginning of time until the date hereof. It is the express intent of Releasors and Releasees that the release and discharge set forth in this Subsection be construed as broadly as possible in favor of Releasees so as to foreclose forever the assertion by any of the Releasors of any Claims against any of the Releasees.

 

(d)       Waiver of Appraisement, Valuation, Stay. In consideration of the Lender party hereto’s agreement to accept the Amended and Restated Notes and to enter into this Agreement, each of the Borrower and the Subsidiaries agree that neither the Borrower nor any Subsidiary nor anyone claiming through or under the Borrower or any Subsidiary will set up, claim, or seek to take advantage of any moratorium, reinstatement, forbearance, appraisement, valuation, stay, cash collateral, extension, homestead, exemption, or redemption laws now or hereafter in force, in order to prevent or hinder the enforcement or foreclosure of any Collateral Documents, the absolute sale of the Collateral encumbered thereby, or the delivery of possession thereof immediately after such sale to the purchaser at such sale. Each of the Borrower and the Subsidiaries for themselves and all who may at any time claim through or under them, hereby waive to the full extent that they may lawfully do so, the benefit of all such laws, and any and all right to have the assets subject to the lien of the Collateral Documents marshaled upon any foreclosure or sale.

 

(e)       Bankruptcy. In the event the Borrower or any Subsidiary files a petition for relief under any chapter of the United States Bankruptcy Code, the Lenders shall be entitled to, and the Borrower and each Subsidiary hereby consents to immediate relief from the automatic stay imposed by the Bankruptcy Code in order that the Lenders may take any and all actions necessary to enforce any rights the Lenders may have under the Loan Documents, including but not limited to the commencement or continuation of the foreclosure of any security documents or otherwise compel the specific performance of any Obligations under the Loan Documents.

25

 

(f)         Waiver of Consequential Damages, Etc. To the fullest extent permitted by Applicable Law, each of the Borrower and its Subsidiaries shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan, or the use of the proceeds thereof. No Indemnitee referred to in paragraph (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby.

 

(g)         Survival. Each party’s obligations under this Section shall survive the termination of the Loan Documents and payment of the obligations hereunder.

 

SECTION 9.04 Successors and Assigns.

 

(a)         Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Collateral Agent and each Lender, and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of paragraph (b) of this Section, or (ii) by way of pledge or assignment of a security interest subject to the restrictions of paragraph (c) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, and to the extent expressly contemplated hereby, the Collateral Agent and the Related Parties of each of the Collateral Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

 

(b)         Assignments by Lenders. Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of the Loans at the time owing to it); provided that any such assignment shall be subject to the following conditions:

 

(i)       Assignment and Assumption. The parties to each assignment shall execute and deliver to the Collateral Agent an assignment and assumption reasonably satisfactory to the Collateral Agent (an “Assignment and Assumption”).

 

(ii)       No Assignment to Borrower. No such assignment shall be made to the Borrower or any of the Borrower’s Affiliates or Subsidiaries.

 

(c)         Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

26

 

SECTION 9.05 Survival . All covenants, agreements, representations and warranties made by the Borrower herein and in any Loan Document or other documents delivered in connection herewith or therewith or pursuant hereto or thereto shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery hereof and thereof, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Collateral Agent or any Lender may have had notice or knowledge of any Default, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied. The provisions of Sections 9.03 and 9.12 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the payment in full of the Obligations, or the termination of this Agreement or any provision hereof.

 

SECTION 9.06 Counterparts; Integration; Effectiveness; Electronic Execution.

 

(a)       Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents, and any separate letter agreements with respect to fees payable to the Collateral Agent, constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Collateral Agent and when the Collateral Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or in electronic (e.g., “pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Agreement.

 

(b)       Electronic Execution of Assignments. The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any Applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act, or any other similar state laws based on the Uniform Electronic Transactions Act.

 

SECTION 9.07 Severability. If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

 

SECTION 9.08 Governing Law; Jurisdiction; Etc.

 

(a)       Governing Law. This Agreement and the other Loan Documents and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement or any other Loan Document (except, as to any other Loan Document, as expressly set forth therein) and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the law of the State of Texas.

27

 

(b)       Jurisdiction. The Borrower irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise, against the Collateral Agent, any Lender, or any Related Party of the foregoing in any way relating to this Agreement or any other Loan Document or the transactions relating hereto or thereto, in any forum other than the courts of the State of Texas sitting in Collin County, Texas, and of the United States District Court in Collin County, Texas, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such Texas state court or, to the fullest extent permitted by Applicable Law, in such federal court.  Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Agreement or in any other Loan Document shall affect any right that the Collateral Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against the Borrower or its properties in the courts of any jurisdiction.

 

(c)       Waiver of Venue. The Borrower irrevocably and unconditionally waives, to the fullest extent permitted by Applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

 

(d)       Service of Process. Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by Applicable Law.

 

SECTION 9.09 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

 

SECTION 9.10 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

 

SECTION 9.11 PATRIOT Act. The Lender party hereto subject to the PATRIOT Act hereby notifies the Borrower that, pursuant to the requirements of the PATRIOT Act, it may be required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the PATRIOT Act.

28

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

 

  BORROWER:
     
  TORCHLIGHT ENERGY RESOURCES, INC.,
  a Nevada corporation
     
  By /s/ John Brda
    John Brda
    President
     
  SUBSIDIARIES:
     
  HUDSPETH OIL CORPORATION,
  a Texas corporation
     
  By /s/ John Brda
    Name: John Brda
    Title:  President
     
  TORCHLIGHT ENERGY, INC.,
  a Texas corporation
     
  By /s/ John Brda
    Name:  John Brda
    Title:  President
     
  TORCHLIGHT HAZEL, LLC,
  a Texas Limited Liability Company
     
  By /s/ John Brda
    Name:  John Brda
    Title:  President
     
  LENDER:
     
  DAVID A. STRAZ, JR. FOUNDATION,
    as a Lender
     
  By /s/ Catherine Lowry Straz
  Name: Catherine Lowry Straz
    Title: Trustee
     
  By /s/ Keebler J. Straz
    Name: Keebler J. Straz
    Title: Trustee
     
     

  

Signature Page - Foundation Note Amendment Agreement

 

SCHEDULE 1

 

Lender Existing Note(s) Amended and Restated Note(s) Pro Rata Share
DAVID A. STRAZ, JR. FOUNDATION 12% 2020 Senior Unsecured Note dated April 10, 2017, as amended, in the amount of $4,000,000 Amended and Restated 12% 2020 Senior Secured Promissory Note dated April 24, 2020, in the amount of $4,000,000 32%

 

 

EXHIBIT A

 

FORM OF AMENDED AND RESTATED NOTE

 

 

 

Exhibit 10.19

 

AMENDMENT TO FOUNDATION NOTE AMENDMENT AGREEMENT

 

THIS AMENDMENT TO FOUNDATION NOTE AMENDMENT AGREEMENT (“Amendment”) dated as of May __, 2020, is to become affixed to, modify and become a part of that certain Foundation Note Amendment Agreement (the “Note Amendment Agreement”) dated as of April 24, 2020 by and among TORCHLIGHT ENERGY RESOURCES, INC., a Nevada corporation (the “Borrower”), each of the Subsidiaries of the Borrower identified on the signature pages hereto, and the DAVID A. STRAZ, JR. FOUNDATION (the “Foundation,” and a “Lender”).

 

WHEREAS, the parties to the Note Amendment Agreement desire to amend the Note Amendment Agreement; and

 

NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements and the respective representations and warranties herein contained, and on the terms and subject to the conditions herein set forth, the parties hereto, intending to be legally bound, hereby agree as follows:

 

1.       The Note Amendment Agreement is amended and modified by amending and restating Section 2.02 of the Note Amendment Agreement as follows:

 

“SECTION 2.02 Accrued Interest; Fees. No later than the earlier of (A) May 25, 2020 or (B) one Business Day after the closing of the Borrower’s contemplated offer and sale of common stock under an underwritten public offering through a shelf takedown using it’s Form S-3 registration statement (No. 333-220181); the Borrower shall pay (a) to the Lenders all past due interest that has accrued on the Existing Notes; and (b) to The David A. Straz, Jr. Irrevocable Trust dtd 11/11/1986, The Northern Trust Company and Christopher M. Straz, as Co-Trustees, an extension fee in the amount of One Hundred Seventy Thousand and No/100 Dollars ($170,000). If any of the payments required by this Section 2.02 is not paid on the required date, such nonpayment shall constitute an Event of Default hereunder automatically and without any further action required of any Lender.”

 

2.       All terms and conditions of the Note Amendment Agreement shall, except as amended and modified by this Amendment, will remain in full force and effect and all rights, duties, obligations and responsibilities of the parties thereto shall be governed and determined by the Note Amendment Agreement as the same has been amended and modified by this Amendment.

 

3.       THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE STATE OF TEXAS.

 

4.       This Amendment shall be of no force and effect until receipt and execution of it by the Borrower, the Subsidiaries identified on the signature pages hereto, and the Lender. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which shall be deemed one instrument, by facsimile signature or by e-mail delivery of a “.pdf” format data file signature of any of the parties, each of which shall be deemed an original for all purposes.

 

[Signature page follows.]

Amendment to Foundation Note Amendment Agreement – Page 1

 

IN WITNESS WHEREOF, each of the undersigned has executed and delivered this Amendment to the Foundation Note Amendment Agreement as of the date first written above.

 

  BORROWER:
     
  TORCHLIGHT ENERGY RESOURCES, INC.,
  a Nevada corporation
     
  By /s/ John Brda 
    John Brda
    President
     
  SUBSIDIARIES:
     
  HUDSPETH OIL CORPORATION,
  a Texas corporation
     
  By /s/ John Brda 
    Name: John Brda
    Title:  President
     
  TORCHLIGHT ENERGY, INC.,
  a Texas corporation
     
  By /s/ John Brda 
    Name:  John Brda
    Title:  President
     
  TORCHLIGHT HAZEL, LLC,
  a Texas Limited Liability Company
     
  By /s/ John Brda 
    Name:  John Brda
    Title:  President
     
  LENDER:
     
  DAVID A. STRAZ, JR. FOUNDATION,
    as a Lender
     
  By /s/ Catherine Lowry Straz 
  Name: Catherine Lowry Straz 
    Title: Trustee
     
  By /s/ Keebler J. Straz
    Name: Keebler J. Straz
    Title: Trustee
     

  

 

Amendment to Foundation Note Amendment Agreement – Page 2

 

 

Exhibit 10.20

 

EXECUTION VERSION

 

TRUST NOTE AMENDMENT AGREEMENT

 

THIS TRUST NOTE AMENDMENT AGREEMENT (the “Agreement”) is made and entered into as of April 24, 2020, by and among TORCHLIGHT ENERGY RESOURCES, INC., a Nevada corporation (the “Borrower”), each of the Subsidiaries of the Borrower identified on the signature pages hereto, and THE DAVID A. STRAZ, JR. IRREVOCABLE TRUST DTD 11/11/1986, THE NORTHERN TRUST COMPANY and CHRISTOPHER M. STRAZ, as Co-Trustees (the “Trust”, and a “Lender”).

 

The Borrower has requested that the Lenders agree to the amendment and restatement of the Existing Notes, and the Lenders are willing to do so on the terms and conditions set forth herein. In consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

SECTION 1.01 Defined Terms. As used in this Agreement and the other Loan Documents, as applicable, the following terms have the meanings specified below:

 

Affiliate” means, with respect to a specified Person, another Person that directly or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

 

Amended and Restated Note(s)” or “Note(s)” means the Amended and Restated 12% 2020 Senior Secured Promissory Notes of Borrower in favor of the Lenders dated as of the date hereof, each of which shall be substantially in the form of Exhibit A. The Amended and Restated Notes in favor of the Trust are described in more detail on Schedule 1.

 

Applicable Law” means, as to any Person, all applicable Laws binding upon such Person or to which such a Person is subject.

 

Business Day” means a day other than Saturday or Sunday on which banks are open for business in Plano, Texas.

 

Closing” means the closing of the transactions provided for in this Agreement.

 

Closing Date” means the first date that all of the conditions precedent set forth in Section 4.01 are satisfied.

 

Collateral” means the property of Borrower and its Subsidiaries as described in and made, or intended to be made, subject to the Collateral Documents.

 

Collateral Agent” means the Trust, in its capacity as collateral agent under any of the Loan Documents, or any successor collateral agent.

 

 

Collateral Documents” means (a) the Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Production dated as of the Closing Date from Torchlight Hazel, LLC, as mortgagor, to the Collateral Agent, (b) the Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Production dated as of the Closing Date from Hudspeth Oil Corporation, as mortgagor, to the Collateral Agent, as acknowledged and agreed, as set forth in Section 7.21 only of said agreement, by McCabe Petroleum Corporation and Greg McCabe, in his individual capacity, (c) the Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Production dated as of the Closing Date from Torchlight Energy Resources, Inc., as mortgagor, to the Collateral Agent, (d) any letters in lieu of transfer orders in respect of the forgoing instruments and (e) any and all other security agreements, pledge agreements, mortgages, deeds of trust, financing statements, fixture filing financing statements, deposit account control agreements or any other security instruments entered into by Borrower or any of its Subsidiaries from time to time, in each forgoing case, as amended, amended and restated, supplemented or otherwise modified from time to time.

 

Change of Control” means an event or series of events by which: (any “person” or “group” (as used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) shall have acquired a greater than 50% beneficial ownership in Borrower’s Equity Interests; (b) Borrower disposes of all or substantially all of its assets, or (c) Borrower shall cease to, directly or indirectly, own and control one hundred percent (100%) of each class of the outstanding equity interests of each Subsidiary.

 

Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings analogous thereto.

 

Credit Exposure” means, as to any Lender at any time, the aggregate principal amount at such time of its outstanding Loans pursuant to all Amended and Restated Note(s) payable in favor of or otherwise owned by such Lender.

 

Debtor Relief Laws” means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect.

 

Default” means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would become an Event of Default.

 

Disposition” or “Dispose” means, except as it relates or pertains to the sale of any Equity Interest of the Borrower or as it relates or pertains to any transaction by or with Warwink Properties, LLC, which are specifically excluded herefrom, any single or series of transactions, agreements or arrangements involving any of the following, whether directly or indirectly: (a) any sale, farmout, assignment, transfer, license, lease or other disposition of all or any portion of any property or asset, or any rights and claims associated therewith (including any sale and leaseback); (b) any sale, farmout, assignment, transfer, or other disposition of all or any portion of any Equity Interest of any Person that directly or indirectly owns any property or asset; (c) any joint venture, partnership or similar business venture with any Person pursuant to which any property or asset is commercially exploited or otherwise included in such venture; or (d) any other transaction, agreement or arrangement pursuant to which access to or use of any property or asset is granted or otherwise provided, or from which any Restricted Payments, profits or proceeds related to or arising in connection with any property or asset are derived.

 

Disposition Conditions” means all of the following requirements with respect to any proposed Disposition: (a) all mandatory prepayments required pursuant to Section 2.05 have been paid in full; (b) none of the Borrower, any Subsidiary, or any Affiliate of Borrower or any Subsidiary may be a counterparty to such Disposition; (c) the Disposition may not be for less than fair market value and on commercially reasonable arm’s length terms; (d) no Default or Event of Default shall have occurred and be continuing or would result therefrom; and (e) true, correct, and complete copies of the Disposition Documents shall have been provided to the Collateral Agent no later than five (5) days prior to the Disposition, and the Collateral Agent shall have approved of the terms thereof, such approval not to be unreasonably withheld.

2

 

Disposition Documents” shall mean all material agreements and documents pursuant to which any Disposition shall be consummated, including any purchase agreement, shareholder agreement, operating agreement, partnership agreement, joint venture agreement, and all related material instruments, agreements, and documents executed in connection therewith, in each case, as amended, restated, supplemented, or otherwise modified from time to time.

 

Disqualified Equity” means any Equity Interest that, by its terms (or the terms of any security or other Equity Interests into which it is convertible or for which it is exchangeable), on or before 90 days after the Maturity Date of the Amended and Restated Notes: (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is redeemable at the option of the holder thereof, in whole or in part, (c) provides for scheduled payments of dividends in cash, or (d) is or becomes convertible into or exchangeable for Indebtedness or any other Equity Interests that would constitute Disqualified Equity.

 

Equity Interest” means, as to any Person, all shares of capital stock of (or other ownership interests in) such Person, all warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership interests in) such Person, all securities convertible into or exchangeable for shares of capital stock of (or other ownership interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all other ownership interests in such Person.

 

Existing Note(s)” means the 12% Senior Unsecured Promissory Note(s) of Borrower in favor of the Lenders. The Existing Notes in favor of the Trust are described in more detail on Schedule 1.

 

Foundation” means the David A. Straz, Jr. Foundation.

 

GAAP” means, subject to Section 1.02, United States generally accepted accounting principles as in effect as of the date of determination thereof.

 

Governmental Authority” means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

 

Hazel Property” has the meaning set forth in the Collateral Documents.

 

Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) all direct or contingent obligations of such Person arising under (i) letters of credit (including standby and commercial), bankers’ acceptances and bank guaranties and (ii) surety bonds, performance bonds and similar instruments issued or created by or for the account of such Person; (c) net obligations of such Person under any swap contract; (d) indebtedness secured by a Lien on property owned or being purchased by such Person; (e) the amount under any capitalized lease or synthetic lease obligation of any Person that would appear on its balance sheet prepared in accordance with GAAP; (f) all Disqualified Equity; and (g) all guarantees of any Person in respect of any of the foregoing.

3

 

Laws” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

 

Lender(s)” means the Foundation, the Trust, and and any other Person that shall have become a Lender pursuant to the terms hereof or pursuant to any other Loan Document.

 

Lien” means any mortgage, pledge, hypothecation, collateral assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as any of the foregoing).

 

Loan” means a loan by a Lender to the Borrower evidenced by an Amended and Restated Note.

 

Loan Documents” means, collectively, this Agreement, all Amended and Restated Notes, all Collateral Documents, and any other documents entered into from time to time in connection herewith and therewith, in each case, as amended, amended and restated, supplemented or otherwise modified from time to time.

 

Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect on, the operations, business, properties, liabilities (actual or contingent), or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole; or (b) a material adverse effect on (i) the ability of the Borrower or any Subsidiary to perform its Obligations, (ii) the legality, validity, binding effect or enforceability against the Borrower or any Subsidiary of any Loan Document to which it is a party or (iii) the rights, remedies and benefits available to, or conferred upon, the Collateral Agent or any Lender under any Loan Documents.

 

Maturity Date” means April 10, 2021.

 

Obligations” means all Amended and Restated Notes, all Loans, all advances to, debts, liabilities, including, without limitation, principal, interest, fees and indemnities, obligations, covenants and duties of, the Borrower and of the Subsidiaries arising under any Loan Document, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against the Borrower, any Subsidiary, or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.

 

Orogrande Property” has the meaning set forth in the Collateral Documents.

 

Permitted Liens” means:

 

(a)       Liens granted under a Collateral Document and securing the Obligations;

 

(b)       Liens existing on the date hereof and listed on Schedule 6.02;

 

(c)       Liens for Taxes not yet due or that are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;

4

 

(d)       easements, rights-of-way, restrictions and other similar encumbrances affecting real property and minor defects in the chain of title that are customarily accepted in the oil and gas financing industry that, in the aggregate, are not substantial in amount, and that do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person, and any zoning or similar law or right reserved to or vested in any Governmental Authority to control or regulate the use of any real property that does not materially interfere with the ordinary conduct of the business of the Borrower and its Subsidiaries;

 

(e)       leases, licenses, subleases or sublicenses granted to others in the ordinary course of business that do not (i) interfere in any material respect with the ordinary conduct of the business of the Borrower and its Subsidiaries, or (ii) secure any Indebtedness.

 

(f)       Liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, suppliers, laborers, construction, or similar Liens arising by operation of law in the ordinary course of business in respect of obligations that are not overdue by more than thirty (30) days or that are being contested in good faith by appropriate proceedings in an aggregate amount not to exceed $1,000,000; provided that such reserve as may be required by GAAP shall have been made therefor, provided further that even if such reserves are made and any such Liens relate to Collateral, such Liens could not be expected to materially impair the use of, or proceeds derived from, the Collateral;

 

(g)       Liens to operators and non-operators under joint operating agreements, unitization and pooling agreements and related orders arising in the ordinary course of the business of Borrower or any of its Subsidiaries to secure amounts owing, which amounts are not overdue by more than thirty (30) days or are being contested in good faith by appropriate proceedings; provided that such reserve as may be required by GAAP shall have been made therefor, provided further that even if such reserves are made and any such Liens relate to Collateral, such Liens could not be expected to materially impair the use of, or proceeds derived from, the Collateral; and

 

(h)       royalties, overriding royalties, net profits interests, production payments, reversionary interests, calls on production, preferential purchase rights and other burdens on or deductions from the proceeds of production, that do not secure Indebtedness for borrowed money and that are taken into account in computing the net revenue interests and working interests of Borrower or any of its Subsidiaries warranted in this Agreement or in any other Loan Document;

 

provided, that Liens described in clauses (b) through (h) above shall not constitute Permitted Liens upon the initiation of any foreclosure or judicial proceedings with regard to the property encumbered by such Liens and; provided further, no intention to subordinate the first priority Lien granted in favor of the Collateral Agent for the ratable benefit of the Lenders is hereby implied or expressed or is to be inferred by the permitted existence of such Permitted Liens.

 

Person” means any natural Person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

 

Pro Rata Share” means, with respect to any Lender, the percentage equal to such Lender’s share of the Loans, based on the then outstanding principal amounts of the Loans. The Trust’s percentage as of the date of this Agreement is set forth on Schedule 1. The Foundation’s percentage as of the date of this Agreement is thirty-two percent (32%).

 

Related Parties” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors and representatives of such Person and of such Person’s Affiliates.

5

 

Required Lenders” means, at any time, Lenders having Credit Exposures representing more than 50% of the Credit Exposures of all Lenders.

 

Restricted Payment” means any repurchase, dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interest of any Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such Equity Interest, or on account of any return of capital to such Person’s shareholders, partners or members (or the equivalent Persons thereof).

 

SEC” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.

 

Solvent” means, as to any Person as of any date of determination, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person, (b) the present fair saleable value of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in a business or a transaction, and is not about to engage in a business or a transaction, for which such Person’s property would constitute an unreasonably small capital.

 

Subsidiary” of a Person means a corporation, partnership, limited liability company, association or joint venture or other business entity of which a majority of the Equity Interests having ordinary voting power for the election of directors or other governing body are at the time owned or the management of which is controlled, directly, or indirectly through one or more intermediaries, by such Person. Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Borrower, except for Warwink Properties, LLC, which is specifically excluded from the definition of Subsidiary hereof.

 

Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

 

Trust” means The David A. Straz, Jr. Irrevocable Trust dtd 11/11/1986, The Northern Trust Company and Christopher M. Straz, as Co-Trustees.

 

SECTION 1.02 Accounting Terms; Changes in GAAP.

 

(a)       Accounting Terms. Except as otherwise expressly provided herein, all accounting terms not otherwise defined herein shall be construed in conformity with GAAP. Financial statements and other information required to be delivered by the Borrower to the Lenders shall be prepared in accordance with GAAP as in effect at the time of such preparation.

 

(b)       Changes in GAAP. If the Borrower notifies the Collateral Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Collateral Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

6

 

ARTICLE II

 

AMENDMENT AND RESTATEMENT OF NOTES

 

SECTION 2.01 Amendment and Restatement of Notes.

 

(a)       Subject to the terms and conditions set forth herein, the Lender party hereto agrees to the amendment and restatement of the Existing Note(s) held by such Lender and the replacement thereof with the Amended and Restated Note as identified on Schedule 1. The Amended and Restated Note(s) issued to such Lender shall amend, restate, replace and supersede (but not cause a novation of) the Existing Note(s) held by such Lender. Concurrently with the Closing, the Borrower shall execute and deliver such Amended and Restated Note(s) to the Lender party hereto.

 

(b)       The terms and provisions of the Existing Note(s) held by the Lender party hereto shall be and hereby are amended, superseded and restated in their entirety by the terms and provisions of the Amended and Restated Note(s) issued to the Lender party hereto. This Agreement and the Amended and Restated Note(s) are not intended to and shall not constitute a novation, payment and reborrowing or termination of the obligations under the Existing Note(s). All advances made and obligations incurred under the Existing Note(s) held by the Lender party hereto that are outstanding on the Closing Date shall continue as advances and obligations under (and shall be governed by the terms of) this Agreement and the other Loan Documents in favor of or for the benefit of the Lender party hereto. Without limiting the foregoing, on the Closing Date, all obligations constituting “Obligations” owed to the Lender party hereto that are outstanding on the Closing Date shall continue as Obligations under this Agreement and such other Loan Documents.

 

SECTION 2.02 Accrued Interest; Fees. No later than twenty (20) days following the Closing Date, the Borrower shall pay (a) to the Lenders all past due interest that has accrued on the Existing Notes; and (b) to The David A. Straz, Jr. Irrevocable Trust dtd 11/11/1986, The Northern Trust Company and Christopher M. Straz, as Co-Trustees, an extension fee in the amount of One Hundred Seventy Thousand and No/100 Dollars ($170,000). If any of the payments required by this Section 2.02 is not paid on the required date, such nonpayment shall constitute an Event of Default hereunder automatically and without any further action required of any Lender.

 

SECTION 2.03 Loan Payments. Principal and interest on the unpaid principal amount of each Loan shall be paid by Borrower to Lenders in proportion to their respective Pro Rata Shares, and in accordance with the terms of the Amended and Restated Notes, at such interest rate and in such amounts, and on such dates as set forth in the Amended and Restated Notes. Notwithstanding the foregoing, the outstanding principal balance of all Loans shall be paid in full on the Maturity Date, also in proportion to the Lenders’ respective Pro Rata Shares.. All payments of principal or interest shall be made by Borrower to the Lenders without setoff, recoupment or counterclaim and in immediately available funds at the office or account specified by the respective Lender.

 

SECTION 2.04 Voluntary Prepayments. Subject to compliance with Section 4 of the Amended and Restated Notes, Borrower may from time to time, on at least ten (10) Business Days’ written notice to Lenders prepay the Loans to the Lenders in accordance with their Pro Rata Shares in whole or in part. Such notice shall specify the date of prepayment and amount of the Loans to be prepaid. The application of such prepayments shall be allocated among such of the Lenders in proportion to their respective Pro Rata Shares. Any partial prepayment shall be subject to the terms of each Amended and Restated Note (including Sections 4 and 5 thereof).

7

 

SECTION 2.05 Mandatory Prepayments

 

(a)         Borrower shall prepay the Loans to the Lenders in accordance with their Pro Rata Shares. at the following times and in the following amounts:

 

(i)       upon any Disposition of less than 100% of Borrower’s right, title and interest (as determined at the time of the Disposition ) in and to the Orogrande Property or the Hazel Property, within three (3) Business Days of any such Disposition, a prepayment amount equal to 75% of the proceeds thereof (up to the outstanding amount due under the Amended and Restated Notes), unless such Disposition results in Borrower directly or indirectly owning less than a 45% working interest ( on an 8/8ths basis) in the Orogrande Property or the Hazel Property, in which case the prepayment amount shall equal 100% of such proceeds (up to the outstanding amount due under the Amended and Restated Notes);

 

(ii)      upon any Disposition of 100% of Borrower’s right, title and interest (as determined at the time of the Disposition ) in and to the Orogrande Property or the Hazel Property, or upon any other Disposition of any other Collateral, within three (3) Business Days of any such Disposition, a prepayment amount equal to 100% of the proceeds thereof (up to the outstanding amount due under the Amended and Restated Notes); and

 

(iii)      within three (3) Business Day of the receipt by Borrower or any Subsidiary of any proceeds from eminent domain or condemnation with respect to any Collateral, a prepayment amount equal to 75% of such proceeds thereof (up to the outstanding amount due under the Amended and Restated Notes).

 

Notwithstanding the foregoing, no Disposition may occur unless the requirements set forth in Section 2.06(b) and Section 6.04 are satisfied.

 

(b)       Borrower shall give written notice to Collateral Agent and Lenders at least one (1) Business Day prior to each mandatory prepayment. All mandatory prepayments of the Loans shall be allocated among such of the Lenders in proportion to their respective Pro Rata Shares.

 

SECTION 2.06 Collateral.

 

(a)       Payment of the Loans shall be secured by the Collateral as provided in the Collateral Documents. The Borrower and each Subsidiary hereby authorizes the Collateral Agent to file all such Collateral Documents of public record in any applicable Texas counties and any necessary Uniform Commercial Code financing statements describing the Collateral in such form and in such jurisdictions where the Collateral Agent shall determine. The Borrower and each Subsidiary agree that they shall, from time to time at the request of the Collateral Agent, execute and deliver such documents and do such acts and things as the Collateral Agent may reasonably request in order to provide for or perfect or protect such Liens on the Collateral.

 

(b)       Neither Borrower nor any Subsidiary may Dispose of any Collateral except in exchange for cash, unless otherwise permitted by the Required Lenders in their sole discretion. If the Required Lenders permit the Disposition of any Collateral in exchange for any Equity Interest, any such Equity Interest shall constitute Collateral and shall be encumbered by a first priority Lien in favor of the Collateral Agent for the benefit of the Lenders pursuant to the Collateral Documents.

 

(c)       In connection with any Disposition of Collateral pursuant to which all Disposition Conditions have been satisfied, in the event any Obligations remain unpaid following application of all required payments pursuant to Section 2.05, the Collateral Agent will release from the Lien of the applicable Collateral Documents such portion of the applicable Collateral that has been Disposed.

8

 

SECTION 2.07 Subsidiary Guarantees.

 

(a)       Subsidiary Guarantees. Each Subsidiary hereby unconditionally and irrevocably guarantees the punctual payment, performance and observance when due, whether at stated maturity, by acceleration or otherwise, of all of the Obligations owed to the Lender party hereto, now or hereafter existing, whether for principal, interest (including, without limitation, all interest that accrues after the commencement of any insolvency, bankruptcy or reorganization of Borrower or any Subsidiary, whether or not constituting an allowed claim in such proceeding), fees, commissions, expense reimbursements, liquidated damages, indemnifications or otherwise arising under the Loan Documents in favor of or for the benefit of the Lender party hereto (such Obligations collectively, the “Guaranteed Obligations”), and agrees to pay any and all reasonable costs, fees and expenses (including reasonable counsel fees and expenses) incurred by Collateral Agent and the Lenders in enforcing any rights hereunder. Without limiting the generality of the foregoing, the Guaranteed Obligations shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by the Borrower or any Subsidiary to the Collateral Agent or the Lenders, but for the fact that they are unenforceable or not allowable due to the existence of an insolvency, bankruptcy or reorganization involving the Borrower or any of its Subsidiaries.

 

(b)       Obligations Absolute. Each Subsidiary guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement, the Notes and the other Loan Documents, regardless of any Law or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of Lender with respect thereto. The obligations of each Subsidiary under this Section 2.07 are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against each Subsidiary to enforce such obligations, irrespective of whether any action is brought against Borrower or any Subsidiary, or whether any such Person is joined in any such action or actions. The liability of each Subsidiary under this Section 2.07 constitutes a primary obligation, and not a contract of surety, and to the extent permitted by law, shall be irrevocable, absolute and unconditional irrespective of, and each Subsidiary hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, any or all of the following: (i) any lack of validity of any of the Loan Documents; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from the Loan Documents, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to Borrower or otherwise; (iii) any taking, exchange, release, subordination or non-perfection of any Collateral, or any taking, release or amendment or waiver of or consent to departure from any Guaranteed Obligations; (d) any change, restructuring or termination of the corporate, limited liability company or partnership structure or existence of Borrower or any Subsidiary; or (e) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by the Lender that might otherwise constitute a defense available to, or a discharge of, the Borrower or any of its Subsidiaries. The terms of this Section 2.07 shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by the Lenders or any other entity upon the insolvency, bankruptcy or reorganization of Borrower or any Subsidiary or otherwise (and whether as a result of any demand, settlement, litigation or otherwise), all as though such payment had not been made.

 

(c)       Continuing. Each Subsidiary hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and any requirement that the Lenders exhaust any right or take any action against Borrower, any other Subsidiary, any other Person, or any Collateral. Each Subsidiary acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated herein and that the waiver set forth in this Section 2.07 is knowingly made in contemplation of such benefits. Each Subsidiary hereby waives any right to revoke the guaranty provided in this Section 2.07, and acknowledges that this guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future. The guaranty provided herein is a continuing guaranty and shall (i) remain in full force and effect until the later of the indefeasible cash or other payment in full of the Guaranteed Obligations, (ii) be binding upon each Subsidiary, its successors and assigns, and (ii) inure to the benefit of and be enforceable by the Lenders and their successors, transferees and assigns.

9

 

SECTION 2.08 Lenders’ Parity.  Each Lender shall participate with respect to its Pro Rata Share in all payments made or received from Borrower and its Subsidiaries pursuant to this Article.  To the extent either Lender receives more than its Pro Rata Share, that Lender shall promptly on demand from the other Lender, pay over the excess to the other Lender so that the Lenders have cumulatively received all payments under this Article in accordance with their respective Pro Rata Shares.

 

ARTICLE III

 

REPRESENTATIONS AND WARRANTIES

 

The Borrower and each Subsidiary represents and warrants to the Lenders that:

 

SECTION 3.01 Existence; Qualification and Power . The Borrower and each Subsidiary (a) is duly organized or formed, validly existing and, as applicable, in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own or lease its assets and carry on its business and (ii) execute, deliver and perform its obligations under the Loan Documents to which it is a party, and (c) is duly qualified and is licensed and, as applicable, in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license. Each Subsidiary of Borrower is identified on Schedule 3.01. Each Subsidiary is wholly owned by Borrower. The common stock of the Borrower is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”).

 

SECTION 3.02 No Contravention. The execution, delivery and performance by the Borrower or any Subsidiary of each Loan Document to which it is party have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of its Organizational Documents, (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any material contractual obligation to which the Borrower or any Subsidiary is a party or affecting the Borrower, any Subsidiary or the properties of the Borrower or any Subsidiary or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which the Borrower or any Subsidiary or its property is subject or (c) violate any Law.

 

SECTION 3.03 Governmental Authorization; Other Consents. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Borrower or any Subsidiary of this Agreement or any other Loan Document, except for such approvals, consents, exemptions, authorizations, actions or notices that have been duly obtained, taken or made and in full force and effect (other than filings to be made with the SEC).

 

SECTION 3.04 Financial Statements; No Material Adverse Change.

 

(a)       Financial Statements. The Borrower’s financial statements set forth in its Form 10-K report filed with the SEC (the “Annual Report”) for the year ended December 31, 2019 (the “Financial Statements”) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and fairly present in all material respects the financial condition of the Borrower and its Subsidiaries as of the date thereof and their results of operations and cash flows for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein.

 

(b)       No Material Adverse Change. Since the date of the Financial Statements, there has been no event or circumstance that, either individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect.

10

 

SECTION 3.05 Litigation. There are no actions, suits, proceedings, claims, disputes or investigations pending or, to the knowledge of the Borrower or any Subsidiary, threatened, at Law, in equity, in arbitration or before any Governmental Authority, by or against the Borrower or any Subsidiary or against any of their properties or revenues that (a) either individually or in the aggregate could reasonably be expected to have a Material Adverse Effect or (b) purport to affect or pertain to this Agreement or any other Loan Document or any of the transactions contemplated hereby.

 

SECTION 3.06 No Material Adverse Effect; No Default. Neither the Borrower nor any Subsidiary thereof is in default under or with respect to any contractual obligation that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. No Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document.

 

SECTION 3.07 Taxes. The Borrower and its Subsidiaries have filed all federal, state and other tax returns and reports required to be filed, and have paid all federal, state and other taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except (a) Taxes that are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves are being maintained in accordance with GAAP or (b) to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

SECTION 3.08 Disclosure. The Borrower has disclosed to the Lenders, or disclosed in the SEC Documents (as defined below in Section 3.09), all agreements, instruments and corporate or other restrictions to which the Borrower or any of its Subsidiaries is subject, and all other matters known to it, that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The SEC Documents, the Annual Report and the reports, financial statements, certificates and other written information furnished by or on behalf of the Borrower to any Lender in connection herewith, taken as a whole, do not contain any material misstatement of fact or omit to state any material fact necessary to make the statements therein (when taken as a whole), in the light of the circumstances under which they were made, not misleading.

 

SECTION 3.09 Compliance with Laws. Each of the Borrower and its Subsidiaries is in compliance with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to so comply, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. Without limiting the foregoing, the Borrower has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act (collectively, the “SEC Documents”). As of their respective dates, the SEC Documents comply with the Exchange Act and all other requirements of Applicable Law.

 

SECTION 3.10 Margin Regulations. The Borrower is not engaged and will not engage, principally or as one of its important activities, in the business of purchasing or carrying Margin Stock, or extending credit for the purpose of purchasing or carrying Margin Stock, and no part of the proceeds of any Credit Extension hereunder will be used to buy or carry any Margin Stock. Following the application of the proceeds of each Borrowing or drawing under each Letter of Credit, not more than 25% of the value of the assets (either of the Borrower only or of the Borrower and its Subsidiaries on a consolidated basis) will be Margin Stock.

 

SECTION 3.11 Investment Company Act. Neither the Borrower nor any of its Subsidiaries is an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940.

11

 

SECTION 3.12 Sanctions; Anti-Corruption.

 

(a)       None of the Borrower, any of its Subsidiaries or, to the knowledge of the Borrower, any director, officer, employee or agent of the Borrower or any of its Subsidiaries is an individual or entity (“person”) that is, or is owned or controlled by persons that are: (i) the subject of any sanctions administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of State (collectively, “Sanctions”), or (ii) located, organized or resident in a country or territory that is, or whose government is, the subject of Sanctions.

 

(b)       The Borrower, its Subsidiaries and their respective directors, officers and employees and, to the knowledge of the Borrower, the agents of the Borrower and its Subsidiaries, are in compliance with all applicable Sanctions and with the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”) and any other applicable anti-corruption law, in all material respects. The Borrower and its Subsidiaries have instituted and maintain policies and procedures designed to ensure continued compliance with applicable Sanctions, the FCPA and any other applicable anti-corruption laws.

 

SECTION 3.13 Solvency. The Borrower and each Subsidiary is Solvent.

 

SECTION 3.14 Liens. Neither the Borrower nor any Subsidiary has any Liens on any of their respective assets or properties other than Permitted Liens.

 

ARTICLE IV

 

CONDITIONS

 

SECTION 4.01 Closing Date. The obligation of the Lender party hereto is subject to the satisfaction of the following conditions (and, in the case of each document specified in this Section to be received by such Lender, such document shall be in form and substance satisfactory to each Lender):

 

(a)       Executed Counterparts. The Lender shall have received from each party hereto a counterpart of this Agreement, each Amended and Restated Note, and each other Loan Document, signed on behalf of such party (or written evidence satisfactory to the Lender (which may include telecopy transmission of a signed signature page to this Agreement) that such party has signed a counterpart of this Agreement).

 

(b)       Certificates. The Lender shall have received such customary certificates of resolutions or other action, incumbency certificates and/or other certificates of responsible officers of the Borrower and each Subsidiary as the Lender may require evidencing the identity, authority and capacity of each responsible officer thereof authorized to act in connection with the Loan Documents.

 

(c)       Corporate Documents. The Lender shall have received such other documents and certificates (including organizational documents and good standing certificates) as the Lender may reasonably request relating to the organization, existence and good standing of the Borrower and each Subsidiary, and any other legal matters relating to the Borrower, any Subsidiary, the Loan Documents or the transactions contemplated thereby.

 

(d)       Officer’s Certificate. The Lender shall have received a certificate, dated the Closing Date and signed by a responsible officer of the Borrower and each Subsidiary, confirming satisfaction of the conditions set forth in this Section and compliance with the conditions set forth in this Agreement.

12

 

(e)       Other Documents. The Lender shall have received such other documents as the Lender may reasonably request.

 

(f)       Representations and Warranties. The representations and warranties of the Borrower and each Subsidiary set forth in this Agreement and in any other Loan Document shall be true and correct in all respects.

 

(g)       No Default. No Default shall have occurred and be continuing.

 

For purposes of determining satisfaction of the conditions specified in this Section, the Lender party hereto shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender party hereto unless the Borrower shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.

 

ARTICLE V

 

AFFIRMATIVE COVENANTS

 

Until all Obligations shall have been paid in full, the Borrower and each Subsidiary covenants and agrees with the Lender party hereto that:

 

SECTION 5.01 Financial Statements. The Borrower will ensure that the following financial statements are filed with the SEC, or if at any time the Borrower is no longer subject to SEC filing obligations the Borrower will deliver the following to each Lender:

 

(a)       as soon as available, and in any event no later than the date required to be filed with the SEC (including permitted extensions), a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, audited and accompanied by a report and opinion of independent public accountants of nationally recognized standing, which report and opinion shall be prepared in accordance with generally accepted auditing standards to the effect that such consolidated financial statements present fairly in all material respects the financial condition, results of operations, shareholders’ equity and cash flows of the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; and

 

(b)       as soon as available, and in any event no later than the date required to be filed with the SEC (including permitted extensions), a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of each of the first three fiscal quarters of each fiscal year of the Borrower, the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal quarter and for the portion of the Borrower’s fiscal year then ended, in each case setting forth in comparative form, as applicable, the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, certified by a financial officer of the Borrower as fairly presenting in all material respects the financial condition, results of operations, shareholders’ equity and cash flows of the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject only to normal year-end audit adjustments and the absence of notes.

 

SECTION 5.02 Certificates; Other Information. The Borrower will deliver to each Lender:

 

(a)       concurrently with the delivery of the financial statements referred to in Sections 5.01(a) and (b), a duly completed certificate signed by a responsible officer of the Borrower certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto;

13

 

(b)       unless filed with the SEC and publicly available at the SEC’s website, promptly after the same are publicly available, copies of each annual report, proxy or financial statement or other report or communication sent to the shareholders of the Borrower, and copies of all annual, regular, periodic and special reports and registration statements that the Borrower or any Subsidiary may file or be required to file with the SEC or any Governmental Authority succeeding to any or all of the functions of the SEC, or with any national securities exchange, and not otherwise required to be delivered pursuant hereto;

 

(c)       promptly after the furnishing thereof, copies of any material request or notice received by the Borrower or any Subsidiary, or any statement or report furnished by the Borrower or any Subsidiary to any holder of debt securities of the Borrower or any Subsidiary, pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished pursuant hereto;

 

(d)       promptly after receipt thereof by the Borrower or any Subsidiary, copies of each notice or other correspondence received from the SEC concerning any investigation or possible investigation or other inquiry by such agency regarding financial or other operational results of the Borrower or any Subsidiary thereof;

 

(e)       promptly following request therefor, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors (or the audit committee of the board of directors) of the Borrower by independent accountants in connection with the accounts or books of the Borrower or any Subsidiary, or any audit of any of them as any Lender may from time to time reasonably request; and

 

(f)       promptly following any request therefor, such other information regarding the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the Borrower or any Subsidiary, or compliance with the terms of the Loan Documents, as Lender may from time to time reasonably request.

 

SECTION 5.03 Notices. The Borrower will promptly notify each Lender of:

 

(a)       the occurrence of any Default;

 

(b)       the filing or commencement of any action, suit, investigation or proceeding (including any thereof by or before any arbitrator or Governmental Authority) against or affecting the Borrower, any Subsidiary, or any Affiliate thereof, that could reasonably be expected to have a Material Adverse Effect;

 

(c)       any material change in accounting or financial reporting practices by the Borrower or any Subsidiary; and

 

(d)       any matter or development that has had or could reasonably be expected to have a Material Adverse Effect.

 

Each notice delivered under this Section shall be accompanied by a statement of an officer of the Borrower setting forth the details of the occurrence requiring such notice and stating what action the Borrower has taken and proposes to take with respect thereto.

14

 

SECTION 5.04 Preservation of Existence, Etc. The Borrower will, and will cause each of its Subsidiaries to, (a) preserve, renew and maintain in full force and effect its legal existence and good standing under the Laws of the jurisdiction of its organization; (b) take all reasonable action to maintain all rights, licenses, permits, privileges and franchises necessary or desirable in the normal conduct of its business, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (c) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.05 Maintenance of Properties The Borrower will, and will cause each of its Subsidiaries to, (a) maintain, preserve and protect all of its properties and equipment necessary in the operation of its business in good working order and condition (ordinary wear and tear excepted) and (b) make all necessary repairs thereto and renewals and replacements thereof, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.06 Payment of Obligations The Borrower will, and will cause each of its Subsidiaries to, pay, discharge or otherwise satisfy as the same shall become due and payable, all of its obligations and liabilities, including Tax liabilities, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with GAAP are being maintained by the Borrower or such Subsidiary, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.07 Compliance with Laws. The Borrower will, and will cause each of its Subsidiaries to, comply with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its business or property, except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

SECTION 5.08 Books and Records. The Borrower will, and will cause each of its Subsidiaries to, maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Borrower or such Subsidiary, as the case may be.

 

SECTION 5.09 Sanctions; Anti-Corruption Laws. The Borrower will maintain in effect policies and procedures designed to promote compliance by the Borrower, its Subsidiaries, and their respective directors, officers, employees, and agents with applicable Sanctions and with the FCPA and any other applicable anti-corruption laws.

15

 

ARTICLE VI

 

NEGATIVE COVENANTS

 

Until all Obligations have been paid in full, the Borrower and each Subsidiary covenants and agrees with the Lender party hereto that:

 

SECTION 6.01 Indebtedness. The Borrower will not, nor will it permit any Subsidiary to, create, incur, assume or suffer to exist any Indebtedness, unless all of the following conditions are satisfied: (a) such Indebtedness is not secured by any Lien on any Collateral; (b) other than any existing Indebtedness owed by the Borrower that is described on Schedule 6.01 (provided that no individual note indebtedness in excess of $1,000,000, as reflected on Schedule 6.01, will be prepaid in cash), such Indebtedness does not have a maturity date on or before 90 days after the Maturity Date of the Amended and Restated Notes; and (c) such Indebtedness is incurred with a person that is not an Affiliate of Borrower or any Subsidiary, is negotiated on an arm’s length basis with commercially reasonable terms, and the proceeds of which are used to finance the acquisition, exploration, drilling or improvements of the Borrower or the Subsidiaries’ oil and gas properties or for their other customary general business purposes.

 

SECTION 6.02 Liens. The Borrower will not, nor will it permit any Subsidiary to, create, incur, assume or suffer to exist any Lien upon any of the Collateral, other than Permitted Liens.

 

SECTION 6.03 Fundamental Changes. The Borrower will not, nor will it permit any Subsidiary to, merge, dissolve, liquidate, consolidate with or into another Person, or Dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except in a transaction in which the Notes are fully paid.

 

SECTION 6.04 Dispositions. The Borrower will not, and will not permit any Subsidiary to, make or enter into any transaction involving: (a) any Disposition of or with respect to any Collateral, or enter into any agreement with respect thereto, unless all Disposition Conditions are satisfied; or (b) any other Disposition of any assets or property unless all Disposition Conditions (other than the condition in Subsection (a) of such defined term) are satisfied.

 

SECTION 6.05 Restricted Payments; Compensation. The Borrower will not, and will not permit any Subsidiary to, declare or make, directly or indirectly: (a) any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except that each Subsidiary may make Restricted Payments to the Borrower, so long as no Default shall have occurred and be continuing at the time thereof or would result therefrom; or (b) any compensation of any officer or employee except in the ordinary course of business and consistent with customary past practices (and in any case not any of the past-due compensation outstanding on the Closing Date, other than the conversion of any past due compensation into shares of common stock of the Borrower).

 

SECTION 6.06 Transactions with Affiliates. Other than any existing transaction between the Borrower and an Affiliate, which is described on Schedule 6.06, the Borrower will not, and will not permit any Subsidiary to, enter into any transaction of any kind with any Affiliate of the Borrower of any Subsidiary, whether or not in the ordinary course of business; provided that the foregoing restriction shall not apply to Restricted Payments and compensation permitted by Section 6.05.

 

SECTION 6.07 Changes in Nature of Business . The Borrower will not, and will not permit any Subsidiary to, engage to any material extent in any business other than those businesses conducted by the Borrower and its Subsidiaries on the date hereof or any business reasonably related or incidental thereto or representing a reasonable expansion thereof.

 

SECTION 6.08 Sanctions; Anti-Corruption Use of Proceeds. The Borrower will not, directly or indirectly, use the proceeds of the Loans, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person, (i) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of the FCPA or any other applicable anti-corruption law, or (ii) (A) to fund any activities or business of or with any Person, or in any country or territory, that, at the time of such funding, is, or whose government is, the subject of Sanctions, or (B) in any other manner that would result in a violation of Sanctions by any Person.

16

 

ARTICLE VII

 

EVENTS OF DEFAULT

 

SECTION 7.01 Events of Default. If any of the following events (each, an “Event of Default”) shall occur:

 

(a)       the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

 

(b)       the Borrower shall fail to pay any interest on any Loan, or any fee or any other amount (other than an amount referred to in clause (a) of this Section) payable under this Agreement or under any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of ten (10) days;

 

(c)       any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries in or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof, or any waiver hereunder or thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof, or any waiver hereunder or thereunder, shall prove to have been incorrect in any material respect (or, in the case of any such representation or warranty under this Agreement or any other Loan Document already qualified by materiality, such representation or warranty shall prove to have been incorrect) when made or deemed made;

 

(d)       the Borrower or any of its Subsidiaries shall fail to observe or perform any covenant, condition or agreement contained in Section 2.02, Section 5.03 or 5.04, or in Article VI;

 

(e)       the Borrower or any of its Subsidiaries shall fail to observe or perform any covenant, condition or agreement contained in this Agreement or any other Loan Document (other than those specified in clause (a), (b) or (d) of this Section) and such failure shall continue unremedied for a period of 30 or more days after notice thereof by the Collateral Agent to the Borrower;

 

(f)       (i) the Borrower or any Subsidiary shall fail to make any payment when due in respect of any Indebtedness (other than Indebtedness under the Loan Documents); or (ii) the Borrower or any Subsidiary shall fail to observe or perform any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which default or other event is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such Indebtedness to cause such Indebtedness to become due or to be repurchased, or redeemed prior to its stated maturity;

 

(g)       an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any of its Subsidiaries or its debts, or of a substantial part of its assets, under any Debtor Relief Law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any of its Subsidiaries or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for a period of 60 or more days or an order or decree approving or ordering any of the foregoing shall be entered;

17

 

(h)       the Borrower or any of its Subsidiaries shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Debtor Relief Law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (g) of this Section, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any of its Subsidiaries or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) take any action for the purpose of effecting any of the foregoing, or (vii) become unable, admit in writing its inability or fail generally to pay its debts as they become due;

 

(i)       there is entered against the Borrower or any Subsidiary (i) a final judgment or order for the payment of money in an aggregate amount (as to all such judgments and orders) exceeding $300,000, or (ii) a non-monetary final judgment or order that, either individually or in the aggregate, has or could reasonably be expected to have a Material Adverse Effect;

 

(j)       a Change of Control shall occur;

 

(k)      any material provision of any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all Obligations, ceases to be in full force and effect; or the Borrower or any other Person contests in writing the validity or enforceability of any provision of any Loan Document; or the Borrower or any of its Subsidiaries denies in writing that it has any or further liability or obligation under any Loan Document, or purports in writing to revoke, terminate or rescind any Loan Document;

 

(l)       the title to any material part of the Collateral shall become the subject matter of litigation before any Governmental Authority or arbitrator that has resulted in or could reasonably be expected to result in a Material Adverse Effect with respect to Borrower or of its Subsidiaries; or

 

(m)     (i) the Collateral Agent fails to have a perfected Lien in any portion of the Collateral (other than Collateral released in accordance with the Loan Documents), or (ii) any Collateral Document shall at any time and for any reason cease to create the Lien on the Collateral purported to be subject to such instrument in accordance with the terms of such instrument (except to the extent that (x) any loss of perfection or priority is permitted by the terms of the Loan Document or (y) any such loss of validity, perfection or priority is the result of any failure by the Collateral Agent to take any action necessary to secure the validity, perfection or priority of the Liens; or

 

(n)      The occurrence of a Material Adverse Effect, as determined by Lender in good faith;

 

then, and in every such event, the Loans shall be in Default and the Lender party hereto may, by notice to the Borrower, take any or all of the following actions, at the same or different times:

 

(i)       declare the Loans owed to such Lender then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans owed to such Lender so declared to be due and payable, together with accrued interest thereon and all fees and other Obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and

18

 

(ii)      exercise all rights and remedies available to the Lender party hereto under the Loan Documents in favor of or for the benefit of the Lender party hereto, and under Applicable Law;

 

provided that, in case of any event with respect to the Borrower described in clause (g) or (h) of this Section, the principal of the Loans owed to such Lender then outstanding, together with accrued interest thereon and all fees and other Obligations accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. In addition, at any time thereafter, the Collateral Agent may enforce the rights of the Lenders under the Collateral Documents.

 

SECTION 7.02 Application of Payments. Notwithstanding anything herein to the contrary, following the occurrence and during the continuance of an Event of Default, and notice thereof to the Collateral Agent by the Borrower or the Required Lenders, all payments received on account of the Obligations shall be applied as follows:

 

(i)       first, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (other than principal) payable to the Lenders arising under the Loan Documents, pro rata to the Lenders based on each Lender’s Pro Rata Share thereof, until paid in full;

 

(ii)       second, to payment of that portion of the Obligations constituting accrued unpaid interest on the Loans, pro rata to the Lenders based on each Lender’s Pro Rata Share thereof, until paid in full;

 

(iii)       third, to payment of that portion of the Obligations constituting outstanding principal of the Loans, pro rata to the Lenders based on each Lender’s Pro Rata Share thereof, until paid in full;

 

(iv)       fourth, to payment of all other Obligations owing to each Lender, pro rata to the Lenders based on each Lender’s Pro Rata Share thereof, until paid in full; and

 

(v)       finally, the balance, if any, after all Obligations have been indefeasibly paid in full, to the Borrower or as otherwise required by Law.

 

ARTICLE VIII

 

AGENCY

 

SECTION 8.01 Appointment and Authority. The Lender party hereto hereby irrevocably appoints The David A. Straz, Jr. Irrevocable Trust dtd 11/11/1986, The Northern Trust Company and Christopher M. Straz, as Co-Trustees, to act on its behalf as the Collateral Agent hereunder and under the other Loan Documents and authorizes the Collateral Agent to take such actions on its behalf and to exercise such powers as are delegated to the Collateral Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Collateral Agent and the Lenders, and the Collateral Agent may fully rely on these provisions as a third party beneficiary. The Borrower shall not have rights as a third-party beneficiary of any of such provisions. Use of the term “agent” herein or in any other Loan Documents with reference to the Collateral Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any Applicable Law. Instead such term is used as a matter of lending market custom, and is intended to create or reflect only an administrative relationship between Lenders and the Collateral Agent.

19

 

SECTION 8.02 Rights as a Lender. The Person serving as the Collateral Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Collateral Agent, and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Collateral Agent hereunder in its individual capacity. Such Person and its Affiliates may generally engage in any kind of business with the Borrower or any Affiliate thereof as if such Person were not the Collateral Agent hereunder and without any duty to account therefor to the Lenders.

 

SECTION 8.03 Exculpatory Provisions.

 

(a)       The Collateral Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents, and its duties hereunder shall be administrative in nature. Without limiting the foregoing, the Collateral Agent shall not, by virtue of the agency relationship created hereunder:

 

(i)       be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

 

(ii)       have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Collateral Agent is required to exercise as directed in writing by the Required Lenders; provided that the Collateral Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Collateral Agent to liability or that is contrary to any Loan Document or Applicable Law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law; and

 

(iii)       except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Collateral Agent or any of its Affiliates in any capacity.

 

(b)       The Collateral Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Collateral Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 7.01 and 9.02), or (ii) in the absence of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction by final and nonappealable judgment. The Collateral Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Collateral Agent in writing by the Borrower or a Lender.

 

(c)       The Collateral Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, or (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document.

 

SECTION 8.04 Reliance by Collateral Agent. The Collateral Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Collateral Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

20

 

SECTION 8.05 Delegation of Duties. The Collateral Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Collateral Agent. The Collateral Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties.

 

SECTION 8.06 Resignation of Collateral Agent.

 

(a)       The Collateral Agent may at any time give notice of its resignation to the Lenders and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Collateral Agent gives notice of its resignation (or such earlier day as shall be agreed by the Required Lenders) (the “Resignation Effective Date”), then the retiring Collateral Agent may (but shall not be obligated to), on behalf of the Lenders, appoint a successor Collateral Agent meeting the qualifications set forth above. Whether or not a successor has been appointed, such resignation shall become effective in accordance with such notice on the Resignation Effective Date.

 

(b)       With effect from the Resignation Effective Date: (i) the retiring Collateral Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents and (ii) except for any indemnity payments owed to the retiring Collateral Agent, all payments, communications and determinations provided to be made by, to or through the Collateral Agent shall instead be made by or to each Lender directly, until such time, if any, as the Required Lenders appoint a successor Collateral Agent as provided for above. Upon the acceptance of a successor’s appointment as Collateral Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring Collateral Agent (other than any rights to indemnity payments owed to the retiring Collateral Agent), and the retiring Collateral Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents. After the retiring Collateral Agent’s resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Collateral Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Collateral Agent was acting as Collateral Agent.

 

SECTION 8.07 Non-Reliance on Agents and Other Lenders. The Lender party hereto acknowledges that it has, independently and without reliance upon the Collateral Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. The Lender party hereto also acknowledges that it will, independently and without reliance upon the Collateral Agent or any other Lender, and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.

 

SECTION 8.08 Collateral Agent May File Proofs of Claim. In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relative to the Borrower or any Subsidiary, the Collateral Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Collateral Agent shall have made any demand on the Borrower) shall be entitled and empowered (but not obligated) by intervention in such proceeding or otherwise:

21

 

(a)       to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Collateral Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Collateral Agent and their respective agents and counsel and all other amounts due the Lenders and the Collateral Agent under Section 9.03) allowed in such judicial proceeding; and

 

(b)       to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

 

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by the Lender party hereto to make such payments to the Collateral Agent and, in the event that the Collateral Agent shall consent to the making of such payments directly to the Lenders to pay to the Collateral Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Collateral Agent and its agents and counsel, and any other amounts due the Collateral Agent under Section 9.03.

 

ARTICLE IX

 

MISCELLANEOUS

 

SECTION 9.01 Notices; Public Information.

 

(a)       Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by email as follows:

 

(i)       if to the Borrower, to the following address: 5700 Plano Parkway, Suite 3600, Plano, Texas 75093; Attention of John Brda (Telephone No. 314-920-0890; Email: john@torchlightenergy.com);

 

(ii)       if to the Collateral Agent, to the following address: The Northern Trust Company, 1515 Ringling Blvd., Suite 1100, Sarasota, Florida 34236; Attention: Thomas M. Lara (Telephone No.(941) 329-2624; Email: tl1@ntrs.com);

 

(iii)       with a copy to the following address: Hill Ward Henderson, 101 E. Kennedy Blvd., Suite 3700, Tampa, Florida; Attention: David S. Felman (Telephone No. 813-227-8483; Email: david.felman@hwhlaw.com);

 

(iv)       if to the Lender party hereto, to it at its address (or email address) set forth in the Amended and Restated Note held by the Lender party hereto or such other address as the Lender party hereto may designate.

 

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received. Notices delivered through electronic communications, to the extent provided in Section 9.06(b) below, shall be effective as provided in said Section 9.06(b).

22

 

SECTION 9.02 Waivers; Amendments.

 

(a)       No Waiver; Remedies Cumulative; Enforcement. The execution of this Agreement and the new Loan Documents shall not constitute a waiver of any Default or Event of Default in the Existing Note(s) or any other Loan Document existing on the date hereof, other than the waiver by the Lender of the payment of interest, when due, on April 1, 2020, nor shall it eliminate any right which any Lender may otherwise have to exercise any remedies by virtue of any Default or Event of Default. No failure or delay by the Collateral Agent or any Lender in exercising any right, remedy, power or privilege hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege, or any abandonment or discontinuance of steps to enforce such a right remedy, power or privilege, preclude any other or further exercise thereof or the exercise of any other right remedy, power or privilege. The rights, remedies, powers and privileges of the Collateral Agent and the Lender party hereto and under the Loan Documents are cumulative and are not exclusive of any rights, remedies, powers or privileges that any such Person would otherwise have.

 

Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Collateral Documents against the Borrower and the Subsidiaries shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, the Collateral Agent in accordance with Section 7.01 for the benefit of all the Lenders; provided that the foregoing shall not prohibit (i) the Collateral Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Collateral Agent) hereunder and under the other Loan Documents, or (ii) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to the Borrower under any Debtor Relief Law; provided, further, that if at any time there is no Person acting as Collateral Agent hereunder and under the other Loan Documents, then (x) the Required Lenders shall have the rights otherwise provided to the Collateral Agent pursuant to Section 7.01 and (y) in addition to the matters set forth in clause (ii) of the preceding proviso and subject to the terms of Article II hereof and Section 7.01, in such case any Lender may, with the consent of the Required Lenders, enforce any rights or remedies available to it and as authorized by the Required Lenders.

 

(b)       Amendments, etc. Except as otherwise expressly set forth in this Agreement, no amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower therefrom, shall be effective unless in writing executed by the Borrower and the Required Lenders, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no such amendment, waiver or consent shall:

 

(i)       extend or increase any Loan commitment of any Lender without the written consent of such Lender;

 

(ii)      reduce the principal of, or rate of interest specified herein on, any Loan, or any fees or other amounts payable hereunder or under any other Loan Document, without the written consent of each Lender directly and adversely affected thereby;

 

(iii)     postpone any date scheduled for any payment of principal of, or interest on, any Loan, or any fees or other amounts payable hereunder or under any other Loan Document, or reduce the amount of, waive or excuse any such payment, without the written consent of each Lender directly and adversely affected thereby;

 

(iv)     change Section 2.04, Section 2.05, or Section 7.01 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender directly and adversely affected thereby;

23

 

(v)       waive any condition set forth in Section 4.01 without the written consent of each Lender; or

 

(vi)      change any provision of this Section or the percentage in the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender;

 

provided, further, that no such amendment, waiver or consent shall amend, modify or otherwise affect the rights or duties hereunder or under any other Loan Document of the Collateral Agent, unless in writing executed by the Collateral Agent, in addition to the Borrower and the Lenders required above.

 

Notwithstanding anything in this Section to the contrary, if the Collateral Agent and the Borrower shall have jointly identified an obvious error or any error or omission of a technical nature, in each case, in any provision of the Loan Documents, then the Collateral Agent and the Borrower shall be permitted to amend such provision, and, in each case, such amendment shall become effective without any further action or consent of any other party to any Loan Document if the same is not objected to in writing by the Required Lenders to the Collateral Agent within ten Business Days following receipt of notice thereof.

 

SECTION 9.03 Expenses; Indemnity; Waiver.

 

(a)       Costs and Expenses. The Borrower and each of its Subsidiaries shall pay all out-of-pocket expenses (collectively, the “Enforcement Expenses”) incurred by the Collateral Agent and any Lender (including the fees, charges and disbursements of any counsel for the Collateral Agent and any Lender) in connection with the enforcement or protection of its rights (i) in connection with this Agreement and the other Loan Documents, including its rights under this Section, or (ii) in connection with the Loans, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans. In the absence of payment by the Borrower such Enforcement Expenses incurred by the Collateral Agent, each Lender shall reimburse the Collateral Agent for its Pro Rata Share of the Enforcement Expenses. Notwithstanding the preceding, all parties are responsible for their own costs and expenses with respect to the negotiation and creation of the Loan Documents.

 

(b)       Indemnification by the Borrower. THE BORROWER AND EACH OF ITS SUBSIDIARIES SHALL INDEMNIFY THE COLLATERAL AGENT, EACH LENDER, AND EACH RELATED PARTY OF ANY OF THE FOREGOING PERSONS (EACH SUCH PERSON BEING CALLED AN “INDEMNITEE”) AGAINST, AND HOLD EACH INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS, DAMAGES, LIABILITIES AND RELATED EXPENSES (INCLUDING THE FEES, CHARGES AND DISBURSEMENTS OF ANY COUNSEL FOR ANY INDEMNITEE) INCURRED BY ANY INDEMNITEE OR ASSERTED AGAINST ANY INDEMNITEE BY ANY PERSON (INCLUDING THE BORROWER AND EACH OF ITS SUBSIDIARIES) ARISING OUT OF, IN CONNECTION WITH, OR AS A RESULT OF (I) THE EXECUTION OR DELIVERY OF THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY THE PARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER OR THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, (II) ANY LOAN OR THE USE OR PROPOSED USE OF THE PROCEEDS THEREFROM, (III) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION, INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY, WHETHER BROUGHT BY A THIRD PARTY OR BY THE BORROWER OR ANY OF ITS SUBSIDIARIES, AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A PARTY THERETO; PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR RELATED EXPENSES (X) ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE, (Y) RESULT FROM A CLAIM BROUGHT BY THE BORROWER OR ANY OF ITS SUBSIDIARIES AGAINST AN INDEMNITEE FOR BREACH IN BAD FAITH OF SUCH INDEMNITEE’S OBLIGATIONS HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT, IF THE BORROWER OR ANY OF ITS SUBSIDIARIES HAS OBTAINED A FINAL AND NONAPPEALABLE JUDGMENT IN ITS FAVOR ON SUCH CLAIM AS DETERMINED BY A COURT OF COMPETENT JURISDICTION OR (Z) RESULT FROM A CLAIM NOT INVOLVING AN ACT OR OMISSION OF THE BORROWER OR ANY OF ITS SUBSIDIARIES AND THAT IS BROUGHT BY AN INDEMNITEE AGAINST ANOTHER INDEMNITEE (OTHER THAN AGAINST THE ARRANGER OR THE COLLATERAL AGENT IN THEIR CAPACITIES AS SUCH). Paragraph (b) of this Section shall not apply with respect to Taxes other than any Taxes that represent losses, claims, damages, etc. arising from any non-Tax claim.

24

 

(c)       Estoppel and Release. Each of the Borrower and the Subsidiaries hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim, claim, or objection in favor of such party as against the Collateral Agent or any Lender with respect to the Existing Note(s) or any other aspect of the transactions contemplated thereby, or alternatively, that any such right of offset, defense, counterclaim, claim, or objection is hereby expressly waived. In connection with the foregoing, and in consideration of the Lenders’ agreement to accept the Amended and Restated Notes and to enter into this Agreement, each of the Borrower and the Subsidiaries for itself and all of its respective heirs, personal representatives, predecessors, successors, and assigns (the “Releasors”), hereby jointly and severally releases, remises, and forever discharges the Collateral Agent and each Lender, and each of their Subsidiaries, Affiliates, Related Parties, successors and assigns (the “Releasees”) from any and all rights, claims, demands, actions, causes of action, suits, proceedings, agreements, contracts, judgments, damages, debts, duties, liens, offsets, liabilities, or obligations, of any kind or character, including without limitation such claims and defenses as fraud, mistake, duress, and usury, whether in law or in equity, known or unknown, choate or inchoate, (collectively, the “Claims”) which any Releasor it has had, now has, or hereafter may have, arising under or in any manner relating to, whether directly or indirectly, Existing Notes or any other aspect of the transactions contemplated thereby, from the beginning of time until the date hereof. It is the express intent of Releasors and Releasees that the release and discharge set forth in this Subsection be construed as broadly as possible in favor of Releasees so as to foreclose forever the assertion by any of the Releasors of any Claims against any of the Releasees.

 

(d)       Waiver of Appraisement, Valuation, Stay. In consideration of the Lender party hereto’s agreement to accept the Amended and Restated Notes and to enter into this Agreement, each of the Borrower and the Subsidiaries agree that neither the Borrower nor any Subsidiary nor anyone claiming through or under the Borrower or any Subsidiary will set up, claim, or seek to take advantage of any moratorium, reinstatement, forbearance, appraisement, valuation, stay, cash collateral, extension, homestead, exemption, or redemption laws now or hereafter in force, in order to prevent or hinder the enforcement or foreclosure of any Collateral Documents, the absolute sale of the Collateral encumbered thereby, or the delivery of possession thereof immediately after such sale to the purchaser at such sale. Each of the Borrower and the Subsidiaries for themselves and all who may at any time claim through or under them, hereby waive to the full extent that they may lawfully do so, the benefit of all such laws, and any and all right to have the assets subject to the lien of the Collateral Documents marshaled upon any foreclosure or sale.

 

(e)       Bankruptcy. In the event the Borrower or any Subsidiary files a petition for relief under any chapter of the United States Bankruptcy Code, the Lenders shall be entitled to, and the Borrower and each Subsidiary hereby consents to immediate relief from the automatic stay imposed by the Bankruptcy Code in order that the Lenders may take any and all actions necessary to enforce any rights the Lenders may have under the Loan Documents, including but not limited to the commencement or continuation of the foreclosure of any security documents or otherwise compel the specific performance of any Obligations under the Loan Documents.

25

 

(f)       Waiver of Consequential Damages, Etc. To the fullest extent permitted by Applicable Law, each of the Borrower and its Subsidiaries shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan, or the use of the proceeds thereof. No Indemnitee referred to in paragraph (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby.

 

(g)       Survival. Each party’s obligations under this Section shall survive the termination of the Loan Documents and payment of the obligations hereunder.

 

SECTION 9.04 Successors and Assigns.

 

(a)       Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Collateral Agent and each Lender, and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of paragraph (b) of this Section, or (ii) by way of pledge or assignment of a security interest subject to the restrictions of paragraph (c) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, and to the extent expressly contemplated hereby, the Collateral Agent and the Related Parties of each of the Collateral Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

 

(b)       Assignments by Lenders. Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of the Loans at the time owing to it); provided that any such assignment shall be subject to the following conditions:

 

(i)       Assignment and Assumption. The parties to each assignment shall execute and deliver to the Collateral Agent an assignment and assumption reasonably satisfactory to the Collateral Agent (an “Assignment and Assumption”).

 

(ii)       No Assignment to Borrower. No such assignment shall be made to the Borrower or any of the Borrower’s Affiliates or Subsidiaries.

 

(c)       Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

26

 

SECTION 9.05 Survival . All covenants, agreements, representations and warranties made by the Borrower herein and in any Loan Document or other documents delivered in connection herewith or therewith or pursuant hereto or thereto shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery hereof and thereof, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Collateral Agent or any Lender may have had notice or knowledge of any Default, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied. The provisions of Sections 9.03 and 9.12 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the payment in full of the Obligations, or the termination of this Agreement or any provision hereof.

 

SECTION 9.06 Counterparts; Integration; Effectiveness; Electronic Execution.

 

(a)       Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents, and any separate letter agreements with respect to fees payable to the Collateral Agent, constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Collateral Agent and when the Collateral Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or in electronic (e.g., “pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Agreement.

 

(b)       Electronic Execution of Assignments. The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any Applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act, or any other similar state laws based on the Uniform Electronic Transactions Act.

 

SECTION 9.07 Severability. If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

 

SECTION 9.08 Governing Law; Jurisdiction; Etc.

 

(a)       Governing Law. This Agreement and the other Loan Documents and any claims, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement or any other Loan Document (except, as to any other Loan Document, as expressly set forth therein) and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the law of the State of Texas.

27

 

(b)       Jurisdiction. The Borrower irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise, against the Collateral Agent, any Lender, or any Related Party of the foregoing in any way relating to this Agreement or any other Loan Document or the transactions relating hereto or thereto, in any forum other than the courts of the State of Texas sitting in Collin County, Texas, and of the United States District Court in Collin County, Texas, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such Texas state court or, to the fullest extent permitted by Applicable Law, in such federal court.  Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Agreement or in any other Loan Document shall affect any right that the Collateral Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against the Borrower or its properties in the courts of any jurisdiction.

 

(c)       Waiver of Venue. The Borrower irrevocably and unconditionally waives, to the fullest extent permitted by Applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

 

(d)       Service of Process. Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by Applicable Law.

 

SECTION 9.09 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

 

SECTION 9.10 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

 

SECTION 9.11 PATRIOT Act. The Lender party hereto subject to the PATRIOT Act hereby notifies the Borrower that, pursuant to the requirements of the PATRIOT Act, it may be required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the PATRIOT Act.

28

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

 

  BORROWER:
     
  TORCHLIGHT ENERGY RESOURCES, INC.,
  a Nevada corporation
     
  By /s/ John Brda 
    John Brda
    President
     
  SUBSIDIARIES:
     
  HUDSPETH OIL CORPORATION,
  a Texas corporation
     
  By /s/ John Brda 
    Name: John Brda
    Title:  President
     
  TORCHLIGHT ENERGY, INC.,
  a Texas corporation
     
  By /s/ John Brda 
    Name:  John Brda
    Title:  President
     
  TORCHLIGHT HAZEL, LLC,
  a Texas Limited Liability Company
     
  By /s/ John Brda 
    Name:  John Brda
    Title:  President

Signature Page – Trust Note Amendment Agreement

 

  LENDER:
     
  THE DAVID A. STRAZ, JR., IRREVOCABLE TRUST DTD 11/11/1986, as a Lender
     
  By: /s/ Christopher M. Straz 
    Christopher M. Straz
      Co-Trustee
     
  By: The Northern Trust Company, Co-Trustee
       
      By: /s/ Thomas M. Lara
          Thomas M. Lara
          Vice President

Signature Page – Trust Note Amendment Agreement

 

SCHEDULE 1

 

Lender Existing Note(s) Amended and Restated Note(s) Pro Rata Share
THE DAVID A. STRAZ, JR. IRREVOCABLE TRUST DTD 11/11/1986, THE NORTHERN TRUST COMPANY and CHRISTOPHER M. STRAZ, as Co-Trustees

12% 2020 Senior Unsecured Note dated April 10, 2017, as amended, in the amount of $4,000,000

 

 

 

12% 2020 A Senior Unsecured Promissory Note dated February 6, 2018, as amended, in the amount of $4,500,000

 

Amended and Restated 12% 2020 Senior Secured Promissory Note dated April 24, 2020, in the amount of $4,000,000

 

 

 

Amended and Restated 12% 2020 Senior Secured Promissory Note dated April 24, 2020, in the amount of $4,500,000

 

68%

 

 

EXHIBIT A

 

FORM OF AMENDED AND RESTATED NOTE

 

 

 

Exhibit 10.21

 

AMENDMENT TO TRUST NOTE AMENDMENT AGREEMENT

 

THIS AMENDMENT TO TRUST NOTE AMENDMENT AGREEMENT (“Amendment”) dated as of May __, 2020, is to become affixed to, modify and become a part of that certain Trust Note Amendment Agreement (the “Note Amendment Agreement”) dated as of April 24, 2020 by and among TORCHLIGHT ENERGY RESOURCES, INC., a Nevada corporation, (the “Borrower”), each of the Subsidiaries of the Borrower identified on the signature pages hereto, and THE DAVID A. STRAZ, JR. IRREVOCABLE TRUST DTD 11/11/1986, THE NORTHERN TRUST COMPANY and CHRISTOPHER M. STRAZ, as Co-Trustees (the “Trust”, and a “Lender”).

 

WHEREAS, the parties to the Note Amendment Agreement desire to amend the Note Amendment Agreement; and

 

NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements and the respective representations and warranties herein contained, and on the terms and subject to the conditions herein set forth, the parties hereto, intending to be legally bound, hereby agree as follows:

 

1.       The Note Amendment Agreement is amended and modified by amending and restating Section 2.02 of the Note Amendment Agreement as follows:

 

“SECTION 2.02 Accrued Interest; Fees. No later than the earlier of (A) May 25, 2020 or (B) one Business Day after the closing of the Borrower’s contemplated offer and sale of common stock under an underwritten public offering through a shelf takedown using it’s Form S-3 registration statement (No. 333-220181); the Borrower shall pay (a) to the Lenders all past due interest that has accrued on the Existing Notes; and (b) to The David A. Straz, Jr. Irrevocable Trust dtd 11/11/1986, The Northern Trust Company and Christopher M. Straz, as Co-Trustees, an extension fee in the amount of One Hundred Seventy Thousand and No/100 Dollars ($170,000). If any of the payments required by this Section 2.02 is not paid on the required date, such nonpayment shall constitute an Event of Default hereunder automatically and without any further action required of any Lender.”

 

2.       All terms and conditions of the Note Amendment Agreement shall, except as amended and modified by this Amendment, will remain in full force and effect and all rights, duties, obligations and responsibilities of the parties thereto shall be governed and determined by the Note Amendment Agreement as the same has been amended and modified by this Amendment.

 

3.       THIS AMENDMENT IS TO BE CONSTRUED UNDER THE LAWS OF THE STATE OF TEXAS.

 

4.       This Amendment shall be of no force and effect until receipt and execution of it by the Borrower, the Subsidiaries identified on the signature pages hereto, and the Lender. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which shall be deemed one instrument, by facsimile signature or by e-mail delivery of a “.pdf” format data file signature of any of the parties, each of which shall be deemed an original for all purposes.

 

[Signature page follows.]

Amendment to Trust Note Amendment Agreement – Page 1 

 

IN WITNESS WHEREOF, each of the undersigned has executed and delivered this Amendment to the Trust Note Amendment Agreement as of the date first written above.

 

  BORROWER:
     
  TORCHLIGHT ENERGY RESOURCES, INC.,
  a Nevada corporation
     
  By  /s/ John Brda 
    John Brda
    President
     
  SUBSIDIARIES:
     
  HUDSPETH OIL CORPORATION,
  a Texas corporation
     
  By /s/ John Brda 
    Name: John Brda
    Title:  President
     
  TORCHLIGHT ENERGY, INC.,
  a Texas corporation
     
  By /s/ John Brda 
    Name:  John Brda
    Title:  President
     
  TORCHLIGHT HAZEL, LLC,
  a Texas Limited Liability Company
     
  By /s/ John Brda 
    Name:  John Brda
    Title:  President

Amendment to Trust Note Amendment Agreement – Page 2 

 

  LENDER:
     
  THE DAVID A. STRAZ, JR., IRREVOCABLE TRUST DTD 11/11/1986, as a Lender
     
  By: /s/ Christopher M. Straz
    Christopher M. Straz
      Co-Trustee
     
  By: The Northern Trust Company, Co-Trustee
       
      By: /s/ Thomas M. Lara
          Thomas M. Lara
          Vice President

Amendment to Trust Note Amendment Agreement – Page 3 

 

 

Exhibit 10.22 

 

EXECUTION VERSION

 

AMENDED AND RESTATED NOTE

 

NEITHER THIS AMENDED AND RESTATED 12% 2020 SENIOR secured Promissory Note (THE “NOTE”) NOR THE SECURITIES ISSUABLE IN CONNECTION WITH THIS NOTE have BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“ACT”), OR THE SECURITIES LAWS OF ANY STATE. Neither THIS NOTE nor THE SECURITIES ISSUABLE IN CONNECTION WITH this note MAY BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR DELIVERY TO TORCHLIGHT ENERGY RESOURCES, INC. OF AN OPINION OF LEGAL COUNSEL SATISFACTORY TO TORCHLIGHT ENERGY RESOURCES, INC. THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS.

 

AMENDED AND RESTATED

12% 2020 SENIOR secured Promissory Note

OF

TORCHLIGHT ENERGY RESOURCES, INC.

 

NOTE NO. 2020-APR-1     April 24, 2020  

 

FOR VALUE RECEIVED, TORCHLIGHT ENERGY RESOURCES, INC., a Nevada corporation with its principal office located at 5700 Plano Parkway, Ste. 3600, Plano, Texas 75093 (the “Company” or “Debtor”), unconditionally promises to pay to THE DAVID A. STRAZ, JR. IRREVOCABLE TRUST DTD 11/11/1986, THE NORTHERN TRUST COMPANY and CHRISTOPHER M. STRAZ, as Co-Trustees, whose address is 1515 Ringling Blvd., Ste 1100, Sarasota, Florida 34236, or its assignee, upon presentation of this Amended and Restated 12% 2020 Senior Secured Promissory Note (the “Note”) by the holder hereof (the “Registered Holder” or “Holder”) at the office of the Company, the principal amount of $4,000,000 (“Principal Amount”), together with the accrued and unpaid interest thereon and other sums as hereinafter provided, subject to the terms and conditions as set forth below. The effective date of execution and issuance of this Note is April 24, 2020.

 

This Note is made and issued pursuant to and is subject to the Note Amendment Agreement dated the date hereof by and among the Company and the Holder (the “Note Amendment Agreement”). Certain capitalized terms used but not defined in this Note have the respective meanings assigned to them in the Note Amendment Agreement. In the event of a conflict between the terms of this Note and the terms of the Note Amendment Agreement, the terms of the Note Amendment Agreement shall control.

 

 

1.       Series. This Note is one of a series of duly authorized and issued promissory notes of the Company designated as its Amended and Restated 12% 2020 Senior Secured Promissory Notes in an aggregate principal face value for all notes of this series of up to a maximum of $12,500,000 with no minimum amount (each, a “Series Note,” and collectively, the “Series Notes”). Each Series Notes is being issued in accordance with that certain Subscription Agreement, between the Company and each holder of the Series Notes, and is subject to the terms and conditions set forth in the Subscription Agreement. The Holder of this Note with the holders of all of the Series Notes are sometimes hereinafter collectively referred to as “Series Holders.”

 

2.       Schedule for Payment of Principal and Interest. The Principal Amount outstanding hereunder shall be paid in one lump sum payment of $4,000,000 on or before April 10, 2021 (the “Maturity Date”), and the interest on the Principal Amount outstanding hereunder shall be payable at the rate of 12% per annum and shall be due and payable monthly, in arrears, with the initial interest payment due June 1, 2020, and continuing thereafter on the first day of each successive month during the term of this Note. Accrual of interest on the outstanding Principal Amount, payable in cash, shall commence on the date of receipt of funds by the Company and shall continue until payment in full of the outstanding Principal Amount has been made hereunder. The interest so payable will be paid to the person whose name is registered on the records of the Company regarding registration and transfers of this Note (the “Note Register”). Payments made by the Company shall be made to all Series Holders at the same time.

 

3.       Payment. Payment of any sums due to the Holder under the terms of this Note shall be made in United States Dollars by check or wire transfer at the option of the Company. Payments made by the Company shall be made to all Series Holders at the same time. Payment shall be made at the address last appearing on the Note Register of the Company as designated in writing by the Holder hereof from time to time. If any payment hereunder would otherwise become due and payable on a day on which commercial banks in Plano, Texas, are permitted or required to be closed, such payment shall become due and payable on the next succeeding day on which commercial banks in Tampa, Florida, are not permitted or required to be closed (“Business Day”) and, with respect to payments of Principal Amount, interest thereon shall be payable at the then applicable rate during such extension, if any. The forwarding of such funds shall constitute a payment of outstanding principal and interest hereunder and shall satisfy and discharge the liability for principal and interest on this Note to the extent of the sum represented by such payment. Except as provided in Section 4 hereof, this Note may not be prepaid without the prior written consent of the Holder.

 

4.       Company’s Option to Redeem Note. Up to 100%, in whole or in part, of the outstanding Principal Amount of the Note, plus any accrued and unpaid interest, will be subject to redemption at the option of the Company. Any amount of the Note subject to redemption, as set forth herein (the “Redemption Amount”), may be redeemed by the Company at any time and from time to time, upon not less than 10 nor more than 30 days’ notice to the Holder. If less than 100% of the outstanding Principal Amount of each Series Note, plus any accrued and unpaid interest thereon, is to be redeemed at any time: (a) the Company must redeem a pro rata amount of each Series Note, and (b) the Redemption Amount applied to each Series Note shall be in a minimum amount of $1,000,000 or an integral multiple thereof. The Company shall deliver to the Holder a written Notice of Redemption (the “Notice of Redemption”) specifying the date for the redemption (the “Redemption Payment Date”), which date shall be at least 10 but not more than 30 days after the date of the Notice of Redemption (the “Redemption Period”). On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 2 of 10

 

5.       2.5% Annual Stock Payment. The Registered Holders of Amended and Restated 2020 Senior Secured Promissory Notes shall be entitled to receive payments of common stock based on the Principal Amount outstanding on the Series Notes (the “Stock Payments”). The Stock Payments shall be calculated and payable (i) as of April 1st of each year that the Series Notes remain outstanding, and (ii) as of a Redemption Payment Date, if applicable, in each case (a “Stock Payment Date”). The number of shares of common stock that a Registered Holder receives is determined by multiplying the Principal Amount that is subject to a Stock Payment by 0.00006849315,1 multiplying that result by the number of days since the previous Stock Payment Date that such Principal Amount was subject to, and dividing that result by the Volume-Weighted Average Price (as defined below) on the present Stock Payment Date.

 

As used herein, the “Volume-Weighted Average Price” means the volume weighted average sale price of the Company’s common stock on NASDAQ as reported by NASDAQ for the 30 consecutive Trading Day (as defined below) period immediately preceding the Stock Payment Date, or, if NASDAQ is not the principal trading market for the Company’s common stock, the 30-day volume weighted average sale price of the Company’s common stock on the principal securities exchange or trading market where the Company’s common stock is listed or traded as reported by Bloomberg L.P. or an equivalent, reliable reporting service. If the Volume-Weighted Average Price cannot be calculated for the Company’s common stock on such date in the manner provided above or if the Company’s common stock is not publicly-traded, the Volume-Weighted Average Price shall be the fair market value as mutually determined by the Company and the Registered Holder. “Trading Day” means any day on which the Company’s common stock is traded for any period on NASDAQ, or on the principal securities exchange or other securities market on which the Company’s common stock is then being traded.

 

6.          Events of Defaults. Any Default or Event of Default as set forth in the Note Amendment Agreement shall constitute an Event of Default under this Note

 

7.          The Holder’s Rights and Remedies upon the Occurrence of an Event of Default. Without limiting any rights or remedies available to the Holder and the Collateral Agent under any of the Loan Documents or otherwise available under Applicable Law, upon the occurrence of an Event of Default, the Holder and the Collateral Agent shall have the following rights and remedies:

 

(a)       This Note is issued under and pursuant to a private placement of Series Notes and, notwithstanding any other provision to the contrary in this Note, the Holder agrees that its rights granted hereunder are on parity with interests of the Series Holders of the other Series Notes issued pursuant to the private placement and the rights, powers, privileges and remedies of the Holder of this Note shall be at parity with the Series Holders of other Series Notes issued pursuant to this private placement. Notwithstanding any provision of this Note to the contrary, no Series Holders shall take any action which would cause that Holder’s interest in the Series Notes to be superior to that of any other Series Holders. Series Holders owning a majority of the outstanding principal amount of the Series Notes (“Acting Holders”) shall have the right (but are not obligated) to appoint an agent (“Agent”) on behalf of all Series Holders upon the occurrence of an Event of Default. For purposes hereof, the Collateral Agent appointed under the Note Amendment Agreement shall be the Agent unless otherwise designated by the Acting Holders. If an Event of Default occurs and the Acting Holders elect to appoint an Agent, all Series Holders agree that the Agent shall represent the collective interests of the Series Holders.

 

 

1 0.025 ÷ 365 = 0.00006849315

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 3 of 10

 

(b)       If any Event of Default occurs and is not otherwise cured, the Holder (or Agent, acting in its capacity as the true and lawful attorney-in-fact with full irrevocable power and authority for all Holders), may provide written notice to the Company, that the full unpaid principal amount of this Note, together with interest owing in respect thereof, is immediately due and payable, time being of the essence, and said principal sum shall bear interest from the date of the Event of Default at the rate per annum 4% in excess of the applicable rate of interest provided in Section 2. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of a subsequent Event of Default. All Series Notes for which the then outstanding principal amount, together with interest owing in respect thereof, shall have been paid in accordance herewith shall promptly be surrendered to or as directed by the Company.

 

8.           Application of Moneys. All moneys received by the Agent or Holder pursuant to any right given or action taken under the provisions of this Note shall be separately accounted for, and all such moneys shall, after payment of any costs incurred by Agent or Holder in the collection of such amounts, be applied as follows:

 

(i)       FIRST, to the payment of all interest then due on the Series Notes ratably, according to the amounts due, to the persons entitled thereto without any discrimination or preference; and

 

(ii)      SECOND, to the payment of all principal then due on the Series Notes ratably, according to the amounts due, to the persons entitled thereto without any discrimination or preference.

 

(iii)     Whenever moneys are to be applied by the Agent or Holder, such moneys shall be applied by it at such times, and from time to time, as the Agent or Holder shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Agent or Holder shall apply such funds, it shall fix the date upon which such application is to be made and upon such date interest on the amounts of principal to be paid shall cease to accrue. The Agent or Holder shall give such notice as it may deem appropriate of the deposits with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the holder of any unpaid Series Note until such Series Note shall be presented to the Agent or Holder for appropriate endorsement or for cancellation if fully paid.

 

9.           Listing of Registered Holder of Note. This Note will be registered as to principal amount in the Holder’s name on the books of the Company at its principal office in Plano, Texas (the “Note Register”), after which no transfer hereof shall be valid unless made on the Company’s books at the office of the Company, by the Holder hereof, in person, or by attorney duly authorized in writing, and similarly noted hereon.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 4 of 10

 

10.       Registered Holder Not Deemed a Stockholder. No Holder, as such, of this Note shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Note be construed to confer upon the Holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise.

 

11.       Waiver of Demand, Presentment, Etc. The Company hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereunder, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder.

 

12.       Attorney’s Fees. The Company agrees to pay all costs and expenses, including without limitation reasonable attorney’s fees, which may be incurred by the Collateral Agent and the Holder in collecting any amount due under this Note.

 

13.       Enforceability. In case any provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.

 

14.       Intent to Comply with Usury Laws. In no event will the interest to be paid on this Note exceed the maximum rate provided by law. It is the intent of the parties to comply fully with the usury laws of the State of Florida; accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, in no event shall such Note require the payment or permit the collection of interest (which term, for purposes hereof, shall include any amount which, under Florida law, is deemed to be interest, whether or not such amount is characterized by the parties as interest) in excess of the maximum amount permitted by the laws of the State of Florida. If any excess of interest is unintentionally contracted for, charged or received under this Note, or in the event the maturity of the indebtedness evidenced by the Note is accelerated in whole or in part, or in the event that all of part of the Principal Amount or interest of this Note shall be prepaid, so that the amount of interest contracted for, charged or received under this Note, on the amount of the Principal Amount actually outstanding from time to time under this Note shall exceed the maximum amount of interest permitted by the applicable usury laws, then in any such event (i) the provisions of this paragraph shall govern and control, (ii) neither the Company nor any other person or entity now or hereafter liable for the payment thereof, shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by such applicable usury laws, (iii) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount thereof or refunded to the Company at the Holder’s option, and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful rate of interest allowed under the applicable usury laws as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under the Note which are made for the purpose of determining whether such rate exceeds the maximum lawful rate of interest, shall be made, to the extent permitted by applicable laws, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the Note evidenced thereby, all interest at any time contracted for, charged or received from the Company or otherwise by the Holders in connection with this Note.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 5 of 10

 

15.         Governing Law; Consent to Jurisdiction. This Note shall be governed by and construed in accordance with the laws of the State of Texas without regard to the conflict of laws provisions thereof. In any action between or among any of the parties, whether rising out of this Note or otherwise, each of the parties irrevocably consents to the exclusive jurisdiction and venue of the federal and/or state courts located in Collin County, Texas.

 

16.         Amendment and Waiver. Any waiver or amendment hereto shall be in writing signed by the Holder. No failure on the part of the Holder to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right hereunder preclude any other or further exercise thereof or the exercise of any other rights. The remedies herein provided are cumulative and not exclusive of any other remedies provided by law.

 

17.         Restrictions Against Transfer or Assignment. Neither this Note nor the shares issuable in connection with this Note may be sold, transferred, assigned, pledged, hypothecated or otherwise disposed of by the Registered Holder hereof, in whole or in part, unless and until either (i) the Note or the shares issuable in connection with the Note have been duly and effectively registered for resale under the Securities Act of 1933, as amended, and under any then applicable state securities laws; or (ii) the Registered Holder delivers to the Company a written opinion acceptable to the Company’s counsel that an exemption from such registration requirements is then available with respect to any such proposed sale or disposition. Any transfer of this Note otherwise permissible hereunder shall be made only at the principal office of the Company upon surrender of this Note for cancellation and upon the payment of any transfer tax or other government charge connected therewith, and upon any such transfer a new Series Note will be issued to the transferee in exchange therefor.

 

18.         Entire Agreement; Headings. This Note, the Note Amendment Agreement and the other Loan Documents constitute the entire agreement among the Agent, the Holder and the Company pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, representations and understandings, written or oral, of such parties. The headings are for reference purposes only and shall not be used in construing or interpreting this Note.

 

19.         Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if in writing and delivered in person, or sent by registered or certified mail (return receipt requested) or recognized overnight delivery service, postage pre-paid, or sent by email addressed as follows, or to such other address as such party may notify to the other parties in writing:

 

(a)       If to the Company, to it at the following address:

 

5700 Plano Parkway, Ste. 3600

Plano, Texas 75093

Attn: John Brda, President

Email: john@torchlightenergy.com

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 6 of 10

 

(b)       If to Registered Holder, then to the address listed on the front of this Note, unless changed, by notice in writing as provided for herein.

 

(c)       If to the Collateral Agent, then to the address set forth in the Note Amendment Agreement.

 

A notice or communication will be effective (i) if delivered in person or by overnight courier, on the Business Day it is delivered, (ii) if sent by registered or certified mail, the earlier of the date of actual receipt by the party to whom such notice is required to be given or three (3) days after deposit in the United States mail and (iii) if sent by email, on the date sent. If any notice or other communication is sent by email, the party providing such notice shall, no later than the next business day after such emailed notice is sent, send a written notice by registered or certified mail (return receipt requested) or recognized overnight delivery service, postage pre-paid.

 

20.         Use of Proceeds. The Company intends to use the net proceeds from the funds received hereunder for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt.

 

21.         Survival. The representations, warranties, obligations and covenants of the Company shall survive execution of this Note.

 

22.         Collateral. As security for the prompt performance, observance and payment in full of all Obligations, including the entire indebtedness evidenced by this Note (including the Principal Amount, and all interest thereon, fees and other charges), the Company and its Subsidiaries have agreed to grant first priority Liens on certain assets of the Company to the Collateral Agent for the benefit of the Holders as set forth in the Collateral Documents. All obligations under this Note are secured pursuant to the Collateral Documents.

 

23.         Conversion Rights.

 

(a)       Conversion. At any time after this, the Holder of this Note will have the right, at the Holder’s option, to convert all or any portion of the Principal Amount hereof and any accrued but unpaid interest thereon into shares of common stock, par value $.001 per share, of the Company (“Common Stock”) in a manner and in accordance with Section 23(b) below (unless earlier paid or redeemed) at the conversion price as set forth below in Section 23(c) (subject to adjustment as described herein). The right to convert the Principal Amount or interest thereon of this Note called for redemption will terminate at the close of business on the Business Day prior to the Redemption Payment Date for such Note, unless the Company subsequently fails to pay the applicable Redemption Amount. The shares of Common Stock to be issued upon conversion under this Section 23 are hereinafter referred to as the “Conversion Shares”.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 7 of 10

 

(b)            Mechanics of Holder’s Conversion. In the event that the Holder elects to convert any portion of this Note into Common Stock, the Holder shall give notice of such election by delivering an executed and completed notice of conversion (“Notice of Conversion”) to the Company. The Notice of Conversion will provide a breakdown in reasonable detail of the Principal Amount and/or accrued interest that is being converted and state the denominations in which such Holder wishes the certificate or certificates for the Conversion Shares to be issued. The Registered Holder must surrender this Note to the Company with the Notice of Conversion, unless such Notice of Conversion is only for accrued interest and no Principal Amount. On each Conversion Date (as hereinafter defined) and in accordance with its Notice of Conversion, the Company shall make the appropriate reduction to the Principal Amount and/or accrued interest as entered in its records and shall provide written notice thereof to the Holder within five (5) Business Days after the Conversion Date. Each date on which a Notice of Conversion is delivered or telecopied to the Company in accordance with the provisions hereof shall be deemed a Conversion Date (the “Conversion Date”). Pursuant to the terms of the Notice of Conversion, the Company will issue instructions to its transfer agent as soon as practicable thereafter, to cause to be issued and delivered to the Holder certificates for the number of full shares of Conversion Shares to which such Holder shall be entitled as aforesaid and, if necessary, the Company shall cause to be issued and delivered to the Holder a new promissory note representing any unconverted portion of this Note. The Company shall not issue fractional Conversion Shares upon conversion, but the number of Conversion Shares to be received by any Holder upon conversion shall be rounded down to the next whole number. In the case of the exercise of the conversion rights set forth herein the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Company of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of the Conversion Shares, unless the Holder provides the Company written instructions to the contrary.

 

(c)           Conversion Price. The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, of this Note is convertible shall be $1.50 per share (subject to adjustment as described herein).

 

(d)           Adjustment Provisions. The Conversion Price and number and kind of shares or other securities to be issued upon conversion pursuant to this Note shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:

 

(i)       Reclassification. In case of any reclassification, consolidation or merger of the Company with or into another entity or any merger of another entity with or into the Company, or in the case of any sale, transfer or conveyance of all or substantially all of the assets of the Company (computed on a consolidated basis), each Note then outstanding will, without the consent of any Holder, become convertible only into the kind and amount of securities, cash or other property receivable upon such reclassification, consolidation, merger, sale, transfer or conveyance by a Holder of the number of shares of Common Stock into which such Note was convertible immediately prior thereto, after giving effect to any adjustment event.

 

(ii)       Stock Split, Dividend. If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a subdivision or split of Common Stock, or by the declaration of a dividend on the Common Stock, which dividend is wholly or partially in the form of additional shares of Common Stock or any other securities of the Company, then immediately after the effective date of such subdivision or split-up, or the record date with respect to such dividend, as the case may be, the Conversion Price shall be appropriately reduced so that the holder of this Note thereafter exchanged shall be entitled to receive the percentage of shares of Common Stock which such holder would have owned immediately following such action had this Note been exchanged immediately prior thereto;

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 8 of 10

 

(iii)       Reverse Split. If the number of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding Common Stock or reverse split, then, immediately after the effective date of such combination, the Conversion Price shall be appropriately increased so that the holder of this Note thereafter exchanged shall be entitled to receive the percentage of shares of Common Stock which such holder would have owned immediately following such action had this Note been exchanged immediately prior thereto.

 

(e)           Issuance of New Note. Upon any partial conversion of this Note, a new promissory note containing the same date and provisions of this Note shall be issued by the Company to the Holder for the principal balance of this Note and interest which shall not have been converted or paid. The Holder shall not pay any costs, fees or any other consideration to the Company for the production and issuance of a new promissory note.

 

(f)            Reservation of Shares. The Company shall at all times reserve for issuance and maintain available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the full conversion of the Note, the full number of shares of Common Stock deliverable upon the conversion of the Note from time to time outstanding. The Company shall from time to time (subject to obtaining necessary director and stockholder action), in accordance with the laws of the State of Nevada, increase the authorized number of shares of its Common Stock if at any time the authorized number of shares of its Common Stock remaining unissued shall not be sufficient to permit the conversion of the Note.]

 

24.         Amendment and Restatement.  This Note is an amendment and restatement of the 12% Senior Unsecured Promissory Note of the Company in favor of the Holder dated April 10, 2017 in the  Principal Amount of $4,000,000 (the “Existing Note”).  The terms and provisions of the Existing Note are hereby amended, superseded and restated in their entirety by the terms and provisions of this Note.  This Note is not intended to and shall not constitute a novation, payment and reborrowing or termination of the obligations under the Existing Note.

 

[Remainder of page intentionally left blank. Signature page follows.]

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 9 of 10

 

IN WITNESS WHEREOF, Torchlight Energy Resources, Inc. has caused this Note to be duly executed in its corporate name by the manual signature of its President/CEO.

 

  TORCHLIGHT ENERGY RESOURCES, INC.
     
  By: /s/ John Brda 
    John Brda,
President/CEO

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 10 of 10


Signature Page - $4,000,000 Trust Note

 

 

Exhibit 10.23

 

EXECUTION VERSION

 

AMENDED AND RESTATED NOTE

 

NEITHER THIS AMENDED AND RESTATED 12% 2020 SENIOR secured Promissory Note (THE “NOTE”) NOR THE SECURITIES ISSUABLE IN CONNECTION WITH THIS NOTE have BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“ACT”), OR THE SECURITIES LAWS OF ANY STATE. Neither THIS NOTE nor THE SECURITIES ISSUABLE IN CONNECTION WITH this note MAY BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR DELIVERY TO TORCHLIGHT ENERGY RESOURCES, INC. OF AN OPINION OF LEGAL COUNSEL SATISFACTORY TO TORCHLIGHT ENERGY RESOURCES, INC. THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS.

 

AMENDED AND RESTATED
12% 2020 SENIOR secured Promissory Note
OF
TORCHLIGHT ENERGY RESOURCES, INC.

 

NOTE NO. 2020-APR-2 April 24, 2020
   

FOR VALUE RECEIVED, TORCHLIGHT ENERGY RESOURCES, INC., a Nevada corporation with its principal office located at 5700 Plano Parkway, Ste. 3600, Plano, Texas 75093 (the “Company” or “Debtor”), unconditionally promises to pay to THE DAVID A. STRAZ, JR. IRREVOCABLE TRUST DTD 11/11/1986, THE NORTHERN TRUST COMPANY and CHRISTOPHER M. STRAZ, as Co-Trustees, whose address is 1515 Ringling Blvd., Ste 1100, Sarasota, Florida 34236, or its assignee, upon presentation of this Amended and Restated 12% 2020 Senior Secured Promissory Note (the “Note”) by the holder hereof (the “Registered Holder” or “Holder”) at the office of the Company, the principal amount of $4,500,000 (“Principal Amount”), together with the accrued and unpaid interest thereon and other sums as hereinafter provided, subject to the terms and conditions as set forth below. The effective date of execution and issuance of this Note is April 24, 2020.

 

This Note is made and issued pursuant to and is subject to the Note Amendment Agreement dated the date hereof by and among the Company and the Holder (the “Note Amendment Agreement”). Certain capitalized terms used but not defined in this Note have the respective meanings assigned to them in the Note Amendment Agreement. In the event of a conflict between the terms of this Note and the terms of the Note Amendment Agreement, the terms of the Note Amendment Agreement shall control.

 

1.       Series. This Note is one of a series of duly authorized and issued promissory notes of the Company designated as its Amended and Restated 12% 2020 Senior Secured Promissory Notes in an aggregate principal face value for all notes of this series of up to a maximum of $12,500,000 with no minimum amount (each, a “Series Note,” and collectively, the “Series Notes”). Each Series Notes is being issued in accordance with that certain Subscription Agreement, between the Company and each holder of the Series Notes, and is subject to the terms and conditions set forth in the Subscription Agreement. The Holder of this Note with the holders of all of the Series Notes are sometimes hereinafter collectively referred to as “Series Holders.”

 

 

2.       Schedule for Payment of Principal and Interest. The Principal Amount outstanding hereunder shall be paid in one lump sum payment of $4,000,000 on or before April 10, 2021 (the “Maturity Date”), and the interest on the Principal Amount outstanding hereunder shall be payable at the rate of 12% per annum and shall be due and payable monthly, in arrears, with the initial interest payment due June 1, 2020, and continuing thereafter on the first day of each successive month during the term of this Note. Accrual of interest on the outstanding Principal Amount, payable in cash, shall commence on the date of receipt of funds by the Company and shall continue until payment in full of the outstanding Principal Amount has been made hereunder. The interest so payable will be paid to the person whose name is registered on the records of the Company regarding registration and transfers of this Note (the “Note Register”). Payments made by the Company shall be made to all Series Holders at the same time.

 

3.       Payment. Payment of any sums due to the Holder under the terms of this Note shall be made in United States Dollars by check or wire transfer at the option of the Company. Payments made by the Company shall be made to all Series Holders at the same time. Payment shall be made at the address last appearing on the Note Register of the Company as designated in writing by the Holder hereof from time to time. If any payment hereunder would otherwise become due and payable on a day on which commercial banks in Plano, Texas, are permitted or required to be closed, such payment shall become due and payable on the next succeeding day on which commercial banks in Tampa, Florida, are not permitted or required to be closed (“Business Day”) and, with respect to payments of Principal Amount, interest thereon shall be payable at the then applicable rate during such extension, if any. The forwarding of such funds shall constitute a payment of outstanding principal and interest hereunder and shall satisfy and discharge the liability for principal and interest on this Note to the extent of the sum represented by such payment. Except as provided in Section 4 hereof, this Note may not be prepaid without the prior written consent of the Holder.

 

4.       Company’s Option to Redeem Note. Up to 100%, in whole or in part, of the outstanding Principal Amount of the Note, plus any accrued and unpaid interest, will be subject to redemption at the option of the Company. Any amount of the Note subject to redemption, as set forth herein (the “Redemption Amount”), may be redeemed by the Company at any time and from time to time, upon not less than 10 nor more than 30 days’ notice to the Holder. If less than 100% of the outstanding Principal Amount of each Series Note, plus any accrued and unpaid interest thereon, is to be redeemed at any time: (a) the Company must redeem a pro rata amount of each Series Note, and (b) the Redemption Amount applied to each Series Note shall be in a minimum amount of $1,000,000 or an integral multiple thereof. The Company shall deliver to the Holder a written Notice of Redemption (the “Notice of Redemption”) specifying the date for the redemption (the “Redemption Payment Date”), which date shall be at least 10 but not more than 30 days after the date of the Notice of Redemption (the “Redemption Period”). On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 2 of 10

 

5.       2.5% Annual Stock Payment. The Registered Holders of Amended and Restated 2020 Senior Secured Promissory Notes shall be entitled to receive payments of common stock based on the Principal Amount outstanding on the Series Notes (the “Stock Payments”). The Stock Payments shall be calculated and payable (i) as of April 1st of each year that the Series Notes remain outstanding, and (ii) as of a Redemption Payment Date, if applicable, in each case (a “Stock Payment Date”). The number of shares of common stock that a Registered Holder receives is determined by multiplying the Principal Amount that is subject to a Stock Payment by 0.00006849315,1 multiplying that result by the number of days since the previous Stock Payment Date that such Principal Amount was subject to, and dividing that result by the Volume-Weighted Average Price (as defined below) on the present Stock Payment Date.

 

As used herein, the “Volume-Weighted Average Price” means the volume weighted average sale price of the Company’s common stock on NASDAQ as reported by NASDAQ for the 30 consecutive Trading Day (as defined below) period immediately preceding the Stock Payment Date, or, if NASDAQ is not the principal trading market for the Company’s common stock, the 30-day volume weighted average sale price of the Company’s common stock on the principal securities exchange or trading market where the Company’s common stock is listed or traded as reported by Bloomberg L.P. or an equivalent, reliable reporting service. If the Volume-Weighted Average Price cannot be calculated for the Company’s common stock on such date in the manner provided above or if the Company’s common stock is not publicly-traded, the Volume-Weighted Average Price shall be the fair market value as mutually determined by the Company and the Registered Holder. “Trading Day” means any day on which the Company’s common stock is traded for any period on NASDAQ, or on the principal securities exchange or other securities market on which the Company’s common stock is then being traded.

 

6.       Events of Defaults. Any Default or Event of Default as set forth in the Note Amendment Agreement shall constitute an Event of Default under this Note

 

7.       The Holder’s Rights and Remedies upon the Occurrence of an Event of Default. Without limiting any rights or remedies available to the Holder and the Collateral Agent under any of the Loan Documents or otherwise available under Applicable Law, upon the occurrence of an Event of Default, the Holder and the Collateral Agent shall have the following rights and remedies:

 

(a)       This Note is issued under and pursuant to a private placement of Series Notes and, notwithstanding any other provision to the contrary in this Note, the Holder agrees that its rights granted hereunder are on parity with interests of the Series Holders of the other Series Notes issued pursuant to the private placement and the rights, powers, privileges and remedies of the Holder of this Note shall be at parity with the Series Holders of other Series Notes issued pursuant to this private placement. Notwithstanding any provision of this Note to the contrary, no Series Holders shall take any action which would cause that Holder’s interest in the Series Notes to be superior to that of any other Series Holders. Series Holders owning a majority of the outstanding principal amount of the Series Notes (“Acting Holders”) shall have the right (but are not obligated) to appoint an agent (“Agent”) on behalf of all Series Holders upon the occurrence of an Event of Default. For purposes hereof, the Collateral Agent appointed under the Note Amendment Agreement shall be the Agent unless otherwise designated by the Acting Holders. If an Event of Default occurs and the Acting Holders elect to appoint an Agent, all Series Holders agree that the Agent shall represent the collective interests of the Series Holders.

 

 
1 0.025 ÷ 365 = 0.00006849315

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 3 of 10

 

(b)       If any Event of Default occurs and is not otherwise cured, the Holder (or Agent, acting in its capacity as the true and lawful attorney-in-fact with full irrevocable power and authority for all Holders), may provide written notice to the Company, that the full unpaid principal amount of this Note, together with interest owing in respect thereof, is immediately due and payable, time being of the essence, and said principal sum shall bear interest from the date of the Event of Default at the rate per annum 4% in excess of the applicable rate of interest provided in Section 2. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of a subsequent Event of Default. All Series Notes for which the then outstanding principal amount, together with interest owing in respect thereof, shall have been paid in accordance herewith shall promptly be surrendered to or as directed by the Company.

 

8.       Application of Moneys. All moneys received by the Agent or Holder pursuant to any right given or action taken under the provisions of this Note shall be separately accounted for, and all such moneys shall, after payment of any costs incurred by Agent or Holder in the collection of such amounts, be applied as follows:

 

(i)       FIRST, to the payment of all interest then due on the Series Notes ratably, according to the amounts due, to the persons entitled thereto without any discrimination or preference; and

 

(ii)      SECOND, to the payment of all principal then due on the Series Notes ratably, according to the amounts due, to the persons entitled thereto without any discrimination or preference.

 

(iii)     Whenever moneys are to be applied by the Agent or Holder, such moneys shall be applied by it at such times, and from time to time, as the Agent or Holder shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Agent or Holder shall apply such funds, it shall fix the date upon which such application is to be made and upon such date interest on the amounts of principal to be paid shall cease to accrue. The Agent or Holder shall give such notice as it may deem appropriate of the deposits with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the holder of any unpaid Series Note until such Series Note shall be presented to the Agent or Holder for appropriate endorsement or for cancellation if fully paid.

 

9.       Listing of Registered Holder of Note. This Note will be registered as to principal amount in the Holder’s name on the books of the Company at its principal office in Plano, Texas (the “Note Register”), after which no transfer hereof shall be valid unless made on the Company’s books at the office of the Company, by the Holder hereof, in person, or by attorney duly authorized in writing, and similarly noted hereon.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 4 of 10

 

10.    Registered Holder Not Deemed a Stockholder. No Holder, as such, of this Note shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Note be construed to confer upon the Holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise.

 

11.     Waiver of Demand, Presentment, Etc. The Company hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereunder, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder.

 

12.     Attorney’s Fees. The Company agrees to pay all costs and expenses, including without limitation reasonable attorney’s fees, which may be incurred by the Collateral Agent and the Holder in collecting any amount due under this Note.

 

13.     Enforceability. In case any provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.

 

14.     Intent to Comply with Usury Laws. In no event will the interest to be paid on this Note exceed the maximum rate provided by law. It is the intent of the parties to comply fully with the usury laws of the State of Florida; accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, in no event shall such Note require the payment or permit the collection of interest (which term, for purposes hereof, shall include any amount which, under Florida law, is deemed to be interest, whether or not such amount is characterized by the parties as interest) in excess of the maximum amount permitted by the laws of the State of Florida. If any excess of interest is unintentionally contracted for, charged or received under this Note, or in the event the maturity of the indebtedness evidenced by the Note is accelerated in whole or in part, or in the event that all of part of the Principal Amount or interest of this Note shall be prepaid, so that the amount of interest contracted for, charged or received under this Note, on the amount of the Principal Amount actually outstanding from time to time under this Note shall exceed the maximum amount of interest permitted by the applicable usury laws, then in any such event (i) the provisions of this paragraph shall govern and control, (ii) neither the Company nor any other person or entity now or hereafter liable for the payment thereof, shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by such applicable usury laws, (iii) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount thereof or refunded to the Company at the Holder’s option, and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful rate of interest allowed under the applicable usury laws as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under the Note which are made for the purpose of determining whether such rate exceeds the maximum lawful rate of interest, shall be made, to the extent permitted by applicable laws, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the Note evidenced thereby, all interest at any time contracted for, charged or received from the Company or otherwise by the Holders in connection with this Note.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 5 of 10

 

15.     Governing Law; Consent to Jurisdiction. This Note shall be governed by and construed in accordance with the laws of the State of Texas without regard to the conflict of laws provisions thereof. In any action between or among any of the parties, whether rising out of this Note or otherwise, each of the parties irrevocably consents to the exclusive jurisdiction and venue of the federal and/or state courts located in Collin County, Texas.

 

16.     Amendment and Waiver. Any waiver or amendment hereto shall be in writing signed by the Holder. No failure on the part of the Holder to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right hereunder preclude any other or further exercise thereof or the exercise of any other rights. The remedies herein provided are cumulative and not exclusive of any other remedies provided by law.

 

17.     Restrictions Against Transfer or Assignment. Neither this Note nor the shares issuable in connection with this Note may be sold, transferred, assigned, pledged, hypothecated or otherwise disposed of by the Registered Holder hereof, in whole or in part, unless and until either (i) the Note or the shares issuable in connection with the Note have been duly and effectively registered for resale under the Securities Act of 1933, as amended, and under any then applicable state securities laws; or (ii) the Registered Holder delivers to the Company a written opinion acceptable to the Company’s counsel that an exemption from such registration requirements is then available with respect to any such proposed sale or disposition. Any transfer of this Note otherwise permissible hereunder shall be made only at the principal office of the Company upon surrender of this Note for cancellation and upon the payment of any transfer tax or other government charge connected therewith, and upon any such transfer a new Series Note will be issued to the transferee in exchange therefor.

 

18.     Entire Agreement; Headings. This Note, the Note Amendment Agreement and the other Loan Documents constitute the entire agreement among the Agent, the Holder and the Company pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, representations and understandings, written or oral, of such parties. The headings are for reference purposes only and shall not be used in construing or interpreting this Note.

 

19.     Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if in writing and delivered in person, or sent by registered or certified mail (return receipt requested) or recognized overnight delivery service, postage pre-paid, or sent by email addressed as follows, or to such other address as such party may notify to the other parties in writing:

 

(a)       If to the Company, to it at the following address:

 

5700 Plano Parkway, Ste. 3600
Plano, Texas 75093
Attn: John Brda, President

Email: john@torchlightenergy.com

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 6 of 10

 

(b)      If to Registered Holder, then to the address listed on the front of this Note, unless changed, by notice in writing as provided for herein.

 

(c)       If to the Collateral Agent, then to the address set forth in the Note Amendment Agreement.

 

A notice or communication will be effective (i) if delivered in person or by overnight courier, on the Business Day it is delivered, (ii) if sent by registered or certified mail, the earlier of the date of actual receipt by the party to whom such notice is required to be given or three (3) days after deposit in the United States mail and (iii) if sent by email, on the date sent. If any notice or other communication is sent by email, the party providing such notice shall, no later than the next business day after such emailed notice is sent, send a written notice by registered or certified mail (return receipt requested) or recognized overnight delivery service, postage pre-paid.

 

20.     Use of Proceeds. The Company intends to use the net proceeds from the funds received hereunder for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt.

 

21.     Survival. The representations, warranties, obligations and covenants of the Company shall survive execution of this Note.

 

22.     Collateral. As security for the prompt performance, observance and payment in full of all Obligations, including the entire indebtedness evidenced by this Note (including the Principal Amount, and all interest thereon, fees and other charges), the Company and its Subsidiaries have agreed to grant first priority Liens on certain assets of the Company to the Collateral Agent for the benefit of the Holders as set forth in the Collateral Documents. All obligations under this Note are secured pursuant to the Collateral Documents.

 

23.     Conversion Rights.

 

(a)       Conversion. At any time after this, the Holder of this Note will have the right, at the Holder’s option, to convert all or any portion of the Principal Amount hereof and any accrued but unpaid interest thereon into shares of common stock, par value $.001 per share, of the Company (“Common Stock”) in a manner and in accordance with Section 23(b) below (unless earlier paid or redeemed) at the conversion price as set forth below in Section 23(c) (subject to adjustment as described herein). The right to convert the Principal Amount or interest thereon of this Note called for redemption will terminate at the close of business on the Business Day prior to the Redemption Payment Date for such Note, unless the Company subsequently fails to pay the applicable Redemption Amount. The shares of Common Stock to be issued upon conversion under this Section 23 are hereinafter referred to as the “Conversion Shares”.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 7 of 10

 

(b)       Mechanics of Holder’s Conversion. In the event that the Holder elects to convert any portion of this Note into Common Stock, the Holder shall give notice of such election by delivering an executed and completed notice of conversion (“Notice of Conversion”) to the Company. The Notice of Conversion will provide a breakdown in reasonable detail of the Principal Amount and/or accrued interest that is being converted and state the denominations in which such Holder wishes the certificate or certificates for the Conversion Shares to be issued. The Registered Holder must surrender this Note to the Company with the Notice of Conversion, unless such Notice of Conversion is only for accrued interest and no Principal Amount. On each Conversion Date (as hereinafter defined) and in accordance with its Notice of Conversion, the Company shall make the appropriate reduction to the Principal Amount and/or accrued interest as entered in its records and shall provide written notice thereof to the Holder within five (5) Business Days after the Conversion Date. Each date on which a Notice of Conversion is delivered or telecopied to the Company in accordance with the provisions hereof shall be deemed a Conversion Date (the “Conversion Date”). Pursuant to the terms of the Notice of Conversion, the Company will issue instructions to its transfer agent as soon as practicable thereafter, to cause to be issued and delivered to the Holder certificates for the number of full shares of Conversion Shares to which such Holder shall be entitled as aforesaid and, if necessary, the Company shall cause to be issued and delivered to the Holder a new promissory note representing any unconverted portion of this Note. The Company shall not issue fractional Conversion Shares upon conversion, but the number of Conversion Shares to be received by any Holder upon conversion shall be rounded down to the next whole number. In the case of the exercise of the conversion rights set forth herein the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Company of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of the Conversion Shares, unless the Holder provides the Company written instructions to the contrary.

 

(c)       Conversion Price. The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, of this Note is convertible shall be $1.50 per share (subject to adjustment as described herein).

 

(d)       Adjustment Provisions. The Conversion Price and number and kind of shares or other securities to be issued upon conversion pursuant to this Note shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:

 

(i)       Reclassification. In case of any reclassification, consolidation or merger of the Company with or into another entity or any merger of another entity with or into the Company, or in the case of any sale, transfer or conveyance of all or substantially all of the assets of the Company (computed on a consolidated basis), each Note then outstanding will, without the consent of any Holder, become convertible only into the kind and amount of securities, cash or other property receivable upon such reclassification, consolidation, merger, sale, transfer or conveyance by a Holder of the number of shares of Common Stock into which such Note was convertible immediately prior thereto, after giving effect to any adjustment event.

 

(ii)       Stock Split, Dividend. If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a subdivision or split of Common Stock, or by the declaration of a dividend on the Common Stock, which dividend is wholly or partially in the form of additional shares of Common Stock or any other securities of the Company, then immediately after the effective date of such subdivision or split-up, or the record date with respect to such dividend, as the case may be, the Conversion Price shall be appropriately reduced so that the holder of this Note thereafter exchanged shall be entitled to receive the percentage of shares of Common Stock which such holder would have owned immediately following such action had this Note been exchanged immediately prior thereto;

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 8 of 10

 

(iii)       Reverse Split. If the number of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding Common Stock or reverse split, then, immediately after the effective date of such combination, the Conversion Price shall be appropriately increased so that the holder of this Note thereafter exchanged shall be entitled to receive the percentage of shares of Common Stock which such holder would have owned immediately following such action had this Note been exchanged immediately prior thereto.

 

(e)       Issuance of New Note. Upon any partial conversion of this Note, a new promissory note containing the same date and provisions of this Note shall be issued by the Company to the Holder for the principal balance of this Note and interest which shall not have been converted or paid. The Holder shall not pay any costs, fees or any other consideration to the Company for the production and issuance of a new promissory note.

 

(f)       Reservation of Shares. The Company shall at all times reserve for issuance and maintain available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the full conversion of the Note, the full number of shares of Common Stock deliverable upon the conversion of the Note from time to time outstanding. The Company shall from time to time (subject to obtaining necessary director and stockholder action), in accordance with the laws of the State of Nevada, increase the authorized number of shares of its Common Stock if at any time the authorized number of shares of its Common Stock remaining unissued shall not be sufficient to permit the conversion of the Note.]

 

24.     Amendment and Restatement. This Note is an amendment and restatement of the 12% Senior Unsecured Promissory Note of the Company in favor of the Holder dated February 6, 2018 in the Principal Amount of $4,500,000 (the “Existing Note”). The terms and provisions of the Existing Note are hereby amended, superseded and restated in their entirety by the terms and provisions of this Note. This Note is not intended to and shall not constitute a novation, payment and reborrowing or termination of the obligations under the Existing Note.

 

[Remainder of page intentionally left blank. Signature page follows.]

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 9 of 10

 

IN WITNESS WHEREOF, Torchlight Energy Resources, Inc. has caused this Note to be duly executed in its corporate name by the manual signature of its President/CEO.

 

  TORCHLIGHT ENERGY RESOURCES, INC.
   
  By:  /s/ John Brda 
    John Brda, President/CEO

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 10 of 10

Signature Page - $4,500,000 Trust Note

 

 

Exhibit 10.24

 

EXECUTION VERSION

 

AMENDED AND RESTATED NOTE

 

NEITHER THIS AMENDED AND RESTATED 12% 2020 SENIOR secured Promissory Note (THE “NOTE”) NOR THE SECURITIES ISSUABLE IN CONNECTION WITH THIS NOTE have BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“ACT”), OR THE SECURITIES LAWS OF ANY STATE. Neither THIS NOTE nor THE SECURITIES ISSUABLE IN CONNECTION WITH this note MAY BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR DELIVERY TO TORCHLIGHT ENERGY RESOURCES, INC. OF AN OPINION OF LEGAL COUNSEL SATISFACTORY TO TORCHLIGHT ENERGY RESOURCES, INC. THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS.

 

AMENDED AND RESTATED
12% 2020 SENIOR secured Promissory Note
OF
TORCHLIGHT ENERGY RESOURCES, INC.

 

NOTE NO. 2020-APR-3 April 24, 2020
   

FOR VALUE RECEIVED, TORCHLIGHT ENERGY RESOURCES, INC., a Nevada corporation with its principal office located at 5700 Plano Parkway, Ste. 3600, Plano, Texas 75093 (the “Company” or “Debtor”), unconditionally promises to pay to DAVID A STRAZ, JR. FOUNDATION whose address is 4401 West Kennedy Blvd, Suite 150, Tampa, Florida 33609, or its assignee, upon presentation of this Amended and Restated 12% 2020 Senior Secured Promissory Note (the “Note”) by the holder hereof (the “Registered Holder” or “Holder”) at the office of the Company, the principal amount of $4,000,000 (“Principal Amount”), together with the accrued and unpaid interest thereon and other sums as hereinafter provided, subject to the terms and conditions as set forth below. The effective date of execution and issuance of this Note is April 24, 2020.

 

This Note is made and issued pursuant to and is subject to the Note Amendment Agreement dated the date hereof by and among the Company and the Holder (the “Note Amendment Agreement”). Certain capitalized terms used but not defined in this Note have the respective meanings assigned to them in the Note Amendment Agreement. In the event of a conflict between the terms of this Note and the terms of the Note Amendment Agreement, the terms of the Note Amendment Agreement shall control.

 

1.       Series. This Note is one of a series of duly authorized and issued promissory notes of the Company designated as its Amended and Restated 12% 2020 Senior Secured Promissory Notes in an aggregate principal face value for all notes of this series of up to a maximum of $12,500,000 with no minimum amount (each, a “Series Note,” and collectively, the “Series Notes”). Each Series Notes is being issued in accordance with that certain Subscription Agreement, between the Company and each holder of the Series Notes, and is subject to the terms and conditions set forth in the Subscription Agreement. The Holder of this Note with the holders of all of the Series Notes are sometimes hereinafter collectively referred to as “Series Holders.”

 

 

2.       Schedule for Payment of Principal and Interest. The Principal Amount outstanding hereunder shall be paid in one lump sum payment of $4,000,000 on or before April 10, 2021 (the “Maturity Date”), and the interest on the Principal Amount outstanding hereunder shall be payable at the rate of 12% per annum and shall be due and payable monthly, in arrears, with the initial interest payment due June 1, 2020, and continuing thereafter on the first day of each successive month during the term of this Note. Accrual of interest on the outstanding Principal Amount, payable in cash, shall commence on the date of receipt of funds by the Company and shall continue until payment in full of the outstanding Principal Amount has been made hereunder. The interest so payable will be paid to the person whose name is registered on the records of the Company regarding registration and transfers of this Note (the “Note Register”). Payments made by the Company shall be made to all Series Holders at the same time.

 

3.       Payment. Payment of any sums due to the Holder under the terms of this Note shall be made in United States Dollars by check or wire transfer at the option of the Company. Payments made by the Company shall be made to all Series Holders at the same time. Payment shall be made at the address last appearing on the Note Register of the Company as designated in writing by the Holder hereof from time to time. If any payment hereunder would otherwise become due and payable on a day on which commercial banks in Plano, Texas, are permitted or required to be closed, such payment shall become due and payable on the next succeeding day on which commercial banks in Tampa, Florida, are not permitted or required to be closed (“Business Day”) and, with respect to payments of Principal Amount, interest thereon shall be payable at the then applicable rate during such extension, if any. The forwarding of such funds shall constitute a payment of outstanding principal and interest hereunder and shall satisfy and discharge the liability for principal and interest on this Note to the extent of the sum represented by such payment. Except as provided in Section 4 hereof, this Note may not be prepaid without the prior written consent of the Holder.

 

4.       Company’s Option to Redeem Note. Up to 100%, in whole or in part, of the outstanding Principal Amount of the Note, plus any accrued and unpaid interest, will be subject to redemption at the option of the Company. Any amount of the Note subject to redemption, as set forth herein (the “Redemption Amount”), may be redeemed by the Company at any time and from time to time, upon not less than 10 nor more than 30 days’ notice to the Holder. If less than 100% of the outstanding Principal Amount of each Series Note, plus any accrued and unpaid interest thereon, is to be redeemed at any time: (a) the Company must redeem a pro rata amount of each Series Note, and (b) the Redemption Amount applied to each Series Note shall be in a minimum amount of $1,000,000 or an integral multiple thereof. The Company shall deliver to the Holder a written Notice of Redemption (the “Notice of Redemption”) specifying the date for the redemption (the “Redemption Payment Date”), which date shall be at least 10 but not more than 30 days after the date of the Notice of Redemption (the “Redemption Period”). On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 2 of 10

 

5.       2.5% Annual Stock Payment. The Registered Holders of Amended and Restated 2020 Senior Secured Promissory Notes shall be entitled to receive payments of common stock based on the Principal Amount outstanding on the Series Notes (the “Stock Payments”). The Stock Payments shall be calculated and payable (i) as of April 1st of each year that the Series Notes remain outstanding, and (ii) as of a Redemption Payment Date, if applicable, in each case (a “Stock Payment Date”). The number of shares of common stock that a Registered Holder receives is determined by multiplying the Principal Amount that is subject to a Stock Payment by 0.00006849315,1 multiplying that result by the number of days since the previous Stock Payment Date that such Principal Amount was subject to, and dividing that result by the Volume-Weighted Average Price (as defined below) on the present Stock Payment Date.

 

As used herein, the “Volume-Weighted Average Price” means the volume weighted average sale price of the Company’s common stock on NASDAQ as reported by NASDAQ for the 30 consecutive Trading Day (as defined below) period immediately preceding the Stock Payment Date, or, if NASDAQ is not the principal trading market for the Company’s common stock, the 30-day volume weighted average sale price of the Company’s common stock on the principal securities exchange or trading market where the Company’s common stock is listed or traded as reported by Bloomberg L.P. or an equivalent, reliable reporting service. If the Volume-Weighted Average Price cannot be calculated for the Company’s common stock on such date in the manner provided above or if the Company’s common stock is not publicly-traded, the Volume-Weighted Average Price shall be the fair market value as mutually determined by the Company and the Registered Holder. “Trading Day” means any day on which the Company’s common stock is traded for any period on NASDAQ, or on the principal securities exchange or other securities market on which the Company’s common stock is then being traded.

 

6.       Events of Defaults. Any Default or Event of Default as set forth in the Note Amendment Agreement shall constitute an Event of Default under this Note

 

7.       The Holder’s Rights and Remedies upon the Occurrence of an Event of Default. Without limiting any rights or remedies available to the Holder and the Collateral Agent under any of the Loan Documents or otherwise available under Applicable Law, upon the occurrence of an Event of Default, the Holder and the Collateral Agent shall have the following rights and remedies:

 

(a)       This Note is issued under and pursuant to a private placement of Series Notes and, notwithstanding any other provision to the contrary in this Note, the Holder agrees that its rights granted hereunder are on parity with interests of the Series Holders of the other Series Notes issued pursuant to the private placement and the rights, powers, privileges and remedies of the Holder of this Note shall be at parity with the Series Holders of other Series Notes issued pursuant to this private placement. Notwithstanding any provision of this Note to the contrary, no Series Holders shall take any action which would cause that Holder’s interest in the Series Notes to be superior to that of any other Series Holders. Series Holders owning a majority of the outstanding principal amount of the Series Notes (“Acting Holders”) shall have the right (but are not obligated) to appoint an agent (“Agent”) on behalf of all Series Holders upon the occurrence of an Event of Default. For purposes hereof, the Collateral Agent appointed under the Note Amendment Agreement shall be the Agent unless otherwise designated by the Acting Holders. If an Event of Default occurs and the Acting Holders elect to appoint an Agent, all Series Holders agree that the Agent shall represent the collective interests of the Series Holders.

 

 
1 0.025 ÷ 365 = 0.00006849315

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 3 of 10

 

(b)       If any Event of Default occurs and is not otherwise cured, the Holder (or Agent, acting in its capacity as the true and lawful attorney-in-fact with full irrevocable power and authority for all Holders), may provide written notice to the Company, that the full unpaid principal amount of this Note, together with interest owing in respect thereof, is immediately due and payable, time being of the essence, and said principal sum shall bear interest from the date of the Event of Default at the rate per annum 4% in excess of the applicable rate of interest provided in Section 2. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of a subsequent Event of Default. All Series Notes for which the then outstanding principal amount, together with interest owing in respect thereof, shall have been paid in accordance herewith shall promptly be surrendered to or as directed by the Company.

 

8.       Application of Moneys. All moneys received by the Agent or Holder pursuant to any right given or action taken under the provisions of this Note shall be separately accounted for, and all such moneys shall, after payment of any costs incurred by Agent or Holder in the collection of such amounts, be applied as follows:

 

(i)       FIRST, to the payment of all interest then due on the Series Notes ratably, according to the amounts due, to the persons entitled thereto without any discrimination or preference; and

 

(ii)       SECOND, to the payment of all principal then due on the Series Notes ratably, according to the amounts due, to the persons entitled thereto without any discrimination or preference.

 

(iii)       Whenever moneys are to be applied by the Agent or Holder, such moneys shall be applied by it at such times, and from time to time, as the Agent or Holder shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Agent or Holder shall apply such funds, it shall fix the date upon which such application is to be made and upon such date interest on the amounts of principal to be paid shall cease to accrue. The Agent or Holder shall give such notice as it may deem appropriate of the deposits with it of any such moneys and of the fixing of any such date, and shall not be required to make payment to the holder of any unpaid Series Note until such Series Note shall be presented to the Agent or Holder for appropriate endorsement or for cancellation if fully paid.

 

9.       Listing of Registered Holder of Note. This Note will be registered as to principal amount in the Holder’s name on the books of the Company at its principal office in Plano, Texas (the “Note Register”), after which no transfer hereof shall be valid unless made on the Company’s books at the office of the Company, by the Holder hereof, in person, or by attorney duly authorized in writing, and similarly noted hereon.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 4 of 10

 

10.      Registered Holder Not Deemed a Stockholder. No Holder, as such, of this Note shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Note be construed to confer upon the Holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise.

 

11.      Waiver of Demand, Presentment, Etc. The Company hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereunder, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder.

 

12.      Attorney’s Fees. The Company agrees to pay all costs and expenses, including without limitation reasonable attorney’s fees, which may be incurred by the Collateral Agent and the Holder in collecting any amount due under this Note.

 

13.      Enforceability. In case any provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.

 

14.      Intent to Comply with Usury Laws. In no event will the interest to be paid on this Note exceed the maximum rate provided by law. It is the intent of the parties to comply fully with the usury laws of the State of Florida; accordingly, it is agreed that notwithstanding any provisions to the contrary in this Note, in no event shall such Note require the payment or permit the collection of interest (which term, for purposes hereof, shall include any amount which, under Florida law, is deemed to be interest, whether or not such amount is characterized by the parties as interest) in excess of the maximum amount permitted by the laws of the State of Florida. If any excess of interest is unintentionally contracted for, charged or received under this Note, or in the event the maturity of the indebtedness evidenced by the Note is accelerated in whole or in part, or in the event that all of part of the Principal Amount or interest of this Note shall be prepaid, so that the amount of interest contracted for, charged or received under this Note, on the amount of the Principal Amount actually outstanding from time to time under this Note shall exceed the maximum amount of interest permitted by the applicable usury laws, then in any such event (i) the provisions of this paragraph shall govern and control, (ii) neither the Company nor any other person or entity now or hereafter liable for the payment thereof, shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by such applicable usury laws, (iii) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount thereof or refunded to the Company at the Holder’s option, and (iv) the effective rate of interest shall be automatically reduced to the maximum lawful rate of interest allowed under the applicable usury laws as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under the Note which are made for the purpose of determining whether such rate exceeds the maximum lawful rate of interest, shall be made, to the extent permitted by applicable laws, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the Note evidenced thereby, all interest at any time contracted for, charged or received from the Company or otherwise by the Holders in connection with this Note.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 5 of 10

 

15.      Governing Law; Consent to Jurisdiction. This Note shall be governed by and construed in accordance with the laws of the State of Texas without regard to the conflict of laws provisions thereof. In any action between or among any of the parties, whether rising out of this Note or otherwise, each of the parties irrevocably consents to the exclusive jurisdiction and venue of the federal and/or state courts located in Collin County, Texas.

 

16.      Amendment and Waiver. Any waiver or amendment hereto shall be in writing signed by the Holder. No failure on the part of the Holder to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Holder of any right hereunder preclude any other or further exercise thereof or the exercise of any other rights. The remedies herein provided are cumulative and not exclusive of any other remedies provided by law.

 

17.      Restrictions Against Transfer or Assignment. Neither this Note nor the shares issuable in connection with this Note may be sold, transferred, assigned, pledged, hypothecated or otherwise disposed of by the Registered Holder hereof, in whole or in part, unless and until either (i) the Note or the shares issuable in connection with the Note have been duly and effectively registered for resale under the Securities Act of 1933, as amended, and under any then applicable state securities laws; or (ii) the Registered Holder delivers to the Company a written opinion acceptable to the Company’s counsel that an exemption from such registration requirements is then available with respect to any such proposed sale or disposition. Any transfer of this Note otherwise permissible hereunder shall be made only at the principal office of the Company upon surrender of this Note for cancellation and upon the payment of any transfer tax or other government charge connected therewith, and upon any such transfer a new Series Note will be issued to the transferee in exchange therefor.

 

18.      Entire Agreement; Headings. This Note, the Note Amendment Agreement and the other Loan Documents constitute the entire agreement among the Agent, the Holder and the Company pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, representations and understandings, written or oral, of such parties. The headings are for reference purposes only and shall not be used in construing or interpreting this Note.

 

19.      Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if in writing and delivered in person, or sent by registered or certified mail (return receipt requested) or recognized overnight delivery service, postage pre-paid, or sent by email addressed as follows, or to such other address as such party may notify to the other parties in writing:

 

(a)       If to the Company, to it at the following address:

 

5700 Plano Parkway, Ste. 3600
Plano, Texas 75093
Attn: John Brda, President
Email: john@torchlightenergy.com

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 6 of 10

 

(b)       If to Registered Holder, then to the address listed on the front of this Note, unless changed, by notice in writing as provided for herein.

 

(c)       If to the Collateral Agent, then to the address set forth in the Note Amendment Agreement.

 

A notice or communication will be effective (i) if delivered in person or by overnight courier, on the Business Day it is delivered, (ii) if sent by registered or certified mail, the earlier of the date of actual receipt by the party to whom such notice is required to be given or three (3) days after deposit in the United States mail and (iii) if sent by email, on the date sent. If any notice or other communication is sent by email, the party providing such notice shall, no later than the next business day after such emailed notice is sent, send a written notice by registered or certified mail (return receipt requested) or recognized overnight delivery service, postage pre-paid.

 

20.      Use of Proceeds. The Company intends to use the net proceeds from the funds received hereunder for working capital and general corporate purposes, which includes, without limitation, drilling capital, lease acquisition capital and repayment of prior debt.

 

21.      Survival. The representations, warranties, obligations and covenants of the Company shall survive execution of this Note.

 

22.      Collateral. As security for the prompt performance, observance and payment in full of all Obligations, including the entire indebtedness evidenced by this Note (including the Principal Amount, and all interest thereon, fees and other charges), the Company and its Subsidiaries have agreed to grant first priority Liens on certain assets of the Company to the Collateral Agent for the benefit of the Holders as set forth in the Collateral Documents. All obligations under this Note are secured pursuant to the Collateral Documents.

 

23.      Conversion Rights.

 

(a)       Conversion. At any time after this, the Holder of this Note will have the right, at the Holder’s option, to convert all or any portion of the Principal Amount hereof and any accrued but unpaid interest thereon into shares of common stock, par value $.001 per share, of the Company (“Common Stock”) in a manner and in accordance with Section 23(b) below (unless earlier paid or redeemed) at the conversion price as set forth below in Section 23(c) (subject to adjustment as described herein). The right to convert the Principal Amount or interest thereon of this Note called for redemption will terminate at the close of business on the Business Day prior to the Redemption Payment Date for such Note, unless the Company subsequently fails to pay the applicable Redemption Amount. The shares of Common Stock to be issued upon conversion under this Section 23 are hereinafter referred to as the “Conversion Shares”.

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 7 of 10

 

(b)       Mechanics of Holder’s Conversion. In the event that the Holder elects to convert any portion of this Note into Common Stock, the Holder shall give notice of such election by delivering an executed and completed notice of conversion (“Notice of Conversion”) to the Company. The Notice of Conversion will provide a breakdown in reasonable detail of the Principal Amount and/or accrued interest that is being converted and state the denominations in which such Holder wishes the certificate or certificates for the Conversion Shares to be issued. The Registered Holder must surrender this Note to the Company with the Notice of Conversion, unless such Notice of Conversion is only for accrued interest and no Principal Amount. On each Conversion Date (as hereinafter defined) and in accordance with its Notice of Conversion, the Company shall make the appropriate reduction to the Principal Amount and/or accrued interest as entered in its records and shall provide written notice thereof to the Holder within five (5) Business Days after the Conversion Date. Each date on which a Notice of Conversion is delivered or telecopied to the Company in accordance with the provisions hereof shall be deemed a Conversion Date (the “Conversion Date”). Pursuant to the terms of the Notice of Conversion, the Company will issue instructions to its transfer agent as soon as practicable thereafter, to cause to be issued and delivered to the Holder certificates for the number of full shares of Conversion Shares to which such Holder shall be entitled as aforesaid and, if necessary, the Company shall cause to be issued and delivered to the Holder a new promissory note representing any unconverted portion of this Note. The Company shall not issue fractional Conversion Shares upon conversion, but the number of Conversion Shares to be received by any Holder upon conversion shall be rounded down to the next whole number. In the case of the exercise of the conversion rights set forth herein the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Company of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of the Conversion Shares, unless the Holder provides the Company written instructions to the contrary.

 

(c)       Conversion Price. The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, of this Note is convertible shall be $1.50 per share (subject to adjustment as described herein).

 

(d)       Adjustment Provisions. The Conversion Price and number and kind of shares or other securities to be issued upon conversion pursuant to this Note shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:

 

(i)       Reclassification. In case of any reclassification, consolidation or merger of the Company with or into another entity or any merger of another entity with or into the Company, or in the case of any sale, transfer or conveyance of all or substantially all of the assets of the Company (computed on a consolidated basis), each Note then outstanding will, without the consent of any Holder, become convertible only into the kind and amount of securities, cash or other property receivable upon such reclassification, consolidation, merger, sale, transfer or conveyance by a Holder of the number of shares of Common Stock into which such Note was convertible immediately prior thereto, after giving effect to any adjustment event.

 

(ii)       Stock Split, Dividend. If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a subdivision or split of Common Stock, or by the declaration of a dividend on the Common Stock, which dividend is wholly or partially in the form of additional shares of Common Stock or any other securities of the Company, then immediately after the effective date of such subdivision or split-up, or the record date with respect to such dividend, as the case may be, the Conversion Price shall be appropriately reduced so that the holder of this Note thereafter exchanged shall be entitled to receive the percentage of shares of Common Stock which such holder would have owned immediately following such action had this Note been exchanged immediately prior thereto;

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 8 of 10

 

(iii)       Reverse Split. If the number of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding Common Stock or reverse split, then, immediately after the effective date of such combination, the Conversion Price shall be appropriately increased so that the holder of this Note thereafter exchanged shall be entitled to receive the percentage of shares of Common Stock which such holder would have owned immediately following such action had this Note been exchanged immediately prior thereto.

 

(e)       Issuance of New Note. Upon any partial conversion of this Note, a new promissory note containing the same date and provisions of this Note shall be issued by the Company to the Holder for the principal balance of this Note and interest which shall not have been converted or paid. The Holder shall not pay any costs, fees or any other consideration to the Company for the production and issuance of a new promissory note.

 

(f)       Reservation of Shares. The Company shall at all times reserve for issuance and maintain available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the full conversion of the Note, the full number of shares of Common Stock deliverable upon the conversion of the Note from time to time outstanding. The Company shall from time to time (subject to obtaining necessary director and stockholder action), in accordance with the laws of the State of Nevada, increase the authorized number of shares of its Common Stock if at any time the authorized number of shares of its Common Stock remaining unissued shall not be sufficient to permit the conversion of the Note.]

 

24.      Amendment and Restatement. This Note is an amendment and restatement of the 12% Senior Unsecured Promissory Note of the Company in favor of the Holder dated April 10, 2017 in the Principal Amount of $4,000,000 (the “Existing Note”). The terms and provisions of the Existing Note are hereby amended, superseded and restated in their entirety by the terms and provisions of this Note. This Note is not intended to and shall not constitute a novation, payment and reborrowing or termination of the obligations under the Existing Note.

 

[Remainder of page intentionally left blank. Signature page follows.]

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 9 of 10

 

IN WITNESS WHEREOF, Torchlight Energy Resources, Inc. has caused this Note to be duly executed in its corporate name by the manual signature of its President/CEO.

 

  TORCHLIGHT ENERGY RESOURCES, INC.
   
  By:  /s/ John Brda 
    John Brda, President/CEO

Amended and Restated 12% 2020 Senior Secured Promissory Note - Page 10 of 10

Signature Page - $4,000,000 Foundation Note

 

 

EXHIBIT 31.1

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, John A. Brda, certify that:

 

1.    I have reviewed this quarterly report on Form 10-Q of Torchlight Energy Resources, Inc. for the period ended March 31, 2020;

 

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d- 15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over the financial reporting; and

 

5.    I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ John A. Brda
John A. Brda
Chief Executive Officer
(Principal Executive Officer)
Date: June 5, 2020

 

 

 

EXHIBIT 31.2

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, Roger Wurtele, certify that:

 

1.    I have reviewed this quarterly report on Form 10-Q of Torchlight Energy Resources, Inc. for the period ended March 31, 2020;

 

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d- 15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material  information relating to the small  business issuer, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over the financial reporting; and

 

5.    I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ Roger Wurtele
Roger Wurtele,
Chief Financial Officer
(Principal Financial Officer)
Date: June 5, 2020

 

 

 

  EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

I, John A. Brda, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report on Form 10-Q of Torchlight Energy Resources, Inc. for the period ended March 31, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such quarterly report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Torchlight Energy Resources, Inc.

 

/s/ John A. Brda
John A. Brda,
Chief Executive Officer (Principal Executive Officer)
 
Date: June 5, 2020

 

I, Roger Wurtele, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report on Form 10-Q of Torchlight Energy Resources, Inc. for the period ended March 31, 2020, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such quarterly report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Torchlight Energy Resources, Inc.

 

/s/ Roger Wurtele
Roger Wurtele,
Chief Financial Officer (Principal Financial Officer)
 
Date: June 5, 2020

 

The foregoing certification is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and is not to be incorporated by reference into any filing of Torchlight Energy Resources, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.